Q1 2025 Earnings Summary
- Sequential growth expected in Q2 driven by automotive recovery: Allegro anticipates second-quarter sales to be in the range of $182 million to $192 million, implying 12% sequential growth at the midpoint, primarily due to the automotive sector returning to normal ordering patterns after inventory rebalancing. This growth reflects confidence in the stability of the automotive end market and positions the company for continued improvement.
- Strong position in the expanding electric vehicle (xEV) market: With over three-quarters of the automotive design pipeline tied to e-mobility, Allegro expects faster acceleration in e-mobility sales as inventory levels normalize. The company continues to win more than its fair share in the market, particularly in xEV and ADAS applications, setting the stage for significant future growth in these sectors.
- Maintained market leadership and path to improved gross margins: Despite the intentional under-shipping to reduce channel inventories, Allegro has maintained its market share in magnetic sensors, with third-party data indicating an extension of its leadership position. The company is confident in returning to higher gross margins through increased utilization, favorable product and distribution mix, and new product introductions, aiming to achieve its target gross margin model of 58% over time.
- Significant revenue decline and increased dependency on automotive sector: ALGM's automotive revenue increased to 80% of total sales in Q1, up from the historical 70%, due to a significant decline in other segments. This heightened dependency on the automotive sector exposes the company to greater risk if the automotive market faces a downturn.
- Gross margin pressure due to underutilization: The company experienced a 400 basis point decline in gross margin from Q4 to Q1, primarily driven by underutilization of capacity. Recovery of gross margins depends on improved utilization rates, which may be challenging if sales do not rebound quickly. ,
- Weakness in industrial and China markets: ALGM's industrial and other markets remain muted, with expectations of recovery potentially pushed into fiscal year 2026. Additionally, revenue from China decreased by 50% sequentially, raising concerns about demand in a key market. ,
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Gross Margin Outlook
Q: How will gross margins recover over the next few quarters?
A: Management explained that gross margins declined by about 400 basis points from Q4 to Q1, primarily due to underutilization. As sales recover, they expect margins to improve, aiming to return to prior levels by the end of the fiscal year. -
Inventory Levels Impacting Future Quarters
Q: What does the remaining inventory digestion imply for future quarters?
A: While inventory adjustments will continue into Q2, significant progress has been made. Management anticipates sequential growth and notes that prior guidance assumptions remain unchanged. -
China Sales Performance
Q: What caused the significant drop in China revenue?
A: China revenue dropped about 50% sequentially due to intentional under-shipping to reduce distributor inventory levels. Management expects improvement as inventory normalizes. -
Automotive Market Outlook
Q: How are broader automotive market trends affecting Allegro?
A: Despite some market softness, Allegro focuses on the mid- to long term. They are encouraged by continued double-digit growth in electric vehicle production, expected to more than double by 2030 . -
Market Share and Design Pipeline
Q: How is market share trending, and how is the design pipeline developing?
A: Third-party data shows they've extended their market share in magnetic sensors. The design pipeline continues to grow, with significant wins in the first quarter. -
E-Mobility Segment Performance
Q: Why did e-mobility revenue decline similarly to other auto segments?
A: The short-term decline is due to shipping dynamics during inventory adjustments. Over time, e-mobility is expected to accelerate faster as conditions normalize. -
Impact of EU Tariffs on Chinese Vehicles
Q: Are EU tariffs on Chinese vehicles affecting Allegro's outlook?
A: Management doesn't see the EU tariffs materially impacting their Chinese customers or business. Their guidance reflects current order patterns and backlog. -
Accounting for Facilitation Fee
Q: How is the $35 million facilitation fee accounted for?
A: It's a one-time payment used to pay interest and principal on debt. Accounted for as a reduction of capital expenditure and is non-taxable. -
Sanken's Future Ownership Intentions
Q: Will Sanken continue to reduce its ownership stake?
A: Sanken values the strategic relationship but has monetized a significant portion of its investment. Future actions depend on their determinations post-lockup period. -
Distribution Inventory Targets
Q: What is the target level for distribution inventories?
A: The ideal level is 8 to 12 weeks of inventory. Management expects to return to these levels over the next few quarters. -
Auto Segment Revenue Mix
Q: Is the higher auto revenue mix a temporary effect?
A: The current mix is due to inventory adjustments and shipping dynamics. Management expects to return to more traditional levels as conditions normalize. -
Utilization and Capacity Impact
Q: How will utilization affect margins moving forward?
A: As sales increase, utilization will improve, positively impacting margins. This is expected to contribute to margin recovery by fiscal year-end. -
Crocus Technology Integration
Q: How does Crocus Technology impact margins?
A: Crocus's variable contribution margins are healthy and above existing levels. Investments continue in R&D, with more product releases expected this year.