Good morning, everyone. I'm Jalene Hoover, Allegro's Vice President of Investor Relations and Corporate Communications. I joined Allegro just over two months ago, with more than two decades in semiconductors. There's no better way than to ramp quickly than to kick off an analyst day event and the company's first at that. We appreciate those of you here in person and those online for taking the time to join us this morning. I'm not going to read our forward-looking statements, I encourage you to do so after today's event when the presentation will be available online in the investor relations section of our website under Events and Presentations. In summary, I'd like to caution you that today's presentation and the accompanying oral remarks contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
We have a great lineup here with us today to provide you with expanded insights into Allegro's strategy, technology and innovation, how we win in industrial and automotive markets, and finally, our business performance and financial model. Note that following Derek's presentation, we will take a 15-minute break prior to Q&A. Once our presentation concludes, we hope that you can stay to enjoy lunch and enjoy our demos. Now it is my pleasure to introduce you to Allegro's President and CEO, Vineet Nargolwala.
Thank you, Jalene, and good morning, everyone, and thank you for joining us for our first-ever Analyst Day. I'm Vineet Nargolwala, President and CEO of Allegro MicroSystems, and I'm so excited to be here today to talk about a great company and where we're headed. When I joined Allegro last June, I saw a company at an inflection point, a company that is serving fast-growing markets with significant technology and business transformations underway. A company which had the right products and technical expertise to help customers in those segments manage their transition, and a company, given the right strategies and disciplined execution, could deliver sustained long-term growth and create significant value for all of its stakeholders. Today, we wanna share those perspectives with you, and I'm confident you're gonna leave here as excited as I am about our future. Why are we here today?
Well, Allegro is a very different company than the one that went public a little over two years ago. It's remarkable how far we've come. What's even more exciting is the journey and the potential ahead. Our origin story or Allegro 1.0 started as Sprague Electric in Worcester, Mass., nearly a century ago. Allegro 2.0 was being a division of Sanken Electric, then being carved out and taken public with the goal of getting to $1 billion in sales. We're almost there. What does the future hold? Internally, we call our next chapter as Allegro 3.0, and we are building on a legacy of nearly a century and accelerating towards the future.
With a sharper focus on e-mobility, clean energy and automation, increasing our technology and product innovation, building a strong ESG foundation, and continuing our growth and exceeding the targets that we had set at the time of the IPO. Today, we are reaffirming our guidance for fiscal Q4, and we want to share with you our strategies and our financial model as we look to the future. First, for those of you who are new to the Allegro story, a quick introduction. Allegro is a global leader in magnetic sensing and power IC solutions. In fact, we are the number one leader in magnetic sensing, and that comprises all, more than 60% of our sales. We're really an automotive-first company. Automotive is in our DNA, and automotive sales are almost 70% of the company.
Industrial is about 20%. The remainder is a wide variety of applications from gaming to power tools. We're over 4,500 employees strong. We serve a wide variety of customers in the automotive and industrial markets. We've been around for a long time. We've been public only for a couple of years. In that short period, we have built up a strong track record of performance with the most recent quarters delivering record sales and earnings growth. Our vision is to move the world to a safer and a more sustainable future. It starts with a highly focused market presence. We got our start in automotive decades ago. Our ICs have always been critical to the safe and efficient operation of vehicles.
We're now evolving that focus to e-mobility, which is the electrification of vehicles and the increasing adoption of safety-related driver-assistance features, also known as ADAS. In industrial, we target segments like clean energy and automation, where the automotive pedigree gives us a great advantage and differentiation and great technology leverage. Our core value is innovation with purpose, and that's timeless. It drives everything we do, and it's centered on customer intimacy with our engineers working very closely with our customers' engineers to solve the most complex problems. We design, build, and launch products for automotive, and then we adapt for industrial. Everything we do is automotive-grade. Our organization culture is customer-centric, it's agile, and we value innovation with the fail-forward mindset. At the same time, we are adopting frameworks that bring efficiency and increase product velocity. This approach has resulted in leadership in magnetic sensing and in targeted power products.
We're now adding to our leadership in power with isolated gate drivers and our over 1,300 patents build a significant moat around our leadership position. This leadership helps to deliver a very attractive financial profile. Our move to a fabless model has created a highly variable cost structure. That, coupled with our target of double-digit sales growth and expanding gross margins, will create an opportunity for significant shareholder returns. Our strategy is simple. We are focused on large, fast-growing markets driven by megatrends that intersect with our product portfolio and technical expertise. Both the automotive and industrial markets are being transformed by the megatrends of electrification and automation that are gonna play out over the next decade. Within automotive, we're now laser-focused on making e-mobility a reality. Within industrials, we are focused on targeted markets like clean energy and industrial automation that are being disrupted by the same megatrends.
Our technical expertise and product portfolio in sensing and power ICs is uniquely positioned to intersect these megatrends. Now we are aligning our entire business system to our strategies. Over 75% of our R&D investment is now focused in these areas. Our teams are incentivized for success in these areas. We are seeing proof that our strategy is working. Design wins in these areas are up 114% year-over-year and represent over 70% of our total design wins. I want to take you a little deeper on e-mobility, which is arguably the biggest transformation in the automotive industry since the introduction of the internal combustion engine. Electric vehicles and the adoption of ADAS features has reached a tipping point.
Beyond the growing sales of electric vehicles, what's remarkable and what really matters is that every OEM is pouring all of their R&D and capital investment into electrifying their fleet. What's driving it, of course, is a confluence of increasing regulation, decreasing costs, especially on the battery systems, and improving infrastructure, namely electric vehicle charging stations. This means that EVs are now projected to grow at over 20% CAGR, and e-mobility, as a total market, represents a $4 billion opportunity for Allegro. Our content opportunity on EVs is twice that on internal combustion engine-driven vehicles, approaching $100 a vehicle. What's really exciting for us is that e-mobility sales now are 43% of our automotive sales and e-mobility design wins are more than 65% of our automotive design wins.
We're also seeing great alignment of our portfolio in fast-growing industrial markets like clean energy and industrial automation. There is an ever-increasing demand for energy and the need for clean energy, and a distributed bi-directional smart grid is more urgent than ever. Here we're focused on solar, on wind, on EV charging stations, where the power conversion challenges are identical to the ones we solve on electric vehicles. In data centers, which has grown nicely for us in the last few quarters, we are focused on thermal efficiency with our fan drivers for server cooling. This market is growing rapidly, and the content opportunity for us is significant. As we think about automation, the world is dealing with a labor shortage that is only getting worse. This is not just in the Western world or in Japan.
Even China, the world's factory, is facing an aging population and declining labor force. It's no wonder that 8 out of 10 smart factory pilots are happening in China. The need for automation is stronger than ever, our robust solutions for accurate and efficient motion control that were designed for automotive are finding great application here. These segments are not only fast-growing, the semiconductors required per system continue to increase, that offers a great content opportunity for Allegro. A lot of you have asked us about our ESG strategy, I'm proud to say that we are taking a very intentional and comprehensive approach to ESG. What makes it so relevant and exciting for us is that our products are critical to helping our customers achieve their sustainability goals. Our core tenet is to maximize the impact of our portfolio.
At the same time, we will work to minimize the environmental impact of our operations and our products and engage our supply chain on advancing sustainability. We will continue to work to build a diverse and innovative workforce and support the communities we operate in by cultivating the right opportunities for their betterment and advancement. In short, ESG is integral to our mission and is good for our business. This is a seminal moment in the automotive and industrial markets as significant technology and business model transformations get underway. Allegro is uniquely positioned to help customers manage this transition and benefit from the opportunities. Being in these fast-growing markets is not enough. We understand and have what it takes to excel, to win, and to be the leader. It starts with customer intimacy to obtain insights that you can't get from market research and build long-term relationships.
It's being better than all the alternatives on the market. What drives us here is the core value of innovation with purpose. It's working closely with customers to understand their needs and bring the right products to the market quickly. It's also using our capital to make smart acquisitions to strengthen our portfolio. It's about performance. We leverage our global engineering team to find the best solution to customer problems. We work with our supply chain to become more efficient every single day. We launch new products at the right time, at the right quality. We operate at 200 parts per billion. That does not happen by accident. Our performance is highly intentional, and it's automotive-grade. Our customers know us and trust us to help us in this transition to a more sustainable future.
Speaking of that future, we are ready with a strong management team with significant industry and public company experience. Beyond those who are participating today, I'm privileged to lead a deep and talented team. We have a great mix of leaders and talent with a long history at Allegro and those who have joined us with great experiences from other companies. Our collective experiences coming together is exactly what we need to guide the company through its next chapter of growth. Joining me today are key members of my team to expand further on our strategies and our financial model. Derek D'Antilio, our CFO. Suman Narayan, our Senior Vice President of Products. Max Glover, our Senior Vice President of Worldwide Sales. I will introduce our next speaker, Mike Doogue, a prolific Allegro innovator with over 75 patents to his name.
Mike has been with the company over 25 years and was recently appointed our first ever CTO. There is no better person than Mike to share with all of us why our technology is so differentiated. Mike?
Thank you, Vineet. Hello, everyone. It's truly my pleasure to speak to you all today. In this session, I will first start with a discussion about Allegro's differentiated products, and then we'll talk more deeply about our innovative automotive-first technology. Then we'll start to talk about how we combine the products and the technology to carve out leadership positions in the e-mobility and in our targeted areas of the industrial market. You've heard it said a few times today that automotive is in our DNA, and that's undeniable. It's actually one of the key foundations that helps us establish the leadership positions we have today. In magnetic sensors, that leadership position is strong. We're very proud of the fact that we are number one in the area of magnetic sensing, and we've been leaders in this space for years.
Sometimes people ask me, how have we maintained a prolonged leadership position in magnetic sensing? The answer is simple, innovation with purpose. We have been prolonged innovators in this space, and as a result, we have the broadest portfolio of products that are more accurate, more efficient, smaller, more robust, and can operate at higher speeds relative to the competition. Customers continue to love our products. I'm happy to report that since the time of the IPO, our market share in magnetic sensing has actually accelerated, showing that we still have momentum in this marketplace. When we think power ICs, we again lead first with our automotive technology. The power market is large, and we don't attack the entire portion of the power market. Instead, we find high-growth areas within the e-mobility market, the industrial market that value our automotive technology.
Our motor driver ICs, they spin motors, fans, and pumps more reliably, more efficiently, and more quietly than most competitor solutions. Our regulator ICs, they convert higher voltages into lower voltages that are more useful in various systems. Let me give you an example. In the car, we have a 12-volt battery. Our regulator ICs will step down that voltage maybe to five volts, 3.3 volts. These voltage rails can be used to power chips throughout the car. Last, certainly not least, our isolated gate drivers. This is a new area for us. These products operate up, at, or above 1,000 volts, and they're actually optimized for driving gallium nitride and silicon carbide transistors. Additionally, when you work at these voltages, it's the sweet spot for the electric powertrain in cars and significant portions of the clean energy market.
It's a fast-growing market, a new area for us. This should be a bright spot for Allegro for many years to come, and I'll come back and talk more about the tech in these products before I wrap up the session today. Before I talk too much about products, let me talk about what is inarguably one of the strongest foundations of our tech, and that's our wafer technology. For decades, we've been investing in this technology. For decades, we've been focused on making it automotive-grade. As a result, we have this truly unique wafer tech. It passes the most stringent standards of the automotive industry. What that means, it can survive 175 degrees Celsius for more than 1,000 hours. We also have 120 V capability.
This is important for 48-volt markets and data center and in EV, but there's something more here as well. In a car, there are many voltage transients that can damage lesser ICs. Because of our high voltage capability, this is just one more way we add to the robustness and the ruggedness of our ICs in the car. Lastly, you already heard about our 200 PPB failure rate, and I can tell you that's a tremendously low failure rate in the field. Our automotive customers deeply appreciate that. This is actually somewhat table stakes to play in automotive. What's also true is that our industrial customers deeply value this as well. It's basically a means of measuring, does a company like Allegro cause you problems in the field? With a number that low, in general, the answer is no.
Now, I have a chip photo on the screen, and I don't want it to put you to sleep. There's some good stuff in there. Stay with me. I put it there for a reason, which is to highlight that we have a truly unique technology in many ways. One of the most important ways is through the up integration we achieve. In that picture, we have precision analog electronics. We have dense digital electronics. This means we can add algorithms, even microcontrollers to our ICs. We have automotive-grade EEPROM memory. This may not sound super interesting. I'll tell you, when you look out into external foundries, it's very difficult to find the right level of automotive ruggedness and memory. We created this ourselves. On the chip, we also have Hall effect transducers, GMR and TMR transducers.
Then not shown here, you'll see it later, we can also integrate high current, high voltage power transistors that are the foundation of our power ICs. It's truly highly integrated. New entrants to the market can only dream about this level of integration. It's a, it's a moat and a barrier for entry for new entrants in the market. You've also heard over the years we've transitioned to a fabless business model. I wanna point out that in that transition, our technology has only become stronger. The reason for this is that through our approach, we installed our highly unique automotive-grade technology into some of the leading wafer fabs in the world, and this technology is captive to us.
At the same time, these are highly skilled wafer fabs. We leverage their expertise in unit processes and wafer processing. We fuse together the best of Allegro with the best of the industry. Now we believe we have the strongest automotive-grade tech we've ever had as a company. Now let me tell you a story about our sensor business. Decades ago, we started investing in automotive powertrain technology. It's one thing to be automotive, it's another level of achievement to be in the powertrain. We had the wafer tech that I just talked to you about. We also developed highly integrated packaging technology. This is an area where Allegro truly differentiates ourselves.
We have a history of integrating all types of components that add value, be it magnets, resistors, capacitors, all with the mindset of solving real and meaningful customer problems that we've uncovered working so closely with our customers. The first business that ramped was our speed sensor business. These speed sensors are at the heart of internal combustion engine cars. They make them more efficient, they make them less polluting. We realized we had found really a high-performing formula in combining wafer tech and package tech to solve problems. We did it again. We looked at the EV powertrain and we made this call long before EVs were clearly going to be as popular as they are today. We applied the same formula. We had the right wafer tech.
We made a completely new set of unique packages for our current sensors because we knew that there were so many current sensors in an EV powertrain. That's been successful, and I'm happy to report that today we're actually one of the rare companies that has more dollar content in an EV powertrain than we do in an internal combustion engine powertrain. The reason is current sensors. Let me double-click on these products. We believe this is the fastest-growing area of the magnetic sensor market. When we look at an EV in the marketplace today, we see cars with up to 40 current sensors inside. They're not just in EVs, you'll find them in clean energy systems, industrial systems as well in good numbers. You see 3 pictures on the right of the slide. These are all packages.
This is an example of how we use our packaging technology to truly differentiate our tech. Through innovation with purpose, we now have the broadest portfolio of high-performance current sensors in the marketplace today. As a result, we help to make electric vehicles have longer range, we help them to charge faster, and we can improve the efficiency of clean energy systems. There's another exciting area of the magnetic sensor market. Some of you already asked me some questions about TMR technology today, which is great. It's an emerging area of the market. TMR, it's a different type of transducer. It's a magneto transducer. It's a little more accurate, has higher resolution, and can operate at higher speeds relative to Hall effect sensors. It's beginning to take share from Hall effect sensors.
I wanna point out Hall effect sensing will be the majority of the magnetic sensor market for many years to come. The fact is that TMR is starting to take share. Customers like TMR, they can make higher performing motors. They can also more easily control power electronics using silicon carbide and gallium nitride transistors. In these applications, the faster operating speeds of TMR can be beneficial. We saw this coming. We started investing in TMR technology more than 10 years ago, and I'm happy to report that if you were to take apart one of the most popular electric cars on the road today, you'd find Allegro TMR products inside. It will continue to be a heavy area of investment for Allegro. We believe we're leaders in automotive TMR sensing today, but through our investments, we plan to extend that leadership position.
I encourage you to keep an eye out for more and more TMR product releases from Allegro in the years to come. Later on, when Suman speaks, you'll hear about some of the other products that are in development for TMR at Allegro. Okay, a different story now for our power business. If you look back between 2000 and 2010, our power business was highly focused on the consumer and office automation market. There was a reason for that. Allegro was, and still is, very good at spinning motors, and there's many motors in this type of equipment. At one point, we realized we were missing a golden opportunity in the area of power, and that was to enter the market leading with our automotive-first technology. We did that. We found applications within the ADAS market, the EV powertrain.
In industrial, there was data center and other target industrial areas. The strategy worked. It continues to work. I'm happy to report that we've actually tripled our market share in our target power areas over the last five years, and it just goes to show how the winning formula of leading into the market with our automotive-first technology can drive good results. When we think of our power business, the motors portfolio is actually one of the most important areas of growth. There are a lot of motors sold in the world today. There's actually a lot of motors in cars today as well. Let me go with the last chip photo of the presentation, but hopefully another good one, which shows in the top of the picture dense digital circuitry. This is where we put embedded algorithms into the chip to help control motors.
At the bottom, you see the power drivers. These are the transistors that actually can put an amp or more into a motor to get the motor to spin. What we have there in that photo is a single chip plug-and-play solution. Our customers like these chips. They put them in the motors, and the motors spin very easily. They're also quiet and efficient. Competitor solutions often require two chips to accomplish what we do in one chip. For example, it's common to have a power driver and a microcontroller in two separate chips on a board in a motor, and the customer might need to write some code in the micro. It's a much more difficult design and challenge relative to Allegro's plug-and-play solutions.
I keep mentioning the benefits of the motor ICs, one's efficiency, and we keep talking about quieter motors, and let me give you a real example about why that's important. If you've ever been in an electric car in the cabin, there's no internal combustion engine noise. It's a quiet place. What was happening is that passengers were actually able to hear a whining noise coming from some of the motors in the cabin. Not using our technology. This was using competitor technology. When switching to a chip like Allegro, this is where the audible noise comes down and the driver experience improves. Just an example. It's a bit of an esoteric reference to quieter motors, but in your daily life, there's many situations where a quieter motor enhances a user experience. Last, but certainly not least, are isolated gate drivers.
I talked about the applications for these ICs earlier, but let me repeat them. They're actually used in high numbers in EV powertrain and clean energy applications. In the EV powertrain, they're in the inverter, they're in the charger, and we believe that there could be up to $30 of Allegro content for these ICs in an electric vehicle. We've actually seen, in an onboard charger application, 32 high-power gate drivers being used. That's gonna be an important stat that I'll come back to in a minute. If you look on the right, the upper right, that's Allegro's newest technology. What we do is we combine multiple functions from the power system into our one chip. This is another story where we do in one chip what competitors require two chips to do. Now think about that charger that uses 32 of these.
You can understand why customers are quite excited about working with Allegro, because when you're using 32 installations of an isolated gate driver, adding 32 single chips rather than 64 chips is a big advantage. This is how we can shrink the size of these power systems by up to 50%, and that's meaningful to the customers. On top of that, we actually bring efficiency benefits of up to 40%. Customers are deeply engaged with us on these products right now. We will release our first gallium nitride isolated gate driver this calendar year. We're already working with our lead silicon carbide gate driver customers, and we expect this business to bring us revenue sometime in the next two years. Truly exciting space for us. In summary, I wanna wrap up with just a few takeaway messages. I talked a lot about the tech.
It's truly unique at both the wafer package and circuit level. Number two, I wanna give credit to the Allegro team. They truly are experts at determining what customer problems are in the field and figuring out how to put together the building blocks of our tech to solve those problems. Third, Vineet mentioned we're applying 75% of our R&D into these high growth areas of e-mobility and target industrial. We're really taking the unique tech, the expertise at solving customer problems, we're putting it in the high growth areas of the market, and we believe this will help us drive outperformance in years to come. Throughout the presentation so far, and you'll hear it again, the words that we win as cars electrify. In fact, Allegro wins when the world electrifies.
To tell you more about why this is true, I wanna introduce Max Glover, our Senior Vice President of Worldwide Sales, and Suman Narayan, Senior Vice President of Products. Gentlemen, the floor is yours.
Hey, thanks, Mike. Good morning. I'm thrilled to be with all of you today, and a warm welcome to those of you attending virtually. As mentioned, Suman and I will take a few minutes and talk through how we win in automotive and industrial markets. Before I dig into automotive or market-specific information, let me explain our strategies to win in the markets that we serve. It really comes down to three things. First, we embrace our automotive first design and manufacturing methodologies as foundational. We build products that thrive in harsh environments. We can produce them at scale, and we can produce them at world-class quality levels. We often support products for very long life, well beyond a decade. We embrace functional safety as a differentiator so that our customers can build critical systems that are fail-safe.
What I'm describing is table stakes for an automotive supplier. Our target industrial customers also see value in these competencies. Second, we have a heritage for joint innovation with our lead customers. We've developed a reputation in the market over many years for pursuing levels of technical customization well beyond those of our peers. Mike mentioned a number of examples where deep engineer-to-engineer dialogues have spawned really amazing ideas that allow us to better serve our customers, and those conversations really inform our deep domain expertise in the markets that we serve. Finally, joint innovation with lead customers is a great business, don't get me wrong, but sustainable multi-year growth comes when we can scale these solutions to additional customers, both large and small, and also apply them to adjacent markets where customers see similar value.
To do that, we have a global direct sales force, and we also have regional technical centers that allow us to engage customers deeply in the geographic regions that we serve. Finally, we serve more than a third of our customers through our global channel partners. In essence, this is how we win. Let me define the markets that we prioritize and apply this strategy. As Vineet mentioned, we look at this in two very basic ways. First, do these markets offer us sustainable long-term growth? Second, do the customers that comprise this market see value in our differentiation? We're fortunate to have more than 10,000 customers. The array of products that they build around our technology is awe-inspiring. However, e-mobility, clean energy, and automation play to our strengths.
Our customers in those markets value the differentiation that we offer, it gives us a long-term growth opportunity across our entire portfolio. This, along with our play to win mentality, is how we outpace industry market growth across sensing and power markets. We're number one in magnetic sensing. We have the opportunity to further increase share in a growing market. As you can see, the SAM for our power business is enormous, we're able to significantly outpace the market growth through a very targeted and focused strategy. You're gonna notice a theme as we walk through the solutions today. All of our target market solutions comprise a unique combination of power and sensing products that we can provide unique differentiation to our customers. Let's get into more detail starting with e-mobility.
I think we all know that the auto industry is gonna change more in the next 10 years than it has in the previous 50. We're ready. As you've heard, we have a trusted pedigree serving the automotive industry, and our solutions are more relevant than ever as these automakers pursue mega trends around electrification and autonomy. Although we're a young public company, we've been serving the automotive market for more than three decades. As a result, we've been able to build a very balanced market profile. No customer is more than 10% of our revenue, and we have a healthy distribution of revenue across the five geographic markets that we serve. As a result, you're gonna find significant Allegro content across all top 20 OEMs globally and many, many more. Serving the automotive industry is hard work as a semiconductor supplier.
That hard work is rewarded because we are awarded business that will span high-volume series production for many, many years. Although the automotive product development cadence is increasing, still substitution cost for a component in high-volume production remains very high. Further, supply and demand alignment has been a hot topic in the industry lately, and I'm proud to report that more than half of our e-mobility revenue is protected under long-term supply agreements with our customers. I'll also add that as the auto industry transforms, direct engagement with the automakers is essential. This is something we've done for many years. We know how to do this. One example that we have employed in the past with automakers directly is to help them leverage our sensing products in their powertrains to make them more efficient so that they can meet increasing fuel economy standards.
We have to replicate this playbook not only from a technical standpoint, but also a commercial standpoint. If we do this, then we can unlock value for Allegro at a system level. We can be acutely informed of industry trends that are emerging, and we can also support our automakers directly with long-term supply agreements, product development agreements, and even direct sales. Our intention is to be an indispensable partner for the automakers as the industry transforms. You've likely heard statistics in the industry around overall semiconductor content growth in automotive. For one, a third-party market research firm states that the value of semiconductor content will double between 2020 and 2026. Largely, this is due to the increased adoption of higher levels of ADAS features, advanced driver assistance systems, and the move to electrification. Through close collaboration with our customers, we've seen this coming.
Our joint engagement with our largest ADAS customer dates back to 2005. Our close collaboration with the global leader in EV powertrain inverters dates back more than a decade. Our pipeline and our design wins have already shifted to e-mobility. This underpins the 25% CAGR opportunity for Allegro in e-mobility and also our overall automotive growth at 7% to 10% above SAAR. The faster the world moves to EVs and embraces ADAS functions at or above level one, which includes functions like lane keep assist, automatic emergency braking, and adaptive cruise control, the faster we can unlock the massive content opportunity associated with our design wins. That's because essentially our growth story in e-mobility is one of content growth. Some of this growth is evolutionary, more intelligence, more sensing, more redundant systems across the vehicle, but some of it is revolutionary.
With the preponderance of blank sheet of paper designs for electric vehicles, we have the ability to influence new architectures and utilize our products to make vehicles more efficient and safer. As you've heard, we build on a traditional auto base as a foundation. Many of these applications like HVAC, lighting, in-cabin actuation, and infotainment will persist regardless of the propulsion type of the vehicle. However, the significant content that we find in the EV powertrain, and specifically steering and braking, allow us in total to access a content opportunity more than 2x in a battery electric vehicle what we would find in a traditional vehicle with a combustion engine. As an industry, we cross a tipping point for mass adoption when we lower the barrier of entry for first-time buyers.
In my recent discussions, both with automakers and large tier one automotive customers, there's a focus on three key technical themes: improving battery efficiency, reducing charging time, and increasing vehicle safety. Solving for these allow automakers to access a wider variety of price points and vehicle classes and help move the electric vehicle concept from early adopter into the mainstream. Let me turn it over to Suman, and you can help us explain how.
Thank you, Max. Morning, all. Driven by electrification, power and sensor products for Allegro MicroSystems in EVs are outpacing market growth. In the next few slides, I'll walk you through a few examples of Allegro's products, where they play, and how we innovate with purpose to address the needs that Max talked about. In electric powertrain, we will address charge time and battery efficiency. In braking and steering, we will address safety. First, let's take a look at the electric powertrain. Every power conversion is an opportunity to extend battery life and thereby extend driving range. The primary function of the EV powertrain, as Vineet mentioned, is to be an efficient power conversion system that delivers energy to the various components of the car, thereby minimizing losses to extend battery life. There are really three key systems in the car.
There is a OBC, onboard charger, which basically converts AC to DC energy and charges the battery. There's the DC to DC converter, which takes the high voltage DC and delivers to the rest of the car. You have the traction inverter, which takes the energy from the battery and converts it to acceleration from DC to AC. When we mean power conversion, that's what we mean. DC to DC to AC, and AC to DC. Let's take a look at why our current sensors play such a crucial role here and why we outperform our competition. Mike talked about this before.
If we take three things to look at on our current sensors, it's our high accuracy on current sensing, especially in terms of measurement, our high measurement bandwidth, and our high levels of integration, which puts our current sensors in a small package and thereby improving power density. We'll look at accuracy a little more here for the traction inverter. In case of the traction inverter, accuracy is really important, and that's really because the current sensor helps you to control the motor quietly and without vibration. The less vibration, also known as torque ripple, you have more battery efficiency as you don't drain the battery fast. Let's take a look at the OBC and DC to DC.
In the OBC and DC to DC, if we need 100 amps and we use a current sensor that has a 5% error, we'd be asking the controller for five extra amps that would drain the battery faster. It's very similar to your cell phones. Allegro's current sensors today are targeting less than 1% error. This results in a more efficient power conversion and extends driving range. Mike also talked about how the SiC and GaN transistors are improving power efficiency. Our new five megahertz high measurement bandwidth current sensors help systems with GaN and SiC power switches, and we do our measurement effectively. Our current sensors can also detect shorts in less than two microseconds. Thereby, you can actually save your components, your expensive components on the car, like your silicon carbide. Additionally, our current sensors are completely isolated from high voltages, addressing system safety needs.
In addition to the high measuring bandwidth, you saw Mike talk about the acquisition of the high voltage isolated gate driver technology, which is now being productized by the R&D teams. The technology and integration in isolated gate drivers are unique, as Mike mentioned, offering 40% more efficiency and 50% reduction in board space. Last but not the least, in extreme weather conditions, our intelligent and code-free motor drivers extend the range of the EV by heating or cooling the battery pack as needed. Over the next two slides, we're gonna talk about braking and steering applications. Let's dive into the technology for braking and steering as it pertains to Allegro's products and how we meet our stringent safety standards for these systems. In braking and steering, we leverage the whole product portfolio from Allegro.
The position sensors, the speed sensors, the current sensors, the power regulators all come together along with the motor drivers in a symphony. Let's look at the EV steering systems. Mike mentioned this, that the EVs need to be quiet. It's a customer expectations that the electronics that they put in the EV also keep the decibels down. In electrical power steering systems, our 2D angle sensor, we talked about this briefly based on TMR technology, gives us a precise position of the EPS motor and allows us for a quiet startup and control. These new TMR-based sensors have up to 8x based better accuracy, angle accuracy compared to all the technology available from our competitors. This level of control reduces the vibration of the motor and allows for a quiet operation of the motor.
Our current sensors close this loop and keeps the vibration down as well. The advent of steer-by-wire systems, the mechanical components of the car, like the steering wheel and the steering rack, is being replaced by purely electronic systems with two or more additional motors at the rack to guide the car. This, in addition to the feedback motors on the steering wheel, is a big multiplier for Allegro as a growing number of motors and steer-by-wire represents a significant multiplier in terms of sensors and QuietMotion gate drivers. We can also see how steering system manufacturers like integration. Our integration of the power regulators and our motor drivers, we offer 20% less board space compared to our competition. As stated earlier, the need to be compliant to ISO 26262 and ASIL standards are really important for our customers.
All of our products for braking and steering systems are rated for automotive safety. Our position sensors combine TMR technology and vertical Hall technology in a single package, achieving ASIL D, the highest safety rating, which our customers use to reduce their design footprint and improve their overall safety. Let's take a look at steering applications as they're transferable to braking systems. As I mentioned before, a lot of the technology transfers over to braking. In braking, our customers demand a fast braking response for safety. When the driver presses the brake, a position sensor is used to detect the amount of braking force. This signal instructs a motor to turn on and create a hydraulic force to the brake calipers. The motor requires several Allegro components similar to the EPS motor: power regulators, gate drivers, current sensors, and motor position sensors.
In addition, a wheel speed sensor is used to detect if the wheels are slipping so that the ABS system can be turned on. The next evolution of braking replaces the hydraulic systems with independent motors on each wheel, which generates a braking force by electromechanical means. This is called EMB. EMB requires smaller electronics to provide a faster braking response. You can see how the content now spreads from steering to braking in the car and also allows our customers to save design and engineering overhead costs by reusing validated components from one system to another in the car. In this slide, we'll talk about how the architectures are evolving over time for braking, steering, and traction motors, and how it's gonna enable more content for Allegro in the future. In the last section on braking, we saw the evolution from electrohydraulic to electromechanical braking.
You saw the changes in steering from traditional EPS to steer-by-wire. With these changes, we expect the component count for Allegro power and sensor products to grow 2-3x per car as the number of motors continue to increase. On the horizon is an even more integrated system called the corner module. In the corner module, we see the possibility of the convergence of the traction motor, the steering, and braking all in the wheel. The beauty of these modern vehicles is that the level of safety required is almost twice as much as before. We can now extend the position of leadership and grow rapidly our solutions and continue the close collaboration with our customers as the architectures continue to change. We talked about a lot of applications and how we address some of the needs that Max brought up.
I wanna give you a quick snapshot of the products that we're releasing to support these applications. These outperform our competition in the applications we saw earlier. We launched our ASIL C-rated high measurement accuracy current sensors at less than 1% error. We continue to launch new ASIL D based position sensor products based on TMR. We're launching our new intelligent motor driver products for battery cooling applications. Our 5 megahertz bandwidth current sensors and isolated gate drivers enable efficient use of faster switching technologies such as GaN and SiC to minimize power losses. The electrification of the powertrain leads to significant lowering of carbon emissions. My team and I are proud that we work on these innovative products that contribute to the reduction, leading the way for a sustainable future for all of us. I just wanna bring a quick summary to what you heard on automotive.
The market opportunity in electrification is significant. We continue to invest in differentiated solutions for e-mobility applications. Coupled with our momentum for customers, we believe we will outpace the market growth. We'll now switch gears to the industrial market, and I'll let Max share with you how we're applying the automotive-first strategy to industrial.
Hey, thanks, Suman. Fantastic. Again, wanna talk about industrial and how we win, and we'll talk about playing to our strengths, and we'll talk about why we target attractive markets like clean energy and automation. Again, we've highlighted our automotive-first strategy on multiple occasions this morning. This is our DNA, this is our differentiation as a company, and we embrace it. We make sure that our targeted industrial strategy also comprehends where there's long-term growth, and we can play to these strengths. The elements of our automotive-first strategy that resonate with our target industrial customers include our rigorous quality standards, our ability for our parts to work in extreme environmental conditions, and our long life cycle, where the vast majority of our products are available for 10 years or more. This is critical in many industrial systems that need to e-exist in the market for decades.
Further, we've doubled down collaboration with our global channel partners over the last five years. These partnerships give us value-added services that complement our roadmap and our technology. These things can range from fast prototyping services for startups and new innovators, all the way to complex end-of-line programming and additional logistics support for some of our largest and most strategic industrial customers. These partnerships have enabled us to grow at above market rates and allow us to exceed the expectations our customers place on us. The industrial markets where the growth opportunity and Allegro entitlement intersect is clean energy and automation. The combined SAM for these markets more than doubles in the next five years, and the $3.5 billion SAM potential for Allegro is significant. Where does Allegro win?
First, you can draw a straight line from our leadership and our technology in electric vehicles to the world's ambitions to electrify everything in clean energy generation and storage. This underpins our ability to address the $2.2 billion clean energy potential. We also win where there's precise motion control required. This can range from robotics within the automation space and advanced thermal solutions for data centers that leverage our BLDC motor driver technology. Finally, we love applications where we can improve energy efficiency. Again, this ranges from solutions that enable power conversion from the grid to an endpoint, highly efficient power supplies, and industrial motors. In total, these fundamentals allow us to unlock an 18% CAGR opportunity across clean energy and automation, and that's validated by our Design Win pipeline. Let's dive a little deeper into clean energy.
The undertaking underway to modernize the world's electric grid is massive and wrought with challenges. As an industry, we need to move from large, centralized energy resources reliant on fossil fuel to highly distributed grids that rely on sources with intermittent output, like the sun and wind. We have to evolve from an always-on, one-way grid to a bi-directional grid that's highly optimized for real-time supply and demand requirements. The overall clean energy market across renewables, grid investments, and inverters was $798 billion in 2021, and it's growing. Within that, solar, inverter, and storage markets are growing at the highest CAGR. With that backdrop, we're acutely focused on serving the EV charging infrastructure market.
Within that, units are growing at 29% CAGR, and this ranges from smaller AC, DC wall boxes that you'll find in a home, an apartment building, a small business or a hotel, all the way to the big megawatt DC fast chargers that can charge vehicles with unprecedented speed and are packed full of power and sensing content. Solar also represents an overall market opportunity of $280 billion in 2025, and the units that are relevant to Allegro are growing at a 20% CAGR. New technical deployments and business models are going to emerge as solar generation and storage has to exist and happen closer to the point of consumption. When we talk to our strategic customers in this space, they have big ambitions to grow, and we are committed to helping them utilizing our IP portfolio and our products.
Let me turn it over to Suman to explain a bit more.
Thank you, Max. As Max said, you know, if we summarized some of the discussions in automotive, when cars electrify, Allegro grows. When the world electrifies, Allegro grows faster. There's a power conversion involved in every one of these applications that you see, solar inverters, EV charging, data center, and automation. I'll walk you through what the parallels are to what you saw in automotive, especially on the EV powertrain and braking and steering. Solar uses same solutions as the EV inverters for power conversion. The principle is the same. Energy from the solar panel can either be sent to a battery for storage or be converted from DC to AC to power the home or grid. The solar inverter needs to operate in a harsh environment like its automotive counterpart.
Leveraging building blocks from automotive products, such as current sensors and isolated gate drivers from the EV space ensures a high level of reliability and a faster time to market. Our current sensors with custom packaging operates at 1,500 volts for the solar string inverters, 150 degrees Centigrade temperature, and has a life expectancy of over 10 years. We also provide system integration that requires fewer external components. You saw some of those examples that Mike mentioned in his talk, both from current sensing, isolated gate drivers, the integration of the PMIC, and the motor drivers. They all offer a value to our customers, which is smaller board space. Next, we'll talk about some of the EV charging. After capturing this energy from the sun, we need to power the car.
In these DC systems, power conversion is very similar to what you saw in the onboard charger or the DC to DC that you saw in the EV powertrain. Our high bandwidth current sensors and isolated gate drivers enable efficient use of faster switching technologies, like you heard before, with GaN and SiC FETs to minimize power losses. In addition to this, our current sensors are also used for accurate phase monitoring and short circuit protection for increased safety. Today, these chargers are made from 10 to 25 kilowatt modules that multiply current sensors. As the trend continues to go to DC to DC, our content continues to increase in both current sensing and gate drivers.
Next, we'll talk about the high-speed fans that are used in data centers and also where our current sensors are used. Our motor driver technology, long proven in the automotive space and other demanding environments for decades, has found a home in data center for efficient operation of the data center fans. Allegro's proprietary QuietMotion controllers offer smooth, quiet motion while eliminating the need to write software. Mike talked about this briefly, and this is why they're used in data center fans. We can also reduce board space by 30%. You saw the elimination of the components, like the microcontroller and things like that that you don't need on the system anymore. These devices are designed for high-speed fans that operate at 28,000 RPM, and they really move heat fast with less power consumption.
The current sensors are used for monitoring and protection of the power outlets on these power distribution units in data centers. We'll talk briefly about automation. Vineet mentioned that acute labor shortages will drive the need for industrial automation in all sectors. The strong demand within the industrial automation space for sensors and motor drivers fits well into Allegro's portfolio for high-quality products with integrated safety features. Intelligent motion control systems are the heart of many of these pick-and-place systems that you see. If you remember, there was a symphony. Whenever there's a motor opportunity in BLDC, you have current sensors, you have position sensors, you have gate drivers, and you have the regulators all play together. We have big opportunity in industrial automation as the world continues to face these shortages. Just to summarize where we are in industrial.
In the industrial markets, we're focusing on clean energy and automation. Max explored why they are fast-growing markets for Allegro. We're effectively aligning our field sales marketing teams to engage closely with the top customers who are looking to solve problems in electrification. We're efficiently using our R&D from automotive-first strategy to quickly build products for this market. We can support the harsh environments, also we can bring Allegro's innovation, quality, safety, and reliability to this industrial market, which our customers value. If you're all tired of this, let me introduce Derek D'Antilio, our Allegro CFO, who can translate what all of these innovative products and growing markets mean to Allegro's future in financial terms. He joined Allegro in 2022, with more than 20 years of experience in semiconductor and high-tech companies. He also served in the U.S. Army.
Thank you for your service, Derek, and please take the stage.
Thank you, Suman, and good morning, everyone. Now that you've heard about what makes Allegro unique, I'll finish this morning by providing some insight on a few things. First, on Allegro's operational transformation. Second, our track record of strong financial execution. I'll summarize the growth opportunities that you've heard about this morning. I'll also introduce our new financial model, and I'll review our investment and capital allocation strategy. Finally, I'll tie back what you heard this morning to our financials and how we think about the future. I'll start by providing an overview of the company's operational transformation, but because it provides some insight into how we think about the business and how we do make investments today.
The way we look at it from an operations point of view is Allegro 1.0 was a pioneering integrated device manufacturer, or IDM, in fact, with its first fab in Worcester, Massachusetts, in 1965. We really do have multiple decades of fab experience. Allegro 2.0 was the period of the transformation from about 2017 until 2021 when we spun off the Polar fab, closed the Worcester fab, and consolidated our two back-end operations into one highly efficient back-end operation in the Philippines. This transformation drove gross margin improvements of over 1,000 basis points in that period of time. We're now just getting started on the Allegro 3.0 period of operations as a fabless asset-light business. Again, this is very important because these changes are really fundamental to how we run the business and how we make investment decisions.
As you've heard, innovation and customers are our first priority. I want to talk a little bit about our operations today and some of the strategy for our future operations. A very unique and important aspect of all of our operations is they're all automotive-grade. What that really means is they're known for having extremely high quality and reliability standards. For example, as you've heard, in auto, quality is measured in parts per billion versus parts per million. An auto-grade qualification for parts establishes a very high barrier to entry. This slide provides an overview of our current operations today and a little bit about our strategy. On the front end, we source wafers from three fab partners. Approximately 50% of our wafers are sourced from UMC in Taiwan, 30%-40% from Polar Semiconductor in Minnesota, and the remainder from TSMC.
A significant portion of this wafer tech is also multi-sourced with these partners, providing a high degree of scalability and risk mitigation for us and our customers. In addition, we're constantly driving forward our wafer tech roadmap, as Mike talked about earlier today, and looking at regionalizing partners in the regions where our customers are. For the back-end assembly and test processes, we use a mix of our internal facility in the Philippines as well as outside OSAT partners in Asia. Approximately half of the assembly and packaging is done at our internal facility in the Philippines, and this includes high-mix, low-volume parts that are more economical for us to do ourselves. It also includes proprietary and advanced packaging for difficult auto applications that are designed to withstand some of the extreme conditions that we talked about this morning.
Industry standard packages, as much as our industrial and our outside third-party industry standard packages and consumer assembly is done at leading OSATs in Asia. As we scale, we expect to continue to optimize this mix of internal and outside packaging. Finally, we perform 100% of our tests at our own facilities, including quality and assurance. We've found that owning quality and test best supports auto grade zero defect initiatives. We've also found it allows us to be very responsive to our customers with quick resolutions and product enhancements. We're also very proud of the track record of financial execution, including meeting both our strategic and our financial targets. We have a robust planning process and a management operating system that helps us drive results.
Our team really believes in the philosophy of doing what we say we'll do and meeting our commitments to our stakeholders. Since our IPO, we've demonstrated above-market sales growth, an increasing percentage of sales into our strategic focus areas, both gross and operating margin improvements, significant operating leverage, and as a result, over the past three years, operating margins have improved by over 1,200 basis points and EPS has nearly tripled. We have also met or exceeded quarterly sales and EPS guidance every quarter since our IPO. Another important and unique element of Allegro's business is that our sales are very well diversified geography and with our channel mix. Sales by geography are well-balanced with China, our largest market, representing only about 25% of our sales.
We have a strong market presence in all major automotive markets in the world, including the United States, Japan, Korea, and Europe. As Max mentioned, no single customer represents more than 10% of sales. Our geographic growth has really been enabled by investments in local sales and technical resources close to our customers, and we continue to do that. For example, a few months ago, we announced a change in our go-to-market approach in Japan to better support our customers there as the Japanese auto industry transitions to an EV-first mindset. Looking at channel mix, a little over 60% of our sales are direct and nearly 40% of our sales are through distribution partners. Our direct sales are enabled by these close relationships built over decades with auto OEMs and tier ones.
We also have long-term agreements with many of these direct customers, which gives us visibility and improves variability for our customers and Allegro. We also leverage our global and regional distribution partners to service over 10,000 customers, particularly in industrial and consumer markets. This slide talks a little bit about how we intend to continue to outgrow the markets we serve. What really underpins the above market growth is our focus on strategic growth areas of e-mobility and the select industrial markets we talked about this morning. We've targeted these markets because we believe they offer long-term secular growth opportunities for our products. A key takeaway is we are growing fast in fast-growing markets. Looking at each market, we'll first look at auto, which represents nearly 70% of our sales. In auto, our target is to grow above auto production or SAAR by 7%-10%.
What gives us confidence in this target is, first, as Max and Suman described, our automotive-first mindset and decades of auto OEM relationship gives us every opportunity to win. Second, our products are designed to enable the secular megatrends in e-mobility that Suman described. As Vineet mentioned, e-mobility represented 43% of our auto business in this past quarter, and this SAM is projected to grow by 25% CAGR over the next five years. In addition, we still have a very robust ICE and safety business that isn't going away. Next, turning to industrial, which represents approximately 20% of our sales today. In the industrial market, we're targeting growth of 5-10% above industrial semiconductor. Here, we leverage our auto-grade technology, as you've heard, to solve similar challenges in clean tech and automation.
As a result of our focus, the SAM, Allegro SAM in industrial is growing at a CAGR of 13% over the next 5 years. Finally, we sell our products through distribution to thousands of customers for consumer applications, and we expect these markets and Allegro sales to generally grow in line with global GDP. In addition to the above market sales growth, we also see a path to continued gross margin expansion. As I described earlier, our operational transformation has given us over 1,000 points of gross margin improvement over the last four years. Our new gross margin target is above 58%. We expect these incremental gross margin improvements will come from 3 areas. First, product differentiation and mix.
Our focus on technology leadership and a mix shift towards feature-rich products that you heard about earlier, research and development investments in our strategic growth areas, and continued BOM cost reductions. The second area is supply chain optimization, where we expect to continue to optimize the mix of internal and external operations, execute on our wafer tech roadmap, and benefit from purchasing power as we grow. The final area is internal efficiencies in our manufacturing facility in the Philippines, where we'll continue to optimize our assembly and test processes and benefit from volume through the factory. As we've talked about, we've continued to deliver strong financial results. Without further ado, I'll talk about our new financial model. From a sales perspective, we're still targeting low double-digit sales growth.
This target really reflects the focus on the fast-growing markets we talked about this morning. It's also consistent with the double-digit growth in our IPO model, but at a starting point of sales that is nearly double what it was two and a half years ago. We're targeting gross margin at or above 58%. Operating expenses are targeted to be below 26% of sales. Within operating expenses, we'll continue to invest in research and development at a level of about 15% of sales to drive continued technology leadership. We'll also continue to make investments in local sales and technical resources close to our customers. In total, we expect OpEx will always grow slower than sales. We'll see continued leverage from SG&A.
Based upon these targets, we expect operating margin to be at or above 32% of sales. This represents a 700 basis point increase over our IPO model. Finally, excluding working capital changes, we expect our targeted free cash flow to be at or above 25% of sales. Finally, turning to our investment and capital allocation strategy. Our first priority is to continue to invest in organic growth, where, as you've heard this morning, we believe we have significant opportunities. Here, we'll continue to make investments in R&D and CapEx in those strategic growth areas. We'll continue to expand our direct sales and our channel partnerships, particularly in regions where we see the largest opportunities. All the investment decisions are going to be based on a combination of sales growth and ROIC. We will also supplement our organic growth with select M&A.
Very importantly, we view M&A as an integral part of our existing strategies, not a diversification. As a result, M&A has to meet certain criteria for us, including it has to either accelerate our strategic growth areas in e-mobility or industrial, it has to complement, extend, or enhance our existing expertise. We have to be able to sell the product through our existing sales channels. Finally, an acquisition must be accretive to our target financial model. These criteria are important as they allow us to realize the benefits of an acquisition faster. We also intend to maintain a very strong and flexible balance sheet. We believe our business model will continue to deliver strong cash flow to support these growth opportunities, but we could use debt where we believe it's accretive and serviceable. I expect to maintain a very strong net cash position at all times.
In summary, we believe the following factors that the team has outlined this morning will allow Allegro to continue to create value for all of our stakeholders. First, our focus on large, fast-growing markets in the secular areas of e-mobility, clean energy, and automation. Second, our technology and market leadership with differentiated product portfolio that drives gross margin improvements. Third, a diversified global marquee customer base where incumbency matters, particularly in automotive. Fourth, an experienced and proven management team. All these factors have resulted in a powerful combination of sales growth and gross margin expansion. With that, I'll now turn it back over to Julene to tell you about the rest of our program.
Thank you, Derek. This concludes our formal presentation. We will take a 15-minute break before returning to our seats at about 10:40 A.M. to kick off the Q&A session. The primary drinks are to the right, restrooms are to the left. Drinks are over there as well.
We'll now begin the Q&A session. Because this call is being webcast, we ask that you please raise your hand if you have a question and wait until you receive a microphone before asking your question. I will use an online platform to take questions from our virtual guests. Additionally, to ensure that we give as many people as possible to ask questions, please limit your questions to one with one follow-up, but you can raise your hand again.
Thank you. Right here. Gary Mobley with Wells Fargo Securities. I wanted to pick up where we last left off with Derek. I wanted to ask about your margin targets, gross margin specifically, if there's an asterisk to it. More specifically, if you see it perhaps trickling down before it trends back up towards 58% because of the FX tailwinds you've benefited from recently, and then as well to achieve that greater than 50% gross margin, what is it contingent on from a timing and from a revenue perspective?
Yeah. Gary, thank you for the questions. In Q3, our non-GAAP gross margin was 58%, but as Gary alluded to, that included about 200 basis points of foreign exchange compared to the beginning of the year. It's really in that 56% range. Our guidance for Q4 is still 57%, approximately 57%, and that still includes some tailwinds from foreign exchange and a little bit of mix benefit there. In the short term, as I've mentioned before, I expect the gross margin to kind of be in that 56, maybe could tail up towards that 57% range. Our medium-term target, and you could view this as 3-5 years, is sustainably at 58%. The factors really I outlined in the presentation, starting with mix and product being the biggest.
As a fabless company, that's really the biggest lever, is mix and product. The second factor is we will continue to get some leverage from both our suppliers and our internal facility. The first one's really gonna be mix and this product differentiation you heard about today.
Hi. Thank you. It's Christopher Casso from Credit Suisse. The question is on impact of pricing and what sort of pricing environment is contemplated in your long-term targets. Then maybe you could speak to a little bit in the shorter term, you know, still seeing foundry wafer price increases. What are you expecting in the shorter term on that as well?
Yeah, good question, Chris. Thank you. In the long-term model that we talked about, in the low double-digit sales growth, that does not contemplate any changes or price increases. In the past two years, we have had some price increases we've talked about both with our OEMs, in particular in our distribution channel. Going forward, the model really just contemplates us growing fast in those fast-growing areas and content gains that we talked about. No pricing and no share is contemplated in that model. We of course will target both of those. In the past, we've had some pricing increases, but the preponderance of our sales increase over the past two years has really been volume and mix. In terms of wafer price increases, we've talked a little bit about us locking in our wafer pricing now with our two of our major partners, UMC and Polar.
That's contemplated in that model as well.
Hi, Joshua Buchalter from TD Cowen. Thanks for the informative day, and good to see everybody. I wanted to ask about the supply side of the equation. I know you've been ramping at UMC. Polar's obviously a long-standing partner, and you added TSM last year. In your long-term target model, given some of the growth rates that your end markets are growing at, is supply a gating factor at all, as I know it has been for the last couple of years? Can you walk us through some of the assurances you have on supply the next, let's say, 1-2 years? I know Polar has the investment. That's probably not until 2025 where that kicks in. Thank you.
Josh, thanks for the question. We don't believe that supply is gonna be a gating factor for our growth in the near term or in the mid term as we look at the future growth rates. As Derek alluded, we have inked strategic agreements with our major suppliers, and that's aligned with the growth rates that we believe we will see and we will have to support. In terms of the Polar investment, we're really excited about what that means for us, and we will be able to expand the capacity as well as bring new technologies to Polar.
The one thing that I just wanna emphasize is that most of our products are able to be manufactured at any of our locations because each of our wafer suppliers has the proprietary technology that Mike laid out, in his prepared remarks.
Thank you. Peter Oser at Tocqueville. Just wondered if you could address how changes in the supply chain and sort of architecture of new car platforms, specifically the sort of consolidation of systems versus more discrete items, how that sort of plays into the competitive nature of the markets you supply? What I'm kind of trying to understand is, you know, you guys have done a really good job about focusing on, you know, niche products that sort of fit your products, you know, that your competitive abilities.
Does the sort of consolidation and change, from, you know, both on supply chain as you're working more with direct OEMs, you know, changing of sort of how the whole industry sort of works, and also the sort of more, you know, cohesive platforms that auto OEMs seem to be driving towards. Does that change the competitive dynamics for you guys and industry? Does it make, you know, a breadth of solutions more important than necessarily core deep, you know, technological, you know, competitive advantage on individual systems, if that makes sense?
Yeah, Peter, thank you for the question, and I'll start off and then maybe have Mike add more color to it. When we look at how we win, the direct relationship with the OEMs has always been central to our value proposition. As systems converge, we think that's gonna be even more important. We have built really strong expertise in our IC solutions, whether it's on sensing or on the power side, in these systems that are now converging. We believe that we're really well-positioned, not just with our heritage and our legacy in those systems, but also with our ability to find new ways to integrate more content, continue to drive smaller packet sizes, continue to bring more power-dense solutions, and also find ways to reduce total BOM cost. Mike, I don't know if you've got more to share there?
I think it's very well said. I mean, when we see consolidation at the system level, it starts to become more apparent to our customers just how much having optimized, consolidated, combined solutions can be at the system level. When pieces are broken apart, that's sometimes not so obvious. When you put them together, it becomes very clear. As we see certain systems consolidating, we actually think that may be a benefit for us because of our high level of integration.
Quinn Bolton with D.A. Davidson. Thanks for the presentations. I guess first, in your presentation, you talked about many of your products are sole sourced. Wondering if you might be able to give us a figure, what percent of your business do you think is sole sourced, especially in the automotive business? I guess a related question to that, given the supply constraints in the automotive business over the last two years across the entire food chain, have you seen the OEMs actually looking to multi-source, or do you think, you know, they're gonna stay with sole source relationships? Then I've got a follow-up. Thanks.
Quinn, thanks for the question. You know, I would say that the amount of effort it takes for an OEM to qualify an IC supplier and the level of qualifications that we have to go through does not lend itself easily to dual source. The vast majority of our design wins, we tend to be sole sourced. It doesn't mean that the conversation stops there. There is a high degree of burden on us to prove that we've got a resilient supply chain, that we have redundant manufacturing capabilities, and there are ways in which we can assure our customers about, you know, whether it's through strategic inventory or what have you, that we have the ability to maintain supply.
You know, I'll ask Max maybe to chime in a little bit and talk about how OEMs are thinking maybe differently or if at all about that situation.
Yeah. Well said, Vineet, and it's a great question. At the end of the day, when we directly engage with the OEMs, they're looking for us to instill confidence that we can supply them for the long term. Instead of, you know, pursuing a commoditized solution, to Mike's earlier points around addressing some of these unique value propositions, instead, we instill confidence not only with long-term supply agreements and direct agreements with the OEMs, but increasingly making sure that they understand our supply chain and how flexible it is so that they have confidence. That allows us to kinda lead with innovation as opposed to looking for marginal value in a crowded field.
Great. My follow-up was just you talked about some of the opportunities in electromechanical braking, steer-by-wire, and the corner modules. Can you give us some sense, when do you think those types of systems will start to see their way into production at some of your lead customers?
Yeah. Maybe I'll let Mike talk about, you know, what sort of timing we are seeing in some of those systems. Some of those are in the design cycle now.
Yeah, we see, for certain systems like electromechanical braking, we see a lot of activity both at the tier one and OEM level. That activity starts now. Actual production timing is not 100% pinned down, but let's just say some of it would be within the next three years. When you think longer term for those corner modules, now, those corner modules, just to remind everyone, they put elements of the powertrain into the corners of the car. That's a much, much bigger transition. That won't happen until 2028 plus, and even if it happens in 2028, some market analysts say it'll be in a small number of cars. That's a much longer term trend. EMB and, steer-by-wire, both of those technologies are actually in design now.
Hey, guys. Gary Mobley, Wells Fargo Securities with a follow-up. Like, recently, you ended your exclusivity with Sanken as your exclusive Japan distributor. I'm curious if we can pull back the layers there and help us understand, you know, how that benefits you in terms of giving you access to a larger subset of Japanese automotive OEMs or tier ones and maybe related some of the Chinese OEMs as well. Thank you.
Yeah, Gary, thanks for the question. Just to provide everybody the context, Sanken had been our primary distributor in Japan for the longest time. We were always in the background doing technical, detailed technical support, but Sanken was taking the lead. As we have now thought about how to support Japanese OEMs as they start to move towards a EV first mindset, it became very clear that they needed more support. We have now restructured our agreement with Sanken, where Sanken is in the background, and we're taking the lead with our engineering support, our field applications engineers, and our salespeople to provide those OEMs the right level of support as they start to lean into this transition. It doesn't mean that Sanken has completely gone away.
They're still in the background doing logistics support and quality support, they'll continue to do that for some time. We think this is really important. As the Japanese OEMs, where we've always had a really strong position, now need more direct help from IC suppliers like us to help them with the right products and solutions in the transition.
Hi, Vineet and Derek.
Yeah.
Here.
Hey.
Sorry about that. Vijay from Mizuho. Just a quick question on the magnetic sensors. I think you said 62% of revenues on magnetic sensors, and then 43% is e-mobility, which is EV and ADAS. How does that map into the magnetic sensors? Is that 70% of your magnetic sensors goes into EV, ADAS?
I don't think we've exactly broken it down, Vijay. Thank you for the question, but I would say that by and large, our product portfolio maps pretty well to our market segments. you know, automotive is roughly 70% of the sales. You can easily apply that to the product segments.
Got it. Just a quick question for Derek. On the gross margin roadmap, you said manufacturing efficiencies. If you look at your mix of foundry today between TSM, UMC and Polar, are you contemplating a change in that mix as you look out to fiscal 2028 or longer term, I guess?
The model doesn't necessarily contemplate a significant change in that mix. That mix, we're contemplating staying the same in the model there, right? We've chosen to have long-term agreements with UMC, a long-term agreement with Polar, and quite frankly, over the last two years, they've become quite cost-competitive. You know, at one point in time, if you rolled the clock back two or three years ago, the Taiwanese suppliers were significantly better cost-priced than the U.S. suppliers. I think TSMC has been pretty aggressive with the market with price increases. I think we've done a good job in negotiating. We'll continue to evaluate our foundry partners in terms of technology, price, capacity, those three, but there could be others. I alluded to, as we start to regionalize that fab channel as well, there could be others in other countries.
Hi. Natalia Winkler from Jefferies. I wanted to ask a question on the isolated gate driver opportunity and just ask, how do you see the market, kind of the existing competition, right, in that space? You guys are expecting revenues in the next two years, right? Who are maybe the players that are already in the space, and what's the differentiation that you see in that product line? I understand that's kind of coming from the Heyday acquisition.
Correct. Natalia, thank you for the question. Maybe I'll get started and then ask Mike to weigh in as well. There are plenty of gate drivers in the market. I think when we think about what is unique about us, it's not dissimilar to the other products, but we drive a lot of integration. It's really the transformer capacity capability as well as the isolation ability and the gate driving capability all coming together is what makes us unique. Mike.
Yeah. As I mentioned in the presentation, we have this winning formula we like to apply whenever we can. It's not always true, but in the area of isolated gate drivers, it's literally true that the competition has to use two chips to accomplish what we do in one chip. It's a little more technically nuanced, but I'll explain it here. We actually combine both an isolated gate driver and an isolated DC-to-DC converter into a single package, and that's the real differentiator for Allegro. The isolated DC-to-DC converter is needed. It's not a corner case when you need it's generally needed. That just talks to the disruptive nature of the technology, such that we take two necessary components, put them into 1 with a single inductor, and that's the innovation that we believe will drive leadership for Allegro going forward.
Just to add, when you now look at more than 30 such instances where you need this product, it starts to add up really quickly, and we can drive roughly 40% lower package size and a resulting BOM cost because of that.
Still. Thank you. The second one was on Voxtel. I think, at the time of the IPO, you know, there was this discussion of potential LiDAR opportunity. Is that kind of still in the play, in the long term?
Yeah, it's a great question. Voxtel is our photonics business, and, you know, we really think of it as an asymmetric bet on the industry adopting 1550 nm eye-safe LiDAR, which is really the crux of the technology here. We remain committed to that. We're sampling customers right now, obviously, there's a lot that needs to go right for that technology to get adopted. We'll give updates as we make progress, for now, it's not a material part of our revenue case going forward.
I have an online question.
Yeah.
From Brett Rosenbaum with Adage Capital Management. Is there a material difference for Allegro's market share in ASP for SiC architectures versus IGBT versus BEV?
Yeah. I'll start and maybe Suman can weigh in as well. You know, we are really agnostic to the underlying device technology, and it's still very early to see SiC and GaN architectures, you know, widely in a automobile, but we don't believe that it'll be a material difference. Suman, I don't know if you think differently.
I think you're right, Vineet. I feel like, with all architectures, we're agnostic to what architectures are playing, whether it's IGBTs or SiCs or GaNs. We want to basically add content with our current sensors to. You know, we talked about some of that to all of those architectures for us. The isolated gate drivers, as we talked about, primarily will continue to grow as the SiC architectures and GaN architectures continue to evolve over time, especially in the automotive space.
Yes. Thank you. As a follow-up, it's Chris Caso. You had talked about the both the content in EV versus ICE vehicles and where it's going over time. I think you said it's 65% of the design wins. What does that imply for your exposure to EV versus ICE over time? You know, obviously there's, you know, long design cycles, so you've got some visibility over time. If you could give some color on that, please.
Yeah. you know, our content opportunity in EVs is twice that, close to twice that of ICE vehicles. ICE vehicles is roughly about $38-$39. With our portfolio today, it's, we are at about $60 on a pure EV, on an equivalent EV. Then with the isolated gate drivers, we get closer to $100. As the architectures evolve, as we see a slew of new EVs come out, we expect our e-mobility sales as a percentage of our total automotive sales to keep growing. Does that... Does... Hopefully, that answers your question, Chris.
Yeah. It's right now, was at 43% of revenue.
Yeah, the most recent quarter we reported it as 43% of revenue.
A year ago, Chris, that was 37, so that's been growing. When you look at that guidance or when you look at that target financial model, right, about outgrowing the underlying automotive SAAR, within that, there's a 25% CAGR on the e-mobility piece starting at 43%. The other business is not going away, we're kind of seeing that growing, particularly the safety, comfort, and convenience growing in line with auto production.
It's really kind of levered to growth in EV and then growth in the ADAS portion of the ICE is really what's driving it.
The section of our business is safety, comfort, and convenience. It's everything from heating and cooling, which obviously has some dynamics around EVs, some of the other safety features within, you know, that are not completely ADAS related. That's growing. Obviously, our pure ICE business will eventually start to decline. Net-net, I would say the other parts of our automotive business are staying flat, and it's really the e-mobility business that's growing for us.
Thank you.
Last follow-up, I swear. If Yole's data is correct, roughly 90% of your magnetic sensor business is Hall effect sensors. The puck is clearly going towards XMR, in particular TMR. My question is, to what extent does this impact your revenue growth? Does a TMR solution carry a higher ASP? To what degree does it impact your gross margin outlook as well?
I would say that we are really excited about bringing TMR technology to our customer base for all the reasons Mike went into, better accuracy, more robustness. We will drive the market and certain applications within the market towards TMR. You know, at this point, you know, we can expect TMR to be definitely differentiated margins relative to Hall, especially in some of these select applications. That's all comprehended in our revenue profile, though. I don't think it drives anything more than what Derek has already laid out in terms of our revenue targets.
If you've already asked your two questions, you're welcome to ask another one.
Hi, thank you. Josh Buchalter from TD Cowen again. I wanted to ask about competition, specifically in power. I mean, it has to be a different competitive set. It's a much bigger market, but you're going up against bigger and well-capitalized peers. You called out the auto grade, your integration at the die level. You know, what are the key areas that allow you to win in what is frankly a more competitive market? That, is it also combining it with your magnetic sensors? Like, how important is that? I'm just curious your thoughts specifically on competition in power. Thank you.
Thanks, Josh. Power is a well-served space, right? You know, we are really focused on leadership in niche applications, and motor drivers is a great example of that, specifically in automotive. You know, for us, it's not about trying to take on the entire power market. It's about really being laser-focused on the applications where we have a lot of expertise, we have the deep customer relationships, and our automotive-grade performance and ecosystem really allows us to differentiate versus somebody who may have a great power product generally, but is not really customized for that particular automotive application. That's really where we shine. Suman, I don't know if you wanna share more on that.
I think we talked about some of the motor driver applications where, you know, especially in steering and braking and those applications, we're laser-focused on, you know, making sure that our motor controllers are optimized for those applications. Mike mentioned the code-free aspect on the fan drivers as well. We're really tailored to the end application, so that's our growth space for us.
Got one over here. Quinn Bolton with Needham. Just to sort of follow up, maybe a little more detail, if you could, on the traction inverters, onboard chargers for both gate drivers and the current sensors. You know, as I look at, you know, a typical traction inverter, I think you know, common configuration would have 12 power transistors. You know, does that equate to roughly 12 gate drivers from Heyday? Is it a different number? Sort of similar question, you know, how many current sensors would you have in a typical traction motor and onboard charger?
Yeah. Quinn, I can start and maybe Mike and Suman can weigh in as well. It really depends auto, OEM to OEM and tier to tier, and it depends on the architecture. Somebody who's got a 400 volt architecture may have a different set of requirements versus an 800 volt architecture. It really depends. I would say, you know, every time there's a power conversion instance, you need current sensors, and you probably need current sensors on both sides of the power equation. Okay?
I agree with what Vineet said. There's so many different power architectures in the market today. You know, one thing remains true, in those types of systems, there's always multiple current sensors, and the trend we're seeing is that there's even more gate drivers in those systems. The relative numbers, they do change greatly depending on the architectures out there, but it's an exciting story for us because in the end, lots of new content for Allegro, no matter what the architecture is in those systems.
Just to follow up and question on the China business. You said China's 25% of the business. First part is the mix of business within China similar to the corporate mix? Is it a little more or less exposed to the auto side? Can you speak to, you know, just sustainability in China, given the geopolitical tensions and such, you know, where your competitive position is? Imagine that's still an important market because of EV, and China is sort of overexposed versus the rest of the world.
Yeah, Chris, it's a great question. You know, I would start by saying that China is an incredibly important market for us. It's 26% of our sales, and we see a tremendous amount of growth going forward as we look at our design pipeline. For us, it's really important to make sure that we are serving the China market in the right way, which is building out and continuing to build out our sales teams, putting more engineering talent on the ground, and we are exploring, you know, continued localization of the supply chain as well. We do a little bit of assembly there today, and we are exploring ways to do more in the China market. Winning in China continues to be a really important imperative for us.
You know, we obviously acknowledge the current geopolitical tensions, and we will continue to monitor that and make sure that, we retain the ability to serve the market in the right way.
Okay. While I have the mic, and we're through a lot of the presentation, maybe I'll ask one of the short-term questions as well. You did reiterate your guidance for the quarter today. You know, the auto industry has been supply constrained for some while. You know, based on some of the slowdown we've seen elsewhere, there's better supply availability. Maybe you could speak to that to say, you know, as the auto industry perhaps tries to catch up on some of the production that they haven't been able to address going forward, you know, what that means for you. On the other side is, you know, there's some concerns about inventory, in general and what you see, with regard to inventory for your automotive customers.
Yeah. Thank you again for the question, Chris. it's clear that we are coming out of a very significant supply constraint environment, and it's across the supply chain, across the ecosystem, right? Whether it's us as an IC supplier or our automotive customers, as the end customers. you know, this year we're gonna see some reasonable step change in the growth profile of automotive production, and we think that's gonna go a long way in alleviating some of the constraints. You know, get our OEM lines operating at higher utilization, get more inventory on dealer lots. Pricing, you know, starts to come more into normal levels. we think that there is still room to run for automotive production. you know, our belief is that equilibrium is somewhere around 90 million units.
It'll take some time to grow into that. This year we'll make a meaningful step towards attaining that equilibrium. As a result of that, I think, you know, we're gonna see and the industry's gonna see continued growth related to automotive production. I'll let Max say a little bit more around what we're seeing in the channels, but to our knowledge, we're not shipping into any inventory positions.
Yeah, well said, Vineet, and thanks Chris for the question. When we talk with our customers, a key theme as we, you know, navigate the current dynamics is really close and frequent contact on what they need. While Vineet mentions the overall units for production in automotive this year are growing at single digit rates, you know, EVs are planning to grow, you know, closer to 50% year-over-year. Our customers are keenly motivated to make sure that they have the right BOM set of components to support that. We're working very closely there, and we're employing commercial agreements and other tactics just to make sure that those discussions are happening, and we're not just relying on an opaque value chain, you know, and ordering patterns as we maybe had in the past.
The customer intimacy there is really, really important, and we know that our customers are trying to make sure that they dial in the critical EV mix of their business this year while supporting traditional auto production at the same time.
Chris, one of the things we've talked about publicly is we continue to watch all aspects of the value chain in terms of where inventory is building, whether it's with our distributors, auto suppliers. We reach out to our customers, as Max has talked about, Max's team, really working with those customers to understand which portion of the backlog, you know, is shippable soon. There's parts of our backlog that are past due that we're working with customers to allow them to reschedule and in fact cancel. We wanna make sure it's good backlog. We wanna make sure they want that product. We wanna make sure we're not shipping any inventory because we have places for immediate production today.
Thanks. Vijay from Mizuho again. It's my last question. Sorry about that. Max, just on the EV magnetic sensing side, can you talk about the competitive landscape and, you know, what you're seeing there or how you, how you see your design pipeline, win pipeline there? For Derek, and Vineet, the Power IC side is obviously a huge blue sky opportunity. Do you see any M&A coming down the pipe there? Thanks.
Good. Maybe I'll address the first one. In magnetic sensing, you know, as with power, it's a well-served market. Clearly, we have a leadership positioning across magnetic sensing, and we also consider ourselves in a leadership positioning in current sensing. Really that's driven by the technology advantage that we think we've built up over 2 decades, and Mike outlined that well. We're confident that, you know, we'll continue that momentum, not only in the overall magnetic sensing space but also in the current sensing space.
Vijay, I think on M&A, you know, Derek laid out really well, you know, our sort of guardrails for M&A. We think M&A is a integral part of our toolkit as we look to drive growth, but it has to make sense. It has to align with our strategies, it has to move our technology roadmap forward. It needs to meet our economic conditions. Absolutely, we'll continue to look for the right assets. You know, the Heyday acquisition for us is working out really well as we've outlined how we think about taking those products into the market. We're really bullish on that. We look for opportunities like that or opportunities that bring a little bit of scale but are really aligned with our technology and strategy roadmaps.
Any more questions?
How you doing? Peter Oser again. Just wanted to follow up on the sort of supply chain, you know, inventory issue and sort of what's going on in production. It would seem like looking at it, not super deeply, but that car manufacturers focused on sort of whatever vehicle system they could make the most gross profit dollars on. That led to, you know, higher premium luxury cars, and it, you know, also obviously with EV transition happening as well. Just wanted to understand, you know, if all production is no longer constrained, do we see a potential negative mix effect as manufacturers go back to sort of more economic vehicles versus luxury premium, and whether that has any meaningful effect or if the switch to EV sort of wipes that sort of off the board?
Yeah, Peter, maybe I'll start and have Max weigh in as well. We do believe that over time there's gonna be EVs at all price points in the market. We see that as we look at our design pipeline and the work we're doing with all the OEMs. From an IC content standpoint, it doesn't make that much of a difference because our products are critical to the operation of an EV or an ICE for that matter. It's not like you can forgo these features. None of what we do is nice to have. It's safety critical. It's critical to the safe and efficient operation of the electric powertrain. We believe that even though automotive OEMs will fill out the portfolio over time, it won't have a material impact on our mix.
Yeah, great. Just to add, our play on autonomy or more specifically ADAS, you know, that's a here and now opportunity, right? When I think about the functions we enable, like lane keep assist, automatic emergency braking, adaptive cruise control, those are penetrating into the mainstream already. Even in those mainstream vehicle classes, we'll see an uplift in content as those features are really driven to the majority of the units that are being produced.
I mean, to do that, you need cost downs or like... What's driving that change? Is it literally just, you know, the ability to, for you guys to deliver a system that's more cost competitive, or is it, you know, as you get scale or whatever, or is it, you know, just customer need that this has to happen because it's now expected? 'cause it, you know, I think in auto industry in general that, you know, as things move from luxury to mainstream to, you know, economy, you know, those sole supplier situations get less and less and price becomes more and more important obviously.
Just, is there something unique about sort of what you're delivering, and you've obviously already touched on it as saying it's, you know, critical, but, any sort of expounding on that, to make it so it, you know, so we understand that this doesn't just go away, as you move down the value chain.
Yeah, Peter, I would say that generally we don't really see changes in our profile as OEMs make decisions on what features to include or not include in a program. It largely depends on what they're treating as a standard versus option. I would tell you that the safety features Max outlined are maybe options, but they're really standard. You know, increasingly, what we used to consider luxury is now a must-have, and nobody wants their families driving in cars without the, these safety features, which are now seen as essential. Regardless of the mix within the automotive portfolio, we feel really good about our ability to grow and continue to serve customers.
Just to follow up with regard to the long-term supply agreements you have with your auto customers, can you talk to, the nature of those agreements, sort of what the average duration is, what they cover, pricing and volume and, you know, just sort of how that, you know, deals with the relationship you have with those customers? And then with that also, the agreements that you have with your foundries that back that up, them up and how that plays together.
Chris, of course, we can't share the details of those agreements, but.
After hours
... they cover the normal things you would expect as, you know, what are the volume needs and what pricing they wanna lock in for that. You know, typically they tend to run a years. In some cases, we have multi-year agreements, but, you know, and they're different than the agreements that we sign with our foundries for sure, right? With our foundries, we have a different dynamic. You know, we talked about the Polar agreement, and then we also talked about the UMC agreement. Two very different animals, but, you know, our customer contracts tend to be very specific to the applications we serve and can be single or multi-year duration.
I guess as a ask question in a better way that you could answer it is. Does it include some pricing in there as well, such that, you know, market conditions change, you know, if, you know, customers' own demand forecasts change, you know, to what extent does that protect Allegro?
It depends. If we're being asked to put in specific investments to support a customer, then I think there's gonna be belts and suspenders on that agreement to protect Allegro. If it's a generally available part, they're just reserving capacity, then it may not have all the hooks. Again, it defers customer to customer.
Thank you.
Okay.
I have an online question for Derek. Carl Croker with Woodline. For your target model, what tax rate should we assume?
I think that one's for you, Derek.
It's a good question. Our non-GAAP tax rate and our guidance for Q4 is 11%, and that's based on today's legislation. In the target model, when you're talking about free cash flow, I've used a tax rate, a cash tax rate of about 15%. That all has to do with the way the R&D capitalization works and the deductions we get. There is a slightly different tax rate between our non-GAAP tax rate that you'll see and our cash tax rate to use in that free cash flow model.
Thank you, Derek. We have time for one more question, if anybody would like to take the final question. No? All right. We'll call it a wrap, and I'll hand the mic back over to Vineet for closing remarks.
Okay. Well, thank you, Jalene, and I wanna thank all of you for your time and your interest in Allegro. I wanna especially thank all of you who braved the flurries here in New York to make it here in person. I wanna close with some summary thoughts that might be helpful to you as you think about Allegro going forward. We are laser-focused on the markets of e-mobility, clean energy, and automation, and this underpins our double-digit sales growth going forward. Innovation with purpose drives everything we do and gives us great technology leverage and gives us great returns on our R&D investment. Our leadership in magnetic sensing and in selected power products is gonna be further enhanced by the focused R&D investments we are making, as well as smart acquisitions like Heyday, and this leads to differentiated margins.
All of this coming together really underpins the attractive financial profile that we laid out for you here today. Thank you again for your time, and we look forward to sharing progress in future dates and future updates. Now I invite you to join us for lunch, and please see our product demonstrations as well. Thank you.