All right. Everybody hear me? Yep. Good afternoon, everybody. Thanks for joining us. My name is Marco Lagos. I am the Head of U.S. Semiconductor Banking on the investment banking side of the team, for Morgan Stanley. I am thrilled and honored to have, with us today the folks from Allegro MicroSystems. To my immediate left is, Derek D'Antilio. He's the CFO. And, Jalene Hoover to his, his left, who runs the IR practice. She's the Head of IR for the company. So thank you both for joining us today. Really appreciate you being here. So let's start with sort of a high-level question, Derek. The company has been public since 2020. You and Vineet joined around 2022, so now you're probably two years and change into, a little less than two years into the journey together.
Can you talk a little bit about that sort of that journey, and what the key things and decisions you guys have made over the last couple of years to put the company in the position it's in today?
Yes.
Great.
Good afternoon, everyone. Thank you, Marco, and thank you to Morgan Stanley. I joined a little over two years ago. Our CEO, Vineet, joined about two years ago. For a little bit of history, Allegro is actually in what we call Allegro 3.0 version right now. The reason I say that is we've only been public for three years and four months, but the company's actually been around for 97 years. It was Sprague Electric, founded in 1926, actually, in Massachusetts. Why that's important is because the company had a fab in Worcester, Massachusetts, in 1965, you know, three years before some of the large semiconductor companies were founded. We have significant history in power semiconductors, significant history in magnetic sensing, and in serving automotive.
So Allegro 1.0 was this company that was owned by Sanken Electric, privately held company for many years, Sprague Electric, and then Sanken. We were an IDM. We had two fabs. We had two backend facilities. A private equity firm bought it in 2017 and really helped to organize that operational structure. We now have one backend facility that's highly utilized in the Philippines. We're a fabless company focused on designing industry-leading magnetic sensing and power ICs, primarily for auto and in certain industrial applications. Vineet and I have really driven what I would call Allegro 3.0. We both come from public company backgrounds, as does Jalene. Much of our new management team does after some of the retirements from significantly larger public companies. So the changes that we put in are we're fortunate to have inherited great products, great customer relationships, great teams.
But the change is really our focus on how do you scale this company now from $500 million three years ago to $1 billion today to far in excess of this, putting in place a public company cadence, what I call a management operating structure, quarterly cadence, design reviews, really a focus on the markets that we serve well, restructuring our sales incentive plans to focus on e-mobility, which is the confluence of electrification of vehicles and ADAS applications, and certain industrial applications that use the same type of technology, for example, clean energy, industrial automation, and data centers. So bringing a lot more focus to the company, a lot more rigor around quarterly performance, and what I call just in general a public company management operating structure. And the team is really excited, and we think we have significant opportunity both organically and with some inorganic opportunities.
That's great. And Jalene, just in the same vein, right, you've been around. You started with the company about a year. I'm gonna be precise here. A year and three months ago? Is that about right?
January 2023, yes.
Okay. So pretty close. So, what excited you? What, what sort of drew you to the opportunity? And then what have you found about the company since being here after a year of being here?
It's a great question, and thank you for having us here. So I've been in semis actually nearly 30 years, and it's a very ancestral industry. And I was introduced, I would say, by you know former colleagues of mine to the team. And you know it's really unique to be with a company as Derek spoke to that's nearly you know been around for 100 years and public for just a few. So you've got this new company like a startup energy combined with having this experienced leadership team really well positioned with these decades of expertise developed on the technology side to address these megatrends these secular growth drivers in electrification and automation and combine that with you know relatively newer leadership where I really sensed talking with Derek and Vineet that they were really closely aligned on the vision.
You know, somewhat selfishly but also opportunistically, I really like a good growth story. You know, the trends that Allegro is addressing in automation as well as, you know, select industrial markets are really going to occur over the next decades. And they're also in areas that we're really passionate about and well positioned to suit, and that's in the ESG realm. So there's just a lot of really great stuff going on. Now, certainly, I think when I joined in January, we didn't have the cycle called growth drivers and impacts that we're dealing with somewhat today. But we have a mid and longer-term focus. You know, as we do in semis, we just ride these out, and we stay focused, and we continue to execute. We continue to invest in R&D.
It's really exciting to be with a team that shares that vision and continues to invest and focuses on our opportunity.
That's great. Thanks, Jalene. Sorry to put you on the spot, but that was great. So.
Thank you.
So Derek and Jalene, so for both of you a little bit, we you talked high-level, Derek, about the company's technology focus and exposure, and you talked about magnetic sensors and power. Can we double-click a little bit on each of those? What exactly about magnetic sensors? What sectors what segments within that? What products specifically? And then same thing with power?
Absolutely. So.
Sorry, the split between those two, if you could.
Sure.
Yeah.
Yeah, absolutely. So, you know, our company was really built on two, the focus on two products: magnetic sensing, leadership in magnetic sensing. We have about 23% market share, so we're the market share leader in overall magnetic sensing. And that's about 60% of our business, magnetic sensing. Power IC is about 40% of our business. And that's actually the company's legacy going back 50 or 100 years is on the power side of business. So we're really focused on sensing current, electrical current, helping manage electrical current, drive electrical current to do things in cars, industrial automation, clean energy, data center. And within magnetic sensing, the key products are current sensors, position sensors, and speed sensors.
Current sensors are used in things, for example, in electric vehicles in measuring the current that goes from the large 400 V or 800 V batteries in an electric vehicle to the other subsystems in a car that might be 12 V or 48 V. So there's a significant amount of current sensors used in an electric vehicle. Same thing in solar inverters. Conversely, in ADAS applications, when you think about lane-keeping assist, you think about certain camera applications, there's a significant amount of position sensors used in electromechanical braking, steer-by-wire, along with speed sensors. So that's really been the growth engine of our company. On the power side, we are experts in regulators, in motor drivers, in LED drivers, so driving efficiently motors for cooling fans in autos, data centers, liquid cooling pumps in both of those markets as well.
That's great. And then you talked a little bit about you mentioned EVs, but there's obviously also great sort of use cases for all these products in your traditional ICE, right, internal combustion engine. What can you talk a little bit about your strategy and how you're strategically suited and positioned for both, you know, the future in EVs and ADAS? I think you touched on that a little bit, but more also kinda how you're still gonna ride out for a while here, the internal combustion engine stuff.
Yeah. Great question. So the legacy of the business going back to the 1990s is in automotive. And that's important because we have decades of automotive experience. Our supply chain is completely automotive-qualified. We do all of our testing in-house in the Philippines with an auto-qualified test supply cycle, which means our parts per billion quality is below 200. So that's all auto-qualified. We've been doing that for a long time with the Tier Ones in the United States and Europe. So that's primarily ICE business, ICE cam and crankshaft business, or safety, comfort, and convenience-type factors. And that's a good business, and we think that'll be a good business for a long time, especially in the United States.
The growth engine of the business over the last couple of years has really been on what we call the e-mobility side of the business, which is the electrification of vehicles, both EV powertrain, hybrid powertrain, and the ADAS applications, which is really being driven by the confluence of those two things. That's been driven by a lot outside the United States, particularly China, Europe, which is now at 25% adoption of EV and hybrid. Japan, we have a great business. It's 15% of our business, which is all hybrid. In China, it's nearly 30% of our business, which is a significant portion of EV. The United States, as Marco mentioned, we're still on the early adoption curve of EVs in the United States, still sub-10%, about 8% for calendar 2024.
For perspective, the United States projection is to produce about 1.2 million EVs in the United States in calendar 2024. There's been a lot of news about push-outs and delays in the United States, largely true. But 1.2 million in the United States, the same number in China is 7.2 million. So significantly higher. Europe is even higher than the United States, but hybrid is just as good for us. So we are really excited about the future business in EV and hybrid and ADAS. We still have a long tail of ICE business that we've been serving, and the safety, comfort, and convenience factors we've been serving for many, many years.
You talk about hybrid. What sort of geographic and market is sort of the case study for you guys for that?
Japan's a great case study for us. 1, we have a great position in Japan. It's about 15% of our business. Our business is very well geographically diversified. Approximately 15% of our business total is United States, 14% is Europe, 15% is Japan, give or take 25%-30% is China, and the rest is the rest of Asia. It's very well geographically diversified, but Japan is the case study for hybrid. Today, it's very low on the EV adoption curve, hundreds of thousands of units, but Toyota is all hybrid for us. And it's been a great business, and it's been a great growth engine over the past year, and we expect it to continue.
You know, our, the company that owns 51% of us, Sanken, and our legacy is a Japanese company, which really helps us in the Japanese market to establish the presence in Japan and sell in Japan. And that's been an exciting market for us.
That's great. We spent a lot of time talking about automotive. Maybe just for the audience, what sort of percentage of the business today is automotive versus other end markets?
Sure. So automotive today is about 70% of our overall business. Industrial, which includes clean energy, largely solar, EV charging stations, which is really exciting for us, industrial automation, and data center is about 20% of our business. And then consumer is about 10% of our business. And the technology leverage point is just about everything we do is designed for automotive. So the current sensors, the position sensors, they're all designed for automotive, all automotive quality. We take those same products and leverage them to where there's a use case, for example, in solar, the inverter, the mini inverter, very similar to an inverter in, in an automotive, in an EV or a hybrid. So we're taking the same use case, the same products, the same quality, and bringing it to those markets. The channel's a bit different.
We're selling that through distribution to the long tail of customers around the world.
So can you talk a little bit about opportunity sizing, right, as you think about sort of the, the TAM, SAM sort of dynamic for across end markets? And then, I know for both of you, this is kinda like asking you who your favorite child is, but what, which opportunity are you most excited about for the company going forward?
Would you start with the opportunity, Jalene?
Yeah.
Well, I mean, we're an automotive-first company, so, you know, certainly the electric vehicle opportunity is super exciting for us. And I think sometimes it's underappreciated that, you know, today, actually, the EV component of our sales is the smallest component, but it's the fastest growing. So really, as long as we're producing cars, Allegro's winning. Obviously, we win more. We have more content with the hybrids and the full BEVs. But that's really where we're primarily focused. And as Derek said, we leverage that same technology in very select applications in the industrial space.
In terms of the size of the SAM, the magnetic sensing SAM is gonna grow to about $5 billion from $4 billion today. We have 23% of that SAM. We just acquired a business that we think is the leading-edge technology that I'm sure we'll talk about. So we're pretty excited about that. And I think, as Jalene mentioned, you know, we're often correlated to EV, which is something that's very exciting for us. But what's underappreciated is the fact that still, more than 75% of our auto business is not just pure EV. It's ICE business. It's ADAS. It's level one and two ADAS business, which is really exciting. There's still a lot of opportunity to penetrate there using position sensors, speed sensors. So as cars move to electromechanical braking or as they move to steer-by-wire, that's all level one and two ADAS.
Lane-keeping assist is all level 1 and 2 ADAS, things we all have in our cars today. That's pretty exciting for us. Some of these industrial applications, particularly within the data center, we just announced our first win, design win, for liquid cooling for pumps in data centers for high-density servers. That's pretty exciting for us as well. We think we have multiple growth vectors.
Yeah. So I not to sort of divert too much from the main topics here, but what you mentioned data center. It's been an on-the-horizon type opportunity for you guys for some time. You know, what is it about what's happening in AI and processing, that's giving you guys and sort of the DNA of the company an advantage and a potential opportunity in that?
It's a great question. So data center peaked at about 5% of our overall revenue about two years ago. Today, it's under 2% of our revenue. There's certain parts today that we sell motor drivers into fans, cooling fans for servers. And as those cooling fans become hotter, more dense for AI, there's a need for liquid cooling. And the liquid cooling drives pump motor drivers that we already have for automotive. Again, it starts in automotive with the pump motor drivers. There's also an opportunity to move from 12 V - 48 V in the data center and regulators and conversions. We use that in our power business as well. So it's a very exciting business for us. We've also that business was traditionally sold through distribution and still largely is. We've started to really focus on driving that SAM.
We've put somebody in charge of that business as a business development team, largely in China and Taiwan and Japan. We're starting to see design wins there.
That's great. So Derek, I mean, you know, not we wanna focus a little bit on you've mentioned China now a couple of times, right? And you've talked about, you know, EVs clearly much more penetrated in China than they are here in the U.S. How are you? Can you articulate this, the China strategy for the company and how you guys are seeing it, especially in light of the overall geopolitical environment we're in today?
Sure. So, you know, when we entered China as a business many years ago, we were brought there by global customers. So global OEMs that operate in that are headquartered in Europe or the United States manufacturing in China, we would sell through distributors in China to them. Most of the business was re-exported out of China. Today, we find ourselves with three different types of customers in China. Still, those global OEMs that are headquartered in the U.S., Europe, Korea, manufacturing in China, we're still selling to them. They're still re-exporting out of China. There's also the global Chinese OEMs, the BYDs and the NIOs that are now customers that re-export a large portion of their product and sell some domestically.
Then the third bucket of customers, which is the fastest growing and today the smallest piece for us but the most exciting, are the indigenous Chinese manufacturers, mostly manufacturing for the Chinese market. So we just put a team on the ground in China just three years ago, just put a country manager there one year ago. I was in China and Shanghai in September. We're investing significantly. We opened a new office there. We're putting FAEs on the ground. We're putting quality on the ground in China. But most importantly, we're hearing from customers in China, just like we're hearing in the United States, they would like some local content. We're not gonna put factories in China, but we've got great relationships with fabs in China. So we're qualifying a fab in China to use for wafers in China for part of the Chinese market.
We already do some assembly today in China in Suzhou, a small portion of our assembly, but there's turnkey suppliers that can help us do probe assembly and test the entire backend in China. So localizing with subcontractors in China while having our FAE and sales team in China is important to us 'cause it's a large growing market that we feel like we have to serve.
Apart from sort of the proximity to customers and the ability to expand your share in China, what other benefits have you seen since you guys have sort of doubled down a little bit and invested in China?
Yeah. So being closer to the customers, obviously, is number one, right? When I was there in September, we had a grand opening of our office. We met with distributors. We met with customers. The good news is a lot of excitement about our products. And price is not the lowest common denominator for most reasons. Because of the re-export to the EU and the United States, they still have to meet those stringent standards. So that's great. So there's a lot of demand for our products. I think the other benefits we've seen by having people on the ground there is we're closer to our customers from a quality standpoint. It can bring solutions to the customers. And the other benefit I'm finding as a CFO is having a supply chain in China is just more cost-effective in China for the Chinese market.
Yep. Makes a lot of sense. So, you know, China, obviously, very exciting. What other and just to give folks, again, another sense for distribution of revenue, talk about sort of North America, Europe, China, Japan, and then non-China, non-Japan Asia split. What does that all sort of look like for you guys?
Sure. Yeah. So, I'll mention again, the U.S. is about 15% of our overall revenue. This is all shipped to. Europe's about 14%. Japan's about 15%. China's between 25%-30%, depending on the quarter. And the remaining 15%-20% is, call it, rest of Asia, which is largely Korea, Taiwan, and Southeast Asia. So pretty good split geographically. There are some areas that I think we're probably underlevered to, right? I think there's opportunities in China. That's why we're investing significantly in China. We're putting more people on the ground there. I think Europe would've been underlevered too. It's 14% of our business, but there's a significant opportunity in Europe. A lot of what gets shipped to China is designed in, in Europe. We just put our first country manager in Germany where the auto market exists.
We've got a design center in Milan that we opened two and half years ago. We're expanding that right now. We recently bought two companies. Both of them happen to be in France, coincidentally, a lot of talent there. So we're finding a lot of engineering talent in Europe, in Milan, in the U.K., in France, and being on the ground in Germany close to our customers, we think there's a lot of opportunity.
That's great. So, you know, is it fair to say then Europe is sort of the region you're most excited about for future growth or not most excited about, but the greatest opportunity for future growth, do you think? Do you know what you?
It's certainly one of them. You know, one of the things that Vineet and Derek have infused within the company is customer intimacy. And that's growing our workforce and having, having people on the ground in areas, particularly where we're wanting to grow those geographies. You know, I would include Germany in that, China, of course, or areas that we've expanded. And then we've taken over also the distribution in Japan as well. Where Sanken was managing that. And so we took that over in the last year as well. So this is all about leveraging what the company's been doing so much for so many years and helping customers to solve their, their challenges.
Yeah. Well, let's, let's talk about that, right? 'Cause I think the one element is competition keeps you sharp, right? You're talking about entering a market where, you know, my colleagues and I obviously spend a lot of time with companies in Germany and the Netherlands and Belgium, right? And those folks like, you know, Melexis and Elmos and ST and Infineon, a lot of sort of for at least for semiconductor folks, household names, right? What, what is it about Allegro, you know, whether it's culturally, from a business strategy standpoint that allows you to sort of compete and win against a lot of those sort of folks that are local to that market?
Yeah. You know, there's some real formidable competitors in Europe, the ones you mentioned, right? Great competitors, good products. I think what allows us to win is our focus, our extreme focus. You've mentioned some very large companies, maybe one that's similar in our size to us, but we've chosen to really focus on what we do best, which is magnetic sensing, current sensing, position sensing, speed sensing, and certain power applications that I talked about, right? There's plenty of other opportunities in power that we've not chosen to go after because we think we have to focus to be the best at those things. And so to compete with those competitors, number one is globalization. So we think we have design centers around the world, including facilities in Asia. We just opened another design center in India. We've got some in Europe.
We've got some in the United States. So I think globalization is part of that. But the extreme focus we have compared to some of our significantly larger competitors allows us to be what I would say the best at what we do in those markets.
That's great. Okay. You talked a little bit about well, let me take a step back, right? You think about M&A strategy, but you have to think about capital allocation first, right? So, you, you've obviously I think you've got a pretty strong, sort of balance sheet, and, and you've used it judiciously, in different things. How do you think about the capital allocation sort of distribution between internal organic R&D type investments, returning cash to shareholders, and then, obviously, M&A and inorganic growth?
Sure. The first thing we focus on is generating, you know, significant free cash flow. This past quarter, we generated 17% of sales in free cash flow. I expect that to continue to increase. That's really our focus, is generate significant free cash flow. The use of that free cash flow, first and foremost, will be investments in organic growth of the business. We can control that the most. Continue to make investments in research and development in the centers I talked about in other parts of the world. We have to be the leaders. You know, as I talked about, the focus to compete with these formidable competitors, making investments in R&D, making investments in sales and FAEs on the ground in those regions, that'll be our primary focus.
So even as we go through inventory digestions, we're not gonna take our foot off the gas on making investments in those areas. We'll, of course, do the right things on the discretionary spend side of things and continue to generate free cash flow. Beyond that, we're gonna pay down debt. We borrowed $250 million to purchase a company called Crocus last year. We're gonna pay that debt down pretty quickly, as I promised the equity holders. I promised the debt ratings agencies. And then beyond that, we'll continue to look at M&A that makes sense. It has to fit with our strategy of growing either e-mobility or those select industrial markets. And a few characteristics are really, really important to myself and the CEO and the rest of our team. One, we have to know the technology. We have to be experts in the technology.
And both of the acquisitions we've done over the last year and a half fit that criteria. And that's very important because we can bring something to that acquisition. We can bring engineers. We can bring management. We have to be able to bring those products to our existing customers. That's critical. And then the company has to come or the products have to come with gross margins or I would call it variable contribution margins that we think are quite acceptable. That's indicative is somebody willing to pay for that technology. My experience is you can fix things like fixed costs. You can fix OpEx. You can't fix somebody willing to pay for your products. You can't fix technology. You can't fix: Can I sell that to my customer? So M&A will be critical.
You know, given the float of our stock, we're not doing share buybacks right now. We're not ready to do a dividend.
Yeah. And, you know, M&A, you know, strategic rationale is sometimes difficult to articulate or is not as clear or well accepted by investors. Then there's stories that are pretty obvious and pretty clear. I think that's absolutely the story with Crocus. But can you elaborate for folks sort of what that allowed the company to sort of continue to do?
Sure. So Crocus Technology is largely a French-based company that's been around for about 17 years. They're the leaders in TMR technology, tunnel magneto-resistance, which is call it the next-gen technology for magnetic sensing or more precise technology for magnetic sensing. Hall-effect technology, which is the preponderance of the market today, we're the leaders. We have 23% market share. That's been around for at least 35 years. Many companies have that. We think we still have technical specification leads. Much fewer companies in that universe have TMR technology. We had a small business, coincidentally, in France. We bought a company that's in France. There's a lot of technology there. So a much smaller universe of companies to compete with.
We believe, based on market data, that that will represent about 20% of the magnetic, magnetic sensing market over the next six or seven years, which is about $1 billion. We believe we have the opportunity to kinda control that curve of adoption in TMR over the next several years.
Okay. Okay. So what you talked about sort of the strategy around M&A. Are there, you know, what other areas do you feel you'll potentially are out there for you to supplement? I know everything has to sort of fit with what you guys are doing and the things that you guys are thinking about.
Yeah. So, so we're experts in driving high power, regulating high power, driving high power. So we look at opportunities within the power business that fit within the high power, regulating, driving high power. Of course, sensing is our bread and butter. So those are the areas you'll see us look at. And things that have to do with e-mobility, anything that can enhance our presence in ADAS, EV, hybrid, something we can bring to our customers. So we continue to look at those opportunities. You know, and it has to, like I said, be, you know, accretive to gross margins over time. We have to be able to sell it to our customers. We'll continue to look at those opportunities.
You know, as we start to move through the cycle of EV and the cycle of ADAS and get into level 3 ADAS, there'll be more of those opportunities.
Okay. Let's talk a little bit about, you know, you've mentioned sort of customers, broadly speaking, and then talked a little bit about sales. You know, what is sort of direct, indirect mix for you folks? And what, how do you think about, you know, distribution versus direct? And then, also customer base-wise, you know, there's obviously areas that have a concentrated set of customers and others that have very many customers. And you guys play well in both. What can you elaborate on that?
That's a great question. So distribution, obviously, has been a little weaker the last couple of quarters. It was about 52% of our revenue here in the December quarter. When you stand back and look at our business, most of our industrial and most of our other/consumer business run through distribution. Most of our automotive is direct with a couple of exceptions where Japan is primarily distribution as well as China where they use distribution as a fulfillment function. Obviously, the concentration of customers would be higher through the distribution channel versus the direct. On the direct side, we mostly sell directly to through the tiers and the CMs on that who then work with the OEMs.
But that doesn't mean that we may not work directly with the OEM who may pull through that sale through the tiers and the CMs.
Got it. Can you talk a little bit about the automotive supply chain in general, the sales cycle in automotive, and why, you know, being a company that's been around for such a long time is important in that ecosystem, and how sticky that business can be if you do it right?
Yeah. So the nice part about the automotive business, it gives you a lot of visibility. So you get a design win. And design wins is really the lifeblood of that business that turns into revenue about three years from now. So it gives us a lot of visibility, the ability to plan our factories, the ability to plan our staffing, and all those sort of things. So CapEx, which is really nice. And that's about 70% of our business. And as Marco mentioned, we've been serving the automotive industry since the 1990s, which gives us what you need, like 10 years of reliability data, the relationships, the test quality, all those kind of things. So having that ability to plan your business on the automotive side of the business allows you to plan multi-years out.
The industrial business and the consumer business is much more quick-at-turns through the distribution channel and typically is a turns business through that. The last couple of years have been an anomaly where there's been some backlog in that business.
Okay. So let's, let's turn to some of the obvious sort of near-term stuff. We've talked big picture for the company for a little bit here, walking through the end markets, right, automotive, industrial, energy, and infrastructure, and consumer. What, what is your sort of medium- to near- to medium-term outlook for each of those four areas?
So probably start in inverse or whatever because this has been a FIFO cycle kind of first in, first out, and it's been a rolling cycle. The consumer cycle started, for many people, you know, actually six quarters ago. For us, it really just started three quarters ago because we were shipping past due backlog the first couple of quarters of fiscal year 2024. But we've really now been in three quarters of a decline in our consumer business. That's starting to get to a trough. I think we have a little ways to go. We can see that pretty clearly because that's all in the distribution channel. So we watch in the distribution channel inventory levels, which are still a bit elevated. We watch POS very, very closely. But I think there's about another quarter or so in consumer.
In the industrial business, that's largely clean energy, a lot of solar, data center, automation. There's a few more quarters to go there that started a little bit later than consumer. So the rolling cycle, when you look at it from many companies, especially us, it continues to roll, consumer first, industrial second. And we really believe that'll come back second. And then auto is kind of interesting. The December quarter was the first quarter we had a decline in auto sales in over two years. That wasn't driven by anything cyclical. That was driven primarily by the UAW strike in the United States where we saw some pull ahead into the September quarter where we're seeing in our guidance for the March quarter, I talked about, now we're starting to see the inventory adjustments in auto primarily at the Tier Ones and the subcontractors and some of the distributors.
The fundamental difference that we see right now between auto and sort of the consumer industrial was consumer and industrial had a much higher peak in 2020 and 2021. They had a market correction plus an inventory correction over the past 18 months. Auto has been fairly consistent from an auto production level over the last several years. Right now is an inventory adjustment from what we can see right now in auto. We expect that to last a couple more quarters as well. And we're gonna be very aggressive about managing down those inventory levels both in the channel, on the consumer side, and the industrial side. And we're gonna work quite closely with our Tier Ones on the automotive side and subcontractors to make sure we work that inventory down as quickly as possible.
I know you've sort of generally guided, but when do you think, you know, things are gonna start to sort of turn around as far as the inventory suggestion?
Yeah. So we guided down at the midpoint of our guidance another 8% in the March quarter, 6%-10% based on the range. We did say that we expect the June quarter to be our trough quarter. And we're gonna aggressively manage, you know, the next two quarters to kinda have that June quarter be our trough quarter.
How do you feel that compares generally to, you know, other folks that have the same general exposure that you do in the rest of semis? Has that sort of have you seen that to be kind of a general thing, or is it something unique to Allegro?
You know, it appears to be remarkably consistent on all three markets, actually, as we look at the commentary, as we look at the data, you know, we look at the reports that come out. It appears to be pretty consistent around a rolling cycle for consumer, industrial, and now auto, you know, all around the same time. Many of the peers of ours and ourselves in the last two months have started to talk about the auto inventory adjustments. So we appear to be all in a similar situation, although different products depending on where you are in the supply chain in auto and whether it's digital or analog. But generally speaking, the analog auto appears to be in a similar situation.
Any opportunities for you guys going forward away from, you know, the traditional power market into digital opportunities or anything in other technologies?
You know, we continue to look at what's next in ADAS. There's many opportunities in ADAS. We have a photonics business today that's pre-revenue. We look at things like what's Level 3 ADAS look like. There's some opportunities primarily in sensing there. There are some high-power opportunities. There's a product called Heyday that we bought a year ago, isolated gate drivers. They're not commercial yet. We just put the first product in the market. It's a high-power isolated gate driver for driving power to gallium nitride switches. The product that's in development is for silicon carbide. We don't plan to make the substrates, but we're driving power to those switches, and it'll be on a reference design. Those products are pretty interesting. Another company that we bought in France. They're about a third smaller from a BOM standpoint and a third more efficient.
Interesting products that we're starting to put on reference designs with gallium nitride switch providers.
Yeah. So, you know, you, you mentioned silicon carbide, and gallium nitride. You know, there's been some softness around EV. I think we, you talked about that briefly. You know, other folks have obviously been in the ecosystem around automotive, in particular with power, have been affected pretty, pretty harshly by that. How do you feel you guys have sort of reacted to that? Why is it that you have had a little bit better resilience, to, to that, to the EV softness compared to other folks?
Yeah. No, if, if I look at our auto business, we sort of have two pieces we talk about publicly. There's the e-mobility piece, which is the EV and hybrid powertrain, and there's ADAS. The bigger piece of that's ADAS from a dollar content standpoint because five years ago, you know, EV was one company. On the other side of that, the non-e-mobility is ICE combustion engine, is the powertrain side of it and safety, comfort, and convenience. So both the ADAS piece and the safety, comfort, and convenience are growing quite robustly. Hybrid's growing quite robustly. As I mentioned, EV in China’s been fantastic. EV in Europe’s been very good. So I think we've held up well partially because of the geographical distribution of sales and partially because of the broad product portfolio that covers all three types of powertrains in an automobile. It's not just EV.
That's actually the smallest piece of our overall auto business today, albeit the fastest growing.
Got it. Okay. So just kinda taking another giant step back just from an education standpoint, what does just so folks get a sense for the scale of the company, can you talk about financially what the company looks like today, revenue, profitability, and then your target financial model for the company that you've, you've put out there?
Sure. This December quarter, we were $255 million in revenue. The quarter before, we were $275 million in revenue. At the peak, it was $280 in revenue two quarters ago. Gross margins are around 55%. We hit as high as 58% from a non-GAAP gross margin two quarters ago, but every star aligned to get there. The target financial model that we put out last March at our analyst day, we believe, is still fully intact. And the target financial model is low double-digit sales growth on the top line. And you know, once you get past any inventory corrections, medium-term gross margins getting to 58%. We did hit that a couple of quarters. And when we went public, we talked about going from 50% to 55%. We were sustainably at 55%, so we put out a new target of 58%.
I don't think that's the endpoint, but that's the medium-term target. OpEx at about 26% of sales over the next couple of years, operating profit of about 32%, and very importantly, free cash flow getting to the mid-20s. So pretty robust free cash flow generation over the next few years.
That's great. Let me. We've got about five minutes left. I wanted to open it up for questions from the audience if anybody has any questions.
I'm just curious. What do you think is the end game with regards to Sanken's stake in Allegro?
Good question. So Sanken owns 51.5% of the stock of Allegro. They have three board seats. We have a really robust shareholder agreement that protects all the managers' shareholders, including myself and everyone who bought shares in us. So Sanken's owned the company since 1989, so they do things in long term. They took it public in 2020 with One Equity Partners. They continue to hold and say publicly that they wanna hold more than 50% of the shares. They actually consolidate Allegro's results in their public filings in Japan. And to do that, to consolidate top line down, they need to hold more than 50% of the shares.
Any other questions? John, I do have one more. All right. So you obviously, you've done a great job, Jalene and Derek, both of you, on sort of education, investor outreach. What do you think investors have missed? What is the one thing you'd love to sort of have investors understand better about the company or part of the story that you'd like them to really know?
It's a great question. And the one we've already touched on today is that, although we are really bullish about our EV opportunity, that's a relatively small component of our revenue today. And we're just broadly, strongly positioned in automotive, period. I think it's underappreciated how long Allegro's actually been in existence. And then, you know, I think, looking at the transformation and the leadership team, the team that got Allegro to where they were when we IPOed, was fantastic. But we've just organically transformed that team. And we have a new team now that, as Derek touched on, has extensive public company experience and experience running multi-billion-dollar companies. And we really are excited about the opportunity ahead and believe in our positioning there.
That's great. And then this is a bit of a sort of personal question here, but it's, you know, you and Vineet both have sort of backgrounds in different areas. Vineet, I think, has a lot more exposure to automotive from another part of the business altogether. You've got, you know, your past job at MKS and other parts of the semi-supply chain bring that you bring to the table. What is the combination of the two of you sort of bring together to the company that's been very helpful, you think?
Yeah. So I think, you know, we both Vineet and I coincidentally happen to be the same age, have the same number of years of experience, albeit some different experiences. But we both were aligned very, very quickly. And we both bring public company cadence, public company management operating system to the company. I think we've brought a lot more accountability, targets, and we both know how to operate in cyclical businesses, right? Automotive's very cyclical. Semiconductor's very cyclical. I've either been auditing or in semiconductor companies since the late 1990s. That's why I can say now I've been through at least four of these cycles, and so it's the only benefit of getting a little bit older. But operating in these cycles, you know, each one's a little bit differently.
But that's why, when I talk about when we're managing through this, I saw in 2009 people did some pretty draconian things. We're gonna continue to. We're both completely aligned on continuing to invest in the things we have to. Research is number one. Sales on the ground is number two. We'll continue to manage discretionary spending as we go through this inventory correction. We should do that. But if you don't do those things, you're not gonna come out on the other side leading. And we firmly believe that as we come out on the other side, we wanna continue to be the leader and gain share.
That's great. Okay. One more, one more shot at questions from the audience? Anybody? No? All right. Well, we're just about at time here. So, wanna thank both of you for taking the time to be here again. Hope you've had a productive day. Good luck with the rest of the meetings today.
Thank you, Michael. Thank you, Morgan Stanley.
Thank you all.