Allegro Microsystems Inc. Stock

Good morning, and welcome to Allegro MicroSystems First Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Thank you, Sarah. Good morning, and thank you for joining us today to discuss Allegro's first fiscal quarter 2027 results. I'm joined today by Allegro's President and Chief Executive Officer, Mike Doogue; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our first quarter 2027 financial results and share our second quarter outlook. We will follow our prepared remarks with a Q&A session.

Today's call includes remarks about future expectations, plans and prospects, which are forward-looking statements. Such statements are based on current expectations and assumptions as of today's date and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated or projected on today's call. The company assumes no obligation to update these statements, except as required by law. For a discussion of these risks and uncertainties, please refer to today's press release and the risk factors contained in our periodic SEC filings.

Additionally, we will refer to non-GAAP financial measures during today's call. Today's earnings press release, which is available on the Investor Relations page of our website at www.allegromicro.com, contains important information about our non-GAAP financial presentation and also includes reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures.

This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly.

It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Doogue. Mike?

Thank you very much, Jalene, and good morning. Thank you all for joining our first quarter 2027 earnings call. We began fiscal 2027 with continued strong momentum, delivering our sixth consecutive quarter of sequential sales growth.

First quarter sales were $259 million, above the high end of our guidance range and representing a 27% increase year-over-year. First quarter EPS was $0.23, increasing more than 2.5x over Q1 of fiscal 2026. Before Derek takes you through the financials in detail, I want to spend a few minutes on the business dynamics driving Allegro's growth.

Our forward demand signals strengthened again this quarter. Bookings increased for the seventh consecutive quarter and backlog continued to expand. Allegro's growth is increasingly fueled by the intersection of our technology with the defining megatrends of AI, electrification and automation. This is particularly evident in our Industrial and Other business, where data center led first quarter growth, increasing 32% sequentially to establish a new quarterly record at 17% of total sales.

Within data center, current sensors continue to emerge as a meaningful new growth pillar, increasing to 22% of first quarter data center sales. We are seeing accelerating customer adoption of our current sensors, which improve efficiency and system power density throughout the data center. Consistent with our expectations, current sensor growth rates are outpacing our motor driver business, which itself remains strong as fans are adopted more broadly in power supplies. This proven momentum across both our power and sensor ICs gives us confidence that fiscal 2027 data center sales will more than double over fiscal 2026.

Looking forward, we remain encouraged by the significant increase in Allegro's content in next-generation AI servers. There is a growing need for high-speed current sensors, intelligent fan driver ICs and an outsized opportunity for isolated gate drivers throughout the data center. This creates a dynamic where rising server power multiplies our content far beyond the simple rack count growth. That expansion is showing up directly in our sales pipeline with data center again leading first quarter industrial design wins and with current sensor design wins surpassing motor drivers. For example, this quarter, we secured design wins for multiple important programs using our market-leading 5 megahertz current sensors, including a high-volume, high-voltage DC power supply with a leading provider. Within the quarter, we also secured multiple programs using our differentiated TMR current sensors in data center power supplies.

Turning to automation and robotics. We continue to see increasing adoption of our sensor and power solutions in robotics applications. Importantly, we are winning in robotics today with our existing technology. The same precise high-resolution sensing and robust power products that have made Allegro a leader in advanced automotive motion control are exactly what robotics designers need now.

Our decades of automotive safety heritage give us a distinct advantage, proven silicon, established high-performance motor control and proven quality at scale. Engaging with key robotics customers has been a top priority. My recent customer visits in North America and China have further confirmed what we already knew, that robotic joints pose the same fundamental safety-relevant motor control challenges that we solve every day in advanced steering and braking applications in cars.

This quarter, we secured current sensor wins with large Chinese humanoid robot OEMs. We also secured a large design win with a prominent North American humanoid robotics OEM that is using our inductive position sensors in robotics joints. These wins reinforce our expectation that robotics and automation will contribute 3% to 4% of our FY '27 sales. And the long-term trajectory is even more compelling as humanoid robots incorporate more joints, actuators and safety critical motion control. We estimate our addressable content will exceed $150 per humanoid by 2030, surpassing our projected automotive content per vehicle. By securing these foundational sockets today, we are building a multiyear sales pipeline that we expect to become a meaningful growth vector for Allegro as the market scales towards the end of the decade.

Turning now to Automotive. First quarter Automotive sales grew 15% year-over-year. This outpaces our long-term target of greater than 10% growth, which is built on our ability to outgrow SAAR by 7% to 10% through content and share gains. Our content per vehicle is expanding as the industry transitions toward electrified powertrains and advanced safety systems. We see a clear path from roughly $40 of Allegro content in legacy ICE vehicles to upwards of $100 in next-generation battery electric vehicles.

Within Automotive focused auto, which includes xEV and ADAS, led first quarter sequential growth. Our content-driven growth is validated by broad-based geographically diverse design wins led by China, Korea and APAC. First quarter auto design wins were up 30% year-over-year. ADAS wins were led by electronic power steering and emerging electromechanical braking applications. High-voltage traction inverters and onboard chargers continue to lead our xEV wins. Let me now give you just a few examples of impactful design wins.

In Korea, we secured several electronic power steering wins across 2 leading OEMs. These wins included Allegro current and position sensors, motor drivers and high-performance power solutions, reflecting the breadth of our sensing and power portfolio and rising content per system. Our current sensors were selected for a sizable win with a top Japanese OEM for a hybrid vehicle traction inverter, where our market-leading current sensors are driving share gains.

In China, our motor drivers, high-performance PMICs and position sensors are gaining share in 12- and 48-volt electromechanical braking systems with both global and local Tier 1s. And finally, we won our first major TMR angle sensor programs for ADAS steering motors with leading China OEMs. This further demonstrates the share gain potential of our market-leading TMR technology.

Our technology leadership continues to translate into broad-based design win momentum. This is fueling our content expansion strategy across xEV, ADAS, data center and robotics, positioning us to capture outsized growth in a large and expanding SAM. We remain confident in our ability to deliver target growth rates in auto and industrial. And in fiscal Q2, we expect both end markets to deliver mid-single-digit sequential growth.

I'll now turn the call over to Derek to provide additional color on our financial performance as well as our second quarter outlook.

Thank you, Mike, and good morning, everyone. Starting with our first quarter results. Sales were $259 million and non-GAAP earnings per share were $0.23. As a percentage of sales, gross margin was 51.1%, operating margin was 19.4% and adjusted EBITDA was 23.9%.

Total Q1 sales increased by 7% sequentially and 27% year-over-year. Sales to our automotive customers increased by 1% quarter-over-quarter to $165 million and 15% year-over-year. Focus auto sales, including xEV and ADAS increased by 3% sequentially and 11% over Q1 of '26. These results reflect growing lead time orders within lead time orders not able to ship in this quarter.

Auto demand from our customers continues to be really strong. As Mike mentioned, auto design wins were up 30% year-over-year, and auto bookings were also up 30% year-over-year and up high single digits sequentially.

Industrial and Other sales increased by 18% sequentially to $94 million and by 59% over Q1 of FY '26, led by continued strength in data center to record levels. Sales to our data center customers were 17% of Q1 sales, up from 14% in Q4 and 10% in Q3 of FY '26. And as Mike mentioned, sensor solutions were now 22% of our Q1 data center sales, increasing 66% sequentially. This has also driven our data center product margins to the mid-50s.

From a product perspective, magnetic sensor sales increased by 6% sequentially to $150 million and by 16% year-over-year. Sales of our power products increased by 7% sequentially to $109 million and by 47% over the prior year quarter. Sales by geography on a ship-to basis were as follows: 32% of sales in what we term rest of Asia, which is essentially Korea, Taiwan and India, 25% of sales in China, 17% in Japan and 13% of sales in both the Americas and Europe.

Now turning to Q1 profitability. Gross margin was 51.1%, up from 50% in Q4 and gross margins have improved by 290 basis points from 48.2% in Q1 of fiscal '26. The improvements were driven by operating leverage, product mix and to an early and lesser extent, recent pricing actions. In addition to outgrowing our target markets, operational excellence and gross margin improvement remain top priorities. While operating leverage is a significant factor contributing to gross margin improvement, we continue to drive factory efficiencies, work through product bill of material transitions, including gold to copper wire bonding and have taken selective price actions. Collectively, these efforts provide a clear path to our target gross margin of 55% and beyond.

Operating expenses were $82 million and declined by $2 million sequentially, largely due to the reset of annual incentive compensation plans at the start of our new fiscal year. Operating margin was 19.4% of sales compared to 15.6% in Q4 and an increase of 830 basis points compared to 11.1% in Q1 of fiscal '26.

The effective tax rate for the quarter was 9.7%. Interest expense was $4 million. The first quarter diluted share count was 188 million shares and net income was $42 million or $0.23 per diluted share. EPS increased by 35% sequentially and 156% over the year ago quarter on sales increases of 7% and 27%, demonstrating the significant operating leverage in our business model.

Moving to the balance sheet and cash flow. We ended Q1 with total cash of $170 million. Q1 cash flow from operations was $22 million, CapEx was $8 million and free cash flow was $14 million. We ended Q1 with term debt of $285 million and net debt of $115 million. From a working capital perspective, first quarter DSO was 35 days and inventory days were 128, both consistent with Q4.

Finally, I'll now turn to our Q2 fiscal 2027 outlook. We expect second quarter sales to be in the range of $265 million to $275 million. At the midpoint of this range, it equates to a 26% year-over-year increase. Additionally, we expect the following all on a non-GAAP basis. Gross margin to be between 50.75% and 51.75%. Operating expenses are expected to be $84.5 million, plus or minus $1 million, and the sequential increase reflects targeted investments in R&D, including in potentially disruptive technologies and higher variable compensation estimates for the year.

Interest expense is projected to be $4 million, and we expect our non-GAAP tax rate to be approximately 10%. We estimate that our weighted average diluted share count will be 188 million shares. And as a result, we expect non-GAAP EPS to be between $0.23 and $0.26 per share, with the midpoint of this range implying an 88% year-over-year increase.

Now I'll turn the call back over to Jalene for your questions.

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 line up with you. We will attend Needham's Seventh Annual Virtual Semiconductor & SemiCap Conference on August 19; Jefferies Semiconductor, IT Hardware & Communications Technology Conference on August 25 and 26 in Chicago; Wolfe Research's TMT Conference on September 10 in San Francisco; and finally, StoneX's 13th Annual TMT Conference on September 17, which we will attend virtually.

We will now open the call for your questions. Sarah, please review the Q&A instruction.

[Operator Instructions] Our first question comes from Joe Quatrochi with Wells Fargo.

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

Yes. Thank you, Joe. So to start, we continue to feel we have a great data center story, growing market. We have strong content growth. And the signals that we're seeing from customers show continued signs of strength. And to remind everyone, when we look at our dollar content evolution going from $150 all the way up to $425 we're really encouraged by the fact that 2/3 of that $425 of content per rack are coming from the fan drivers and the current sensors. We're seeing very strong momentum from current sensors themselves, as we discussed in the prepared remarks. But we continue to see growth in the data center, and that growth is reflected into the mid-single-digit growth number we gave for FQ2.

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

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

Yes, sure. So most of what we're seeing, we have a good strategy to have not only a geo-diverse supply chain, but with enough capacity to grow. When you have in lead time orders, it ends up being the back end where you have constraints. And we did have plans and executed those plans to expand capacity on the back end. And that we continue to have back-end equipment rolling on each and every quarter.

Our next question will be from Chris Caso with Wolfe Research.

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

Yes, Chris, thank you. This is Derek. So as we said in our call at the end of April, you're absolutely right. The majority of our auto customer contracts begin in the beginning of the calendar year. And as is normal, we saw low single-digit declines in majority of those auto customer contracts. Like many in the industry, we're seeing inflationary headwinds from commodity costs and other costs.

So we are taking selective price actions that really began in earnest here at the end of our first quarter, largely in the distribution channel. So very little bit of that pricing benefit was in Q1. The slight beat on gross margin in Q1 really had to do with positive mix, and that also had a slight beat on the revenue in terms of having the long tail of distribution and general industrial sales with higher gross margins. As we move into the back half of this year, Q3 and Q4, we expect our pricing actions that we're taking now to be more impactful and beneficial to gross margins.

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

Yes. So the current sensors do have a higher gross margin profile than the fan drivers. And from a growth rate perspective, I won't put a hard number on it, but we have multiple positive dynamics going on here. We know that the power levels consumed by the data centers are increasing. And these current sensors are used in power supplies. So to the extent that power levels go up, the need for current sensors goes up as well.

We have an additional tailwind here because we are gaining share in the market as well. The traditional solution in these power supplies might be a transformer or an isolated amplifier. But because of Allegro's innovations, because of our TMR technology, we were able to make these small form factor current sensors with very high bandwidth, very high speed capability, and that's why we're taking share in the space. So we're confident that it will be an attractive growth rate, but we're not putting a number to that rate at this time.

And Chris, I mentioned on the call here that our gross margins now in the data center business are now in the mid-50s as a result of current sensors now being 22% of that business.

Our next question is with Tom O'Malley from Barclays.

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

Thanks, Tom. So we're feeling very good about our auto business. We said in the prepared remarks, we believe we can achieve our model of double-digit growth, growing 7% to 10% above SAAR. And there's many reasons for that. One of those reasons, just to remind everyone, our xEV and ADAS SAM, it grows at a CAGR of about 18%, layer some more good numbers onto that, which Derek and I covered in the prepared remarks, but with FQ1 sales up 15% year-over-year, FQ1 bookings up 30% and FQ1 design wins up 30%. We're seeing momentum.

The thing that I always like to check, I've been on the road a bunch. I was in Europe, North America, Japan and China recently. And as we spoke to customers, our dollar content growth story is very much alive and well. I was able to meet with one of the Tier 1s out there that was first to market with electromechanical braking systems. They're shipping in production, very high dollar content increase for Allegro.

I was in China talking to an inverter manufacturer. Our market share with that very sizable customer in the Chinese market has increased significantly over the last few quarters. So we continue to see signs of positivity in auto, and we're confident we can deliver our growth rate.

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

Yes, sure. We look at all kinds of data center statistics and one of them being CapEx spend, which still for calendar year 2026, you can find quite a range on that number. But generally, you see numbers close to 80% year-over-year growth in CapEx spending. If that were to flex up or down, our provided number would flex up or down. Really, we've been securing tremendous design wins with short time to market. It's driving, like we said, the more than doubling within the year. And as we go through the quarters, we'll give a little bit more color, but the things that would drive it would be CapEx spend and some of the design win activity we have in the funnel.

Our next question will be from Vijay Rakesh with Mizuho.

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

Thanks, Vijay. This is Mike. So yes, I'll use the same numbers I already mentioned, but it's good to reground ourselves. So in older data racks, we had $150 of content, $425 of theoretical content in AI-forward racks. And like I said, 2/3 of that $425 is coming from our current sensors and our fan drivers. What I didn't say earlier, when you look to the future, we believe there's hundreds of dollars more in content that could be added to the $425 as we layer in the isolated gate drivers, 800-volt topologies.

And we're also investing in some new sensor areas that would add dollar content to the rack for Allegro. So we see a long multiyear evolution of dollar content growth. But in the near term, we have full portfolios of market-leading products, namely the fan drivers and the current sensors to drive near-term growth. We think it's an exciting story in both the short term and the long term.

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

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

Yes. As we talked about in our Analyst Day almost 6 months ago, we expect to be trending over the next couple of years towards that mid-50s gross margins, 55% and beyond, right? We're making pretty significant progress, up almost 300 basis points year-over-year in Q1 versus last year, up another 110 basis points quarter-over-quarter from Q4 to Q1, up another 20 basis points to Q2.

And within the Q2, the drop-through is only 57%. Some of that's mix as there's more auto in there. There's some mix within industrial. But as I mentioned to one Chris' question, we expect to see pricing layer in more heavily in the back half of this year, which will have an uptick in gross margins. We also expect some of those BOM optimizations like converting from gold to copper on the wire bonding to have more impact later this year and as we move into next year. We're confident we're going to move quickly towards that mid-50s gross margins over the next couple of years.

Our next question is with Blayne Curtis from Jefferies.

I want to ask you about TMR. It's become a big part of your product releases. Just kind of curious in terms of like of your shipments. And I really want to know about the competitive landscape within auto and data center. How much interest are you seeing in TMR versus Hall?

Sure. Thanks, Blayne. This is Mike. So we've been talking about TMR for a while, knowing that as time evolved, the benefits of TMR would start to extend into growth applications really across the business. In my prepared remarks, I spoke about a new win where we were able to get TMR motor position sensor into an ADAS motor, into a steering motor in China. That was the first time that we've accomplished that. There had been other players out there. I don't like mentioning their names in public calls. I think you know who they are. They had been established in that space at certain geos, and we're starting to go in and penetrate the market with our own market-leading TMR solutions in that application. If I -- and that's not the only one in auto, by the way, we took some share recently in oil pumps and other areas with good motor position.

In the data center, I mentioned that we're ramping TMR current sensors. And what's happening in the data center is that as customers want to adopt and they are adopting silicon carbide and gallium nitride, the switching speeds in the power converters go up to gain efficiency and reduce the size of the power converter. That means you need a very fast current sensor. TMR current sensors can be much, much faster than Hall effect-based current sensors, and that's why we're winning in the data center power supply space as well.

And we do have -- at least we believe we do have the world's fastest magnetic current sensor in the data center space today. So those are some of the examples of where we're taking share in these growth markets and a little bit of color as to why we're taking share.

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

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

Our next question is from Joshua Buchalter with TD Cowen.

Congrats on the results and guide. Maybe following up on a couple of previous ones. So really good to see the current sensor business start to grow to a meaningful portion of the data center mix. And it sounds like you're very confident also in sort of the gate driver business and maybe also the PMIC for power delivery in data center. Could you maybe speak to when we should expect those latter 2, the gate drivers and PMIC for power delivery to start to layer into the data center business more meaningfully?

Yes. Thanks, Josh. And yes, I've been saying for a while now, the expected duration to see material impact in the data center from our isolated gate drivers is 18 to 24 months. So call it about an 18-month expectation for [indiscernible]. Very well engaged with customers. It's a dynamic market. So we actually will begin sampling a Generation 2 product that is ideal for the data center this fall, which will drive a little bit more acceleration of momentum in that product line.

So we are very excited about the isolated gate drivers in data center. I did mention it adds hundreds of dollars to the theoretical content for Allegro in the rack. And on the PMIC side of things, I don't want anyone walking away thinking that is a big growth vector for Allegro in the data center. Our PMICs tend to be more automotive focused. But even without the PMICs, we have a really robust dollar content growth story for Allegro in the data center.

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

Josh, this is Derek. And you hit it on the latter, right? Some of it is how we handle the inventory. If you remember, unfortunately, 2 years ago, we had a very painful quarter in June of calendar '24, where we were down 50% in China, 30% overall, a lot of inventory digestion. As a result of that, we came back a lot quicker earlier in the cycle here.

That said, we're still continuing to see a lot of strength in auto. And we mentioned design wins being up 30%, which bodes well for the out years and the bookings up 30%, which bodes well for the near-term quarters and even sequentially up high single digits. So strong auto. And within the quarter, we continue to see a growing proportion of in-quarter orders, which obviously can't be shipped within that quarter as lead times are extending. So I think some of it has to do with the timing you mentioned of kind of where the cycle was and how people handled inventory throughout.

Our next question will be from Timothy Arcuri with UBS.

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

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

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

No, it's not really timing. It's really just the law of large numbers. Remember, we're coming from a place where data center was 2% of our revenue just 6 quarters ago. It was 10% just 4 quarters ago, right? So as you start to get to plus $100 million a year run rate, it's just the law of large numbers. There's no real decel in our content gains. As Mike mentioned, we continue to have 66% growth in current sensors, which is driving the gross margins much higher. It really is just where we are kind of in the law of large numbers.

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

Sure. So POS was a record this quarter. Disti sales were about 60% of our total sales this quarter. Direct was about 40% of our sales and sell-in and sell-through were pretty equal. Inventory in the channel remained actually flat right now in a very healthy place in our normal kind of weeks on hand.

Our next question is from Joe Moore with Morgan Stanley.

Yes, along the same lines on the quarter you just reported, it looks like industrial ex data center was pretty strong sequentially, if I've done the math right. Can you talk about any noteworthy trends that are driving that?

Yes, Joe, this is Derek. There were really 2 things in there and it kind of drove us over the high end of our guidance. It was really the long tail of industrial business, the general and industrial that all ships through distribution, which actually has quite good gross margins. That had a bit of an uptick in the quarter.

And that business can be a bit lumpy, and that was probably the last place in the distribution inventory channel that had any what I would call excess inventory, and that's largely gone now at this point. So a little bit of timing there. And as we move into Q2, when we look at the gross margin, a combination of mix from more auto and even within the industrial business, a little bit heavier and some other things in there in Q2. So those kind of long tails of what else is in general industrial can be a bit lumpy from quarter-to-quarter.

Okay. And then in terms of your comments on robotics and industrial automation, can you distinguish between those 2 things, content opportunity for Allegro and humanoids is pretty obvious, but are you also seeing bigger changes in other form factors for industrial automation and how much of that 3% to 4% of revenue you talked about might be in the kind of newer humanoid form factors?

Yes. Joe, good question. This is Mike. So when we look at our dollar content opportunity in many ways, it comes down to how many joints or how many degrees of freedom there in something that moves. So whether it's a singular robotic arm on a conveyor belt, picking things up, moving them around, that would have multiple joints and multiple dollar content opportunities for Allegro.

So we model it -- we model our end opportunity based on the number of joints. Obviously, there's a lot more joints and degrees of freedom in a robot, especially when you include the hands. But there's ample opportunity in factory automation systems for autonomous mobile robots moving inventory around factories, arms picking and placing boxes throughout the factory, and we're seeing wins and revenue ramps kind of across the full spectrum there.

Our next question is from Quinn Bolton with Needham & Company.

I wanted to follow up just on the sort of the gross margin outlook, Derek, maybe just try to better understand how your pricing actions are layering in. I think you said that the pricing actions in disti kind of kicked in towards the end of Q1. So I would have thought you'd have a full quarter effect maybe in Q2, which would have benefited margins, but it sounds like it's more of a fiscal third and fourth quarter effect. So is that just timing of when those price actions take hold? Is it really when you can get the direct business to -- when you can increase pricing on the direct business. But just any more color on how those pricing actions kick in because I guess I would have thought the September quarter might have seen a greater benefit from those actions taken earlier this year.

Yes, Quinn. As I mentioned earlier in the call, the majority of our auto customers are on contracts, which begin in the beginning of the calendar year, the first quarter of the calendar year. And in net, that was down low single digits in terms of pricing. There are opportunities to selectively pass on surcharges for costs that are increasing and some of those midway through the year. We're also making transitions from gold to copper in lieu of doing some of those things.

The disti pricing did start in Q1 towards the tail end of Q1. That will be in Q2. But what's happening from Q1 to Q2 is a bit of a mix where auto is also up mid-single digits. And as I mentioned, the gross margins in auto are, of course, a bit below industrial gross margins and, of course, have that pricing dynamic that I talked about. I do expect us to see the benefit of more pricing in Q3 and into Q4, also the benefit of some of those BOM optimizations that we talked about. So I expect continued gross margin protection throughout the year.

Great. And then a follow-up on the robotics question. I think you said robotics would be 3% to 4% of sales in fiscal '27. Can you level-set us, was it low single digits, 1%, 2% in '26? Was it 0? And any thoughts as you look into fiscal '28, could that get to sort of mid- to high single digits? Could it reach double digits based on your bookings or the design win activity?

Yes. Thanks, Quinn. This is Mike. So we wanted to provide a little guidance there with that 3% to 4% number, just to establish a baseline that says, hey, we're already winning here, our products and the value proposition of our products are landing. We won't obviously won't forward guide with numbers, but we are starting off of a relatively small base. I think the growth rates ultimately come down to the pace of adoption of robots with more joints.

I just talked about a model where our growth rate really comes down to the number of joints in robots over the next few years. There's an array of projections, not only in terms of the number of humanoids, but also the number of robots out there. But what we look at is a very strong growth opportunity. And as you multiply what's really a meaningful number at 3% to 4% by a high long-term growth opportunity, we think it can have a meaningful impact on the growth rate of the company over time.

Our next question is from Liam Pharr with Bank of America.

I guess I just want to start with China. 25% of sales flat Q-over-Q in terms of the percent of [ revenue ], so growing in line corporate average. But I was wondering if you could just kind of discuss the demand environment you're seeing there, especially considering your -- one of your competitors just reported pretty strong results from China in their recent quarter.

Yes. So this is Mike, and I mentioned I had just been in China. So what we found on the ground match what we see in our internal data, relative strength in China. So we talk a lot about design wins in China in each of these quarterly calls, and it's not because we're trying to focus on China. That's where a significant number of very large and meaningful design wins have been happening.

And what I like about what we see on the ground in China is that these high-dollar content opportunity sockets that we have out there like electromechanical braking. 5 years ago, when people were talking, we abbreviate that EMV braking, it wasn't supposed to go to market first in China, but it did. And there's now multiple OEMs with EMV braking systems in cars with our devices inside of them.

I also spoke about how in the EV market, not only is the EV market for these S&P numbers growing around 25% in our fiscal year '27, we know a lot of that action is happening in China. And when I visited one of our top customers in China today, only to find out that our market share has gone up significantly over the past year. We continue to see many signs of strength in China. And I think some of these signs of strength will play out over the coming quarters and years, but we feel very good about the China business.

And this is Derek. Just a data point. Our China business grew 6% sequentially, so pretty healthy.

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

I didn't get the question, Derek, sorry.

Liam, could you please repeat the question?

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

Yes, yes, absolutely. Sorry, I didn't catch that one the first time. So we see trends broadly across the globe towards EMV braking and steer-by-wire. It would be a meaningful amount of growth. What you have there is more of a situation where cars had brakes, cars had steering systems. So now you're just picking up the additional content. But I think it's really just one of the many factors that gives us confidence in our ability to grow double digits in automotive in a world where automotive SAAR is flat to in some models negative. So these types of systems that are keeping us growing well above market in FY '27 and beyond.

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

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

All right. Good afternoon, everybody. Thank you for coming to the 54th Annual TD Cowen 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, I appreciate you sticking around New York despite the Knicks being in the finals -- not yourself, Knicks. Maybe just to start things off, could you both maybe spend a couple of minutes introducing yourselves and introducing the audience to Allegro MicroSystems?

Sure, absolutely. So I'm Derek D'Antilio, the Chief Financial Officer of Allegro MicroSystems. I've been here for about 5 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. After Jalene introduces herself, I'll tell a little bit more about the company.

Jalene Hoover, I head up Investor Relations, Corporate Communications at Allegro. I've been in semiconductors for around 30 years, including Cirrus Logic and Silicon Labs, then with Allegro for about 3.5 years.

Great. So I guess between Jalene and I, we have about 60 years of experience in semiconductors. I don't know if that's good or bad. But -- 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 doing power 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 5.5 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, ASIL D 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 that I'm sure we'll talk about like data center and ultimately, robotics.

All right. Thank you for the background. Before we get into the more fun product and content-driven details, maybe we could start with -- you just had your earnings calls a couple of 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, where we are with inventory positioning?

Sure. So we finished our fiscal year at the end of March for our March 31 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 continue to see real strength across our business in all of these areas. And going back about 1.5 years, for us to talk about the sort of cycle dynamics, the automotive industry has actually been quite stable over the last 5 to 6 years. Automotive unit growth has grown about 1 million to 2 million units each of the last 5 years, projected to be kind of flattish to maybe marginally down this year.

But if you look -- zoom out over about 40 years, the auto industry production units have only declined 10% in 2 years, 2009 and 2020, right? So it's a pretty stable market. There was an inventory build that we went through like a lot of people a couple of years ago. But we're seeing really strong demand, really strong design wins, and it shifted from being a go-get bookings to a 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.

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, 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.

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, I said, very nice projection of 1 million to 2 million units a year auto production, good mix shift to xEV over the last several years. But the auto Tier 1s built inventory in '22 and '23. That never really happened before. They did that for 2 reasons. One, they were getting dollars from the OEMs to do that in certain countries in Japan and Europe and even in the United States.

And two, interest rates were the lowest they've been in 100 years, right? 3 years later, those 2 dynamics are much different. They're not getting those dollars. Interest rates are not particularly high, but they're normal again, right? And so they're not building those. And these automotive Tier 1s 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 with our 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 within a lead time. So they're dealing with that 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.

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?

Yes. Sure. So 2 things. I think rates absolutely help. At the end of the day, our automotive is consumer-driven good, right? So rates absolutely help there. So rates come down, people need 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 OEMs. So -- and even if it does happen, it's a onetime blip that people pick up 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 to the second part of your question again, Josh.

What triggers restocking? And like are your customers comfortable with where levels are?

Yes. 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 with 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 way.

Yes. Sorry, it was actually a 3-parter like a good sell-side analyst. It was how far out is visibility extending?

Yes. So visibility is actually really good, right? One of the nice parts about automotive being, give or take, 70% of our business is you get design wins that go out 5 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.

Okay. 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?

Yes. 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 Geelys, the Nios, the Cherys 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 suppliers.

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 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.

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

Okay. And then I guess 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?

Sure. And I wouldn't say we're immune to the competition in China, right? China has 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, ASIL D, grade 0 auto safety specifications. And the regulations in China for whether it's emissions or safety are just as strict as they are 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 wafer 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 2 biggest fabs, where we're bringing one up in China. That certainly helps. And I would say that this started 4 years ago, right? It takes many years to bring up a fab. It has never been a demand. It's been a 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.

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

Yes, it absolutely does. So in our March quarter, seasonally, China Auto in China was down. Again, China is 90% auto for us. It was down with the shutdown for Chinese New Year 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.

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

Sure. So we've made a very purpose decision, both with our sales team, with our product development team to focus on sort of 2 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. xEV 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-volt to 400-volt, 48-volt 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 2 areas. 3 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.

Yes. I think -- I always assume 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 where we are in those design cycles with current sensing exposure? And specifically, you bought -- you made an acquisition of Crocus a few years ago, specifically to bolster your TMR sensing portfolio. Where are we in the integration of that into your road map and with your customers?

So let's sort of start with the last piece. We bought this business that does TMR, tunnel magnetoresistance. 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 the right applications. Not all of it will move to TMR, whatever the value proposition is.

But there are about 8 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 3 or 4 companies that do that. So the pool is a lot smaller. So we fully expect that our market share should be at least that number, if not significantly higher.

Maybe using that as a segue. So you have the rich legacy in magnetic sensing. But you also have, I think, 1/3 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?

Yes. 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 really 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, 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 you get the most mileage out of that car, the step down of the power throughout the process all the way up 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 nitride or silicon carbide.

And I think the isolated gate driver business is perhaps your highest single content socket that you have. 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 we think about that layering into your model?

It's not. So we bought this technology about 3 years ago. It was a technology at the time, no revenue. Right now, it's in the low single digits. It's in sampling for the gallium nitride 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% of our business, put them in charge of this isolated gate driver business. It's really a start-up 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 1/3 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 3 functions into -- on one chip into a monolithic chip and 1 package compared to having multiple chips.

And I think 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?

Absolutely. So it's -- we call it a high-voltage power business, right? And it does all 3 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 drivers is in development, expected to be released later this year, and the silicon high-power gate drivers is already in the market.

Okay. Let's switch gears to data center, which is the topic of the year, obviously. You're not historically -- 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 and applications where Allegro MicroSystems is exposed to data center applications?

Sure. I'll provide some of the history. And Jalene has 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 3.5 years ago. Within that, we were shipping in inventory. That business went away for about 2 years as that inventory digested.

Coming into FY '26, data center was probably 2% of our total business. Exiting the year, as Josh said, it was 14% of our business. It quadrupled within FY '26. That part is exciting. A lot of that was the motor drivers. The even more exciting part is -- now 18% of what we're shipping in the data center is current sensors from managing the current that goes into the power, we're actually replacing resistors. Resistors need things that can dissipate 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, Jalene, to that?

Yes. So we are actually in design-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-volt and 800-volt technology as well as continued adoption of our current sensor technology as well and the gate drivers.

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

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

Yes. So the liquid cooling today is what we believe will be an incremental opportunity for us as 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, right? 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 they're maybe the 2.5-inch diameter for the racks, reducing to about half the size for the power management solutions.

And Josh, to answer your second question, it was motor drivers for the past 3 years. This past quarter, current sensors were 18% of our data center business. It was 0 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, as 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.

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 mix between 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 Allegro content for both the fans and for current sensing and for opportunities related to gate drivers.

Okay. And you're primarily -- like 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 customers are the power module manufacturers, so the Lite-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.

Sure. Okay. So moving to broader 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?

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 household, think of the Roomba as well as cobots, factory automation. But going forward, we actually see that content opportunity to be larger than our automotive. So that content, in fact, think of the home bot at like a $5 content opportunity increasing to $55 for a 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 the highest runners. But this will be an evolution as we go through this process. So it's -- right now, it's obviously the engagement. They're going through prototyping. Next phase is to develop solutions that will probably be in the hundreds to tens of thousands of units ultimately to 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 of 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 a 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 a really small form factor, 1 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.

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, take China out of the equation for a second. It's Hyundai Mobis, it's through Boston Dynamics, it's the Tesla, it's the Toyota, right? It's these companies we already have relationships where we 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 in the same thing in China.

Okay. And any time line at which 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.

So today, as Jalene 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. It's existing product families in many cases, existing customers, right? So we'll be on those road maps.

And the products that are being designed today that are going in 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 start to get into 2030, 2031. Sounds a long way away, but you have to be there today in the design wins. You have to be there today in the samples with the reliability data with the customers to get that opportunity in a few years.

I think to add to that is an accelerator would be a geography like China where 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 advanced humanoid robotics that will take time to go through that evolution. So to push pull factors, if you will.

Okay. I'm going to make a really hard pivot to gross margins now.

So Derek's favorite.

Higher is better.

Okay. Let me write that down. So you guys obviously peaked at 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?

Sure. So our gross margins peaked for a year at 56% on a non-GAAP basis. Actually 2 quarters they hit 58%. And that was at sort of the peak of the inventory cycle, pricing cost structure was different. Over the last couple of years, auto pricing has come back down. Our commodity pricing has quadrupled, for example, things like gold. And so our gross -- and then utilization, of course, came way down in the back end. Our gross margins troughed at about 46% on a non-GAAP basis. That was the end of last fiscal year. We exited this fiscal year at 50%, so up over 400 basis points. So that's good. We guided Q1 to 50% to 51%.

Our model is to get back to north of 55%. And really, there are 3 big pieces of that. One is volume. So volume helps a lot. Our variable contribution margin is above 60%. So putting volume through our back-end facility provides more than $0.60 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 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 -- it was a 200 basis point headwind in FY '26 alone. So we're going through that process. It takes time to qualify that. It doesn't all happen in 1 quarter. It will happen over the next year or 2.

In addition, there are things like shrinking the die size, which is the biggest piece of our bill of material, Jalene, talked about with TMR, they use a significantly smaller die, 1 millimeter square by 1 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 as we move into 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 closer to 90%, really getting us 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 in the next couple of years.

Okay. We're running out of time. So I'm going to ask my last 2 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, passing on higher input costs and pricing being more firm than it's been in the last couple of years. And on that note also, you guys are a bit unique in that you're a fabless company and 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 time lines in which robotics, for instance, might be more meaningful?

Yes, great question. So on the pricing side, we said it on our 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 a 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 and those kind of things. So that's happening. 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 2 fabs in Taiwan. We have 1 fab in the United States that does about 1/3 of our wafers. They're doubling the size of their fab, not for this reason. It's part of an expanding project with some CHIPS Act 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 have the capacity going forward.

Okay. All right. Well, we're out of time. Derek, Jalene, thank you so much for joining us again.

Thank you very much, Josh. Appreciate it. Good luck for the next.

Good morning, and welcome to Allegro MicroSystems Fourth Quarter and Full Fiscal Year 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Thank you, Alliah. Good morning, and thank you for joining us today to discuss Allegro's fiscal fourth quarter and full fiscal year 2026 results. I'm joined today by Allegro's President and Chief Executive Officer, Mike Doogue; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our fourth quarter and full fiscal year 2026 financial results and share our first quarter outlook. We will follow our prepared remarks with a Q&A session.

Today's call includes remarks about future expectations, plans and prospects, which are forward-looking statements. Such statements are based on current expectations and assumptions as of today's date and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated or projected on today's call. The company assumes no obligation to update these statements, except as required by law. For a discussion of these risks and uncertainties, please refer to today's press release and the risk factors contained in our periodic filings with the SEC.

Additionally, we will refer to non-GAAP financial measures during today's call. Today's earnings press release, which is available on the Investor Relations page of our website at www.alllegromicro.com, contains important information about our non-GAAP financial presentation and also includes reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures. This call is also being webcast, and a replay will be available in the Events and Presentations section of our IR page shortly.

It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Doogue. Mike?

Thank you very much, Jalene, and good morning. Thank you all for joining our fourth quarter and full fiscal year 2026 earnings call. We finished fiscal year 2026 with strong momentum, delivering a fifth consecutive quarter of sales growth at $243 million. Fourth quarter EPS was $0.17, nearly tripling year-over-year. FY '26 sales increased by 23% year-over-year to $890 million and EPS more than doubled to $0.54 per share. This performance is a result of our team's dedicated execution of strategic initiatives discussed at our February Analyst Day.

In automotive end markets, our focused auto sales, which includes xEV and ADAS, increased 30% in FY '26. Content expansion and share gains drove this growth. FY '26 growth included gains in steering and braking for ADAS applications, increased adoption of high-voltage traction inverters and ramping programs for VLDC motor drivers and xEV powertrain systems. As a result, total auto sales grew 17% in fiscal 2026, well above our SAAR plus 7% to 10% target coming off an inventory digestion period.

Industrial and other end markets led fourth quarter sales growth with a data center up 41% sequentially to establish a new quarterly record at 14% of total sales. For fiscal 2026, industrial and other end markets grew 38%, led by data center and robotics and automation. This is well above our high-teens sales growth target for our industrial business. Our high-efficiency motor drivers for 3-phase data center fans continue to gain traction. Historically, these fans cooled CPUs and GPUs but they've now expanded into power supplies and into network switching equipment.

We're also seeing growing adoption of our high-speed current sensors in power supplies, battery backup units and capacitor backup units across the data center. Our data center content is not limited by unit volume growth. We are seeing strong growth as a result of our expanding product portfolio and the adoption of new high-voltage data center architectures. As AI racks move from 15 kilowatts to 1 megawatt of power consumption, Allegro's content scales with power per rack. Because we solve the thermal and sensing challenges that come with extreme power density, our content opportunity per rack scales from approximately $150 in today's servers to over $425 in next-generation AI configurations.

I'd like to share a few highlights from my trip to Asia last month, where I met with our top data center customers in Taiwan and Vietnam. Three things stood out. First, customers expect data center fan volumes to grow for the foreseeable future, even as liquid cooling is adopted. Continued growth is driven by fan proliferation into power supplies and into network switching equipment, which use a large number of fans and are rarely liquid cooled.

Second, design win activity for our current sensors in power supplies and backup systems is large and growing. Both Hall and TMR current sensors are shipping or will soon ship across multiple hyperscaler platforms in AC to DC, PFC and DC-to-DC power stages. Current sensors for data centers are emerging as a meaningful new growth pillar, and we expect this to be an area of significant growth over the next several years.

And finally, we're seeing significant design in progress for high-voltage drivers and data center power supplies. In addition to data centers record performance, robotics and automation sales doubled year-over-year in fiscal 2026. We saw increasing adoption of our sensors in factory and building automation applications during the year, along with growing engagement and design wins with humanoid robotics customers. For example, we secured two design wins with leading Chinese robotic companies for use in robotic joints during the quarter. In the first win, our current sensors were selected over local alternatives based on superior performance and our smaller package size. In the second win, our latest inductive sensor was selected in an approximate 90 IC per robot opportunity, where small form factor, high-precision motor control capability and our local coil design expertise were decisive factors. Initial shipments will begin in calendar 2026 with volumes expected to increase in 2027.

Now turning to design win and backlog momentum. Our fiscal '26 design wins increased more than 30% year-over-year. Focus auto, including xEV and ADAS, led automotive design win activity with powertrain-agnostic safety, comfort and convenience also achieving strong results. Data center-led industrial design wins for the full year. In addition, we exited the year with a total company backlog sitting at a multiyear high. These metrics give us confidence in our forward-looking momentum.

Our R&D investments are guided by our core value innovation with purpose, which drives differentiated sensor and power technology. Great pride in holding the #1 position in magnetic sensing, reflecting our broadest portfolio and our leading performance in the market. Allegro's magnetic current sensors enhance our technology and market leadership positions in output accuracy, bandwidth and power density.

To illustrate this leadership, I'll share some recent examples. In Q4, our 10 megahertz TMR current sensor was named EDN's 2025 Sensor Product of the Year. As the industry's first 10 megahertz TMR IC, it offers the highest bandwidth solution available today, enabling the high-speed control required for next-generation gallium nitride and silicon carbide power systems across xEV, data center and robotics applications.

We also expanded our sensor portfolio during the quarter with the release of an ASIL D passive TMR angle sensor. This IC delivers the fail-safe reliability essential for the industry's transition to steer-by-wire ADAS systems. Those systems support Allegro's 2 to 3x content uplift compared to conventional steering systems.

One of our more differentiated and fastest-growing technologies in magnetic sensing is. We expect CMR to extend our leading magnetic sensing position. During fiscal 2026, TMR represented approximately 30% of our sensor product releases offering the superior accuracy, bandwidth and low power consumption that our customers demand. We're also expanding our lead in power ICs, which we expect to drive continued share gains. In fiscal 2026, we released our first isolated gate driver specifically designed for silicon carbide transistors and are seeing strong customer interest. Our power-through architecture delivers up to 40% greater efficiency -- and we expect to see a 2 to 3x dollar content uplift from isolated gate drivers as customers move toward 800-volt xEV platforms and higher power AI architectures. This is a clear example of how our differentiated technology translates directly into content expansion and share gains.

As we enter fiscal 2027, we see demand trends that support continued growth, and we remain confident in our ability to execute towards our target financial model.

I'll now turn the call over to Derek to provide additional color on our financial performance as well as our first quarter outlook.

Thank you, Mike, and good morning, everyone. Starting with our fourth quarter results. Sales were $243 million and non-GAAP earnings per share were $0.17. As a percentage of sales, gross margin was 50%, operating margin was 15.6% and adjusted EBITDA was 20.4%. Q4 sales increased by 6% sequentially and 26% year-over-year. Sales to our automotive customers were essentially flat sequentially at $164 million, including an expected decline in China due to the Chinese New Year. Auto sales increased by 18% over Q4 of FY '25 and focused auto sales, which include xEV and ADAS, increased by 25% versus Q4 of '25.

Industrial and other sales increased by 23% sequentially, $79 million and 49% over Q4 of FY '25. We led by continued strength in data center to record levels. Sales to our data center customers were 14% of Q4 sales, up from 10% in Q3 and 8% in Q2. And as Mike discussed, we are seeing continued strength in data center demand as we move into fiscal '27. From a product perspective, magnetic sensor sales increased by 2% sequentially to $141 million, an increase by 21% over the prior year quarter.

Sales of our Power Products increased slightly 12% sequentially to $102 million and 35% over the prior year quarter. Sales by geography on a ship-to basis were as follows: 30% of sales in the rest of Asia, 25% of sales in China, 17% Japan, 15% of sales in Europe and 13% in the Americas.

Now turning to Q4 profitability. Gross margin was 50%, up from 49.9% in Q3 and 45.6% in Q4 of fiscal '25. Operating expenses were $84 million, an increase of $5 million sequentially, largely due to annual payroll tax resets and higher incentive compensation. Operating margin was 15.6% of sales compared to 15.4% in Q3 and an increase of 660 basis points compared to 9% in Q4 of fiscal '25. The effective tax rate for the quarter was 6%. Interest expense was $5 million, which included $650,000 of expenses related to the repricing of our term loan down another 25 basis points to SOFR plus 175 basis points. The fourth quarter diluted share count was 187 million shares and net income was $32 million or $0.17 per diluted share. Non-GAAP EPS increased by 13% sequentially and 183% over a year ago quarter on sales increases of 6% and 26%, demonstrating the significant operating leverage in our business model.

Now turning to a summary of our full fiscal year 2026 results. Total sales increased by 23% year-over-year to $890 million. Auto sales were $629 million, an increase of 17% compared to fiscal '25 and were 71% of our total sales. Focused auto sales, which is ex EV and ADAS with $349 million, an increase of 30% year-over-year and represented 55% of our auto sales. Industrial and other sales were $261 million, an increase of 38% year-over-year, led by data center, which more than quadrupled and represented 10% of our total FY '26 sales. From a geographical perspective, the rest of Asia and China sales led regional growth.

Rest of Asia sales increased 44% year-over-year due to strength in data center and China sales grew 36% year-over-year, led by growth in our Focus Auto. Gross margin for the full year was 49.4%, an improvement of 140 basis points year-over-year. Operating leverage and factory efficiencies helped to more than offset price and commodity cost increases. The cost of gold in particular, was an approximately 200 basis point headwind in fiscal 2026.

And as we move into FY '27, our teams remain focused on our goal to call for conversions as well as other cost reduction in factory efficiency initiatives as we progress towards our gross margin targets. Operating margin was 14.1% of sales. Adjusted EBITDA for the year was 19.1% of sales and earnings per share were $0.54, more than double the prior year.

Moving to the balance sheet and cash flow. We ended Q4 with $175 million of cash. Q4 cash flow from operations was $36 million. CapEx was $17 million and free cash flow was $19 million. For the full year, free cash flow was a record $125 million, and we also made $60 million in voluntary debt payments. Bringing our total debt balance to $285 million and net debt to $116 million exiting the year. From a working capital perspective, fourth quarter DSO was 35 days. Compared to 40 in Q3 and inventory days were 128 days compared to 133 in Q3.

Finally, I'll turn to our Q1 fiscal 2027 outlook. We expect first quarter sales to be in the range of $245 million to $255 million. The midpoint of this range equates to a 23% year-over-year increase. Additionally, we expect the following, all on a non-GAAP basis. Gross margin to be between 50% and 51%. Operating expenses are expected to decline sequentially to $80 million, plus or minus $2 million. Within that, we expect to continue to make strategic investments in R&D and sales to drive above-market growth, and these are funded largely through continued reallocation of resources and process efficiencies.

Interest expense is projected to be $4 million. We expect our non-GAAP tax rate to be approximately 9%. We estimate our weighted average diluted share count will be 187 million shares. And as a result, we expect non-GAAP EPS to be between $0.19 and $0.23 per share.

Now I'll turn the call back over to Jalene for questions.

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our first fiscal quarter conference line up with you.

We will attend TD Cowen's 54th Annual Technology, Media and Telecom Conference in New York on May 27, Evercore's 2026 TMT Global Technology Conference on June 2 in San Francisco, Bank of America Securities 2026 Global Technology Conference on June 3, also in San Francisco; and Mizuho's Technology Conference 2026 on June 9 in New York.

We will now open the call for your questions. Alliah, please review our Q&A instructions.

[Operator Instructions] Our first question comes from the line of Gary Mobley of Loop Capital.

I know you mentioned in your prepared remarks that backlog is at a multiyear high. I'm hoping that maybe you can share some additional details in terms of what's changed in the past 90 days as far as revenue KPIs go and then perhaps maybe drilling down by end market. Anything you can provide there would be helpful.

In the last 90 days, in the prepared remarks, I talked about a trip, I took to visit data center customers. It gave me increasing confidence that we have a strong story there, especially as we see the current sensors ramping on top of continued strong demand in fan drivers. So we're feeling good about the industrial market as we look ahead.

In the automotive space, we're seeing good signs of strength, both in terms of the backlog, but also forward-looking design wins. And at our Analyst Day, we talked a lot about the importance of our increasing dollar content story, and it's encouraging to see a preponderance of wins in our automotive area coming in those applications that have higher dollar content. So those would be the two most notable trends.

Okay. And Derek, I know in the past, you've communicated that the gross profit drop through over the long term, should range between $0.60 and $0.65. It looks like what's embedded in the Q1 guide is something about that, maybe $0.67. So perhaps maybe you can share with us the drop through you expect for the year and perhaps some additional detail by quarter as some seasonal factors might play into the expense equation.

Sure. And as you can see in the numbers, the Q4 drop-through was in the low 50s, and that typically happens as our annual price negotiations with customers happen in that March quarter. Sort of revenue declines in that quarter for those price negotiations. And even though we negotiate potential cost declines in certain areas, whether it be wafers or OSATs or those sort of things, that takes a quarter or 2 to cycle through inventory. So we see some of that benefit going into our first quarter with a drop who's actually closer to 70% in the first quarter at the guide of 50% to 51%.

I also mentioned on the call that we have had some significant headwinds, particularly commodity costs and recently fuel costs. And I might get the question of what are we going to do with prices we are doing select price increases, but it's very nuanced, that didn't start in Q4, that will start at the end of Q1. And what we, of course, always look to do is offset any sort of cost increases we have with factory efficiencies with improvements with our vendors. And we did a lot of that in 2026.

We improved our gross margin by 140 basis points even with the annual price declines even with the cost headwinds, we'll continue to do that as we go into 2027 and look to do select price increases as we move throughout the year.

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

This is Neil Young on for Quinn Bolton. So data center grew pretty strongly quarter-over-quarter. As you look into fiscal year '27, can you help us think about the -- or help us think through the durability of that growth? And specifically, how much of the forward pipeline is still fan driver driven versus the newer current sensor and isolated gate driver opportunities? And then I have a follow-up.

Sure. This is Mike. And when we look at the data center business, we see very terrible demand in the call last quarter. There were some back and forth about what is the right growth rate for the business on a long-term basis. And we look at that growth rate for our data center business coming in well north of 20% on a long-term basis. As we look ahead in FY '27, we believe our growth rate will come in well above 20%. We're not going to forward guide with specific numbers, but we do see strength data center coming into FY '27.

Back to the question on the mix. The majority of our business is still with the fan drivers, and that's a good story. It's a good story because, as I mentioned in the prepared remarks, the fans are starting to appear in new locations within the data center build-outs, most notably power supplies. So that business continues to grow and remains strong.

On top of that, current sensors in these power supplies, that business started to ramp in FY '26 and we believe it will ramp even more strongly in FY '27. The isolated gate driver business is still 18 to 24 months out from having material revenue in the data center but we're encouraged by design and activity that's happening now.

And this is Derek. To add one piece of context. Current sensors entering FY '23 virtually 0 part of that data center business. In Q3, it was about 10%. In Q4, it got closer to that 20% of our data center business.

Great. And then you guided June quarter gross margin in the 50% to 51% range, while the longer-term model still is targeting that over 55%. Could you maybe walk us through the biggest drivers of that bridge from here, whether it be op leverage, factory efficiency, mix, new products, et cetera? And which one of those are most controllable versus volume dependent?

Sure. The three pieces of that really operating leverage. And so when you look at our model, as Gary pointed out, we're going to grow at about 70% drop-through in the Q1, and that always happens in that quarter. But the typical drop-through is between 60% to 65%. That's our variable contribution margin. So as we put more volume through our back-end facility in Philippines and the fixed cost growing inflation, you get a significant amount of leverage. So if you're plugging your revenue numbers like we have at our Analyst Day, that's the biggest driver of overall gross margin going forward.

The second biggest piece though is improving that variable contribution margin and we talked about this gold to copper conversion program that's ongoing. It's not going to happen all in one quarter. There's customer qualifications that are required. So it will happen over time. But that was a 200 basis point headwind in FY '26 alone. So as we move through that program, that's a significant uplift in addition to negotiating cost savings with our wafer suppliers and others, especially as they get through these geopolitical times right here.

Those are the two biggest pieces, and those are the pieces. The second piece is clearly controllable by us. The first piece is market dependent, which we see good things happening right now. And the third level, which is not insignificant, is continued factory efficiencies. And within FY '26, again, we were able to offset 200 basis points of gold headwinds and still improve our gross margin just through factory efficiencies, and we'll continue to do those things going forward.

Your next question comes from Joe Quatrochi of Wells Fargo.

Maybe first just to start, can you kind of walk through the puts and takes of focus auto for the March quarter, I think that was kind of flattish sequentially? And then how do you think about that kind of accelerating? Or where could that go in fiscal '27?

So Focus Auto, the way I look at it, it was up roughly 30% year-over-year in FY '26. So it's demonstrating strength on the annualized basis of FY '26. And I think we'll see something similar in FY '27. And the reason for that goes back to what I mentioned just a few minutes ago, when we look at our design wins, where they're happening, do we have share gains, we get a very positive story in our Focus Auto segment and that we do see strong share gains. We do see significant wins in these areas with expanding dollar content. So we remain positive on the future of Focus Auto, and we remain positive on our ability to outgrow auto production SAAR plus 7% to 10% because of our strong story between share gains and dollar content gains.

And Joe, a little specificity on Q4. The reason why focus Auto was flat to down a little bit was largely China -- we have a large business in China on the focus auto that continues to grow. In fact, our design wins were led by China ADAS applications. So that's encouraging for the future. And within that, we're expecting focus auto and auto to be up in Q1 a couple of percentage points. and then Q1 will be led by data center on the industrial side, as you might imagine.

Yes, that's helpful color. And maybe just on the industrial side, I think maybe ex data center, that was actually pretty strong sequentially. What's driving that? Is it I assume robotics is still maybe a little bit small, but any help there and just kind of what's driving nondata center industrial?

Yes. In our category of robotics and industrial automation, it's not large, but I wouldn't necessarily characterize it as small either. So we saw some meaningful movement there. On the factory automation side of things, we're not talking about certainly humanoid robots but there are a lot of robotic systems in factories, product moving equipment, et cetera, and we're seeing strength there. Additionally, we're seeing strength in energy infrastructure. I think there's some pull-through there perhaps because of data center build-outs, and we see continued strength in the 2-wheeler market as well, 2-wheeler transportation.

Our next question comes from Timothy Arcuri of UBS.

Derek, I wanted to ask also on data center and what's being assumed for the guidance in June? Because if it grows in the same -- I mean, it grew 40% in December, it grew 40% in March. If it grows 40% in June, then the rest of the business is down like 3% to 4% and the rest of industrial is down like mid-teens, which doesn't seem to make a lot of sense. So maybe data center is assumed to slow down on a sequential basis in June. Can you kind of go into that?

So you could -- look, data center was 14% of our total sales in Q4. You could increase that by a couple of percentage points, 2 or 3 percentage points. So in Q1, it will be 16%, 17% of our total sales. which implies 20% to 25% growth in the data center. And I wouldn't call it a slowdown. It's the law of large numbers, right? And so if you take 20% to 25% a quarter, that's still a pretty significant growth rate. Remember, in FY '26, entering the year, data center was still 2% or 3% of our sales as we had a real rebound in fans and then the current sensors the last couple of quarters.

Okay. Got it. And then -- so it seems like mature node foundry is getting pretty tight. You have two of your three major foundries there. Are you seeing cost pressure? You did cite gold -- pressure from gold. Is some of it like wafer pricing pressure as well? And can you sort of talk about -- you did talk about maybe raising prices a little bit to kind of pass that on. Can you just talk about the foundry costs?

Yes. So Joe, I think we've done a pretty good job and our foundry partners have been really good working with us. So that's not the biggest headwind we have necessarily right now. I think they've been really good partners. I guess headwind happens to be gold and then more recently, fuel charges for freight and also in our Philippines facility.

To touch on the pricing increases, it's not the first place we go. It's not a cost-plus type of situation. We work with these customers. We've worked with for years on finding efficiencies and of course, converting some of those things from gold to copper on the wires. That's the first place. We will do select price increases that will begin here at the end of Q1. Some of that is surcharges related to those two costs that I mentioned.

Our next question is from Vijay Rakesh from Mizuho.

Just a quick question on the data center side again. It looks like if you quadrupled for this fiscal, your content is going up 4x. Just wondering -- sorry, from $150 million to $425 million, I guess. As you look at fiscal '26 -- fiscal '27, '28, any thoughts on how the data center side should grow? And are you going to be breaking it out every quarter?

As I mentioned, we look at the long-term data center growth rate north of 20% and what we really see as you go through that evolution of dollar content, it's really driven by architectures and the on-ramp of new technologies in the data center, right, whether it be 800-volt architectures, et cetera.

So for our current sensors, Derek mentioned, we saw a nice ramp in FY '26. That will be the next step-up for us and the speed with which they ramp is somewhat correlated to the different architectures that are adopted and when and with what market share but we see nothing but positivity there. Like I said, we expect FY '27 to be well above a 20% growth rate and we're seeing very positive signs right now from customers and from the architectural evolutions happening out there that seem to benefit Allegro.

Got it. And in terms of the auto side, are you seeing any memory constraints affecting that in the second half or into '27? That's it.

Yes, this is Mike. I'll take that one. Our customers all seem concerned. But when we see it is when somehow orders are impacted, and we are not seeing that. We're seeing no impact of material shortages on our orders. So I know it's tied out there, but it's not really impacting our business at this point, at least as far as we can tell.

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

Matthew Pan on for Tom. Just curious, one of the other analog players with high auto exposure is sort of guiding to auto sequential growth in June, pretty well above historic seasonality. Sort of looking at like your guys' historic seasonality in March -- or sorry, in June. And I know you talked about sort of up a couple of points for auto in June. Is there any reason you shouldn't be growing above seasonality there?

No. I mean our guide total for the March quarter is up about 3% at the midpoint. The range is obviously a little bit higher than that at the high end of that. And within that, auto grows a couple of percentage points as China comes back. And then we're also shipping a significant amount of our products as we talked about into industrial and data center.

To be honest, we have a little bit of delinquency that we're starting to build in certain pockets in both auto and in industrial that we're putting some capacity in the back end in the Philippines, as you saw, $17 million in CapEx in Q4. So that will help with capacity to facilitate both of those.

Got it. And just a follow-up on -- we're hearing more about China EVs for exports. How impactful is this to you? And is your content any different on exports?

I'll take that one. We remain confident in our China business overall. Certainly, China is the largest automotive market in the world, and we're having good success with China OEMs. I would say from a dollar content perspective, we feel positive about the dollar content we're establishing by OEM in the Chinese OEM landscape. So as those cars may now become export models into the world. We have good dollar content in those cars, and we view that as a good to neutral thing. We have no concern about Chinese cars selling at higher levels relative to a dollar content.

Our next question comes from the line of Joshua Buchalter of TD Cowen.

To start, maybe we could -- could you provide an update on what you're seeing in the auto backdrop, specifically on inventories? Like still safe to assume that we're not seeing any meaningful signs of restocking, but that you're comfortable that inventory levels are low. And then should -- I guess, if indeed inventories are at healthy levels, any reason we shouldn't be modeling the 7% to 10% plus SAAR for this fiscal year as we see it right now?

So we still see somewhat thin inventory levels in automotive. We've seen no clear signs of restocking, at least not at a broad level. So that's the environment that we're in right now. And when we look to the future, as I mentioned earlier, with share gains, with the dollar we have. We certainly model when we look ahead, SAAR plus 7% to 10%, and that's probably the best model to put forth at this point.

Okay. And then on the data center side, obviously, CPUs have gotten a lot of renewed attention recently. Is it safe to assume that most of your cooling fan exposure is on the CPU side? Or maybe you can just help us with the CPU versus accelerated servers exposure as we think about your current sensing and the PMIC side of the house in data center?

Sure, Josh. I actually did a bit of digging on my trip with customers to just actually model out as cooling is adopted to cool GPUs, CPUs, et cetera, what does that really do to fan demand? And our top customers painted a picture where because of the enormous number of power supplies going into the architectures and the fact that there are fans in those power supplies, they still see a story of growth for fan drivers in the data center even as liquid cooling is adopted.

Now to be clear, fans that were cooling GPUs and TPUs will go to liquid cooling. That is a fact. But the proliferation of fans into the power supplies is significant, and it seems that it more than overcomes the loss of fans when GPUs are liquid cool.

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

Thank you, Alliah. This concludes today's call. Thanks to all of you for taking the time to join us this morning. We look forward to seeing you at various investor events over the coming weeks.

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

Good morning. Thank you all for taking the time to come in person and those online for joining us this morning. Welcome to Allegro MicroSystems Analyst Day event. I'm Jalene Hoover, I head up Investor Relations and Corporate Communications. I am not going to read these forward-looking statements, but I do encourage you to read them later when the presentation will be available online in the Investor Relations section of our website under Events and Presentations.

In summary, I'd like to caution you that today's presentation and the accompanying all remarks include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And now it's my pleasure to introduce you to Mike Doogue, President and CEO.

Thank you, Jalene, and good morning, everyone. Welcome to Boston. I think we've escaped any major snowstorms so far, but I know many of you came from far and wide, and I hope the weather continues to cooperate. I do want to reiterate a sincere thank you to everyone here in the audience, also everyone joining us online for our 2026 Analyst Day. The event is a timely one. It essentially marks my 1-year anniversary as Allegro's CEO. That makes this a great time to reflect both on the past year and on the years to come. Speaking of this past year, our fiscal year is almost finished, finishes in March, and it's been a pivotal year for Allegro in many ways.

We're pleased to report that on a year-over-year basis, our sales are on a pace to grow by more than 20% year-over-year. And in addition, as we exit our fourth quarter, we're on pace to have more than a 400 basis point increase in gross margin. So we have very positive momentum. And this positive momentum, it's actually the perfect jumping off point for today's discussion because positive momentum is the essence of what we're calling Allegro Reimagined, and that's the focus of the day today.

Here on this page, the agenda, I'm going to start the day by summarizing the key takeaway messages. We want you to hear those upfront. Then I'll also talk a bit about what's new and different with me serving as Allegro's CEO. After that, I'll hand over the stage to the great lineup of speakers. They'll give you a more detailed view of the entire Allegro story. And as you can see at the end of the session, there will be ample time for Q&A. There will be lunch. And there's also a demo room nearby. I encourage you all, if you have the time to go see the demos.

It's a unique opportunity to see our products sort of in the wild in action to understand not only what they do, but how we build leadership positions in certain applications. All right. So before we take a deeper dive across many speakers into the Allegro story, I wanted to put today's takeaways on a page. And the Allegro story, it really does start with our differentiated and durable technology. Throughout the day, you'll hear the entire speaker lineup talk about our growing leadership position across both magnetic sensors and power ICs. The products that we make, they are the fundamental drivers of an improved growth story that we're telling today. And I have to say, after 27 years at the company, I sincerely believe our products and our technology, they're better than they've ever been.

What do we do with these excellent products? We believe they are the basis upon which we can continue to outperform in our core xEV and ADAS markets. xEV and ADAS, these are the markets that should enable us to grow much faster than automotive vehicle production or automotive SAAR. We'll use those 2 terms interchangeably today. So even in a low Auto SAAR environment, we're modeling the growth rate of Allegro -- of our automotive business to be north of 10% on a CAGR basis. So low double-digit growth for automotive. That's a great story for Auto, but the Allegro growth story actually gets even better from there.

And the reason is because of our growing Industrial business. You'll see a lot of statistics throughout the morning, but our Industrial SAM, it's growing at a 17% CAGR. And we believe we can grow our industrial sales even faster than the market. The reason it's a result of our expanding dollar content in the data center and in humanoid robots among other applications. So let's put this all together, right? We grow Automotive at a CAGR north of 10%. We grow Industrial at a high teens CAGR. And what this results is an overall sales CAGR for Allegro in the mid-teens. So mid-teens growth, that will be the foundation of our new financial model, which we'll roll out for you today. And this is a significant upgrade in terms of the growth model that we had at our Analyst Day 3 years ago.

We are super focused on sales growth. Of course, we're focused on a lot more than that. We're also marching down a clear path with a systematic plan to get our gross margins back up and above 55%. And we're going to do all this while limiting our OpEx growth essentially to match the rate of inflation. So in aggregate, we're improving sales and gross margins. We have this prudent approach to managing OpEx. This puts us on a path on a go-forward basis to double our revenue and quadruple our EPS. And this is the road map that we all have to create significant shareholder value for our shareholders. So what we have here now on the page, this is a representation of the strategic engine driving the company forward.

So on the left, you see an array of important technologies. We started investing more and more in precision sensors and TMR technology. Build upon that, we invested in 48-volt power, isolated gate drivers, more intelligent motor drivers. When we were making these investments, we knew these were the right investments for xEV and ADAS. So at the center of the page, you see this 18% CAGR for the SAM for xEV and ADAS. This is what we were targeting initially. But we also knew that the same technology would one day come to the data center. The same technology was essential in humanoid robots.

And so when you look over on the right, that's where you see the even larger growth opportunity for the company in these emerging Industrial markets. To put some numbers to what's on the page, our Automotive SAM for xEV and ADAS, it's a $5 billion SAM. That's what's growing at 18%. In the Industrial space, the targeted SAM on the page, $3.5 billion in data center and robotics and automation. That's the one growing with 27% CAGR. So these are large secular growth markets. And we have a bold strategy where we are taking our market-leading technologies and intersecting them with these large secular growth markets and in particular, in areas where we see growing dollar content for Allegro.

So with this strategy, we're harnessing new secular tailwinds, and we're driving Allegro's growth potential to new heights. So on the page now, this is really an overview of what's new and different with me in the seat for the past year. There's been a fair amount of change, and it all begins with a sharpened strategic focus. So we've sharpened our focus on high-growth Auto and Industrial markets. We just talked about those. It's worth noting, again, a clear and important part of the strategy.

We're focusing once again on these areas of the market where we see strong dollar content gains, and I'll walk you through some examples of those gains in just a few minutes. Throughout the day, you'll learn how we've reallocated our R&D spending to focus more on our target markets, again, xEV, ADAS, data center and robotics. And you'll hear how Rick, our SVP of Sales, he'll explain an important change in our go-to-market strategy, which is helping us harness the growth opportunities across both Automotive and Industrial.

Throughout the past year, we've also strengthened our relentless focus on profitability. We've always been focused on it. When I look back over the last year, we now have a broader team focused day in and day out on gross margin improvement, a more global team, and we're marching down this path to get north of 55% gross margins. Derek will walk you through a bridge and a deep discussion of what that journey looks like. Another key focus for us over the past year, it's what I'm calling disruptive innovation. And here on the page, that's really creating these new vectors of value. So what we're doing is we're investing in new technologies, new products that can create new high-growth revenue streams for Allegro. We're trying to create multiple new $100 million revenue streams in the future.

And this is not really a new concept. When I was CTO, this was a focus for our team, and our work is well underway. We're actually sampling customers with some of these new technologies today, getting positive feedback. And even in some cases, we're seeing clear potential for gross margins in excess of 70% with some of these new product areas. And we won't be talking in depth about these areas today for one reason, which is competitive reasons. We don't want to tip off the competition too, too much in terms of exactly what we're doing. But you'll see some of these technologies discussed at a high level. I encourage you to pay attention in the robotics section that Mark Gill will undertake later on today. He will talk about a new force sensor technology that we're investing in, primarily for the hands and humanoid robots.

The last change that's certainly worth noting, we had an excellent team coming into the year over the last 12 months. We brought in new leaders. We have a very cohesive team of people who are dedicated to the cause. We're working hard to grow sales faster, get margins north of 55% and ultimately increase shareholder value. I'll go through a list of the new leaders a bit later on in my session this morning, but we have a great new team, very focused on the mission.

All right. So Derek is going to take you through a deep dive on the model at the end of the session today, but we didn't want you to have to wait so long to see the model. So I'm flashing it up on the page. And the model all starts with the mid-teens sales growth that you can see at the top of the chart. As I mentioned, the march back to greater than 55% gross margins is also essential. And what we see in the end is that when you drive sales faster and grow faster, you increase gross margins, certainly a positive impact on our operating margin, free cash flow and our earnings. So this is the road map. We're all good at math. When you look to the future, this is the road map that says, as we deliver this model, we're on a path to double revenue and quadruple EPS. And like I said, this is the blueprint for value creation at Allegro.

All right. So that is actually the summary of the takeaway messages for today. We wanted to hit you with them upfront. I'll have you snapping pictures. That's fantastic. Feel free. So we wanted to set the stage about what you're going to hear. But there's so much more to say, and that's what you're going to hear about starting with me and from the rest of the speaker list here today. And I want to zoom out for a minute and just ground ourselves and talk a bit more, hey, why is Allegro a durable and compelling investment? And really, what do we do? So at our core, we are leaders in sensors and power ICs. And these ICs, they enable electromechanical systems to sense, move and manage power with efficiency and precision.

So we're in a lot of motors, electric motors. We're in a lot of power conversion devices. When you look at our magnetic sensors, these represent 61% of sales, and they act as the eyes and the ears of these electromechanical systems. They're giving sensor feedback. We have the broadest portfolio of magnetic sensor ICs in the world. We span from Hall to TMR. We were early investors in TMR, leaders in the space. And so we have this complete toolkit in sensing with this broad portfolio. We can make customized ideal solutions that solve our customers' most pressing problems, and that's one way we differentiate in the market. When you look at our power ICs, these are the muscles of these electromechanical systems. They control motors and they efficiently manage energy conversion systems from 12 to more than 800 volts.

In the world of power, we have a lot of unique IP. We have unique and differentiated high-voltage IP. We have market-leading algorithms for spinning motors, and we have this 120-volt auto-grade zero wafer process, which is important for both sensors and power, but it's really perfect for the 48-volt revolution that's happening in cars, in the data center and in robots. So in the end, we have these foundational pieces of power IP. We ultimately can make electric motors smaller and more efficient or power conversion systems smaller and more efficient. This is exactly what our customers want across Auto and Industrial, the name of the game is size and efficiency, and we unlock significant benefits for our customers.

In terms of Allegro's focus markets, just over 70% of sales coming from the Automotive market. And within Automotive, our focus is squarely on xEV and ADAS. And I want to reiterate, when we talk xEVs, the reason for the x, we actually benefit whether hybrid or battery electric vehicles are adopted. We have significantly higher dollar content in an HEV and in a BEV compared to an ICE car. So we don't much mind as vehicles electrify, if they're hybrids, fine, if they're battery electric vehicles, that's great, too. The other focus area of ADAS, that stands for advanced driver assistance systems. In Allegro's world, that means steering and braking. So any time your car is taking over the steering or the braking, there's a good chance there's an Allegro auto-grade, high reliability system behind that steering and braking system. Why do we talk so much about xEV and ADAS?

It's actually where the value is in Automotive semis. And it's where our dollar content opportunity is expanding the most rapidly. And it's also where our technology is most critical and resonates best with customers. So it's a great Automotive foundation. When we think of industrial coming in at 28% of sales, this is where we see higher growth, right? There's a high teens CAGR for the market, and we believe we can deliver a high teens CAGR for our sales in the industrial market. And this is because there's a new evolution for Allegro's business. I talked earlier about how our fundamental technologies are crossing over into the data center, into the robotics market. And this is really boosting the growth of our industrial business.

And across both Auto and Industrial, we're winning broadly because we have leadership positions in precision motion control and in hyper-efficient power management, and our solutions are highly sought after by our customers. If we zoom out for a minute, I talked about a lot of markets, but the markets are actually well aligned to the megatrends that we're all dealing with every day that are in front of us, both personally and professionally. So we have a great growth story in electrification, in automation of the factory or the car and certainly in the data center. And all of these megatrends that are upon us today, these are all growth drivers for Allegro's business today.

You look to the right, advanced humanoid robotics, we've certainly secured wins in this space, but this would be an example of a megatrend driving significant SAM expansion and value creation for Allegro on a go-forward basis. And it creates a very strong story. And let's put some numbers to that story. So to start, our serviceable available market or SAM, it totals nearly $14 billion by fiscal '31. That's a good number, but there are better numbers on this page. So if we look at the composition of the market, our focus areas, they're the ones in blue on the slide, xEV, ADAS, AI, data centers and robotics, they represent a combined $8.4 billion SAM, and that's growing at a 21% CAGR.

If you look right in the middle of the slide, the rest of the market outside of our focus areas in blue, there's a CAGR of 2%. So this growth differential, it's certainly not a coincidence. It's 100% by design. This is the essence when I talk about a focused strategy at Allegro. We are focusing in these markets that have the 21% growth rate and dialing down our investments in markets that contribute to that 2% growth rate. We've deliberately positioned the whole company for growth in the fastest-growing pockets of the market and again, where our dollar content is rapidly expanding. So as we look at this chart on the previous page, if you look at the gray on the bottom, there's a 12% CAGR. That was the overall growth rate of Allegro's total SAM. And we're coming in today saying we're going to grow with a mid-teens sales CAGR.

So the obvious question is, well, how do you outgrow the market? A somewhat obvious answer is that we do it primarily through share gains. So our share gain story, it really comes down to 2 main engines driving the gains. The first one is accelerated innovation. We'll talk a lot today about differentiated technologies like TMR, like isolated gate drivers. Great opportunities for share gain there. Just as important to the story is this fundamental evolution in our go-to-market strategy. I'll save the details for Rick's presentation, but by dividing our sales force into an Automotive sales force and an Industrial sales force, we're really unlocking faster rates of design wins, better customer coverage. Before that, we were geographically aligned. We had sales coverage on a geo basis.

What we're doing now is because we see this strong growth rate in Industrial, we've architected a system where without taking our foot off the gas in any way in Automotive, we're now giving more attention to the Industrial market and harnessing this secular growth. So dollar content. Dollar content, it's absolutely essential to understanding the story. I'm going to walk you through a few examples. So on the left part of this slide, you see an example for an onboard charger. So an onboard charger, this is the charging circuit that is inside your car. When you plug a cable in from outside your car into the car, there's a charger, it charges the battery in the car. And we believe we're leaders in this space for current sensing today.

We'll sell 5 or 6 current sensors into an onboard charger. But there's a step change happening within Allegro, and it's coming through the form of our isolated gate drivers. And those are abbreviated IGDs on this slide for brevity. We're working with customers sampling our new gallium nitride and silicon carbide gate drivers to customers. And we're actually working on the same board where our current sensors already reside in the charger. And what we're seeing is next to the 5 to 6 current sensors, there could be 12, sometimes even 32 of our gate drivers on the board. And the ASPs for these 2 products just model them as essentially the same.

So what you can see is a greater than 3x dollar content expansion opportunity in the charger. And if I were to run you through an example for an Automotive inverter in an EV, you'll see a similar story. So this is just an example of how dollar content contributes to the growth story. There's an equally impressive ADAS growth story on the right, 2x to 3x content gains. Troy is going to walk you through that in depth when he takes the stage and talks about Automotive.

The dollar content story, it's equally impressive in the industrial market. We'll start on the left with the data center. So what you see in the center next to the robot, that's a data center rack. And as AI and advanced data center applications roll out, the power consumed by that rack, it goes up tremendously. And what that means is you need to have a lot more cooling solutions inside the data center rack. So as many of you are aware, we're leaders in high-efficiency fan drivers that spin the advanced fans doing a lot of the cooling. And if you look to the lower left of the page, a few years ago, we had less than $150 available in a data center rack. And in a few years from now, we'll have more than $425 of opportunity.

Within the $425 could be hundreds of these fan drivers, but we're also adding in current sensors and gate drivers into power supplies in the rack. So our 10 megahertz TMR current sensors is really our very fast current sensor portfolio, already ramping in data center power supply applications. And we are sampling broadly the same power supply customers with our isolated gate drivers. So we're seeing a rapid expansion in dollar content. Two quarters ago, we publicly stated 8% of our sales overall were coming from the data center market. In the December ending quarter, that number went up to 10%, which we also stated publicly. So this phenomenon, this growth phenomenon in data center, it is happening now, and it's a driver for the business now and for many years to come.

When you look to the right in robotics, I'll save that story largely for Mark, but I do want to add a few anecdotes. So I've traveled the world, whether it's in China or the U.S. working with advanced humanoid robot companies, a trend keeps emerging. We keep hearing things like we would use 75 of your position sensors in our robot. We would use 75 of your current sensors in your robot. And then I say there's about 50 motor drivers in a humanoid robot, although I was at our demo station yesterday and our newly appointed CTO assured me there's far more motors in a robot. So that's the beauty of these types of markets. They're always evolving. But the story is constant that Allegro has a tremendous dollar content opportunity in humanoid robots, and Mark will walk you through that story in depth.

From a tech perspective, TMR, in the end, it is just another type of magnetic sensor. It's not radically different categorically from a Hall-effect sensor, but it does provide a few key differences, higher accuracy, higher resolution and higher speed. So when you're in an ADAS motor in a car, a steering or braking motor, if you're in the shoulder motor of a robot, quite honestly, they don't really want to use Hall-effect angular encoders. They want the precision. They want the accuracy of a TMR-based sensor. So we're seeing great gains in both ADAS and robotics with our TMR technology.

The same is true in EVs and in the data center, whether it's in that onboard charger or in the power supply I spoke about. Customers prefer very fast, fast response time sensors. And with our Hall sensors, we can't go fast enough with our TMR sensors like our 10 megahertz TMR sensor that we recently released. This is the ideal solution for these power supply companies in the data center and also in power conversion in the car. So in the end, we see TMR as an important share gain engine for Allegro. There are far fewer competitors for us in the TMR space. So this is a winning formula for Allegro.

The second platform, our isolated gate drivers. As systems move to higher voltages in xEV chargers and AI power supplies, our gate drivers are essential for enabling greater power density and efficiency in both AC to DC and DC to DC conversion applications. So we can accomplish in a single chip, the same functions that many of our competitors require 2 chips to implement. So ultimately, we end up delivering size benefits and also efficiency benefits. It's a disruptive technology, unlocking a new multibillion-dollar SAM. And here's where we also believe we can gain significant share on a go-forward basis. So when I think of technology leadership, it's never accidental. And here on this page, it's a depiction of how we're being smarter and more focused with our R&D spending.

And I want to just start with the numbers on the top, 15% to 17%. Pretty much as long as I've been at Allegro, which has been a long time, we've managed the company with R&D spending as a percent of sales in this 15% to 17% average window. We are not changing that. When I talk disruptive innovation, more innovation in the right markets, we can do this without spending more money. And we're doing it through reallocation, as you see here on the page. So we're systematically reducing investment in these lower growth other categories. I want to point out that if you look at the Focus Auto box, it's the same amount of investment, both in a backward-looking and forward-looking perspective. We're not taking our foot off the gas in any way on Auto.

What you do see is increased investment in Focus Industrial. Here, we have the higher growth opportunity, higher gross margins, and we're able to pivot our R&D focus to the areas of greatest growth without spending incremental dollars. At the top of the stack, cost innovation. So this is something I've talked about a lot in the last year. There's many elements of cost innovation, but if I were to summarize it maybe the cleanest way, I'm very impressed with what the teams have done. We're taking chips, very high-volume chips that are selling today, the next generation, same form, fit, function and performance. We might be shrinking the chip 30%, 40%, 50%. So this will have a positive contribution to COGS reduction and ultimately higher gross margins. And this will be an evolution. There's many products going through this evolution, but this will have a strong impact on our path back above 55% gross margin, and it's starting now and should continue for many quarters to come.

All right. One of my favorite topics. I'm a big fan of AI and some of us were talking about it out in the -- before the presentation started. I want to give you a feel of what we're doing within Allegro with AI. And I'm proud of the team. It was not necessarily through my leadership. It was through other leaders in the room. They really brought us to the point where we were ahead of the curve with AI adoption at Allegro. And what does that mean? On the left, this is a representation of the chip design process. So we are well down a path using advanced AI tools to be more efficient in our design process. What that means for a reasonably complex chip, perhaps we needed 12 engineers to make that chip in the past.

Through the use of AI, we can drop that down something like 9 engineers. And what we will then do with the same pool of engineers, we can make more products, we can make them faster, and we can use new products as a powerful growth engine, both for revenue growth and for gross margin growth. In the middle, it really is depicting AI in the factory. So over the last 12 to 18 months, whether it's improving yields, decreasing test times, better factory floor planning, the team has done a great job adopting AI. And I got to be honest, the fun thing about AI is that it's evolving so quickly that each and every quarter, we're adopting new techniques, spreading them out across the company to unlock these efficiency gains through AI that will have a positive impact going forward.

In the rightmost picture, you see the hand there. This is really a representation of the fact that we are already down a path and already sampling early prototypes to customers to start embedding edge AI into some of our products. We found a lot of use cases where people say, you have the sensor data, can you do more intelligent things with it and help me solve problems in my end application. And this is an area of investment. This is one of the new growth vectors I spoke about earlier. And we're in the early stages, but getting very positive feedback from our customers.

All right. So I'm getting close to the end, but this is an important chart. This is a chart in response to many of the survey feedback elements that so many of you gave to us. And it tries to describe the major growth drivers for Allegro, both in the near term and the medium term. So I want to start on the bottom of the chart, that gray area, these are our other markets. And the point I want you to walk away with, this is a solid foundational business that continues to grow. Some of the questions we've been getting, as ICE cars decline, what happens to the base business, it continues to grow. It's not all ICE. Within the Industrial space, we have 2-wheeler growth, we have energy infrastructure growth, and we have medical market growth. And even within Auto, there's still share gains happening for Allegro, mostly in motors for safety, comfort and convenience applications, some of them in the cabin, et cetera. So this is a stable business that continues to grow.

The more exciting piece of the slide is the blue on top of the gray. These are the focus areas, again, xEV, ADAS, data center and robotics. Here, you see significant sales growth, and here's where we're modeling an ability to grow well into the double digits from a sales CAGR perspective. The growth is happening today. If you look at the picture, we broke it into essentially 2 halves divided by the chart line in the middle, you can see xEV, ADAS and data center are the growth drivers for the next few years. They're the growth drivers now. Various sensors driving the growth, TMR already driving above-market growth. When you get to the outer period, this is where robotics kicks in. This is where the advanced ADAS systems with much higher dollar content kick in, where 48-volt markets start to truly scale. And here's where our isolated gate drivers start to contribute more to the growth story. The takeaway here, there is a little bit of a decoder for you to see what the growth drivers are. But this is why we believe we can deliver this mid-double-digit sales CAGR on a go-forward basis.

All right. Back to the team. So we talked a lot about strategy. Strategy is only as good as the team that executes it. And like I mentioned, we have a fantastic team, but we did make it better over the past year. First, we brought in Rick as our SVP of Global Sales. You'll hear from him in a minute. In the fall, we brought in Troy to be SVP of Products. And the 2 of them really, really upskilled the team and are doing a tremendous job. A few weeks ago, we announced the promotions of Ian Kent. He was our VP of Operations, now our SVP of Operations, running all of our global operations in quality, which would mean our internal factory and OSATs, and we promoted Jamie Haas to CTO, filling the former role that I had. Jamie is a 20-year [ cereal ] innovator that I've worked with very closely. No one better than him to carry the torch of innovation with purpose. So I'm honored to work beside this team. It's one of the best performing teams I've seen at Allegro, and we're all focused on creating value as we look to the future.

So now let me end where I began, takeaway messages. I'll keep it simpler this time, though. This page does capture the essence of Allegro Reimagined, which is fairly simple, a more focused, faster-growing, more profitable company with a clear mission to create shareholder value by intersecting these market-leading technologies to these secular growth trends that are upon us today. So that is it for me. I'm now excited to have the rest of the speakers come up, led, of course, by Troy Coleman, our SVP of Products. Troy, take it away.

All right. Thank you, Mike. Good morning, everyone. I'm Troy Coleman, and I'm proud to lead the products organization here at Allegro. I started at Allegro just a few short months ago. So I thought I'd step back and share a little bit about why as it gets to the very heart of the discussion that we're having here today. After 25 years in the semiconductor industry, I saw something truly special in Allegro, a company with world-class technology and products, deep and trusted customer partnerships and a leadership team under Mike that has a clear, focused and compelling vision for the future.

Mike's strategy of Allegro Reimagined isn't just a tagline. It's a disciplined plan to win and grow in the fastest end segments of the market. I chose Allegro because I'm completely confident in this plan and our team's ability to execute. So nowhere is that opportunity more apparent than here in automotive. Over the next 20 minutes or so, I hope to give you some perspective of how we're bringing that vision to life in our largest and most dynamic end market. I'll focus on 3 key messages here today. First, how the rapid adoption of xEV and ADAS is increasing our dollar content by upwards of 2 to 3x. Secondly, I'll detail our competitive edge.

Our leadership is not accidental. It is based on that foundation of technology as well as deep trusted customer partnerships that ultimately lead to share gains. And finally, I'll explain how our new product investments are already addressing the new wave of innovation in vehicle architectures that ultimately ensures our growth for years to come. But before we look forward, it's important to understand the foundation that we're building upon. Allegro has been a trusted partner in the automotive industry for over 30 years. That deep pedigree means that our customers, the world's leading OEMs and Tier 1s, rely on us for the quality, reliability, efficiency and performance that is required in these most demanding applications.

As you can see here, we have an incredibly comprehensive portfolio from the ICE or internal combustion engine to the xEV powertrain for powertrain-agnostic solutions such as ADAS and safety, comfort and convenience. Over the course of the discussion today, I'll talk about xEV and ADAS as our focus Automotive and ICE and SEC, which I'll use for simplicity, as our Other Automotive. I'll just touch briefly on SEC because we're going to touch on that just briefly today. But on the SEC front, think about this as the LED lighting in the front or the rear of your car, maybe your window lift motors, your heating and cooling system. Effectively, there's motors throughout the car.

So this is an area, along with ICE that we continue to gain share and ultimately grow. So that will be an important part of the growth plan that we share with you here today. An additional theme that you'll see throughout the discussion is the shift in new vehicle architectures and specifically 48 volts. So I'll touch on 48 volts and what that effectively means to our customers and to Allegro. So Allegro is uniquely positioned to win and capitalize on these industry trends. And hopefully, to show you a little bit about that in the upcoming slides.

So you're probably wondering how does Allegro consistently outgrow the market when the total vehicle production really doesn't drastically change. And that's effectively what this chart is showing, that the total number of vehicles is probably around that 1% to 2% growth range. But what this also shows is the 2 most important secular trends that are driving our business today. And that is the shift to xEV as well as the adoption of ADAS. You can see that here denoted by the blue and the light blue for hybrid and battery electric and then by the green line for the ADAS adoption itself.

So the key takeaway here is that our growth is being supercharged by the mix of vehicles being produced. This is ultimately helping us to accelerate our opportunity in ADAS and xEV and ultimately lead us to outpacing the total vehicle production market or what we call SAAR by 7% to 10%.

So let's take a look at the numbers. This slide helps to underpin our strategy. By 2031, our Focus Automotive growth opportunity is growing to about $5 billion at an 18% CAGR. You can see here xEV SAM is running at about 23%. The ADAS about 10%. So this effectively is why the majority of our product investments are geared and biased towards xEV and ADAS. Although ICE and SEC are growing at a slower rate, Allegro is and will continue to grow and gain share in this space and ultimately drive a part of that as a part of our overall plan that we'll share with you here today.

So I know there's a bunch of numbers on the slide here, but I wanted to sum it up like this. At the end of the day, with Allegro's products as well as the 2x increase in new products that Mike mentioned earlier, we are poised to grow faster than the market and outpace SAAR by 7% to 10%. All right. Let's look at the dollar content by vehicle. So this is a visual of the growth of the vehicle itself. And as the industry moves towards an electrified software-defined vehicle of tomorrow, our dollar content grows. We see a clear path from the $40 in fiscal year '21 to $60 today to upwards of $100 in the future based on the adoption of those standards like xEV, ADAS and 48 volts as well as the adoption of our new products.

You can see here the color dots denoting that. In fiscal year '21, our primary opportunity was around braking and steering, maybe a couple of in-cabin motors. But as you move towards xEV and that xEV acceleration, you can see here in blue how new onboard chargers or inverters come into the mix. And then as you move forward, that adoption of 48 volts as well as ADAS continuing to be adopted across all vehicle types starts to come in play. And you see new innovation like steer-by-wire as well as electromechanical braking as well as the overall 48-volt architecture. So this increase in dollar content per vehicle along with share gains from our targeted product investments is effectively the core of our sustained long-term growth opportunity here in Automotive. So I hope that gives you a picture of the opportunity that's in front of us in Automotive. Next, I'm going to dive into xEV, ADAS and 48 volts and talk about how each of those are giving us an opportunity to accelerate our growth.

So let's start with xEV. As vehicles electrify, the demand on the powertrain becomes immensely more complex as you're having to manage high voltages from 48 volts all the way up to 800 volts. This opportunity is for Allegro to really participate in. As you move from a traditional gas-powered vehicle to the hybrid electric and battery electric vehicle of the future, our content opportunity grows by nearly 3x. You can see here in an ICE vehicle, a 12-volt ICE vehicle, the majority of our opportunity was really position sensors, speed sensors, maybe some in-cabin motor drivers. But as that shift happens to hybrid and battery electric, you see our new opportunities of content coming on to the board. You see our TMR-based angle sensors and current sensors. You see our new isolated gate drivers and even advanced motor drivers. So our technology here excels in these xEV applications.

As Mike mentioned, the understanding of our products and how they fit in this system is pretty well understood. I mean, at the end of the day, our sensors are the eyes and the ears of the system and our power ICs are the brains and the muscles that in here help us to effectively manage the flow of energy, right? So why does Allegro win in the xEV space? We win because we solve our customers' most difficult challenges from superior accuracy to power density, to better efficiency and overall system level cost savings.

Let me touch on power density for a second. Power density is effectively driving more and more power into a smaller and lighter space. So if I am able to reduce my die size by, let's say, 60%, along with my package solution, be able to triple the output power, that's effectively power density. And it's critical in applications like EV where space and size and weight are really critical. You can see here on the right-hand side how our products are solving our customers' challenges today. From our XtremeSense TMR, highest bandwidth solution that basically is used for next-gen power architectures like SiC & GaN.

I'm highlighting the 10 megahertz solution here today, and I would probably be remiss if I didn't basically make mention that the Electronic Design News just named this the Product of the Year last week. And maybe, I guess, since I'm still on that theme, let me stick with that for a second because just last week, we also introduced the industry's most accurate current sensor. And at CES, we introduced the industry's most power dense current sensor. So some on the team is calling that the triple crown, effectively the highest bandwidth, the most accurate and the most power dense current sensor on the market, just showcasing that we're continuing to lead and drive and strengthen our leadership here in the magnetic current sensor area.

All right. Our isolated gate drivers are doing in 1 ship what our competitors do in 2. And our motor drivers help our customers spin motors quieter and more efficiently than anyone. You'll see all of this firsthand in the demos that we have set up for you later today. Let's now transition and take a look at ADAS. So ADAS for Allegro is primarily defined as steering and braking. You can see as these systems evolve towards fail-safe applications like steer-by-wire, our content opportunity grows by nearly 2 to 3x. The evolution of ADAS is also showing signs of integrating some of the more powertrain components like an inverter with the steering and braking, developing something that the industry is calling corner modules.

So this is effectively having the propulsion, the steering and the braking all within a single wheel base. You can see from this that we're positioned pretty well in the steering market today. But as this innovation happens to corner modules or even electromechanical and steer-by-wire, our content opportunity continues to grow, but we can also continue to strengthen and build upon that leadership that we have in that space. So for these ADAS systems, the analogy is the same. Our sensors are the eyes and the ears and our power ICs are the brains and the muscles to ensure precise fail-safe control. We win in these sockets where failure is not an option.

So let's talk a little bit about that. Fail-safe performance is the name of the game in the ADAS system. Our customers value the safety and reliability that Allegro products bring. All of our products are designed with the highest level of functional safety in mind, driving ASIL D requirements, which ultimately our customers require and depend on. In addition to our differentiated products, we're able to build trusted partnerships with our customers around these solutions. And that ultimately makes when these products are designed in much harder to replace without a ton of effort. And so that's something that Mike called sticky earlier. We'll touch on that a little bit.

Let me touch on a couple of examples here on the right-hand side. The angle and torque sensors are delivering up to 20x lower noise for a better steering feel. You'll see that in one of the demos here today. Our power management ICs help our customers deliver over 50% less bill of materials. And our motor drivers built on our 120-volt process technology is helping to enable compact, highly efficient true 48-volt systems. So although we have leadership in this space here today, we're not standing still. As an example, we'll be introducing a new solution later this spring that has a level of integration that's never been seen before in this new application. So just a little bit of a teaser there.

All right. Moving forward. One of the themes that we mentioned throughout xEV and ADAS is that shift to 48 volts. Let me touch on that and a little bit about what that means for our customers as well as for Allegro. First, Allegro is driving the shift to 48-volt power, which ultimately is a huge advantage for our customers in efficiency and in weight. On the left-hand side here, you can see some of the advantages to the OEMs. With 4x lower current required in comparison to a 12-volt system, the amount of cabling used in the car can be drastically reduced, estimated to be 5x lighter in weight. And you can see that just by the depiction of the gauge of the wire on the screen here.

That also inherently drives 16x less heat generated within the car. And ultimately, what that means is better overall battery life and extended battery life. So for those that like to have your EVs driving longer distances and maybe have a little bit of range anxiety, ultimately, the shift to 48 volts is going to help with that. Allegro is uniquely positioned to win in the 48-volt space because of our 120-volt process technology. This ultimately helps us build 48-volt solutions that are true 48 volts, and our competitors are struggling to match that type of performance. Over the past many years, our customers have also lacked a sizable number of components in the 48-volt space. I think that's starting to evolve, but it hasn't been a challenge with Allegro. We actually have an expansive portfolio of 48-volt solutions today from our motor drivers to our isolated gate drivers, to power management ICs and even current sensors that are meeting our customers' 48-volt needs today.

As many of you know, 48 volts is not just restricted to Automotive. We're seeing 48-volt interest from our data center and our robotics customers as they move to that 48-volt backbone, and Mark will talk a little bit about that later today. So that's a look at our leadership across the technology vectors, but ultimate validation of any strategy is with our customers. So let's take a look at what our customers have to say. Our success is validated by the deep trusted partnerships that we build with industry leaders such as the ones here on the screen.

From a couple of these examples, you can also see that customers in China ultimately value the same Allegro differentiators that our customers worldwide do: safety, reliability and performance. This also makes our products sticky, as I mentioned. And yes, in China, products are sticky. It also reinforces the importance of our China for China supply chain strategy, which Rick will touch on a little bit later today. Also want to give you one specific example of what a true customer partnership looks like. At a recent meeting at CES, a prominent customer in the ADAS space came to a meeting prepared, and I mean very prepared to share with us their system-level challenges across all of their next-generation programs and projects.

Throughout that discussion, it became very apparent that Allegro's products as well as our ability to innovate and willingness to innovate with our customers gave us -- put us in a very good position to ultimately win their business. This open dialogue and discussion and relationships that are built in this way has been something that Mike has fostered over the years, and it ultimately gives us a model for how we listen to our customers, how we act with urgency and ultimately, how we win with our customers. I'm confident that in working with Rick, that we can build many more relationships just like these. And it's examples like this that give me confidence that we can consistently outgrow the market across the board here.

All right. I'm now going to shift from our leadership across xEV, ADAS and 48 volts to what drives -- how this ultimately drives sustainable growth for Allegro. So this kind of brings it all back together. As I mentioned in the intro, between now and fiscal year '31, our focus areas of xEV and ADAS will drive a nearly $5 billion opportunity at an 18% CAGR. This reinforces our strategy to align our resources towards those areas where our products are most differentiated and valued in that xEV, ADAS and 48-volt space. And I'll also reiterate from previous slides that along with our products and the relationships that we build with our customers, we are poised to grow in Focus Automotive and in Other Automotive faster than that combined 8% growth of the market itself.

So this is the foundation of our financial outlook. I'll show what that means from a revenue perspective. So our strategy of focusing on these high-growth areas is poised to deliver greater than 10% growth in the Automotive space. We expect our focus areas to approach probably a 20% CAGR over the next decade. I know I've only briefly touched on the Other Automotive space here, too, but you can see in that gray bar, Other Automotive is also consistently growing. We see an opportunity as SEC and ADAS get adopted more into ICE that ICE will also continue to grow and gain share. So that's an important piece of our overall plan.

But ultimately, what this means is that we are effectively driving towards greater than 10% growth across the automotive space. We'll continue to expand our existing portfolio while also addressing new opportunities around inductive TMR sensors and isolated gate drivers. So based on all of this, I'm confident that we can consistently outgrow the market and drive automotive to be a very big piece of what we do here at Allegro.

All right. This brings me to my key takeaways for the discussion today. And in closing, I guess if there's only 3 things that you remember from the automotive piece of this discussion, I hope that it's this. First, regardless of what happens in the Automotive Industry from ICE to xEV or otherwise, Allegro is poised to grow faster than the market through content expansion and share gains. Second, we have a competitive edge in technology and in innovation. From our 120-volt process technology to delivering products that meet our customers' safety, reliability and performance, we are uniquely positioned as invaluable partners.

And third, our new product investments across TMR sensors, the isolated gate drivers, advanced motor drivers are already addressing the vehicles -- the shift in vehicle architectures, and we are uniquely positioned to win in xEV, ADAS and the 48-volt space. All right. All in all, the opportunity in Automotive is great. I'm excited to be a part of the Allegro team, and I'm confident that we can grow and gain share across this space. Next, I'll turn it over to Mark to talk about Industrial. And I can tell you that my products team is equally excited about the opportunity here in the industrial space. So Mark?

Thank you, Troy. For those that don't know me, my name is Mark Gill, and I've been with Allegro for the past 6 years. So you just heard about our expanding opportunity in the Automotive market, where we have been successful for the last 3 decades. So today, what I want to show you is how we are leveraging that same DNA of innovation and quality to capture our -- the next growth story, which is the Industrial market. So my goal over the next 20 minutes is to focus on 3 themes that describe Allegro's industrial business. So first, where are we strategically focusing? Where we're focusing our investments to build a powerful and sustainable growth engine.

Then secondly, how are we winning in today's fastest-growing markets like AI data center and then how are we building on that leadership for tomorrow's robotics revolution. And then third, I'd like to provide some insight into our targeted high teens revenue growth with elevated margins in this market. So as Mike outlined earlier on, we see powerful megatrends that are shaping the industrial market. First, in this new electrified world, distributed energy from solar farms, EV charging stations, battery backup and a whole bunch of others presents immense opportunities for power conversion. For Allegro, these are the same fundamental problems of efficiency and safety that we solved for the electric vehicle, and they're now just playing out on a grid-wide scale.

Our 48-volt and 800-volt product capabilities are perfect to deliver energy-efficient industrial solutions. Now second is a transition to a more automated future. For years, the world's leading automakers, as you just heard, have trusted Allegro to solve complex motion problems in their ADAS systems. The core magnetic circuit design from our market-leading angle sensors for these in steering and braking systems, and they've been proven over billions of miles on the road, this same core design is the foundation for the high-precision factory motion sensors that we're delivering today. And as we'll see shortly, this same capability is positioning us to lead in the next frontier of humanoid robotics.

And third is the advent of artificial intelligence. AI is creating an unprecedented demand for power in data centers and Allegro is at the heart of this solution. But as Mike noted earlier, our relationship with AI runs much deeper. We're not just enabling it in data centers, we're embedding it in our design tools to accelerate innovation and building enhancements into our future products to create truly smart edge sensing solutions, and you're going to see more on that later. So these powerful megatrends create for us nearly a $6 billion industrial opportunity, growing at about 17% annually.

Now to truly understand this strategy, it's key to recognize that industrial is not just a singular market, but it's a combination of 2 focused markets, namely AI data center and robotics that drive an accelerated top line growth and then a wide-ranging Industrial other group that drives higher gross margins and safeguards against market cyclicality. And it's this end market diversity that's an opportunity to showcase our strengths and leverage the attributes that define Allegro. For example, for our customers, our lead customers in AI data center or robotics, for them, success requires deep technical partnerships.

Here, our dedicated engineering and sales teams work hand-in-hand with our customers to define next-generation innovative solutions. For critical applications like energy infrastructure that must run 24/7, there is no substitute for trust. This is where our customers value our Automotive heritage and our commitment to quality and reliability. And for fast-moving markets like medical wearables or power tools, customers need a partner that can support dynamic supply needs across the globe. Our worldwide presence and multisource manufacturing strategy keep ahead of changing ordering patterns and deliver confidence in supply.

So now that we've established the key megatrends that drive our strategy, let's dive into the fast-growing market of AI data centers. The shift towards AI, I think, has fundamentally reshaped data center requirements and deployments. The need for specialized processes has driven a significant increase in overall energy consumption, leading to the development of hyperscalers that require unprecedented amounts of electricity. Now as Troy mentioned in his Automotive discussion, when system architecture changes are aligned with differentiated Allegro content, then the resulting opportunity accelerates beyond simple deployment numbers.

As you can see from this image, when the data center architectures transition from traditional to modern hyperscalers, we're experiencing more than a tenfold increase in our motor driver content. And where historically, we were just cooling the processes, today in an AI data center, the fan opportunity is actually over-indexed to cooling the power supply subsystems. Together, our fan motor drivers, our high-bandwidth current sensing portfolio and our new isolated gate drivers deliver a $1.7 billion SAM for Allegro, growing at over 20% for the long term. And it's important to note that this $425 average content per rack we talk about here already contemplates a transition to more liquid cooling in some high-end compute trays of the AI hyperscalers.

So now Allegro's content growth evolves from first, delivering the power to the racks and then secondly, cooling the processes that consume that power. So let's start with the power delivery challenge. So offering a wide range of current sensors for this application, our customers confirm that our devices that support 800-volt operation increase efficiency for their high-voltage DC systems, while our 10 megahertz bandwidth products reduce the size of bulky transformers and our tiny 3-millimeter square products enable accurate current sensing in the incredibly dense spaces found in the hyperscaler environments. Looking forward, our isolated gate drivers enable new, more efficient hybrid power architectures built on silicon carbide or GaN switches that reduce system size by up to 40%, directly addressing the industry's need for insatiable demand for power density.

But remember, today, the majority of our revenue for data center power systems is with our fan drivers, and these are needed to cool the power subsystems. And as rack power increases, the opportunity for the fan drivers grows accordingly with that power. So the second opportunity we mentioned is cooling the processors. All that processing generates an enormous amount of heat that needs to be extracted, whether it's 12-volt or 48-volt air cooling or liquid cooling, are efficient, quiet motor drivers running increasingly high RPM power the processor cooling systems that are critical to keep this multibillion-dollar facilities online.

Overall, our revenue in data center has historically been driven by fan motor drivers, which we see will continue to grow into the future. This past year, our current sensors started meaningful production. And within the next 2 years, the isolated gate driver revenue starts. The move from -- in data centers to 48-volt and even higher working voltages actually aligns perfectly with the products that we deliver for the electric vehicle, allowing Allegro to rapidly deliver a robust and innovative product portfolio here.

So now I want to jump forward a second and move to the market that we believe will define the next decade of technological advancements, and that's in humanoid robotics. Once again, Allegro's content opportunity evolves with the evolution of the system content. Today's household robots have just got a few joints, each with an opportunity for Allegro's sensing and motor drive components. Factory robotic arms have 5 to 10 joints, each with an opportunity for position sensors, current sensors and motor drivers. So building on our foundation of Automotive-grade quality, we see factory automation having an opportunity for us for about a $400 million SAM.

But more recently, we see an emerging opportunity into more sophisticated robots where a wide range of service robots, quadrpeds or humanoid robots, they're being imagined. Now interestingly, these robots run typically on a 48- or 60-volt bus for all the reasons of efficiency that Troy mentioned earlier on, creating yet another share gain opportunity with our specific leadership in automotive ADAS, 120-volt capable processes and ASIL safety systems. So today, we're hearing that Allegro's core technology is aligned well with the requirements of these robotic systems that can deliver more than $150 per robot to us.

Now to capture this value, our opportunities begin in the larger joints like hips or shoulders, where our accurate TMR or inductive sensors provide the critical feedback on force, position and torque needed for stable, powerful movement. Embedded algorithms within our high-efficiency motor drivers dramatically reduce torque ripple and audible noise, resulting in smoother and more reliable operation of these long limbs. But the key to unlocking the full opportunity value lies in the hands, where miniaturization and integration are paramount.

So to consider the size of this opportunity, I invite you just take a look at your own hands for a second and consider the number of joints in front of you, each needing motors and multiple sensing modalities. For these robots to be truly dextrous, Allegro is creating an integrated miniaturized chip that combines the muscles of our motor drivers with the nerve endings of many of our tiny TMR sensors. It's a small single package that is truly exciting our customers, combining sensing and acting and will be sampled to our lead partners in the second half of this year. With at least $150 on every high-end robot, conservatively, this represents a $1.4 billion SAM, growing at over 30%. And yes, the SAM could be higher. Today, I want to give you a little bit of early insight into a new product area for this market where Allegro is the exclusive licensee of an Advanced Force sensing technology based on quantum tunneling, which is the fundamental principle underneath TMR.

As Mike referenced earlier on in his AI slide, this surface sensing technology enables the hand to manage delicate tasks like grip strength. And when connected through our smart interface IC, it forms an array of intelligent edge sensors, allowing the robot's hand to feel and react instantly. Now this is very different from applying magnets to a fingertip. This technology is immune from stray fields. It's also very different from capacitive sensing. This technology allows any reasonable material to be used in the hand or the gripper.

This level of smart sensing is the key that unlocks truly dextrous motion and will be sampled again to select customers in the second half of this year, and you will have the opportunity to see a demo of this after lunch today. So to be clear, while the factory automation revenue is being captured today, significant humanoid robotic revenue is still years away, but the battle for the architecture of the future is being fought and won right now.

So having looked at the focus areas of the industrial market, let's just look at the other industrial areas, and they include things like energy infrastructure, personal mobility and a variety of consumer and other medical products. The largest opportunity in the other industrial market area is the energy infrastructure. And it's at the very center of the global transition to more resilient power. In solar inverters are 1 megahertz or 5 megahertz, current sensors provide precise measurement for maximum power point tracking, enhancing the energy harvesting efficiency of these systems.

For EV charging stations, they're crucial for accurate billing over current protection and ensuring safe charging. In battery backup systems, our sensors enable precise monitoring of charge and discharge vital for extending battery life, but also ensuring overall system safety. And on that theme of safety, our high-bandwidth 10 megahertz TMR sensors provide the fastest fault detection on the market, protecting these high-value assets from any catastrophic failure.

So then finally, let's talk about the engine for capturing the long tail of innovation across the globe, representing a market of about $1.5 billion. It's where we partner with thousands of customers from the established leaders to the next waves of start-ups that value our industry-leading performance. These markets allow us to leverage the full breadth of the Allegro portfolio in powerful ways. In personal mobility or in 2-wheelers, for example, we're taking our deep expertise in automotive products and applying it directly to power the future of urban mobility.

For medical or portable products, our leadership in low-power TMR or Hall effect sensing is enabling a new generation of wearables that enhance health and wellness. At a recent meeting at CES, I saw power tool executives just broadly smiling as they put our motor drivers through their paces, and we're thrilled with what they saw. And through our catalog business, we empower innovators everywhere, giving them direct and rapid access to the broadest range of magnetic sensing products. So this broad market exposure is actually the perfect complement to our targeted focus markets.

It provides a stable, higher-margin revenue stream and gives us a valuable window into emerging trends that may define tomorrow's growth opportunities. It's what makes our industrial portfolio so powerful and durable. So let's bring this all back together again then. As you can see, we are positioning ourselves to capture a share of nearly a $6 billion market driven today by the growth in AI data center, factory automation, energy infrastructure, while the future is accelerated by robotics. But what makes this opportunity truly compelling for Allegro is the quality of the growth.

First, it's incredibly efficient. Because the core challenges in the industrial market mirror those of the automotive market, we achieved significant R&D leverage. We're building on our existing world-class IP to create a new revenue stream with a higher return on investment. And second, this market structure is accretive to our margin model. The diversity of industrial customer base generally supports a favorable pricing environment for Allegro, where customers are typically ordering product in the tens of thousands rather than the tens of millions that you might find in the automotive environment.

And we're able to leverage our high-volume automotive manufacturing capability for this, but often make reductions in component costs through bill of material changes. So overall, the industrial business generally enjoys elevated gross margins and stronger profitability. So what this chart represents is a higher growth, higher-margin business that perfectly complements our automotive leadership. So you've heard from me about the values that we bring to our industrial customers, and perhaps it's time, therefore, to hear from them directly. Whether it's reducing noise in a data center liquid cooling pump or improving efficiency in a server power supply or reducing system footprint in industrial automation systems.

Our innovative products resonate with these industrial customers worldwide. So what does this mean for our financial outlook? We see a clear multiphased industrial strategy built on markets where we believe we can effectively compete and can deliver to our financial commitments of a high teens revenue growth at elevated margins. In the near term, our market growth is powered by our leadership in AI data centers across all industrial markets, our advanced current sensors, motor drivers and game-changing XtremeSense TMR technology are winning designs today and creating a powerful revenue stream.

Looking ahead, that market momentum is supercharged by winning the next wave of innovation in robotics. And additionally, our investments in isolated gate drivers, inductive angle sensing and these highly integrated robotic hand solutions will become significant new revenue engines, layering on top of our existing growth. Margin growth is enabled by reusing our automotive core technology, delivering higher ROI and by the pricing and costing favorability that we typically enjoy with this customer base.

Through Mike's leadership, we have now an updated, clear and executable plan. We're driving near-term results with our existing leadership positions while simultaneously investing in the next pillars of growth, ensuring higher margin, high-teens growth trajectory for years to come. So let's go back to where I started from. Today, I look to deliver a clear message.

First, the industrial market is a core strategic growth engine for Allegro with well-defined focal points. Second, we're making investments to extend that leadership from the data center and the factory floor into the robots that will define the next decade. And then third, we are leveraging our automotive expertise and building a higher growth, higher-margin business that will be a powerful driver of value for years to come. Thank you. With that, I'll hand over to Rick to explore our new sales strategy. Rick?

Thank you, Mark. And good morning, everyone, and thank you for the time this morning. I'm Rick Madormo, and I am the new Head of Sales here at Allegro. I brought with me my speaker notes because Jalene said, if I'm off -- not off here in 15 minutes, she's coming up and getting me, which nobody wants to see, especially me. So next month is my 1-year anniversary here at Allegro.

When I joined here, I brought with me about 30 years of semiconductor sales experience. Over that 30 years, I've not made a lot of changes, not a lot of moves from company to company. But when I have, I've looked for companies that bring 3 things: Number one, solutions that are important to the customers we serve in either solving their problems or unleashing their products. It's really important to be important to the customers you're serving. Number two, inside the company, a culture that truly puts the customer at the center of everything we do.

And then number three, a strong experienced leadership. Hopefully, by the end of today, you'll agree with me that I do feel we have a really strong blend of all 3 here at Allegro and driving our growth. Over the next 10 to 15 minutes or under 15 minutes, I'll discuss the strategic changes that we are making to the sales organization, probably the biggest change that we've made in my first year, and we'll talk about what drove those changes and hopefully, which will accelerate our growth going forward.

We'll talk about how we're applying our technology to the high-growth areas and how those growth areas are being driven by the megatrends that Mike spoke to in the beginning of all this. I'll provide some color on our continued momentum in China. And then lastly, I'll give you a look at our sales pipeline, which shows that it's robust and growing through the end of the decade and more than drives the growth that we've been talking about here today.

Our entire go-to-market strategy is driven on deep customer intimacy. Now that sounds like a catch phrase, but customer intimacy, true customer intimacy is more than just customer relationships. Let me give you an example of this that just played out this past month. This past month, we had one of our top customers join us at our offices. They flew in their engineering and purchasing executives, and we spent time with our leadership for hours discussing their challenges going forward and how we may help them get through those and unleash a new product for them.

In those meetings, we created a new product that's going to help solve their problems, that product will then be unleashed to all customers going forward. That's what customer intimacy looks like in action. Our most successful top-selling products are not off-the-shelf components. In a lot of instances, it's that co-collaboration with our customers that generate these products, and then we make it available to all. This collaborative process creates incredibly durable and sticky products, which then translates into resilient, predictable revenue going forward.

And lastly, it creates a strong competitive moat against our competitors. I've led this sales process in the 3 previous companies that I worked for. And all it really takes is making sure that we have the correct people, the right sales structure and a very planned and purposeful sales approach. All this focus on the customer really led us to a question. Our customers are not organized by geography, so why should we be? This insight was a catalyst for a pivotal shift that we made in our sales structure.

As you can see here, as customer feedback is truly at the center of what we do, we reorganized our sales team to better support this. We moved away from a geographic model to one that is focused on end markets, both automotive and industrial teams. This allows for deeper expertise and a more focused sales approach to each. We are taking the proven playbook that has defined our decades of success in the demanding automotive segment, and we're applying those same disciplines and methodology now more purposefully against the industrial segment.

We're maintaining a sharp focus on automotive. This actually increases our focus to those that are calling on the automotive segment and strategically attacking the significant opportunity that Mark just spoke about from the industrial landscape. This isn't about trying something new. It's about leveraging that successful formula to capture new growth. To accelerate our reach and our growth, we deploy a purposeful 2-pronged distribution strategy. We have a deep global partnership with companies like Arrow and Future that helps us drive scale and logistics, while simultaneously, we are leveraging specialty distributors like Digi-Key and Mouser to help us penetrate that broader industrial market, giving us access to thousands of customers and emerging applications.

This comprehensive channel strategy ensures we are capturing growth at every market of the level -- of the market. So as you've been hearing a lot today, the most powerful megatrends are shaping the future really work in our favor. Precision sensing demand is rising, which is great news for us, driven by ADAS, robotics and factory automation, all of those demand precision sensing. The exponential growth in data center demand extreme reliability and efficiency. Other perfect areas for us to address and help our customers address.

And then lastly, the electrification of all things requires efficiency across all markets. By aligning our market-focused teams to these trends, we are positioned to unlock the mid-teens revenue growth that you've been hearing about today. This growth is built on a stable and well-balanced foundation. As you can see from this slide, our sales are geographically diverse. This balance reduces risk. Furthermore, we're not overly dependent on any one customer to drive our revenue, which provides another layer of stability.

Our channel mix is evenly split between distribution and direct sales, giving us the flexibility on how we go to market around the world. Let me double-click on this 28% of our business that is in China. 90% of our China business is safety critical automotive or automotive powertrain, 90% of our business. Both of those applications are extremely sticky. I'd also like to point out that our design win rates in the region are accelerating as well. This past year, our design wins in China grew 35% from the year prior.

So the combination of the accelerating design wins and the stickiness of our products and the applications we serve give us high confidence in continued growth in China. Looking forward, why am I confident that growth can continue? It really comes down to 2 simple thoughts. Number one, their investment strategies are in direct alignment with the core of what we do. Their focus on data center, robotics, ADAS, xEV is everything that you heard today, and it's what they're focused on.

And number two, we have a strong China for China supply chain to service this growth. We've already established our back end in China and our products are ramping. We're currently working with partners and customers to approve this process. Our long-range plan is to do a broader product rollout that are fabricated on wafer technology from China as well. So our overall China for China strategy is built on 3 key core pillars. First, it's local innovation and support. We have built a strong local team of application engineers and business development leaders who are working hand-in-hand with our China customers in co-developing solutions. They're not just selling parts, they are co-developing solutions and providing real-time support, which gives us a significant speed and relationship advantage from our competitors who are managing this space from afar.

Second is local partnerships. Our strategy is to be deeply embedded in the local ecosystem. We are aligned with winning domestic OEMs who are not just leading within China, but are now exporting those innovative vehicles to around the world. So our success will grow as their success grows. And third, I've already mentioned our local supply chain. We are actively qualifying local Chinese foundries and OSATs. This is not just about cost reduction. It is about building a resilient domestic chain -- supply chain and insulating us from geopolitical friction. It also helps us to serve our Chinese customers more effectively.

Now this brings me to probably the most forward-looking metric and something I live every day, which is our sales pipeline. This chart here shows you our current identified and active opportunities that we are working with our customers. As you can see, they are growing robustly through the end of the decade. Most importantly, it more than supports this mid-teens revenue growth rate that we've been talking about, giving us high confidence in our ability to meet or beat these long-term goals.

Critically, we have the pipeline and now we have the sales structure to convert that to revenue. We've been talking a lot today about the industrial market and how this offers a considerable growth opportunity for us here at Allegro. Our success is validated by the company we keep. In the industrial space, we directly partner with market leaders like Delta, Nidec and Lelon, while our channel partners are supporting the critical broader industrial market.

Positive example of this success over this past year on industrial is a greater than 100% increase in design wins for our data center business specifically this past year. Another positive reflection of this focus played out this past January at the CES show. Our overall customer meetings were up year-over-year. But more dramatically, 50% of those meetings were with industrial customers looking to solve very complex problems. That's kicked off a lot of follow-up meetings where we're going to collaborate with those customers to solve their problems.

And in automotive, our advantage is built on 3 decades of trust along with the scalable solutions that Troy mentioned from ICE to EV. We have collaborated with or are designed in at the top worldwide OEMs and Tier 1s. This is a testament to the already established customer intimacy that we have in automotive. Early in my presentation and throughout this presentation, I've mentioned to you the criticality of this collaboration and customer intimacy. A great example of this played out recently with one of our top Tier 1s.

Our work with them led them to a major OEM win for their application. It also spawned a series of products for us. And now those products are available to all customers around the world. The auto industry has changed or will continue to change more in this decade than it has in the past 50 years, and we are aligned to support that growth. Lastly, our customers consistently praise our collaboration and technical solutions, noting how we help them get to market faster and meet stringent requirements.

This is backed by industry recognition with recent awards for our technology, service and partnerships with the leaders in automotive, AI and data center markets. So in summary, Allegro has a clear, focused go-to-market strategy. We are aligned with durable megatrends. Our business is built on a stable, balanced foundation and our sales pipeline confirms a good growth trajectory. With that, I'll move this over to the financial piece, which you're probably all most interested in, and that's our CFO, Derek.

Thank you, Rick, and good morning, everyone. And thank you for coming to Boston in mid-February, beautiful weather. For those of you who don't know me, I'm Derek D'Antilio, the CFO here at Allegro. [ Ben ] here about 5 years at Allegro. And in my 5 years at Allegro, I've certainly seen the company evolve quite a bit.

I joined a year after the IPO. And in those 5 years, I've seen the final transition from an IDM to a completely fabless company. We've become a completely independent company for the first time in over 30 years. I've watched the transition of our leadership team that Mike talked about. And now I'm more optimistic than I've ever been. And as you've heard today, we have very large opportunities focused on some very exciting markets within auto, data center, robotics and a lot of other areas within industrial that are in our greenhouse.

So my agenda today, I'll start with our historical financial performance, which gives a little bit of a basis of where we're going in the future. We've actually been there before with some of these metrics. I'll recap the SAM that you've heard about today, both in automotive and industrial and what it means in total. I'll discuss some of the recent investments we've made over the last 3 years that set us up well for scale and value creation. Then we'll spend the bulk of our time on the future, the target financial model that Mike introduced earlier today and very importantly, the bridges of how we get there from a gross margin and operating margin standpoint.

And finally, I'll close with our capital allocation strategy. So our financial priorities at Allegro are quite simple. There are 4 of them. First, we're focused on accelerating the pace of revenue growth. As Mike and the others have talked about, we're now targeting mid-teens sales growth. That's a pretty significant upgrade from our prior model of low double digits. Second, we're committed to continued gross margin expansion. And to me, this is a direct reflection of our technology and the customers value it and our operational execution.

Third, we expect to use significant operating leverage to help drive earnings power and free cash flow much faster than sales growth. And then fourth, we'll reinvest that free cash flow in growth opportunities, both organic, potentially inorganic and potentially select share repurchases, all while maintaining a very, very strong balance sheet. First, let's look at our historical performance. From our IPO year through fiscal '24, our sales grew at a double-digit sales pace and our earnings grew more than twice as fast as sales.

Then like the rest of the industry, we had the inventory correction. It was painful, but we acted decisively and early and took actions for our customers and our business. And as a result, we were operating profit and free cash flow positive even at the trough. We've also learned some lessons and adapted our business processes. And I believe now we're better positioned for sustainable, profitable growth going forward. And now you can see here the reacceleration has begun.

And FY '26 is shaping up to be a very, very strong recovery year. Sales are projected to grow by more than 20% at the midpoint of our Q4 guidance and EPS is projected to again double year-over-year. The key takeaways here are: one, we have a history of above-market growth in sales; two, our team has now navigated through both a prolonged down cycle and up cycles; and three, operating leverage has been and will continue to be a very powerful earnings multiplier.

So let's talk about priority #1, sales growth, accelerating sales growth. As you've heard a lot about today from Mike and the others, we're well positioned in large and growing markets. As you can see here on the chart, our total market opportunity is nearly $14 billion, and these markets are growing at a healthy 12%. But the real story is where we're focused. We've targeted the highest growth segments of automotive and industrial. And within auto, xEV and ADAS are projected to grow a combined 18% CAGR in a nearly $5 billion SAM.

Within industrial, the focus markets that you heard about today include some of the fastest-growing markets like data center and robotics. Those are projected to grow at a combined rate of 27%, the market. These focus areas combined represent about $8.5 billion opportunity, growing at 21%. And as Mike talked about, we've realigned our resources. We're making investments in growth, in research and development and sales to ensure we continue to outgrow the broader markets.

Moving to our second priority and a little bit of history here and one that I'm particularly focused on is improving gross and operating margins. As you can see here in this chart, before the inventory correction, we consistently improved both gross and operating margins. From our IPO in fiscal '21 through fiscal '24, our average gross margins were 55% and our average operating margins were 24%. The inventory correction was tough and steep for Allegro, the way we manage with our customers and inventory.

And I believe many of the changes you've heard about today make us stronger and more resilient going forward. And now we're projecting to exit fiscal '26 at the midpoint of our Q4 guidance at 50% gross margin. That's already 440 basis points above what it was 1 year ago, demonstrates the leverage on the gross margin side. And in Q4, operating margins are projected to be approximately 16%, nearly double trough levels, again, demonstrating that leverage.

Now turning a little bit to operating expenses and a key element of how we get that leverage. We've had a very disciplined approach to OpEx management while making investments. Over the last 5 years, we have invested both in organic growth and inorganic growth. And a significant portion of these investments have been really funded through aggressive, what we call aggressive cost reallocation, taking costs from areas that are not growing or areas that are cash positive and moving those into the growth areas.

From an R&D investment standpoint, we're funding the leadership, and that's historically averaged about 15% of sales, but we didn't cut that in the trough. That's extremely important that we continue to fund that leadership in technology that drives our business. And OpEx has historically averaged about 30% of sales. Within R&D, as Mike talked about, we're focused on both releasing compelling new products, but also achieving significant cost reductions of upwards of 50% on existing products.

And over the last several years, there's been a real focus internally on R&D efficiency. In fact, it's been a key element of our incentive compensation plans. And this focus has yielded results and improvements in cycle time and allowed us to more than double the number of product releases in the last 5 years while increasing OpEx at a rate of about 7% a year, inclusive of acquisitions. We've also integrated 2 acquisitions of technology over the last 3 years, largely into the R&D organization, one, the TMR that you heard about today and the second one, the isolated gate drivers.

Looking at SG&A, we continue to be very disciplined here. And again, making reallocation of cost to fast-growing markets and regions within sales. And our G&A has actually been about flat for 5 years since the year of our public offering by focusing on efficiency, leveraging a new Philippine shared services center or center of excellence and now starting to automate and use AI. And again, we have the SG&A in place to do well over $1 billion. We were there 2 years ago.

Let's discuss our business model and our manufacturing strategy. We have a fabulous business model. We believe this fabless model and some of the investments we've made over the last 3 years, really in our Philippines facility pave the way for scale and significant operating leverage going forward. Our global footprint includes partners that give us the capability to support multiple supply chain lanes for our customers. On the front end, we work with multiple wafer fabs running both standard and proprietary Allegro processes in the U.S., Taiwan and other countries.

And for assembly and test, we also have multiple sources. We work with market-leading OSATs in Asia and all proprietary packaging and almost all test is done in our own facility in the Philippines. Our experience has been that having in-house test really supports better customer quality and customer service and cycle times to your customers. And as Rick mentioned, specifically for China, which is about 1/4 of our shipments, we're executing on our China for China strategy, which began almost 5 years ago. This is not new.

We've qualified local OSATs in China, and we're already shipping from those OSATs. We're also qualifying local fabs in China. And again, as Rick mentioned, this isn't just about cost, although that's a benefit. It's about building a resilient local supply chain in China to give our customers confidence that we can continue to deliver regardless of geopolitical friction. The good news, as I said, much of the investment has already been made that's required to accelerate our sales and gain the operating leverage.

As you can see here, over the past 4 years, we've invested approximately $400 million in capital, largely in our back-end facility in the Philippines and also in R&D. And for the past 2 years, our CapEx has been now at or below our target of 5% of sales really on growth opportunities and maintenance CapEx. These investments can now support up to about $1.2 billion in sales. And that's not a hard sailing. It's based on mix. We've also invested in focused M&A around technologies that fit our profile. We've invested in TMR and isolated gate drivers you heard about today. These technologies really bolster our market-leading sensor portfolio with the TMR and give us a compelling opportunity in the fast-growing high-power market of data center and automotive with the isolated gate drivers.

And all of these investments that have already been made mean we're well positioned to deliver strong return on invested capital going forward and value creation for all of us. Now let's turn to the financial model. This is our vision for the next 3 to 5 years. We're targeting mid-teens sales growth, as you've heard, by focusing on the fastest-growing segments of the market, coupled with making investments to continue to gain share by releasing these new products like TMR, isolated gate drivers, 10 megahertz current sensors.

We're targeting returning to above our historical average of 55% gross margins. And I should mention, this is not an absolute ceiling, but I believe this is a very credible target. And on the next page, I'll walk you through the bridge to get back above these numbers. We have a very defined path with identified projects to get back to the mid-50s. And once we get there, we'll identify opportunities to keep going. We're maintaining our targeted operating margins at or above 32%, driven by operating leverage.

And putting it all together, we're targeting earnings per share of more than $2, which is 4x FY '26 earnings per share. And finally, we're targeting free cash flow of 20% to 25% of sales. We believe this model provides a path to significantly more earnings power than our prior model. Now turning to the gross margin bridge. How do we get back to that mid-50s? It comes down to 3 things. The biggest piece of it, the biggest driver is operating leverage. As our sales grow, because we've already made the investments, we get more leverage from our factory in the Philippines and our fixed costs. The fixed costs have actually been flattish for the last 3 years.

Second, we continue to make opportunities for factory efficiencies. We're constantly driving improvements in automation, equipment utilization and reductions in cycle times. That has both benefits for gross margins and reductions in our on-balance sheet inventories. And third, a part that I talk a lot about is optimizing our variable contribution margin or what many call product margin. The variable contribution margins for Allegro since our IPO have averaged a healthy 60% to 65%, the drop-through. So VCM does include a lot of these factors you see here on the screen. And those can move that towards the higher end of that drop-through range or the lower end of the drop-through range.

Of course, as Mark talked about, our goal is to continue to drive a higher mix of industrial products, which historically have had a significantly higher gross margin profile than our automotive products, largely because of the volumes that our customers are buying in and because of the manufacturing requirements. Release more feature-rich products such as the TMR, the gate drivers, some of these current sensors you'll see later today in the demo rooms, a sharper focus on cost innovation.

And this is something that's particularly enduring to me when we're looking at things like 30%, 40%, 50% reductions in the BOM cost. For example, converting from gold to copper wire and significant die size reduction with things like TMR. And finally, there is a cost benefit to ramping our China for China supply chain. We will do all that with acknowledging that we will have to continue to manage ASPs and particularly on the auto side, continue to deliver productivity gains in the form of ASPs to our customers. And this is a target and a bridge that we're very confident in.

Now turning to our third priority, leveraging that to take advantage of the operating leverage to continue to get that 2x drop-through on EPS compared to sales. As I mentioned, from our IPO until the year of the inventory correction, our operating margins averaged 24%. During our trough year, the inventory correction, our operating margins dropped to just below 10%. And as you can see, we're expected to exit FY '26 back at 16%. And again, looking at this operating bridge, you can see most of our gross margin improvement is driven by volume, which could lead to 4 to 8 percentage points on operating margin.

We expect operating leverage on the OpEx, as Mike talked about growing it at inflation to add another 10 to 14 percentage points to operating income. These 2 things result in powerful operating leverage and again, that 2x EPS growth compared to sales. Finally, turning to our fourth priority is our capital allocation. First, I should mention we're on pace to generate record free cash flow in fiscal '26. And our top priorities for the use of that cash is investing in growth. We'll fund R&D and sales efforts that continue to give us leadership in the markets that we talked about today, particularly the fastest-growing markets that we want to be leaders in.

We will pursue M&A, and we have done that in the past with very selective criteria. For M&A to work for Allegro, it has to be complementary to our technology. For example, TMR was very complementary to what we already do in magnetic sensing. It has to accelerate growth in one of those strategic focus areas that we talked about today. And finally, of course, it has to be accretive to our financial model in some way. We also plan to maintain a very strong balance sheet and balance debt paydown with liquidity. We've already reduced debt by $165 million over the last 2 years, and our leverage ratio -- our net leverage ratio is below 1:1 right now.

Finally, we may do opportunistic share repurchases if they make sense for our shareholders. And before we move to Q&A, I just want to recap some of the key takeaways from today. One, Allegro is a technology leader. We compete on specifications, not on price. We're #1 in magnetic sensing and have leading edge power ICs. We're upgrading our sales growth targets from low double digits to mid-teens. That's a significant upgrade. We plan to extend our technology and market leadership with the leading-edge technologies of TMR, gate drivers and some of the current sensing opportunities you've heard about today.

Our R&D and sales engine are squarely focused on these growth markets, and we're reallocating our resources there. And last but not least, the new target financial model provides a path to more than $2 of EPS, a significant upgrade to the earnings power compared to our prior model. With that, I'll turn it back over to Jalene for the rest of the program.

Thank you, Derek. We are going to take a 15-minute break and then come back in here, and we'll do the Q&A session. Drinks are here. There's also some in the hallway and restrooms are down the hall far to the right.

[Break]

Right, we're going to get started with the Q&A session. [Operator Instructions] Thank you.

Gary Mobley with Loop Capital. I appreciate the thorough walk-through of how you're going to gain market share, but I want to ask about share gain opportunities on the magnetic sensing side, which is over 60% of your revenue. And I guess my pushback is that we already have leading market share in a highly fragmented market, so let's call it, 15%, 16% market share. Your focus is on margin creation. So given those constraints in the market structure, is there some sort of natural resistance to additional share gains no matter how much you invest organically? And related is there an opportunity to consolidate the market in what is otherwise a fragmented market?

Great. I am live, right? You can all hear me. Perfect. So thank you, Gary. So first, I'll point out, we have actually managed to gain share in magnetic sensors from the time of our IPO to today. So we've been demonstrating an ability to do that. We do it in various ways. So I would say when I look at the future of magnetic sensing, there's key drivers in angular position sensors and in current sensors. This is the area of the technologies where they intersect with xEV, ADAS, robotics, data center.

And we've been doing a lot of investment. We've demonstrated an ability to have unique -- truly unique market-leading products. The 10 megahertz TMR current sensor that I spoke about, there isn't another very fast magnetic sensor on the marketplace today that I'm aware of, and it's starting to get designed in at a very positive clip into data center power supplies into EV applications. And that's a model we step and repeat through TMR, when I mentioned road reposition and fast current sensors, we will leverage that technology to bring truly unique products to market. If you look at our -- the number of competitors we have for hall ICs, I don't actually know the number, but it's something north of 12 competitors, I think. But when you go into the TMR space, you're in low single digits. And it's through all these dynamics that we feel we can continue to gain on the magnetic sensor side.

Grant Joslin at UBS. So looking at the sales funnel going from about $1 billion to $2.5 billion over 5 years, that looks like a 20% CAGR, if I do my math right. So like you said, well ahead of the mid-teens guide. Could you talk about what would have to happen for revenue growth to end up at the mid-double digits guide versus what has to happen for things to come in better than that? Like is that 20%?

I can kick that off, Rick, and you can add your expertise. So we showed the funnel, the pipeline for a reason, which is to show we have the opportunities to deliver the mid-teens growth. And Rick, more so than even myself has lived in this world of managing a funnel where you want to have the opportunities there to have upside potential, good things happen, bad things happen in the development cycle.

To get back to your question, within that funnel, there are probabilities on certain programs, the types of things where we can kind of push and pull win rates up or down, you have market-leading products come to market maybe a little earlier than you expected, competitive positioning, another competitor might fall down. These are the types of things dynamically that can happen to boost that win rate or push it down. When I look at -- I'll give you an example for our isolated gate drivers, lots of opportunities in that funnel. We are working extremely hard as a global team. We've put marketing people, engineering people in all corners of the globe to drive the win rate on a technology like that up and to the right. And if we accomplish higher-than-modeled win rates with this emerging technology, that's the type of thing that could push actual sales above the green line in that graph and closer to the top of the bar. What did I forget, Rick?

I think you're right. I think the only thing I would add to it, which is what we talked about in the presentation is this is the main reason why we are having the change in our organization. So instead of one individual having to call on automotive one day and industrial next, we're having each individual team get a deeper expertise in the applications that the customers are working on so that we can improve those win rates across both.

And maybe one more. You asked a good question. Take the humanoid robotics market, which I'm a firm believer in. We definitely have the technology that, that market wants. If that market were to come in faster than our assumptions, if opportunities now turned into real revenue in the humanoid market earlier than expected, that would be the type of driver we could envision as well.

We have questions biased heavily to one half of the room.

Tom O'Malley with Barclays. Two questions. One is to the end of your response there just on humanoids. How much of that is baked into the long-term growth trajectory? And when do you see that inflecting? I don't know if you have revenue today coming from humanoids, but when do you see that elbow in the curve?

And then the second is just on the gross margin walk-through. Clearly, price is the only thing that's moving against you. You look kind of like the high single-digit impact over the next 3 to 5 years. Is that a steady cadence of pricing headwind, 2% to 3%? Or are you baking any mix shift or anything that's changing that's resulting in that?

That was a good 2 for you. You remember the second half because I'm going to forget it. So in humanoids, we -- every market leader we're under NDA, so we can't talk in any great depth. But what we've been seeing is we do see companies who are saying, "Hey, in the next 12 to 18 months, there are companies saying that's when we'll have 10,000 or, let's say, low tens of thousands of robots". Then there's sort of 2 camps in the robotics space. There are some very bullish companies. You know who they are saying, soon, there will be millions of robots sold, soon being within a 3-year window. There's also some conservative companies.

What we modeled in our numbers was a more conservative case. We didn't want to go to the -- when we model the SAM, we didn't go to the most aggressive SAM growth model we can find. We're not even using the most aggressive dollar content model because everything is dynamic. What we know is there will be a tremendous amount of sensors and motor drivers in humanoid robots. We know that over time, there will be many, many robots sold. But I think it will start to become more material revenue for Allegro in roughly a 3-year period. To your question about are we already selling -- we're selling into advanced robots and have been for years. It's meaningful revenue. We're not disclosing the amount right now, but it's meaningful revenue in factory automation, et cetera, et cetera. And we have secured recent wins with humanoid, leading humanoid companies as well. And we're in a little bit of that dance together just to see what forecasts look like over the next 12 to 24 months.

And Tom, on your second question on the financial model, I'd encourage you to look at it in totality. We're increasing our sales growth rate to mid-teens from low double digits, right? And there's some trade-offs happen there, particularly geographical mix. But even on the gross margins, that 55% is certainly not a ceiling. It's our near-term 3- to 5-year target. We have expectations of getting there sooner and there's defined path, and I feel really good about the credibility of that. A lot of it is driven by volume, of course, leverage. We've already made those investments. A significant amount comes from leverage.

We continue to make factory automation improvements, and we're going to continue to see -- I think you're going to see that accelerate. And on the BCM part, the question on your pricing, as we saw the last couple of years, pricing came down last year, more frictional than it has in the past. We talked about our earnings call a few weeks ago, we expect this year's pricing environment to be much better. And with the productivity gains our customers typically expect that low single digits, that was different last year. So we troughed on the gross margins. And if that gross margin, the BCM came in higher mix of industrial products, bigger cost advantages on our BOM side of things, we could come in higher than that 60% to 65%, which would drive higher gross. So it's certainly not a ceiling. It's a very credible target, and there's actually defined projects internally to get to those mid-50s.

Yes, it's Joe Moore from Morgan Stanley. Just a follow-up to that last question. There was a time when you had contemplated 58% gross margin in your 5-year outlook, and you've been at 56% before. Can you just -- what is the difference now? Is it mix? Is it the sort of volume in different areas? Is it price? And then just how big is a variable is price when you think out 5 years? Is it like 1 or 2 points? Is it bigger than that?

Yes. It's a great question. I remember at our last Analyst Day, almost exactly 3 years ago, we were at -- we were actually that quarter, we topped 58.2% gross margin on a non-GAAP basis. We only did that 2 quarters. And I said to people at the time that the -- and people question whether or not our target was too conservative, being 58%, we are kind of already there. And what I said at the time, which is true, is we were really at about 56%, right? And a lot of things are structurally different now 3 years later.

One is certainly price. That was the most elevated price has been in the automotive market probably ever in semiconductors. Two, input costs have not come down, right? Input costs continue to go up, whether it's commodities, gold, energy, labor costs, those things don't come down. So while price comes down, those things don't come down as fast. So it's fundamentally a different starting point. That said, we feel really good about that bridge back to the mid-50s. A lot of it is leverage as we talked about. It is a grind to get back there, and I feel really confident in getting back to that mid-50s. And those are really the differences between what we looked at 3 years ago and now.

Vijay from Mizuho. Just a quick question on the industrial side. I think looking at the 17% growth, it looks like industrial will be about 35% of your mix by 2031, let's say. Within that, what do you see data center and robotics as a mix?

And just a second part to that, you mentioned geographic mix would change as well. Just wondering what the mix would be between China because China seems to be growing a lot faster for you. I think you mentioned 35% growth in the past year.

Thank you. So when we think about industrial growth, both in the short, medium and long-term, we're modeling the bulk of the industrial growth coming from the data center. And that's for a couple of different reasons. You're all aware of the very high growth rates for capital spending in the data center, but we also have the dollar content growth story on top of that. So as we look at the industrial business growing in the high teens, biggest portion will be from the data center. Like I said, robotics starts to kick in, in about 3 years. And when you look out about 5 years, the robotics piece starts to become certainly more meaningful, still would be smaller than the data center piece.

Geographic mix, when we think about the geographic mix, you heard a lot from Rick when he was talking about everything we're doing to maintain positive momentum and growth China. So we are confident in the growth of the China business for all the reasons that he mentioned. I do think that over time, as you start to look at data center growth and some of the robotics growth, I would anticipate that the percentage of our revenue from China starts to come down more naturally as there's more growth outside of China. So there will be a slight shift there. I'm not projecting that to be from share loss or things like that. I just think some of the dynamics and some of the main growth vectors will happen a bit more outside of China for us. Mark has been raising his hand beautifully.

Quinn from Needham. I wanted to follow up on the sort of pricing question. As you guys highlighted in both of the targeted markets, you've got your focus areas and sort of the other areas. And as you mix shift to the focus areas where I assume you have a higher mix of sole sourced or proprietary products. Does that change the pricing dynamic over time? Could you see less pricing pressure as the focus areas become a higher percentage of the mix over the 5-year model?

Thanks, Quinn. So certainly, because I mentioned how we're shifting R&D spending to the focus areas. So that's where we're going to have our most differentiated products, most value-add products. And as a result of that, typically, what we found when we're in that type of mode of innovation, there is less pricing friction. We have more pricing power in those markets. So that would be the expectation.

Okay. Great. And then I think, Mike, in your presentation, you talked about some new end markets being $100 million opportunities. Wondering if you might be able to comment on product opportunities such as the isolated gate drivers. Do you see that becoming a $100 million product category, say, within the 3- to 5-year financial model that you set out today?

That is a very fair question, Quinn. Yes. So we set this threshold of $100 million sort of to say, hey, this is something that would be meaningful for the company. So it's a good point. Yes, we would expect to see the isolated gate drivers getting above $100 million within a 5-year window.

Great. Thanks for the informative presentation. Really appreciate it. Mark Lipacis from Evercore ISI. A question for Derek. You talked about maintaining a strong balance sheet. How do you quantify that? As you think about a net leverage ratio you target or a cash that you want to keep on the balance sheet.

A question for Mike. As you are expanding the foundries for manufacturing your chips, how do you protect your intellectual property? It sounds like it seems to me that you exposed to risk of your intellectual property being taken?

And then for Rick, the data center business is up a lot. You've been doing sales for a long time. Like how do you -- how do we know that there's not double ordering? Everybody Mike talked about the CapEx numbers, they're through the roof and there are real supply chain constraints. And is it just the simple truth that semiconductor companies can never figure out that there's double ordering? Or it's like how do you manage that process?

Yes, Mark. So in terms of maintaining a strong balance sheet, there's multiple ways to define it, right? As I talked about, we are on track to have a record free cash flow year in FY '26. So that's a good starting point. The second piece is we've paid down a significant amount of debt, $165 million that we used to buy the focused business that we used to buy back some shares 2 summers ago at $23.16. We paid $165 million back voluntary accelerated repayments. And the reason we did that is for 2 reasons. One is it's accretive to EPS to do that. And 2 is it moves the enterprise value, right, from debt holders to all of us in this room. We'll continue to balance those 2 things.

Right now, we're sitting on cash of about $160 million, which equates to one metric of liquidity of, give or take, 6 months of OpEx plus CapEx. We have a $250 million completely undrawn revolver. So we feel really good on the liquidity side. We'll continue to probably make voluntary debt repayments. And as we've talked about, we'll continue to look at both internal investments, but a lot of that comes from really aggressive cost reallocation and look at inorganic opportunities that really, really fit well, right? Things like the TMR business, things like isolated gate drivers that fit with our technology. We can sell them to our existing customers. Our team knows how to sell them, and it's accretive to our financial model. So it's all those things in the mix.

So the second question was wafer tech IP, yes. So when we look at our ecosystem, as we've stated publicly many times, the bulk of our wafers are coming from a single partner in Taiwan and another partner in North America. And in both cases, we have installed our own proprietary technology in both of those locations.

And I should point out, we get a lot of questions not yet today, do we see 8-inch capacity becoming a problem going forward? We do not see that with our partners. So that means we don't have to go to too many other partners to get our capacity. And these 2 partners that we've worked with have protected our IP fantastically over the decades we've been working with them. If your question was in relation perhaps to working with new fabs in China, an interesting phenomenon exists in automotive, where the bulk of our automotive revenue, and we disclosed perhaps for the first time today that 90% of our revenue in China is automotive. It's actually on older parts. So we are moving process technologies to China that are quite old. They're quite old, but they represent most of the revenue in the automotive space there today.

We don't consider that particular process node to be a very high risk because it's an older node, and that's -- we're being very selective that we're not moving the truly critical new technologies to new partners that we don't have a deep relationship with.

And then I would hit on the data center and is there double ordering. So like we talked about in my presentation is -- and this may sound corny, but let me explain, which is it gets down to the customer intimacy piece. So each of our main providers into the data center, we have very formalized QBRs.

A couple of weeks, we're all flying out there to meet with 3 of them and get engaged into some very good conversations about their demand and what's driving the demand. And it really works when you're face-to-face first just taking on orders, #1. Number 2, is we're still feeling across the business, delinquencies against that demand. And when you start looking at their ordering habits, they're having delinquency to those end customers. So it's really working that entire ecosystem to understand where the build rate and who's ahead and who's not. And right now, based on these QBRs that we're having face-to-face and based on the entire ecosystem, we still feel people are behind the demand, not in front of it.

Sam from TD Cowen. You guys mentioned you still have an appetite for M&A. And based on SAM you're taking aim at. And the 2 acquisitions you've already done in the last few years, I don't see any obvious gaps in the portfolio. So is there a technology that you know that's an obvious win for you guys that you selectively would be interested in buying?

Yes. It's a great question, Sam, not particularly. I mean what we would be looking for, like Derek mentioned in his presentation, we're always looking at something that would be fundamental to the story and perhaps something we don't have today, right? That would be naturally what you'd be looking for, but we wanted to be One Sigma away from what we do today, not 2 or 3.

So a good example when Mark was talking about some of the Force Sensing Technology in robotics. Now we went out with a prudent approach where we got an exclusive license from a company, and we're now able to sort of test that technology before even thinking about a tuck-in or a smaller acquisition in that space. But when you think about humanoid robotics, you want to have force sensors that we have a phrase internal to the company that we want to own the humanoid hand. There's so much electronics in the hand, and we're targeting areas where we could increase our dollar content in systems where we already have significant content.

Liam Farr, Bank of America. For your data center portfolio, what needs to happen to make that accretive towards gross margins? And what kind of time line should we expect for that to kind of kick in? And kind of follow-on to that, how much of a headwind can data center be to gross margin in the near term before those higher-margin sockets kick in?

I can start Mike and -- can let me kick in. So today, we talked about this publicly. Our data center business gross margins in the aggregate are a couple of hundred basis points below our fleet average. And the reason for that is the majority of the products we're selling have been motor drivers, which just have a little bit lower gross margin. They're still good, but below our fleet average.

As we start to sell current sensors, which we did the last couple of quarters, as that becomes a bigger piece of that portfolio, that's one of our flagship products, one of our higher-margin products. That will naturally move the gross margins in data center up. And some of these intelligent motor drivers and some of the cost reductions we talked about also helps. The third leg of that stool is the isolated gate drivers for silicon carbide and gallium nitride. Those products are in sampling right now. That really also helps the gross margins going forward.

Yes, the current sensors are ramping nicely now. When you go to the demo room, you can see a data center power supply. We can point out the current sensors inside of them. So that is happening now. The isolated gate drivers in the last call, we said that will start to meaningfully contribute revenue to data center in 18 to 24 months. But I will go back to the topic of cost innovation that I brought up. So Troy owns all the products. So he and I have been putting our heads together. And there are many things we're looking at in terms of just getting COGS down for the high-running motor drivers as well. We have plenty of ideas there. I don't ever think about the growth of our data center business even with the motor drivers or fan drivers is anything but exciting. We'll manage the gross margins. We're out there trying to get all the business we can get. We can work around the margins.

Thanks for the follow-up question. Derek, you mentioned that your current OpEx can support $1 billion in annual revenue and your manufacturing footprint can support what, $1.2 billion, you're effectively there now. And so how do you keep your OpEx growth at inflationary only without having to add more people? And should we think about in just 1 year or 2 when you're at $1.2 billion in revenue that the capital intensity grows up from that 5% targeted level?

So on the OpEx side, in fiscal '24, we did $1.048 billion, almost $1.050 billion in revenue, with the OpEx infrastructure we have today and actually slightly less. We hadn't fully integrated the Crocus business. We just bought the Isolated Gate Driver business. So we actually have more of an OpEx infrastructure today than we did 2 years ago. So I'm very comfortable the OpEx infrastructure itself can support well over $1 billion, particularly on the sales and on the G&A side. We've been very aggressive with cost reallocations, and we'll continue to do that. That said, the investments in OpEx will be in R&D. They will be in these fast-growing areas. We'll make investments there. We'll talk about those investments.

Same thing in sales in some of the fastest-growing markets of the world. G&A, we're getting a lot of benefit from having our center of excellence in the Philippines. We continue to move functions there. And then we're just getting started on the AI side of things, and I think that's going to be a huge benefit. So on the OpEx, we guided already for the Q4 going to be $81 million, up $2 million from Q3, really a payroll tax reset. And I did say on the call that I expect that number actually to go down in Q1. And if you did the math off of that, it's about inflationary increase in fiscal '27. So we're very comfortable with that.

On the investments we've made, again, we did $1.048 billion, 2 years ago before we were midway through that CapEx cycle in the Philippines. So we're very comfortable with the capacity we have there. We actually have 4 buildings in our Philippines facility right now. The third building is halfway facilitized with equipment right now. The fourth building is just a shell. So that doesn't even count that building beyond that $1.2 billion and mix will be dependent on that. So we have plenty of capacity with our back-end facility in the Philippines and with our OSAT partners and our fab partners.

Any other questions? We don't have any online. So there are no more questions, we can wrap up.

Awesome. So I want to thank you all for being here today. Really thank you for your support, especially if you own shares. If you follow us, we appreciate all of you. We know you're very busy people, so we appreciate you taking time out of your busy schedules to be here today. And once again, I do encourage you all to go through the demo area to take a peek at the demos. But thank you for coming. Thank you for your questions, and thank you for your support.

Good morning, and welcome to the Allegro MicroSystems Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jalene Hoover, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you, Michelle. Good morning, and thank you for joining us today to discuss Allegro's fiscal third quarter 2026 results. I'm joined today by Allegro's President and Chief Executive Officer, Mike Doogue; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our quarterly financial performance and share our fourth quarter outlook. We will follow our prepared remarks with a Q&A session.

Today includes remarks about future expectations, plans and prospects, which are forward-looking statements. Such statements are based on current expectations and assumptions as of today's date and are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated or projected on today's call. The company assumes no obligation to update these statements, except as required by law. For a discussion of these risks and uncertainties, please refer to today's press release and the risk factors contained in our periodic filings with the SEC.

Additionally, we will refer to non-GAAP financial measures during today's call. Today's earnings press release, which is available on the Investor Relations page of our website at www.allegromicro.com, contains important information about our non-GAAP financial presentation and also includes reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures.

This call is also being webcast, and a replay will be available in the Events & Presentations section of our IR page shortly.

It is now my pleasure to turn the call over to Allegro's President and CEO, Mike Doogue. Mike?

Thank you very much, Jalene, and good morning, and thank you all for joining our third quarter earnings conference call. We continue to see positive momentum across the business, once again achieving growth in bookings and backlog to multi-quarter highs and securing significant design wins in our strategic focus areas, led by ADAS, xEV and data center.

This momentum has enabled us to deliver strong third quarter results with sales above the high end of our guidance range at $229 million and EPS above the midpoint of our guidance range at $0.15. E-Mobility led continued growth in third quarter automotive sales. Our automotive sales growth was once again fueled by Allegro content gains and the increased adoption of xEV and ADAS systems in cars. This momentum is reflected in our third quarter automotive design wins where e-Mobility led the quarter.

In ADAS, we secured key wins for position sensors and motor drivers in electronic power steering systems. We also had several design wins for higher dollar content steer-by-wire systems with OEMs in North America, China and Europe. In xEV, we won several designs with our current sensor ICs and onboard charging systems and high-voltage traction inverters.

In our Industrial and Other end markets, sales growth was again led by data center, establishing a new quarterly record at 10% of sales, up 31% sequentially. The rapid expansion of higher power AI servers continues to drive increased demand for our fan driver ICs. Additionally, our market-leading high-speed current sensors are ramping in data center power supply applications, where we enable crucial improvements in efficiency and power density. We are pleased to report that current sensors were a growing contributor to data center sales growth.

Looking ahead, we are also building another growth vector in the data center with our isolated gate driver ICs. We recently released our first isolated gate driver IC for silicon carbide transistors, and we are broadly sampling this new IC to market leaders in the data center power supply market.

Our growing product portfolio and strong market pull were also evident in our industrial design wins, where data center continued to lead third quarter wins. Our motor drivers for cooling fans represent the majority of data center wins in the quarter with current sensors also securing meaningful wins and driving future content gains. Sales for many of these new wins will ramp within calendar year 2026.

To further capitalize on our industrial opportunities, we conducted a robotics roadshow in the U.S., Japan and China. This focused customer activity confirmed new wins and pilot production ramps with market leaders in quadruped and humanoid robots. Our customer engagements validated our high content opportunity in robots, including up to 150 Allegro sensor ICs and 50 of our power ICs in advanced humanoid robots.

Let me now pivot to our focus on relentless innovation. During the quarter, we introduced an innovative current sensor that cuts power-related losses by up to 90%, enabling new levels of power density in xEV and data center applications. This IC can measure up to 200 amperes of current in a very tiny form factor and is gaining broad customer interest while deepening our competitive advantage. For some perspective, the maximum current consumed by the average American household is 200 amperes, and our new sensor can measure 200 amps of current in a package form factor that is less than half the size of a postage stamp.

As I mentioned earlier, we also expanded our Power-Thru isolated gate driver portfolio by releasing our first IC that drives a broad array of silicon carbide transistors. Our isolated gate driver ICs present a significant content uplift opportunity in automotive and industrial markets. We have sampled our new silicon carbide driver to a broad group of industrial customers, and we are also sampling market leaders in the xEV charger and inverter markets.

We also attended CES this quarter. Robotics was the highlight of the show and a hot topic of conversation with our customers. We had dozens of customer meetings at the show. And it is clear that customers view our highly differentiated, market-leading TMR sensors as a key enabler for their next-generation platforms. Additionally, existing and new customers confirmed our belief that Allegro's unique motor driver ICs allow them to make smaller, quieter and more efficient electric motors in both automotive and industrial applications.

In summary, we are seeing positive momentum across the business and continue to execute on our strategic priorities. We are excited to share more regarding our strategy, growth drivers and target financial model at our upcoming Analyst Day in a couple of weeks.

I'll now turn the call over to Derek to review the Q3 2026 financial results and provide our outlook for the quarter.

Thank you, Mike, and good morning, everyone. Starting with our third quarter results. Net sales were $229 million and non-GAAP earnings per share were $0.15. As a percentage of sales, gross margin was 49.9%, operating margin was 15.4%, and adjusted EBITDA was 20.1% of sales.

Total Q3 sales increased by 7% sequentially and 29% year-over-year. Sales to our automotive customers increased by 6% sequentially and 28% year-over-year. And within auto, e-Mobility sales increased by 46% year-over-year. Industrial and Other sales increased by 11% sequentially and 31% year-over-year, led by continued strength in data center to record levels. Distribution sales increased by 11% sequentially and 39% year-over-year. End market demand remained robust in both sell-in, and POS increased in the quarter.

From a product perspective, magnetic sensor sales increased by 5% sequentially and 21% year-over-year, and sales of our power products increased by 9% sequentially and 43% year-over-year. Sales by geography on a ship-to basis were as follows: 30% sales in China, 27% in the rest of Asia, 17% in Japan, 15% in the Americas and 11% of sales in Europe.

Now turning to Q3 profitability. Gross margin was 49.9%, an increase of another 30 basis points sequentially. Operating expenses were $79 million, an increase of approximately $3 million compared to Q2 largely due to variable compensation. Operating margin was 15.4% of sales, an increase of 150 basis points compared to 13.9% in Q2 and 10.8% a year ago. The effective tax rate for the quarter was 7%.

Third quarter interest expense was $4.7 million. Third quarter diluted share count was 186 million shares, and net income was $29 million or $0.15 per diluted share. EPS increased by 15% sequentially and 114% year-over-year on sales increases of 7% and 29%, demonstrating the significant operating leverage in our business model.

Moving to the balance sheet and cash flow. We ended Q3 with cash of $163 million and our term loan balance was $285 million. Cash flow from operations was $45 million, CapEx was $4 million and free cash flow was $41 million or 18% of Q3 sales. From a working capital perspective, DSO was 40 days compared to 45 in Q2 and inventory days were 133 days compared to 135 in Q2.

Finally, I'll turn to our Q4 2026 outlook. We expect fourth quarter sales to be in the range of $230 million to $240 million. The midpoint of this range equates to a 22% year-over-year increase. Additionally, we expect the following all on a non-GAAP basis. Gross margin to be between 49% and 51%, the midpoint of this range equates to an increase of 440 basis points compared to Q4 of FY '25, again showing the operating leverage in our business. Operating expenses are expected to increase by approximately 3% sequentially largely due to annual payroll tax resets.

And earlier this month, we repriced our term loan down another 25 basis points to SOFR plus 175 basis points. This repricing reflects our lenders' confidence in our business model and our financial discipline. Interest expense is projected to be $5 million in Q4, which includes approximately $700,000 of expenses related to this repricing. We expect our tax rate for the quarter and the full year to be 8%. We estimate that our weighted average diluted share count will be 186 million shares. And as a result, we expect non-GAAP EPS to be between $0.14 and $0.18 per share.

Now I'll turn the call back over to Jalene for Q&A.

Thank you, Derek. This concludes management's prepared remarks. Before we open the call for your questions, I'd like to share our fourth fiscal quarter conference line up with you. We will attend Morgan Stanley's Technology, Media and Telecom Conference on March 2 in San Francisco and Loop Capital Markets Seventh Annual Investor Conference virtually on March 9. And finally, we are excited to host our upcoming Analyst Day event on February 18 in Boston and look forward to seeing many of you there.

We will now open the call for your questions. Michelle, please review Q&A instructions.

[Operator Instructions] Our first question comes from the line of Timothy Arcuri with UBS.

Derek, if I look at gross margin, revenue came in above the high end but gross margin was barely at the midpoint. And then in the guidance, the sort of mental are a bit below the 60% to 65% you've been talking about. Can you talk about that?

Yes. Sure, Tim. So in the quarter, I would say that the gross margin was largely geographic and product mix. What I mean by that is China was 30% of our sales in the third quarter, and so that drives the gross margins down a bit, about 10 basis points below the midpoint of our guidance, still 30 basis points above last quarter.

And on a positive note, as I've talked about in the past, we're expecting gross margins to be between 49% and 51% for the March quarter, which is actually better than we expected originally because coming into that March quarter, we always expect to have some pricing friction. But two things are happening in this March quarter. One is with Chinese New Year, China is a smaller piece of the overall mix. And number two, as we've talked about in the past, we expect pricing this year to be far less pronounced than it was last year.

And then can you just talk about sell-in versus sell-through and whether -- that's kind of been a tailwind, but it seems like that tailwind, it sounds like they were about equal. So that tailwinds kind of gone away so you're going to get back to shipping to sell-through.

That's exactly right. For the past about 4 quarters leading up to this, we had a significant POS far exceeded sell-in, right, as they were burning down inventories. Our distributor inventories are down nearly 50% over the last almost 5 quarters right now. This quarter, POS and sell-in were close to each other. Sell-in was slightly higher than POS. Going forward, I'd expect those two to be about equal. Regions will vary.

And I should just say, Tim, too, on distribution, it's maybe a little bit less indicative of actually what's happening in markets because all of our sales in Japan are serviced through distribution and about a little bit more than half of our sales in China are serviced to distribution. That also includes auto, of course. And 90% of our industrial sales, including data center is serviced through distribution.

Our next question comes from the line of Joe Quatrochi with Wells Fargo.

I know you don't give like segment guide, but just trying to think about how to think about automotive growth into the March quarter relative to the continued strength you're seeing in industrial and data center.

Yes. So for the March quarter, it will absolutely be led by Industrial. So Industrial will be up in the March quarter. The midpoint of the guidance is up about 2.5% in total for the company led by Industrial. I expect auto to be above flat to marginally down, again, led by Chinese New Year. Chinese New Year drives that. And I should say we're also right now still shipping 20% below our peak in automotive at this point even in this Q3.

And maybe not sure -- Joe, this is Mike. Not sure if there is a deeper question just about automotive in general. But I do want to point out, we feel good about what we're seeing in automotive, strong bookings and backlog, great design win activity across xEV and ADAS and actually great design wins in China as well. So we are feeling good overall about automotive.

That's helpful. Yes. As a follow-up, just kind of maybe double-clicking on the automotive. I mean, are you seeing any propensity from your customers to maybe build a little bit of inventory just given there's been some disruptions across like kind of the auto supply chain from a component standpoint?

Yes. The instructions are out there. We have yet to see any meaningful increases in inventory at the Tier 1s in automotive. I've stated in prior calls, we see a fairly lean inventory out there in automotive, and that's what we continue to see.

Our next question will come from the line of Blayne Curtis with Jefferies.

A couple of questions. I just want to ask on the data center business. I think you mentioned fan drivers still kind of driving the majority of the growth, but obviously, big opportunity with the gate drivers as well as current sensors. Can you maybe just talk about that pipeline a little bit more, when that revenue kind of layers in and how big that opportunity is for you?

Sure. So thanks, Blayne. Yes, as you know and as we stated, the biggest piece of the business today in our data center area continues to be the fan drivers. There's just really continued to be a larger number of fans going into these data center racks as power levels increase.

What started about a year ago, that's when we started ramping our current sensor business in the power supplies for these higher-power data center installations. That business is growing nicely. I mentioned in the prepared remarks the record-setting levels of data center that we achieved this quarter. Current sensors played a role in that. So it's nice to see that ramping significantly.

On the gate drivers, big opportunity there. We're excited about it. We have truly unique products. We are in the design-in phase with some of the biggest customers in the marketplace. We would expect to see revenue in that space start to ramp somewhere in the 18-month to 24-month time frame.

And then maybe just a follow-up for Derek on the gross margin. So as we think about data center increasing as a percent of the overall mix, how do you think about that impacting gross margins?

Yes. As I've talked about in the past, the majority of what we're shipping to data center today, as Mike talked about, is motor drivers of fans, which are slightly below fleet average from a gross margin standpoint. But what's actually affecting the March quarter slightly to a positive basis is more of the current sensors we sell, and they have slightly better gross margins. So as we continue to move in that direction with current sensors and, of course, isolating gate drivers, the margin will continue to improve within data center for us.

Our next question will come from the line of Tom O'Malley with Barclays.

When I look at the e-Mobility business and the general broad trucking SAAR business, it looks like both are seeing a bit of growth here in the quarter. Can you talk about in the guidance what's assumed between those two and where you're seeing some of the additional growth?

I actually didn't catch your question, Tom. I'm sorry, there was a little...

I'll start, Tom. We're not going to really parse out the guidance between e-Mobility within auto and ICE business. That can vary depending on what's scheduled to ship within the quarter. As I said, in total, I expect the March quarter to be up 2.5% at the midpoint of guidance. Within that, industrial will certainly lead the way led by data center. I expect auto to be flat to down marginally really just because of Chinese New Year. The biggest portion of our e-Mobility business continues to be ADAS applications both from a revenue standpoint and from a design win standpoint.

Got you. I guess inherent in the question is you've heard others in this earnings period already talk about the health of auto maybe a little bit slower off the bottom than on the industrial side. It sounds like you've got some really good trends in your specific industrial verticals. But just anything on the health of the broader auto market. Are you seeing customers behave any differently? Are you starting to see any inventory build there? And then customers? Just anything on the broader health of auto would be helpful is, I guess, where I'm getting at.

Yes, sure. I'll take that one. So when we look at our automotive SAM, it's about $8 billion, $5 billion of which is the e-Mobility portion of the business. So that would be our xEV and our ADAS business. And we see strong momentum not only for Allegro there but strong activity from our customers. No signs of slowing down generally when you look on a global perspective across ADAS and EV.

When we look at the stats for EV growth going forward and taking that from S&P, the growth rates for electrified vehicles continue to be around 20%. Some people say high teens. We're seeing that activity both in hybrid where we do very well and battery electric vehicles where we also do very well. And ADAS adoption is starting to enter a broader swath of cars, which is a good tailwind for us.

So we see the design work continuing to be very robust. It's a good sign for the future. We have a lot more dollar content as a company in these future design-ins. So we're pleased there. Like I said earlier, from an inventory perspective, we still see people holding very thin inventory in automotive as well.

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

First of all, let me extend my congratulations on the good top line execution. If we nitpick on anything in particular, which is, I guess, what we're paid to do, it might be the OpEx discipline. I understand that you guys need to reward yourselves for execution and hence the variable compensation recognition in the quarter and the guide. But as we look into fiscal year '27, how should we think about the OpEx growth relative to sales growth?

Yes. Gary, this is Derek. If you look at our OpEx, you're actually right, the increase in the quarter was almost entirely a variable compensation. And without that, we're kind of on our plan for OpEx. The increase in the March quarter is simply the payroll tax resets. As we roll into the June quarter, which I'm not really giving guidance for, but as I said before, we've built our OpEx to service well over $1 billion. So as we reset our variable compensation in that June quarter, we also have merit increases, you should expect only inflationary increases within OpEx.

And some other things, we've been able to really keep our G&A flat for about 5 years. And those dollars have been reallocated into where you'd want them to be reallocated, into research and development, into some of these high-growth areas like isolated gate drivers, TMR. And over those last 3 years, we've bought those two acquisitions into largely into R&D. So it's really all about reallocation. I expect going forward after we get through Q4 that OpEx will increase at about the rate of inflation.

Just my follow-up, I want to ask about the lifetime value of design wins, I have no doubt that you track the lifetime value of all these design wins on a quarter-by-quarter basis. Maybe you're not willing to share what the value is and whatnot. But can you at least give us an idea of what type of revenue growth supported by the trends that you're seeing in lifetime value design wins, say, over the last 12 months?

Yes. So good question, Gary. This is Mike. So we do track that, of course. A couple of quick points. We're not going to give numbers. But when we look at this year, we're seeing much higher intensity, meaning higher dollar values for design wins, which is a positive sign for an accelerating business. The funnel that we see, the results of all these design wins, it does support our double-digit sales growth number.

What I can say, this is a good plug, you're a good setup person for this one. We're going to have a deep discussion at our Analyst Day in a few weeks that will actually show you some data and walk you through how our funnel and how the design wins support a robust growth number. So we're going to make you wait a few weeks for the numbers. But we appreciate the question, and you'll see a better answer at Analyst Day.

Our next question comes from the line of Quinn Bolton with Needham & Company, LLC.

Let me offer my congratulations as well. I guess, Mike, one question I've gotten from investors is as you look at sort of across the auto analog landscape, some of your peers are sort of back, if not at record auto levels. You're kind of still at 20% percent below peak. Why do you think you're slower to get back to peak? And I guess the real concern is, do you think there's any evidence of share loss to the broader analog peer group?

Yes. Thanks for the question, Quinn. So no, we don't think there's any evidence of share loss. In fact, we feel like we're driving the opposite. So share loss is not even a part of the conversation for us. I think every company has different situations. There were relationships with customers where you have some customers that were just happy to build much larger than expected levels of inventory. That's what we were impacted by. And now we're working closely with those customers, and we feel good about the growth future of automotive.

In our e-Mobility SAM, 16% CAGR, driven largely on the backs of automotive dollar content gains. So we are at this measured pace that you've been seeing roll out quarter-over-quarter. We continue to increase. We have the bookings and backlog to keep that happening in automotive. But I want to reiterate, we don't think a share loss is any part of the story when we tell Allegro's automotive story. And in fact, again, ours is one of share gain.

And then, Derek, I guess, just looking at the variable comp, usually as you go into the next fiscal year, that resets. You talked about March ticking higher because of FICA and payroll taxes. I guess, is there any opportunity for a step down in OpEx once you get into the June quarter? Or is $81 million sort of the right base to be thinking about as we head into June and, as you said, grow that base at a sort of inflationary rate sort of on a sequential basis through the year?

Yes, Quinn. Absolutely. So what I talked to earlier to Gary about is I expect year-over-year inflationary increases in OpEx. So mathematically, as we get past this March quarter, there will be a couple of million dollars step down in OpEx, one, as we reset variable compensation, offsetting that is merit increases that happen in that June quarter. But net-net, I expect OpEx to be marginally down in that June quarter and then growing from an inflationary after that.

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

I want to talk a little bit more about the data center business and how you're thinking about growth in that going forward. And I guess there's two aspects to that business, one is the fan business which is existing and then some of the other things you're layering on top of that. For that existing business, should we expect that, that's growing sort of at or a little above a rate of what we're expecting for that data center business and then we're growing on top of that? Just maybe just some clarification on how you're thinking about that growth going forward.

Absolutely, Chris. This is Mike. So good question. So as we all know, data center is a growth market. It is for us as well. So when we look at profiling our business, we expect the business to grow at sort of the typical market rate with a CAGR north of 20% at least on a short-term basis. And as you've suggested, we have a growing dollar content story as well. So we have the capability to grow higher than that. So we think it will be a robust growth business for Allegro for many quarters to come.

One thing I want to point out. We've been getting a lot of questions that there have been comments and releases about increased prevalence of liquid cooling. We believe that the dollar content expansion story we have in data center, which I'll share in a minute, holds true even with all these new levels of liquid cooling architectures out there. So if you look in our investor presentation today, you'll see our dollar content opportunity per rack for Allegro at around $150 today, growing to $425 in the future.

And we maintain those numbers even in the face of increased liquid cooling. There's just a lot of potential for Allegro products in the data center, so it will remain a growth story.

As a follow-up, and this is something that I'm sure you're going to touch on at the Analyst Day, but maybe I'll ask a preview question. With regard to the operating leverage that you [ look to ] have in a recovery and not just for a quarter or 2, but as we look out kind of over the next 2, 3 years or so, what should we expect with regard to operating leverage? And I mean, one is the ability to absorb some of the fixed costs on the gross margin side and OpEx growth in comparison to the revenue growth.

Yes, Chris. So this is Derek. So you can already see it in FY '26, right? If you use the midpoint of our Q4 guidance, the sales growth is expected to be just over 20%. And on that, we'll more than double our non-GAAP EPS. That's all operating leverage from two things. One, that's that 60% drop through on gross margin, where gross margins at the midpoint of Q4 improving 440 basis points above the trough 4 quarters ago.

And then two, as I mentioned, we'll be pretty disciplined and continue to be very disciplined on OpEx and reallocation. And remember, we did $1,048 billion in revenue in FY '24 with the fixed cost that we have in the COGS and also the OpEx that we have. So the significant operating leverage in the model.

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

For the first one, I just wanted to dig into the Industrial segment. So first, on the data center, if you could quantify how much it was as a percentage of sales in December. I think in the past, you said it was about 8% for the September quarter, I believe. So how large was it in December?

And then outside of the data center, what trends, Mike, are you seeing in the rest of your Industrial business? Recently, we have seen very positive commentary from the likes of TI and Microchip and others. So I'm curious, what are you seeing outside of the data center in your Industrial segment?

Sure. Thanks, Vivek. On the first one, that's easy. I did say in my prepared remarks that the data center business was 10% of total sales for Allegro in the quarter. So you see a nice increase from 8% last quarter. Any further questions on that, Vivek?

And what are you expecting for March, if you could give us that?

Yes. We're not guiding forward other than I sort of gave the answer just a few questions ago that if you look at the growth rate of data center, we expect and we believe we have the potential to grow at about that growth rate going forward.

Moving on to the trends that we're seeing. There's an interesting storyline here. So Allegro developed a large array of unique technologies, whether it's precision sensing, 48-volt to 800-volt isolated gate drivers. And as we were developing that tech, we had automotive at the front of our mind, but we knew that all of that technology was going over into the industrial market.

So 48-volt technologies went to the data center. It's actually roughly 48 volts is the preferred voltage rail for humanoid robots, for example. Isolated gate drivers are all throughout the EV with the 800-volt battery. They're all throughout the data center. So from a general trend perspective, we see very positive signals from the industrial market. It really matches the unique technologies that we have very, very well.

So we see very good customer activity, design and activity in the industrial market. Perhaps your question was more in the short term in terms of the health of customers. Certainly, we see robust growth in our data center customers. Beyond that -- and certainly, we see growth from the broader swap of industrial customers, but not at the same level of data center. The rest of the market is at a more muted growth level, but it is growing.

Got it. For my follow-up, maybe one for Derek on gross margins. So the last time you were at these revenue levels, gross margins were in the mid-50s. I realize that was an extraordinary set of time. But I was just hoping, Derek, you would contrast where you are now versus the situation then. And more importantly, what are the next levers you have to take gross margins towards your target model? Is it volume? Is it mix? Is it utilization? Like just what does the road map look like from here in the near to medium term?

Sure. When gross margins were at their peak, right, obviously, volumes were at their peak and we were at peak in terms of pricing in the industry and those sort of things. Both of those things have come down over the last few years while costs have gone up, right? So our costs have gone up. We continue now to start to get cost mitigations or cost reductions from our vendors, which is really, really helpful.

Going forward, what I'd expect really is a large majority of it is going to be led by leverage, as we talked about, improving 440 basis points just over the last 12 months. That's all leverage. The second piece is factory efficiencies. We continue to do a lot of things on our own factories to be far more efficient. And then the third piece is to maintain that very healthy variable contribution margin between 60% and 65% that we've talked about and sort of held in that range, generally speaking, year-over-year since have been public.

That requires continued more mix of industrial, these higher-margin parts that we keep releasing with TMR and some of these other things. It requires geographic mix. In requires cost reductions, product cost reductions that Mike has been talking about with some things like copper to gold, the gold to copper and those sort of things, and then managing ASPs, which I think we're doing quite well this year.

Our next question is from the line of Joshua Buchalter with TD Cowen.

Congrats on the results and guide. Maybe following up a bit on that last one. It seems like there's a lot of optimism in particular on current sensing in both auto and data center and industrial. Any way to sort of help us better understand how much of this is sort of the legacy hall effect portfolio versus some of the TMR stuff layering in, in particular, the IP you got from Crocus?

Thanks, Josh. This is Mike, and I'm always happy to talk about current sensors for lots of reasons. So when we look at the growth of magnetic sensors, current sensing, we believe that's the highest area of growth both for the market and for us. There's a number of reasons for that. When you think about power management in general, whether it's cars, electrifying power levels of the data center, robotics, you have these -- even energy infrastructure, there's so many areas of power conversion. And people want to measure current to have active information for the control of this power conversion step.

We offer products, whether they're hall or TMR, they can increase the efficiency of a power conversion system. We were the first company to come to market with these innovative magnetic current sensors. And we have continued to just layer innovation upon innovation into the current sensor space. In terms of the predominance of revenues today, it's mostly hall today. And we've actually been pushing the boundaries of efficiency gains through optimized packaging, through higher bandwidth or speed of operation. So we were leading the market in terms of those attributes with hall sensors and getting increased levels of design wins.

We talked recently about our 10 megahertz TMR current sensor, a newer product for Allegro. This now starts to take the current sensor capability beyond what can be achieved with hall ICs. And it is actually very important to have a fast current sensor to make power conversion more efficient. So we're starting to accelerate activity with customers, accelerate share gains through the use of TMR in current sensing. And that's actually a strategy or a playbook that we plan to step and repeat in other areas of our sensor business as well.

Glad you could talk about your favorite topic. Maybe one for Derek. You guys have done a nice job delevering both by paying down debt and by having EBITDA move higher. I saw that you didn't pay down any in the December quarter for the first time in a while. Are you guys comfortable with the amount of debt on the balance sheet here? And how should we think about capital allocation going forward?

Yes. Thanks, Josh. Yes. So we've built a little bit of cash this quarter. We built about $40 million of cash, ended the quarter with $163 million, which interestingly kind of equates to about 6 months' worth of sort of OpEx plus CapEx, which is just one benchmark for liquidity. We have an untapped line of credit for $256 million, which we don't plan to tap. So I feel like we have a good amount of liquidity, which is obviously one of our priorities.

We have $285 million in term loan exiting the quarter.and we refinanced that here to a fairly tight SOFR plus 175. Exiting Q4 at the midpoint of our guidance, the net leverage ratio is just slightly below 1:1. There's no metric for where we're trying to get to. I think that's a pretty healthy number. We will continue to balance liquidity on the balance sheet with paying down debt because I think that's just accretive to EPS, and it moves some of the enterprise value, of course, to the shareholders. So we'll continue to look at that each quarter.

Our next question comes from the line of Vijay Rakesh with Mizuho.

Good quarter, Mike and Derek. Just on the e-Mobility side, obviously, a nice step-up in the December quarter. Was there any pull in there? Or do you see that growing at kind of similar rates as you go to 2026? I know you mentioned a big driver was ADAS and the current sensing. But just wondering how you look at that through 2026. And I have a follow-up.

Thanks, Vijay. This is Mike. Yes. So sometimes new programs pop so I don't talk too much about quarter-to-quarter dynamics. But in general, in E-Mobility, yes, we've had a lot of strength in ADAS. Recently, we see a lot of wins as well in the xEV space. We see going forward a 16% growth rate for our SAM in the e-Mobility space. So we continue to believe this will be a long-term growth driver, and we have the design wins to back it up both across ADAS and EV.

Got it. And I saw you mentioned robotics in your slide deck. Just wondering -- and also you mentioned in the remarks that you have been doing the customer engagements in U.S., Japan, et cetera. Just wondering how you see the revenues there as you look out '26, '27, '28 in terms of mix or dollars.

Yes, absolutely. This is Mike again. So I mentioned sort of the potential unit count in humanoids. And the robotics market is about a lot more than humanoids, but certainly, humanoids are where the real dollar content is at. So as we work with customers, the trend I would say we're seeing is you have customers talking about tens of thousands of robots per year in the near term. Over the next few years, maybe that ramps up to hundreds of thousands of humanoid. And you have some companies which are talking about numbers much bigger than that as well.

So we see revenue ramp starting to happen probably 2 or 3 years out. It really comes down to how the market develops. But internally, this is how we're looking at it. We are out there talking to the lead robotics manufacturers. I mentioned in the prepared remarks, we've confirmed numerous times 150 sensor sockets for both our position and current sensors in a humanoid robot, up to 50 of our motor drivers. So the dollar content is high. But as I said, you'll start to see tens of thousands of robots in the next year, then that ramps to hundreds of thousands. And hopefully, we get to millions over the 3-year period. But that's really up to the market. We just plan to be prepared for the ramp, and we have ideal technologies and products to support that ramp.

And Vijay, this is Derek. Maybe just to touch us on some of the OpEx investments, right? What's really nice about this is much of the robotics space, particularly the humanoids, a lot of that is automotive type of customers and automotive customers. So in many cases, it's existing products to existing customers. So we really get to continue to leverage that OpEx and their existing customers, which is probably the best tangential sale you can have.

Our next question comes from the line of Joe Moore with Morgan Stanley.

First, I wanted to follow up. You sort of mentioned average selling prices moving in a good direction. Can you talk about any changes in like-for-like pricing? Any difference in how those negotiations are going, customer behavior or anything like that?

Sure, Joe. This is Mike. So in the prior call, we even talked about pricing dynamics staying the same. But I'll repeat them. As we enter calendar year 2026 with our customers, we would normally be looking at a low single-digit reduction in ASPs, and I've characterized this year's pricing environment as one where the reductions are very low single-digit reductions. That's for a number of different reasons.

I think we're all aware of some of the pricing dynamics from competitors in the marketplace. There have been other signals in terms of tight supply, et cetera, that allow us to have a more favorable than normal pricing environment as we enter 2026., I will say we do have longer-term contracts with customers that do have some price declines built in. So that is why there is still a very low single-digit decline in pricing. But more favorable in 2026 than historical.

Great. And then on the robotics piece, I want to ask about that as well. Who should we think of as the major customers there? You talked about automotive customers, which there are some clear examples of that. But are you seeing the sort of traditional industrial robotics companies make investments in humanoid? And just is this an evolution from existing robots or an entirely new space? Just how do you think about all of that?

Yes. Thanks, Joe, it's Mike. I can't mention names, of course. But unfortunately, the answer to your question is a little bit all of the above, right? I think so many of these companies that have motor manufacturing and motor control expertise are looking to get into the humanoid space. And that's fantastic for us because, as Derek mentioned, not only do we sell motor drivers to many of the leading motor companies out there, but many of them need position sensor feedback, current sensor feedback.

So we see a broad swath of customers, which would include many of the automotive players but also just major motor manufacturers, some of the bigger industrial companies in general all trying to dip their toe into the water. And I think there is such an array of robots and so many components of those robots that there's room for various players. But our strategy is just to make sure that we're participating and securing design-ins with the winners, which will probably include some of the new innovative players that we're working with as well. So it's a dynamic space, a very interesting one as well. And we're happy to have such high dollar content and be participating in the market.

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

Thank you, Michelle. This concludes today's call. Thanks to all of you for taking the time to join us this morning. We look forward to seeing you at various investor events in the coming weeks.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

All right. Welcome back, everybody. I'm Joe Moore from Morgan Stanley Semiconductor Research. Very happy to have with us today the management team of Allegro MicroSystems. We have Derek D'Antilio, CFO; and Mark Gill, VP of Corporate Strategy. Thank you guys for coming.

Welcome.

So maybe you could just talk -- start off with a little bit of an overview. You had a CEO change. You've had a good 2025. Can you just talk about what stands out? What's most different about how Allegro is operating versus where you were a year ago?

Sure. We had a strong stretch of years from the time we went public from 2020, we just celebrated our fifth anniversary of being a public company last month, and thank you, Nasdaq for letting us ring the bell again there. So it was exactly 5 years ago in October. We had a very strong stretch with the automotive up cycle coming out of COVID.

And automotive has continued to be fairly robust and grow the last several years. But what happened was there was a pretty significant inventory correction in automotive, which is a bit unusual because automakers and Tier 1s don't typically -- Tier 1s, especially don't typically carry a lot of inventory. Well, they did do that starting in 2022 because they were getting incentives from OEMs. Interest rates are the lowest they've been in 100 years. And what happened beginning in the December quarter of 2023, we recognized that there was a lot of double ordering, there was excess inventory.

We started to allow customers to cancel orders in that quarter. And we started to see the downturn, particularly in inventory correction much sooner than many of our peers, I believe, and particularly that June of 2024 quarter was quite painful where we came down about 30% sequentially, largely in China where we cleared a lot of inventory.

So what are we doing differently? We do have a new CEO that was promoted actually in February of 2024 -- sorry, 2025, just a year ago here. Mike has been with the company for 28 years, and Mike is really all about innovation. He was our CTO prior to this, and he's really focused on innovation and taking a lot of what we're doing in automotive and have done really well in automotive over the last 30 or 40 years and leveraging that to some fast-growing industrial areas that we can talk a little bit about.

We've also made some significant changes in our senior leadership team. We have a new SVP of Sales. We have a new SVP of Products. We feel like we're at the end of the late eighth inning of this inventory correction. So the setup coming into 2025 or midway through 2025 here, we feel like we're in a lot better place than we were even a year ago. And there were some lessons learned, I would say, we had in this inventory correction. We have much better models now, internal models for looking at what we'll call our opportunity, our content opportunity, our entitlement models within automotive and particularly with our distributors in the red yellow greens are we overshipping there.

So we feel like we're in a much better place. We feel like our customers are in a much better place in terms of how they're behaving with inventory.

All right. Yes. Maybe you could touch on the nearer-term environment. You had guided December quarter to 5% up quarter-on-quarter, better than seasonal. Can you talk about the drivers of that and kind of generally what you're seeing in the market these days?

Sure. So the December quarter, if you look back over the last, say, 15 years, even prior to being public, typically, that December quarter was down 5% on average. It's the only quarter that really has discernible seasonality. Part of the reason for that is we have a very well geographically dispersed revenue mix. So 25% of our revenues in China, 20% is in Japan, 20% Korea, U.S. and Europe make up the rest.

And so for example, in that quarter, you have shutdowns in North America and Europe and a lot of the factories, that quarter is typically down 5%. But you're right, we're guiding up 4% sequentially at the midpoint. So we're above seasonal. What's really driving that is continued strength in auto. I think as many people know, auto is turning out to be a better year in '25 than many people thought coming into the year. Coming into the year, it's projected to be down a little bit.

Liberation Day came along in the United States and things looked a little bit draconian. Since that point in time, now they're expecting auto production to be up about 3 million units this year. That's number one. Number two, we've seen a real resurgence in our data center business which last quarter was about 8% of our revenue and that's -- those 2 things are really driving this strong December quarter.

Great. And you mentioned this kind of late eighth inning of the inventory burn. You've got revenues that are still significantly below the prior peak. What gives you the confidence that we're that close to the end of this? And where do you think we sit relative to consumption?

Sure. So we look at all of these sort of forward-looking data points, right? And the forward-looking data points are the book-to-bill ratio, the push-pull ratio, how much the pull-in versus the push out, backlog, pricing dynamics. We can also see in the distribution channel, which is half of our sales, we can clearly see on a daily, weekly basis how much inventory they have of our products, what the POS is, what the sell-in is.

So we know in September, we under shipped the distribution channel by $5 million. So POS was about $120 million. We undershipped that by about $5 million. That's much better than undershipping by $15 million to $20 million as we had been doing for the previous several quarters. So we're much closer there. I guided for this quarter, I expect distribution inventories to be about flat, a little bit of geography movement there.

And then on the auto side, where you don't get that same visibility necessarily because they're using the inventory, we're seeing more in-quarter type of orders. We're seeing more like claims for line potentially lines down in those -- particularly in data center. We're also seeing things that you typically see in an up cycle like our own books having some delinquency on it for parts where we have shortages ourselves.

It's interesting to me when we saw this kind of next period disruption which was a pretty short-term effect, but people went line down pretty quickly. And I feel like there has to be an indication there that there's just not a whole lot of inventory. And like I'm a little surprised given the magnitude of the shortages we saw just a couple of years ago that you alluded to that people would want inventory that lean. Where do you think we are in that? And is there still a memory of that shortage? And can it get triggered by something like that, that sort of changes base?

It's all of the above. I think we're lean on inventories, particularly on the auto side, except for maybe -- at least for us, except for maybe Europe and Japan. U.S. is absolutely lean. China is absolutely lean, Korea is absolutely lean. On the distributor side, we're back to within sort of our weeks on hand of 10 to 12 weeks. It's not lean, but it's back to within that sort of target model for distributors.

Will they change their behavior? They certainly remember what happened 3 years ago. However, interest rates are markedly different than they were 3 or 4 years ago. They were getting incentives from the OEMs. So quite frankly, when it's a working capital business, both for the distributors and for the Tier 1s, I'm not sure there's an incentive for them to necessarily go and build a lot of inventory. What we are starting to see, though, is people are willing to pay expedite fees, people willing to buy parts from brokers, right, which are at higher cost than you would buy versus build inventory at least at this point.

Yes. Your pattern in autos has been maybe a little bit different than others where, as you said, you took -- you had kind of a harsher correction and then your recovery has been a little bit more steady and strong coming out of it. Is any particular rationale that any idiosyncratic differences for Allegro that sort of caused it that way or just the way you managed it?

I'll start, Mark, and you can feel free to jump in, but it's really the way we manage it, right? When you look at actual automotive production, again, it's been remarkably stable over the last 5 years, right? It's increased 2 million or 3 million units a year for each of the last 5 years. Only 2 times in the last 3 years as auto production dipped below 10% drop, 2009 and 2020. So it's a pretty stable overall end market. It's really how people manage the inventory reductions and increases back up.

Yes. And I think if you look at that total SAAR number, that's the growth, it's a fairly benign thing. But underneath that, there's some pretty good growth with regards to battery electric vehicles, hybrid electric vehicles, and we are well aligned to that as well. So there's a lot of geographic discussion about what regions those things grow. But at the end of the day, all of that electrification is a good solid growth platform for Allegro.

Maybe you could give us a little color on -- you've talked about your content per internal combustion and per EV. Can you just give us an update there and what the drivers are of that?

Yes. So if you think about the content we have today, you can just take our revenue divided by the number of vehicles, you can get a number and it's approaching sort of like about $9 per vehicle we have today. Our opportunity content in an ICE vehicle is about $40. That's associated with the powertrain, the safety systems, the ADAS systems and those comfort convenience things you have within the vehicle.

When we see what's going on in the automotive industry, then there's some pretty seismic shifts, ICE vehicles becoming electric or electrified vehicles. And there's 2 things that are going on in there. You're moving to a platform that's got more onboard chargers, inverters and the likes, that makes a significant difference in the content that we can provide. And that takes us from about a $40 content in a regular ICE vehicle up to about $100 of content opportunity in either a battery electric vehicle or a hybrid.

And it's actually a really important point for Allegro, and it's quite different, I think, for us relative to other companies. We don't really care whether it's a battery electric vehicle or a full hybrid vehicle. We have about that same $100 content either of those 2 platforms. So that's the first element. But even then within the ICE vehicles, people still want to make them better. They still want to make those more attractive for consumers. And one of the ways they're doing that is bringing ADAS and safety features into those vehicles.

So as we see the human being removed and putting in motors to replace the muscles and the sensors to replace other things, we're moving from hydraulic-based systems into electric-driven based systems, the content for Allegro there approximately doubles from those base systems to more advanced driver assistance systems. So along with the electrification and those increase in ADAS systems, there's really a very strong content. And that's what helps us drive well above that SAAR growth rate.

Great. That's helpful. And I guess what are you seeing in the pace of ADAS innovation? And are you -- does it matter if we're talking about Level 2, Level 3, Level 4? Is there -- I assume there's more content in autonomous, but it seems like you have quite a bit of content in Level 2 as well?

Yes. From Allegro's perspective, it doesn't really matter those higher-end versions of ADAS systems or the Level 3, 4, 5 systems. For us, as soon as you take the driver out of the way, you need -- you need an electric system to be able to drive steering and braking. So it's -- as soon as we move into the content of saying we've got an ADAS, Level 1 plus type systems, you've got Allegro content in steering systems as we move into electric power steering and perhaps even steer-by-wire systems and you have Allegro content in braking systems as we move into the more electromechanical braking and then whatever architectures become after that.

So it's basically as soon as you get into ADAS, you get into the domain in which we enjoy.

Great. Thank you. And maybe you could talk a little bit about regional trends, both from the standpoint of the demand picture by region. Is there any difference there? And then specific to China and some of the innovations we're seeing out of China, how well are you positioned?

Yes, I'll start there. So in the September quarter, every region grew for us except for Europe, right? And it's no secret that Europe didn't really grow because -- partially because of seasonality in Europe and partially because it's the area that's probably the most challenged from an automotive standpoint. Now that's 13% of our total business.

The U.S. was very strong. Japan came back very strong. China has continued to be very strong. Korea has been very good for us. With specifics to China, and I'll turn it over to Mark in a minute, we have a strong position in China. It's about 27% of our business. About 90% of that is auto. We sell to -- that's a ship to number. We sell to all the foreign companies like VW and Tesla and everybody else who manufacture in China, but also the Chinese global manufacturers, the BYDs, the NIO, Geely, Chery. And remember, all of the growth in China auto projected over the next several years and more likely forever is all export related. So that helps us quite a bit.

And in fact, our September quarter, our design wins were led by 2 things: China ADAS applications and data center.

Interesting. Okay. Maybe we pivot to industrial. Can you talk about what you're seeing in the industrial market maybe outside of the data center, where there's some sort of cyclical headwinds still that you're seeing and then some of the bright spots in medical and areas like that?

Yes. So medical is -- so outside of -- so data center, electrification of the grid, trying to make that more robust, for example, the medical business, which was a business that we acquired in through our acquisition of a company called Crocus, those are all solid growth drivers. And each one has got its individual characteristics as to why we see that. And if you think about North America, you got a lot of desire for data center. When you look at the electric grid requirements for that, people are bringing all sorts of technologies in to try to make their local power supply robust, they're local to those things.

If you think about medical, it's no -- I think everyone is aware, diabetes is something that is unfortunately prevalent and is growing in our society. As a consequence that the patches that are in that medical product there are -- there's a growth associated with them. And interestingly, as those companies have made those products available and over-the-counter for consumers, it increases the market opportunity for just anybody who wishes to have more understanding about the way that their body reacts to foods and exercise and the likes. So it's another market we're quite excited about.

And then to round out the industrial, Joe, the remaining pieces of our industrial are, we'll call it, broad-based industrial. That part hasn't -- that's been pretty muted for the past year or 2. That's the stuff we sell through the distributors. It ends up in places like Milwaukee tools drills, Xbox controllers, precision sensors. We don't have to do a lot to get that business, but I love it because it's great gross margins because they're buying them in small quantities.

And maybe I'll talk about this after, but probably the most exciting part in the future for us in our industrial business is humanoid robotics and there's a lot of opportunity there, right? And that's really taking existing products into, in some cases, existing customers and, of course, new customers there as well.

And who are the customers that you think about in robotics? I was talking to a company yesterday saying there's dozens of them now and you have to have a breadth of distribution-based strategy to serve it as opposed to some of the high-profile stuff that's out there?

Correct. So there's clearly a couple of leading companies in North America who are well known and have some of the most advanced technologies on a worldwide basis. If you think about robotics, there's a wide range of types of robots as well. I think in companies in Korea and Japan might be leading the way in sort of the service and support robotics. You find elderly care, other hospital care, restaurants and the likes of things there.

And then clearly, in China, similar to what you see in the electric vehicle market, where there's a point where there are hundreds of companies looking to get into the electric vehicle market, there are hundreds of companies there trying to get into the sort of robotics area as well. And robotics clearly changes from relatively simple devices that you might find in your home through factory robots that are -- let's say, the interesting part for Allegro is joints, right? Things that have motion and sensing associated with them. That little robot around your room cleaning up for you might have, let's say, the equivalent of one joint in it. Those factory robots might have 6, 7, 10 types of joints in them.

The reason why people are getting excited about this move to humanoid robotics is just think about your body and the number of joints that you have, and in particular, the number of joints you've got here, right? And we're talking about dozens and dozens of new opportunities in that and so it's a great opportunity for Allegro with motor products that are really the muscles associated with this and then our current sensors and position sensors that are sort of the nerves that think about the positioning, the force, the torque associated with it.

So it's a really good opportunity. We're engaged with companies all around the world on doing this, right? This is not just one particular thing in North America that likes all of our companies we're dealing with, and there's great innovations that they're bringing, and we are also supporting them with highly integrated and highly robust precise products for the robotics applications.

And going back to the first question, what we doing differently in 2025. In the past, Allegro has designed all of its products for automotive. We test all of our products for automotive. We sell through distribution to some of these interesting markets originally with solar inverters that have a similar application. So things that have autonomy, electrification, similar to cobots, similar to factory automation.

Now we're being much more purposeful in R&D to drive spins and derivatives for the industrial market for these markets, much more purposeful in our sales organization with the new sales organization, and Mark is actually leading our efforts on the industrial side of things by having focused business development teams on data center, on robotics. So we expect that to be a faster-growing area for us, both of those.

Great. Well, in addition to robots, there's a lot of enthusiasm for data center these days in AI as well. For you guys, you had a quarterly record. I think it was 7% of revenue going into data center. Can you talk about the visibility that you have in that business and go through some of your content drivers over time?

Sure. I'll provide some numbers and then Mark can certainly talk about some of the content that's there and some of the data center piece of it. But we had a data center business about 3 or 4 years ago that got to be 7% of our business at its peak. This past quarter, it was 8% of business, right? And the even better news is now it's much more pervasive. Prior to that, it was just cooling fan motor drivers for fans. Now it's fans, it's power management, some of the opportunities they have right there. So that business has come back really fast. So it went through an extended period of inventory exhaustion between the distributors and the fan manufacturers. We're very excited that the business is back, even more excited that it's far broader from a portfolio standpoint and into the power management side of things.

And maybe you could talk about the power management as a lot of discussion of moving from 48 volts to 800 volts, how is Allegro positioned for those transitions?

Yes, I have to say extremely well. So I love the fact that these data center companies and their architectures are tuning into those voltages, which are interestingly and perhaps purposefully the same as we have in the vehicle. So if you think about all of the technology that we've been creating over the last decade have been associated with electrifying the vehicle, much of that technology associated with -- let's start with 800 volts, okay? It's our high-end BEV battery voltage.

So the devices that we have there, our current sensors to be able to measure those are supporting well over 800 volt supplies. The products are immediately applicable for those data center architectures there. The high-voltage gate drivers that we are creating and deploying and sampling out for data center customers also designed for supporting those sorts of levels of voltage in the product. So we attach very well to those 800-volt rails and of course, 800 volt is a little high and perhaps a little dangerous at times. So you want to find a nice intermediate voltage and 48 volt is that motor drivers of a variety of our position sensor, our current sensor products, et cetera, and others in our power sensor portfolio.

I think one of the things that we talk about inside of our organization is we have something we call true 48-volt products. That is 48-volt is ICE, but you've always got spikes and up and down on these things. You need a product portfolio that is able to survive any of those sort of transients you end up seeing. Our base tech is 110, 120-volt type base technology. So when you've got those 48-volt systems, any perturbations on them, our products are surviving those. That's quite different than a number of our competitors.

So we believe we've been investing in this way for the automotive industry for a long time. And as Derek says, it gives us the immediate applicability to go and work with those customers on 48-volt designs or even 800-volt designs in data center as well.

Okay. And you've talked about content in AI servers being a lot higher than traditional servers. I guess where are you in penetrating those opportunities today?

Yes. So as Derek mentioned, we've got a couple of years behind us on the motor drivers that were associated with driving fans. So they were 12-volt single phase, moving into 48-volt, 3-phase fans as those systems become more and more powerful to remove the heat from the systems. One of the things we know about data centers, they consume a lot of power. As a consequence, there's -- we're moving, if you like, those fans, not just from cooling off the compute trays, but now also moving them into the power supply systems and starting to cool those power supply systems. So that's sort of one element of that story. And it's a base layer of the growth we have in our data center business.

But AI data centers need more than that and their power supply systems are becoming so -- do they need to be so efficient that the frequency of operation of them is moving from tens of kilohertz to hundreds of kilohertz to megahertz. To be have control of those, you need control loops that are 5x to 10x faster in the components. This is where our 1 megahertz, 5 megahertz, 10 megahertz current sensors, which are unique products where they are using those control to make sure those data center supplies are the most efficient they can be.

And then the third layer of this is the isolated gate drivers. Those are just being sampled out to those customers now. Those are, again, trying to make the power supply systems the most efficient. And we have not just an efficiency from a power standpoint, but they're physically smaller than the other products with an integration of the isolated supplies associated with them. So think of the sort of layers of -- we've got the motors. We've had those for some number of years, the fan drivers, and that's continuing, starting pretty much now is the current sensors in our megahertz, 5 megahertz, 10 megahertz products. And then 1 year, 1.5 years from now is where the gate drivers are starting to come in for that. So it's 3 layers staggered out in time.

And these isolated gate drivers drive high power to gallium nitride devices. We don't make the gallium nitride devices. They'll be on the same board. And further than that, we're sampling isolated gate drivers for silicon carbide, think about the EV inverters.

Yes. A lot of innovation in those markets. I'll ask one more question and then open it to the audience. Maybe just talk about your portfolio, your sensor portfolio. I think you released the industry's first 10 megahertz TMR current sensor. Can you just talk about that and kind of where you feel you are with the road map of your sensor products?

Yes, absolutely. So a number -- a couple of years ago, we acquired a company called Crocus Technology. They had some -- what we thought at that point in time was the best in the industry TMR technology. We had some of our own. We assessed ours versus their. We thought it was the right reason to acquire that technology. That is now fully integrated within our organization, and it's fully integrated in all of our sensing portfolios. So it's in current sensors, position sensors, speed in switches and latches, et cetera.

Examples, when we first acquired that technology, the primary product there was in that medical patch you described earlier on. It's a switch. It's a very straightforward switch technology using TMR. The next thing we were looking at is a heterogeneous ASIL-D position sensor, which has got a whole sensor and a TMR sensor overlaying each other. They're looking at the same signal. They're making sure that each one is measuring the right thing. That's using an ASIL-D steering system. You just spoke about that 10 megahertz current sensor that is the industry-leading fastest current sensor.

So TMR for us is it's a technology, but it can -- we are using it to advance all of the vectors that matter in a sensing portfolio, be that the accuracy, the speed, the power density of these products, the bandwidth of them. And we believe that you've seen some advances from us here, and you're going to see more from us pushing on each of these different vectors as we go through 2026.

Yes. When you look at our road map, Joe, if you look at the products that are continuing to tape out to market this year and next year, a significant portion of those on the magnetic sensing side are now using underlying TMR technology. So that bodes well for 3, 4, 5 years from now, those products being in the market.

Okay. Let me pause here. We have 5 minutes left to see if there's any questions from the audience.

Can you talk about the dollar content that goes into humanoids comparison to EVs or cars in general?

Yes, go ahead, finish.

So in general, the content opportunity on an ICE vehicle is about $40, okay, the content opportunity. On a hybrid electric vehicle or a battery electric vehicle with a standard 400-volt battery, it's about $60 to $65. On an 800-volt battery, battery electric vehicle goes up as high as $100 with those silicon carbide isolated gate drivers.

For robots, humanoids in comparison to EVs, how much -- I mean, you were talking about humanoids, it's more complex, more sensors. What do you expect? I think if you compare EVs, there's only 20 million out there per annum. Robots will be $100 million if you look for the households. So your TAM goes up. What happens basically to your financials [indiscernible]?

Yes. I think the definition of those robots is quite wide with regards to the types of functions and numbers of joints. But if we're talking about those humanoid robots on the right-hand side of that scale, it's more like $100, $110 per robot at this point in time. But I also say that number could increase. The market is very much emerging with regards to products and systems architectures and the technology that we have that would be applicable for them. So at this moment in time, feel free to think of it as about $110. But we'll have an Analyst Day in February, and you may see some updates to those technology numbers at that point in time.

And from an impact on financials today, we're already shipping products into automation, low single-digit million dollars, Cobots already shipping products into that, right? Humanoids are really in the early stages in the sampling design win phase, but you have to be there to really have meaningful revenue in 2030, 2031, 2032. But we do feel like that's going to be a meaningful piece of our business and have a seriously good impact on our financials. A couple of years out, you have to do the right things today from a design win standpoint to participate.

Can we close out with a little bit on -- we got another question.

I just wanted a bit of clarification on your side about magnetic sensing. In particularly in cars, there's a company in Europe, Melexis that does a lot of Hall effect sensors, I think, and they quite a big market share in that. But I see you say that you're the market leader and also that your TMR technology is going to be better or replace Hall effect sensors. Could you explain the competitive dynamics and how that TMR technology help you take market share and where you are in that journey?

Absolutely. So we often use a third-party company called Omdia to try to look at market shares. They position Allegro as the #1 market shareholder with about 23% market share. Second, 4 or 5 points below that Infineon's and third, four or five points below them at Melexis. So that's external reporting. They do that based on their revenue numbers reported. That's just an external view there.

TMR technology has the absolute capability to deliver more precision in everything that's measuring. It is fundamentally a faster technology. It's going to deliver higher response rates and higher bandwidth for the products.

So when we're looking at position sensors, the accuracy is going to be better. When we're looking at current sensors, the accuracy, the speed of operation is going to be better. And the technology is intrinsically stronger and better, which means you don't need much support circuitry around it, which means it's much smaller. And that gives you very different applications that you could enter into that hall is going to be struggling with.

And the example I provided there clearly is if you're in those humanoid robotics and you're looking at the diameter of a finger, which doesn't have a lot of space in it and you need to bring multiple different sensors in there, we believe that the TMR sensing technology is very, very applicable for those small spaces and levels of high integration. It's also very much lower power. Again, TMR technology is what was in that medical patch. So it's very good at extending out lifetime on battery type -- low battery -- low capacity type batteries, not the car stuff, but low-capacity portable type applications.

[indiscernible] cars already...

Yes. So for example, I gave the example earlier on, right, of that heterogeneous redundancy. And see, for Allegro, we have both of those technologies. We can choose which of those is the appropriate one for the particular application that gives the customer most value in what they're looking for.

Okay. Well, that brings us up to the end of our time. Thank you guys very much for being here.

Thank you very much, Joe.

You are most welcome.

Thank you.

Good morning, and welcome to Allegro Microsystems Second Quarter Fiscal Year 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jalene Hoover, Vice President of Investor Relations and Corporate Communications.

Thank you, Kathy. Good morning, and thank you for joining us today to discuss Allegro's Fiscal Second Quarter 2026 Results. I'm joined today by Allegro's President and Chief Executive Officer, Mike Doogue; and Allegro's Chief Financial Officer, Derek D'Antilio. They will provide highlights of our business, review our quarterly financial performance and share our third 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 that are 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 are included in our earnings release, which is available in 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 as a result, 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 factors that could cause actual results to differ from our forward-looking statements are described in detail in our earnings release for the second quarter of fiscal 2026 and in our most recent periodic and other filings with the Securities and Exchange Commission. Our estimates, expectations and 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?

Thank you very much, Jalene, and good morning, and thank you all for joining our second quarter earnings conference call. We remain encouraged by the positive momentum we continue to see across the business, achieving multiyear highs and second quarter bookings and backlog and delivering strong design win activity in our strategic focus areas, particularly in e-mobility and data center. This momentum has enabled us to deliver strong second quarter results with sales, gross margin and EPS above the midpoint of our guidance ranges at $214 million, 49.6% and $0.13, respectively.

In the second quarter, we saw broad strength in our automotive sales with growth in e-mobility and other auto. Our automotive sensor business grew through increased adoption of our ICs and xEV powertrain systems. And motor driver IC sales also grew in electronic power steering systems in ADAS and in applications and other auto.

In our industrial and other end markets, sales growth was led by data center, establishing a new quarterly record. Data center momentum was fueled by a broad server power architecture upgrade supporting next-generation AI workloads as systems move toward higher voltage and power levels. As a result, the demand for our data center fan driver ICs continues to increase, and additionally, our market-leading high-speed current sensor ICs are ramping in data center power supply applications where they enable crucial efficiency and power density improvements.

Looking ahead, we are building another growth vector in this market. Within the quarter, we sampled our new high-voltage gate drivers for silicon carbide with market leaders in the data center power supply space. Collectively, this strong market pull is reflected in our design win activity, where data center continued to lead Q2 industrial design wins with revenue from any of these wins ramping within the next year.

Shifting to automotive design wins. E-mobility continued to lead second quarter activity. We secured a multi-portfolio ADAS win for a steering system using our current sensors and motor drivers with Chinese OEM.

Additionally, our current sensors won multiple designs with an onboard charger and high-voltage traction inverter systems with a North American XEV OEM. As I've said in the past, relentless innovation that drives performance leadership is a priority for Allegro. During the quarter, we released the industry's first 10 megahertz TMR current sensor, a disruptive IC that further extends our competitive advantage.

We believe our 10 megahertz sensor, the highest bandwidth magnetic current sensor in the market by a significant margin will help accelerate our sales growth. These ultrafast sensors reduce the size of inductors and other components in high-voltage power systems. Within the quarter, I also traveled to China where I spent time with our teams, our customers and our suppliers. This time on the road reinforced my excitement about our opportunity and positioning in this important geography.

Our sales to China have grown every quarter since Q1 FY '25 when we launched a strategy to quickly correct an over-inventory situation. Today, China inventory levels are lean, design win activity remains strong and we have no indication of any material pull-in activity from our customers in response to tariffs.

We continue to navigate geopolitical challenges. Therefore, it was encouraging to see China lead our second quarter automotive design win activity for Allegro led by ADAS and xEV applications. While in China, I was also pleased to confirm new design-ins and wins for our sensor ICs in nascent quadruped and hematoid robotics programs.

In summary, we continue to execute on our strategic priorities. We are seeing positive momentum across the business, especially in auto and data center markets. and recent design wins confirm our increasing dollar content opportunity in high-growth auto, data center and robotics applications.

I'll now turn the call over to Derek to review the Q2 2026 financial results and to provide our outlook for the third quarter.

Thank you, Mike, and good morning, everyone. Starting with our second quarter results. Net sales were $214 million and non-GAAP earnings per share were $0.13. Gross margin was 49.6%, operating margin was 13.9% and adjusted EBITDA was 19% of sales. Total Q2 sales increased by 5% sequentially and 14% year-over-year. Sales to our automotive customers increased by 8% sequentially and 12% year-over-year, while e-mobility sales increased by 21% year-over-year.

Industrial and other sales declined by 1% sequentially and grew 23% year-over-year. We saw continued strong performance in data center, offset by a decline in consumer and broad-based industrial where we continue to see some remaining inventory burn. Distribution sales increased by 22% sequentially and 23% year-over-year. Sell-in was still below POS, which remained near the highest levels it's been in 6 quarters.

From a product perspective, magnetic sensor sales increased by 1% sequentially and 2% year-over-year. Magnetic Sensor sales increased by 13% in the first half of fiscal '26 compared to the second half of fiscal '25. And sales of our power products increased by 13% sequentially and 42% year-over-year. Sales by geography were as follows: 29% of sales in China, 24% in the rest of Asia, 17% in Japan, 17% in the Americas and 13% of sales in Europe.

Sales grew in all geographies, except for Europe, where we saw seasonal declines. Now turning to Q2 profitability. Gross margin was 49.6%, an increase of another 140 basis points sequentially. Operating expenses were $76 million approximately $3 million above our outlook due to an increase in variable compensation expense and a further weakening of the U.S. dollar.

Operating margin was 13.9% of sales, compared to 11.1% in Q1 and 11.7% a year ago. The effective tax rate for the quarter was 6%, driven lower by tax planning and elections made within the one Big Beautiful Bill. Second quarter interest expense was $5.1 million, and the second quarter diluted share count was 186 million shares. Net income was $24 million or $0.13 per diluted share.

Non-GAAP EPS increased by 44% sequentially and 63% year-over-year, demonstrating the significant operating leverage in the business model.

Moving to the balance sheet and cash flow. We ended Q2 with cash of $127 million. Cash flow from operations was $20 million was $6 million and free cash flow was $14 million. From a working capital perspective, DSO was 45 days, compared to 40 days in Q1 and inventory days were 135 days compared to 141 days exiting Q1.

During the quarter, we made another voluntary debt repayment of $25 million bringing our total debt balance to $285 million and net debt to $168 million. Finally, I'll now turn to our Q3 2026 outlook. We expect third quarter sales to be in the range of $215 million to $225 million. The midpoint of this range equates to a 24% year-over-year increase and above seasonal for the December quarter.

Additionally, we expect all the following on a non-GAAP basis. Gross margin to be between 49% and 51%. Interest expense is projected to be $5 million reflecting a 25 basis point reduction in SOFR. We expect our tax rate for the quarter and full year FY '26 to now be 8%, a decline from prior estimates of 10%. We estimate that our weighted average diluted share count will be 186 million shares. And as a result, we expect our non-GAAP EPS to be between $0.12 and $0.16 per share.

Now I'll turn the call back over to Jalene for your questions.

Thank you, Derek. This concludes management's prepared remarks. Before we open the call to your questions, I'd like to share our third fiscal quarter conference line up with you. We will attend Wells Fargo's Ninth Annual TMT Summit on November 19 in Rancho Palos Verdes, UBS's Global Technology Conference on December 2 and 3 in Scottsdale. Nasdaq's Investor Conference held in association with Morgan Stanley on December 10 in London and Barclays 23rd Annual Global Technology Conference on December 11 in San Francisco.

And finally, we are excited to announce that we will be hosting our next Investor Day on February 3, 2026 in Boston. We'll send a save the date announcement soon, providing additional details. We will now open the call to your questions. Cathy, please review Q&A instructions.

[Operator Instructions] Our first question comes from the line of Joe Quatrochi with Wells Fargo.

Congrats on the results. maybe just kind of try to understand a little bit inside the automotive business, I think mobility was up a little bit sequentially, but non-e-mobility was up a lot more. Any sort of color on just how do we think about what's driving that? Is it inventory replenishment? And what -- how do you think about that going forward?

Joe, thanks. This is Mike. So yes, just to kind of reiterate some of the stats on auto, up 8% quarter-over-quarter and up 12% year-over-year, but e-mobility was up 21% year-over-year. So we are seeing growth in the e-mobility space, as we would expect based on the strong activity we have through design wins in the e-mobility space. When we look at the overall growth of the auto business in this quarter that we're reporting on, we did have some growth in our motors business for what I would call more in-cabin and chassis-related applications.

These are sort of the powertrain agnostic applications where there are an increasing number of loaders and we're getting an increasing number of design wins in that area. So we were actually quite pleased to see some of those wins flow through within the quarter.

And then as a follow-up, I think your slide deck has referenced an opportunity like $425 million per rack of revenue for AI servers. Any help on just kind of understanding what you're capturing today? And how do you see that trending over the next couple of years?

Yes, absolutely, and it's an exciting story. So what we're seeing is that as the data center or, let's say, new data centers start to pivot more towards an AI architecture not only are the power levels consumed by the servers going up enormously, but in a commensurate basis, you need lots of cooling within those high-power data centers, they get hot. So we are seeing strong pull-through for our 3-phase fans that we've been selling into the data center market for many years now. What's happening, the fans are moving into new areas within the rack. Most notably, we're seeing the fans move over into the power supplies, which are now getting so hot that they need to be cooled directly.

So that's 1 tailwind for us in the data center space. Another positive sign, which I talked about in my prepared remarks, our current centers are now being adopted and ramping within the power supplies as well. Measuring current is essential to having efficient power management in those power supplies. We offer a smaller form factor solution that also has reduced heating or reduced OMIC losses to offer a greater efficiency in those power supplies.

That business started to ramp roughly a year ago, and we're in the middle of the ramp now. We have differentiated ICs. Today, we talked about a 10 megahertz current sensor using our TMR technology. Within the last year, we released a 5 megahertz device. These higher speed current sensors help shrink the size and help optimize the control of those power supplies. So it is a new growth vector that is ramping right now within the data center as well.

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

On the first one, just on the demand side, very near term. I was wondering if you are noticing any direct or indirect effects because of the next year situation that is going on and it's constraining output at some of the large auto OEMs. And in general, Mike, how would you describe kind of the regional demand environment? I think you mentioned Europe is still a little bit below trend. But just in general, how would you describe what the kind of the broader regional demand situation is and where you see inventory kind of being on the better versus worse side.

Yes. Thanks, Vivek. So on the first question, we read in the press, the potential impact of the Nexperia situation personally, we have not seen any changes in demand from our end customers that attribute to that situation. So I don't have much more to say on that situation.

In terms of the regional trends that we see coming into this quarter, we were pleased to see an uptick in sales in the Americas. We also saw growth in all regions other than Europe. So we continue to see pockets of weakness and pockets of inventory within the European market. And there are still some pockets of inventory in the North American market, but that's why we are encouraged to see it grow a bit more in this quarter.

And from my follow-up on just a sequential trend. So you are guiding to growth in the December quarter, right, which tends to be usually flat to down or so. So I'm curious what's driving that above seasonal growth and for extra credit, if you could give us a sense for how should we think about seasonality going into March?

Yes, Vivek, this is Derek. Typically, you're right. The December quarter over the course of almost 2 decades, we saw about a 5% decline in that quarter, usually led by industrial. Last year, we had a 5% decline in that quarter. Interestingly, it was auto in North America and other places. But in the years where there's been a cyclical upturn in those previous years were cyclical upturn has happened, we've performed above seasonal in the December quarter.

So we're guiding up this December quarter, largely led by continuing strength in auto and in data center. The 2 areas we've seen a lot of strength in the past several quarters. I'm not going to guide for March, but we've typically not seen seasonality in the March quarter other than Chinese New Year shutdowns in China and other parts of Asia, which typically is a little bit lower for those. But that's the beauty of our business being pretty well geographically diversified, and that's a quarter we usually see a rebound in the Americas Japan and Europe that's typically offset those things.

The next question comes to the line of Gary Mobley with Loop Capital.

Derek, I'm having a little bit of a difficult time reconciling the 60 basis points of gross margin upside you delivered for the quarter. Seemingly, there were some headwinds like foreign exchange also automotive was a higher percentage of mix. You delivered right on with that $0.75 of gross profit drop-through. So what drove that gross margin upside for the quarter?

Yes. I would say, Gary, it came in as we expected, right? I expect it to have about 75% drop-through and having the revenue at $214 million above the midpoint, that's the extra 60 basis points. You're absolutely right. There are certainly headwinds with the cost of some commodities continuing to go up. Foreign exchange, at least for the Philippine peso did moderate from a decline in the second quarter here, and we expect it to moderate going forward.

So that's good. That's a tailwind. And we continue to do things in our factory to be far more efficient. So our target is to have that 60% to 65% drop-through the guide for Q3 equates to exactly 65% at the midpoint of that guidance. So I feel like it came in as we expected, offsetting some of the headwinds with continuing to look at PPV from our vendors and also factory efficiencies.

Just my follow-up, I want to ask about the shipment into the channel is embedded in your third quarter revenue guide that $220 million midpoint, does that assume that you're still under shipping to end demand? And maybe you can give us a sense if so, by how much?

So I'll give the statistics on Q3 -- sorry, in Q2, we were still shipping below POS. Our sell-in was still a couple of percentage points below POS we still did burn some inventory came down by a couple of million dollars, distributed inventory in the second quarter. I would describe it as the curve is slowing because we've burned a lot of inventory last year. It's been going on for the better part of 5 quarters now. I would say we're in the late eighth inning right now. There may be some additional burn in the December quarter in the long tail of consumer and broad-based industrial in certain pockets.

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

Really nice results. The first is just on the mix of business in the quarter. It looks like your no mobility business was very strong. We've seen a bit of slowing on the e-mobility side. Could you just maybe give us the breakdown of what you expect between e-mobility and non-e-mobility in your guidance for the third quarter?

Yes. So thanks for the question. I mentioned earlier, with E-Mobility being up 5% quarter-over-quarter, but also, let's remember that it's up 21% year-over-year and I mentioned these motor driver design wins throughout the cabin or the chassis in the car. These are these powertrain agnostic applications that we continue to pursue because that's where some of our motor driver technology shines. I've talked many times in the past that we are exceptionally skilled at spinning motors, more quietly, more efficiently, et cetera.

So we did pick up some wins in those areas and they're ramping within the quarter, and that added to the growth of the automotive market within the quarter. Obviously, again, the E-Mobility up 5%; auto overall up 8%. These motor applications driving most of the delta between the 5% growth and the 8% growth.

And Tom, some of this is geographical. For example, the Americas grew 11% in the quarter, while China grew 7.5%. And as you might imagine, it's more of the traditional auto in the Americas.

Anything on the guidance between those 2 just into the out quarter on what you're expecting between those 2 segments?

No. We're not going to guide to that level of granularity. I will say that the growth in Q3 from a macro market standpoint will be led by automotive, Tom.

And maybe the other thing I'd add...

Go ahead.

I was going to say, the only other thing I'd add is part of the reason we talk about our design wins being so strong in the e-mobility space is just to highlight the fact that most of the growth that we're seeing most of the dollar content gains that we're seeing continue to be in the e-mobility space.

Helpful. And then just as a follow-up, into the out year, I think more broadly, auto estimates for just market growth have come down a little bit, but you guys have shown an ability to grow really despite the broader market kind of slowing or really being kind of flattish. Can you remind us again is there a way or a framework to think about your growth versus what the broad market looks like into 2026? And any kind of puts and takes that we can to apply kind of your growth trajectory versus what we think is kind of more of a flattish market for next year.

So there's a couple of different ways to answer that one. I'll first go back to the model that we've shared many times where we say that our total content opportunity in an internal combustion engine car is roughly $40. When you look at either hybrids or EVs, it doesn't matter which one, right? It's the dollar content is the same, roughly in hybrid and full EVs that dollar content for Allegro today is at $60. And as we roll out some of our new products like our isolated gate drivers, that number goes up to $100.

So you can see within those statistics, that is the dollar content story that underpins our ability to far outgrow the vehicle production market.

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

Yes. The first question is related to gross margins as we go into next year. And in the past -- this past year, you've seen a seasonal decline in gross margins in the March quarter as annual price reductions kind of take hold. Should we expect similar this year? And then perhaps with that, could you talk a bit about what your pricing expectations are into next year? Or are you still expecting a fairly normal pricing environment?

Yes, Chris, what's interesting is that 60% to 65% gross margin drop-through, it's held pretty true since we've been public on an annual basis, but there are quarter-to-quarter perturbations, meaning that in that March quarter, typically, when pricing is negotiated with customers and they're down, the pricing is down, that hits that quarter immediately like it did this past year. The cost cycle back into our P&L over the next 2 quarters, which you did here, so we have a better drop through in those 2 quarters and then it normalizes out.

2 or 3 years ago when prices were increasing, we had the opposite effect, where we had higher gross margin in that March quarter. So it certainly depends on the pricing environment. What I did say this past year in March of 2025 quarter was the friction on the pricing was a bit more than it had been because we had price increases for the past several years. And that was also on a lower revenue number. So the amount of basis points is higher and now our inventory days have gone from 185 days on balance sheet to 135. So the turns of the cost into the P&L will be quicker. So all else being equal, I expect the impact to be less and maybe Mike could talk a little bit about the pricing environment.

Yes. From a pricing perspective, there are competitors in the market right now that have been publicly stated as raising prices. I don't think there's a broad appetite from our customer base for price increases nor am I saying that's part of our strategy, but our expectation heading into the new calendar year is that we can hold pricing more favorably for Allegro than we might have been able to do in other periods.

Got it. That's helpful. I guess going forward, you made some comments, Derek, this was sort of in the late eighth inning with regard to inventory reduction and such. Is that a comment for both the distribution channel as well as the direct customers? And if that's the case, how do we think about that with respect to revenue growth and seasonality as we get over the next few quarters? I mean is it if we start to get some restocking, if demand stabilizes here, does that suggest above seasonal quarters once the inventory burn is complete?

Yes. So I'll start, Chris. What we saw in Q2 was continued inventory burn a small amount. Distributor inventory came down by about another $5 million our sell-in was mid-single digits below POS. POS remained pretty strong. I expect to see a little bit more and that's all on the distributor side where we get data from our distributors on a regular basis. I expect to see a little bit more inventory burn in the very long tail of consumer and broad-based industrial here in the December quarter.

So I feel like we're getting to the end of that on the distributor side. On the automotive side, it's a little harder to see the actual inventory with our customers but we're getting more in-quarter lead time orders. So that tells us that, that coupled with forecast tells us that, that's also getting near the end of the inventory burn as well.

And I could just add to that, that I mentioned I was in China within the quarter. One nice piece of learning within that trip, our internal teams did a nice job pulling our Tier 1s in the China market for their inventory levels of Allegro products. And we were seeing very healthy, if not in some cases, slightly low levels of inventory in the China market space. I bring that up for a couple of reasons. Number one, we're getting the obvious and insightful questions being asked, do you see any evidence of stocking in China? We weren't seeing that, but it also shows that we could be poised for growing to end demand in China in the coming quarters.

And Chris, to answer the second part of your question, as we've laid out in our financial model, we expect that end demand for us is growing at low double digits going forward. If there was a restocking cycle, which we don't really see evidence of that right now, that could be above that number.

The next question comes from Blayne Curtis with Jefferies.

Nice results. 2 questions. I just wanted to ask, obviously, data center has been all over the news. And I'm just kind of curious how you've seen the outlook for data center improved over the last quarter. And then I don't know if you're able to kind of frame how big it is within industrial I'd also be curious, just commentary as to -- obviously, there's a 3x increase in content to AI, but how much is AI today versus general-purpose servers.

Yes. Thanks, Blayne. I'll talk generically, you can poke at the answer, I didn't answer your questions. But as I mentioned earlier, what we're seeing is just the incredible levels of power that are being consumed in these newer data center architectures. We're starting to see transition to 48-volt discussion of 800-volt. And if I could summarize that at the highest level, all those trends align very nicely with some of the competitive advantages of our products that would include our motor or fan drivers our current sensors and increasingly, we're getting some uptick in activity in the data center landscape from our isolated gate drivers.

Everything we're seeing is related to the higher power levels, getting the heat out of these power supplies, getting the heat out of the cabinet or the rack itself is becoming more important, and we have numerous technologies now that help achieve these higher levels of cooling and higher levels of performance in the data center. We are not experts in data center or server architectures, although we're putting more time and energy and to studying trends for the future.

We do see trends that should increase the number of fans for Allegro interact within an AI data center should increase the numbers of current sensors and eventually the isolated gate drivers and that's an encouraging sign.

Got you. And then I wanted to ask -- I guess if I did the math right, the Disty sales were up 22% sequentially. So I think that's a high number vers historically. I guess I'm just curious you just described that you said inventories are down in that channel? I guess, why the jump? And is it more end market related? If you can just provide any color would be great.

Yes, Blayne, that's exactly right. So distributor sales for us, sell-in was up 22%. We continue to see -- it continue to shift below POS by about mid-single digits, and we also burned about $5 million in inventory in the distribution channel. So distribute our sales into the distributors have been pretty low for the past 6 quarters. So it's back to what it was about 6 quarters ago. And really, I think we're going to continue to see that increase. The way I distribute the sales work is all of our industrial products go through distribution and then we have fulfillment done through distribution for both auto and industrial in places like Japan and most of China as well.

The next question comes from the line of Quinn Bolton with Needham & Company.

Nice job on the results and outlook. I guess I just wanted to come back. I think last quarter, you had sort of put consumption at the end of '24, somewhere in the level of $220 million to $230 million. And I think you sort of felt that, that was probably a good level to think about through this year, given some of the annual price declines. Just wanted to make sure you guys hadn't changed your outlook for where you think sort of end consumption is. And then looking forward, when do you think you get back to that sort of low double-digit growth rate in that TAM? Do you think that's something you're looking for in 2026?

Yes, Quinn, that's exactly right. We talked about getting to about $225 million. In the fourth quarter of 2024, that $225 million number was the number I gave in consumption at that point. That number has continued to grow organically just from the markets that we serve, offset it by some of the price declines that have happened in the market over 2 years. So we still think that number is in that range. It may have moved up a little bit from there. Now that pricing has largely stabilized, that number should continue to move up at the rate of our content opportunity in the market, so called out the 10% per year.

So that number will continue to increase. And as I mentioned, as we get through I think we're in the late innings of this inventory burn for us. I don't expect to continue to see material inventory burns. And beyond that, as I call a previously asked, if there is a restocking cycle, we could even see growth above that content opportunity growth.

Great. And then I wanted to follow up, Mike, you sort of addressed some of the applications in the data center, but I was wondering if you could specifically talk about 800-volt given a number of the hyperscalers talking about moving to 800-volt rack power distribution rails in next-generation racks, I think you've kind of gone through where you play in 48-volt, but do you have specific applications at that 800-volt rail on top of what you've kind of previously highlighted on the 48-volt rail?

Yes. Great question, Quinn, and we have a great 800-volt story. And part of the reason is that a lot of the technologies we developed for the EV space were all developed around 800-volt batteries and EVs. So whether you look at our current sensors or our isolated gate drivers, they were all designed specifically to offer efficiency gains, power density gains, size benefits in 800-volt systems. So we are actually excited about becoming transition to an 800-volt architecture at data center.

Thank you. The next question comes from Joshua Buchalter with TD Cowen.

Congrats on the results and guide. I'm sensing a lot of optimism on the current sensing side. Really, it seems like it's been building all year. Is this because of the TMR portfolio maturing and potentially being applicable and ready for autos. Maybe you could just speak to how much of the current sensing piece is current and ready on TMR across your applications?

Yes. Thanks, Josh. It's Mike. So we're excited about current sensors for lots of reasons. One of them is just the growth potential the current sensors offer both in electrified vehicles and really in the electrification of everything, which would include the data center. So the team has done a really nice job increasing the number of package offerings that we deliver to customers that help them solve some of the size problems they have, some of the power density problems that they have. And the packaging technologies create a great platform for them what becomes circuit innovations.

I talked about this new 10 megahertz TMR current sensor. And this is a great example of us taking a market-leading TMR tech, combining it with our market-leading packages and creating a product that is highly sought after, both in the EV space, like in the onboard charger part of the EV world, but also in these data center power supplies. And once again, these faster current sensors help protect against short circuit conditions with gallium nitride and silicon carbide. But when you switch these power supplies faster, not only can you make them more efficient, but you can also shrink the size of some expensive inductors and other components in the power supply. So TMR is helping out quite a bit in the world of current centers and in our sensor business as a whole.

As my follow-up, it sounds like you have incremental confidence in the pricing environment. Obviously, maybe I was hoping you could expand on what's changed in the market that's driving that confidence? And then also when you talked about being able to hold pricing better into I think you said stable. Are you expecting flat pricing into 2026? Or is that just relative to the step down that happened at the beginning of this year that it's more stable.

Yes, it won't be flat pricing. It will just be more stable. I think what we're seeing is that some of the larger players in the market who had been very aggressive on pricing to try to fill factories they're starting to take their foot off the gas. Some of them are even talking about price increases. And we just think it creates a more stable environment for pricing, but we're not saying pricing will be flat entering next year.

The next question comes from the line of Vijay Rakesh with Mizuho.

Mike and Derek, just a quick clarification on the e-mobility and magnetic sensors. I saw e-mobility growing 21% year-on-year, and the magnetic sensor was growing only 2% year-on-year. Is that because a lot of the traction is on the motor driver side here? And do you see a pull-through for the Magnit sensors with the motor trials like the position speed or find sensing alongside those motor drives, as you look out?

Thanks, Vijay. I'm actually glad you asked this question. So as Derek stated in his prepared remarks, in the first half of fiscal year '26, mag sensors were up 13% relative to the second half of FY '25. And what you're seeing in the stats in the second quarter of last year of FY '25. It was a bit of an anomalous spike up in revenues for magnetic sensors, which are making the numbers this quarter on a year-over-year basis.

Just a bit anomalous based on some lumpiness within the quarters. We feel great about our magnetic sensor performance, very strong wins in the EV space and the ADAS space. As I mentioned, we're ramping the current sensors and data center. We're seeing robotics wins. We actually had a record quarter for TMR sales within this quarter. So there's a little bit of a timing dynamic in the numbers in terms of year-over-year growth, but the story for magnetic sensors remains quite strong.

Got it. And then, Derek, on the longer-term 58% gross margin target, just wondering in how we should look at that the progression to that, whether it's product mix or foundry or loading pricing, et cetera, again, just walk us through that.

Yes. So 50% is our long-term target. We're taking it sort of piece by piece, right? The first goal was to get back to 50%. The guide for our midpoint in the December quarter was 50% coming off some troughs kind of at the 46% range. So we continue to grind our way back to 50%. And the biggest piece of that continues to be leverage. We have a significant amount of capacity both at our wafer suppliers and in our back-end facility in the Philippines, where we've invested heavily over the last 4 years.

So we get a lot of leverage. That's that 60% to 65% drop through, and that's really the biggest piece of it. Aside from that, mix will certainly help some of these newer products that Mike talks about with the TMR, the high-voltage gate drivers, this 10 megahertz current sensor we released, those inherently have more value to our customers and higher gross margins as they begin to ramp.

And we continue to do a lot of good things with efficiencies in our factory, which does 2 things: improves gross margin and allows us really to temper our CapEx. This quarter, our CapEx was $6 million or 3% of sales I expect that to remain below 5% of sales, our target model. So those are really the things that will drive gross margin. On the variable contribution margin side, I don't expect that to change considerably, because we'll be continuing to have cost down with our vendors, of course, and those hopefully will exceed the price downs we have with our customers. And that's kind of a netting that happens there.

The next question comes from the line of Joe Moore with Morgan Stanley.

I wanted to come back to the data center business. I think -- I want to make sure I have the right sizing that it's kind of mid-single-digit percentage of revenues? And can you kind of help us with how much of that currently is cooling versus power?

Yes Joe, this is Mike. So we have said publicly in the past that data center had hit 7% of sales for Allegro. And in the -- here in Q2, the number was only slightly higher than that, but did set a record. And we are still seeing the majority of our revenue coming from cooling, but we're seeing a faster ramp on the power supply side of things. So I think the future is bright on both the cooling and the power supply side of the business.

Okay. That's helpful. And then with regards to the comment you made a few minutes ago that the rack content is quite a bit different. Can you expand on that a little bit just because of the market right now, there's a combination of kind of racks of way servers versus full rack scale. What's the difference in content for you guys?

Yes, Joe, I am no expert on all the permutations of the configurations out there. But in our investor deck on our website, we talk about $150 of potential content in a more conventional high compute server going up to 425 for Allegro and more of a G&A type server configuration. That's not tied to any 1 hyper-specific server configuration. It's more related to the conversations we're having with our customers about the transition over to magnetic current sensors and the power supplies being a general trend and then also the need to have more fans in the server architectures.

We are seeing significant numbers of fans in certain architectures that rely on liquid cooling heavily as well. So I think there's some positive news in at least some of the architectures we've seen that even though there's liquid cooling, there tends to be quite a few fans. And then as we look ahead, becomes even more exciting when we can put high-voltage gate drivers into the power supplies. And as I said in my prepared remarks, we're working with customers on that right now.

Congratulations on the numbers.

The next question comes from the line of Timothy Arcuri with UBS.

I want to go back to this question on distribution. It was up 22%. It sounds like it's just shy of $120 million. But then you said that they burn $5 million worth of your part. So it sounds like sell-through was like $5 million, we've been higher than that. Yet the direct sales were down 10%. So it kind of seems like end customers are building inventory, and they're pulling from the disty. So I know that you don't have as much visibility as to what's kind of happening at the end customer. But does that make you a little concerned that maybe they are building inventory just out of disti.

That's not what we're seeing right now. We don't have visibility further down the line, but a lot of that is geographical for us as well. We use distributors for both demand generation for the industrial side of the business, but also for fulfillment in auto in Japan and China. So Disney could be up to the extent that China is of Japan was up industrial in certain markets like data center we serve through distributors. So that really will drive some of that.

Okay. And then it sounds like based on the answer to a prior question, it sounds like data center you're kind of a mid- to high single-digit share of this $900 million TAM that you put in the deck. So how -- like how big do you think your share can get there? Is it -- I know that the story really is one that TAM is growing versus your share, but are you also going to gain share in that TAM? And kind of what do you think that your share can get to?

Yes. So I'll take that one. This is Mike. I won't comment on absolute share numbers, but I would say the best trend that we want to make sure it's crystal clear is that we had a data center business that was largely built on fan drivers. We're now happily seeing current sensors ramp in the power supply. And then the third wave will be these isolated gate drivers that we talked about.

As we bring in current sensor and isolated gate driver technology, we're starting from a low base. So it inherently implies market share gains for Allegro. And I think in aggregate, it creates a strong story of growth in the data center. There's really so much going on in terms of the architectures of the data centers. When is it 800 volts or not, it's tough to give any tangible numbers regarding the future. But I'm confident in saying that we have a strong story on data center.

Our last question comes from the line of Mark Lipacis with Evercore ISI.

Derek, you had mentioned that some -- you're seeing some of your customers trying to order within lead times. So I'm hoping you could just review some of the cycle signals? Are you seeing expedites, are you seeing pull-ins? Or are any of these things changing quarter-to-quarter? And is any of what's going on with your own company lead times? Or any changes there or lead times from your suppliers? And then I had a follow-up.

We continue to see book-to-bill be above one. We haven't given the absolute numbers. That continues to be pervasively above one, all of calendar 25 years. That's good. Our backlog continues to build. We are seeing orders within lead time, and we're having a typical sort of up-cycle constraint in the sense that we're also building some delinquency, meaning we're having challenges building products and getting it through our back-end factory. We're putting more capacity online to service things like data center in the future as we move forward.

So I would say those are the types of metrics you usually see when you come into this environment after a prolonged inventory clearing period.

Got you. Very helpful. And then a follow-up. There's in the news concerns around rare earth metals or do you guys use those? And if so, what's your strategy for building inventory here?

Yes. Thanks, Mark. This is Mike. So rare earth is used throughout so many industries, as you know, I would say the first signs we saw in terms of rare of tightness were from some of our customers that were putting rare earth materials into things like motors they've done a bunch of work starting in the spring and seem to have been navigating that carefully. Additionally, we're looking at a vendor that we used to buy some magnets from.

We spoke to them a few months ago when they assured us they had multiple years worth of supply of rare earth materials and we continue to work with them. And then finally, obviously, today was a big day for announcements about potential U.S.-China relations and the lifting of some potential restrictions. Net-net, I think lots of companies have their head on a swivel and are doing all the right things to make sure they have continuity of supply and people have been navigating that successfully at least from our seat to date.

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

Thank you, Kathy, and thank you all online for taking the time to join us. This concludes this morning's conference call.

Again, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.