Allegro Microsystems Inc at Wells Fargo TMT Summit Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : <_ALACRA_META_ABSTRACT>Perfect. So maybe just to frame the discussion to start, I think as we look at the Allegro Micro story, what do you think is misunderstood by investors or maybe underappreciated from the story? And how do we think about the next three to five years, what you're most excited about? Derek D'Antilio - Allegro Microsystems Inc - Chief Financial Officer, Senior Vice President, Treasurer Yeah. It's a good question. And as Jalene and I have been meeting with investors and at conferences over the last -- particularly the last 9 to 12 months, we found that there are a fair amount of, I would say, misunderstandings around the Allegro. When Allegro went public back in October of 2020, the company had already been around for nearly 100 years. It was founded in 1926 as Sprague Electric. So people think it's a new company. It is a new public company, new four years, but it's been around for 99 years. Why that's important is because the company has been serving automotive for 35 years as well. So it has reliability data, it has all this information, it has auto-qualified and it has experience in power semiconductors since the mid-1960s and automotive sensors since the 1990s. The other thing that we found that was probably a misunderstanding is people equate Allegro with EV. And so EV -- when EV is slow in North America or EV is slowing in North America as being a big problem for Allegro. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 7:00PM, ALGM.OQ - Allegro Microsystems Inc at Wells Fargo TMT Summit And a few data points that we've pointed out is EV is awesome. It's growing over 20% globally, still projected to grow 20% globally, plus 20% for the next five or six years. But right now, EV is less than 20% of our overall business. And so it's a nice, exciting growth factor for Allegro but less than 20% of our overall business, while auto is 70-plus percent of our business, but we're doing things internal combustion engines that we've been doing for the past 35 years, ADAS applications, things that you see in Level 1 and Level 2 ADAS applications that we all have in our cars today and safety, comfort and convenience factors inside the cabin of the car. So that's the preponderance of our auto business. And then when I hear that EV is having challenges in North America, that's a true statement. How much of an impact does that have for Allegro? The answer is -- the short answer is not much. We ship 15% of our products to North America. And North America today is 8% adoption of pure EV, which means that less than 1.5% of our overall sales globally are to US EV. So while it's good is better, more is better, if they take away incentives and do those things, it's generally inconsequential to Allegro today. The other thing that's interesting in Allegro is we get a lot of China questions, which is fair, given today's geopolitical environment. And about 25% of our sales are to China, so not outsized per se compared to where the auto market is globally. 18% of our sales are to Japan, which is a pretty enviable position in Japan. 20% is rest of Asia, which is Korea, Taiwan, Southeast Asia, India, 15%, North America, 14%, Europe, so very well balanced geographically. And the last piece I'll mention is we're not tied to any one automotive maker. Yes, we sell to Tesla. Yes, we sell the BYD, all the other traditional automakers. But no one customer is more than a couple of percentage points of our overall sales. And even distributors are only 8%, 9% of our sales. And what I'm most excited about over the next three to five years is how Allegro wins in being a relatively smaller semiconductor company, relatively small being $1 billion in revenue, compared to some of these much, much larger companies is we're exclusively focused on winning in two areas. We're the market share leader in magnetic sensing. We have 23% market share. That's grown from 19% since we went public, so about 1 percentage gain share per year. We are -- we spend -- we invest about half of -- 75% of our R&D in magnetic sensing. And then in power semiconductors, which is the other 40% of our business, we've become really good at things like motor drivers, energy regulators, high-power gate drivers, so very focused power semiconductor company, has again been doing that literally since 1965, so very focused R&D. And the part that I'm excited about is we continue to be the innovation leader and viewed as a premium product in magnetic sensing, particularly. And what I mean by that is companies are willing to pay more for our product on a like-for-like product basis, as evidenced by our gross margins, because of the specification differences on our products, because of the currency efficiency they get, because of the battery life they get, because of the accuracy they get in angle sensors and things like ADAS applications. So we have released now twice as many products this year as we have in the past. And even through these downturns, I've learned through -- now been through about five of these, that continuing to invest in research and development is critical. We have to continue to be the market leader because we win on specifications through investing in R&D, not only organically, but we bought two businesses over the last few years that fit perfectly with our technology, perfectly with our customers, things like TMR, which is the next click in magnetic sensing, we're starting to bring that to the market right now, both with traditional auto applications, which is really exciting, and some new applications. Maybe Jalene, you could talk a little bit about the continuous glucose monitoring and some of those applications? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 7:00PM, ALGM.OQ - Allegro Microsystems Inc at Wells Fargo TMT Summit

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : That's really helpful. And I think you guys, in your last earnings, you gave us some new metrics in terms of updating your TAM and things. Can you just maybe walk through some of those? And what are the biggest changes that you made this past quarter in terms of valuing some of those opportunities?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : That's helpful. Maybe just focus a little bit on the more near term, I think June quarter, you thought maybe that bottom and now we're thinking about guiding for December being down sequentially. Can you talk about just what dynamic have changed in that time period? And I guess, how do you think about channel inventory looking into '25?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : What about as we look into 1Q? And I'm not asking you to guide, obviously, but China auto has been strong and if you look at the production data, historically, it's pretty small range of down high 20% to 35% sequentially. Should we think about that as being a potential different seasonality in the business relative to in the past, just given China's automotive demand is much stronger than historically?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : In March.

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : March quarter, yes.

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay, that's helpful. Maybe let's have a click on the Automotive. You guys talk about e-mobility versus non-e-mobility. How do we think about the two growth vectors within that? And maybe just where do you see that mix going over time?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay, that's helpful. You talked about what's been happening in Europe and North American OEM. I mean, how do you feel about the setup into 2025? Do you think things are a cleaner start looking into next year? Obviously, expectation for production is relatively muted or more normalized post COVID, supply chain crunch? But how do we think about that setup?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Yeah. Maybe we'll touch on the target model and things in a sec here. But I mean, I guess, go back to what you're saying in terms of you're seeing some of these Tier 1s that their inventory is going well below the normal, I mean, what's -- can you remind us what's your lead times for chip production in terms of wafer in to wafer out and relative to that inventory that they're holding?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay, that's helpful. I think you mentioned a little bit earlier, but we can double-click on you're doing some different supply chain things in China. Can you talk about that? How does that help with your competitive positioning there? Can you elaborate on that?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : And only having 50% of that being really manufactured in China, just given some of the proprietary nature, your customers are fine with that?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : And I guess, for the discussions you're having with them, for the cars that they want to export out of China, they are preferring to have a non-Chinese wafer chips. Is that the right way to think about it, I guess?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay, that's helpful. Maybe let's shift away from auto for a second, talk about the industrial market, obviously, broadly speaking pretty weak for semis. Can you talk about the inventory dynamics that you're seeing there? How do you think about the setup into '25? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 7:00PM, ALGM.OQ - Allegro Microsystems Inc at Wells Fargo TMT Summit

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay. I mean, in some of those markets, right, changes in administration, maybe solar is a little deemphasized probably.

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : In the US, right? But can you talk about the liquid cooling opportunity? Is that a content uplift relative to fans? Or how do we think about that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 7:00PM, ALGM.OQ - Allegro Microsystems Inc at Wells Fargo TMT Summit

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : How do we think about just the -- you just mentioned a bit, the cross-R&D capabilities of what you're doing in auto translating into other markets? I mean, where does -- you said earlier, 75% of R&D is spent on magnetic sensors. But how does that translate across auto to industrial? Is there a really good crossover that you're just --

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : That's helpful. You talked about gross margin a little bit ago. Near-term puts and takes on gross margin, how do we think about the upcycle as we look into next year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 04, 2024 / 7:00PM, ALGM.OQ - Allegro Microsystems Inc at Wells Fargo TMT Summit

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : That's helpful. I mean, in terms of pricing and competition, are you seeing -- you talked about just the dispersion of geographic revenues or anything we should be thinking about from a pricing competition on that front?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay. I think you talked about a long-term gross margin of 58%. I mean, obviously, you said near-term volume is the driver. I mean, are there other things that we should be thinking about that gets you to that target?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay, that's helpful. You mentioned announcing some of the new products recently, I mean, isolated gate drivers. Can you -- for maybe some of us who are not as familiar, can you talk about the position there? Why is that important? And what is the opportunity looking over the next few years there?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay. When you launch a new product like that, how long does it take to -- especially for -- in automotive, right, how long does it take to start to see that -- see wins in the pipeline turn into revenue?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Yeah. How do you think about depending on a lot of the semi companies -- there's a clear difference in how fast China automotive is moving relative to the Western regions. And I think some people view that as a positive. But then I think that a lot of investors maybe will push back and say, well, but that's turning into more like a smartphone type of cycle or iteration, where every year or every two years, you're having to go win your socket again. How do you guys think about that?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Yeah. Okay. I think earlier this year, you guys had done some things with Sanken, obviously, was a large owner, still is a large owner. But can you talk about the capital allocation priorities now, now that you did some transaction with Sanken that increased the float? But maybe talk about how should we think about capital allocation post that?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Yeah. Okay. That's perfect. I mean, in the 30 seconds we have left here, anything we didn't cover that we should have?

Question: Joe Quatrochi - Wells Fargo LLC - Analyst : Okay, perfect. Thank you for joining us.