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    Allegro Microsystems Inc (ALGM)

    Q2 2025 Earnings Summary

    Reported on Jan 14, 2025 (Before Market Open)
    Pre-Earnings Price$22.22Last close (Oct 30, 2024)
    Post-Earnings Price$22.46Open (Oct 31, 2024)
    Price Change
    $0.24(+1.08%)

    What went well

    • Allegro MicroSystems expects significant revenue growth as inventory digestion completes, with management indicating that end consumption levels could return to $225 million per quarter or higher, aligning with previous run rates before the inventory correction.
    • Strong momentum in China, with Q2 shipments/sales up 54% sequentially, driven by normalization of inventory levels and increased demand from Chinese automotive customers. This indicates a robust recovery and growth potential in that market.
    • Localization of manufacturing in China is ahead of schedule, with first parts from local partners rolling off by the end of the year, which is expected to be positive for gross margins over time, improving competitiveness and service to Chinese customers.

    What went wrong

    • ALGM is experiencing a sharper revenue decline compared to peers in the automotive sector, with guidance indicating approximately a 20% year-over-year decrease, while peers are down modestly, suggesting potential loss of market share or weaker demand for ALGM's products.
    • Prolonged inventory digestion in North America and Europe is taking longer than expected, compounded by production cuts from OEMs, which could lead to continued revenue declines or delays in recovery for ALGM. ,
    • ALGM is facing challenges achieving its prior gross margin targets due to declining revenues and onetime charges, potentially impacting profitability.

    Q&A Summary

    1. Inventory Impact on Revenue
      Q: Why is revenue declining despite previous expectations for growth?
      A: Despite strong demand, lingering inventory issues in North America and Europe, compounded by production cuts from OEMs, are causing a revenue decline. The company took early action to correct inventory levels and expects this to resolve as inventory normalizes ( , , ).

    2. China Sales Recovery
      Q: How did China sales perform this quarter?
      A: China sales showed great momentum, with shipments up 54% in the second quarter. Inventory rebalancing is behind them in China, contributing positively to performance ( , ).

    3. Gross Margin Outlook
      Q: What is the outlook for gross margins amid declining revenue?
      A: Despite a 6% revenue decline forecasted for next quarter, gross margins are expected to improve to 49%–51%, up from 48.8%. This is due to normalization of geographical mix and better factory utilization ( , ).

    4. Manufacturing Localization in China
      Q: Is the company moving production to China, and what is the impact?
      A: The company is localizing manufacturing in China to serve local OEMs better. This initiative is ahead of schedule, with first parts from OSAT partners expected by year-end. Over time, this is expected to positively impact gross margins ( ).

    5. Competitive Landscape and Market Share
      Q: How is the company performing in magnetic sensors, and are there pricing pressures?
      A: The company expects to maintain or extend its market share in magnetic sensing due to strong design win momentum and new product introductions. Pricing has stabilized, returning to typical industry patterns with around 2% annual price reductions as volumes ramp ( ).

    6. Industrial Segment Recovery
      Q: What is the outlook for the industrial segment recovery?
      A: While hesitant to call it a full recovery, the company sees encouraging signs in the industrial segment, particularly in medical and selective consumer sectors. A broader recovery is expected in 2025 ( ).

    7. Gate Driver Win in China
      Q: Can you provide details on the gate driver win with a China OEM?
      A: The company secured a win with its GaN isolated gate driver, offering 30%–35% space and cost savings by combining three functions into one chip. This solution appeals to OEMs seeking system cost reductions and flexibility in sourcing. The company will soon sample silicon carbide drivers as well ( ).

    8. Outlook for Magnetic Sensors vs. PMIC
      Q: Is the outlook better for magnetic sensors or PMICs?
      A: The company sees broad-based momentum in both segments, with magnetic sensing sales up 12% and power sales up 13% in Q2. Generally, magnetic sensing is stronger in automotive, while power products have a bit more presence in industrial ( , ).

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