Allegro MicroSystems (ALGM) Q4 2025: Backlog Up 20% as E-Mobility and Data Center Demand Signal Recovery
Allegro MicroSystems exited Q4 with a resurgent backlog, distribution inventory normalization, and accelerating design wins in e-mobility and industrial automation, signaling a cyclical upturn. Management’s commitment to innovation-led SAM expansion and operational efficiency sets up a margin recovery story, with Q1 guidance confirming the bottom is in. Investors should track execution on cost initiatives and product ramps as the company targets above-market growth in auto and industrial end-markets.
Summary
- Backlog Momentum: Sequential bookings rose 20%, with backlog reaching a two-year high and design wins concentrated in high-growth segments.
- Inventory Reset: Distribution channel inventory dropped 25% year-over-year, clearing the way for normalized sell-in and future revenue growth.
- Margin Recovery in Focus: Operational initiatives and cost reductions position Allegro for gross margin improvement as new product ramps accelerate.
Performance Analysis
Allegro delivered a sequential rebound in both automotive and industrial sales, with e-mobility and data center demand fueling the uptick. Automotive sales, accounting for roughly half of total revenue, grew 8% sequentially, led by a 16% jump in e-mobility, now representing 50% of auto sales. Industrial and other sales rose 9% sequentially, driven by data center and robotics, although both end-markets remain below prior-year levels due to protracted inventory corrections.
Gross margin came in below expectations at 45.6%, pressured by product mix, price resets, and lower factory absorption as Allegro drew down finished goods inventory. Operating margin compressed to 9%, reflecting both the margin headwinds and annual payroll resets. Management emphasized that cost reductions and restructuring savings should begin to flow through in Q1, with a 140 basis point gross margin improvement guided at the midpoint. Free cash flow was positive, aided by inventory reduction and disciplined working capital management, while another voluntary debt payment further de-risked the balance sheet.
- Design Win Concentration: Over 70% of Q4 design wins were in strategic growth vectors such as e-mobility, robotics, and data center, supporting long-term outperformance potential.
- Distribution Sell-Through Outpaces Purchases: Point-of-sale exceeded point-of-purchase, confirming that channel inventory is now at healthy levels and destocking is largely complete.
- Product Mix Shift: Power product sales surged 19% sequentially, reflecting traction in ADAS and data center applications, while magnetic sensors remained a core revenue driver at 61% of sales.
Allegro’s sequential rebound, coupled with strong bookings and backlog, suggests the company is emerging from the cyclical trough, with operating leverage set to improve as volumes recover and cost actions take hold.
Executive Commentary
"Relentless innovation that drives leadership in new and existing markets and applications will be a top priority. Innovation with purpose is central to everything we do at Allegro, and through innovation, we will strengthen our competitive advantages and drive double-digit sales growth in automotive and industrial end markets."
Mike Duke, President & Chief Executive Officer
"Fourth quarter bookings were up another 20% sequentially and have now increased for the fifth consecutive quarter to the highest they've been in more than two years. Orders within lead time continue to increase, backlog has resumed growth, and we are actually starting to see select component or raw material shortages."
Derek D'Antilio, Chief Financial Officer
Strategic Positioning
1. E-Mobility and ADAS Content Expansion
Allegro is doubling down on e-mobility, targeting a $5 billion serviceable available market (SAM) with a 16% compound annual growth rate (CAGR). The company’s content per vehicle is structurally higher in electric powertrains and advanced driver-assistance systems (ADAS), with recent design wins in inverter and braking systems supporting outperformance versus internal combustion engine (ICE) platforms. Management reiterated confidence in achieving SAR plus 7% to 10% growth in automotive, underpinned by these content gains.
2. Industrial Automation and Data Center Upside
Industrial focus is shifting to high-growth verticals such as robotics, data center, and clean energy. Allegro’s differentiated motor drivers and current sensors are critical for AI data centers, which offer more than double the content opportunity versus legacy servers. The company is also establishing early leadership in medical and robotics, positioning itself for emerging multi-billion dollar SAMs as factory and consumer automation accelerates.
3. Technology Differentiation and Product Pipeline
Innovation remains at the core of Allegro’s strategy. The company released 50% more new products versus its IPO year, emphasizing XtremeSense TMR (tunneling magnetoresistance) sensors and high-voltage isolated gate drivers. These products drive both margin uplift and SAM expansion, with recent wins in biomedical and automotive thermal management applications. Early adoption of cost innovation, such as copper wire bonding, further supports margin recovery.
4. Operational Efficiency and Cost Discipline
Restructuring and supply chain localization are unlocking cost savings. The $15 million annualized restructuring program is split equally between cost of goods sold (COGS) and operating expenses (OpEx), with benefits beginning in Q1. The opening of a shared services center in the Philippines and ongoing China-for-China initiatives are expected to drive further efficiency, while vendor-negotiated pricing and supply chain optimization underpin margin targets.
5. Shareholder Alignment and Governance Enhancements
Corporate governance improved through a major share repurchase from Sanken Electric, reducing Sanken’s stake to 33% and increasing free float by 30%. This move, alongside voluntary debt reduction, enhances capital flexibility and aligns the company for future strategic alternatives, as evidenced by the board’s disciplined approach to the recently withdrawn OnSemi acquisition proposal.
Key Considerations
Allegro’s Q4 marked a clear inflection point, with operational and strategic levers now set to drive above-market growth and margin recovery. The company’s execution on innovation, cost structure, and supply chain flexibility will be critical as end-market demand returns.
Key Considerations:
- Backlog and Bookings Surge: Five consecutive quarters of increasing bookings and a two-year high in backlog set the stage for revenue acceleration as customer inventories normalize.
- Gross Margin Recovery Path: Cost reductions, restructuring, and favorable product mix are expected to drive margins toward the 50% near-term target, with a long-term goal of 58%.
- Product Ramp Execution: Success of XtremeSense TMR sensors and high-voltage gate drivers will determine Allegro’s ability to capture outsized share in auto, industrial, and data center markets.
- China Supply Chain Localization: Progress in qualifying local wafer and backend partners is key to sustaining growth and mitigating geopolitical risk in the critical China market.
- Channel Inventory Health: Distribution inventory is now at multi-year lows, reducing risk of further destocking and supporting a more predictable sell-in cadence.
Risks
Key risks include ongoing gross margin pressure from pricing resets and absorption headwinds, potential raw material shortages as demand rebounds, and heightened competition in China from domestic suppliers. Tariff volatility and geopolitical uncertainty remain wildcards, though management reports minimal direct impact to date. Execution risk is elevated as Allegro ramps new products and cost initiatives in parallel with a cyclical recovery.
Forward Outlook
For Q1 2026, Allegro guided to:
- Sales of $192 million to $202 million, implying 18% year-over-year growth at the midpoint
- Gross margin between 46% and 48%, up 140 basis points at the midpoint
- Non-GAAP EPS of $0.06 to $0.10, nearly doubling year-over-year at the midpoint
For full-year 2026, management maintained a focus on:
- Double-digit sales growth in both auto and industrial segments
- Gross margin trajectory toward the 50% near-term target, with a long-term model of 58%+
Management cited operational leverage, cost reductions, and continued innovation as drivers of improved profitability, with a credible path to long-term margin targets as volumes recover and product mix shifts favorably.
Takeaways
Allegro’s Q4 results and Q1 guide confirm a cyclical bottom, with improving backlog, normalized inventory, and a robust design win pipeline positioning the company for above-market growth and margin recovery.
- Recovery in High-Value Segments: E-mobility, ADAS, and data center are driving the rebound, with Allegro’s differentiated content supporting structural outperformance.
- Margin Inflection Ahead: Cost discipline, restructuring, and product innovation are expected to restore gross margin toward 50%+ as volumes return.
- Execution on Innovation and Localization: Investors should monitor ramp progress in TMR sensors, gate drivers, and China supply chain localization for sustained growth and risk mitigation.
Conclusion
Allegro MicroSystems is emerging from a cyclical trough with a clean channel, rising backlog, and accelerating innovation in high-growth verticals. Margin recovery and execution on new product ramps will be the key levers for shareholder value creation as end-market demand returns.
Industry Read-Through
Allegro’s results reinforce that the automotive and industrial semiconductor cycle has bottomed, with normalized inventories and rising bookings signaling demand recovery. Data center and automation content growth is a clear secular tailwind, benefiting suppliers with differentiated sensor and power management portfolios. Channel inventory health and supply chain flexibility will be critical for peers as well, especially in the context of ongoing geopolitical and tariff uncertainty. The return of raw material shortages and robust design activity point to a broader upcycle for the sector in the coming quarters.