Allegro MicroSystems, Inc. Common Stock Q1 2027 Earnings Call

Good morning and welcome to Allegro MicroSystems first quarter fiscal year 2027 Earnings Conference call. At this time, all participants are in a listen only mode. After the presentation, there will be a question and answer session. To ask a question during this session, you need to press star one. One on your telephone. You will then hear an automated message advising. Your hand is raised to withdraw your question, please press star one. One. Again. 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.

Thank you Sarah. Good morning, and thank you for joining us today to discuss Allegro's first fiscal quarter 2027 results. I'm joined today by Allegro's President and Chief Executive Officer Mike Doogue. And Allegro's Chief Financial Officer. Derek D’Antilio. They will provide highlights of our business review. Our first quarter 2027 financial results and share our second quarter outlook. We will follow our prepared remarks with a Q&A session. Today's call includes remarks about future expectations, plans and prospects, which are forward looking statements. Such statements are based on current expectations and assumptions as of today's date and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated or projected on today's call The company assumes no obligation to update these statements except as required by law For a discussion of these risks and uncertainties, please refer to today's press release and the risk factors contained in our periodic SEC filings. Which we will refer to non-GAAP financial measures during today's call Today's earnings press release, which is available on the Investor Relations page of our website at w w w dot Allegro MicroSystems. Contains important information about our non-GAAP financial presentation and also includes reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures.

This call is also being webcast, and a replay will be available in the events and Presentations section of our IR page shortly. It is now my pleasure to turn the call over to Allegro's president and CEO Mike Doogue. Mike.

Thank you very much. Jalene and good morning. Thank you all for joining our first quarter 2027 earnings call. We. Began fiscal 2027 with continued strong momentum, delivering our sixth consecutive quarter of sequential sales growth. First quarter sales were $259 million above the high end of our guidance range and representing a 27% increase year over year. First. EPS was $0.23, increasing more than 2.5 x over. Q1 of fiscal 2026. Before. Derek takes you through the financials in detail. I want to spend a few minutes on the business dynamics driving Allegro's growth. Our full. Demand signals strengthened again this quarter. Bookings increased for the seventh consecutive quarter and backlog continued to expand. Allegro's growth is increasingly fueled by the intersection of our technology, with the defining megatrends of AI, electrification, and automation This is particularly evident in our industrial and other business, where data center led first quarter growth increasing 32% sequentially to establish a new quarterly record at 17% of total sales. Within data. Center. Current sensors continue to emerge as a meaningful new growth pillar, increasing to 22% of first quarter data center sales. We are seeing accelerating customer adoption of our current sensors, which improve efficiency and system power density throughout the data center.

Consistent with our expectations, current sensor growth rates are outpacing our motor driver business, which itself remains strong as fans are adopted more broadly in power supplies. This proven. Momentum across both our power and sensor ICS gives us confidence that fiscal 2027 data center sales will more than double over fiscal 2026. Looking forward, we remain encouraged by the significant increase in Allegro's content and next generation AI servers. There is a growing need for high speed current sensors, intelligent fan driver ICS, and an outsized opportunity for isolated gate drivers throughout the data center. This creates a dynamic where rising server power multiplies our content. Far beyond simple rack count growth. That expansion is showing up directly in our sales pipeline, with data Center again leading first quarter industrial design wins. And with current sensor design wins surpassing motor drivers. For example, this quarter we secured design wins for multiple important programs using our market leading five megahertz current sensors, including a high volume, high voltage DC power supply with a leading provider. Within the quarter. We also secured multiple programs using our differentiated TMR current sensors in data center power supplies. Turning to. Automation and robotics. We continue to see increasing adoption of our sensor and power solutions in robotics applications.

Importantly, we are winning in robotics today with our existing technology. The same precise high resolution sensing and robust power products that have made Allegro a leader in advanced automotive motion control. Our exactly what robotics designers need now our. Decades of automotive safety, heritage give us a distinct advantage. Proven silicon established, high performance motor control and proven quality at scale. Engaging with key robotics customers has been a top priority. My recent customer visits in North America and China have further confirmed what we already knew that robotic joints posed the same fundamental safety relevant motor control challenges that we solve every day and advanced steering and braking applications in cars. This quarter. We secured current sensor wins with large Chinese humanoid robot OEMs. We also secured a large design win with a prominent North American humanoid robotics OEM that is using our inductive position sensors in robotics joints. These. Wins reinforce our expectation that robotics and automation will contribute 3 to 4% of our FY 27 sales, and the long term trajectory is even more compelling as humanoid robots incorporate more joints, actuators, and safety. Critical motion control. We estimate our addressable content will exceed $150 per humanoid by 2030.

Surpassing our projected automotive content per vehicle by. Securing these foundational sockets. Today, we are building a multi-year sales pipeline that we expect to become a meaningful growth vector for Allegro. As the market scales toward the end of the decade. Turning now to automotive first quarter automotive sales grew 15% year over year. This outpaces our long term target of greater than 10% growth, which is built on our ability to outgrow SA by 7 to 10% through content and share gains Our content per vehicle is expanding as the industry transitions toward electrified powertrains and advanced safety systems. We see a clear path from roughly $40 of Allegro content and legacy Ice vehicles to upwards of $100 in next generation battery electric vehicles. Within. Automotive Focus Auto, which includes XXV and Adas, lead, first quarter sequential growth. Our content driven growth is validated by broad based, geographically diverse design wins led by China, Korea, and APAC. First quarter auto design wins were up 30% year over year. Adas wins were led by electronic power steering and emerging electromechanical braking applications. High voltage traction inverters and onboard chargers continued to lead our Zev wins. Let me now give you just a few examples of impactful design wins.

In Korea, we secured several electronic power steering wins across two leading OEMs. These wins included Allegro current and position sensors, motor drivers, and high performance power solutions, reflecting the breadth of our sensing and power portfolio and rising content per system. Our. Sensors were selected for a sizable win, with a top Japanese OEM for a hybrid vehicle. Traction inverter, where our market leading current sensors are driving share gains in China, our motor drivers. High performance pmics and position sensors are gaining share in 12 and 48 volt electromechanical braking systems, with both global and local tier ones. And finally, we won our first major TMR angle sensor programs for Adas steering motors with leading China OEMs. This further demonstrates the share gain potential of our market, leading TMR technology. Our technology leadership continues to translate into broad based design win momentum. This is fueling our content expansion strategy across XXV, Adas data center and robotics, positioning us to capture outsized growth in a large and expanding Sam. We remain confident in our ability to deliver target growth rates in auto and industrial and in fiscal Q two, we expect both end markets to deliver mid single digit sequential growth.

I'll now turn the call over to Derek to provide additional color on our financial performance. As well as our second quarter outlook.

Thank you, Mike, and good morning everyone. Starting with our first quarter results. Sales were $259 million in non-GAAP earnings per share were $0.23. As a percentage of sales. Gross margin was 51.1%. Operating margin was 19.4% and adjusted EBITDA was 23.9% total. Two one sales increased by 7% sequentially in 27% year over year sales to our. Automotive customers increased by 1% quarter over quarter to $165 million in 15% year over year focused auto. Sales, including XXV and Adas. Increased by 3% sequentially and 11% over Q1 of 26. These results reflect growing lead time orders within lead time orders not able to ship in this quarter. Auto. Demand from our customers continues to be really strong. As Mike mentioned, auto design wins were up 30% year over year and auto bookings were also up 30% year over year. And up high single digit sequentially. Industrial and other sales increased by 18% sequentially to $94 million, and by 59% over Q1 of FY 26, led by continued strength in Data center to record levels. Sales to our data center customers were 17% of Q1 sales, up from 14% in Q4 and 10% in Q3 of FY 26. And as. Mike mentioned, sensor solutions were now 22% of our Q1 data center sales, increasing 66% sequentially.

This is also driven our data center product margins to the mid 50s. From a. Product perspective, magnetic sensor sales increased by 6% sequentially to $150 million, and by 16% year over year. Sales of our. Power products increased by 7% sequentially to $109 million and by 47% over the prior year quarter. Sales by geography on a ship to basis were as follows. 30. 2% of sales in what we term rest of Asia. Which is essentially Korea. Taiwan and India. 25% of sales in China. 17% in Japan and 13% of sales in both the Americas and Europe. Now turning to Q1 profitability. Gross margin was 51.1% up. From 50% in Q4 and gross. Margins have improved by 290 basis points from 48.2% in Q1 of fiscal 26. The improvements were driven by operating leverage, product mix into an early and lesser extent. Recent pricing actions. In addition to outgrowing our target markets, operational excellence in gross margin improvement remained top priorities. While operating leverage is a significant factor contributing. To gross margin improvement, we continue to drive factory efficiencies. Work through product build material transitions, including gold to copper, wire bonding, and have taken selective price actions. Collectively, these efforts provide a clear path to our target gross margin of 55% and beyond.

Operating expenses were $82 million and declined by $2 million sequentially. Largely due to the reset of annual incentive compensation plans. At the start of our new fiscal year. Operating margin was 19.4% of sales, compared to 15.6% in Q4 and. An increase of 830 basis points compared to 11.1% in Q1 of fiscal 26. The effective tax rate for the quarter was 9.7%. Interest expense was $4 million. The first quarter diluted share count was 188 million shares, and net income was $42 million, or $0.23 per diluted share. EPS increased by 35% sequentially and 156% over the year ago quarter. On sales increases of seven and 27%, demonstrating the significant operating leverage in our business model. Moving to the balance sheet and cash flow, we ended Q1 with total cash of $170 million. Q1 cash flow from operations was $22 million. CapEx was. $8 million and free cash flow was $14 million. We ended Q1 with term debt of $285 million and net debt of $115 million. From a working capital perspective, first quarter DSO was 35 days and inventory days were 128. Both consistent with Q4. Finally, I'll now turn to our Q2 fiscal 2027 outlook. We expect second quarter sales to be in the range of 265 to $275 million.

At the midpoint of this range, it equates to a 26% year over year increase. Additionally, we expect the following on a non-GAAP basis gross margin. To be between 50.75% and 51.75% operating. Expenses are expected to be $84.5 million, plus or -1 million, and the. Increase reflects targeted investments in R&D, including in potentially disruptive technologies and higher variable compensation estimates for the year. Interest expense is projected to be $4 million, and we expect our non-GAAP tax rate to be approximately 10%. We. Hate that our weighted average diluted share count will be 188 million shares. And as a result, we expect non-GAAP EPS to be between 23 and $0.26 per share. With the midpoint of this range implying 88% year over year increase. Now I'll turn the call back over to Jalene for your questions.

Thank you. Derek. This concludes management's prepared remarks before we open the call for your questions, I'd like to share our second fiscal quarter conference line up with you. To attend Needham's seventh annual Virtual Semiconductor and Semi Cap Conference on August 19th. Jefferies semiconductor. IT Hardware and Communications Technology Conference on August 25th and 26th in Chicago. Wolf. TMT Conference on September 10th in San Francisco. And finally, Stonex 13th annual TMT conference on September 17th, which we will attend virtually. We will now open the call for your questions. Sarah, please review the Q&A instructions.

Thank you. As a reminder to ask a question, you need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one. One again to ensure everyone has an opportunity to participate. Please limit yourself to one question and one follow up. Please stand by while we compile the Q&A roster. Our first question comes from Joe Quatrochi. With Wells Fargo. Your line is open.

Hey, thanks for taking the questions Maybe just a little bit of help wondering in the puts and takes of the September quarter guide for revenue. I think you said mid-single digits for both industrial and auto, but just curious if you could help us understand kind of what the data center growth expectation is for this quarter.

Yeah. Thank you. Joe. So, you know, to start, we continue to feel we have a great data center story growing market. We have strong content growth and the signals that we're seeing from customers. Show continued signs of strength. And, you know, to remind everyone when we look at our dollar content evolution, going from $150, all the way up to $425, we're really encouraged by the fact that two thirds of that $425 of content per rack are coming from the fan drivers and the sensors. We're seeing very strong momentum from sensors themselves. As we discussed in the prepared remarks. So we continue to see growth in the data center, and that's that growth is reflected into the mid single digit growth number we gave for Fk2.

And Joe. I'll provide a little more color on the Q2 guide. We talk about.

Mid-single digits for both auto and industrial. That's based upon what we can ship. That's based upon what's in our backlog for that particular quarter. And what we saw in Q1 actually is we continue to receive within lead time orders, both in data center and in auto. And so some of those orders couldn't be shipped in Q1. And we're building a little bit of delinquency. We'll ship over the next couple of quarters.

That's helpful. Maybe as a follow up to that, I mean, can you talk about just like the plants that increase capacity? Is it, you know, front end or back end capacity? That maybe the bottleneck of those orders that, you know, can't be shipped within lead time?

Yeah, sure. So, you know, most of what we're seeing, we have a good strategy to have not only a geo diverse supply chain, but with enough capacity to grow. When you have in lead time orders, it ends up being the back end where you have constraints. And we did have plans and executed those plans to expand capacity on the back end. And that we continue to have back end equipment rolling on each and every quarter.

Thank you.

Thank. You. Joe. Our next question will be from Chris. Caso with Wolfe Research. Your line is open.

Yes. Thank you. Good morning. I guess the first question was would be with regard to some of what you said on pricing and you did talk about some pricing actions. Could you elaborate a bit on, on, on what you're doing there?, what will that have any effect on, on gross margins going forward? And we know that particularly with your auto customers, you have some annual negotiations that occur at the end of the year., you know, is this in place of that, you know, will ,, you know, how will price increases be factored in as we go through the year and into next year?

Yeah. Chris. Thank you. This is Derek., so as we said in our call at the end of April. You're absolutely right. The majority of our auto customer contracts begin in the beginning of the calendar year. And as is normal, we saw low single digit declines in majority of those auto customer contracts ., like many in the industry, we're seeing inflationary headwinds from US commodity costs and other. Costs. So we are taking selective price actions that really began in earnest here at the end of our first quarter, largely in the distribution channel. So very little bit of that pricing benefit was in Q1. The slight beat on gross margin in Q1 really do it positive mix. And that also had the slight beat on the revenue in terms of having the long tail of distribution and general industrial sales with higher gross margins. As we move into the back half of this year, Q3 and Q4, we expect pricing actions that we're taking now to be more impactful and beneficial to gross margins.

Got it. As a follow up question. It sounds like you're getting some good traction on on current sensors within data center. Can you talk as the data center business grows?, what do you expect for current sensing as percentage of your data center business? You know, I guess sounds like we should expect that to grow by how much and is there a relative?, mix difference, margin difference in the,, the fan controllers versus the current sensing part of the data center business?

Yeah. So the current sensors do have a higher gross margin profile than the fan drivers. And, you know, from a growth rate perspective, I won't put a hard number on it, but we have a multiple positive dynamics going on here. We know that the power levels consumed by the data centers are increasing. And these current sensors are used in power supplies. So to the extent that power levels go up, the need for current sensors goes up as well. We have an additional tailwind here because we are gaining share in the market as well. The traditional solution. In these power supplies might be a transformer or an isolated amplifier, but because of allegro's innovations, because of our TMR technology, we were able to make these small form factor current sensors with very high bandwidth, very high speed capability. And that's why we're taking share in the space. So we're confident that it will be an attractive growth rate, but we're not putting a number to that rate at this time.

And Chris, I mentioned on the call here that our gross margins now in the data center business are now in the mid 50s. As a result of current sensors now being 22% of that business.

Got it. Thank you. You're welcome.

Thank you Chris. Our next question is with Tom O'Malley from Barclays Tom, your line is open.

Hey guys, thanks for taking my question. I just wanted to do a health check on auto. It looks like it was pretty strong across both the quarter and kind of indicating the guide, but just maybe what you've seen over the last quarter. Any areas of strength or weakness? And then you've seen some of your larger competitors be a bit lighter on the auto side, anything that you would call out that's differentiated from them. Thank you.

Thanks, Tom. So, you know, we're feeling very good about our auto business. We said in the prepared remarks, we believe we can achieve our model of double digit growth, growing 7 to 10% above SA. And there's many reasons for that. One of those reasons, just to remind everyone, are Zev and Adas Sam. It grows at a CAGR of about 18%. Are some more good numbers onto that which Derek and I covered in the prepared remarks. But with FQ1 sales up 15% year over year. FQ1 bookings up 30% and FQ1 design winds up 30%. We're seeing momentum. The the thing that I always like to to check, I've been on the road a bunch. I was in Europe or North America, Japan and China recently. And as we spoke to customers, our dollar content growth story is very much alive and well. I was able to meet with one of the tier ones out there that was first to market with electromechanical braking systems. They're shipping in production, very high dollar content increase for Allegro. I was in China talking to an inverter manufacturer. Our market share with that very sizable customer in the Chinese market has increased significantly over the last few quarters.

So we continue to see signs of positivity in auto. And we're confident we can deliver our growth rate.

Helpful. Not to get super specific on numbers, but you talked about the data center business more than doubling in this coming year. I think at the Analyst day, many people walked away kind of with that strength in mind. And so a lot of numbers have gone there. Is that just a starting point? The doubling I know obviously a really big number already. Or do you think that as the year goes along, you may revise that? Is this something that you have a lot of visibility on, or maybe talk to the lead times and your ability to upside that number? Thank you.

Yeah, sure. You know,, we look at all kinds of data centers statistics and one of them being CapEx spend, which still for calendar year 2026, you can find quite a range on, on that number. But generally you see numbers close to 80% year over year growth in CapEx spending. If that were to flex up or down, you know, our provided number would flex up or down. Really, we've been securing tremendous design wins with short time to market. It's driving, like we said, the more than doubling within the year. And as we go through the quarters, we'll give a little bit more color. But you know, the things that would drive it would be CapEx spend and some of the design win activity we have in the funnel.

Thank you Tom. Our next question will be from Vijay Rakesh with Mizuho. Your line.

Hi guys. Yeah. Hi guys. Just a couple of quick questions on the data center side as you go from 400 to 800 volt, looks like your content triples per rack., can you talk to what the mix is of current sensing and the fan motors and the gate drivers?, is it similar or does that make change? And should the margin profile still be in the mid 50s, there? Thanks. And the follow up.

Thanks. Vijay. This is Mike. So yeah, I'll use the same numbers I already mentioned, but it's good to reground ourselves. So, you know, in older data center acts, we had $150 of content, $425 of theoretical content in AI forward racks. And like I said, two thirds of that 425 is coming from our current sensors. And our fan drivers. What I didn't say earlier, when you look to the future. We believe there's hundreds of dollars more in content that could be added to the 425 as we layer in the isolated gate, drivers 800 volt topologies, and we're also investing in some new sensor areas that would add dollar content to the rack for Allegro. So we see a long multiyear evolution of dollar content growth to grow. But in the near term, we have full portfolios of market leading products, namely the fan drivers and the current sensors to drive near-term growth. We think it's an exciting story in both the short term and the long term.

And Vijay. This is Derek. Just to touch on the last part of your question, I would expect the gross margins in that business to remain in the mid 50s. Current sensors being above the fleet average and sort of the