Good day and thank you for standing by. Welcome to the Allegro MicroSystems Q3 Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Ms. Katie Blye. Ms. Blye, the floor is yours.

Good morning and thank you for joining us today for Allegro's third quarter results for fiscal year 2022. I'm joined today by Allegro's President and Chief Executive Officer, Ravi Vig; and Allegro's Chief Financial Officer, Derek D'Antilio. We will review our quarterly financial performance and provide a summary of our outlook. Our earnings release and the accompanying financial tables are available on the Investor Relations page of our website. This call is being webcasted and a recording will be available on our IR page shortly. Please note that comments made during this conference call will be forward-looking statements as defined by federal securities laws. These forward-looking statements include projections and other statements about future events that are based on current expectations and assumptions and as a result, are subject to risks and uncertainties that could cause actual results to vary materially from our projections. Please refer to the earnings press release we issued today, and other documents filed by us with the SEC, including the risk factors discussed in detail in our most recent 10-K filed on May 19, 2021. The company assumes no obligation to update any forward-looking information presented. The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for the presentation of Allegro's GAAP financial results and may be calculated differently than similar measures used by other companies. We're providing this supplemental information because it may enable investors to make meaningful comparisons to core operating results and more clearly highlight the results of our core ongoing operations. A reconciliation of GAAP to non-GAAP financial measures referenced during today's call can be found in our earnings press release, which has been posted to our IR page. I'll now turn the call over to Allegro's President and CEO, Ravi Vig.

Thank you, Katie, and good morning, everyone. Q3 was the story of great products, accelerating design wins, and strong financial performance. Demand from our customers remains very strong, especially in our target automotive and industrial markets. We continue to benefit from multiple tailwinds, including alignment to high-growth applications, automotive content expansion, and design win momentum. Our Q3 design wins in emerging growth markets and xEV, ADAS, industry 4.0, and data center are up nearly 100% on a rolling four quarter basis with total design wins of roughly 25%. The momentum and makeup of the wins in these areas support the better than industry growth in our long-term target revenue model. Now turning to Q3 results. In fiscal Q3, we overcame the COVID-related disruptions described last quarter and revenue was up 13% year-over-year to $186.6 million. We expect to be back on track to prior revenue run rate in Q4, and margin expansion again exceeded the high-end of our guidance with non-GAAP gross margins at 54.8%, and we continue to make progress towards a 55% target. This year shaping up to be one for the record books. Now, most of you saw our announcement a few weeks ago that Paul Walsh is retiring after a long and successful career in this industry. I want to take this opportunity to thank Paul again, particularly for being a partner in our strategic transformation and subsequent IPO. I fully support his decision and wish him the best. Today I'm pleased to introduce you to Derek D’Antilio, our new Chief Financial Officer. Derek joined Allegro in January, with decades of broad financial and operating experience in high tech. We are glad to have Derek on board. He's an accomplished CFO with a strong business acumen and the financial expertise to continue the work that Paul started. And he's already hitting the ground running. Now I'll turn the call over to Derek, who will provide you with more color on the financials and then I'll share more details on the business and our outlook.

Thank you, Ravi, and good morning, everyone. First let me say I'm very excited to be part of the Allegro team, and after my first few weeks with the company, I'm very encouraged about the prospects for the business. From what I've seen, Allegro is well-positioned within high-growth markets and the company has made great financial progress. In Q3, Allegro delivered another quarter of solid financial results, revenue, gross margin, and earnings per share all exceeded our guidance. Customer backlog remains strong across all of our target markets and regions, and backlog continues to climb, sitting at historic levels. Last quarter, the company expected that business would be impacted by COVID-19 related supply disruptions at assembly partners in Malaysia. I am pleased to report that our increasingly diversified supply chain enabled us to recover supply more quickly than anticipated, and revenue for the quarter was $186.6 million, an increase of 13% over the same quarter one year ago and down 4% sequentially. Our sales, marketing, supply chain, and operations teams have all done a remarkable job supporting our customers, particularly in the automotive sector. As a result of their efforts in Q3, our automotive revenue grew 4% sequentially to $130.8 million, representing 70% of our revenue. We continue to see strong growth in our xEV and ADAS businesses, which represented roughly 37% of our automotive revenue in the quarter. Our industrial revenue was $31.9 million, representing 17% of revenue in the quarter. Industrial revenue declined 12% sequentially due to supply constraints. Our industrial customer demand remains very strong with backlog at record levels. Other revenue was $23.9 million, representing 13% of revenue in the quarter, declining 23% sequentially. A sequential decline was anticipated based upon supply constraints, and we expect that other revenue will stabilize over the coming quarters. Once again, no single end customer represented more than 10% of our revenue in the quarter. Customer orders continue to outpace supply, and our technology and operation teams have been working diligently to secure additional capacity. Our TSMC ramp is well underway, and we expect our TSMC wafer receipts to double this quarter on track to plan. We are also in the process of securing long-term capacity with our foundry partners to enable sustainable growth, and we continue to bring on additional sources of backend capacity to give us enhanced flexibility. We are pleased with the progress we've made on both of these fronts. We also continue to make meaningful progress towards our target financial model. In Q3 GAAP gross margin was 54.2%, a recent record. Gross margin continued to benefit from multiple factors including structural improvements, good cost controls, and an advantageous product mix. After excluding $0.7 million for stock-based compensation expense and $0.4 million of other charges, non-GAAP gross margin was 54.8%, up 100 basis points sequentially and more than 500 basis points compared to the same quarter just one year ago. We remain on track to meet our non-GAAP gross margin target of 55%. GAAP operating expenses were $65.6 million. GAAP R&D expense was $30.3 million and GAAP SG&A expense was $38 million. Total non-GAAP operating expenses in Q3 were $59.2 million, compared to $57.5 million in Q2, representing 31.7% of revenue. Operating expenses in the quarter included higher variable compensation of about $0.9 million above last quarter's run rate and continued investments in research and development. Non-GAAP adjustments include stock-based compensation of $6.9 million and $2.1 million of other charges offset by a $2.7 million gain from an adjustment of a contingent consideration liability. Non-GAAP R&D expenses were $29.3 million and non-GAAP SG&A expense was $30 million. We expect non-GAAP expenses to be up modestly in the fourth quarter. Third quarter GAAP operating income was $35.6 million or 19.1% of sales and non-GAAP operating income was $43.1 million or 23.1% of sales. GAAP net income was $33 million for the quarter with an effective tax rate of 16%. The Q3 diluted share count was 192.1 million shares and GAAP earnings per diluted share was $0.17. Non-GAAP net income was $36.1 million, or 19.3% of revenue. The Q3 non-GAAP effective tax rate was 15.9% and we expect that to be about 16% in the fourth quarter. Our non-GAAP earnings per diluted share was $0.19, exceeding our guidance by about 5.5%. We also continue to strengthen our balance sheet in the quarter. Cash and cash equivalents in Q3 increased by $11 million over Q2 to $267 million. We generated $46.7 million in operating cash flow in the quarter, a sequential increase of $15.3 million. Accounts receivable balances were $107.4 million, and we ended the quarter with DSO of 52 days within our target range. Net inventory rose marginally to end the quarter at $79 million, an increase of about $0.8 million. Days in inventory were 83, compared to 77 in Q2, still below our target of about 100 to 110 days. In addition, inventory in the channel remains at historically low levels. In summary, demand remains very strong, backlog is at historically high levels, and we continue to make very meaningful progress toward our target financial model. Now we'll turn the call back over to Ravi for additional commentary on the business and our outlook for the fourth quarter.

Thank you, Derek. Revenue in Q3 reflected year-over-year growth across our strategic product lines and end markets. We continue to benefit from multiple tailwinds, including automotive content expansion, design win momentum, and fast-growing end markets. Fuelling these tailwinds is the alignment of our R&D pipeline with emerging growth markets, which was a key part of our strategic transformation. Our investments in xMR and embedded motion control are yielding innovations that are giving us a competitive advantage, and we are seeing this translate into market share gains. The result is accelerating new product revenue that we believe will have a positive impact on both the top and bottom line. Here are three examples from last quarter that offer great proof points of our technical leadership. First, our back bias GMR solutions continue to take share from competitors, particularly in xEV, where our technology enables significant efficiency gains. We expanded our share in transmission speed sensors with 10 design wins in the quarter. Second, we secured 25 new steering and braking design wins, including the center motor driver for a major market player and the next generation steering systems for a market leader in EVs. Third, we expanded our family of 3D position sensors to include a tiny 3D IC for both low and high-speed motor position applications, with initial design wins in areas such as E-bikes, factory robotics, and automotive wipers; it's an incredibly versatile chip and well-aligned with our strategy to expand our channel sales and grow our broad-market industrial business. Moving to end market in Q3, automotive revenue was up 15% year-over-year to $130.8 million. We had another record quarter for xEV powertrain revenue, which was up roughly 60% on a rolling four-quarter basis. This compares favorably to xEV current production growth of 49% over that period, supporting the content momentum we have in this growing market. We believe our results would have been even stronger were it not for the supply chain challenges we faced in Malaysia in that quarter. Looking ahead, xEV comp reductions are forecasted to grow at a 32% CAGR from 2021 to 2025. On top of that growth, we estimate that xEV has 60% more content opportunity than internal combustion vehicles. We win with electrification, and we believe we're in a strong position to take advantage of this secular growth trend. We also continue to see acceleration in the adoption of level one plus ADAS systems and advanced steering and braking. Last quarter, we launched our first high-resolution TMR real speed sensor, which is a key enabler of level three plus automation in passenger vehicles. We're also increasing our braking system content across our product portfolio. Last quarter, we secured a significant design win with a market-leading Tier 1 supplier in Europe using our 3D position sensors in an ADAS level three plus ready brake-by-wire solution that is modularized across vehicle platforms. We continue to win with ADAS adoption, and we believe we are uniquely positioned with a broad range of solutions for these ADAS level one plus rating systems. Our alignment with the secular growth trends extends beyond automotive into the industrial and infrastructure markets. In Q3, our industrial business was up 35% year-over-year to $31.9 million. We saw strong results in many major categories like robotics, green energy, and EV charging infrastructure. In these areas, as well as data centers, we saw revenue double year-over-year. This strong growth was offset by falls in broad-based industrial revenue stemming from supply constraints. Demand is quite healthy and at record levels across our industrial business, and we expect to return to growth in Q4, ending FY22 with strong double-digit growth for the year. Looking to FY23 and beyond, we expect one of our strongest industrial growth drivers to be data centers. New designs with data centers are layering on top of the long-term agreements we discussed last quarter, positioning us for strong sustained growth in this key market. This growth has been driven not just by data center buildouts to support hyperscalers and 5G, but also by enhancing existing service stacks with the economics of conversion, which offer both efficiency gains and significant noise safety. Looking ahead, Q4 is playing out exactly as we framed last quarter. We anticipate a return to sequential growth, with revenue in the range of $193 million to $197 million, ending fiscal '22 at approximately 29% year-over-year growth. For Q4, we expect both automotive and industrial to be off sequentially, and other revenue will be flat to down. We expect non-GAAP gross margin to be in the range of 54% to 55%. We anticipate non-GAAP earnings per share in the range of $0.20 to $0.21. Looking ahead, I believe the acceleration within our strategic markets is a strong indicator of competitive differentiation. We have a strong innovation pipeline and we're in a prime position at the convergence of growth trends in automotive, green energy, industry 4.0, and data centers. We believe Allegro is a secular growth story and expect that technology content and market expansion will be key enablers of better than industry growth. With that, I'll turn the call back over to Katie.

Thanks, Ravi. That concludes our prepared remarks. Now we'll open the call for questions. Operators, can you please review the question-and-answer instructions with our participants.

Yes. Thank you. And our first question comes from Gary Mobley of Wells Fargo. Your line is open.

Good morning, everybody. Welcome to the earnings call. Derek and Paul, I wish you the best in the next chapter. I want to start out by asking about some of the supply constraints that you spoke of, perhaps impacting your outlook for the fourth fiscal quarter. I'm wondering if you can break out the contribution of those supply constraints between those factors that may be specific to kitting in your customers' supply chain and what may be specific to your own internal supply constrained considerations such as back-end assembly?

Yes. Just to clarify, the supply constraints that affected our fiscal Q3 revenues were all specifically associated with COVID-related impacts in Malaysia. At this point, we have a continuing general industry-wide supply-demand imbalance, including wafer supply and back-end supply as we continue to balance our growth projections. So, we continue to ramp capacity, as stated, our TSMC wafer receipts will double quarter-over-quarter, which gives us great momentum on the wafer front. We have secured long-term agreements and capacity with back-end suppliers and we also continue to bring on alternate sources to further increase our capacity. So at this point, we feel good about our growth momentum. But clearly, due to design wins and the strong tailwinds of the target market, demand will continue to exceed supply in the near future.

Gotcha. I think previously, you were counting on your gross margin exiting in fiscal year '22 to be roughly 55%. Your guidance is simply a rounding issue to get you to that point. But how do you view the achievement of 55% gross margin in the context of fiscal year '23? Would you expect it to be driven more so by your production mix than your three different front-end fab options? Or would you expect it to be driven more so by overall product mix and ASP tailwinds?

Hi Gary, this is Derek. Thank you. I believe the company has said that the 55% is more about a longer-term gross margin target for fiscal '24. But you're right, in Q3, we had a great gross margin quarter, and really what drove that was two macro trends. One is the structural improvements you've seen over the last couple of years here at Allegro, which gross margins have increased 500 basis points over one-year as a result of those structural improvements. The second piece really is the mix shift towards the higher-feature content products that Ravi talked about in xEV and ADAS. So there are two macro trends driving that. But in the near-term, as we've said, we expect gross margins to be between 54% and 55%.

Okay, appreciate it. I'll hop back in the queue. Thank you, guys.

Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open.

Yes. Hi, guys. Congratulations on a great quarter and congratulations, Paul and Derek. I had a quick question on the design wins. I know you talked about design wins being up 100%, but just running how investors should think about revenue conversion, especially as these are pretty strong growth segments with xEV and ADAS and data center, etc. But how do you think through how that should translate to the revenue pipeline from the design wins? Thanks.

Yes. Our design wins, when we claim them, are projects that are awarded to us by our customers' purchasing organizations. For all practical purposes, they have a reasonable degree of assurance that they will convert to revenue. We continue to provide this data to show the momentum of the company, but it doesn't replace our revenue guidance that we provide.

Got it. And I know you talked about auto and industrial up sequentially into the March quarter. So good to see that. But you also talked about some constraints in the supply chain side and industrial. If you can guess what they are? How are you seeing that alleviate? When do you see it alleviate? That's it. Thanks.

Yeah, so when we start looking at the market in general, our business is really driven by the design wins that we have driving up our production win conversions, if you want to call it that, as well as the key sectors that we are working in such as xEV, ADAS, and the broad industrial and data center sectors. We see that despite the increase in capacity that we continuously generate, demand levels still continue to exceed supply. I think they will continue to exceed supply in the near future. Thanks.

Great. Thanks a lot, Ravi.

Thank you. Our next question comes from Quinn Bolton of Needham. Your line is open.

Congratulations on the nice results and outlook, and welcome Derek. Ravi, just wanted to start with sort of a bigger picture. I think, in past conference calls, you guys have talked about your confidence in growing at a low-to-mid-double-digit rate in fiscal '23. As you look into calendar '22, auto production versus content gains, can you give us a sense of what you're sort of baking in in terms of unit production increases in calendar '22 or fiscal '23 versus your expectations for continued content gains, and then I've got a follow-up.

Yeah, we've seen the market data from independent projections of car production, but we remain cautious in terms of the car production numbers that are currently being forecasted. We do see that the supply-demand challenges existing today in automotive will continue to have an impact. Early data year-to-date from external sources has already indicated that there is a slowdown and that there is an impact on car production due to semiconductor availability. Our mid-teens guidance is factoring in some cautiousness regarding industry car production. We will continue to review this as the year goes on and as supply dynamics evolve.

So is it safe to assume you think it’s probably more skewed to content gains? If vehicle production comes in, it’s forecast that could be a tailwind to the business?

Our business is really in the automobile or automotive sector, as well as industrial, which represents 35% of our overall business, so while we expect growth in automotive, there's a reason for optimism overall in our industrial business as well. But at this point, I think the entire industry is better off being a little cautious about where the growth will land.

Great. My follow-up question was just wondering if you could spend a little bit of time talking about some of the traction you're seeing on the GMR side of the business. I think you mentioned some back-bias and speed sensors for transmissions. But broadly, can you say where you're seeing the greatest interest in GMR technology? Is it mostly in speed sensors? Are you seeing that technology beginning to move into the current sense market, which I know is a big application or big requirement in electric vehicles?

Yes. We see GMR and TMR applicable in four different areas. First, there is wheel and motor coding, which involves high-density ring magnet-type products that are suitable for ADAS applications specifically in braking. We also have speed sensors that provide transmission manufacturers with enhanced solutions for xEV. We have made about 10 transmission sensor wins over the quarter. The third area is in ADAS in terms of motor encoding, where TMR sensors offer increasingly safe solutions. The fourth area is current sensors with TMR technology that will penetrate the xEV market. We are proud of the breadth of applications for GMR and TMR and we will address multiple facets of the automotive ecosystem.

Thank you, Ravi.

Thank you. And next we have an unidentified analyst of Barclays. Your line is open.

Hey, good morning. Thanks for taking my question. I wanted to ask you Ravi, on pricing. You talked about your gross margins returning towards 55%, but you're seeing a lot of people start to see pricing start to layer through. Maybe you could just address whether you're seeing any tailwind from pricing now and as you look to the next fiscal period.

I think what you'll find is that we have long-term relationships with strategic customers and our pricing approach has been margin-neutral on ASP. We want to make sure that Allegro can operate successfully, but we are not focused on attacking margins from an optimal pricing perspective. Automotive and industrial partnerships are key, and we’re working hard on strategic relationships. So good opportunities exist at this point, but our focus is on being margin-neutral with a strong emphasis on mix.

Thanks. And I might have missed this, but you had been breaking out kind of ADAS and xEV as a percent of auto revenue, I think it was 35% last quarter. Just curious if you mentioned that number, and I missed it.

It's 37%. You’ll see a slight uptick each quarter in that particular number.

Thank you. Our next question comes from Srinivas Pajjuri of SMBC Nikko. Your line is open.

Thank you. And good morning, Ravi and Derek. Congratulations to both of you. First, my question on TSM sourcing. I know it's early days, but just wondering if you have any longer-term target for how you see your sourcing mix with TSM versus UMC and others. Also, how that mix might impact pricing and margins going forward?

Our Asian sources are certainly more competitive in terms of pricing than our US sources, so that's not surprising. As TSM ramps, we continue to increase the ratio of our Asian sourcing. We anticipate continued leverage as this sourcing mix develops. It's not just about cost, but it really is a technology play for us. They're great partners, capable of manufacturing to automotive quality standards and supply chain requirements, providing stability in production. So there are significant benefits for us with these sources, and we will actively explore new partnerships as part of our long-term growth objectives.

Got it. And then Ravi, a question on the channel inventory. Things are still quite tight on the auto side, but a year ago versus now, we're hearing that production at factories around the world is not as bad. Could you comment on channel inventory levels at your customers, and any thoughts on how they might manage their inventories going forward?

Channel inventory for us still remains at record lows. When we look at our distribution inventories, they are extraordinarily low, and we know that our OEM direct customers are taking every part we can provide them. Demand is particularly strong across the critical areas like xEV, ADAS, and complex components, all facing tight supply. We certainly participate in ongoing discussions regarding material supply and production stability. Overall, our key growth markets continue to exhibit extraordinary growth, and we believe we're positioned well within these sectors.

Got it. Thanks, Ravi.

Thank you. And if we have Natalia Wendler of Jefferies, your line is open.

Hi, Ravi. Hi, Derek. A quick question on the ADAS. Thank you so much for providing color on growth and the proportion of automotive. I think on ADAS, the question I had was, do you see a similar uptick in content increases as vehicles transition from level one to higher levels?

As we transition from level one to level two and beyond, the electronic content tends to increase significantly. As systems become more independent, the need for additional components intensifies. The industry is undergoing a significant change where motion control in the vehicle is being reimagined, particularly with the emergence of skateboard platforms for electrification. The convergence of ADAS and electrification is clear, leading to additional demand for our solutions. We are optimistic about the secular growth trends related to motion control within vehicles.

That's very helpful color. Thank you. And for my follow-up, I just wanted to double-check; you guys put a lot of focus on data centers and potential growth. Do you feel like this will serve as a main source of growth for the industrial segment in future fiscal periods?

We announced last quarter that we entered several long-term agreements in this area. The data center business continues to grow significantly for us. Year-over-year, we saw growth of more than double. As these new projects ramp, we anticipate seeing strong performance in data center revenue. In addition to this, we have a solid core strategy focusing on motion control, which encompasses both automotive and industrial applications. We expect equal growth in our broad-market area of industrial business.

Thank you. And we have a question from John Pitzer of Credit Suisse. Your line is open.

Yeah. Good morning, Ravi, Derek. Thanks for letting me ask the question. Ravi, I'm going to go back to an answer you gave earlier about pricing, saying that you're raising pricing only to pass along costs, and the real driver for pricing will be product mix. Could you elaborate on the second half of that? Given the strong design pipeline, how should we view pricing and the path to your gross margin targets? Should we consider the path to your target as potentially faster, or does the target need to be revised higher?

Great question, John. Our pricing strategy is focused on being margin-neutral given current cost changes while pursuing higher-margin opportunities through new segments. These emerging growth segments typically provide us with higher margins due to their nature, and we anticipate some uplift as demand grows in these areas. Our efficiency initiatives in production and robust sourcing strategies will also help us maintain and enhance our margins. While we have exceeded our target thus far, we remain focused on stabilizing around the 55% gross margin before planning our next steps.

Thanks, guys.

Thank you. I'm seeing no further questions in the queue. I'll turn it back over to the speakers for closing remarks.

Okay, thank you, Chris. If there are no further questions, we will conclude the call this morning. Thank you all for joining us today.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.