ALLEGRO MICROSYSTEMS, INC. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Business Results: Q2 sales totaled $187 million, with non-GAAP EPS of $0.08 at the high end of the outlook. The company is executing new product roadmaps, having announced two new XtremeSense TMR current sensors post-Crocus acquisition.
• End Markets:
  • Automotive: Encouraged by global demand for magnetic sensing and power semiconductors. China xEV production is growing, with shipments returning to normal ordering patterns. Europe and North America still face inventory digestion challenges due to OEM production cuts.
  • Industrial and Other: Signs of increased activity after a prolonged inventory digestion period, with expectations of demand recovery in 2025.
• New Products: Highlights include design wins for a PHEV inverter, clean energy smart metering, a high voltage isolated gate driver for lithium battery testing, and TMR technology for blood glucose monitoring.
• China Supply Chain: First parts from the new China supply chain are set to launch by the end of the year, with progress in qualifying wafer suppliers and OSATs.

Segment Performance

• Automotive: Q2 sales to automotive customers were $142 million, an 8% sequential increase and a 28% year-over-year decline. Auto sales accounted for 76% of Q2 sales, with e-mobility sales at $71 million, a 14% sequential increase.
• Industrial and Other: Sales were $45 million, a 27% sequential increase but 42% year-over-year decline.
• Product: Magnetic sensor sales were $129 million, a 12% sequential increase, representing 69% of Q2 sales. Power product sales were $58 million, a 13% sequential increase.
• Geography: Sales were well balanced with 26% in China, 21% in rest of Asia, 20% in Japan, 18% in the Americas, and 15% in Europe.

Guidance

• Q3 Outlook: Sales are expected to be in the range of $170 million to $180 million. Gross margin is projected to be between 49% and 51%. Non-GAAP EPS is expected to be between $0.04 and $0.08. A $25 million voluntary debt payment was made, reducing the term loan balance to $375 million.
• December Quarter: The midpoint guidance is higher than June levels, but North America and Europe still have ongoing inventory digestion challenges due to OEM production cuts.

Risks

• Inventory Digestion: Lingering effects of inventory digestion in North America and Europe, exacerbated by production cuts by OEMs, leading to churn in tiers and contract manufacturers.
• Macro Uncertainty: Continued macroeconomic uncertainty affecting order patterns in certain regions, particularly in North America and Europe.

Question and Answer

• Q: Sharp correction in June, sequential down again. What changed? A: Inventory digestion was a key challenge. While China saw a 54% growth in Q2, North America and Europe still face inventory issues due to OEM production cuts.
• Q: Gate driver win with China OEM. Expand on that? A: The win was for a GaN isolated gate driver, offering space and cost savings, with potential for more traction as silicon carbide and GaN FETs gain prominence.
• Q: Weeks of inventory? A: Normal levels are 8-12 weeks. Inventory has come down in China but remains elevated in North America and Europe.
• Q: Gross margin expansion in Q3? A: Q2 gross margin was 48.8% with a one-time quality resolution. Q3 gross margin is expected to be 49%-51% due to normalization of geographical mix and factory utilization.
• Q: China supply chain strategy? A: Localized manufacturing in China is underway, with OSAT parts rolling off by year-end and wafer qualification ongoing to move a sizable portion of China revenues to domestic production.
• Q: Competitive landscape and pricing? A: Confident in maintaining/extending market share with new product momentum. Pricing is stable, returning to typical 2% productivity share with customers.
• Q: Inventory and lead times? A: Inventory dollars increased, but days of inventory came down due to revenue growth. Inventory days are expected to tick up, with half of inventory being wafer/die bank and finished goods managed for quick response.
• Q: End consumption and demand? A: End market demand is strong, but pockets of inventory digestion in North America and Europe persist due to OEM production cuts and tier inventory churn, though natural consumption still tracks long-term models.