All right, well, good afternoon. Welcome to the, I think the second to last session of day one of our 52nd Annual TMT Conference . Very pleased to be joined by Allegro MicroSystems CEO, Vineet Nargolwala. Vineet, thank you for joining us.
Thank you for having me.
I think most people here are probably familiar, but maybe you could spend a minute or two talking about Allegro, introduce yourself and the company.
Sure. So hi, I'm Vineet Nargolwala, CEO of Allegro MicroSystems. Been with the company almost two years now, and it's been one heck of a ride. You know, in the last three years, Allegro has grown over 80% top line, and we've grown EPS 13 times—more than 13 times. So as I said, it's been a, been a heck of a ride. You know, we're a billion-dollar magnetic sensing leader. We are an automotive-first company, so everything we do is designed for automotive. We've been in automotive long before it was cool, operating there for over 40 years now, and that's really our DNA. But we then take that technology that we develop for automotive into selected industrial markets, like clean energy and industrial automation, and that's really who we are.
You know, we've been on a journey of expanding our margins. We're now at, you know, call it mid-50s%, with a path and a target of getting closer to 58% and above that. You know, we are known for our leadership in magnetic sensing and the power applications we serve. We are hyper-focused on automotive and the select industrial markets, and we pride ourselves on innovation and on agility, and that's those are really the three big reasons why we win in the marketplace.
Got it. Thank you for the intro, and we're gonna get back to innovation and agility, I promise. But I did want to start talking a little bit about the cycle. I mean, your first-
Yeah
... year or so at the company was basically how much are you gonna beat by, and that, that variable was driven by how much capacity you were getting.
Yep.
The last couple quarters, it's been softer, and you've entered a period of cyclical digestion. Could you maybe walk through, you know, the drivers of, of I guess, the inventory buildup and, and how you expect to recover coming out of it off the June quarter guidance?
Sure. Yeah, you're exactly right. So when I joined the company, our single biggest challenge was would we get enough wafers to keep our customers supplied? Well, we solved that problem, and then some, and we went on a pretty significant capacity expansion. You know, as I think about the two end markets we serve, in the automotive end market, there was a dynamic of the OEMs who always operated on just-in-time , and required their OEMs and tiers to hold inventory, really wanted their tiers to increase the level of inventory that they were holding, right? So their tiers and the contract manufacturers. So typically, they were holding about four to six weeks, and they, over a period of time, bumped it up to double that.
As interest rates stayed higher for longer, and the OEMs took away the incentives to hold that additional inventory, we are seeing the tiers and the contract manufacturers start to pare back that inventory level. So for us, it was a question of, okay, we signaled it in the last quarter, and we expected this, the sort of the same rate to happen this quarter. We were thinking that this would happen more sort of over multiple quarters. But as we made the turn into this calendar year, and we started having the three-way discussions between OEMs, the contract manufacturers, and us, we came to the realization that the OEMs, the tiers, really wanted to bring back the inventory levels in line much sooner, and so we have worked with them to aggressively bring that down.
So we think that at by the end of this quarter, roughly four weeks of inventory come out, and that brings most of our tiers and contract manufacturers into the right range. And so automotive demand continues to be stable. EV growth continues to be pretty robust at about 25% to 27%. So we think that going into next quarter, automotive, we're gonna start shipping into demand into normal demand, and that's where we think automotive, we will see the sequential growth going into Q2.
And has there been any change in the demand backdrop, even as, you know, there's a lot of headlines about EV softness?
Yeah.
You're obviously well tied to EVs.
Yeah.
And then within that, can you maybe talk about the confidence in a return to low- to mid-single-digit... Sorry, low- to mid-double-digit growth in the September quarter? It's a question we've gotten from a lot of investors-
Yeah
... is, which I think a fair one, is, you know, why the down 30 and then plus double digits-
Right
... instead of down 20, plus five, something like that.
Yeah.
I think you touched on it with the inventory and the Tier one conversations, but maybe you could expand on that?
Sure
... and the demand drivers.
So maybe your first question first. So we actually don't see any EV slowdown, right? So there's obviously a lot of ink spilled on EV momentum is slowing. That's really a, you know, a very narrow lens on what's happening perhaps in North America and maybe even with a couple of players in North America. We have a very global business in automotive. We're exposed to all the regions, pretty much as the automotive distribution holds, and we see significant growth happening across the board, and nobody we know in the OEM space is working on new ICE platforms, right? So it's all BEVs, right? Be it battery electric vehicles.
You know, I think when we think about the quarter-to-quarter transition, what gives us confidence and conviction in the profile is the forecast we've received from our OEMs and the tiers, and then the confirmed orders in our backlog. So we've already filled to more than where we are for this, what we've signaled for this quarter, so we feel good about the quarter, and then we look at the trajectory going into next quarter. We're seeing the orders come in that give us the confidence that we will see that, you know, call it mid-teens growth rate going into next quarter.
Is that mainly an auto discussion? Like, how is the inventory situation on the industrial and other side?
That is absolutely an auto discussion. We're not ready to call recovery in industrial markets as of yet. We think that's probably second half, if not later. Within industrial, of course, there are nuances, so our clean energy space continues to show some good momentum. But it's not broad-based, right? So, EV charging is growing, but solar is not. Data centers, I think, is still digesting from the traditional air-cooled standpoint, the inventory in the channel.
Mm-hmm.
Liquid cooling, you know, some really interesting designs and architectures, but it's not settled yet, and we'll see the first design wins come into play in the next 12 months or so.
Okay, I want to-
Yeah
... circle back to that-
Yeah
... but maybe we'll go into the auto market now. I think, you know, from the outside looking in, it's not the obvious—Allegro MicroSystems and your power ICs, and in particular—
Yeah
... magnetic sensing, it's not the easy conceptual EV story about power semis into an inverter or-
Mm
... ADAS processing for-
Yeah
... automation. Can you spend a couple of minutes explaining Allegro MicroSystems' secular growth and the content story of on both the magnetic sensing and power IC side in the auto market?
Sure. So yeah, magnetic sensing is not something that rolls easily off the tongue, right? And it's a hard technology to understand, so we get it. But magnetic sensing has proven to be one of the most efficient and effective ways of measuring very important modalities. For example, in EVs, it's current. So the traditional way of measuring current was a shunt resistor, right? So basically, you know, current flows through a resistor, you measure the voltage drop, and you try to measure the current. Well, the problem is that there is a lot of power dissipation that happens in a shunt resistor. So the advantage of magnetic sensing is that you can accurately measure current without the current having to pass through it.
When you look at an EV, there are over 40 applications where current needs to be measured, and it's really important. You have a 400-volt or 800-volt battery source, and you're stepping down the voltage to operate at 12-volt, 24-volt, and 48-volt, depending on the subsystem, and you're also converting it to AC for the traction motors. There's power conversion happening all over the EV, and at every stage, before and after, you want to measure current in order to make sure that you're accurately and efficiently transferring the power. That's why current sensing is one of the biggest applications on an EV, and magnetic sensing is the most elegant and efficient way to measure current. That's where we're seeing a ton of growth. Motor drivers is another area where we're seeing a lot of growth.
PMICs is another area. These are more of the traditional power management ICs, if you will. For us, it's always leading with magnetic sensing, and we optimize the solution with our power ICs around that magnetic sensing solution. That's how we win.
I know a big part of the rationale of your acquisition of Crocus was the TMR and current sensing part of the portfolio.
Yes.
Can you talk about what that brought to Allegro, why that was so important, and the rationale behind the acquisition?
Absolutely. Yeah, we are really excited about the Crocus technology and the team being part of Allegro, and now I'm happy to report that, you know, more than six months in, the team is fully integrated, the technologies are fully integrated. So the way to think about Crocus' TMR versus what we were working on, we were working on a TMR sensor for automotive, and we are actually shipping our, our native TMR. The Crocus team, really strong team of physicists that have really built a very strong TMR stack coming out of the MRAM world, and then they pivoted to sensing. And we believe that together, the combination will be really powerful, and it's proving out to be that case.
We think TMR, which stands for tunnel magnetoresistance, technology, is really well suited for the most demanding applications within automotive and industrial, including medical, by the way. Very high accuracy, higher resolution at very, very low power, and that becomes important anytime you get into a battery-operated environment. So, we're seeing the most demanding applications like battery management systems, like high resolution angle sensing, all migrate towards TMR. So we're getting really good pull and momentum with our customer base within automotive and in industrial. It also came to us with a book of business in medical, so I know it's different than automotive, but it's starting to become a very interesting application for us.
Right. And by the way, this is meant to be interactive. If anyone has a question in the audience, just raise your hand or throw something at me, and we'll get a mic over to you to get your question asked. On the current sensing side, are there metrics you can give to help, you know, investors understand, you know, again, what the actual real cost savings or range extension that you can get from moving across your portfolio to TMR, for instance, and or even from shunt to AMR and TMR? Sorry, GMR.
It's really a power budget question.
Mm.
So, you know, the question is better asked of an OEM, I think, because they look at the overall power budget and say: Okay, if we deploy so many shunts, we have so much power dissipation. It'll differ from architecture to architecture, so it's hard to put an exact finger on it. But, you know, we have the lion's share in the world on, on current sensing applications-
Mm
... as well as on position and speed applications. You know, most recently, we had a third-party report which said that we actually grew our share over the last 12 months, while all the other solution sets remained static or actually regressed. It's clear evidence that our solutions are winning in the marketplace, they're resonating with customers, and we're seeing more and more applications of our current sensing.
What do you think gives Allegro, I guess, the right to win, and what's led to those, those share gains? Is it, you know, packaging and form factor? Is it resolution? Is it all the above?
It's all of the above.
Reliability?
I think when it comes to magnetic sensing, you know, it, it's not obvious, but we are the 800-pound gorilla in that space.
Mm.
We have the broadest portfolio, the highest performing portfolio, and we have excellent, excellent portfolio of Hall sensing, and now we are augmenting that with MR sensing. We have GMR, and then increasingly it's all going towards TMR, right? So when an OEM or a tier looks at us, they're able to find the exact fit for their application within our portfolio without having to lose or having to go outside of this, this portfolio. And we continue to invest heavily in expanding that leadership and making sure that we are continuing to drive innovation within the magnetic sensing world, and that's why we win.
I guess I would ask the same question on the power side. I mean-
Yeah
... you're known for the Magnetic Sensing.
Yeah.
But you still have a, I think it's roughly a third of the business is power ICs.
Yeah.
What's Allegro's edge there? You know, may BEV 's the pull from the magnetic sensing and the sockets you have there.
Yeah.
But what are some of the learnings and the technologies that you have-
Yeah
... on the power side that makes Allegro win in autos?
Yeah, so it's a great question because, you know, we'll be the first ones to admit we're not a broad-based market leader in power like we are in magnetic sensing. But in the applications we serve, we have such deep domain expertise, especially in the automotive applications, that we have been able to build leadership in those power niches, right? A great example is motor drivers in the case of safety applications and ADAS applications. We have learned through our experience in automotive how to spin motors really efficiently and very quietly, and that matters when, you know, you think about cabin noise, and you think about EVs, where there is no engine noise, and you want to make sure that your, your customer experience and the driver experience is absolutely superior, right? And our motor drivers are able to deliver that.
The accuracy matters as well, so when you're relying on motor drivers to do lane departure and lane keep, even small degrees of error matter. And so we bring the most accurate, the most reliable automotive-grade motor drivers, PMICs, DC-to-DC converters, and now high voltage gate drivers into our portfolio. Because of that innovation and the agility we bring, it's hard to... for broad-based power players to compete with us in those applications.
So on the power side is a big application ADAS, and can you talk about the content story there, and what's the opportunity as vehicles go from L0 to L1 to L2-
Yeah
... for Allegro?
Yeah, it's a great question. So within ADAS, right, we are in the meat and potatoes of ADAS, so it's more the steering and the braking, so it's really fundamental, and it's more at the Level one, Level two. And the take rates there have been really good, and they continue to grow. So we still have a lot of juice left in that ADAS story when it comes to just steering and braking. And braking is continuing to evolve and look more like steering, and eventually there'll be corner modules, where steering and braking all comes into one. And so our ability to continue to optimize space and bring functionality together into one package continues to be really valued by the market, right?
Typically, in an electric-electronic power steering, we'll ship about seven or eight ICs, combination of multiple angle sensors for redundancy, motor drivers, PMICs, and regulators all working together and all tuned to operate as one system in that electronic power steering. And so that has led us to, you know, working with multiple EPS tiers to build a real leadership position in that application in global automotive.
Maybe we could, I guess, reframe the question and, or, I guess, take it to another place-
Yeah
... which is industrial.
Yeah.
You play in a number of areas across factory automation, data center, I mean, all over industrial.
Yeah.
What's the pitch when you're going to customers in the industrial market that you make? How much of that is similar to the auto market? How much of it is taking auto- grade reliability to-
Yeah
... applications that haven't traditionally needed them?
Yeah. So, you know, I would say our industrial exposure is very focused. We are not a broad industrial catalog player, even though, you know, we are not averse to selling into broad industrial, but that's where our distribution partners come in. Where we are focused on industrial is really on clean energy and industrial automation, and there we solve the same problems that we solve on vehicle. So a great example is the motor drivers I just talked about in electronic power steering are the same motor drivers we sell into industrial automation for robotic arm control. And so the same accuracy that's required in steering control is required in robotic dexterity, right? So think about a robot doing pick- and- place on a factory line.
That's one of the hardest applications, and you need very precise motor control and position sensing in order for the robot to know exactly what, you know, what to lift, how far to take it, and how far, where to place it. And so that's how we take automotive technology, and, and really, you know, we're not ashamed to say we are automotive first. So everything we do is designed for automotive. We'll build, design, and launch products for automotive, and then we'll take it to industrial markets like automation and clean energy, where we get rewarded for the automotive pedigree, the reliability, and the quality that you mentioned, and we'll get a premium for it, right? And so that's really our, our playbook.
And what's... I guess, obviously, it's been through, going through digestion now, but what's sort of the medium- to long-term growth outlook for industrial, and what are, what are the biggest contributors to that over time, as you see it? And I know you're playing all over the place, but is it data center? Is it charging infrastructure?
Yeah. So, so the mega trends that drive our industrial growth, our industrial business growth, are very clear. It's the electrification of everything, right? Everything from buses and scooters and motorcycles and industrial equipment and farm equipment to automation of everything, right? The demographic statistics are not in the favor of more labor. It's in the favor of more automation, whether it's China, whether it's Japan, whether it's the U.S., Western Europe. So more automation is happening everywhere, and our ICs are central to making automation work effectively and efficiently.
Mm-hmm. And, I mean, shifting gears a little bit, Yeah, Allegro, you, you established company over multiple decades, but you more recently have gone through a manufacturing transition and moved-
Yeah
from an IDM to a fabless company. Can you talk to us about the rationale for making that move? Why now? And, you know, what are the long-term benefits, I guess, financially and operationally, that you-
Yeah
Expect to get from diversifying your manufacturing base?
Yeah, it's a great question, and the transition from an IDM to a fab-lite model has really been, you know, a big contributor to our EPS growth over the past few years, right? And so, the obvious benefits are that we get to work with the best-in-class foundry partners, and we do about 50% of our assembly in-house and 50% with OSATs, and we do 100% of our test in-house, largely from an automotive quality standpoint. But we've been able to take advantage of additional capacity at different foundries. We've been able to take advantage of latest process technology that frankly would've been too capital intensive for us to undertake.
So I think it allows us to get the benefits of, you know, the best-in-class technologies around us without having the capital intensity that we normally would have, had we owned all of the foundries.
You've talked more recently about potentially qualifying a Chinese foundry.
Sure.
You know, China's kind of the elephant in the mixed- signal world.
Yeah.
Can you talk about, one, the rationale for why you-
Yeah
... decided to go down the path with the Chinese foundry? And two, what are you seeing competitively from China? I mean, obviously, China's pushing the EV industry forward, so that's a positive for your secular content growth.
Yeah.
But also they're investing in building out a mature node semiconductor market with the goal of being self-sufficient. So could you talk about, I guess, the competitive...
Yeah
... and market factors there?
Yeah, so you're right to highlight China. It's an incredibly important market for us. It's our single largest market at about 25% of our sales. You know, as we've grown in China, more of our business has become focused on China, local China OEMs. It used to be that most of our business in China was supporting global OEMs operating in China. So as that business has transformed, our customers have told us very clearly that they want us to be more local, and part of this is, you know, business continuity planning from their perspective. Part of this is us wanting to take advantage of the local capabilities as well and be closer to the customer. And so we are in the process of qualifying a local foundry and a local OSAT partner.
You know, we will localize more than half of our China volume in China over the next, call it 24 to 48 months. So we're really excited about what that potential brings. Obviously, it helps to de-risk our China business, but more importantly, as we see the Chinese OEMs now striding on the global stage, we want to win with them, right? It's not the hundreds of OEMs that you hear about, it's really the top 10 Chinese OEMs.
Mm
... that matter, that are active at a global scale.
Got it, and competitively, have you seen any change in the environment because of increased investment in China, or is it?
Yeah, so China is important for a lot of players, whether it's our global competitors or increasingly some local competitors. I would say that our value proposition of quality, reliability, performance still very much holds and is valued by the local OEMs that want to be seen as a quality player at the global stage, right? And the risk reward is not in the favor of trying to localize or trying to switch something that, you know, maybe costs $1, but provides an important risk mitigation function within their EV or their hybrid.
Right. Wanted to shift gears a little bit to the model. Obviously, gross margins are depressed right now, in part because of the Crocus acquisition, which we knew about-
Yeah
... and the headwinds that you outlined, but also because of the inventory correction. Can you talk about the near- to medium-term targets and levers you have to bring gross margins, at least initially, back into the mid-50 range, and then-
Yeah
... longer term, towards your greater than 58% target?
Yeah. Yeah, it's a great question. I would say right now, the margin dynamic is largely related to lower volume and under absorption. We start to get back to mid-50s% very quickly as the volume comes back.
Mm.
We've talked about, you know, sort of a mid-teens growth profile through this year, and so by the end of the fiscal 2025 period, we should be back to where we finished Q4 of
Mm
... 2024, fiscal 2024. So we feel good about getting back to the mid-50s, right? And then we have a clear path based on continued productivity in our plants and our supply chain, and the product mix as well. As we launch more new products to the market, typically, that's where innovation is, that's where we get higher ASPs, and so we believe product mix is gonna be very favorable over the next few years. And so we, we think that, you know, getting to 58 or higher is still very much-
Mm
... the right goal for us.
Got it. First-class problem, Allegro generates a good amount of cash.
Yeah.
But you've also got a big shareholder out there that kinda makes-
Yeah
... doing repurchases a bit complicated.
Yeah.
You've done some tuck-in M&A over the last 18 months. Should we expect more of that? And can you talk about priorities for uses of cash, as you know, initially you pay down the debt from the Crocus deal, but then-
Yeah
... longer term.
Yeah, so you're right in saying that dividends and buybacks don't really make much sense for us. So our number one priority for our cash is investing in our growth. Happy to say that the last couple of years have been a pretty big capital expansion for us, so that's largely behind us. So we were running at about 2x our normal CapEx rate. We will now get back to more of a normal run rate, roughly 5% to 6% of sales. And so our priority will be to look for the right assets that align to our strategy, our market focus, accelerate our technology roadmap. So you can expect us to be pretty active in that regard, but it'll be very disciplined, very focused on the markets we serve.
Got it. Well, the light over there says we're about out of time. What should I have asked but didn't? Or, what's... You know, obviously, we talked a little bit about this earlier, but, you know, what's frustrating you about your investor communications, and what's part of the story that you wish that we were getting that maybe is less clear than it should be?
I think very simply, we are a long cycle business, right? So we're winning designs today that will turn into revenue three to five years from now. We don't really manage to the quarter, right? So I think there's a lot of concern, and probably fairly so, around what's happening here in the near term. But really for us, it's the long-term, mid to long-term growth story that I think is super exciting. We continue to win more than our fair share in the market. We continue to expand the markets we serve, so I think it's a really exciting time at Allegro.
Awesome. Well, Vineet, thank you. We appreciate you coming to the conference and the broader partnership with TD Cowen. Thank you.
Absolutely.
Thanks.
Thanks a lot.
Thanks, man.