Q4 2024 Earnings Summary
- Strong Growth Momentum in E-Mobility and Automotive Markets: Allegro's e-Mobility segment grew by 38% year-over-year, powering an overall 17% growth in Automotive sales for fiscal 2024. The company continues to see great momentum, with over half of their design wins in fiscal '24 coming from e-Mobility. They are confident in their ability to execute their strategy in e-Mobility and outperform the market in the mid to long term.
- Anticipated Return to Sequential Revenue Growth: Allegro expects to return to sequential revenue growth starting in Q2, with low to mid double-digit growth rates, driven by the recovery of the Automotive market after inventory corrections. The company anticipates this growth trend to continue over the next couple of quarters, leading back to normal operating quarterly run rates within the fiscal year.
- Temporary Gross Margin Pressures with Expected Recovery: The current gross margin pressures are primarily due to temporary underutilization, accounting for about 300 basis points of impact, while pricing adjustments contribute only about 100 basis points and are temporary and targeted. The company expects margins to recover as utilization increases with returning demand. New products with higher ASPs are performing well, indicating stable or improving margins in the future.
- Weaker-than-expected guidance for Q1, with revenues projected to decline significantly and being materially below the Street's expectations, due to inventory rebalancing and reduced demand in the Automotive segment.
- Extended inventory corrections in both Automotive and Industrial markets, with management expecting the correction to continue for another couple of quarters, indicating prolonged demand weakness and uncertainty in recovery timing.
- Gross margin pressure from underutilization (impacting margins by approximately 300 basis points) and price adjustments to clear channel inventory, which could negatively affect profitability in the near term.
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Weaker June Guidance
Q: What's causing the weaker outlook in June?
A: The weaker June guidance is due to a sharper than expected inventory correction in the Automotive sector. Customers are reducing inventories from 10–12 weeks back to 4–6 weeks faster than anticipated, leading to lower short-term demand. This creates a clearing event that positions the company for sequential growth. -
One-Time Price Adjustments
Q: Are the price adjustments in the channel one-time or ongoing?
A: The price adjustments are a one-time, targeted support to distributors, particularly in Asia, to help clear inventory. They do not expect this pricing phenomenon to be ongoing, and new products with higher average selling prices are holding up well. -
Decline Driven by Volume
Q: How much of the decline is due to volume versus pricing?
A: The sequential decline is mostly due to lower volumes as customers reduce inventory levels. Pricing is the smallest part of the transition. -
Sequential Growth Outlook
Q: Will low double-digit sequential growth continue for multiple quarters?
A: They expect low to mid-double-digit sequential growth in the coming quarters. It may take a couple of quarters to return to normal operating run rates, but they feel confident about reaching there within the fiscal year. -
EV and Hybrid Demand
Q: Is the slowdown due to EVs, and how does the shift to hybrids affect you?
A: They have not seen a slowdown in EV production outside the U.S. Components shipped to hybrids and EVs are largely the same, with similar content. Their e-Mobility segment grew 38% year-over-year in fiscal '24, driving overall Automotive growth of 17%. -
Industrial Market Recovery
Q: What is the outlook for the Industrial market recovery?
A: The Industrial sector continues to experience a prolonged inventory correction compounded by lower demand. They expect the correction to continue for another couple of quarters and are optimistic about a return to growth in the second half of fiscal '25. -
Managing Underutilization
Q: How are you managing operations during underutilization?
A: Since they no longer own a fab, underutilization is in assembly and test operations. The team has managed short-term costs effectively and can ramp up quickly when demand returns. Enhanced supply chain resilience enables swift response to demand upticks.