Allegro MicroSystems (ALGM) Q3 2026: Data Center Sales Jump 31% as Content Expansion Accelerates
Allegro MicroSystems’ Q3 2026 highlighted a decisive pivot toward high-growth industrial verticals, with data center sales up 31% and now representing 10% of total revenue. Automotive e-mobility design wins and industrial robotics engagement signal durable content expansion, while margin discipline and capital allocation remain in focus amid geographic and product mix shifts. Looking ahead, the company is positioning for sustained operating leverage and diversified growth vectors as legacy inventory headwinds fade and new applications ramp.
Summary
- Data Center Content Expansion: Industrial data center now 10% of sales, with new current sensor and gate driver wins ramping.
- Automotive E-Mobility Momentum: ADAS and XEV design wins reinforce long-term content and share gains.
- Operating Leverage to Drive EPS: Margin improvement and disciplined OpEx set stage for outsized earnings growth into FY27.
Performance Analysis
Allegro delivered broad-based revenue acceleration, with total sales up 29% year over year and 7% sequentially, driven by both automotive and industrial verticals. Automotive sales, which account for the majority of revenue, grew 28% YoY, with e-mobility (ADAS, XEV) up 46% YoY as content per vehicle rises. Industrial and other end-markets outpaced, up 31% YoY, led by data center, which reached a record 10% of total sales. Distribution channels also saw robust activity, with sequential and annual double-digit growth and a normalization of sell-in and sell-through levels after a period of inventory burn-down.
Gross margin expanded 30 basis points sequentially to 49.9%, supported by mix improvements and cost discipline, though geographic mix, especially higher China exposure, modestly weighed on margins. Operating margin rose to 15.4%, up 150 basis points from Q2, with EPS up 114% YoY, reflecting strong operating leverage. Free cash flow conversion remained healthy at 18% of sales, and working capital metrics improved, with days sales outstanding (DSO) and inventory days both trending down. Variable compensation drove a temporary uptick in OpEx, but underlying cost structure remains well-controlled.
- Industrial Outperformance: Data center sales surged 31% YoY, with fan drivers and current sensors driving growth and new gate driver ICs broadening future content.
- Automotive E-Mobility Outpaces ICE: Content gains in ADAS and XEV continue to offset flat legacy auto, supporting Allegro’s share gain narrative.
- Margin Expansion Despite Mix Headwinds: Sequential margin gains show leverage, even as China sales rose to 30% of mix.
Operating leverage is now a clear earnings driver, with management pointing to further gains as volume ramps and new product introductions scale across both automotive and industrial applications.
Executive Commentary
"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."
Mike Duke, President and Chief Executive Officer
"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."
Derek D'Antilio, Chief Financial Officer
Strategic Positioning
1. Data Center as a Growth Engine
Data center now represents 10% of total sales, up from 8% last quarter, driven by fan driver ICs and high-speed current sensors. Allegro’s new isolated gate driver ICs, targeting silicon carbide transistors, are being sampled with leading power supply and XEV inverter customers, setting up a multi-year content expansion as AI server power density rises. Management expects further ramp within 18-24 months, with current sensors already contributing higher margins than legacy fan drivers.
2. E-Mobility and ADAS Content Gains
Automotive e-mobility—ADAS (Advanced Driver Assistance Systems) and XEV (hybrid/electric vehicles)—remains Allegro’s largest and fastest-growing vertical. Q3 saw multiple design wins for position sensors, motor drivers, and high-voltage current sensors, especially in steer-by-wire systems and onboard charging. The company’s focus on content per vehicle, rather than pure unit growth, is driving a 16% CAGR in e-mobility sales, with robust design win funnel supporting long-term double-digit growth.
3. Robotics and Industrial Diversification
Allegro is actively building a robotics vertical, with pilot production ramps and design wins in quadruped and humanoid robots across the US, Japan, and China. High content per robot—up to 150 sensor ICs and 50 power ICs per advanced robot—positions Allegro for meaningful future revenue as volumes scale from tens of thousands to potentially millions of units over the next several years. This leverages existing automotive customer relationships and product portfolios, driving efficient OpEx allocation.
4. Margin and Cost Structure Discipline
Margin expansion is being driven by product mix, cost reductions, and factory efficiency gains. While geographic mix (higher China) and product mix (fan drivers) can weigh on margins, the ramp of higher-margin current sensors and new gate drivers is expected to drive further improvement. Management is reallocating OpEx toward R&D and growth areas, while keeping G&A flat, and expects OpEx to grow only at inflationary rates post-Q4 payroll resets.
5. Balance Sheet and Capital Allocation
Allegro ended Q3 with $163 million in cash and a net leverage ratio below 1x, reflecting healthy liquidity and prudent capital structure. The company repriced its term loan to SOFR plus 175 basis points, signaling lender confidence. Management will continue to balance debt paydown and liquidity, with no plans to tap additional credit lines in the near term.
Key Considerations
This quarter marked a transition from inventory normalization to renewed end-market demand, with both legacy and growth segments showing differentiated trends. Management’s focus on content expansion, disciplined cost structure, and diversified growth vectors sets the stage for a multi-year runway.
Key Considerations:
- Sell-In and Sell-Through Normalize: Distribution inventory burn-down is largely complete, with sell-in and POS now in balance, reducing channel risk.
- Data Center Margin Mix Improves: Shift from lower-margin fan drivers to higher-margin current sensors and gate drivers is structurally positive for future gross margin.
- Automotive Inventory Remains Lean: No evidence of inventory build at tier ones; management sees robust bookings and backlog, supporting continued share gains.
- OpEx Growth to Moderate: Temporary Q3/Q4 increases driven by variable compensation and payroll resets; post-Q4, OpEx expected to grow only with inflation.
- Robotics Is a Long-Term Call Option: High content per robot and early customer traction could drive outsized industrial growth if volumes scale as projected.
Risks
Geographic and product mix shifts, especially higher China sales and a legacy reliance on lower-margin fan drivers, may weigh on gross margin in the near term. Automotive demand is susceptible to macro and supply chain volatility, though current inventory remains lean. Pricing pressure is lower than historical norms, but management still expects low single-digit ASP declines due to long-term contracts. Industrial growth outside of data center is more muted, and robotics revenue remains speculative until volumes materialize.
Forward Outlook
For Q4 2026, Allegro guided to:
- Total sales of $230 to $240 million (midpoint: up 22% YoY)
- Gross margin of 49% to 51%
- Non-GAAP EPS of $0.14 to $0.18
For full-year FY26, management maintained a positive growth outlook, with:
- Operating leverage to drive outsized EPS growth vs. sales
- OpEx to normalize post-Q4, growing only with inflation
Management highlighted that industrial will lead Q4 growth, with automotive flat to slightly down due to Chinese New Year, and data center momentum expected to continue. Analyst Day in February will provide additional detail on design win funnel and long-term model.
Takeaways
Allegro’s Q3 2026 results confirm a successful transition toward high-growth, high-content industrial and automotive verticals.
- Data Center and Robotics Provide New Runways: Content expansion in data center and early robotics wins diversify growth beyond legacy auto, with margin upside as mix shifts toward higher-value products.
- Automotive E-Mobility Drives Share Gains: Robust design win momentum in ADAS and XEV supports Allegro’s content growth narrative and mitigates cyclical auto volatility.
- Margin Discipline and OpEx Control Key to EPS Upside: Operating leverage is now translating to bottom-line gains, with further improvement expected as new products scale and cost structure remains tight.
Conclusion
Allegro MicroSystems exits Q3 2026 with clear evidence of diversified growth, margin expansion, and disciplined execution. The company’s strategic bets on data center, e-mobility, and robotics are translating into real design wins and revenue, positioning Allegro for multi-year outperformance if execution continues and end-market trends hold.
Industry Read-Through
Allegro’s results reinforce the secular tailwinds in power management and sensing for both automotive and industrial markets. The acceleration in data center power content, driven by AI server proliferation and the shift to higher voltage architectures, signals opportunity for analog and mixed-signal peers. Robotics, while early, is emerging as a high-content, high-growth vertical for sensor and power IC suppliers. Auto analog peers may see similar inventory normalization and content-driven growth, but must balance geographic mix and margin discipline as competitive intensity rises, especially in China. The muted growth in non-data center industrial verticals suggests selective opportunity, reinforcing the importance of product differentiation and design win execution across the sector.