Allegro MicroSystems (ALGM) Q4 2026 earnings review
Data Center Surge and Margin Leverage Drive a Strong Finish
Allegro MicroSystems delivered a flawless 'beat-and-raise' quarter, marking its fifth consecutive quarter of sequential sales growth. While automotive end markets experienced stable but moderate growth, the Industrial segment exploded, driven by a 41% sequential jump in Data Center revenue. The real story here is the operating leverage: a 26% YoY revenue increase drove a 183% YoY explosion in Non-GAAP EPS. Management successfully offset 200 basis points of gold cost headwinds through factory efficiencies, pushing Q4 Non-GAAP Gross Margins to 50%. Looking ahead to Q1 FY27, guidance signals an accelerating profit trajectory as Data Center mix shifts higher and copper conversion initiatives begin to take hold.
🐂 Bull Case
Data Center went from near-zero in FY23 to 14% of total Q4 sales. Content per rack is set to jump from $150 to $425 as AI architectures push higher power density requirements, pulling both cooling fans and high-speed current sensors.
The company's variable contribution margins are running close to 70% entering Q1. As volume scales through the Philippines back-end facility, operating leverage is accelerating.
🐻 Bear Case
Overall automotive growth is entirely dependent on Focus Auto (xEV and ADAS). Legacy auto demand remains sluggish and sequentially flat, leaving the company heavily reliant on EV penetration rates.
Gold prices generated a massive 200 bps headwind to gross margins in FY26. If the company fails to execute its copper conversion roadmap, persistent inflation could throttle long-term margin targets.
⚖️ Verdict: 🟢
Bullish. Allegro is executing perfectly on a pivot from a pure auto-play to a dual-engine growth story (Auto + AI Infrastructure). The margin expansion in the face of raw material inflation proves their pricing power and operational discipline.
Key Themes
Data Center Content Expansion Accelerating
Data center sales grew an incredible 41% sequentially, reaching a record 14% of total sales. Initially driven purely by cooling fan motor drivers, the growth is now layering on high-speed current sensors for power supplies. As AI racks transition from 15kW to 1MW, Allegro's content opportunity expands from $150 to $425 per rack. This mix shift is highly accretive to overall growth.
Focus Auto Driving Transportation Portfolio
While sequential auto sales were flat due to the Chinese New Year, 'Focus Auto' (xEV and ADAS) grew 25% YoY in Q4. Allegro is outgrowing the global auto SAAR by ~7-10% through content expansion. New product categories like isolated gate drivers for silicon carbide (SiC) architectures represent a multi-billion dollar SAM expansion moving forward.
TMR Innovation Fueling Share Gains
The release of the industry's first 10 MHz TMR current sensor—named 2025 Sensor Product of the Year—is driving immediate differentiation. Providing the highest bandwidth available, it directly enables the high-speed control required for next-generation GaN and SiC power systems. TMR now represents 30% of Allegro's sensor product releases.
Commodity Inflation Restricting Gross Margins
Rising raw material costs, particularly gold, created an approximate 200 basis point headwind to gross margins in FY26. While management offset this via factory efficiencies, they are now forced to implement 'select price increases' and expedite a complex customer-qualification process to shift from gold to copper wire bonding. This creates execution risk.
Capacity Constraints and Rising Delinquencies
Following a prolonged period of industry-wide inventory digestion, Allegro is now experiencing 'up cycle constraint.' Management admitted to building some delinquency in pockets of both Auto and Industrial end markets. Q4 CapEx stepped up to $17M to add back-end capacity in the Philippines. If demand accelerates faster than capacity, Allegro risks leaving revenue on the table.
Flatness in Legacy Auto
Total Automotive sales sequentially stalled at $164M. The entirety of the segment's 18% YoY growth is being carried by Focus Auto (+25%). If EV adoption rates slow broadly or Chinese EV exports face severe tariff pushback, Allegro's legacy auto components do not possess the momentum to carry the segment.
Other KPIs
A record year for cash generation. FCF expanded from $22M in FY25 to $125M in FY26. This allowed the company to make $60M in voluntary debt payments over the fiscal year, bringing net debt down to a highly manageable $116 million.
Accelerating. Sales increased 35% YoY and 12% sequentially. This segment is benefiting heavily from the Data Center build-out (fan motor drivers) and the broader electrification shift.
Guidance
Accelerating. The $250M midpoint implies 23% YoY growth and sequential expansion. Management expects Q1 growth to be led predominantly by Data Center strength.
Accelerating. Expected to step up from Q4's 50.0%. Management pointed to a 70% incremental drop-through in the first quarter as pricing adjustments take effect and cost reductions cycle through inventory.
Accelerating. The $0.21 midpoint represents a substantial sequential increase from Q4's $0.17 and a more than 100% YoY increase from $0.09 in Q1 FY26, driven by higher gross margins and strict OpEx control.
Key Questions
Liquid Cooling vs. Air Cooling Dynamics
As hyperscalers rapidly transition to direct-to-chip liquid cooling for 1MW racks, how does the loss of GPU cooling fans mathematically weigh against the proliferation of fans in power supplies and network switching? Can the $425/rack content target be achieved in a fully liquid-cooled rack?
Gold-to-Copper Conversion Timeline
With gold creating a 200 bps headwind in FY26, what percentage of the portfolio has currently been successfully qualified and converted to copper, and when will this peak in terms of gross margin relief?
Capacity Delinquencies
You mentioned building delinquency in both Auto and Industrial. Are these constraints related to back-end Philippine testing capacity or front-end foundry wafer supply, and when do you expect supply to normalize against demand?