Q3 2024 Earnings Summary
- ALGM expects its automotive sales to grow in the high teens for fiscal '24, significantly outpacing the Light Vehicle Production growth of 8%, driven by strong design wins and growth in the e-mobility sector, with e-mobility sales increasing from 44% to 54% of auto sales year-over-year.
- ALGM is capitalizing on emerging opportunities in AI data centers, securing design wins for motor drivers used in advanced liquid cooling solutions for AI servers, indicating strong growth potential in this segment.
- ALGM's content in electrified vehicles is 1.5 to 1.7 times that of ICE vehicles, positioning the company to benefit from the global shift towards vehicle electrification, regardless of OEMs' strategies, as they are agnostic to the choice of powertrain.
- The company expects continued revenue declines into the June quarter due to elevated inventory levels in the distribution channel, which are above target ranges, leading to reduced sales as the company manages inventory levels down.
- Gross margins are declining in the near term due to pricing pressure in the channel, lower distribution sales (which typically have higher margins), and fixed costs associated with the Crocus acquisition, with gross margins guided down by 100 basis points and expected to remain in the lower range for the next few quarters.
- The automotive segment is experiencing inventory rebalancing at tier suppliers and subcontractors, a new dynamic that may take longer to resolve, contributing to anticipated declines in sales within this segment.
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Gross Margin Outlook
Q: What's causing gross margins to decline, and when will they recover?
A: Gross margins are declining due to pricing pressure, a lower distribution mix, and costs associated with the Crocus acquisition ,. In Q3, gross margin was 54.6%, better than guidance. Going into Q4, margins are projected to be 53% to 54% and are expected to remain in this range for the next few quarters ,. As distribution normalizes and synergies from Crocus materialize, margins are expected to return to 55% and move toward the 58% target over time ,. -
Inventory Destocking Timing
Q: When will inventories return to normal levels?
A: Inventory destocking typically takes about three quarters; we expect normalization by Q1 fiscal '25 ,. We continue to manage down distribution sales to reduce elevated channel inventories. The June quarter is expected to show a decline similar to the December and March quarters. -
Revenue Guidance and Segment Declines
Q: How are sequential declines split between auto and industrial?
A: Sequential declines are occurring across all end markets due to ongoing inventory digestion, particularly in industrial. In automotive, we're seeing rebalancing of inventories, but OEM demand remains stable with robust xEV production estimates. -
Auto Growth Above Market
Q: Will you outgrow the auto market this year?
A: Yes, we expect to outgrow auto production by 7% to 10%, consistent with our model ,. For fiscal '24, we anticipate automotive revenue growth in the high teens, contributing to overall sales growth of 7% ,. -
Investments in China
Q: How are you investing to strengthen China relationships?
A: We're localizing part of our supply chain in China, with agreements with local OSATs and working with a foundry partner. We expect to start shipping from our China partners in the next 12 to 18 months. -
Crocus Acquisition Impact
Q: How does Crocus affect margins and customer engagement?
A: Crocus adds fixed costs impacting margins, but synergies are expected in the second half of calendar '24 , ,. We've auto qualified Crocus products and are accelerating adoption of TMR technology across automotive and industrial customers. -
EV Sentiment and Design Activity
Q: How is customer sentiment in the U.S. EV market?
A: Despite low sentiment in the U.S., OEMs are investing significantly in electrifying their fleets. Our content in plug-in hybrids and battery electric vehicles is about 1.5 to 1.7x that of pure ICE vehicles, making us agnostic to the type of electrification. -
Data Center Design Wins
Q: What's driving design wins in AI liquid cooling?
A: AI chips in data centers require advanced cooling solutions; our motor drivers are used in pumps for liquid cooling systems. We're seeing initial design wins and are excited about the growth potential as AI data centers expand.