Conference Transcript - ALGM 2026-05-27

Josh, Analyst — TD Cowen

All right. Good afternoon, everybody. Thank you for coming to the 54th annual TD Cow and TMT conference. Really pleased to be joined by Derek and Jalene from Allegro Microsystems. Both of you, thank you for coming down in the coldest room, I think, on the East Coast. And also, Derek, appreciate you sticking around New York despite the Knicks being in the finals, not your Celtics. Maybe just to start things off, could you both maybe spend a couple minutes It's introducing yourselves and introducing the audience to Allegro Microsystems.

Derek D’Antilio, CFO

Sure, absolutely. So I'm Derek D'Antelio, the Chief Financial Officer at Allegro Microsystems. I've been here for about five years. It's a company that's headquartered actually in Manchester, New Hampshire. And the company was headquartered in central Massachusetts for actually the last 60 years. But after Jolene introduces herself, I'll tell you a little bit more about the company.

Jolene Hoover, Head of Investor Relations

Jolene Hoover. I head up Investor Relations, Corporate Communications at Allegro. I've been in semiconductors for around 30 years. including Sirius Logix and Silicon Labs. I've been with Allegro for about three and a half years.

Derek D’Antilio, CFO

So I guess between Julene and I, we have about 60 years of experience in semiconductors. I don't know if that's good or bad. So Allegro Microsystems is a company that's actually been around, believe it or not, as a company for about 100 years. It was Sprague Electric, founded in 1926, became Sprague Semiconductor in 1965 to empower semiconductors. Now our company is 60% magnetic sensing We're the market share leader, global leader in magnetic sensing. We have about 23%, 24% market share. Went public five and a half years ago. 40% of our business is power management. Why I give the history is because we have these relationships with customers, particularly in the automotive business, that go back 40 and 50 years having reliability, safety standards met, ACILD certifications in automotive. And automotive is 70% of our business. That's exciting. That's growing fast. We'll talk about some of that. 30% of our business are some fast growing industrial areas that I'm sure we'll talk about like data center and ultimately

Josh, Analyst — TD Cowen

robotics. Alright, thank you for the background before we get into the more fun product and content driven details, maybe we could start with, you know, you just had your earnings call a couple weeks ago, it seems like things are certainly better cyclically and also secularly for the analog group as a whole could you talk about maybe high level what trends you're seeing in your key markets and from a cyclical standpoint, you know, where we are with inventory positioning?

Derek D’Antilio, CFO

Sure. So we finished our fiscal year at the end of March. We're on March 31st year end, and we finished our fiscal 26 on a strong note. Our sales were almost $900 million, up 23% year-over-year. Our auto business grew 17% year-over-year. More importantly, what we call our focus auto, which is XEV, hybrid, and EV, and ADAS applications grew 30% year-over-year. Industrial business grew 40% year-over-year, which was quadrupling of data centers. So we continue to see strong numbers over the past year. Very importantly, our backlog continues to build. We had a record bookings quarter in the March quarter. So we continue to see real strength across our business in all these areas. And going back about a year and a half, Josh, to talk about the sort of cycle dynamics, the automotive industry has actually been quite stable over the last five or six years. Automotive unit growth has grown about one or two million units each of the last five years, projected to be kind of flattish to maybe marginally down this year. But if you zoom out over about 40 years, the auto industry production units have only declined 10% in two years, 2009 and 2020, right? So it's a pretty stable market. There was an inventory bill that we went through like a lot of people a couple years ago. But we're seeing really strong demand, really strong design wins. And it's shifted from being a go-get bookings to sort of an operations problem, making sure that we're servicing our customers, making sure that we're meeting our on-time delivery schedule. So really robust demand continues across our markets right now.

Josh, Analyst — TD Cowen

And from an inventory standpoint, I mean, I think you guys were more on the proactive side of trying to cut downstream levels earlier than others. And you've, for a while, been flagging that levels are, in some spots, quite low. How are you seeing your customers' behavior trending and any signs of restocking? And overall, I guess, are you comfortable with downstream inventory levels and we can stop asking about inventory?

Derek D’Antilio, CFO

Sure. Sure. So as Josh mentioning, the auto industry went through an interesting time of inventory build that they never did. In 22 and 23, the auto industry, like I said, very nice projection of one to two million units a year, auto production, good mix shift to XEV over the last several years. But the auto tier ones built inventory in 22 and 23. That never really happened before. They did that for two reasons. One, they were getting dollars from the OEMs to do that in certain countries in Japan and Europe and even the United States. And two, interest rates were the lowest they've been in 100 years, right? Three years later, those two dynamics are much different. They're not getting those dollars. Interest rates are not particularly high, but they're normal again. And so they're not building those. And these automotive tier ones are managing their balance sheets and their working capital, and so are the distributors. So what we saw was a prolonged period of inventory digestion throughout our fiscal 25 or calendar 24. And what we saw is inventories actually came down below levels that they carried prior to the pandemic. And in fact, customers were placing orders within lead time for a period of time. We could supply those orders a year ago, and so could our peers. We told customers we couldn't do it now, and now we're ending up having to deliver within 20 weeks of lead time. So they're dealing with that from across the spectrum. I don't see a massive restocking happening within auto, and I probably understand that, again, because of the working capital dynamics for those companies.

Josh, Analyst — TD Cowen

And what do you think is needed to trigger that restocking and getting inventories to levels that you would feel more comfortable with? Is it rates coming down? And I guess on that note, how far is your visibility extending right now as lead times have started to lengthen?

Derek D’Antilio, CFO

Yeah, sure. So two things. I think rates absolutely help. At the end of the day, an automotive is consumer-driven good, right? So rates absolutely help there. So rates come down. People will be more inclined to continue their build plans. People are more inclined to carry a little bit more inventory. But I don't see them spiking those inventories again to what they did a few years ago when there was sort of the golden screw and they're getting money from OEM. And even if it does happen, it's a one-time blip to people's pickup on their revenue. We do want it to be at healthy levels because it helps everyone manage their supply chains. In terms of the second part of your question, go back through the second part of your question again, Josh.

Josh, Analyst — TD Cowen

What triggers restocking, and are your customers comfortable where levels are?

Derek D’Antilio, CFO

So I don't know if they're comfortable where they are right now, right? Customers are still placing orders, not pervasively, but many customers are still placing orders within our lead time, right? And so we're telling them it's really 20 or really 22 weeks. The good news is our peers are saying the same thing. That hasn't triggered a restocking yet because they can still buy at brokers at a higher price. I think as that becomes more pervasive, it could trigger some restocking. I don't anticipate that being a massive reward.

Josh, Analyst — TD Cowen

Sorry, it was actually a three-parter, like a good sell-side analyst. It was how far out is visibility extended.

Derek D’Antilio, CFO

Yeah, so visibility is actually really good, right? One of the nice parts about automotive being, you know, give or take 70% of our business is you get design wins that go out five years, right? And so that's really, really helpful. We had record bookings in the March quarter. We have multiple quarters of backlog. That means booked orders. So that's really, really helpful. So on the auto side, it allows you to really plan. I would say that we're starting to get much better visibility from our industrial customers, our distributors, and in particular, our data center customers, which really didn't have a lot of visibility coming into this year and kind of caught us a bit off guard in a good way. We're getting much better visibility there because they're asking us to put capacity in place for us in testing and those sort of things. So I'm getting involved, approving testers, approving handlers. But to do that, we need the orders and we need the visibility. So it's much better than it was 12 months ago.

Josh, Analyst — TD Cowen

And then I guess on that note, you and your peers sort of flagged some volatility specifically in China. That's obviously become literally the most important global automotive market right now. What are you seeing from an order pattern perspective there? and anything we should think about as increasingly China auto mix shifts from local consumption to exports?

Derek D’Antilio, CFO

Yeah, so for us, China is 30% of our ship to revenue, right? And about half of that ends up getting re-exported back outside of China. It's the global manufacturers that manufacture in China. It's also the BYDs, the Geely, the Neos, the Chari that sell outside of China. And you're absolutely right. All of the production growth of auto in China for now and going forward and probably forever will be export-related, all the growth, right? That's good on the margins for companies like Allegro and Western Supplies. We have a great position in China. 90% of our China business is automotive, largely ADAS, largely EV. A lot of it's critical safety applications like electromechanical steering, electromechanical braking, things that have critical safety parameters that while local competitors might be able to beat us on price, they can't meet those standards, and those regulations are still pretty strict, right? That said, the export market helps a lot because as they're shipping product into Europe, into the United States, into Japan, that really helps to have Western components in those parts, and that's where us and our European competitors really thrive. Okay, and... Oh, sorry, Delina.

Jolene Hoover, Head of Investor Relations

I was just going to say, we commented in the last few earnings call that China Focus Auto, which is the XEV and ADAS, has actually led those design wins.

Josh, Analyst — TD Cowen

Okay, and then I guess, you know, on that note also, there's been perpetual concern about local competition in China. You guys have seemingly been immune from that. You also, a couple of years ago, went down a path of connecting with some local foundry partners. Can you maybe speak about the local competition specifically within China and how beneficial that manufacturing footprint has been?

Derek D’Antilio, CFO

Sure, and I wouldn't say we're immune to the competition in China. China's always been the most competitive market I've ever dealt with, and it always continues to be. The good news is you still win by having competitive specifications, ACIL-D, grade zero, auto safety specifications, and the regulations in China for whether it's emissions or safety are just as strict as the hour and anything else in the world. So that helps a lot, right? So we win on specifications. We're never going to win on price against Chinese competitors. I don't intend to win on price. In terms of the second part, having a supply chain in China, we're in the process of qualifying a way for fab in China. We just went live with a turnkey OSAT in China. In the fourth quarter, we're already shipping product from an OSAT that does probe, assembly, and test for us and ships already from China. We're a fabless company, so we have fabs in the United States, and Taiwan are our two biggest fabs, but we're bringing one up in China. That certainly helps, and I would say that this started four years ago, right? It takes many years to bring up a fab. It has never been a demand. It's been really nice to have in China, but it's also nice to have on the wafer side because the cost is better from a wafer. Everything we do is on 200-millimeter wafers, a little bit, we'll call it legacy technology, 0.18 microns, because you have to put high power through these things. And so the preponderance of those fabs are being built in China and the one we use in the United States. So that's been helpful.

Josh, Analyst — TD Cowen

Okay, last one on China auto, and then I promise we'll go back to the rest of the world. You know, your analog semiconductor neighbors in Massachusetts on their recent earnings call called out specifically that I think China or auto orders got a lot stronger at the end of their quarter. Did that comment surprise you? Is that sort of track with what you guys have been seeing just directionally through the first part of this year?

Derek D’Antilio, CFO

Yeah, it absolutely does. So in our March quarter, seasonally, China auto when China was down. Again, China's 90% auto for us. It was down with the shutdowns for Chinese New Year. It happens every year. But we did see an uptick in revenue in the March. We'll call it March within that quarter, right, similar to some of our neighbors in there. There was a pickup after Chinese New Year and Chinese revenue for us, yes.

Josh, Analyst — TD Cowen

Thank you. And so now actually into the content side. You know, at your analyst day recently, you highlighted sort of a growth algorithm for how we should think about you guys growing more than SAR. Can you walk through some of the key sockets that you're most excited about on both the sensing and power side, and maybe help us understand what's tied to ADAS, what's tied to EVs, et cetera?

Derek D’Antilio, CFO

So we've made a very purposed decision, both with our sales team, with our product development team, to focus on sort of two big markets within auto. Like I said, we've been serving auto for over 45 years, right? And a lot of that was the Western automotive manufacturers, traditional ICE, in-cabin safety, in-cabin comfort, LED lighting. We still do that. we still make money doing that. But the focus areas have been ADAS applications, things like electromechanical steering, electromechanical braking, where there's a lot of redundancy required for position sensing, current sensing, motor drivers. XCV is great, especially when you get to 400 volt batteries and 800 volt batteries with all the DC to DC conversion that happens from 800 to 448 all the way down to the 12 volt systems. Anytime you have those conversions, we have a lot of current sensors. We have the fastest current sensors on the market. And if you look at our auto business now, about 55% of our auto business in total is what we call focus. It's those two areas. Three years ago, it was 35%. So we're making a lot of inroads. That's the fastest-growing area of our automotive. We expect that to grow high teens from a TAM standpoint over the next several years. And so we're very excited about that piece of the auto. The other piece is the ICE piece of it. I would call that sort of a cash cow where we've had long-time customers. We continue to service those customers, especially the ones that are doing both.

Josh, Analyst — TD Cowen

Yeah, I think, you know, I always assumed that more of your content was historically tied to current sensing because of the magnetic sensing exposure. But it actually seems like a lot of that growth is still on the come. Can you maybe speak about, you know, where we are in those design cycles with current sensing exposure? And specifically, you know, you made an acquisition of Crocus a few years ago specifically to bolster your TMR sensing portfolio. You know, where are we in the integration of that into your roadmap and with your customers?

Derek D’Antilio, CFO

So I'll sort of start with the last piece. We bought this business that does TMR, tunnel magnetic resistance. It's kind of the next click of precision. Everything we do today is on Hall Effect technology. Everything the industry does largely is on Hall Effect technology. That's been around for 35 years. TMR is much more precise. Customers will pay a higher ASP for that in the right applications. The cost is pretty similar to develop it, so the margins are better in general for a current sensor. Some of those products that we've released, like the 10 megahertz current sensor that's used in data center, right now it's being sampled in data center, is a TMR product. We bought that company in Halloween on October of 2023, and now about 30% of the products in our magnetic sensing business, if you will, are being designed using TMR. So we expect by the end of the decade that a significant portion of our magnetic sensing revenue will come from TMR. The exciting part for us is customers pay more for it for the right applications. Not all of it will move to TMR, whatever the value proposition is. But there are about eight companies, we'll call it, in the Western world that does magnetic sensing. Like I said, we have 23%, 24% market share. Within TMR, there's only about three or four companies that do that. So the pool's a lot smaller. So we fully expect that our market share should be at least that number, if not significantly higher.

Josh, Analyst — TD Cowen

Maybe using that as a segue, so you have the rich legacy in magnetic sensing. But you also have, I think, a third of your business is power, ICs as well. That's a much larger but also a much more competitive market. Can you maybe walk through what's your right to win and differentiation in power? Is it the high-frequency switching that you're able to offer? Is it the auto-grade qualifications? What's the strategy, and how synergistic is the current sensing portfolio?

Derek D’Antilio, CFO

Yeah, part of it goes back to the history. We were a power company well before a magnetic sensing company, right? Magnetic sensing we've been doing since the 1990s, but power literally since the 1960s, which is kind of interesting. And so a lot of technology there, but the fundamental rights to win revolve around some of the auto-grade technology. technology, it revolves around being able to manage high power, right? So things that require high power usages and power conversions or step ups or step down without losing power, that's really where we shine. So if you think about 800 volt batteries being in an EV, making sure that you get the most mileage out of that car, the step down of the power throughout the process all the way out to the 12 volt systems, that's really where we shine. And the same thing applies to the data center and some of the same things apply to robotics going forward. And then when you layer in some of the newer technologies we've put in power. So really where we shine is we can spin motors very, very efficiently. Brushless DC motors, DC to DC conversion, step ups and step downs. And the most recent product is isolated gate drivers for driving high power to fast switching devices, whether it's gallium nitrate or silicon carbide.

Josh, Analyst — TD Cowen

And, you know, I think the isolated gate driver business is perhaps your highest single content socket that you have. You know, is that at the point, that was through an acquisition a few years ago also is that at the point where it's contributing meaningful revenue yet or how should

Derek D’Antilio, CFO

we think about that layering into your model it's not so we bought this technology about three years ago it was a technology at the time no revenue right now it's in the low single digits it's in a sampling for the for the gallium nitrate gate drivers in the data center it's a very exciting opportunity for us we took the gentleman who runs our power business and brought our power business to 40 percent of our business put him in charge of this isolated gate driver business it's really a startup within our business to run it a bit differently, but it's a really exciting opportunity for us. And the value proposition there really is, our isolated gate driver is about a third the size of our competitors. So when you're putting those on a board in a data center where space matters, or even in certain parts of the EV, space matters a lot, that's important. The power loss matters. So those kind of things really matter. And we're putting essentially three functions on one chip, into a monolithic chip in one package, compared to having multiple chips.

Josh, Analyst — TD Cowen

And I think, you know, you've highlighted GAN, but if I'm not mistaken, it's also applicable and works with silicon carbide or silicon high-voltage power as well, correct?

Derek D’Antilio, CFO

So we call it a high-voltage power business, right, and does all three of those things. The product that we're in sampling right now is with a GAN product that's actually getting design wins. The silicon carbide isolated gate driver is in development, expected to be released later this year, and the silicon high-power gate driver is already in the market.

Josh, Analyst — TD Cowen

Okay, let's switch gears to data center, which is the topic of the year, obviously. You haven't historically been thought of as a data center story because of all the auto exposure, but you've had a data center business for a while. Can you walk us through, I think it was 14% of revenue last quarter, what are the key sockets in applications where Allegro Microsystems is exposed to data center applications?

Derek D’Antilio, CFO

Sure, I'll provide some of the history. And Jaleen's been spending a lot of time with our product team, particularly on the data center side, and could articulate some of those things as well. But from a data center business standpoint, Allegro has traditionally sold to the data center largely just the DC fan, motor drivers. And that went through distribution. It peaked at about 10% of our revenue maybe three and a half years ago. Within that, we were shipping into inventory. That business went away for about two years as that inventory digested. Coming into FY26, data center was probably 2% of our total business. Exiting in the air, as Josh said, it was 14% of our business. It quadrupled with an FY26. That part's exciting. A lot of that was the motor drivers. The even more exciting part is now 18% of what we're shipping to data center is current sensors from managing the current that goes into the power racks, replacing resistors. Resistors need things that can dispense heat a lot better, manage power, measure current in real fast time to protect things downstream like GPUs and CPUs. That's an exciting part of our business. and then ultimately these gate drivers for the GAN in the data center. I don't know if you want to add anything, Julian, to that.

Jolene Hoover, Head of Investor Relations

Yeah, so we actually have designed in with a few data center customers today with our gate driver solution. And obviously, as you noted, a huge content opportunity going forward. So when you look at our data center opportunity today, it's about $150 content growing to $425. That growth is really driven by the transition and adoption of 48 and 800 volt technology. as well as continued adoption of our current sensor technology and the gate drivers.

Josh, Analyst — TD Cowen

Okay, and so how should we think about your exposure to air cooling versus liquid cooling? And I guess you mentioned how big is current sensing today, and is that the opportunity that could be the largest, or is it the gate driver side?

Derek D’Antilio, CFO

So why don't you start with the liquid cooling, Julie, and then we can talk a little bit about the current sensing.

Jolene Hoover, Head of Investor Relations

Sure, so the liquid cooling today is what we believe will be an incremental opportunity for us. So that leverages our motor driver technology. And what we've seen this year, for example, is we're actually seeing an expansion of the fan technology from just the racks into the power management. So the data centers have this insatiable need for cooling. So there's increased fan opportunity. We've actually, Mike has brought some toys to several of our investor meetings where we've got the fans. and there may be two-and-a-half-inch diameter for the racks, reducing to about half the size for the power management solutions.

Derek D’Antilio, CFO

And, Josh, to answer your second question, it was motor drivers for the past three years. This past quarter, current sensors were 18% of our data center business. It was zero at the beginning of the year. Absolutely the fastest part of our data center growth is in current sensors because that's all content gains. That's all replacing another technology that we just have a better product for. And there's some competitors, of course, but we're really getting a lot of traction there, especially with our... We have the fastest megahertz current sensors on the market. We have a Hall Effect one that does 5 megahertz. We have a TMR one that does 10 megahertz, so no one even comes close to that. And then the isolated gate drivers, like we said, haven't started shipping. They're in sampling. Those have opportunities to be much chunkier, larger sockets themselves. But in the short term and medium term, current sensors will be the biggest growth driver within the data center for us.

Josh, Analyst — TD Cowen

Okay, and maybe it doesn't matter because CPU growth is seemingly going to be quite high as well, but can you walk through, is your exposure in data center primarily on accelerated servers and AI racks, or is it CPU only racks, or is it mixed between

Derek D’Antilio, CFO

both? It's both, and really it's driven by it's not tied to any particular architecture, any particular company higher power equals more legal content for both the fans, and for current sensing, and for opportunities related gate drivers. Okay, and

Josh, Analyst — TD Cowen

you're primarily your customer engagements are primarily with ODMs, like are you at the point where you're engaging with downstream with hyperscale vendors as well generally speaking our customer

Derek D’Antilio, CFO

are the power power module manufacturers so the light ons the deltas the advanced energies similar to the thermal management companies a lot of them overlap actually that's our customer we might go up one level in terms of understanding the power architecture that's coming downstream but we're not designing asics for the gpu or the cpu manufacturer okay so moving to broader

Josh, Analyst — TD Cowen

industrial. That went through an inventory correction of its own. Is that sort of wrapped up and sort of, hopefully with the inventory correction behind us for you and your peers, what are the content opportunities within the broader industrial market that you're most excited about?

Jolene Hoover, Head of Investor Relations

So I'll touch on the automation robotics opportunity. Those sales, though nascent today, they're low single digit percentage of sales. They actually doubled in fiscal year 26. Most of that revenue today is in more households, you know, think of the Roomba, as well as Cobot's factory automation. But going forward, we actually see that content opportunity to be larger than our automotive. So that content, you know, in fact, think of the home bot at like a $5 content opportunity increasing to $55 for Cobot and about $150 for the humanoid robot. And that's an area where we are focusing our sales team to drive engagement that's critical at this time obviously targeting those companies that we believe will be they you know the highest runners but this will be an evolution as we go through this process so it's you know right now it's obviously the engagement they're going through prototyping next phases to develop you know solutions that are probably be in the you know hundreds to tens of thousands of units ultimately to the two hundreds of thousands and then millions of units. So we talked about on our last earnings call that we had a win in China, a couple wins that we called out, one of which was a 90 IC unit content opportunity. And that's important because the number of ICs in these wins is significant. And we have the technology today. It leverages our sensor technology, our position sensors, our current sensors, our drivers. And we do believe that our TMR sensors in particular would be of greater value, not only because of the level of precision involved, but their high efficiency, and the really small form factor, one millimeter square die. So when you're thinking about our longer term vision of really owning the robotic hand, and you've got really small joints, there's a lot of them, and you're packing a lot of content into each of those joints, that's an opportunity we're really excited about.

Derek D’Antilio, CFO

And this is another area that we really leverage our auto-grade relationships, our auto-grade technology, when you think about a lot of these companies, at least initially, that are doing production-level robotics, right, you know, take China out of the equation for a second, it's the Hyundai, Mobus, it's through Boston Dynamics, it's the Teslas, it's the Toyotas, right? It's these companies that we already have relationships with, they already have the reliability data, and of course, there's a whole host of companies in the West Coast that are non-related to auto that we're already engaged with, and the same thing in China.

Josh, Analyst — TD Cowen

Okay, and, you know, any timeline at which, you know, you would expect robotics to be a material portion of revenue? I know it gets talked about a lot by the whole industry, but nobody ever gives me any numbers on how much it actually contributes, so I'm going to try now.

Derek D’Antilio, CFO

So today, as Julian said, it's low single-digit millions of our product, right? But it's meaningful because it is factory automation, it is cobots, it is those kind of things, right? Humanoids is a minuscule piece of our revenue today. For us internally, both our business development teams and our product teams, it's not a question of if, it's just a when, right? Is it 2030? Is it 2031? It really doesn't matter. We have to be there. We have to get the wins today. We have to have those customer engagements today. we have to be ready to capture that with existing products and that's what's exciting about it's existing product families in many cases existing customers right so we'll be on those roadmaps and the products that are being designed today that are going to production today those won't ultimately be the 50,000 unit ones these are the beta versions and things like that so I think meaningful starts to get into 2030 2031 okay sounds a long way away but you have to be there today and the design wins you have to be there today in the samples with the reliability data with the customers to get that

Jolene Hoover, Head of Investor Relations

opportunity in a few years. I think to add to that is, you know, an accelerator would be a geography like China where it's, you know, the adoption and advancement of this technology is critical given the population decline. Conversely, I think people need to appreciate that there's a qualification process with, you know, advanced humanoid robotics that, you know, will take time to go through that evolution. So it's a push-pull factors, if you will. Okay, I'm going to make a

Josh, Analyst — TD Cowen

really hard pivot to gross margins now. This is Derek's favorite.

Derek D’Antilio, CFO

Higher is better.

Josh, Analyst — TD Cowen

Okay, let me write that down. So you guys obviously peaked in the high 50s during when pricing was peak and everyone was running at over 100% utilization rates. You've walked through some fall-through numbers, but could you maybe spend some time talking about how you expect to go from where you're at today to that mid-50% gross margin target you gave at the analyst day?

Derek D’Antilio, CFO

Sure. So our gross margins peaked for a year at 56% on a non-gap basis actually two quarters they hit 58% and that was that sort of the peak of the inventory cycle pricing cost structure was different you know over the last couple of years you know auto pricing has come back down our commodity pricing is quadrupled for example things like gold you know and so our gross and then utilization of course came way down the back end our gross margins troughed at about 46% on a non-gap basis that was the end of last fiscal year we exited this fiscal year at 50% so up over 400 basis point, so that's good. We guided Q1 to 50 to 51 percent. Our model is to get back to north of 55 percent, and really there are three big pieces of that. One is volume, so volume helps a lot. Our variable contribution margin is above 60 percent, so putting volume through our back-end facility provides more than 60 cents per dollar of revenue through the model, right? That helps a lot. The second piece really is improving that variable contribution margin, and there are sort of So multiple things happen there. One is we're going through a large gold to copper conversion on our wires on the packaging, right? And that's a significant, there was a 200 basis point headwind in FY26 alone. So we're going through that process. It takes time to qualify that. It doesn't all happen in one quarter. It'll happen over the next year or two. In addition, there were things like shrinking the die size, which is the biggest piece of our bill of material Julian talked about with TMR. They use a significantly smaller die, one millimeter squared by one millimeter squared. CFOs love those things because you get a significantly higher yield, more die per wafer. That helps a lot. Mix helps as you start to put more current sensors into the data center. So previously, data center was margin dilutive to our business because it was all motor drivers. As we're selling more current sensors, it's much closer to the fleet average. We expect that to exceed the fleet average moving to the back half of this year. And then as we put the isolated gate drivers out there. And then the last piece of it is continued factory efficiency, improving our overall equipment utilization from the mid-60s to close to 90%, really getting use out of that back-end facility. So there's multiple levers here sort of all happening at the same time. They're not necessarily linear, but I think we have a solid plan to really get back north of that mid-50s on gross margin

Josh, Analyst — TD Cowen

in the next couple of years. Okay, we're running out of time, so I'm going to ask my last two questions at once. First one, can you speak about what you're seeing in pricing here and now? Because there's a lot of attention on analog pricing you know passing on higher impact costs and pricing being more firm than it's been the last couple years and on that note also you guys are a bit unique in that you're a fabulous company in competing with many IDMs there's concerns about shortages again and do you feel like you have enough capacity secured to grow through some of the you know timelines in which robotics for

Derek D’Antilio, CFO

instance might be more meaningful yeah great question so on the pricing side we said it on on a call, we're increasing pricing, but it's not across the board, right? We've had these relationships with customers for, like I said, over 40 years. 70% of the business is auto, so you have to be much more surgical on price increases. In fact, with auto customers, you end up having productivity declines every year, but on our long tail of distribution customers, pricing increases are happening because of input costs. We also are doing surcharges for things like gold, fuel, those kind of things, so there's different flavors of price increases, whether it's expedite fees on shipping, those kind of things, so that's happening, and I think we'll balance that with market share gains. On the second piece, in terms of capacity, we feel like we have the capacity to handle the business we have today and in the near term and the foreseeable future. Bringing up these fabs in China helps a lot, particularly for automotive, but also for the robotics, right? And quite frankly, we have two fabs in Taiwan. We have one fab in the United States that does about a third of our wafers. They're doubling the size of their fab, not for this reason. It's part of an expanding project with some Chipsack funding. We have other fabs around the world that we're using. So frankly, for a company our size we might have too many fabs that's the bad news the good news is we'll

Josh, Analyst — TD Cowen

have the capacity going forward okay all right well we're out of time Derek Jolene thank you

Derek D’Antilio, CFO

so much for joining us again yeah thank you very much Josh appreciate it good luck to the Knicks