Chip designer Allegro MicroSystems (NASDAQ:ALGM) reported results ahead of analyst expectations in the Q3 FY2023 quarter, with revenue up 33.3% year on year to $248.7 million. Guidance for next quarter's revenue was $265 million at the midpoint, 5.05% above the average of analyst estimates. Allegro MicroSystems made a GAAP profit of $64.5 million, improving on its profit of $32.9 million, in the same quarter last year.
Allegro MicroSystems (ALGM) Q3 FY2023 Highlights:
- Revenue: $248.7 million vs analyst estimates of $245.2 million (1.46% beat)
- EPS (non-GAAP): $0.35 vs analyst estimates of $0.32 (9.6% beat)
- Revenue guidance for Q4 2023 is $265 million at the midpoint, above analyst estimates of $252.2 million
- Free cash flow of $38.8 million, up 12.7% from previous quarter
- Inventory Days Outstanding: 102, up from 85 previous quarter
- Gross Margin (GAAP): 57.3%, up from 54.2% same quarter last year
The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ:ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.
Allegro MicroSystems' peers and competitors include Analog Devices (NASDAQ: ADI) Texas Instruments (NASDAQ: TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).Sales Growth
Allegro MicroSystems's revenue growth over the last three years has been mediocre, averaging 15.2% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $186.6 million to $248.7 million. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
This was a good quarter for Allegro MicroSystems as revenues grew 33.3%, topping analyst estimates by 1.46%. This marks 9 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
However, Allegro MicroSystems believes the growth is set to continue, and is guiding for revenue to grow 32.3% YoY next quarter, and Wall St analysts are estimating growth 13.1% over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.
This quarter, Allegro MicroSystems’s inventory days came in at 102, one day above the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.
Pricing Power
Allegro MicroSystems's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 57.3% in Q3, up 3 percentage points year on year.
Over the past year, Allegro MicroSystems has seen its already strong gross margins continue to rise, averaging 55.5%, indicative of a potent competitive offering, pricing power, and efficient inventory management.
Profitability
Allegro MicroSystems reported an operating margin of 30.3% in Q3, up 7.2 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending up over the last year, averaging 26.6%. Allegro MicroSystems's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to grow 18.4% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Allegro MicroSystems's free cash flow came in at $38.8 million in Q3, up 45.2% year on year.
Allegro MicroSystems has generated $118.8 million in free cash flow over the last twelve months. This is a solid result, which translates to 13.1% of revenue. That's above average for semiconductor companies, and should put Allegro MicroSystems in a relatively strong position to invest in future growth.
Allegro MicroSystems’s average return on invested capital (ROIC) over the last 5 years of 18.8% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Allegro MicroSystems's Q3 Results
With a market capitalization of $6.58 billion Allegro MicroSystems is among smaller companies, but its more than $334.3 million in cash and positive free cash flow over the last twelve months give us confidence that Allegro MicroSystems has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly Allegro MicroSystems outperformed analysts’ earnings expectations this quarter. And we were also glad to see the improvement in operating margin. On the other hand, it was less good to see the inventory levels increase. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 1.07% on the results and currently trades at $34.8 per share.
Is Now The Time?
Allegro MicroSystems may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Allegro MicroSystems is a solid business. However, its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its high return on invested capital suggests it is well run and in a strong position for profit growth, and its impressive operating margins are indicative of an highly efficient business model.
Allegro MicroSystems's price to earnings ratio based on the next twelve months of 27.3x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about Allegro MicroSystems and looking at the semiconductors landscape right now, it seems that it doesn't trade at an unreasonable price point.
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