Earnings Call Transcript - ALGM Q1 2026

Operator, Operator

Good morning, and welcome to the Allegro MicroSystems First Quarter Fiscal Year 2026 Earnings Conference Call. Please note 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.

Jalene A. Hoover, Vice President of Investor Relations and Corporate Communications

Thank you, Haily. Good morning, and thank you for joining us today to discuss Allegro's Fiscal First Quarter 2026 results. We will provide highlights of our business, review our quarterly financial performance, and share our second quarter outlook. We will follow our prepared remarks with a Q&A session. Our earnings release and prepared remarks include certain non-GAAP financial measures. The non-GAAP financial measures discussed today are not intended to replace or be a substitute for our GAAP financial results. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings release, which is available on the Investor Relations page of our website at www.allegromicro.com. This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly. During the course of this conference call, we will make projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that 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 or events to differ materially from projections. Important factors that can affect our business, including those that could cause actual results to differ from our forward-looking statements, are described in detail in our earnings release for the first quarter of fiscal 2026 and in our most recent periodic and other filings with the Securities and Exchange Commission. Our estimates, expectations, or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changes to assumptions, or other events that may occur, except as required by law. It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Doogue. Mike?

Michael C. Doogue, CEO

Thank you very much, Jalene, and good morning, and thank you all for joining our first quarter earnings conference call. We are encouraged by the positive momentum we are seeing across the business, including continued strong bookings, increasing backlog, and strong design win activity in our strategic focus areas. This momentum has enabled us to deliver strong first quarter results with sales and gross margin above the high end of our guidance ranges at $203 million and 48.2%, respectively. We also delivered non-GAAP EPS of $0.09, above the midpoint of our guidance range. E-Mobility led our automotive sales growth in the first quarter, with particular strength in current sensors for xEV applications like high-voltage traction inverters and onboard chargers. We expect this positive e-Mobility trend to continue as a result of tailwinds from ADAS-related safety feature adoption and the continued electrification of vehicle powertrains. In our Industrial and Other end markets, we were encouraged by continued growth in Q1 sales. Data Center as well as Robotics and Automation, both strategic focus areas for Allegro, were significant contributors to our Industrial growth in the first quarter. On our May call, I spoke about my strategic priorities as CEO. And as a reminder, one of our top priorities is to demonstrate relentless innovation that drives performance leadership in new and existing markets and applications. To that end, I'm proud of the team for releasing an innovative new ASIL-C current sensor this quarter. This IC is specifically designed to meet the safety, efficiency, and commercial needs of xEV inverters. These inverters are power electronic systems that power the main traction motor in a hybrid or fully electric vehicle. With this newly released IC, Allegro offers a market-leading device that enables customers to use two current sensors and an inverter, whereas most competitor solutions require three sensors. This new IC optimizes our customers' bill of materials while still achieving rigorous automotive safety standards. During the quarter, the team also released our first U-core current sensor ICs that enable customers to use smaller magnetic cores or cordless inverter current sensor systems, thereby reducing the cost, size, and weight of the vehicle traction drive while extending vehicle driving range. Together, these innovative new current sensor ICs support our leadership position in xEV inverters. Our teams have already demonstrated an ability to gain market share with these new ICs, highlighting the value of relentless innovation with purpose. During the quarter, we also released a new 48-volt motor driver IC that results in more efficient, quieter, and more reliable cooling fans for use in AI data center installations. Moving to design wins, more than 75% of first quarter wins were in strategic focus areas, including e-Mobility, Data Center, Robotics and Automation, Clean Energy, and Medical Applications. E-Mobility and Data Center wins led our first quarter design win activity, and these wins highlight the breadth of our portfolio and our strong product and market positions that can ultimately drive future growth. In automotive, notable wins included a sizable traction inverter win with a leading Chinese automotive OEM, demonstrating our ability to secure new business in China as a result of our differentiated current sensor technology. We also secured multiple wins with a leading automotive OEM in the APAC region across electronic power steering, onboard charger, and in various vehicle cooling applications. Moving now to Industrial wins, we continue to capitalize on opportunities in high-growth sectors in Data Center, motor drivers for cooling applications and current sensors for server power supplies led to significant first quarter design win activity. It's a promising sign to see increasing sales momentum from our industry-leading high-bandwidth current sensors. These ICs enable higher switching frequencies and higher power density in space-constrained data center power supplies. We also secured several wins in Robotics and Automation with both our magnetic current sensor ICs and our advanced motor driver ICs. In addition, our TMR technology continues to gain traction in a growing number of applications, and we secured several global Q1 design wins with TMR ICs across applications in Data Center, Robotics and Automation, Medical, and Clean Energy. Furthermore, we are also seeing strong interest from leading customers as we sample them with our high-voltage isolated gate drivers for silicon carbide-based power systems in e-Mobility, Clean Energy, and Data Center applications. Sampling activity for our isolated gate driver ICs increased significantly in recent months. In our May call, I also spoke about the importance of cost innovation as a means of increasing gross margins. For example, in the June ending quarter, we optimized our manufacturing flow and increased test yield for certain high-volume TMR devices, resulting in a tangible COGS reduction for TMR devices acquired from Crocus. In summary, we continue to execute on our strategic priorities, and we are seeing positive momentum across the business. I'd like to thank Allegro's employees, partners, customers, and investors for their continued support across all aspects of our business. I'll now turn the call over to Derek to review the Q1 2026 financial results and provide our outlook for the second quarter.

Derek P. D'Antilio, CFO

Thank you, Mike, and good morning, everyone. As Mike mentioned, we continue to see positive forward-looking metrics for the business, including continued strong bookings, in fact, to levels we haven't seen since our fiscal '23, as well as orders within lead times and further reductions in our customers' inventories. Now I'll turn to our first quarter results. Sales were $203 million and non-GAAP earnings per share were $0.09. Gross margin was 48.2%, operating margin was 11.1%, and adjusted EBITDA was 16.4% of sales. Q1 sales increased by 5% sequentially and 22% year-over-year. Sales to our automotive customers increased by 3% sequentially, led by e-Mobility sales, which increased by 16% sequentially. Auto sales increased by 13% year-over-year, and e-Mobility increased by 31% year-over-year. Industrial and Other sales increased by another 11% sequentially and for the fourth consecutive quarter, led by continued growth in Data Center, Robotics and Automation, and a resurgence of Clean Energy. Industrial and Other sales increased by 50% year-over-year. Sales into the distribution channel were about flat sequentially and increased by 19% year-over-year. POS was the highest it's been in nearly 2 years, and we continue to see reductions in our distributors' inventories. Our distributor inventory dollars declined by another 13% sequentially and 28% year-over-year, and we are beginning to prioritize shipments to address low inventory levels for specific parts. From a product perspective, magnetic sensor sales increased by 10% sequentially, led by e-Mobility, and increased 12% year-over-year. Sales of our power products declined by 2% sequentially and increased 43% year-over-year. Sales by geography were 28% in China, 24% in the rest of Asia, 17% in Japan, 16% in the Americas, and 15% in Europe. Now turning to Q1 profitability. We also continue to be very focused on improving gross margins and our return on invested capital. Gross margin was 48.2%, an increase of 260 basis points sequentially while absorbing foreign exchange headwinds from a weakening U.S. dollar. Operating expenses were $75 million, about $3 million above our outlook due to an increase in variable compensation, timing of R&D spend, and a weakening U.S. dollar. Operating margin was 11.1% of sales compared to 9% in Q4 and 6% a year ago. Operating income improved by 128% on a 22% sales increase year-over-year, demonstrating the operating leverage in the business model. The effective tax rate in the quarter was 9.5%. First quarter interest expense was $5.5 million. And the first quarter diluted share count was 185 million shares and net income was $16 million or $0.09 per diluted share. Moving to the balance sheet and cash flow. We ended Q1 with cash of $139 million. Cash flow from operations was $62 million, CapEx was $11 million, and free cash flow was $51 million or 25% of sales. Cash flow from operations included a $30 million tax refund. From a working capital perspective, DSO was 40 days, consistent with Q4, and inventory days were 141 days compared to 148 in Q4. Inventory dollars declined by another $10 million sequentially, largely due to a decline in finished goods as we continue to fulfill some orders within lead times from finished goods. Finally, in Q1, we made another voluntary debt repayment totaling $35 million, bringing our debt balance down to $310 million and net debt to $181 million compared to net debt of $224 million at the end of Q4. Finally, I'll now turn to our Q2 2026 outlook. We expect second quarter sales to be in the range of $205 million to $215 million. The midpoint of this range equates to a 12% year-over-year increase. Additionally, we expect the following, all on a non-GAAP basis: gross margin to be between 48% and 50%, OpEx is expected to be approximately $73 million. Interest expense is projected to be $5 million, inclusive of another $25 million debt repayment we just made this morning. We expect our tax rate to be 10%, reflecting the projected geographic mix of income. We estimate that our weighted average diluted share count will be 186 million shares. As a result, we expect non-GAAP EPS to be between $0.10 and $0.14 per share, up 50% year-over-year at the midpoint on a 12% sales increase. Now I will turn the call back over to Jalene for questions.

Jalene A. Hoover, Vice President of Investor Relations and Corporate Communications

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our second fiscal quarter conference lineup with you. We will attend Needham's Sixth Annual Virtual Semiconductor and SemiCap one-on-one Conference on August 20, Evercore's ISI Semiconductor, IT Hardware and Networking Conference on August 26 at the Peninsula in Chicago; and Jefferies' Semiconductor, IT Hardware and Communications Technology Conference on August 27 at the Four Seasons also in Chicago. We will now open the call for your questions. Haily, please review Q&A instructions.

Operator, Operator

Our first question comes from Joe Quatrochi from Wells Fargo.

Joseph Michael Quatrochi, Analyst

I was wondering, I think you talked about starting to see some areas of increasing shortages and needing to refill inventory. Can you talk about the forward demand picture you're seeing in the demand pull from your customers and how you're thinking about the dynamics of potential tariff pull-ins versus continued recovery?

Michael C. Doogue, CEO

Yes. Thanks for the question, Joe. So just a reminder on some of the strong positives, that's really the best way to summarize trends in the business. We continue to see the growing book-to-bill with strong bookings, growing backlog, continuing to see significant orders within lead time and inventory reductions in the Disti channel. So we're seeing a lot of positive signs. What I can say when we start to think about the impact of tariffs and potential pull-ins, I personally have been on the road a lot talking with customers, and I found it to be quite valuable. In almost every meeting, there have been real tangible discussions about potential future component shortages, meaning other Allegro components based on real and growing demand in the marketplace, that's true both for industrial and automotive customers. Certainly, we acknowledge the uncertainties created by the tariff situation, but we find it to be an encouraging sign to be having more and more conversations with customers about real manufacturing-based line tightness, and it's just another signal that demand is picking up out there.

Derek P. D'Antilio, CFO

And Joe, this is Derek. I'll add to that. It's something that we have our sales teams in the regions on the lookout for if there's any unusual bookings activity or unusual sales activity. So far, we believe the impact of any sort of pull-ins is immaterial from tariffs. We obviously don't get the reasons why a customer is pulling something in. But in general, it's because they need it because of a potential line down, for example, in places like data center. From a tariff perspective, right now, there's no direct impact for Allegro. We ship about 15% of our products into the United States or into North America. Everything is shipped from the Philippines to all regions. From an indirect standpoint, as far as downstream with our customers, there clearly could be an impact for things like Section 232 and steel and aluminum imports as some of the automakers announced yesterday. But the impacts to Allegro on that are yet to be seen in the kind of downstream.

Joseph Michael Quatrochi, Analyst

That's really helpful. And then as a follow-up, can you talk a little bit more about just the industrial exposure? I think in the past, you talked about clean energy, solar being a big piece of that. I know there's been some changes with the big infrastructure bill in terms of subsidies for solar. Any help there on like what those discussions with customers have been like?

Michael C. Doogue, CEO

Yes, absolutely. If you look at our investor deck, you'll see in our focused industrial area, it's about a $3 billion SAM growing at a double-digit growth rate. It spans Data Center, Robotics, and Factory Automation. Yes, clean energy and also the medical market. I bring that up, Joe, just to say clean energy is one leg of the stool, but we have a lot more legs on that stool. In particular, we've been seeing an uptick recently in the Data Center portion of the Industrial business. As we go out, if I paint with a broad brush talking to our industrial customers, we're seeing strong recovery in the business. We have four quarters of growth, and the clean energy piece is just one piece of that business. There is a little bit of softness there, but it's being made up by the strength in other areas like data center.

Operator, Operator

Our next question comes from the line of Vivek Arya from Bank of America Securities.

Vivek Arya, Analyst

The first one is on gross margin. So they exceeded the high end of your outlook. I'm curious what helped to drive the upside? If you could help differentiate between utilization, pricing, and mix, what was specifically different than your initial assumptions? As we look forward, how do you see these three drivers as you kind of march towards your goal of 50% over the next few quarters?

Derek P. D'Antilio, CFO

Yes, Vivek, thank you. In terms of our Q1 gross margin being at 48.2%, which was 20 basis points above our guidance range, revenue was about $1 million above that guidance range. With that revenue level, it was within our expectations. We expected a fairly good drop-through going into Q1. I've talked in the past about a 60% to 65% drop-through. For Q1, though, we expected the drop-through to be in that 90% range because, as you may remember from the May call, we talked about how many of our pricing negotiations with our customers occur in the March quarter. So we have a timing dynamic where pricing comes down pretty immediately, but the cost benefits from negotiating cost downs with suppliers take about a quarter or two to cycle through our inventory with 150 days in inventory. We start to get that benefit in the June quarter, and that moves into the September quarter as well. Our guidance at the midpoint for the September quarter from 48% to 50% at the midpoint of 49%, equates to about a 75% drop-through where we continue to get some of those benefits of the cost rolling forward on a FIFO basis. Post that quarter, you can continue to use that 60% to 65% drop-through. The majority of that is really utilization or leverage in the business. The other levers that could provide some upside to that are mix. In the June quarter, we encountered two headwinds: one was foreign exchange with the Philippine peso, which was kind of noise, but it was still a headwind. The second piece of that was direct sales were higher than distribution in the quarter. As distribution starts to come back from a sell-in standpoint, the majority of that is industrial, and we get some tailwinds from that, which could result in some upside.

Vivek Arya, Analyst

Very helpful. Then maybe, Mike, one for you. Your views on the automotive demand recovery because there have been some mixed messages from some of your larger peers, Texas Instruments, STMicro, and others. How do you see the demand environment now versus what you thought 90 days ago? How are you looking at automotive sales growth going into your September quarter against what is probably just a flattish auto production environment globally?

Michael C. Doogue, CEO

Yes, we can start with that auto production forecast. I was pleasantly surprised to see S&P revise their automotive production forecast up over the past quarter. That is a forecast change that goes from a slight decline in production to generally a flat vehicle production landscape. But nonetheless, that's a positive movement of the forward-looking automotive forecast that lines up with what we're seeing when we go out and talk to customers. I mentioned earlier these discussions about automotive tightness where a lot of our auto customers are looking for expedited delivery of material to keep their lines running at maximum efficiency, confirmed both through direct customer discussions, but also discussions with our sales teams. We're just seeing a pretty marked increase in those types of situations out there in the marketplace. I'm not saying that the recovery in auto is very strong at this point in time. But Derek and I, when we look at the situation, we're seeing all the right signs to indicate that we're staring at a recovery in front of us.

Operator, Operator

Our next question comes from the line of Gary Mobley from Loop Capital.

Gary Wade Mobley, Analyst

Derek, that revenue guide for the September quarter of $210 million, would you say that represents shipping to true end demand? Or are we still seeing some reduction in the distribution channel that holds the quarterly revenue back?

Derek P. D'Antilio, CFO

Gary, it's not yet shipping to end demand. In the past, I've provided a number of between $220 million and $230 million, which was the last time we calculated off of our sales in Q4 of '24, what the end demand looks like. We still think that number holds about true right now, $220 million to $230 million. We undershipped the distribution channel again in Q1. We might come back to parity in Q2 when I net out the fact that some distributors actually need select parts for inventories. There are regions, like Europe that still have a way to go on the downside of things. But we are now starting to see distributors need select parts. The net of those two things could make sell-in flattish in Q2. So we're not quite shipping to demand there. Even with our direct customers, we're still not shipping to demand. The guide for Q2 is up about 3%, and we would expect the majority of that to be automotive.

Gary Wade Mobley, Analyst

Got it. Appreciate that color, Derek. Mike, you just highlighted the mix data points in the automotive market. On the negative side, clearly, we've seen a number of leading Western automotive OEMs revise down their profit forecast because of tariffs and whatnot. Has that had any sort of impact on the design RFQ activity with many of those Western automotive OEMs? In other words, are they trying to plug the dike, so to speak, because of the tariff environment?

Michael C. Doogue, CEO

Good question. I've not seen any of that activity as a result of tariffs. If there is any press out there about delays in R&D programs in automotive, the ones I have seen perhaps a quarter ago were more related to companies trying to sort out exactly how to balance their platforms between EV powertrains and ICE powertrains. We've seen a little bit of that dynamic, but nothing related to the tariff situation in terms of program pushouts or R&D program changes in plans.

Operator, Operator

Our next question comes from the line of Nathaniel Quinn Bolton from Needham & Company.

Nathaniel Quinn Bolton, Analyst

Mike, Derek, congratulations on the nice results and outlook. I guess my question is this auto recovery and looking into the second half of the calendar year. I know you give guidance only one quarter out. But historically, you've seen some seasonality in the December quarter. Certainly, it sounds like the growing backlog, the increasing bookings, the chance to potentially start refilling the channel could all align for a better-than-seasonal outlook in December. But just wondering if you might be able to comment on whether you would expect normal seasonality in December or whether you think the cycle can sort of overpower typical seasonal trends as that cycle starts to kick in?

Derek P. D'Antilio, CFO

Yes, Quinn, you're correct. We reviewed the past 15 years or so, and generally, for most of that time, the December quarter has shown a 5% decrease in seasonality. This decreases primarily occurred in the Industrial and Other sectors, and to some extent, in consumer. For instance, the September quarter typically experiences a slight increase in consumer, generally a couple of million dollars. Historically, the 5% decline has been associated with Industrial and Other sectors, although last year, it was observed in the auto sector. This year is intriguing because we’re uncertain whether the long-term trends or our position in the cycle will outweigh this seasonal pattern. In 2023 and 2024, it did, indeed. Currently, there are several strong tailwinds that could influence this. Therefore, providing guidance for the December quarter is somewhat challenging. Historically, it has been down 5%, but with the current favorable trends, it could range from down 5% to up 5%.

Nathaniel Quinn Bolton, Analyst

Got it. And then I guess just a second question. You're seeing increasing expedites, it sounds like both from OEMs and potentially distis. You've talked about Disti Inventories coming down. At what point do you think you start to restock the channel? I know September sounds like you're expecting sort of flattish disti or selling to match sell out in that disti channel. But would you expect to be in a position sort of exiting this year to start refilling the channel? Or are you going to take it one quarter at a time?

Derek P. D'Antilio, CFO

Yes. We take it one quarter at a time, right? But we get pretty good visibility into our top distributors, of course, and that's all contractual. We get their POS data, we get the inventory data. So we watch that very closely, and we've been actively working with our distributors for over a year now to bring down that inventory. For example, in the June quarter last year, our sales in China declined 55% because we really helped drive down the inventory in the channel. That was a good thing. We had a North America reset in the December quarter, a little Europe reset in the March quarter. We still have pockets of inventory in parts of Europe and North America. Asia is in really good shape. What we're starting to see right now is for select parts, we actually have to restock that channel. The net effect of those two things will result in distribution sales into the channel being about flat in the September quarter.

Operator, Operator

Our next question comes from the line of Chris Caso from Wolfe Research.

Christopher Caso, Analyst

I guess the first question is regarding China. We've heard different things from different suppliers regarding China. It looks like 28% of revenue. It's not terribly different than what you've seen in the past, but can you talk to specific trends of what you're seeing for both the direct customers and distribution customers within China?

Michael C. Doogue, CEO

Yes, Chris, I'll take that one. First of all, as you stated, we've built a robust business in China. When I look at that business, it's across a broad portfolio of devices, each of which have their own strong levels of differentiation. Additionally, in the prepared remarks, I brought up a singular win with a Chinese OEM for an xEV current sensor application. When I look at the wins within the quarter, I see pretty strong momentum in terms of new wins in e-Mobility, particularly in China. We're seeing a continued ability to win. We also have customers who are responding quite positively to our China-for-China supply chain. In general, we feel good. That being said, I talked in last quarter's call that there is stiff competition in China. It tends to be at the lower end of the market. We don't have much business at the lower end of the market today, and our strategy is to continue to release differentiated products to compete more at the higher end of the China market. There are also the geopolitical concerns existing in China. Net-net, there are many tailwinds we have through innovation in our products, but a couple of headwinds on competition and geopolitics. Overall, we're feeling good about our ability to grow in China in the short term.

Christopher Caso, Analyst

As a follow-up question, I'd like to discuss pricing. We're probably in the early stages of recovery right now, so it's probably early to see pricing trends. I know last year, you had to make some pricing moves to move some inventory. You'll be starting soon the annual price negotiations with your auto customers. What's your view regarding pricing as you head into the end of the year and into next year in the context of maybe supply getting a little bit tighter?

Michael C. Doogue, CEO

Yes, it's a dynamic situation, as we all know. Any time we enter the year, we start thinking about if we can land at a low single-digit price reduction year-over-year. In many cases, in automotive, we have certain contractual obligations to land there. We think we're going to stay in that space. I'm just going to preempt the question. Sometimes people say, because of tariffs, are customers asking you for bigger price reductions? When supply gets tight, we might be able to demand some price increases. But net-net, we feel like we're going to land in a normal year-over-year price reduction environment as we enter the next calendar year.

Operator, Operator

Our next question comes from the line of Tom O'Malley from Barclays.

Thomas James O'Malley, Analyst

I wanted to dive into the sequential performance on the Industrial and Other side, which was very strong in June, I think, up 14%. That coincided with a bit of a pickup in China and then a bit of a pickup in Europe as well. Could you map for us where you are seeing that strength? Is that industrial side more isolated on China? Are those correlated at all? Or was that kind of broad-based strength across the different geographies?

Derek P. D'Antilio, CFO

Tom, it was fairly broad-based. A lot of it was other Asia, which includes places like Taiwan. Data center led the strength in terms of dollars. Our industrial business in China is a relatively small piece of the overall business. So it was Europe, it was the Americas in some places. Data center really led the strength in terms of dollars. And Mike can give us some examples of what we're selling into the Data Center, but it was Data Center, a small resurgence in Clean Energy, and then an uptick in Robotics and Automation, and most of that activity is in other Asia.

Thomas James O'Malley, Analyst

Helpful. When I look at the e-Mobility versus your other auto businesses, there's a pretty big divergence over the last couple of quarters where you're seeing kind of mid-teens growth on the e-Mobility side and then some declines in your more star tracking business. When you look at what's growing within that e-Mobility bucket, is that related to EVs more specifically? There’s news around potentially EV credits, some pull forwards there being a bit better. Can you help me understand how much of that is being driven by EV? Do you have any fears around any sort of order patterns changing just because there is a chance of change in the rules?

Michael C. Doogue, CEO

Yes. We're pleased to see the strong growth rates in our e-Mobility business. Just as a reminder, in our e-Mobility business, which includes ADAS and EV areas of the automotive sector, most of our dollars in that space come more from the ADAS side of the application space. When we see growth in e-Mobility, there's often a decent balance of growth in the ADAS and EV portions of the business. A lot of the growth in EV comes from new wins. We continue to secure new wins in both ADAS and EV. We won't split out the actual numbers between ADAS and xEV, but the majority is coming from ADAS, and we see a robust future for the xEV dollars that we have growing as well.

Derek P. D'Antilio, CFO

In terms of the U.S. changes in regulation, a data point I've given in the past is currently today, about 15% of our sales are U.S., and the U.S. is at about 10% adoption of ePure EV. Hybrid is included in that as well. That means that U.S. EV, Pure EV, is about 1.5% of our total sales. It's not necessarily impactful, but it is great when it grows. The other data point you may have seen is that S&P actually has EV in the United States growing as a percentage faster than many other regions, except for Europe due to it coming off a very small number.

Operator, Operator

Our next question comes from the line of Blayne Curtis of Jefferies.

Blayne Peter Curtis, Analyst

I was wondering on the e-Mobility side, you mentioned a few drivers in the script. Maybe you could highlight future drivers. You mentioned TMR pricing coming down. I know that's a more future-oriented aspect to insert that technology into auto. I don't think I've heard about gate drivers. Can you walk us through some of these new products within e-Mobility as you look out the next year or two?

Michael C. Doogue, CEO

Yes. Thanks for the question, Blayne. I think I understand it. When we look at e-Mobility in general, what are some of the growth drivers? We continue to see increases in dollar content. We started talking about that in steering systems where we have fairly large chipsets across our different product areas in a steering system. That's now carrying over into braking systems, whereas previously, there was a relatively small semiconductor content in braking systems. There's increased adoption of electric motors and other components in braking systems, including higher safety standards that give us an increasing dollar content opportunity in the ADAS space. That’s already starting to unfold and has many years to come. In the EV space, our #1 area of growth is in the current sensor space. We've had those products for a long time. We're leaders in that area. Our isolated gate drivers come into play, driving a large SAM expansion and strong growth opportunities as we move forward. As a reminder, with that business, when we initially acquired it, the first products to go to market were driving gallium nitride transistors. GaN has a lower market penetration than silicon carbide, which is why we were intentional in calling out that we are now broadly sampling our silicon carbide-based isolated gate drivers. Most of that business is in the EV space, with a close second being activity in the data center space. We feel good about the isolated gate drivers in terms of the uplift we will see in both EVs and in the industrial and data center space.

Blayne Peter Curtis, Analyst

I do want to ask you about the Data Center because that was a segment you broke out a while back, and it kind of fell off as spending in the Data Center went down. You mentioned that was within Industrial Other. Has Data Center become more material? Or is it the largest segment? Can you walk us through some of the bigger segments within that industrial business that have gone up a bunch?

Michael C. Doogue, CEO

We had a robust data center business that got caught up in the inventory cycle. As we're coming out of the cycle, not only are the fan driver ICs we've been talking about for years coming back strongly, but now we have a lot more of our current sensors being used in the power supplies in the data center. So we've expanded our dollar content footprint. The next chapter in that story is the one I just spoke of, where the isolated gate drivers will offer another dollar content expansion in the data center. We believe it's a key strategic area for us in terms of future growth, and we'll continue to highlight it in future calls.

Operator, Operator

Our next call comes from the line of Vijay Rakesh from Mizuho.

Vijay Raghavan Rakesh, Analyst

Just a quick question. A follow-up on Blayne's question. When you look at the e-Mobility side, can you give us some color on what the pipeline looks like for your Traction xEV in China and APAC? What are the big OEMs? Where are you seeing increased penetration? What notable wins are you seeing across APAC, China, etc.? What's the competitive landscape look like?

Michael C. Doogue, CEO

Yes. I can't really talk in depth about OEM activity as they crown upon that or sometimes we're contractually not allowed. But what I can say is that in recent quarters, I actually went to the APAC region and signed an important development agreement for a next-generation current sensor in a very popular EV. This is representative of the type of activity we have with many of our partners where we bring innovative solutions to the table becoming a partner of choice. In China, I brought up a sizable win in an inverter with a local China OEM. In the e-Mobility space in China, we secured a significant number of wins across numerous local OEMs providing vehicles to the domestic market. Expanding into Japan, we have recognized strong dollar content in the hybrid and battery EV space, particularly through good success on the hybrid side.

Vijay Raghavan Rakesh, Analyst

On your China-for-China strategy, does that support all your China revenues now? Are the margins there attractive with the China-for-China approach allowing you the 75% drop-through that Derek mentioned?

Michael C. Doogue, CEO

The China-for-China strategy is strong and requires significant work to roll out our products to run on that supply chain. I will say that when we work with vendors in China, there are two things occurring. They're actively pursuing our business, and I think the cost base for producing semiconductors in China is a bit lower than other regions. This allows us to compete better in China. We wouldn't characterize it as a direct margin uplift for the company, but through the China-for-China supply chain, it’s an important part of remaining competitive in China while sustaining margins.

Operator, Operator

Our next question comes from the line of Tim Arcuri from UBS.

Timothy Michael Arcuri, Analyst

Derek, gross leverage is down to about 2x for September based on your guidance. When will capital deployment shift from debt paydown to capital return, maybe some share repurchase? Basically, when do you consider the balance sheet to be fixed and you're happy with it?

Derek P. D'Antilio, CFO

Right now, the most accretive thing we can do is continue to repay debt. We just made another $25 million payment this morning. We're not worried about the leverage level per se, but it happens to be the most accretive thing we can do right now. In terms of capital deployment, our CapEx is down to below 5% of sales. It will continue there as we've gone through the investment cycle over the last couple of years. We will continue to invest organically in R&D and sales where it makes sense in high-growth areas. We continue to look at M&A that makes sense; however, I don't expect to do anything soon. In terms of returns, we don't plan to do a dividend anytime soon. We did do a share buyback from Sanken last summer for a specific reason and it was structured favorably for Allegro shareholders. Currently, no plans for additional broad-based share buybacks.

Timothy Michael Arcuri, Analyst

I wanted to follow up on the China-for-China strategy. I think you are getting chips from SMIC maybe at the end of this year. I think you've taped out around 10-15 products in that fab and you're routing wafers from other existing fabs through OSATs in China. Can you discuss like is that on track with SMIC? Does that change your competitive position in China?

Michael C. Doogue, CEO

It is on track, and yes, we believe it changes our competitive positioning. Wafer technology transfers take time, and they are progressing. Many companies in our industry have emphasized the need to move at 'China speed.' What this has meant is that some companies have wanted to jump right into exercising their China back end, using wafers from outside China. We are seeing an increase in the number of customers wanting to exercise the back end. There's value in just the back-end portion of the supply chain. To answer your question, we feel like it’s going well and differentiating our business in China.

Operator, Operator

Our next question comes from the line of Nicole Kozhukhov from Morgan Stanley.

Joseph Lawrence Moore, Analyst

I want to ask about OpEx. I think your long-term plan is 26% of sales. As your revenue accelerates, do you get there quicker? Do you use that opportunity to invest more in some of your new markets? How do I think about the OpEx trajectory?

Derek P. D'Antilio, CFO

What you've seen over the last two and a half years is SG&A has remained relatively flat. We've managed to offset inflation by moving many of our functions to our new shared services center in the Philippines. We'll continue to find ways to offset inflation in SG&A with cost reduction opportunities. Although we will invest in sales and R&D in strategic areas, there won't be a step-up in OpEx in dollars. The percentage will improve significantly. You’ll see reallocations within OpEx to fast-growing strategic areas.

Joseph Lawrence Moore, Analyst

Can you discuss the pipeline there? Do they favor European over American suppliers? Any prospects for China organically developing what you do on the semiconductor side?

Michael C. Doogue, CEO

Yes. We continue to win in China and have a significant number of design wins this quarter. We must be clear that while there is increased competition in China, our strategy is to differentiate by offering products that save customers money at the system level, avoiding head-to-head, pin-for-pin, price-for-price battles. Right now, it's a long-term strategic play. We're feeling good about our design funnel and the innovations to come.

Operator, Operator

Our next question comes from Joshua Buchalter from TD Cowen.

Joshua Louis Buchalter, Analyst

I wanted to ask about current sensing. It seemed like your confidence in the near- to medium-term contribution from current sensors in autos has increased. It seems a little early for the TMR IP you acquired for Crocus to impact the auto market. Is this primarily for Hall-effect sensors or your legacy GMR sensors? Can you elaborate on what's driving the near- to medium-term current sensing side?

Michael C. Doogue, CEO

We feel very good about our current sensor roadmap. To answer your question, the ICs I spoke about are using Hall-effect technology. It takes time to develop a custom product for a specific application. These products were started roughly two years ago. As we look at our current sensor roadmap going forward, we are pivoting more strongly to TMR. We have product sampling to customers that have much better signal-to-noise ratios, much higher bandwidth, and we've been pleased with the customer feedback on these upcoming TMR ICs.

Joshua Louis Buchalter, Analyst

I wanted to ask about the legacy auto business. If I back into the numbers, I think the non-e-Mobility auto revenue was down sort of high-single, low-double digits sequentially and year-over-year. Was that some of the inventory dynamic that Derek discussed? Anything else going on there? Should we expect that business to stabilize, or is that just at the point where e-Mobility is so much greater as a portion of the mix that it should be flat to down?

Michael C. Doogue, CEO

Yes, Josh, you nailed it with your first comment about the inventory component impacting numbers outside of e-Mobility. They're small numbers. Our Japan number quarter-over-quarter was not robust either. We believe that’s timing of purchases, and there's no longer-term signal for the quarter-over-quartes in either the other automotive business or in Japan. Both should be fine.

Operator, Operator

At this time, I'm showing no further questions in the queue. I would now like to turn it back over to Jalene for closing remarks.

Jalene A. Hoover, Vice President of Investor Relations and Corporate Communications

Thank you, Haily. We appreciate you taking the time to join us. This concludes this morning's conference call.

Operator, Operator

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.