Allegro MicroSystems (ALGM) Q2 2027 earnings review
Allegro's industrial sales jump, while its car chip growth slows
Allegro MicroSystems, a maker of power and magnetic sensor chips for cars and servers, is riding a data center boom while its main car business grows more slowly. Total revenue rose 29% from a year ago as industrial and data center sales jumped 79%, beating the quarterly plan. Profit per share excluding one-offs doubled on higher factory utilization, and chief executive Mike Doogue said new design wins hit a record since its 2020 listing.
| Revenue | $276.9M +29% from a year ago |
|---|---|
| Industrial and Other sales | $104.4M +79% from a year ago |
| Profit per share, excluding one-offs | $0.26 doubled from $0.13 a year ago |
| Q3 revenue outlook | $278–288M middle of the range: +23% from a year ago |
⚖️ Verdict: 🟢 Bullish
The story got better because industrial and data center demand grew 11% from last quarter, more than double the pace management had planned for. That shift toward higher-margin server chips is lifting gross and operating margins into the third-quarter outlook even before promised material cost savings arrive. One caution: annual growth in the larger automotive division slowed for a third straight quarter to 11%, and the company sent another $5 million in cash advances to its loss-making affiliate wafer factory.
The question now is whether data center growth reflects durable chip gains per server rack or a temporary wave of customer building. If it is durable, rising power-sensor adoption will keep lifting margins; if it is a single spending wave, orders will cool once server builders pause. The data center revenue share and product split on the conference call will show which side is winning.
🐂 Bull Case
Industrial and Data Center Sales Outran the Plan
Allegro makes power and sensing chips, and its industrial and data center business is now carrying the company's growth. Three months ago management planned for around 5% quarterly growth in this division, yet critics warn that relying on data centers ties the business to a single server spending cycle.
Instead, industrial and other sales rose 11.2% from last quarter and 78.6% from a year ago to a record $104.4 million. Chief executive Mike Doogue said data center sales set a new record, lifting total revenue to $276.9 million, above the $265 million to $275 million plan.
That surge matters because industrial and other chips now bring in 37.7% of total revenue, up from 27.3% a year ago, which shows the earlier quarterly plan was cautious. Because data center chips carry higher profit margins than car chips, this shift also lifts total profitability.
What to watch: data center's exact share of total sales on the conference call. A share above last quarter's 17% would confirm that server power demand drove the industrial beat.
Sales Growth Cut the Cost Share of Revenue
Allegro is turning a much larger share of its sales into profit as factory volume recovers. Finance chief Derek D'Antilio said the chipmaker executed on its priority of expanding profitability, even as operating expenses excluding one-offs rose to $85.6 million, just above its $83.5 million to $85.5 million plan.
- Operating margin excluding one-offs: 20.6%, up 6.7 percentage points from a year ago
- Cost of making products excluding one-offs: 48.5% of sales, down 1.9 percentage points from a year ago
- Research and development excluding one-offs: 18.2% of sales, down 2.4 percentage points from a year ago
- Selling and administrative costs excluding one-offs: 12.7% of sales, down 2.3 percentage points from a year ago
Revenue grew more than twice as fast as operating expenses, so every major cost line shrank as a share of sales and profit per share excluding one-offs doubled to $0.26. For the third quarter, the outlook implies an operating margin of 21.3% by our math, even with operating expenses planned up to $87 million.
What to watch: third-quarter gross margin excluding one-offs against the 51.5% to 52.5% plan. Reaching the top half would show that product mix and factory savings outweigh rising research spending.
Record Design Wins Back the Growth Target
Design wins, which are customer commitments to use Allegro's chips in future products, reached a six-year high. "Our forward demand signals strengthened significantly this quarter. We delivered our highest quarterly design-win performance since our 2020 IPO—up nearly 40% year-over-year—and bookings increased for the eighth consecutive quarter," Doogue said.
Doogue added that these orders give management confidence to "exceed our target model of mid-teens annual sales growth." Eight straight quarters of rising customer orders show that buyers are still booking capacity well ahead, even though the third-quarter plan calls for 2.2% quarterly growth at the middle of the range.
What to watch: commentary on unshipped customer orders during the call. If shipping delays eased while orders rose, the third-quarter revenue plan is likely cautious again.
Positives this quarter didn't test
Three product growth drivers from prior quarters are not broken out in the earnings release and await the conference call or quarterly filing.
- Current sensors in data centers: last quarter these higher-margin chips reached 22% of data center sales; the call will show if their share kept rising.
- Robotics and automation chips: management previously planned for this line to reach 3% to 4% of full-year sales; any revenue update on the call will test that ramp.
- Tunnel magnetoresistance (TMR) magnetic sensors: new customer wins in car steering and server power supplies are normally updated in prepared remarks.
🐻 Bear Case
Car Chip Growth Slowed for a Third Quarter
Automotive remains Allegro's largest market at 62.3% of sales, and Doogue pointed to broad annual growth across both car and industrial markets. However, automotive revenue grew 10.7% from a year ago to $172.5 million, slowing from 27.9% three quarters ago, 17.5% two quarters ago, and 14.6% last quarter.
Part of that slowdown comes from a tougher comparison against last year's recovery, and quarterly car chip sales still rose 4.3% from the first quarter. Even so, the release did not disclose growth for Focus Auto, its electric-vehicle and driver-assistance chip lines that grew slower than total auto sales last quarter.
What to watch: the Focus Auto growth rate in the quarterly filing or call remarks. A second quarter below total automotive growth would show that electric-vehicle chip demand is lagging older car parts.
Affiliate Wafer Fab Losses and Advances Keep Growing
Allegro buys semiconductor wafers from Polar Semiconductor, an affiliated US factory in which it holds a minority stake. In the second quarter, the chipmaker paid another $5.0 million in cash advances to its related party, bringing six-month cash advances to $20.0 million and total related-party other assets on the balance sheet to $35.0 million.
At the same time, Allegro recorded a $2.9 million loss from its equity investment in the affiliate, up from $2.3 million a year ago, which cut into its reported pre-tax profit of $27.8 million. Over the first six months, those investment losses more than doubled to $6.6 million.
What to watch: related-party purchase totals and advance repayment terms in the quarterly filing's footnote. Rising cash advances alongside wider factory losses would mean securing domestic wafer supply is costing more cash than planned.
Risks this quarter didn't answer
Three standing risks were not addressed in the earnings release and depend on details from the conference call or quarterly filing.
- Liquid cooling in servers: whether liquid cooling is replacing cooling fans that use Allegro's motor driver chips; the call will show if management quantifies fan vs power-supply chip demand.
- Gold-to-copper wire conversion: management previously promised that switching from gold to cheaper copper wire inside its chips would lift margins in the second half; the call will show how many percentage points it adds to the Q3 margin plan.
- China competition and tariffs: China accounted for about a quarter of sales entering the quarter; the filing's geographic table will show if local rivals slowed regional sales.
💲 Other KPIs
Free cash flow — operating cash flow minus equipment purchases — more than doubled from $13.9 million a year ago and rose from $14.0 million last quarter, by our math. That lifted free cash flow to 11.0% of sales, up from 5.4% in the first quarter, even after a $5.0 million cash advance to a related party.
Total debt minus cash and restricted cash fell from $116.7 million last quarter and $111.9 million at the end of fiscal 2026, by our math, as cash rose to $201.1 million. Five days after the quarter closed, D'Antilio said the company "made another $25 million voluntary debt repayment" on September 30.
Stockpiles of raw materials and chips fell 3.4% from last quarter's $188.1 million and sits just 6.4% above a year ago, while revenue grew 29.2% over the same year. That decline freed up $5.7 million in operating cash during the quarter.
🔮 Guidance
New. The middle of the range is $283 million, which implies 23% growth from a year ago and 2.2% growth from this quarter. Annual growth slows from 29% largely because last year's third-quarter sales jumped to $229.2 million. Allegro has beaten the top of its range for four straight quarters; if the average 3.5% beat above the middle holds, Q3 sales would reach about $293 million by our math.
New. The plan calls for 52.0% at the middle of the range, up half a percentage point from this quarter's 51.5% and up 2.1 percentage points from 49.9% a year ago. It marks the fifth straight quarter of sequential gross margin expansion.
New. Planned at $87 million plus or minus $1 million, up from $85.6 million this quarter and $79.0 million a year ago. At the middle of the revenue plan, operating expenses would equal 30.7% of sales by our math, down from 30.9% in the second quarter.
New. The middle of the range is $0.27 per share, an 80% increase from $0.15 a year ago and up one cent from this quarter's $0.26.
❓ Key Questions
What was data center's exact share of second-quarter sales?
The release noted record data center sales inside the $104.4 million industrial division but did not give its percentage of total revenue, which reached 17% last quarter.
How fast did Focus Auto sales grow from a year ago?
Total automotive growth slowed to 10.7% from 14.6% last quarter. Investors need to know whether electric-vehicle and driver-assistance chips outgrew older car parts or lagged them again.
Why did cash advances to the affiliate fab reach $35 million?
Allegro sent another $5 million in cash to its related-party wafer supplier and booked a $2.9 million investment loss. Management has not explained when those advances will be repaid.
How much of the Q3 margin rise comes from copper wire?
The plan lifts gross margin excluding one-offs to 52.0% at the middle of the range. Management previously promised that switching from gold to copper wire would help in the second half.