Good morning, and welcome to the Allegro MicroSystems Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions]. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised to this conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President, Investor Relations and Corporate Communications.

Thank you, Kevin. Good morning, and thank you for joining us today to discuss Allegro’s third fiscal quarter 2024 results. I’m joined today by Allegro’s President and Chief Executive Officer, Vineet Nargolwala; and Allegro’s Chief Financial Officer, Derek D’Antilio. They will provide highlights of our business review our quarterly financial performance and share our fourth quarter and full fiscal year 2024 outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures. The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for our GAAP financial results. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release, which is available in the Investor Relations page of our website at www.allegromicro.com. This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are based on current expectations and assumptions as of today’s date and as a result, are subject to risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements are described in detail in our earnings release for the third quarter of fiscal 2024 and in our most recent periodic filings with the Securities and Exchange Commission. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changes to assumptions or other events that may occur except as required by law. It is now my pleasure to turn the call over to Allegro’s President and CEO, Vineet Nargolwala. Vineet?

Thank you, Galen, and good morning, everybody, and thank you for joining our third quarter fiscal year 2024 conference call. I’m pleased to report that we delivered another solid quarter against a weaker backdrop in fiscal Q3, consistent with expectations and our guidance. While we expect continued inventory digestion across markets in the short term, our design win momentum continues at record levels and reinforces our confidence in our ability to grow above market over the mid- to long term, consistent with our target financial model. Furthermore, we are actively managing the business to optimize profitability and cash flow throughout the cycle. In Q3, we delivered sales of $255 million, up 2% year-over-year, reflecting continued strength in automotive. Sales in our strategic growth areas, including e-mobility and Industrial, which includes clean energy and automation, we’re up approximately 20% year-over-year to $150 million or 59% of total sales. Innovation with purpose is our core value. During the quarter, we announced the launch of the second product of our high-voltage isolated gate driver portfolio. Allegro’s newest Power-Thru solution has crucial safety features designed to protect against high operating temperatures in electric powertrain systems. It also provides high performance in noisy environments present in microinverters in solar applications, power supplies and data center applications and onboard chargers for electric vehicles. Recall that a high-voltage isolated gate driver technology came to us through our acquisition of Heyday just over a year ago. The progress we are making with our Power-Thru product family demonstrates our ability to effectively integrate acquired technology and bring it to market quickly. We’re applying the same approach and intensity to our recent acquisition of Crocus which further strengthens our magnetic-sensing IC portfolio and extends our leadership in this very important product category. I’m pleased to report that the integration of…

Thank you, Derek. This concludes management’s prepared remarks. Before we open the call for your questions, I’d like to share our fourth fiscal quarter conference line up with you. We are attending Wolfe’s Inaugural Semiconductor Conference on February 15 at the Jay Autograph Collection in San Francisco, California; Susquehanna’s 13th Annual Technology Conference on March 1 with attendance virtual and Morgan Stanley’s TMT Conference on March 4 at the Palace Hotel in San Francisco, California. We will now open the call for your questions. Kevin, please review the Q&A instructions.

[Operator Instructions]. We’ll pause for a moment while we compile our Q&A roster. Our first question comes from Chris Caso with Wolfe Research.

I guess just a first question on the guidance for the March quarter and some of the commentary you had on the June quarter as well. Could you characterize that between the auto and the industrial segment? Obviously, industrials already pulled back quite a bit here from the peak. In terms of the sequential decline that you expect for March, and it seems like you’re also implying a sequential decline in June. How would that be broken out between the 2 segments? Derek D’Antilio: Yes, Chris, this is Derek. So when I look at -- we don’t really guide by market, right? But when I think about Q4, we’re seeing that be across all end markets, and it’s really the inventory digestion continuing, particularly in industrial. Other is starting to come to a trough. And then in auto, as Vineet mentioned, there’s some dynamics of inventory kind of clearing out in the auto market. We expect that to continue into Q4 and Q1.

Yes, Chris, this is Vineet. Thanks for the question. So I think the -- we have been pretty transparent and have communicated the inventory digestion in the industrial and other markets. I think the order dynamic is more recent, and it’s really a rebalancing. As I’ve engaged with CEOs of base OEMs and the tiers, it’s clear that the automotive OEM demand continues to be pretty stable. And indeed, the xEV production estimates continue to be very robust. Really, the pressure is coming from the contract manufacturer in the tier side where there’s a rebalancing of inventory back into the pre-pandemic levels. And that’s a little bit of what we’re seeing here in fiscal Q4. And as Derek alluded to, we’ll see some of the same time is continue to the next quarter.

As a follow-on to that, Vineet, you made also a comment that you expect to kind of outgrow the market within auto. When you say that, are you define the market as sort of auto units, which is still expected to grow this year or core of the auto semiconductor peers? Take into account that the end market still grows but inventory comes down. Said more simply, do you expect that in calendar ‘24, you’ll be able to grow the auto market on a year-on-year -- your auto revenue on a year-on-year basis?

Yes, Chris. So a couple of clarifications there, right? So any time we talk about outgrowing the market, it is from an auto perspective, it’s based on auto production. So that’s the basis. And if you recall, when we talked at our Analyst Day, we laid out a model which talked about 7% to 10% growth above auto production. That’s how we characterize the market. Our comment which I think Derek made in the prepared remarks was with respect to full year fiscal ‘24, including our Q4 guidance, where we expect for the full year fiscal ‘24 top line to be about 7% year-on-year growth. When within that, automotive to be exceptionally strong high teens. And so that’s consistent with our model. And as a reminder, we are long cycle. The quarter-to-quarter, we’ll see some perturbations. But really, what we’re focused on is full year growth and really pleased with how the team has executed that strategy to deliver that kind of growth considering the backdrop.

Our next question comes from Gary Mobley with Wells Fargo.

Derek, you’re guiding the fourth quarter gross margin down about 110 basis points sequentially. Can you bridge that delta for us between lower distribution mix, pricing and contribution Crocus and the other factors that are affecting that? And then as it relates to the start to the fiscal year ‘25, I would assume that with June quarter revenue trending down again sequentially, should we expect another leg down in the gross margin as well? Derek D’Antilio: Yes, Gary. So our Q3 gross margin came in about 60 basis points better than sort of the guidance. Some of that was mix. We did see some pricing dynamics, particularly in the channel in Q3, which is the first place you usually see the pricing pressure because that’s market-based. We saw that start in Q3. Going into Q4, we’re starting -- we’re having the negotiations and their calendar year contracts with our customers. So there will be some pricing going into Q4 before we get the benefit from our vendor pricing negotiations for about a quarter or so. So that’s a part of the Q4 guide down by, call it, 100 basis points off of Q3. Some of that is also the distribution mix, which we expect to be again down in Q4 as we continue to manage channel inventories. And then the last piece, you’re right, Crocus is an element to that with their fixed cost as we start to see synergies come in the second half of calendar ‘24. Going into Q1, I’d expect gross margins to remain in that 53% to 54% range, Gary, for the short term here. The good news is when we model our gross margins now that we have a really variable cost structure and a flexible manufacturing model, they hold up significantly better than they would have when we had multiple facilities and multiple fabs. So I expect gross margins to hang in that 53% to 54% range in the short term. And of course, over time, as the distribution normalize, we’ll come back up to and then heading towards our model of 58%. And the last thing I’ll mention is, in Q3, organically, our gross margin was over 55% for Allegro.

Vineet, I want to ask more of a longer-term focused question. China is a very important market in the overall automotive market for sure. And so my question to you is, what sort of investments are you making there in terms of forging relationships with localized foundry partners, back-end partners and whatnot? How are you showing China domestic customers that you’re willing to invest in the market in an effort to win their trust to maintain their business?

Gary, thanks for the question. And you’re right, China is incredibly important to us. And actually, in the most recent quarter, we saw some really nice growth in China despite all sort of the macro noise that you hear, which just reinforces the belief we have to be in China to win with the Chinese customers, and we’re really pleased with the progress we’re making. To the question you asked, we are investing in localizing a part of our supply chain in China. We have inked an agreement with local OSAT, and we expect in the next 12 to 18 months, we’ll start shipping from our China partners locally. And we are also working with a foundry partner in China which will take a little bit longer to qualify wafers, but it’s part of the plan. And so it’s important for us to demonstrate to our Chinese partners and customers that we are indeed investing in the region. Not just for supply chain resilience from their perspective, also to take advantage of economies of scale locally. And so we’re really excited about the progress we’re making, and we’ll continue to update everybody as we make progress.

Next question comes from Quinn Bolton with Needham & Company.

This is Nick Doyle on for Quinn. So sentiment around EV as low, at least in the U.S., I think the China data points continue to be strong. And I understand Allegro is a bit agnostic to EV versus ICE but wanted to get your sense on customer sentiment. What are you seeing from U.S. EV customers? Is there better design activity than the recent data point suggests from guys like Tesla and GM?

Yes, Nick, thanks for the question. And so let’s take a step back. I think as you look at emissions and fuel economy regulations globally, the end outcome is pretty clear that all OEMs will have to move towards a pretty high mix of battery electric vehicles or some sort of emissions-free vehicle in order to comply with those regulations. The path there is going to be different for each OEM. Some OEMs are investing completely and totally in battery electric vehicles. Others are taking more of a mixed approach with plug-in hybrids and equal part of their focus and strategy. And as you point out, the positive for Allegro is that we are really agnostic to whether the platform is plug-in hybrid or it’s full battery electric. Our content is very similar. And it’s about 1.5 to 1.7x that of a pure ICE vehicle. So we’re really pleased regardless of the direction any OEM takes, and we’re ready to support the OEMs and the tiers with a really broad portfolio of magnetic sensing and very targeted power applications. From a design activity standpoint, I would tell you that every OEM is investing significant amounts of capital in R&D into electrifying their fleet. And it’s various degrees of electrification, as I’ve just pointed out. I can’t comment on any specific OEM. But suffice to say that every OEM is working on a bunch of new models, which will hit the market over the next 2 to 3 years. And so I think from a consumer standpoint, it’s going to be a really exciting time because there will be a ton of choice when it comes to battery electric vehicles or plug-in hybrid vehicles at all price points and from every brand.

Great. And maybe you could talk about the design win activity in data center, specifically the AI liquid cooling. I think your exposure there was something new. We kind of heard at the start of the year. What is it about your power solutions that enable you to win these AI liquid cooling sockets?

Yes. Nick, thanks for the question. So this has been a pivot from our partners that we work with that serve the data center infrastructure market as AI data centers or AI chips are proliferating through data centers. The cooling approach or the cooling solution is much different than a traditional data center. AI chips are larger and they run hotter. And so the power consumption and the heat dissipation is orders of magnitude higher than a regular data center chip. And so just air cooling is not enough. And that’s why a lot of our partners are innovating and coming up with really clever liquid cooling solutions. And so when we look at the data center market, our design win activity through this inventory digestion period, has actually stayed pretty strong. And now we’re starting to see the first design wins on liquid cooling solutions where essentially our motor drivers are used not just now for fans but also for the pumps that are used to pump the liquid and to make sure that the level and the pressure of the liquid is staying consistent. So really excited about what the potential is here. And I think we’re just getting started.

Our next question comes from Vijay Rakesh with Mizuho.

Just Vineet and Derek. Just a quick question here. If you look at your outlook, I think it looks like the key is the inventory destocking, especially on the margin line. As you look at June quarter, do you think [Indiscernible] and OEM inventories get back to normal in that 4- to 6-week range that you talked about? Derek D’Antilio: Yes, Vijay, thank you for the question. It usually takes a couple of quarters, right? Historically, it’s taking, generally speaking, about 3 quarters. So I’ll call the December quarter, the first quarter, March is the second quarter and June is the third quarter. So if history is any guidance, that would be the case that Q1 will get back to normal. So we expect right now that Q1 will be our trough quarter. And we’re going to see that across end markets. We’re starting to see it -- it’s really kind of a rolling cycle, as you know. So within our consumer business, that’s getting to a trough right now, and that could come sooner, right? And that could start to rebound a little bit sooner. And then I’d expect industrial to rebound. In auto, the dynamic, as Vineet mentioned, is relatively new with the auto inventory rebalancing at the tiers and the subcontractors, which will be, I think, last to kind of complete that rebalancing.

Got it. And then on the auto side, obviously, a big chunk of your sales there is 75% or something. But the outlook for fiscal ‘24, up 15% to 18% versus where LVP is. Can you talk to what’s driving that? That’s it. Derek D’Antilio: Yes. So let me give you the numbers. For our fiscal ‘24, which ends in March, we expect our auto sales to be up high teens and overall sales to be up 7%. And for that same period, LVP is about 8%. So we’re about double that, a little bit more than double that, consistent with our model, so 7% to 10% outgrowth on top of that. And really what’s driving that has been the continued design wins and the growth within EV and xEV and the e-mobility side. So the e-mobility side of our business go from 44% of auto a year ago to 54% of auto the same quarter this year.

And then would you expect to continue that into fiscal ‘25 that same above LVP 10% above LVP growth? Derek D’Antilio: Yes. We’re not guiding for ‘25 right now, and we’re going to continue to watch the market closely for ‘25, Vijay.

Our next question comes from Blake Friedman with Bank of America.

Just kind of wanted to approach the comments on June from a different perspective. So when I look at your auto and industrial peers on a fee to top basis, most are down anywhere from 20% to 35%. And -- and when I look at your March quarter guide, it implies declines on a peak-to-trough basis, closer to mid-teens. So I know you mentioned June would mark the trough of the cycle, but is it fair to say Allegro the peak-to-trough declines this cycle can finish at the lower end of that range? Derek D’Antilio: Yes. So the way we haven’t given any guidance, Blake, with respect to the June quarter, right? But we had a decline of about 8% in the December quarter. Our guidance is about a decline of 8% in the March quarter. And so again, if history is any guide, we’re expecting that these 3 quarter cycles, we’ll continue to see that kind of a decline in the March quarter as well.

Got it. And then just more of a longer-term question on gross margin. I know you outlined the puts and takes to kind of -- in the short-term recovery. But to get to your 58% target, can you maybe describe that bridge from 54% to 55% to 58%, puts and takes from there? Derek D’Antilio: Sure. Good question. So when I look at our Q3, we were actually above 55% on an organic basis before we start to get synergies for Crocus. So that was about a 70 basis point headwind for the Crocus -- first quarter of Crocus and we’re continuing to work to get synergies on their business. And as that business scales, we’ll also get gross margin. The other piece of it is our distribution sales are obviously down. And as we’ve talked about in the past, that’s about 800 to 1,000 basis points higher than the OEMs just because of the volumes. So as that starts to normalize, that’s generally about 100 basis points. That kind of brings us back up to that 56% to 57% range. And then our supply chain teams continue to work on a flexible manufacturing model by moving products or standard product to subcontractors, as Vineet talked about China supply chain and then continuing to leverage our back-end facility in the Philippines, but we continue to -- we have opportunities for optimization. And we just finished a large capacity expansion in the Philippines and that’s something that happens every few years. That’s not going to continue into next year. So we’ll continue to leverage the Philippines. So we think with our vendor leverage as we scale our Philippines facility and getting synergies from Crocus, and as the distribution sales start to normalize, we get to that 58% level. And we were there, of course, 2 quarters ago.

Our next question comes from Joshua Buchalter with TD Cowen.

I guess I wanted to follow up on the previous one, and I apologize for beating the inventories digestion to that. But did you just say that you expect the June quarter to be down as much as the December and March quarter? And I guess big picture, can you talk to confidence that you’ll be able to get this inventory cleaned up by the June quarter? And any anecdotes about where inventory levels are at your end customers would be helpful. Derek D’Antilio: Yes, Josh. So right now, inventory levels in the channel where we have direct visibility and contractual visibility are elevated. Those are above our target ranges and that’s why distribution sales are down. We continue to manage distribution sales down in watching that POS and watching the inventory in the channel. We’re starting to see that clear in consumer and as I said, I expect that consumer is probably at a trough first, which is the March quarter. Industrial continues to clear, particularly parts of the data center, parts of solar, that may take another quarter to clear out of there. Auto is a relatively new dynamic, of course, with the rebalancing of the inventories that Vineet talked about. And yes, we do expect if history is any guide, that the June quarter decline would be similar to the decline we saw in the December quarter and the March quarter.

Okay. And then as a follow-up, I wanted to ask about Crocus. I believe you mentioned some initial traction in the prepared remarks on e-mobility. Are those products -- does that indicate that the products are close to or are auto qualified and maybe you could talk to a bigger picture about how your engagement with your customers have changed now that you’ve got Crocus in the company and expanding your current sensing portfolio.

Josh, this is Vineet. Thanks for the question. So I can indeed confirm with pleasure that we have now auto qualified the Crocus product. It is what we call a generic call. Now we will -- as we are engaging with each individual customer, obviously, there’s a qualification cycle as per the unique design. But we are very actively engaged across automotive and industrial customers. And I’d characterize the engagements and some of the excitement in 2 ways. One is with the industrial base that Crocus had where maybe there was a little bit of trepidation on engaging with a smaller company, a start-up company. That’s gone away, and now we’re able to engage with a much more comprehensive portfolio around sensing and power with those customers. And so those customers are really excited to engage with us and really take advantage of the whole portfolio. On our customer base, where perhaps some of the more challenging applications, we were working through some of those technical challenges. The addition of the Crocus TMR stack has now made the solution very obvious and very easy. And so we are accelerating the adoption of the TMR stack onto our parts. And really, as I mentioned, we are now going to market through a common brand. ExtremeSense TMR is now the world’s most comprehensive magnetic sensing portfolio on TMR, really addressing the most demanding challenges around sensitivity, around speed of response around low power consumption. And so we see really an endless set of opportunities that we can address together. So really excited about the 2 technologies coming together under one brand.

Our next question comes from Thomas O’Malley from Barclays. Thomas O’Malley: I wanted to ask about the auto trends into March, but I wanted to ask more specifically on the makeup of those auto trends. So if you look at the December quarter, you’re still seeing really strong growth on a year-over-year basis from the ADAS and xEV rev. But your core non faster-growing auto business was down 7. Could you talk about when you look into March, what your expectations are for the split between those 2 businesses? Do you see sequential declines in some of the faster-growing ADAS and xEV revenue? And just given all of the weaker data points on EV that we’ve been hearing lately, is that the reason for the incremental auto weakness for the next 2 quarters? Or is it really more of the core, more SAR kind of levered auto? Derek D’Antilio: Yes, Tom, this is Derek. So in the Q3 quarter, you’re right, e-mobility was up strong. The traditional auto business was down. And if you remember in our guidance, we talked about the UAW strike in the United States. It did actually have some impact. When we looked at the pull ahead with the Detroit Bake 3. Sales were down significantly in Q3 compared to Q2. There was a pull ahead we saw in Q2, and we expected that. And rolling into Q4, we don’t -- we’re not going to break that out guidance by market. But it’s really the inventory digestion primarily at the tiers and at the subcontractors. It’s not specific to end market demand, certainly not EV, and certainly not ADAS.

Yes, Thomas. This is Vineet. So I’ll just add to that. As Derek pointed out, we had some order push-pull dynamic with our North America customers, largely around the UAW strike. At the same time, we’ve seen some really strong growth with our China customers and our Japan customers. And so I think that’s the dynamic we’re seeing. If I take a step back and I sort of look at the mid- to long term, we know that Chinese OEMs, Japanese OEMs, European OEMs are really forging fast and furious towards an all-electric future. The North American OEMs are taking their own path with a mix of plug-in hybrids as well as battery electric vehicles. And we’re serving all of them in their own unique way. But I think the path on each region to an all-electric future will be slightly different and will take a slightly different time line. Thomas O’Malley: Helpful. And then my follow-up is just on the gross margins. A bit lower into March, but I think you mentioned mix. Can you talk about how you see that margin profile recovering? I mean if lead times have come down and the channel looks a little bit different than it did over the last couple of years, shouldn’t margins stay kind of more at these levels? And if you look at auto potentially recovering, does that help bring those margins back after the June-September quarter time frame? Can you just walk me through the puts and takes of how much recovery do you see in the gross margins? And how quickly you think that comes back? Derek D’Antilio: Yes. As I mentioned, our Q3 gross margin was about 60 points better than we had guided to at the 54.6%. Within that, Allegro’s organic gross margin was still over 55%. So organic gross margin is still very good and very healthy. It holds up well based on the flexible manufacturing model that we have. Going into the March quarter, we’re guiding to 53% to 54%. And that projects a continued decline in distribution sales, which, as I mentioned, generally has significantly higher gross margins than OEM sales because of the volumes they’re buying. Product mix also plays a part in that from quarter-to-quarter. And then the third piece of the March quarter is the continued Crocus integration and Crocus fixed cost before we start to see synergies in the second half of the year. So I’d expect that gross margin to remain in that 53% to 54% range for the near term, the next couple of quarters. And then as we start to get synergies, start to see the normalization of the distribution, I expect that to go back up to 55% in the medium term, and then we’ll work towards our model of 58% back to where we were a few quarters ago.

Thank you. At this time, I’m not showing any further questions in the queue. I’d like to turn the call back over to Jalene for any closing remarks.

Thank you, Kevin. We appreciate you taking the time to join us this morning. This concludes the call.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect, and have a wonderful day.