Hello and good morning. Welcome, everybody. Thank you for joining us at Needham's 27th Annual Growth Conference. My name is Quinn Bolton. I'm a semiconductor analyst for Needham & Company. It's my pleasure to host this fireside chat with Allegro MicroSystems. Allegro is a leading supplier of magnetic sensors and power ICs targeting the automotive and industrial markets. The company holds the number one share position in magnetic sensors worldwide, as well as the leading position in current sensors. We believe Allegro is well positioned for growing content per vehicle, driven by the trends towards autonomy and electrification, and we recently named the company as our top pick for 2025. Joining me from the company are President and CEO Vineet Nargowala and CFO Derek D'Antilio. Vineet, Derek, thank you for joining us at the Needham Growth Conference.
Thank you. Good morning.
Thank you, Quinn. Good morning, everyone.
Guys, I wanted to start off with your biggest business, automotive. Obviously, lots going on. But if I look at your September or the guidance you gave in September for the December quarter, you're guiding overall revenue down about 6% at the top line. But I think embedded in that was a pretty cautious outlook for North America and European auto customers. How much of that weakness that you're seeing in North America and Europe is just sort of overall weak end demand versus the continued effect of inventory digestion?
Yeah, Quinn, it's a great question, and I'll start, and then Derek can jump in as well. When we look at the overall automotive landscape, we've seen continued strength in China. Our other Asian markets, notably Japan and Korea, have been largely stable with bias towards growth, and I would say North America and Europe have been the two areas or the regions where inventory digestion has taken a bit longer than I think everybody expected, and then in Europe, we're obviously seeing some signs of more challenges related to the legacy OEMs in Europe as they try to figure out their electrification strategy. There's obviously a lot of repositioning of plants and R&D investments and so on, so I think if I look at North America, it continues to be an inventory digestion story, encouraged by what we saw in terms of Q4 sales, especially December.
I was reading a report this morning which said that XEV sales, so battery electric and hybrid sales, rose to almost 20% of total U.S. sales in 2024. So despite all the doom and gloom and sort of the negative sentiment, quietly, EVs and hybrids have continued their steady climb and now are as high as 20% of total U.S. sales. So that's encouraging, and then I think in Europe, once the legacy OEMs figured out their plans, the industry is pretty confident that companies like BMW and VW and Benz will figure out how to electrify their portfolio and start moving towards economic and also compelling products, so long way of saying inventory digestion, a little bit broadly, but some sort of challenges around repositioning in Europe. Over the mid to the long term, we're optimistic that they'll figure it out.
But we see continued tailwinds from the electrification of the portfolio. And we've said this before, and I'll say it again, we don't actually need global auto production to grow for us to grow. We see content lift from the transition to hybrids and battery electric vehicles, increasing levels of autonomy that will continue to drive our content forward.
Yeah, no, and we'll get into a lot of those drivers here in the Q&A. As you head into the March quarter, Vineet, what are your expectations for sort of inventory dynamics at both your distribution channel as well as at direct customers?
Yeah, so I talk about it in terms of end markets. So I think in automotive, we're closer to the end of inventory digestion than to the beginning, right? So I think other than a couple of maybe straggling pockets, and we said this before in our earnings call as well in the prior quarter, other than a couple of straggling pockets, I think the inventory digestion is largely going to be behind us. So we should start to shift more into what we would call our normal consumption model. I think on the industrial side, it continues to be pretty uncertain. There's a lot of questions around incoming U.S. administration, how much of the rhetoric gets turned into policy, what is the impact on tariffs, so on and so forth. So I think in industrial, we're seeing some pockets like cloud, data center, medical continue to show green shoots.
Broadly, I think it continues to be cautious, waiting on sort of certainty. But we know that the inventory positions have been drawn down pretty significantly. Okay, maybe some pockets again here or there, but cautiously optimistic that as trade policy becomes more certain, we'll start to see more normal ordering patterns come through.
Quinn, as you well know, one of the nice parts about the Allegro business is the well-balanced geographic dispersion of sales with about a quarter of our sales in China, 20% in what we call rest of Asia, which is really Taiwan, Korea, India, give or take 15%-20% in Japan, somewhere in 15% in the U.S. and another less than 15% in Europe. That's served us well over the years as different regions go through different economic cycles. We're seeing the same thing right now. We're seeing different dynamics, as Vineet touched on. We talked about this publicly at our last conference call in November and also at our last public fireside chat in that the inventory clearing, the market dynamics, we did a lot of that early in China back in our Q1. We took a big hit in China.
Cleared a lot of inventory. China was back up 52% for us in the September quarter. As you suggested, we did guide to have a lower December auto quarter with North America and Europe, which is no secret. There's been a lot of announcements in both those regions, and as Vineet mentioned in North America, we feel good about it in the sense that it's really an inventory digestion taking longer, and there's been a lot of positive news and sentiment in North America from an auto perspective. Europe, as we talked about, has both a macro challenge and the inventory clearing. Now, Europe for us happens to be our smallest market for us, but we continue to make inroads there as well.
Perfect. I know you guys will talk about this on public calls, but maybe just give us a sense of the design win momentum you saw in 2024 on the automotive business?
Yeah, Quinn, that continues to be very strong. We don't obviously provide quarterly updates on our design wins, but we continue to see the majority of our design wins, again, come from e-mobility within automotive and the target industrial markets in the industrial space. So in medical, in cloud, data center space, in the automation and robotics space now. So it feels really good, and we are really encouraged by the intersection of what we're working on in terms of new products as well as the design wins we're seeing in the target markets that we are focused on.
Perfect. I know S&P Global Mobility is sort of forecasting SAR to be sort of flattish, maybe down 40 basis points in 2025. But speaking to your e-mobility business, what kind of XEV growth rate are you looking at over the next few years? Do you still see that as a sort of 20-ish% grower? What kind of growth rate do you think that market is going to be growing at?
Yeah, we think so. We think, as I've said before, we don't actually need auto production to grow. So if auto production is flat and inventory digestion is largely behind us, we start shipping into normal consumption, we should see growth. And then the tailwind for us is the continued electrification and the continued adoption of ADAS feature sets. And that for us is tied to you talked about XEV growth. We believe, and this is not just us, various third parties have reported XEVs would still grow a healthy mid-20% range globally, some regions faster than the others. China has been on a really, really strong growth trajectory. We think that continues, maybe moderates a little bit versus the torrid rate for the last couple of years. But there's so much more room to grow in Europe, North America, and Southeast Asia.
So we think that continues to grow. So we see a lot of tailwinds despite a flat production market.
And Quinn, we chatted about this, but at my last public fireside chat, we talked about how Allegro went through our strategic planning process in the fall. And it's kind of a constant process, but we do a full update in the fall timeframe for our board. And one of the outputs of that is that new investor presentation that we published with our earnings in November. And in there, there's a slide where we really just updated our SAMs and our TAMs, which are slightly bigger than they were a couple of years ago, both in industrial and auto. But very importantly, it allowed us to reconfirm the growth in those areas of XEV and ADAS.
What we found very, very interesting was when the company went public a few years ago, that by 2028 or 2030, there were some projections for XEV, both hybrid and electric vehicles, which were quite good. Today, those projections are 65% better than they were by 2028. That includes hybrids, which we have similar content on. While sentiment, particularly in North America on EVs, has been a little down, I think the data shows otherwise, which is great for us and our peers.
You've talked about the e-mobility side of the business. Maybe just what are your thoughts on the growth rate looking forward over the next few years on e-mobility? Can you give us some sense how much of the e-mobility is largely XEV-driven versus sort of the ADAS side of things?
So Quinn, roughly 50% of our sales are in e-mobility. The rest of it is a segment we call safety, comfort, and convenience, which is agnostic to the powertrain. So it grows slightly above SAR. And then there's a smaller segment, which is purely ICE powertrain, which we model at about, call it high single-digit decline over the next few years. So that's what comprises our automotive business. E-mobility continues to be our growth engine. And within that ADAS, and again, we're in sort of the real mission-critical part of it, which is your advanced power steering, your advanced braking systems with really a cross-section of our portfolio. It's our current sensors, it's our position sensors, it's our motor drivers, it's our automotive-grade PMIC. So it's a really custom-built portfolio, which is automotive-grade for these mission-critical applications.
The fastest growth we're seeing is, of course, on our XEV portfolio, which is largely around current sensors, PMIC, motor drivers, all of it around efficiency and safety for electric vehicles.
Perfect, and on the XEV side, I think there may be some misperception out there in the market with investors that your business is primarily driven by the battery electric vehicles. Can you maybe just sort of talk about your dollar content across the XEV landscape?
Sure. So let's start with high-level numbers. So our content opportunity on a pure ICE vehicle today is roughly around $40. That goes up to as much as $60 on a hybrid or what we would call a 400-volt battery electric vehicle. And then as battery electric vehicles move towards higher voltages, 800 volts and above, and you start to see more wide bandgap compound materials being used with our high-voltage gate drivers, that content opportunity goes up to as high as $100 a vehicle. So it's a very nice progression of content as there is increasing electrification in cars. On hybrids, I would remind everybody that we benefit from both conventional powertrain, and it's generally a lower-powered engine, but still needs transmission, still needs all the traditional sensors.
And then you've got a smaller battery pack, but still a lot of the same electric powertrain considerations that you would have on a pure battery electric. So we get to benefit from both. And obviously, our safety, comfort, and convenience, as people seek more comfort, more tech in their cars, that content continues to grow nicely as well for us.
Quinn, another way to spin it sort of is to say that more than half of our auto business is powertrain agnostic between the safety, comfort, convenience, and the ADAS applications, which are level one and level two.
Got it. Okay. Wanted to sort of switch. A couple of years ago, or almost two years ago, you terminated your distribution agreement with Sanken. What's your outlook now for the Japanese market now that you're sort of targeting that market more of a direct sales relationship?
Yeah, so we are very fortunate to have a very enviable position in Japan as a U.S. company. And we all know how hard it is to break into the Japanese market. And our relationship with Sanken gave us that ringside view of what was happening in Japan and with Japanese OEMs, especially in automotive. And as Japanese OEMs became more serious about electrification, we wanted to have more of a direct relationship because we felt with our engineering talent and resources, we could serve them in a much better way than our partner Sanken could. So fast forward to today, we've got our own team serving the customers directly. We are heavily engaged with the full force of our R&D team, our sales, our FAEs.
And I'm really pleased to report that we've seen great progress and a lot of momentum in design wins with the Japanese OEMs in automotive, but also in the industrial and a little bit on the consumer side as we've been able to make our value proposition crisper in the eyes of the customer. And so whether it's automotive, especially in GMR, in highly mission-critical applications, or as industrial in automation, as well as in some of the gaming and consumer-related applications, we're seeing really good momentum. And I'm confident that as we look at the next year or two, we'd start to see some pretty significant step change in our growth profile in Japan.
Great. I wanted to sort of move to the acquisition of Heyday and your move into the isolated gate drivers. I know you've announced your GaN gate driver already. Maybe give us a sense of what the customer feedback has been. I believe you also have announced your first design win with a Chinese customer for that. And then on the silicon carbide gate driver, is that still set to sample later this year?
That's correct. So really encouraged about the progress we're making with our high-voltage power business, which is related to isolated gate drivers. We have a very unique value proposition. We've continued to invest in that space. As you pointed out, we got our first wins on the GaN gate drivers. Really excited about our silicon carbide gate drivers, both for onboard chargers as well as for traction inverters, which we'll be sampling later this year. And we all know that silicon carbide is finding a lot of favor, not only in battery electric vehicles, but also in the data center space as power density becomes important and power efficiency becomes important. So we're seeing really good design win momentum and sampling momentum with these customers.
I'm bullish that over the course of the next 18-24 months, we'll start to rack up these design wins and really build a strong business there.
Yeah, we definitely heard from some of the other folks presenting at the conference the idea that silicon carbide could start to move into the front ends of the data center power supplies as those racks go from 120 kilowatts to 400-500 kilowatts over the next couple of years. So on those gate drivers, maybe just can you give us a sense of what the dollar content per auto would be as those designs ramp?
Yeah. So as we talk about our content in battery electric vehicles going from $60 roughly on a 400-volt battery architecture to close to $100 of content opportunity, that delta is largely driven by the gate drivers. We haven't really quantified the content opportunity yet in the industrial side because that continues to be pretty fragmented. But certainly the automotive one, we believe, is pretty real. And we're excited about bringing those products to market.
Great. Moving to the China business, I believe it's roughly 25% of sales. Can you discuss your strategy to localize your China supply chain? When do you expect to have first production from OSATs? When do you expect to have local Chinese wafer manufacturers qualified and ramping?
Yeah. So China is an incredibly important region for us, Quinn, about 25%-26% of sales. This is where we've seen continued strength, even through sort of the inventory digestion period, if you will, first region out of it. And we have some really, really strong partnerships and relationships who have been urging us to think about local production for some time. And about a year and a half ago, we saw the writing on the wall that if we didn't localize, that by localizing, we could see even more meaningful growth in China. And so fast forward to today, we are qualifying, and we've got more than 10 tape outs at our foundry. We continue to make progress there. The foundry sourcing will probably take shape over the next 18-24 months.
But I'm pleased to say that from the OSATs, we'd start shipping this year. So we've already started shipping one part, but we'd start shipping more in earnest before the end of the year. So really pleased with the progress the team has made in a very short period.
We've been for a number of years actually doing some assembly, about 10% of our assembly in China, Quinn. The fact that we're now moving the rest of that portion of the supply chain for standard packaging and other things to the China market is not necessarily new. That's moving along quite well. Derek, I wanted to sort of follow up there. I think in a recent fireside chat, you had mentioned that you're not necessarily moving everything for China to China, that what you'll outsource are more sort of standard process flows, that some of the proprietary foundry processes in particular may stay offshore. Just talk about what will you sort of manufacture in China? What do you keep sort of more proprietary and perhaps with your current suppliers?
Yeah. So we are very careful to make sure that we are protecting our IP while we localize in China. So we have one of our more standard processes, which we are localizing with our foundry partner. And a lot of the standard packages will go to our OSAT partner in China. Everything else, we will ship in from the outside into China. We believe that's the right balance for now. We obviously assess continuously and see if we need to adapt that strategy. But we believe that that's going to satisfy the desire on the part of a lot of our Chinese customers and partners to have local production. And that will probably be roughly 50% of what we think is going to get shipped into China.
Quinn, on the packaging side, it's a pretty similar strategy that we have today for the entire world where we do a lot of the industry standard packaging, the high-volume packaging at OSATs where they can do it pretty efficiently. And then anything that's sort of custom packaging for both proprietary purposes and because we can just do it more cost-effectively, we do that in our own facility in the Philippines.
Yeah. Could you spend a minute maybe just the China for China strategy? Certainly very important, I think, for production that's consumed locally within China. But as the Chinese OEMs export more internationally, how much of that production needs to be locally produced in China? Or are they more willing to source parts from international manufacturing locations?
Yeah. So it's a great question, Quinn. Right now, we're not really seeing a parsing of local production versus global production. I think there's just a desire to have more locally. Just like we're concerned about, the U.S. government is concerned about technology advancements and supply continuity. The Chinese customers are concerned about their supply continuity. So I think the localization really speaks to their desire to maintain supply continuity and continue to source high-quality, high-performance parts from suppliers like us. I think as we know that they've become net exporters, and as they expand globally, we believe that they're going to be very open to sourcing from our global supply lanes. It doesn't have to come from China.
And Quinn, you touched on that interesting point, right, where the majority, at least the expectations right now and the projections are, the majority of China auto growth, production growth over the next several years is going to be net export. And that bodes well for Allegro and companies like Allegro because the standards still significantly matter, right? It's not just a cost equation. So the fact that our products have a technological mode, have significantly higher standards, and those sort of things, that still matters a lot because of that net export growth.
That's a great point.
I think many semiconductor companies will say the best products still win in China. But there's a concern by investors about the threat from local competition in the China market. And so can you describe what you're seeing in terms of local competition in China? Do you see anyone locally in mag sensors or power ICs that could be a threat over the next couple of years?
Yeah. So the timeframe here is pretty important. I would say over the next couple of years, our competitors are still going to be the big global players. And our strategy in China, Quinn, is we're not serving if you hear the reports, there's over 100 EV OEMs or automotive OEMs, right? We don't treat all of them equally, right? So we're really laser-focused on the top five, call it 10 OEMs that have scale, that have global ambitions, that value quality and performance. And we believe our value proposition really resonates with them. And so there are probably local competitors that are serving the rest of the landscape. And we aren't too concerned about it. For the next couple of years, our competitors, as we focus on those customers, will continue to be the global players that we compete with in the rest of the world.
Got it. Wanted to shift over now to the industrial and other business. Looks like that business troughed in June and is starting to recover. I know earlier you said there's still pockets of inventory you have to get through in various industrial markets. But hopefully, it looks like the bottom was put in in June. What do you see application-wise driving the recovery as we head into 2025 in the industrial and other business?
Yeah. So very excited about our return to growth in industrial markets. And we're starting to see the green shoots. I think most of the inventory digestion there as well is behind us now. And I would say the applications we see leading the charge, excited about what we see in medical, excited about what we've seen in automation and robotics, and then also the cloud infrastructure where these are the markets where we're starting to see an increasing percentage of orders come in within lead time, which says maybe the worst is behind us. And now folks are starting to replenish and get ready for the build-out that is happening.
The medical opportunity sounds really interesting. Over the past couple of conference calls, I think you've announced now two pretty major wins in continuous glucose monitors with your TMR switch and sensor product. Can you give us some sense of those design wins? How big is this medical TAM for the company?
Yeah, so excited about this new segment for us, and we really inherited this through our acquisition of Crocus, and TMR is such a great technology because it's very, very low power. It's ultra-sensitive, great resolution, great signal-to-noise ratio, so any application that needs to conserve power needs to get higher accuracy and higher resolution in very tight spaces because these dies are one millimeter square or less. TMR is a fantastic application, and so on CGMs, TMR serves as a switch for the wake-up for basically the patch, so it's a very critical function required for the customer experience and the battery life, and have we quantified the TAM?
We have, and I know in the investor presentation, Quinn, we've initially quantified our SAM at about $300 million. I've also said publicly today we're shipping about $5 million a quarter. So we think there's a very large opportunity, and it's a new large opportunity here for us, which is exciting.
Yeah.
I didn't know the five million. That's pretty nice already.
Yeah. And we continue to expand on that business. And we see adjacencies in applications that perhaps are not as core to us, but certainly we're getting pulled into it around wearables and so on. So really bullish about what TMR technology can do within automotive and outside of automotive.
Yeah. I guess maybe just on that TMR opportunity, I know it's a pretty high-growth opportunity. But any thoughts on how fast that TMR TAM is growing over the next several years in those industrial applications?
So I don't think we've shared in total, when we purchased Crocus and announced the acquisition in August of 2023, we shared the projections that TMR is growing at 30% a year and expected to be about a $1 billion market or 20% of the overall magnetic sensing market. So it's growing significantly, three times the rate of the overall magnetic sensing market. And what's interesting for Allegro is it's one of the reasons why we did that Crocus acquisition. We already had some TMR. They have a nice TMR stack. And when you think about the magnetic sensing space, Allegro has 23%, 24% market share. There were far fewer competitors. So our expectation and our aspirations are to have higher than that market share by the time we get to that.
Great. Wanted to sort of switch over to sort of some financial or just more business-related questions. A couple of questions we're asking most of our companies here at the conference. One is around the incoming administration and policies they may enact. And so the first question is about tariffs to the extent that the Trump administration does increase tariffs. Is there any direct impact on your business? I know indirect impact if tariffs cause higher prices, there may be a lower demand impact. But just anything that could hit you directly in terms of tariffs.
So Quinn, I think the details matter, right? The specific details of tariffs on which parts? Is it all countries? Is it a select group of countries? So it just depends on how they get deployed and implemented. One of the questions I get a lot from customers is, what are you building in China that's coming to the U.S.? Well, and the answer to that is nothing because we don't actually build anything in China for the rest of the world. Anything we do in China is going to be purely for the China market. So I think from that standpoint, we feel pretty good. Obviously, if there are broad-based tariffs applied to anything that's coming in from outside the U.S., we'll get impacted. That's a systemic risk that I think us and all of us in the industry and other industries are going to have to face.
Typically, my experience with tariffs is that becomes a cost that gets passed on to the customers, right? Not a great thing, but ultimately, that's what happens.
A little bit about our geographic footprint, Quinn, is today we're shipping everything from our facility in the Philippines, which is still kind of a good country, I suppose, from that standpoint. Our wafer suppliers are North America. We have one in Minnesota. We have one in Taiwan. Pretty well with China, as many talked about. Just like our customer base, our supply base is fairly well geographically dispersed, including a large U.S. wafer supplier.
Got it. The other question we'll get is if the Trump administration reduces incentives for either solar or electric vehicles, would that have a meaningful impact on your business?
No, I'll give you some numbers, Quinn. So I talked about this at the Fireside Chat I was at in November. In the US, about 8% adoption of EV at this point in time right now. Allegro has 15% of our sales shipped to the US. So if you take kind of the multiplication of those two things, about 2% of our total sales of US EV; it is growing fast, and that's great, but it won't have a meaningful impact on our sales.
Great. You guys have set a gross margin target of 58%. I think your guidance for the December quarter is 50%. What are the biggest drivers for you to reach that long-term gross margin target?
Yeah. So the good news is we reconfirmed that long-term gross margin target just two months ago when we reposted our investor presentation after going through the strategic planning process. So we're still confident in that long-term target. And so the drivers to that are the biggest piece of it, especially in the near term, is leverage, volume leverage. So since we've been public, we've had about a 65% drop through on gross margin or variable contribution margin. So leverage and filling up our facility in the Philippines helps a lot with that. The other pieces are going to be mix. And mix can be across geographies. Mix is new products, the TMR, the isolated gate drivers that currently have a higher ASP. And then we're doing a number of things to continue to make our underlying cost structure more competitive.
So those will really be the three drivers you'll see kind of to help us get back towards that mid-50s and then eventually up to our target of 58.
Perfect. I think at the recent fireside chat, you also sort of talked about expectations for the pricing environment. What are you seeing in terms of pricing for 2025? And has pricing had any impact on your longer-term growth outlook for the business?
So Quinn, our longer-term growth outlook comprehends some level of price, especially in our automotive business, right? And I would say the automotive pricing environment is back to normal. By that, I mean it's called a 2%-3% of productivity that we share with our partners and OEMs. And that's pretty typical. Most of our design wins are long-term contracts. Typically, it's a five-year production life plus service life after that. And in the production life, when you start off, pricing is high because volumes are low. As volume ramps, you get productivity. You share that with the customer, right? So typically, that's in the 2%-3% range. And I would say we are back to that range now.
Great. You've mentioned your strategic review or annual planning process, and you wrapped that up last fall. I know you sort of reiterated your sort of longer-term model and outlook. But were there any other sort of big takeaways from that strategic planning process? Any shifts in strategy or?
No shifts in strategy. We believe, obviously, there are tweaks in it. We adapt a few strategic initiatives. But it's a healthy way for us to make sure that we are staying current. And it's not just a once-a-year process. It's a continual process. But we sort of what Derek alluded to is we sort of put a bow on it, and we talk about it with our board, and we update our investor deck. And it's really with the view of taking into account the latest inputs, what's happening in our regions in China and Europe and so on. And that drives our investment decisions in the near term to make sure that we're still looking at the puts and takes that get us to the right outcomes over the mid and the long term.
Got it. I think recent calls and Fireside Chats, you've talked about seeing some customers in China and Korea placing orders within lead times. But I think you've also talked about, obviously, in the near term, you can ship within lead time, but you're starting to ask customers for a little bit better visibility so that you can plan your business and those folks aren't caught short. Are you seeing the customers respond to those requests for sort of longer-dated delivery times?
Not yet is the honest answer, Quinn. That might happen. Inventory is on everybody's mind, right? We think as the uncertainty abates and people feel more confident, we'll start getting back into those normal ordering patterns. In the meantime, we built a die bank, as I think Derek has alluded to before. We've got a little bit of finished goods. We remain ready to support our automotive customers and industrial customers for some reasonable snapback, right? Obviously, it's not infinite, but at least for some reasonable period of time, we should be able to support orders within lead times. Eventually, we will need to get everybody back into the normal ordering patterns.