Allegro MicroSystems to Announce First Quarter Fiscal Year 2027 Financial Results

Good morning and welcome to Allegro Microsystems' first quarter fiscal year 2027 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Thank you, Sarah. Good morning, and thank you for joining us today to discuss Allegro's first fiscal quarter 2027 results. I'm joined today by Allegro's President and Chief Executive Officer Mike Dune and Allegro's Chief Financial Officer Derek D'Antilio. They will provide highlights of our business, review our first quarter 2027 financial results, and share our second quarter outlook. We will follow our prepared remarks with the Q&A session. Today's call includes remarks about future expectations, plans, and prospects, which are forward-looking statements. Such statements are based on current expectations and assumptions as of today's date and are subject to risks and uncertainties that could cause actual results and events to differ materially when those anticipated or projected on today's call. The company assumes no obligation to update these statements except as required by law. For a discussion of these risks and uncertainties, please refer to today's press release and the risk factors contained in our periodic SEC filings. Additionally, we will refer to non-GAAP financial measures during today's call. Today's earnings press release, which is available on the Investor Relations page of our website at www.allegromicro.com, contains important information about our non-GAAP financial presentation and also includes reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures. This call is also being webcast, and a replay will be available in the events and presentation section of our IR page shortly. It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Duke.

Thank you very much, Dillene, and good morning. Thank you all for joining our first quarter 2027 earnings call. We began Fiscal 2027 with continued strong momentum, delivering our sixth consecutive quarter of sequential sales growth. First quarter sales were $259 million above the high end of our guidance range and representing a 27% increase year-over-year. First quarter EPS was $0.23, increasing more than 2.5x over Q1 of Fiscal 2026. Before Derek takes you through the financials in detail, I want to spend a few minutes on the business dynamics driving Allegro's growth. Our forward demand signals strengthened again this quarter. Hookings increased for the seventh consecutive quarter, and backlog continued to expand. Allegro's growth is increasingly fueled by the intersection of our technology with the defining megatrends of AI, electrification, and automation. This is particularly evident in our industrial and other business, where data center-led first-quarter growth, increasing 32% sequentially to establish a new quarterly record at 17% of total sales. Within data center, current centers continue to emerge as a meaningful new growth pillar, increasing to 22% of first-quarter data center sales. We are seeing accelerating customer adoption of our current centers, which improve efficiency and system power density throughout the data center. Consistent with our expectations, current sensor growth rates are outpacing our motor driver business, which itself remains strong as fans are adopted more broadly in power supplies. This proven momentum across both our power and sensor ICs gives us confidence that fiscal 2027 data center sales will more than double over fiscal 2026. Looking forward, we remain encouraged by the significant increase in Electro's content in next-generation AI servers. There is a growing need for high-speed current sensors, intelligent fan driver ICs, and an outsized opportunity for isolated gate drivers throughout the data center. This creates a dynamic where rising server power multiplies our content far beyond simple rack count growth. That expansion is showing up directly in our sales pipeline, with data center again leading first quarter industrial design wins, and with current sensor design wins surpassing motor drivers. For example, this quarter, we secured design wins from multiple important programs using our market-leading 5 MHz current sensors, including a high-volume, high-voltage DC power supply with a leading provider. Within the quarter, we also secured multiple programs using our differentiated DMR current sensors in data center power. Turning to automation and robotics, we continue to see increasing adoption of our sensor and power solutions in robotics applications. Importantly, we are winning in robotics today with our existing technology. The same precise, high-resolution sensing and robust power products that have made Allegro a leader in advanced automotive motion control are exactly what robotics designers need now. Our decades of automotive safety heritage give us a distinct advantage, proven silicon, established high-performance motor control, and proven quality at scale. Engaging with key robotics customers has been a top priority. My recent customer visits in North America and China have further confirmed what we already knew, that robotic joints pose the same fundamental safety-relevant motor control challenges that we solve every day in advanced steering and braking applications in cars. This quarter, we secured current sensor wins with large Chinese humanoid robot OEMs. We also secured a large design win with a prominent North American humanoid robotics OEM that is using our inductive position sensors in robotics joints. These wins reinforce our expectation that robotics and automation will contribute three to four percent of our FY27 sales. And the long-term trajectory is even more compelling as humanoid robots incorporate more joints, actuators, and safety-critical motion control. We estimate our addressable content will exceed $150 per humanoid by 2030, surpassing our projected automotive content per vehicle. By securing these foundational sockets today, we are building a multi-year sales pipeline that we expect to become a meaningful growth vector for Allegro as the market scales toward the end of the decade. Turning now to automotive. First quarter automotive sales grew 15% year-over-year. This outpaces our long-term target of greater than 10% growth, which is built on our ability to outgrow SAR by 7% to 10% through content and share gains. Our content per vehicle is expanding as the industry transitions toward electrified powertrains and advance safety. We see a clear path from roughly $40 of Allegro content in legacy ICE vehicles to upwards of $100 in next generation battery electric vehicles. Within automotive focus auto, which includes XED and ADAS, led first quarter sequential growth, our content-driven growth is validated by broad-based, geographically diverse design wins led by China, Korea, and APAC. First quarter auto design wins were up 30% year over year. ADAS wins were led by electronic power steering and emerging electromechanical braking applications. High-voltage traction inverters and onboard chargers continued to lead our XEV wins. Let me now give you just a few examples of impactful design wins. In Korea, we secured several electronic power steering wins across two leading OEMs. These wins included Allegro-Carnington position sensors, motor drivers, and high-performance power solutions, reflecting the breadth of our sensing and power portfolio and rising content per system. Our current sensors were selected for a sizable win with a top Japanese OEM for a hybrid vehicle traction inverter, where our market-leading current sensors are driving share gains. In China, our motor drivers, high-performance Phoenix, and position sensors are gaining share in 12 and 48-volt electromechanical braking systems, with both global and local tier 1s. And finally, we won our first major TMR angle sensor programs for ADAS steering motors with leading China OEMs. This further demonstrates the share gain potential of our market-leading TMR technology. Our technology leadership continues to translate into broad-based design wind momentum. This is fueling our content expansion strategy across XDV, ADAS, Data Center, and Robotics, positioning us to capture outsized growth in a large and expanding SAM. We remain confident in our ability to deliver target growth rates in auto and industrial, and in fiscal Q2, we expect both end markets to deliver mid-single-digit sequential growth. I'll now turn the call over to Derek to provide additional color on our financial performance, as well as our second quarter outlook.

Thank you, Mike, and good morning, everyone. Starting with our first quarter results, sales were $259 million, and non-GAAP earnings per share were $0.23, 51.1%. Operating margin was 19.4%, and adjusted EVDA was 23.9%. Total Q1 sales increased by 7% sequentially, and 27% here. Sales to our automotive customers increased by 1% over a quarter to $165 million and 15% year-over-year. Focus auto sales, including XEV and 8S, increased by 3% sequentially and 11% over Q1 of 20%. These results reflect growing lead time orders within lead time orders not able to ship in this quarter. Auto demand from our customers continues to be really strong. As Mike mentioned, auto design wins were up 30% year-over-year, and auto bookings were also up 30% year-over-year, and up high single-digit sequentially. Industrial and other sales increased by 18% sequentially to $94 million, and by 59% over Q1 of FY26, led by continued strength in data center to record loads. Our data center customers were 17% of Q1 sales, up from 14% and 10% in Q3 of FY26. As Mike mentioned, sensor solutions were now 22% of our Q1 data center sales, increasing 66% sequentially. of product margins to the magnetic sensor sales increased by 6% sequentially to $150 million and by 16% year-over-year, $109 million, and by 47% over the product. Sales by geography on a shift-to basis were as follows. 32% of sales in what we termed West of Asia, which is essentially Korea, Taiwan, and India. with 25% of sales in China, 17% in Japan, and 13% of sales in both the Americas and Europe. Now turning to Q1 profitability, gross margin was 51.1%, and gross margins have improved by 290 basis points from 48.2% in Q1 of Fiscal 26. The improvements were driven by operating leverage, product mix, and, to an early and lesser extent, recent pricing actions. Growing our target markets, operational excellence and gross margin improvement remain top priorities. While operating leverage is a significant factor contributing to gross margin improvement, we continue to drive factory efficiencies, work through product-build material transitions, including gold-to-copper wire bonding, and have taken selective price actions. Collectively, these efforts provide a clear path to our target gross margin of 55% and beyond. Operating expenses were $82 million and declined by $2 million sequentially, largely due to the reset of annual incentive compensation plans at the start of our new fiscal year. Operating margin was 19.4% in sales compared to 15.6% and an increase of 830 basis points compared to 11.1% in Q1 of Fiscal 26. Interest expense was $4 million. The first quarter diluted share count was 188 million shares, and net income was $42 million, or $0.23 per diluted share. EPS increased by 35% sequentially and 156% over the year-ago quarter on sales increases of 7% and 27%. demonstrating a significant operating leverage in our business model. Into the balance sheet and cash flow, we ended Q1 with total cash of $170 million. Q1 cash flow from operations was $22 million. CapEx was $8 million. And free cash flow was $14 million. With term debt of $285 million and net debt of $115 million. From a working capital perspective, first quarter DSO was 35 days, and inventory days were 128, both consistent with Q4. Finally, I'll now turn to our Q2 fiscal 2027 outlook. Second quarter sales to be in the range of $265 to $275 million. The midpoint of this range equates to a 26% year-over-year increase, 50.75% and 51.75%. Operating expenses are expected to be $84.5 million, plus or minus $1 million. The financial increase reflects targeted investments in R&D, including in potentially disruptive technologies and higher variable compensation estimates for the year. $4 million, and we expect our non-GAAP tax rate to be approximately 10%. We estimate that our weighted average diluted share count will be 188 million shares. And as a result, we expect non-GAAP EPS to be between $0.23 and $0.26 per share, with the midpoint of this range implying an 88% year-over-year increase. Now, we'll turn the call back over to Jalene for your questions.

This concludes Management's prepared remarks. Before we open the call for your questions, I'd like to share our second fifth-year conference lineup with you. We'll attend Needham's 7th Annual Virtual Semiconductor and Semicap Conference on August 19th, Jeffrey's Semiconductor IT, Hardware, and Communications Technology Conference on August 25th and 26th in Chicago, Wolf Research's TMT Conference on September 10th in San Francisco, and finally StoneX's 13th Annual TMT Conference on September 17th, which we will attend virtually. We will now open the call for your questions. Sarah, please review the Q&A instructions.

Thank you. As a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. To ensure everyone has an opportunity to participate, please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Joe Wadrocki with Wells Fargo. Your line is open.

Yeah, thanks for taking the question. Maybe just a little bit of help wondering in the puts and takes of the September quarter guide for revenue. I think you said mid-single digits for both industrial and auto, but just curious if you could help us understand just kind of what the data center growth expectation is for this quarter.

So, you know, to start, we continue to feel we have a great data center story, growing market, we have strong content growth. And the signals that we're seeing from customers, to remind everyone, when we look at our dollar content evolution going from $150 all the way up to $425, we're really encouraged by the fact that two-thirds of that $425 of content per rack are coming from the fan momentum. So we continue to see growth in the data center, and that growth is reflected.

And, Joe, I'll provide a little more color on the Q2 guide when we talk about mid-single for both auto and industrial. That's based upon what we could ship. That's based upon what's in our backlog for that particular quarter. And what we saw in Q1, actually, is we continue to receive within lead time orders, both in data center and in auto. And so some of those orders couldn't be shipped in Q1, and we're building a little bit of delinquency.

That's helpful. Maybe as a follow-up to that, I mean, can you talk about just, like, the plans that increase capacity? Is it, you know, front-end or back-end capacity that's maybe the bottleneck of those orders that, you know, can't be shipped within lead time?

Yeah, sure. So, you know, most of what we're seeing, we have a good strategy to have when you have in-lead time orders. And that we continue to have back-end.

Thank you.

Thank you, Joe. So our next question will be from Chris Casso with Wolf Research. Your line is open.

Yes, thank you. Good morning. I guess the first question would be with regards to some of what you said on pricing, and you did talk about some pricing actions. Could you elaborate a bit on what you're doing there? Will that have any effect on gross margins going forward? And we know that, particularly with your auto customers, you have some annual negotiations that occur at the end of the year. You know, is this in place of that? You know, how will price increases be factored in as we go through the year and into next year?

Yeah, Chris, thank you. This is Derek. So, as we said in our call at the end of April, you're absolutely right. The majority of our auto customer contracts begin in the beginning of the calendar year. And as is normal, we saw low single-digit declines in the majority of those auto customer contracts. Like many in the industry, we're seeing inflationary headwinds from commodity costs and other costs. So we are taking selective price actions that really began in earnest here at the end of our first quarter, largely in the distribution channel. So very little bit of that pricing benefit was in Q1. the slight beat on gross margin in Q1 really had to do a positive mix, and that also had the slight beat on the revenue in terms of having the long tail of distribution and general industrial sales with high gross margins. As we move into the back half of this year, Q3 and Q4, we expect our pricing actions that we're taking now to be more impactful and beneficial.

Got it. As a follow-up question, it sounds like you're getting some good traction on current sensors within data center. Can you talk as the data center business grows, what do you expect for current sensing as a percentage of your data center business? You know, I guess it sounds like we should expect that to grow by how much. And is there a relative mixed difference, margin difference in the fan controllers versus the current sensing part of the data center business?

Yeah, so the current sensors do as margin profiled on the fan drivers. And, you know, from a growth rate perspective, I won't put a hard number on it, but we have multiple positive dynamics going on here. We know that the power levels consumed by the data center, these current sensors, are used in power supplies. So to the extent that power levels go up, the need for current sensors goes up as well. We have an additional tailwind here because we are gaining share in the market as well. The traditional solution in these power supplies might be a transformer or an isolated amplifier, but because of Allegro's innovations, because of our TMR technology, we were able to make these small form factor current sensors with very high capability, and that's why we're taking share in the space. So we're confident that it will be an attractive growth rate, but we're not putting a number to that rate at this time.

And, Chris, I mentioned on the call here that gross margins now in the data center business are now in the mid-50s as a result of current census now being.

Helpful.

Thank you, Chris. Our next question is with Tom O'Malley from Barclays. Tom, your line is open.

Hey, guys. Thanks for taking my question. I just wanted to do a health check on auto. It looks like it was pretty strong across both the quarter and kind of indicated in the guide. But just maybe what you've seen over the last quarter, any areas of strength or weakness, and then you've seen some of your larger competitors be a bit lighter on the auto side. Anything that you would call out that's differentiated from them?

Thanks, Tom. So, you know, we're feeling very good about our auto business. We said in the prepared remarks we believe we can achieve our model of double-digit growth, growing 7% to 10% above SAR. And there's many reasons for that. And one of those reasons, just to remind everyone, our XEV and ADAS, Sam, it grows at a CAGR of about 18%. It layers some more good numbers onto that, which Derek and I covered in the prepared remarks. But with FQ1 sales up 15% year over year, FQ1 bookings up 30%, and FQ1 design wins up 30%, we're seeing movement. And the thing that I always like to do, I was in Europe, both America, Japan, and China recently. And as we spoke to customers, our dollar content growth story is very much alive and well. I was able to meet with tier ones up there that was first to market with electromechanical breaking system content increase for Allegro. I was in China talking to an inverter manufacturer. our market share with that very sizable customer in the Chinese market has increased significantly over the last few quarters. So we continue to see signs of positivity in auto, and we're confident we can deliver our growth rate.

Helpful. And then not to get super specific on numbers, but you talked about the data center business more than doubling in this coming year. I think at the analyst day, many people walked away kind of with that strength in mind. And so a lot of numbers have gone there. Is that just a starting point, the doubling? I know, obviously, a really big number already, or do you think that as the year goes along, you may revise that? Is this something that you have a lot of visibility on, or maybe talk to the lead times and your ability to upside that number? Thank you.

Yeah, sure. You know, we look at all kinds of data center statistics, and one of them being CapEx spend, which still for calendar year 2026, you can find quite a range on that number. But generally, you see if that were to flex up or down, you know, our provided number would flex up or down. Really, we've been securing tremendous design wins with short time to market. It's driving, like we said, the more than doubling within the year. And as we go through the quarters, we'll give a little bit more color. But, you know, the things that would drive it would be CapEx spend and some of the design win activity we have in the funnel.

Thank you, Tom. Our next question will be from Vijay Rakesh with Mizzou.

Yeah, hi, guys. Yeah, hi, guys. Just a couple of quick questions. On the data synthesis side, as you go from 400 volt to 800 volt, it looks like your content triples per rack. Can you talk to what the mix is of current sensing and the fan motors and the gate drivers? Is it similar or does that mix change? And should that margin profile still be in the mid-50s there? And they follow up.

This is Mike. So, yeah, I'll use the same numbers I already mentioned, but it's good to reground ourselves. So, you know, in older data center racks, we had, like I said, two-thirds of that 425 is coming from our current sensors and our fan drivers. What I didn't say earlier, when you look to the future, we believe there's hundreds of dollars more in content that could be added to the 425 as we layer in the isolated gate drivers, 800-volt topologies. And we're also investing in some new sensor areas that would add dollar content growth. So we see a long multi-year evolution of dollar content growth. But in the near term, we have full portfolios of market-leading products, namely the fan drivers and the current sensors to drive near-term growth. We think it's an exciting story in both the short-term and the long-term.

And Vijay, this is Derek. Just to touch on the last part of your question, I would expect the gross margins in that business to remain in the mid-50s, current centers being above the fleet average, and so the motor drivers slightly below it. As isolated gate drivers come in, we also expect those to be.

Got it. And just to continue on that same topic, Derek, when you look at the data center side, there's going from 10% to almost 17%, 20% revenues now, and carries a much better margin profile as well. How do you see the overall gross margins trending as you look at next year? Because that would be the central mix that could continue to go up because of the growth on the AI side. So maybe you can talk to how the margins kind of line up.

Yeah, as we talked about in our analyst day almost six months ago, we expect to be trending over the next couple of years towards that mid-50s quarter record. And within the Q2, the drop-through is only 57%. Some of that's mixed. There's more auto in there. There's some mixed within industrial. But as I mentioned, when – Thank you, DJ.

Our next question is with Blaine Curtis from Jefferies. Blaine, your line is open.

Good morning, guys. Thanks for having me on the question. I want to ask you about TMR. It's become a big part of your product releases, just kind of curious in terms of, like, of your shipments. And I really want to know about the competitive landscape. within auto and data center, how much interest are you seeing in TMR versus haul?

Sure. Thanks, Glenn. This is Mike. So, you know, we've been talking about TMR for a while, knowing that as time evolved, the benefits of TMR would start to extend into growth applications really across the business. In my prepared remarks, I spoke about a new win where we were into an ADAS. That was the first time that we've accomplished that. There had been other players out there mentioning their names in public calls. I think you know who they are. They had been established in that space at certain geos, and we're starting to go in and penetrate the market with our own market-leading TMR solutions in that application. And that's not the only one in auto, by the way. In the data center, I mentioned that we're ramping TMR. It's happening in the data lithium nitride the power converters go up to gain efficiency that means you need a very fast current sensor TMR current sensors you do have in the data center space today so those are some of the examples of where we're taking share in these growth markets and a little bit of color as to why we're taking share

and then maybe I wanted to follow up on Tommy's question on auto not to nitpick but like focus auto has kind of decelerated obviously EVs went through a very tough patch. I was kind of feeling like maybe they're getting a little bit better. I'm just kind of curious your perspective. Obviously, a great design win, so I'm not thinking on it, but I wanted to know your perspective on the EV market here.

Yeah, we looked at some recent S&P data, and it mentioned that we actually adjusted it to our fiscal year 27. So, within our fiscal year 27, EV market, EV production growth was in the neighborhood of 25%. So, that remains a healthy number and we're seeing that with our own customer activity. You know, obviously a lot of that activity is coming out of China. I think there's been particular strength in the China export market these days. I know that their domestic market was not growing as robustly, but their export sales are. But across the globe, really, we see continued momentum and strength in the EV space. Thank you.

Thank you, Blaine. Our next question is from Joshua Buckalter with TD Cohen. Your line is open.

Hey, guys. Thank you for taking my question, and congrats on the results and guide. You know, maybe following up on a couple previous ones. So, really good to see the current center business start to grow to a meaningful portion of the data center mix, and it sounds like you're very confident also in sort of the gate driver business, and maybe also the P-Mix for power delivery in data center. Could you maybe speak to when we should expect those latter two, the gate drivers and P-Mix for power delivery to start to layer into the data center business more meaningfully? Thank you.

Yeah, thanks, Josh. And yeah, I've been saying for a while now, the expected duration to see material impact in the data center from our isolated gate drivers is 18 to 24 months, so call it about an 18-month expectation for us. Very well engaged with customers. It's a dynamic market, so we actually will begin sampling a Generation 2 product that is ideal for the data center this fall, which will drive a little bit more acceleration of momentum in that product line. So, we are very excited about the isolated gate drivers in data center. I did mention it adds hundreds of dollars to the theoretical content for Allegro in the rack. And on the PMIC side of things, I don't want anyone walking away thinking that is a big growth factor for Allegro in the data center. Our PMICs tend to be more automotive focused, but even without the PMICs, we have a really robust dollar.

Okay, got it. Thank you for the color there. And then, yeah, similar nitpicky question is Blaine's. I mean, several of your peers this quarter have highlighted auto restocking. You know, your growth obviously is much better during the down cycle than your peers, but the last couple of quarters has sort of flattened out as others have started to reaccelerate. Is there anything different about your customer or product mix or maybe how you handled inventory as to why your sequential growth is looking a bit different than some of the larger auto semi-suppliers.

Thank you. Hey, Josh, this is Derek, and you hit it on the ladder, right? Some of it's how we handle the inventory. If you remember, unfortunately, two years ago, we had a very painful quarter in June. As a result of that, you know, we came back a lot quicker earlier in the cycle here. That said, we're still looking for the out year.

Thank you, Derek.

Thank you, Josh. Thank you, Joshua. our next question will be from Timothy Arcuri with UVS. Timothy, the line is open.

Thanks a lot. I just want to circle back to the original question in terms of what's embedded in the guidance for data center. I mean, I'm assuming it has to be up 25 percent Q on Q, something like that, which would put it like in the 20 percent range. And if that's the case, then the rest of industrials down like 10. So, it seems like I can account for almost all of the sequential revenue growth in data centers. So, can you tell me if any of that's wrong?

Yeah, Tim, this is Derek. I'm not going to really guide to a granular level below auto and industrial. We expect both auto and industrials to be up mid-single digits. It's based on what's scheduled to ship. I wouldn't say that data center is going to grow in the 20s, right? Data center is going to grow probably faster than that in single digits, but not in the 20s. And as you start to look at just the lower-large numbers, and Mike said we're going to double year over year. You can kind of see some of the math, all that, Mike. But we're still very confident in continuing to grow.

And I guess why would it, Derek, then why the decel? I mean, I get the lower-large numbers, but is there some, like, timing on certain projects? And, I mean, that's a pretty big decel.

No, it's not really timing. It's really just the lower-large numbers. Remember, we're coming from a place where data center was 2% of our revenue just six quarters ago. It was 10%, just four quarters, you know, plus $100 million a year run rate. It's just there's no real key sell in our content gains. As Mike mentioned, we continue to have 66%. It really is just where we are kind of in the lower large numbers.

Okay. And then can you talk about selling versus sell through, Derek?

Sure. So POS was a record this quarter. Disney sales were about 60% of our total sales this quarter. Direct was about 40% of our sales. And sell-in and sell-through were pretty equal. Inventory of the channel remained actually flat right now in a very healthy place in our – Okay, thank you.

Thank you, Timothy. Our next question is from Joe Moore with Morgan Stanley. Joe, the line is open.

Great, thank you. So, yeah, along the same lines, on the 40 units reported, it looks like industrial X data center was pretty strong sequentially, if I've done the math right. Can you talk about any noteworthy trends that are driving that?

Yeah, Joe, this is Derek. There were really two things in there that kind of drove us over the high end of our guidance. It was really the long tail of industrial business, the general and industrial, that all shifts through distribution, which actually has quite good gross margins. That had a bit of an uptick in the quarter, and that business can be a bit lumpy, and that was probably the last place in the distribution inventory channel that had any what I would call excess inventory, and that's largely gone now at this point. So a little bit of timing there, and as we move into Q2, when we look at the gross margin, a combination of mix from more auto and even within the industrial business, a little bit of hypermedical and some other things in there in Q2. So those kind of long tails of what else is in general industrial can be a bit lumpy and cordy.

Okay, thank you.

And then in terms of your comments on robotics and industrial automation, can you distinguish between those two things, the content opportunity for Allegro and Humanoid is pretty obvious, but are you also seeing bigger changes in other form factors for industrial automation and how much is that 3% to 4% of the revenue you thought about might be in the kind of newer human form factors? yeah you know joe good question this is mike so when we look at our dollar content opportunity in many ways it comes down to how many or how many degrees of freedom there is something that moves so whether it's a singular robotic arm on a conveyor belt picking things up moving them around you know that would have multiple joints and multiple dollar content opportunities for Allegro. So, we model it based on the number of joints. Obviously, there's a lot more joints in degrees of Needham than a rope to hands, but there's ample opportunity in factory automation system. Mobile robots moving inventory around factories, arms picking and placing boxes throughout the factory and seeing wins and revenue ramps kind of across the floor.

Great. Thank you. Thank you, Joe. Our next question is from Quinn Bolton with Needham and Company. when the line is open.

Thank you for taking my question. I wanted to follow up just on the sort of the gross margin outlook, Derek, and maybe just try to better understand how your pricing actions are layering in. I think you said that the pricing actions in DISTES kind of kicked in towards the end of Q1, so I would have thought you'd have a full quarter effect maybe in Q2, which would have benefited margins, but it sounds like it's more of a fiscal third and fourth quarter. that was down opportunities to selectively pass on.

So we're also making transitions from gold to copper in lieu of doing some of those things. The DISC pricing did start in Q1 towards the tail end of Q1. What's happening from Q1 is a bit of a mix where auto is also what meets single digits. And as I mentioned, the gross margins in auto are, of course, a bit below industrial gross margins. And of course, out of that pricing dynamic that I talked about, I do expect us to see the benefit of more pricing in Q3 and into Q4, also the benefit of some of those BOM optimizations that we talked about. So I expect continued corresponding protection.

Great. That's an additional color. And then a follow-up on the robotics question. I think you said robotics would be 3% to 4% of sales in fiscal 27. Can you level set us? Was it, you know, low single digits, 1%, 2%, and 26? Was it zero? And any thoughts as you look into fiscal 28? Could that get to sort of mid to high single digits? Could it reach double digits based on your bookings or the design with activity?

Yeah, thanks, Quinn. This is Mike. So, you know, we wanted to provide a little guidance there with that for just to establish a baseline that says, hey, we're already winning here our products and the value proposition of our products, our landing. We won't obviously walk forward guide with numbers, but we are starting off of a relatively small base. I think the growth rates ultimately come down to the pace of adoption of robots with more joints. I just talked about a model where our growth rate really comes down to the number of joints. There's an array of projections, not only in terms of the number of humanoids, but also the number of robots out there. But what we've looked at is a very strong growth opportunity. And as you multiply what's really a meaningful number at 3% to 4% by a high long-term growth opportunity, We think it can have a meaningful impact on the growth rate of the company.

Thank you, Quinn. Our next question is from Liam Farr with Bank of America. Your line is open.

Thank you so much for taking my question. I guess I just want to start with China. 25% of sales flat Q over Q in terms of, you know, percentage of raw. So, you know, growing in-line corporate average. But I was going to kind of discuss the demand environment you're seeing there, especially considering when your competitors just reported pretty strong results from China in their recent quarter?

Yeah, so this is Mike, and I mentioned I had just been in China. So what we found on the ground matched what we see in our internal data relative strength in China. So we talk a lot about design wins in China at each of these quarterly calls, and it's not because we're trying to focus on China. And that's where a significant number of very large and meaningful design wins have been happening. And what I like about what we see on the ground in China is that these high-dollar content opportunity sockets that we have out there, like electromechanical braking, you know, five years ago when people were talking, we abbreviate that EMV braking, it wasn't supposed to go to market first in China, but it did. And there's now multiple OEMs with EMV braking systems in cars with our devices inside of them. I also spoke about how in the EV market, not only is the EV market for these S&P numbers growing around 25% in our fiscal year 27, we know a lot of that action is happening in China. And when I visited one of our top customers in China today only to find out that our market share has gone up significantly over the past year, We continue to see many signs of strength in China, and I think some of these signs of strength will play out over the coming quarters and years.

But we think our China business grew.

Thank you. And then kind of on the note of EMD, I was just wondering if you could discuss the traption and kind of how much growth that could drive in fiscal 27, especially considering it seems there's a lot of, you know, great demand there.

William, could you please repeat the question?

Absolutely. Could you comment on the demand kind of environment for the electromechanical braking and the steer-by-wire and how much growth back to drive in fiscal 27?

Sorry, I didn't catch that one the first time. So, you know, we see trends broadly across the globe towards EMB braking and steer-by-wire. It would be a meaningful amount of growth. You know, what you have there is more of a situation where cars have just picking up the additional content. but I think it's really just one of the many factors that gives us confidence in our ability to grow double digits in automotive. These types of systems that are keeping us growing.

Thank you for your question Liam. At this time I'm showing no further questions in the queue so I would like to hand it back to Jolene for closing remarks.

Thank you Sarah. This concludes today's call. Thank you for taking the time to join us this morning. We look forward to seeing you at conferences over the coming weeks.