Allegro MicroSystems Q1 2024 Earnings Call Transcript

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August 1, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to Allegro Microsystems First Quarter Fiscal 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Speaker 1

Thank you, Carmen. Good morning and thank you for joining us today to discuss Allegro's 1st fiscal quarter 2024 results. I'm joined today by Allegro's President and Chief Executive Officer, Vineet Nagawala and Allegro's Chief Financial Officer, Derek Dentilio. They will provide highlights of our business, review our quarterly financial performance and share our 2nd This call is also being webcast and a replay will be available in the Events and Presentations section of our IR page During the course of this conference call, we will make projections or 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 And as a result, are subject to risks and uncertainties that could cause actual results or events to differ materially from are described in detail in our earnings release for the Q1 of fiscal 2024 and in our most recent periodic filings with Securities and Exchange Commission.

Speaker 1

Our estimates or other forward looking statements may change and the company assumes no obligation to update It is now my pleasure to turn the call over to Allegro's President and CEO, Vineet Nargawala. Vineet?

Speaker 2

Thank you, Jalene. Good morning and thank you all for joining us for our Q1 2024 conference call. I'm pleased to report that we had a strong start to fiscal year 2024, including record sales of $278,000,000 up 28% year over year. On a trailing 12 month basis, We've achieved $1,000,000,000 in sales, marking a new milestone. We've also achieved record non GAAP earnings per share of $0.39 an increase of 63% year over year.

Speaker 2

Our financial performance demonstrates the progress we are making towards executing the strategy that we laid out at our recent Analyst Day event. We continue to sharpen our market focus on e mobility and select industrial markets, including clean energy and automation with sales in these strategic growth areas increasing 63% year over year to $159,000,000 or 57% of total sales, up from 45% in Q1 of 2023. EMobility, which includes the increasing electrification of vehicles and higher adoption of ADAS feature sets continues to drive Allegro's above market Total Q1 automotive revenue grew 27% year over year, outpacing auto production growth of approximately 6% over the same period. Sales into eMobility applications increased by 58% year over year and represented 48% of our Q1 automotive sales, up from 39% in Q1 of 2023. Our solutions based design approach continues to be well received by our customers.

Speaker 2

Nearly 60% of 1st quarter automotive design wins were in eMobility. A recent example during the quarter was a multi portfolio chipset ADAS design win with a leading North American OEM, further validating our strong value proposition. Our design win momentum and the significant content opportunity associated with those design wins continues to drive our above market performance in automotive. Moving on to the industrial market. Growth in clean energy and automation drove 70% year over year sales increase in Q1, resulting in record industrial sales.

Speaker 2

1st quarter industrial design wins Leverage our sensor technology for DC charging, residential solar inverter and energy storage applications where we see expanding opportunities for our solutions. We continue to align our investments in R and D and customer support capabilities to focus on high growth secular megatrends in automotive and industrial markets that intersect with our technical expertise and market leading sensor and power product portfolios. I'm excited about the launch this quarter of the first device in our new PowerThru portfolio that leverages technology from our acquisition of Heyday Integrated Circuits last October. In addition to validating our ongoing commitment to innovation and execution. This launch serves as a proof point for the rapid pace at which our team can integrate new technologies into commercially viable and market ready products.

Speaker 2

Our new PowerThru isolated gate driver offers a single packet solution with an up to 50% smaller footprint and a 40% efficiency improvement compared to competitor offerings. This helps designers achieved their efficiency and power density goals in clean energy and e mobility applications. This is especially important This is the first of many new products to come in our new PowerThru portfolio and I want to congratulate the team on this 1st and very important milestone. Next, I want to talk about another important milestone, a first in our ESG journey. I'm pleased to have released our inaugural ESG report just last week, which highlights the significant steps we have taken thus far towards building a more sustainable future.

Speaker 2

Our commitment to ESG is directly aligned to our corporate strategy and growth plans through the products we innovate and the applications they enable, which in turn support a greener and more sustainable world. In addition to solving customer challenges like reducing emissions, making applications more energy efficient and harnessing renewable energy, Our innovative teams are also imagining ways to enhance our impact to the communities where we live and work. As we answer the need for more clean energy with innovative, efficient, socially responsible and environmentally conscious solutions, We're building long term value for all our stakeholders. I want to thank our teams who delivered another outstanding quarter and what we continue to build every day while executing our strategy and serving our customers. I'll now turn the call over to Derek to review the Q1 financial results and provide guidance for our Q2.

Speaker 2

Derek?

Speaker 3

Thank you, Vinit. Good morning, everyone. Starting with a summary of our Q1 financial results, Q1 sales were a record $278,000,000 gross margin was 57 and adjusted EBITDA was 36.3 percent of sales. As a result, earnings were $0.39 per share, an increase of 63% compared to Q1 of fiscal 2023. Sales in the Q1 increased by 28% compared to Q1 of fiscal 2023 and 3% sequentially.

Speaker 3

As a reminder, our Q4 had And on a comparable 13 week basis, 1st quarter sales increased by 11% sequentially. Please keep this in mind with respect to all sequential comparisons. Sales to our automotive customers were $190,000,000 or Within Automotive, eMobility sales increased by 7% sequentially and 58 year over year, representing 48% of 1st quarter sales, up from 39% a year ago. Industrial sales were $68,000,000 increasing 18% sequentially and nearly 70% year over year, led by automation and clean energy. Other sales, which includes consumer and computer applications, were $20,000,000 declining 30% sequentially and 27% year over year.

Speaker 3

From a product perspective, magnetic sensor sales were $174,000,000 increasing 4% sequentially and 27% year over year. And sales of our power products were $104,000,000 increasing 1% sequentially and 29% year over year. Sales through distribution represented 56% of our 1st quarter sales, reflecting the transition from Sanken to a Japanese distribution channel during the quarter. Excluding Japan, Q1 distribution sales were approximately 41% of sales compared to 43% in Q4 and 37% a year ago. Once again, no single end customer represented more than 10% of Q1 sales and sales by geography were well With 22% of sales in both China and the rest of Asia, 21% in the Americas, 20% in Europe and 15% in Japan.

Speaker 3

Now turning to Q1 profitability, gross margin was 57.8%, Consistent with Q4 and above our guidance range of approximately 56% due to favorable product and were 27% of sales compared to 28% in Q4 and 30% a year ago. 1st quarter R and D Expenses were 14% of sales and SG and A was 13% of sales. Operating margin was 30.8% compared to 30.2 percent in Q4 and 25.3 percent a year ago. Operating margin dollars increased by The effective tax rate for the quarter was 12.6%, slightly higher than our guidance of 11 $77,000,000 or $0.39 per diluted share, an increase of 5% sequentially and 63% year over year. Moving to the balance sheet and cash flow, We ended Q1 with cash of $362,000,000 Cash flow from operations in the Q1 was $49,000,000 consistent with Q4 and free cash flow was $4,000,000 We also significantly enhanced our liquidity by closing a new $224,000,000 revolving credit facility to replace an expiring $50,000,000 revolver.

Speaker 3

From a working Capital perspective, Q1 DSO was 40 days compared to 45 days in Q4 and days of inventory were 132 days compared to 127 days in Q4. As discussed in our last call, We continue to rebuild our wafer and die bank, which allowed us to reduce our delinquent backlog and improve our lead times, which declined by approximately 30% in Q1. We are also investing to expand our operations in the Philippines to support anticipated future growth and 1st quarter capital expenditures were $45,000,000 Before I turn to Q2 guidance, I'll provide some color on what we are seeing in the business environment. Automotive in certain industrial markets, including clean energy and automation, have been resilient in the first half of calendar remains robust and is expected to increase by 5% in calendar 'twenty three to nearly 87,000,000 units And EV sales are projected to grow by approximately 30%. In the industrial market, government policies, Regulations and investments are driving the clean energy market with an estimated $1,700,000,000,000 in investments announced this year.

Speaker 3

We are, however, cautious in the near term given the macroeconomic uncertainty with increasing Interest rates, inflation and geopolitical concerns. More specifically, we are monitoring China closely where auto production declined 15% in the first half of calendar twenty twenty three. Our sales in China in Q1 declined 13% sequentially or 7% on a comparable 13 week basis. We are seeing multiple factors at play OEM finished goods inventory is higher than normal due to the transition to more stringent emission standards And at the same time, China's renewal of its new energy vehicle tax incentives, combined with OEM price reductions, are expected to increase sales volumes in the midterm. And as a reminder, our sales are very well balanced geographically.

Speaker 3

China represents about a quarter of our sales. We believe that our products and strategy will drive long term above market growth, But macro uncertainty and rapidly changing business environment, particularly in China, makes it difficult to precisely predict Quarter to quarter impacts. We are watching these macroeconomic factors and leading indicators in our business closely, so we can best serve our customers And continue to execute to our target financial model. Now with that backdrop, I'll turn to Q2 outlook. We expect sales in the Q2 to be in the range of $270,000,000 to $280,000,000 The midpoint of this range is a 16% We expect gross margins to be between 56% 57 percent reflecting the projected product and channel mix and we expect operating expenses to be between 26% 27% of sales.

Speaker 3

We expect our non GAAP tax rate to be approximately 13% and our diluted share count to to be in the range of $0.35 to $0.39 per share. Now, I'll turn the call back over to Jalene for questions. Jalene?

Speaker 1

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our 2nd fiscal quarter conference line up with you. We are attending Needham's Virtual Semiconductor and SemiCap 1 on 1 Conference on August 22 and Jefferies Semiconductor IT Hardware and Communications Summit on August 30 at the Four Seasons Hotel in Chicago. We will now open the call for your questions.

Speaker 1

Carmen, please review the Q and A instructions.

Operator

Thank you, Jalene. And I will ask our participants to please keep your questions to 1 and one follow-up. Our first question comes from the line of Gary Mobley with Wells Fargo Securities. Please proceed.

Speaker 4

Thank you. Good morning, everybody. Thanks for taking my question. Derek, I appreciate the qualitative comments with respect to Visibility, but maybe if you can quantify things a little bit more and quantify what your customer order lead times are Given that, I believe delinquent backlog, as you cited, is down 30% sequentially and maybe if you can quantify Where your backlog sits today relative to where it has been recently and what sort of revenue coverage you might be contemplating in the second quarter revenue guide.

Speaker 2

Hey, Gary, this is Vinit. Thanks for the question. So You asked a few questions in that question. So let's take it 1 by 1. I would say that I think starting with lead times, we're really With the work the teams have done to bring our lead times back into what I would call industry standard lead times.

Speaker 2

There's a few packages I would say are still constrained. We're working through those. But on the whole, we are very pleased with the progress we've made. And as we've said before, as lead times come back into normal range, we expect the backlog to moderate. So I would say the backlog is now back In what I would consider normal levels as well.

Speaker 2

That said, our order patterns continue to be very strong. Our design wins continue to be really good. And so on the mid- to long term and certainly the visibility we get into our Forward looking business makes us feel really confident about the growth rates that we committed to at the Analyst Day. Derek, I don't know if you want to add anything more to that. Yes.

Speaker 3

And Gary, with respect to Q2, we feel really good about the Q2 guidance. That's largely covered by our backlog. And within that, we'd expect auto to be up marginally and industrial and other to kind of be flat to down slightly in Q2 based upon the projected shipments

Speaker 4

That is helpful. And if I can ask a follow-up question about Gross margin, I believe the beat in the Q1 was about 180 basis points. Maybe if you can single out the contributing factors between mix, Revenue mix and FX tailwind and embedded in your Q2 gross margin guide, is there an expectation of A continuation of the foreign exchange tailwind.

Speaker 3

Yes. Thank you, Gary. This is Derek. So really The larger proponent of Q1's beat was on the product mix and that will vary from quarter to quarter. So we had a very favorable product mix in Q1.

Speaker 3

We've also benefited from the transition in Japan from Sengen as a distributor as a Tier 1 distributor to the distribution channel and that's been marginal. The foreign exchange With the smaller piece of Q1, it was still impactful. We do expect that to start to normalize in Q2. So Q2's guidance reflects our Projected shipment mix along with normalization of the U. S.

Speaker 3

Dollar and the Philippine peso.

Speaker 5

Got it. Thank you all.

Operator

Thank you. One moment for our next question please. And it comes from the line of Joshua Borkhalter with TD Cowen. Please proceed.

Speaker 4

Hey, guys. Thanks for taking my question. I wanted to follow-up on the Segment guidance you just gave. So if I back into the numbers correctly, which is a big if, The industrial segment, it seems like it's going to be down after a couple of quarters of very strong growth. Is there any sort of inventory digestion going on there?

Speaker 4

And then Kind of same thing with the other segment, it suggests down pretty sharply again in the fiscal second quarter. Are we how close are we for that to Thank you.

Speaker 3

Yes, Josh, this is Derek. So the results the last couple of quarters and particularly the mix between market and even in Q1 were really a result of what we Shipped, shipping out of backlog, making allocation decisions. Going into Q2, there's still some of that. From a distribution Channel standpoint, we're at target levels right now. We've continued to rebuild that distribution channel over the last 4 quarters.

Speaker 3

As you know, that troughed about a year ago. We've continued, I think, to work with our We're at target levels right now in our distribution channel. So within Q2, I'd expect sales to distribution to be down marginally Sales to OEMs to be up slightly.

Speaker 4

Okay, got it. Thanks for the color. And then I also wanted to ask about China from your prepared remarks. You mentioned it declined 7% in the quarter. Was that commentary mainly focused on autos or was it more broadly across your other segments.

Speaker 4

And do you expect China to grow into the back half of the year as some of the auto numbers have picked up in recent months? Thank you.

Speaker 2

Yes. Hey, Josh, this is Vinit. So I'll take that one. I think before I jump into some China specific The context here is that anytime you go to big technology or market transition, it's never a straight line, right? It's never linear.

Speaker 2

And the transition to an all electric future is going to be no different. Now China does have some specific issues that it's dealing with. But we believe That in the near term there is going to be choppiness across all our end markets. Derek pointed out that auto production declined in China in the first half. We're certainly seeing some impact of that.

Speaker 2

Industrial continues to be from an inventory standpoint still elevated. But make no mistake, China is a very important region for us. It's very important for the entire automotive industry. It's the leader by volume when it comes to autos and EVs. And local Chinese OEMs or Chinese brands are now playing a much bigger role in the global stage when it comes to EVs.

Speaker 2

So we're really Confident and have a lot of conviction in our mid to long term thesis around China and the China OEMs. Near term like we said it's going to be a choppy market. A little bit like solving for multi variable calculus, right? There's a lot of variables at play. And as Derek pointed out, it's a little hard pinpoint the quarter to quarter transition exactly, but we feel really good about the mid to long term perspectives in China.

Speaker 4

I'll leave the multi variable calculus to you guys, but thanks for all the color. Thanks.

Operator

Thank you. And it comes from the line of Chris Caso with Wolfe Research. Please proceed.

Speaker 4

Yes. Thank you. Good morning. I guess the first question would be around lead times. And I think your comments said that they were down About 30% in the Q1.

Speaker 4

Can you talk about where that stands against where lead times would normally be? And it is increasing supply still likely to bring those lead times down further as we go through the year and what impact they may have on your order rates?

Speaker 2

Yes. Hi, Chris. This is Vinay. I'll take that one. So our lead times, as I said, we've our teams have done a great job of reducing our delinquent backlog and bringing the lead times back into what we would consider Market competitive or industry standard.

Speaker 2

Having said that, we do have plans to further reduce our lead times, especially targeted around our Distribution channel, some of our industrial customers where point of sale really matters. And so you can expect us to continue to bring down our lead times. Think from an inventory level, Derek can add some more, but we feel really good about where we are with our inventory levels now. And the nature of that inventory being in sort of dieback, I think gives us a lot of optionality.

Speaker 3

Yes. I think, Chris, I expect inventory levels from a dollar standpoint to flatten out from here on. As Vinit mentioned, we have sufficient die bank. And it's really there to Our customers from a quick turn standpoint, so we feel good about the current levels, but I wouldn't expect it to increase from here.

Speaker 4

Okay, great. As a follow-up, follow-up is on pricing. And I guess we've heard some commentary from others, perhaps some uncertainty about what will happen with foundry pricing As we go into next year, can you talk about your view of what you think is the cost situation As you go into calendar 2024 and if that changes, how that may affect your pricing to your customers and your revenue on a year on year basis next year?

Speaker 2

Yes, Chris. Maybe I'll start with the second part first. So we've been very consistent in our Commentary around pricing and our pricing especially in our automotive business which is about 70% of our business has always been value proposition We are in long term agreements with most of our customer base. It's very hard for us to sort of do transactional pricing. So it's not a question of Input costs go up or down X and hence price goes up or down Y.

Speaker 2

So I think our value And the innovation we drive in our products helps drive the value proposition and the pricing equation. And so we feel really good about the stickiness of that pricing as we From an input cost standpoint, I would say that the pace of change has moderated, but inflation hasn't completely gone away. And so we are in active dialogue with some of our major suppliers and partners around what's changing, what to expect as we go into the next Calendar year, but we feel good about balancing sort of the input and the output here From a cost standpoint.

Speaker 4

Got it. Thank you.

Operator

Thank you. One moment for our next question, please. And it comes from the line of Quinn Bolton with Needham and Company. Please proceed.

Speaker 5

Hey guys, and congratulations on the nice quarter and outlook. I guess, Vineet, just wanted to come back to your commentary around the China market. It sounds like you're seeing Perhaps some volatility in the auto business in China, but if you look beyond China, I assume the rest of the geographies, You're not seeing anything that makes you nervous about the outlook for the other geographies. Is that the right interpretation of your Prepared comments?

Speaker 2

Yes, Quinn, thank you. That's exactly right. So I would say when we look at our other regions, the order patterns, The stability is fairly consistent with what we've seen in our past quarters. It's really China and the commentary was very China specific that it's hard to sort of pinpoint exactly The quarter to quarter transitions, we're really bullish about the mid to long term. But in the near term, there are multiple Variables at play that make it really hard to pinpoint the quarter to quarter transition.

Speaker 2

So it is very China specific. The rest of the regions I think are Performing as we expected and certainly we see while we're watching it closely, we don't see any Near term churn in those regions.

Speaker 3

And Quinn, as you know, one of the nice parts about our business is that each of the sort of 5 regions are approximately 20% of our sales. So it's pretty well

Speaker 5

Got it. And just a follow-up on the China business. I don't know if I missed it, but did you make comments about where you thought dealer inventory levels We're within China. I know production seems like it had slowed, but do you have any thoughts on inventory levels of vehicles within the China market? Are they elevated?

Speaker 5

Are they Back to normal. I think some of your auto peers had suggested that dealer inventories in China may now be back to more normal

Speaker 2

Yes. Quinn, what we commented on was that there is a phenomenon happening right now In China, where there is a transition to a more stringent emissions standard, and that has driven, some Excess inventory of the leftover models that are perhaps not compliant to the new emission standard. So that's going to take a little bit of time to work through. This is pretty consistent with what OEMs have commented publicly as well as other tiers have. So we're not alone in seeing this phenomenon.

Speaker 2

Having said that, we see the EV market continue to grow nicely and the added incentives that exist in China or were renewed in China Around EVs, I think are going to be really good for the long term growth of the EV market.

Speaker 5

Perfect. And then just maybe For Derek, just on the wafer allocations among TSMC, UMC and Polar, is there any sort of mix shift That you see this year among your suppliers that could create either margin tailwinds or headwinds? Or do you think that the Margin outlook and foundry pricing is pretty stable.

Speaker 3

So I don't anticipate a significant shift in the mix. In Q1, it was about 20% polar, 70% UMC, give or take 10% TSMC. That will vary a bit quarter to quarter. And pricing and the revenue per wafer Will vary as well. So I don't anticipate that having a significant impact on gross margins.

Speaker 3

As Vineet mentioned, we also continue to work with our customers And our vendors to make sure we're marching towards our target financial model point, but I don't anticipate the wafer allocation itself to have a significant impact on our gross margins this Perfect. Okay. Thank you.

Operator

Thank you. All right, I'm not showing any further questions. I will turn it back to Yarlene Hoover for her final remarks.

Speaker 1

Carmen, I'm not sure if you can hear us or not, but thank you so much. Hi, hi. Go ahead. Okay. Thank you so much.

Speaker 1

We appreciate everybody for taking the time to join us today. This concludes this morning's conference call.

Operator

Thank you all for participating and you may now disconnect.

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