Allegro MicroSystems, Inc. (ALGM) Earnings

Management highlights

### Overall Growth Trajectory - Delivered sixth consecutive quarter of sequential sales growth, with seventh consecutive quarter of rising bookings and expanding backlog. Growth is driven by alignment with AI, electrification, and automation megatrends. - Q1 FY27 total sales hit $259 million (above the high end of prior guidance), up 7% sequentially and 27% year-over-year; non-GAAP EPS was 23 cents, up 35% sequentially and 156% year-over-year. ### Data Center Business Highlights - Current sensors have emerged as a major new growth pillar, growing faster than the still-strong motor driver business; management expects full fiscal 2027 data center sales to more than double fiscal 2026 levels. - Rising server power levels increase Allegro's content per rack far faster than simple rack count growth; content per next-generation AI rack reaches $425, two-thirds of which comes from current sensors and fan drivers, with hundreds of additional dollars of potential content from isolated gate drivers for 800-volt topologies. - Secured multiple high-value design wins this quarter, including 5 MHz current sensors for a high-volume high-voltage DC power supply and DMR current sensors for other data center power supply programs. ### Robotics and Automation Highlights - Leverages existing automotive-grade motion control and safety technology to win robotics designs; secured design wins with large Chinese and North American humanoid robot OEMs for current and inductive position sensors in robotic joints. - Expects robotics and automation to contribute 3% to 4% of total FY27 sales, with long-term projected content per humanoid robot exceeding $150 by 2030 (surpassing Allegro's average automotive content per vehicle). Opportunity exists across all robotic form factors, not just humanoids, tied to the number of moveable joints. ### Automotive Business Highlights - Grew 15% year-over-year, outperforming the long-term target of over 10% growth, driven by 7% to 10% annual outgrowth of SAM via content and share gains. Content per vehicle is expanding from ~$40 for legacy ICE vehicles to over $100 for next-generation BEVs. - Focus Auto (XEV + ADAS) grew 3% sequentially; first quarter design wins increased 30% year-over-year, with broad strength across geographies led by China, Korea, and APAC. Notable wins include multiple electronic power steering programs at Korean OEMs, a current sensor win for a hybrid traction inverter at a top Japanese OEM, and share gains in 12V/48V electromechanical braking systems in China. ### Profitability and Operational Improvement - Q1 gross margin hit 51.1%, up 110 basis points sequentially and 290 basis points year-over-year, driven by operating leverage, favorable product mix, and early contributions from selective pricing actions. - Operational priorities include factory efficiency improvements, material transitions (gold to copper wire bonding), and selective price increases, with a clear path to a target gross margin of 55% and beyond. Operating expenses declined $2 million sequentially to $82 million, driving operating margin expansion to 19.4% (up from 11.1% year-over-year).

Guidance

- **Second Quarter FY27 Total Sales:** Expected in the range of $265 million to $275 million, with a midpoint representing 26% year-over-year growth. Both automotive and industrial end markets are projected to deliver mid-single-digit sequential growth. - **Second Quarter FY27 Profitability (non-GAAP):** Gross margin expected between 50.75% and 51.75%; operating expenses expected to be ~$84.5 million; non-GAAP EPS projected between $0.23 and $0.26, with a midpoint implying 88% year-over-year growth. - **Full Year FY27 Data Center Sales:** Management reaffirms the expectation that full year data center sales will more than double FY26 levels; annual results will adjust up or down based on data center industry CapEx trends and design win funnel progress. - **Long-Term Gross Margin:** Management remains confident the company will trend toward 55% gross margin and beyond over the next several years, driven by mix shift to higher-margin data center products, incremental pricing benefits, and BOM optimization efforts.

Segment performance

**By End Market:** - Automotive: Q1 FY27 sales were $165 million, a 1% sequential increase and 15% year-over-year increase, accounting for 63.7% of total sales. Focus Auto (XEV + ADAS) sales grew 3% sequentially and 11% year-over-year. Auto bookings and design wins both increased 30% year-over-year. - Industrial and Other: Q1 FY27 sales were $94 million, an 18% sequential increase and 59% year-over-year increase, accounting for 36.3% of total sales. Data center sales represented 17% of total company sales (up from 14% in Q4 FY26 and 10% in Q3 FY26), reaching a new quarterly record. Current sensor sales make up 22% of data center sales, growing 66% sequentially, with data center product margins reaching the mid-50s. **By Product Type:** - Magnetic sensors: Q1 FY27 sales were $150 million, a 6% sequential increase and 16% year-over-year increase, accounting for 57.9% of total sales. - Power products: Q1 FY27 sales were $109 million, a 7% sequential increase and 47% year-over-year increase, accounting for 42.1% of total sales. **By Geography (ship-to basis):** - Rest of Asia (Korea, Taiwan, India): 32% of total sales - China: 25% of total sales, grew 6% sequentially - Japan: 17% of total sales - Americas: 13% of total sales - Europe: 13% of total sales

Risks & headwinds

- Actual future results may differ materially from forward-looking projections due to inherent risks and uncertainties, referenced in the company's SEC filings and today's earnings press release. The company assumes no obligation to update forward-looking statements unless required by law. - The timing of within-lead-time orders can create short-term sequential shipping delays, as some new orders received in Q1 could not be fulfilled within the quarter, leading to backlog that will ship over the next two quarters. Back-end manufacturing capacity is the current constraint for unfulfilled orders, though the company is actively expanding back-end capacity quarterly. - General industrial long-tail sales through distribution can be lumpy quarter-to-quarter, creating variability in top-line and gross margin results. - Data center sales growth is dependent on industry CapEx spending, which has a wide range of projections and can impact annual results if CapEx varies from current expectations.

Analyst Q&A

• Q: What is the data center growth expectation embedded in the Q2 mid-single-digit industrial guidance, and where is the current capacity bottleneck for unfulfilled within-lead-time orders? /

  A: Data center growth is already reflected in the mid-single-digit industrial sequential growth guidance for Q2. The company continues to see strong data center demand, with growing content per rack driven by rising adoption of current sensors. Back-end manufacturing capacity is the primary constraint for unfulfilled orders, and the company is executing on a planned quarterly expansion of back-end capacity to meet growing demand. Some Q1 orders could not be shipped in-quarter and will be fulfilled over the next two quarters.

• Q: Can you elaborate on recent pricing actions, how they will impact gross margins, and how they fit into annual auto customer contract negotiations? /

  A: Most auto customer contracts renew at the start of the calendar year, and this year saw low single-digit net price declines for these contracts. To offset inflationary commodity and operating cost headwinds, the company implemented selective pricing actions that took effect late in Q1, primarily in the distribution channel. Very little pricing benefit hit Q1 results, with gross margin upside from Q1 coming mainly from favorable product mix. Management expects pricing actions to have a larger positive impact on gross margins in the second half of FY27 (Q3 and Q4).

• Q: What is the health of the automotive market, and how does Allegro's performance differ from peers? What is the visibility for upside to the full-year data center doubling target? /

  A: Allegro's auto business remains very strong, with Q1 sales up 15% year-over-year, bookings up 30% year-over-year, and design wins up 30% year-over-year, on track to meet the target of 7-10% outgrowth of market growth. The company is seeing strong content growth and share gains across key regions, including notable share increases in China's EV market. The full-year data center sales doubling target is based on current design win activity and visible demand; if industry CapEx spend grows faster or slower than currently expected, the final result will flex accordingly.

• Q: What advantages does TMR technology have over competing solutions in auto and data center, and what is Allegro's current traction? /

  A: TMR technology enables much faster current sensing than older Hall effect-based solutions, which is critical for next-generation data center power supplies using wide bandgap semiconductors (silicon carbide, gallium nitride) that require high switching speeds. Allegro currently has the world's fastest magnetic current sensor for data center and is gaining share rapidly in this market. In automotive, Allegro recently won its first major TMR angle sensor design for ADAS steering motors in China, penetrating a market previously dominated by other suppliers, and is also gaining share in other automotive applications like oil pumps with TMR technology.

• Q: When will isolated gate drivers and PMICs start contributing meaningfully to data center sales, and why is Allegro's auto sequential growth lower than some peer auto semiconductor suppliers? /

  A: Management expects 18 to 24 months for isolated gate drivers to deliver material data center revenue, with sampling of a second-generation data center-optimized product starting this fall that could accelerate adoption. PMICs are not a meaningful near-term data center growth vector for Allegro, as the company's PMIC portfolio is primarily focused on automotive. The slower sequential auto growth relative to some peers stems from timing: Allegro cleared inventory earlier in the current cycle after the 2024 China slowdown, and current strong bookings lead to unfulfilled in-quarter orders that will ship in future periods.