Allegro MicroSystems (ALGM) Q2 2026: Data Center Sales Hit 7% of Revenue, Driving Above-Seasonal Growth
Allegro MicroSystems delivered a quarter marked by record data center momentum and robust automotive design wins, pushing growth well above typical seasonality. Management’s focus on e-mobility, high-voltage solutions, and data center power density is translating into higher dollar content per customer and expanding end-market opportunity, despite ongoing inventory normalization in select segments. With guidance calling for continued above-seasonal growth and margin expansion, Allegro’s execution signals an inflection in both product mix and strategic positioning for FY26.
Summary
- Data Center Expansion Accelerates: Record design wins and ramping power supply content are reshaping Allegro’s industrial growth profile.
- Automotive Content Opportunity Widens: E-mobility and chassis-agnostic motor wins are driving sustained outperformance versus vehicle production trends.
- Margin and Leverage Momentum: Operating leverage and product mix improvements are supporting margin expansion and strong free cash flow conversion.
Performance Analysis
Allegro MicroSystems posted a standout quarter, with total sales up 14% year over year and 5% sequentially, led by strength in automotive and industrial end markets. The automotive segment, which now represents a majority of revenue, grew 12% year over year, with e-mobility sales up 21% and non-e-mobility auto also contributing meaningfully. Industrial and other segments grew 23% year over year, propelled by record data center sales, although broad-based industrial and consumer remained soft due to lingering inventory.
Gross margin rose 140 basis points sequentially to 49.6%, reflecting improved product mix, factory efficiencies, and operating leverage as revenue scaled. Operating margin improved to 13.9%, while non-GAAP EPS jumped 44% sequentially and 63% year over year, demonstrating the company’s ability to convert top-line growth into bottom-line gains. Distribution channel sales surged 22% sequentially, with inventory days declining, signaling progress on channel normalization. Free cash flow was strong at $14 million, supporting voluntary debt repayment and a further reduction in net leverage.
- Automotive Diversification: Non-e-mobility auto applications, such as in-cabin and chassis motor drivers, are becoming a larger share of growth, reducing dependence on any single powertrain trend.
- Data Center as a Growth Engine: Data center now exceeds 7% of total sales, with rapid adoption of Allegro’s high-speed current sensors and fan drivers in next-gen AI server architectures.
- Inventory Burn Nearing Completion: Channel and customer inventory levels are approaching lean, with management indicating the “late eighth inning” of the distribution correction cycle.
The combination of above-seasonal sales guidance, margin expansion, and robust design win activity positions Allegro for continued outperformance into FY26, even as some legacy industrial and consumer markets remain sluggish.
Executive Commentary
"We remain encouraged by the positive momentum we continue to see across the business, achieving multi-year highs in second quarter bookings and backlog, and delivering strong design-win activity in our strategic focus areas, particularly in e-mobility, and data center."
Mike Duke, President and Chief Executive Officer
"Non-GAAP EPS increased by 44% sequentially and 63% year over year demonstrating the significant operating leverage in the business model."
Derek Dantilio, Chief Financial Officer
Strategic Positioning
1. Data Center: Multi-Vector Expansion
Allegro’s data center business is rapidly evolving from a fan-driver franchise to a multi-product growth engine, with high-speed current sensors and new high-voltage gate drivers gaining traction in next-generation power supplies. The company’s content opportunity per AI server rack is rising, as cooling and power density requirements escalate with the shift to 48-volt and 800-volt architectures. Importantly, design win momentum is translating into near-term revenue ramp, with management highlighting “many of these wins ramping within the next year.”
2. Automotive: E-Mobility and Beyond
While e-mobility remains a primary growth vector, Allegro is broadening its automotive exposure through powertrain-agnostic motor driver applications in cabin and chassis systems. Design wins in ADAS, steering, and high-voltage inverter systems with both Chinese and North American OEMs are expanding Allegro’s dollar content per vehicle, with management quantifying a path from $40 per ICE vehicle to $60 in hybrid/EV and up to $100 with new product introductions.
3. Channel and Inventory Management
Distribution channel normalization is nearly complete, with inventory days down to 135 from 185 at peak. Sell-in remains below point-of-sale, but the pace of inventory burn is slowing, and management expects the process to conclude in the coming quarter. China’s inventory levels are now lean, and direct customer inventory is stabilizing, reducing risk of further destocking.
4. Product Innovation and Margin Expansion
Relentless innovation, particularly in TMR (Tunnel Magnetoresistance) current sensors, is enabling Allegro to deliver disruptive products with higher ASPs and gross margins. The release of the industry’s first 10 MHz TMR current sensor and ramping high-voltage gate drivers are expected to drive both mix and margin improvement, supporting the company’s long-term 58% gross margin target.
Key Considerations
Allegro’s Q2 results underscore a business in transition, leveraging product innovation and end-market diversification to outgrow legacy industry cycles.
Key Considerations:
- Data Center Revenue Mix: Data center now accounts for over 7% of sales, with the majority still from cooling but power supply content ramping rapidly.
- Automotive Content Gains: The shift toward higher-value applications and new design wins in both e-mobility and traditional auto are expanding Allegro’s SAM (serviceable addressable market).
- Channel Health: Distribution inventory is nearly normalized, reducing risk of further channel headwinds and setting the stage for POS-driven growth.
- Margin Trajectory: Factory efficiencies, product mix, and leverage are supporting sequential margin gains, with further upside from new product ramps.
- Pricing Environment Stabilizing: Management expects a more stable pricing environment in 2026, as aggressive competitor discounting moderates.
Risks
Risks remain around macro-driven slowdowns in auto production, lingering inventory in certain industrial and consumer segments, and potential volatility in end-market demand due to geopolitical or supply chain disruptions. Pricing pressure is expected to moderate, but any resurgence in competitive discounting or raw material cost spikes could challenge margin progress. Additionally, the pace and breadth of data center adoption remain subject to hyperscaler investment cycles and architectural shifts.
Forward Outlook
For Q3 2026, Allegro guided to:
- Sales of $215 to $225 million (midpoint up 24% YoY and above seasonal norms)
- Non-GAAP gross margin between 49% and 51%
- Non-GAAP EPS of $0.12 to $0.16 per share
- Tax rate of 8% for Q3 and FY26, down from prior estimates
For full-year FY26, management maintained a positive outlook, citing:
- Continued above-seasonal growth in auto and data center
- Inventory normalization nearing completion, setting up for POS-driven growth
Takeaways
Allegro’s Q2 results highlight a company moving decisively up the value chain, with structural tailwinds in both auto and data center offsetting lingering softness in legacy segments.
- Data Center Ramp: Ramping content in AI server architectures is transforming Allegro’s industrial profile and providing a durable new growth vector.
- Automotive Outperformance: E-mobility and chassis/cabin motor drivers are driving above-market growth, with design win velocity supporting multi-year content expansion.
- Inventory Burn Nearly Complete: Channel and customer inventory normalization is largely behind the company, reducing risk of further destocking and enabling more direct translation of end demand to revenue growth.
Conclusion
Allegro MicroSystems’ Q2 2026 performance and guidance reflect a business accelerating out of an inventory correction and capturing multi-year secular tailwinds in data center and automotive. With innovation in current sensing and power management, and a disciplined approach to margin and channel management, Allegro is well positioned for sustained growth and operating leverage into FY26 and beyond.
Industry Read-Through
Allegro’s data center momentum highlights the accelerating demand for power density and thermal management solutions as AI workloads reshape server architectures, with implications for semiconductor and component suppliers across the ecosystem. Automotive content expansion, especially in e-mobility and ADAS, reinforces the secular shift toward electrification and advanced driver assistance, benefiting suppliers with differentiated sensing and power IC portfolios. Channel normalization trends observed here may signal a broader inventory reset nearing completion for analog and mixed-signal peers, setting up the sector for more demand-driven growth as 2026 unfolds.