Thank you for standing by, and welcome to Allegro MicroSystems 3Q Fiscal 2021 Financial Results. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. And I would now like to hand the conference over to Katie Blye. Please go ahead.

Good evening and thank you for joining us today for Allegro third quarter results for fiscal year 2021. I'm joined today by Allegro's President and Chief Executive Officer, Ravi Vig; and Allegro's Chief Financial Officer, Paul Walsh. We will review our quarterly financial performance and provide a summary of our outlook. Our earnings release and the accompanying financial tables are available on the Investor Relations page of our website. This call is being webcasted, and a recording will be available on our IR page shortly. Please note that comments made during this conference call include forward-looking statements within the meaning of federal securities laws. These forward-looking statements include projections and other statements about future events that are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties that could cause actual results to vary materially from our projections. Please refer to the earnings press release we issued today and other documents filed by us with the SEC, including the risk factors discussed in detail in our final IPO prospectus filed on October 30, 2020. The Company assumes no obligation to update any forward-looking information prevented. The non-GAAP financial measures that are discussed today are not intended to replace will be a substitute for the presentation of Allegro's GAAP financial results and may be calculated differently than similar measures used by other companies. We are providing the supplemental information because it may enable investors to make meaningful comparisons of core operating results and more clearly highlight the results of our core ongoing operations. Reconciliation of GAAP to non-GAAP financial measures referenced during today's call can be found in our earnings press release, which has been posted to our IR page. I will now turn the call over to Allegro's President and CEO, Ravi Vig. Ravi?

Thank you, Katie, and good evening, everyone. We're pleased to report results well above expectations and a strong outlook for the March quarter. Demand momentum accelerated throughout fiscal Q3, resulting in $164.4 million of revenue, a record for our current business. Strong customer demand was driven in part by the end market recovery particularly in automotive, coupled with customer restocking. Non-GAAP gross margin was up nearly 200 basis points sequentially, and non-GAAP operating income was up approximately 38% sequentially. Non-GAAP diluted EPS came in at $0.13 per share ahead of our guidance. All considered, it was a great start in our first full quarter as a public company. I'm also pleased to report that we remain on track with the strategic objectives we have outlined. In the coming quarter, we expect to continue to benefit from these efforts and from the strong end market tailwinds within a tightening supply chain. With record backlog and bookings, we have extended visibility into the first half of fiscal '22. With that in mind, fourth quarter revenue is anticipated to increase again sequentially to a new record for the business to $167 million, plus or minus $2 million. Non-GAAP gross margin for fiscal Q4 is also anticipated to move upwards of 50% to 51%. And non-GAAP diluted EPS is expected to be in the range of $0.13 to $0.15. I'll now turn the call over to Paul Walsh for a detailed review of the financials. Paul?

Thank you, Ravi. Net revenue in fiscal Q3 of $164.4 million was up 20% sequentially and 21% compared to the same period last year for our core end markets. Demand surged to record levels across our end markets, but particularly in automotive. We saw bookings accelerate as the quarter progressed and backlog strengthened with extended order visibility into the first half of fiscal '22. Automotive revenue increased to 69% of our mix or $113.9 million, increasing 27% sequentially and 15% year-over-year. Our industrial revenue was also strong, increasing 9% sequentially to $23.7 million or 14% of total revenue, and was up 11% year-over-year. Industrial customer demand accelerated, and we continue to see very healthy backlog. Our other business was $26.9 million for the quarter or 16% of revenue. This was an increase of 5% sequentially. Despite meaningful growth across our top customers, we did not have any customers greater than 10% in Q3. GAAP gross margin for the quarter was 45.3%, up sequentially and compared to the year ago period. Our non-GAAP gross margin was 49.6%, which does not include adjustments for $1.2 million in expected future cost savings related to the closing of our AMTC manufacturing facility in Thailand, which totaled 0.7% of net sales. Non-GAAP gross margin adjustments include $4.7 million in mostly one-time IPO-related stock compensation charges, transfer pricing of $1.5 million for the Polar fiscal '21 commitment, $0.6 million of one-time costs associated with exiting our AMTC facility and $0.3 million of intangible asset amortization for Voxtel. The strong margin performance occurred despite a rapid acceleration in demand, highlighting the strength of our gross margin profile across all of our product lines. Gross margin improvements also reflect the results of our manufacturing efficiency initiatives, we just completed the relocation of all production from AMTC ahead of…

Thank you, Paul. Strong third quarter demand supported the early innings of the market recovery, has put us about a year ahead of our prior internal revenue expectations. As Paul mentioned, our operations team responded well to the rapidly increasing demand, and we were able to maintain good margins. Revenue is at new highs. We are raising our outlook, and we expect a year-over-year growth that our year-over-year over year growth will outperform market forecast in fiscal '22. Unique to Allegra will be the benefits of our manufacturing transformation that are expected to reduce our cost and improve our profitability while maintaining our supply flexibility in fiscal '22 and beyond. Coming back to the third quarter. Power IC products were up 8% sequentially and 25% year-over-year, representing 23% of the revenue. As you know, we are the market leader in magnetic sensor ICs, which represented 67% of revenue. Third quarter automotive strength helped drive 27% sequential magnetic sensor IC growth, and 19% year-over-year growth. Taking a closer look at our automotive end markets, our revenue was up 27% to $113.9 million. We believe that half of our growth reflects automotive production rates. Industry automotive production forecast increased by about $2 million during the quarter, and the consensus now is that about 23 million cars were produced. Based on our customer history and the relatively low inventories at customers coming into the quarter, we believe that the remainder of our sequential automotive revenue growth reflects market share gains and restocking in about equal measure. Our automotive customer order rates continue to be well ahead of car production suggestive of continued restocking into fiscal Q4. While the global recovery provides nice tailwinds, we have focused on long-term sustainable growth, and I'm happy to report that design wins increased over 60% sequentially in…

Thank you, Ravi. Operator, will you please review the question-and-answer instructions with our participants.

Thank you. [Operator Instructions] And your first question comes from the line of Gary Mobley from Wells Fargo. Your line is now open.

Thanks for taking my question. And let me extend my congratulations on a strong finish with calendar year. I wanted to start out by asking about gross margin. So Paul, you did a pretty good job of sort of walking us through the variance in the reported December quarter relative to gross margin guide and you're obviously expecting an improvement. But I was wondering if you can break down for us, what sort of capacity limitations you have with UMC? How that may be forcing you to take more than your purchase amendments with Polar and how that overall played out in the gross margin impact in the December quarter and into the March quarter? And then I have a follow-up.

Sure. Thanks, Gary. Yes, we - one of the drivers for gross margin in the quarter was the mix of wafers towards Polar. We actually consider ourselves fortunate to be able to have that as a as a safety valve, if you will. And we've indicated that in the coming quarters, we'll rely on a heavier mix from Polar. But long term, we're committed to continuing to expand at UMC and with other foundry partners as well. So, I think it's something that we can work through. We don't have any capacity limitations necessarily that will impede us in our near-term growth. So, we feel pretty good about it.

Okay. As a follow-up and related to the topic, I wanted to ask you guys about your qualification in your eventual transition of manufacturing at TSMC. Could you give us some sort of update there?

So Paul, I'll take that.

Sure.

So our TSMC activity has been ongoing. We expect to have revenue from that activity in our next fiscal year in FY '22, getting wafers to supply-demand in the second half, and we expect it to ramp up into fiscal '23. This is as expected, given the long qualification cycles that we have in automotive, we had projected this particular stock rate.

Next question is from Mark Lipacis with Jefferies. Your line is now open.

So first question on the backlog. So it sounds like the backlog went up a lot. Paul, can you talk about, to the extent how the profile of that backlog has changed. Maybe like from 90 days ago, to what extent do you have a backlog visibility into -- that goes into the June quarter, two quarters out instead of just the first quarter? And then -- and I think I'm hoping that you can help me reconcile as the backlog is up and there's not -- doesn't -- it's not obvious that there's a lot of constraints from your suppliers, like you're guiding for about 2% growth at the midpoint. And I'm wondering if you could just help me about the difference reconciling strong backlog, growth in the backlog and lower sequential growth outlook? Thanks.

Thank you, Mark. Yes, in ordinary times, we have very good visibility into our backlog. We continue to have excellent visibility into what we've seen. Certainly, the demand has accelerated, like everyone has seen. So, we have good visibility, certainly, and it gives us great confidence in the current quarter, but we get visibility into the June quarter as well. So, I think it gives us a lot of confidence, and it certainly helps with our planning going forward.

Okay. Great. That's helpful. And a lot of times when you get into demand environments like this, people start worrying about double ordering and building inventory, safety stocks are pretty high. Can you give us a sense what kind of visibility do you have into your products once you ship them? Do you have visibility all the way to the production line? Does it end of before that? And how you've been through the cycles before, how do you kind of manage or assess when you get to a point where you get concerned about the risk of double ordering and inventories building up out there? That's all I had.

Sure. Well, I mean, our ordering patterns, our demand patterns and backlog is something we monitor every week. And that's just been a discipline we've had for a long time. The visibility that we have in most do have is we have great visibility into the distribution channel. And as we alluded to earlier in the call, those inventories are quite lean. And so -- but beyond that into the non-distribution level of customers, I think it's a different the visibility is certainly different. I -- and I would probably ask Ravi for -- if you want to shed any color on what we would see there from that from that channel?

Yes. I think, as Paul said, the -- we have been monitoring our customers. What we know is that we are on -- in constant communication with many of our customers, given the rapid acceleration of the backlog, and we've been trying to monitor the demand signals. We do know that there is a substantial end customer pull at this point. There is substantial restocking of the end customer, but also their production rates have been increasing. So, it really is a blend. But I think as we could extract that in times like this, we've all been through the semiconductor cycles. And in times like this, we do have the risks of backlog of actually our shipments getting ahead of themselves. So we monitor this very carefully, and we are very cautious in making sure that to the best of our ability that customers are not getting ahead in terms of their order patterns.

Your next question is from Blayne Curtis of Barclays. Your line is now open.

Just kind of curious, it's kind of gross margins and inventories. Inventories came down, obviously, you're trying to manage -- I'm assuming some mixtures Polar, obviously, it's a headwind to gross margin. So I'm just kind of curious how you're thinking about managing the inventories back up? And then just a little color as to the improvement you're seeing in the March quarter? And then kind of just if you could help us a little bit more with the trajectory, you get back to some more normalized levels, but can you just give a little more granularity on the timing of when this Polar mix could come off? And when -- if you could, get some better allocations that you would see?

Sure. Blayne, I'll take that. So yes, inventory came down. It really wasn't a surprise given the acceleration in demand and revenue. We're very focused on ensuring that we have the appropriate levels of inventory. And so, we continue to look at that both for the March quarter and beyond. And both from a capacity perspective with UMC, but also with being able to manage to fill anything we might need from Polar, as we alluded to. Long term, the strategy and as to when that may happen when we would roll off Polar, it's a little unclear at the moment just because of the of the demand environment, but it's not a long-term strategic goal to -- in fact, our long-term strategic goal is to wind -- continue to wind Polar down, which would create a significant a sustainable tailwind on gross margin long term.

Okay. And then I do want to ask you -- I know it's a small part of the business, but Photonics actually was almost the last two quarters, a little under $1 million. So just any comments on the -- it seems like it's coming in a bit better than at least what I had drivers of Photonics and kind of any outlook? I know it's a small segment, but it seems like it's tracking a bit better versus what I had.

Yes. I think Photonics is a segment where, at this point, it's really in a reinvestment phase. So, we are focused on product development and re-architecting that business to be more applicable to automotive LIDAR. As we've said in the past, our real metrics for this particular business will come down to product releases and customer engagements in the automotive front. Yes, we have small revenue, but our real revenue is going to come from. And our real focus is on the automotive LIDAR, which we expect to start progressing in terms of products and design wins over the next couple of quarters.

And your next question from John Pitzer of Credit Suisse. Your line is now open.

Congratulations on solid results. Paul, I wanted to go back and just revisit the fiscal third quarter gross margins to make sure. I understand the delta that's going on just relative to where the Street was versus where you reported, was most of it the 70 bps from the closure? And if that's it, why couldn't you recognize that in the December quarter? Or is this all being driven by incremental costs from things like Polar?

Good question, John. Basically, when I think of the revenue guidance range, like we anticipate having this amount to 70 bps or thereabouts as we entered the quarter, and it was part of what I would characterize as our guidance range of 50 to 51 back November. Without that, I was guiding towards 50%. So with 49.6%, we were quite close to the 50s. And the reason we can't really include it because it's viewed much more as more as a pro forma adjustment rather than a non-GAAP adjustment. That said, we don't -- I mean, with AMTC, the Thailand facility being essentially complete with production and in the wind down phase, we really won't have that going forward.

So effectively, the fiscal fourth quarter gross margin guidance includes the benefit from the Thailand closure.

Yes, exactly. Yes. That's the way in. We should see some benefit. We're in the wind down phase, and you know how those things are, there's a little bit of ramp-up, but we should be seeing that.

And then my second question for Ravi. Just on the auto side, you talked about kind of half of the strength you think being restocking. I'm just kind of curious, I think this is the first time that I can remember where major auto OEMs are being forced to shutter capacity because they can't get semiconductors, which tells you both how cyclically strong things are, but perhaps more importantly, how much more structurally important ships are to building cars. I'm kind of curious, do you think this will change how the auto guys view inventory? And will they just hold structurally more inventory? And especially given that your cost side of the equation is moving up, how do you think about pricing vis-à-vis your rising cost and tight supply right now?

Yes. So, I think we're already seeing the impact of the tightening of the belt buckles and the part of the automotive supply chain in the COVID quarters. And I think inventories got down to extraordinarily low levels. I think this was a trend actually that started in the prior year. So, we came into this year with extraordinarily low inventory levels, and we continued through the COVID quarters with where inventory kept declining. And no one forecasted the recovery, this rebound in automotive. And this large recovery has completely depleted or it has been depleting the supply chain, the semi-supply chain. And as you've rightly stated that semis are becoming more and more critical to the operation of vehicles, and what we're seeing now, I think we're seeing the backlog trends change as we speak. We're seeing our visibilities go out a couple of quarters, maybe sometimes or more, which is something, which is quite unusual for us. So, I think there is something going on in the automotive supply -- from the part of our automotive customers, where they are giving us bigger visibility. And I think they are trying to address this shortfall by increasing their restocking. It doesn't really apply to us. But what you see is that the high end processors are competing against the trends or the demand is created by cellular and 5G. And I think the automotive customers are ending up recognizing this. I'm sorry, what was the second part of your question?

Sort of your pricing philosophy right now, can you take pricing up to cover cost increases? Can you take it up beyond that? How are you trying to manage incremental costs with long-term customer relations?

Yes. So, typically, we are not transactional both with our suppliers or with our customers. What that means is that we're not a commodity company, and we don't commoditize either our purchasing or selling. So, we have long-term agreements with our suppliers at least our critical suppliers in terms of pricing, which we expect will help us whether this there's constraints that everybody -- that a lot of companies are seeing. But on the other hand, we also have agreements with our customers that we look at. And with situations occur that are out of our control, we do have conversations with customers on pricing. We are addressing pricing in a limited fashion right now, while we continue to monitor the market. We continue to monitor the supply chain and continue to monitor the supply chain cost. So, yes, it is a conversation that we're having with our customers, with some of our customers.

And next question from Srinivas Pajjuri of SMBC. Your line is now open.

And congrats on being a public company and solid execution. Ravi, I just want to go back to your comment about design wins. I think you mentioned your design news are up about 80% or so. And you also said that your ICE business is up double digits, which is a little bit surprising to me. So if you could talk about -- give us a bit more color on the design win pipeline and where you're winning these designs? And if these are for ICE versus xEV and ADAS, and also, I think in the past, you said you were optimistic about improving gross margins with the new products. If you could talk about if these new design wins are going to drive any incremental margin opportunity?

Yes. So in terms of design wins, we were up 60% Q-over-Q. And the bulk of those design wins were in our xEV or ADAS areas. And when I say xEV, it could be hybrid electric or battery electric. And some of these design wins are impactful. We expect that they will actually have meaningful revenue impact starting this particular quarter and accelerating beyond so -- and similar to the ADAS wins that we're having. Typically, our xEV and ADAS business is our emerging business and has higher margins than our ICE business, which is more mature. So, we are really happy about this trend that we're seeing where our xEV and ADAS products are being deemed as best-in-class and being picked up by market-leading customers. And this is worldwide. We're seeing it in Japan. We're seeing it in Korea. We're seeing it in Europe. So, the second part of your question was on ICE. So the ICE quarter-over-quarter growth is really representative of the bounce back in car production and the restocking that's going on right now. It's not really a content growth at this point.

Got it. And then one for Paul. Paul, gross margin, a lot of questions have been asked on the topic. But if you look beyond the fiscal Q4, as we look out to the next fiscal year, can you talk about the puts and takes of gross margin? I guess what I'm trying to get is if the benefits related to the Thailand factory are fully baked in fiscal fourth quarter. You still have any additional benefits coming in, in June and beyond? And then if there are any other drivers beyond the next fiscal -- I mean, next quarter?

Sure. Srini. Yes, as Thailand rolls off and we become basically a single back end manufacturing facility in fiscal '22, we expect to see incremental improvements throughout the year, certainly. We're -- so that's a strong tailwind. And the Polar wafer mix is something of a short-term tailwind -- headwind that offsets that. And I think as we go through like many of our peers, as we look at different areas where costs may be rising, we're looking at how we offset those. And so and we also anticipate just certain efficiencies that would help throughout the next fiscal year.

Next question is from Vijay Rakesh of Mizuho. Your line is now open.

Hi, Ravi and Paul, congrats on a good 2020. It's a question on your autos. When you look at the combustion engine ICE versus EV, wondering what the split was of that in auto in September and how it trended in December? Is the mix shift significantly or how the shift moved?

Yes. So Vijay, as we've spoken before, ICE dominates the market in terms of car production and car volumes. So it has a much larger established base. EV is an emerging segment, rapidly growing. We are extraordinarily excited about it, but it's still coming off a small car production base. So the best thing I can tell you is that our xEV business grew 57% year-over-year, which for the quarter. So it's talking about extraordinarily strong momentum. We are seeing rapid acceleration in the adoption of our products in this particular area. We're very excited about some of the new products that we've released, and we will continue to focus our R&D in this particular area.

Got it. And then look at the December quarter, it looks like autos I think you said grew 15% year-on-year. EBITDA for electrical LVP grew 2% year-on-year. How would you expect -- as you go forward, any thoughts on how investors should be looking at the outperformance versus LVP?

Yes, we were looking at this data ourselves. And what is always difficult in as a semiconductor supplier is that our numbers in terms of the clear multiplicity of LVP, they get modified or modulated by supply chain strategies on our customers. So inventory bills tend to boost things up and inventory declines or burn offs tend to pull things down. So in 2019 calendar year, it was a very large pullback in automotive, especially in the analog and sensor space. And a lot of it was the result of inventory pullback. So, some of the data might look a little larger-than-expected because of inventory pullbacks, but we are seeing content growth. I mean, it is -- just, for example, my xEV statistic, it's a wonderful statement on how we see our things growing. We're seeing growth in ADAS. Again, that's a content story for us. So we do expect to continue to outperform the LVP market. Obviously, the auto production market statistics.

And next question from Quinn Bolton of Needham & Company. Your line is now open.

Hi, Ravi and Paul, congratulations on the nice revenue and strong backlog. Wanted to ask, Ravi, I think you mentioned in the script that auto production is back to 23 million units in the fourth quarter. If I annualize that, it looks like we're kind of back to pre-COVID levels. Wondering, as you look forward into March and June, do you expect some of the semiconductor shortages that are pretty well known? Does that take the auto production down for a couple of quarters until the supply chain can work through those issues? Just wondering if you had any thoughts on kind of where production goes the next couple of quarters?

Yes. I mean, it's a good question. We follow IHS and LMC, and we use them. We believe that they're probably a little smarter than we are in projecting automotive production. The expectation for this coming year is still running between $85 million and $88 million. Given that we ended last quarter with a $23 million vehicle quarter, they're projecting a little bit of flattening, actually at the projection flattening in terms of the production rates. We're seeing the demand at this point. The auto customers are wanting every product that we can -- every unit that we can ship at this point. So the demand is strong. We see the visibility out in the next couple of quarters. It's a unique situation right now where the backlog extends is giving us extraordinary visibility beyond our 90-day typical visibility that we have. So it's looking strong for now. I think there's -- it is a combination of -- for us, a content story that we've got content increasing. It's a combination of some restocking that I believe that's going on. And I don't believe it's an LDP growth story. So it's going to be either flat or just mildly declining, but not of any real significance.

Great. And then the follow-up question I had is you mentioned the restocking activity, and it sounds like we've gotten down to very low levels through the supply chain here in the second half of 2020. From your experience going through past auto cycles, how long does that restocking activity typically play out? Is that a two-to four-quarter kind of phenomenon? Does it come back quicker? Or just any sense on how long that restocking could -- over how many quarters do you think that plays out?

Yes. Well, it's interesting, but I'm not sure that history really applies to this because I think with the increased reliance on semiconductors, I think we may be seeing a change in the near term strategy, near to midterm strategy on automotive customers. They may be looking to have higher levels of inventory at this point just to protect themselves against the supply constraints that they're seeing today. I really don't have a better answer than that. So we're just going to have to wait it out. We're going to have to see how it goes. We don't see it pulling back much throughout this year. We see continued -- we see that our fiscal '22 will be strong. So we're pretty excited about that. And we're pretty happy about the visibility we have.

And the last question from Mark Lipacis of Jefferies. Your line is now open.

Thanks for working me back into the queue. So I had a question on the industrial markets. I know when you were doing the roadshows, this is seemed to be like a greenfield opportunity, largely a greenfield opportunity. And you're expecting very healthy growth in that market. Can you just remind us in this market, to what extent are you're taking chips that you had originally designed for the automotive market and just opportunistically finding opportunities for them in the industrial market versus designing products from scratch for this market? And can you talk a little bit about the sales cycle, the sales process here in industrial versus auto? Is it a shorter -- should we think about a shorter sales process there?

Yes. So, yes, it's a great question. Our Industrial business is actually a mix of both targeted design products as well as a leverage of products that apply very well across the automotive and industrial spaces. So for example, our current sensors that we do for automotive, they have similar types of requirements in the industrial space. They are in the solar inverters as well as in the HEV inverters in vehicles. So, there is some synergy, there's more synergy than we would expect in our electrification product portfolio. There's also more synergy that we would expect in our motion control product portfolio. But we are particularly proud of the activities that we've done in data center where we've developed and released a family of Quiet motion fan drivers that include embedded algorithms and address the three-Phase plan cooling leads for data centers and service. And this particular product line is growing dramatically. It is up substantially year-over-year. I think it's almost up 200%. And it speaks to both the increased needs of data centers, including needs of data centers, but it also speaks to the adoption of our technology and how well it's been targeting this particular market space. So it's a blend. We see both types of activities. Our 48-volt automotive activities line up very well with the 48-volt industrial activity. So, our wafer technologies lined up very well. We do not work very deeply in the 5-volt and sub-5 volt levels. So, there is a lot of synergy over there. The design cycles certainly are quicker. And what I would say is that once you get designed into a platform at one of these large industrial customers, the selling cycle, then all of a sudden becomes very quick when you win a new project on that same platform, the ramps happen very quickly. We sometimes get very little notice in this particular space. Katie?

Great. All operator, I think that is our last call or last question. So thank you all for joining us today.

And I just want to thank everyone in our first earnings Q&A session as a public company, we're very excited, and we talked a lot today about bookings and our visibility, and it's -- we feel fortunate that this is where we are and having this in our initial launch as a public company. So, it's very exciting for us, and we look forward to speaking with you as soon.

And thank you, Paul. And I just wanted to wrap up. I wanted to second Paul's comments. It is an exciting journey that we've been on. And we're particularly proud of the quarter we've had. We're particularly proud of the visibility we have into the next year, both on the top line as well as in gross margin and the continued initiatives that we have that hopefully help us deliver good quarters in the future, good and great quarters in the future. Thank you all for attending, and have a great evening.

Ladies and gentlemen, this concludes today's conference. Thank you everyone. You may now disconnect.