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Allegro MicroSystems (NASDAQ:ALGM)
Q3 2021 Earnings Call
Feb 02, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to Allegro MicroSystems third Q fiscal 2021 financial results. [Operator instructions] And I would now like to hand the conference over to Katie Blye. Please go ahead.

Katie Blye -- Senior Director, Investor Relations

Good evening, and thank you for joining us today for Allegro's third-quarter results for fiscal year 2021. I'm joined today by Allegro's president and chief executive officer, Ravi Vig; and Allegro's chief financial officer, Paul Walsh. We will review our quarterly financial performance and provide a summary of our outlook. Our earnings release and the accompanying financial tables are available on the investor relations page of our website.

This call is being webcasted, and a recording will be available on our IR page shortly. Please note that comments made during this conference call include forward-looking statements within the meaning of federal securities laws. These forward-looking statements include projections and other statements about future events that are based on current expectations and assumptions, and as a result, are subject to risks and uncertainties that could cause actual results to vary materially from our projections. Please refer to the earnings press release we issued today and other documents filed by us with the SEC, including the risk factors discussed in detail in our final IPO prospectus filed on October 30, 2020.

The company assumes no obligation to update any forward-looking information presented. The non-GAAP financial measures that are discussed today are not intended to replace will be a substitute for the presentation of Allegro's GAAP financial results and may be calculated differently than similar measures used by other companies. We are providing the supplemental information because it may enable investors to make meaningful comparisons of core operating results and more clearly highlight the results of our core ongoing operations. Reconciliation of GAAP to non-GAAP financial measures referenced during today's call can be found in our earnings press release, which has been posted to our IR page.

I will now turn the call over to Allegro's president and CEO, Ravi Vig. Ravi?

Ravi Vig -- President and Chief Executive Officer

Thank you, Katie, and good evening, everyone. We're pleased to report results well above expectations and a strong outlook for the March quarter. Demand momentum accelerated throughout fiscal Q3, resulting in $164.4 million of revenue, a record for our current business. Strong customer demand was driven in part by the end market recovery particularly in automotive, coupled with customer restocking.

Non-GAAP gross margin was up nearly 200 basis points sequentially, and non-GAAP operating income was up approximately 38% sequentially. Non-GAAP diluted EPS came in at $0.13 per share ahead of our guidance. All considered, it was a great start in our first full quarter as a public company. I'm also pleased to report that we remain on track with the strategic objectives we have outlined.

In the coming quarter, we expect to continue to benefit from these efforts and from the strong end market tailwinds within a tightening supply chain. With record backlog and bookings, we have extended visibility into the first half of fiscal '22. With that in mind, fourth-quarter revenue is anticipated to increase again sequentially to a new record for the business to $167 million, plus or minus $2 million. Non-GAAP gross margin for fiscal Q4 is also anticipated to move upwards of 50% to 51%.

And non-GAAP diluted EPS is expected to be in the range of $0.13 to $0.15. I'll now turn the call over to Paul Walsh for a detailed review of the financials. Paul?

Paul Walsh -- Chief Financial Officer

Thank you, Ravi. Net revenue in fiscal Q3 of $164.4 million was up 20% sequentially and 20% -- 21% compared to the same period last year for our core end markets. Demand surged to record levels across our end markets, but particularly in Automotive. We saw bookings accelerate as the quarter progressed and backlog strengthened with extended order visibility into the first half of fiscal '22.

automotive revenue increased to 69% of our mix or $113.9 million, increasing 27% sequentially and 15% year over year. Our industrial revenue was also strong, increasing 9% sequentially to $23.7 million or 14% of total revenue and was up 11% year over year. Industrial customer demand accelerated, and we continue to see very healthy backlog. Our Other business was $26.9 million for the quarter or 16% of revenue.

This was an increase of 5% sequentially. Despite meaningful growth across our top customers, we did not have any customers greater than 10% in Q3. GAAP gross margin for the quarter was 45.3%, up sequentially and compared to the year ago period. Our non-GAAP gross margin was 49.6%, which does not include adjustments for $1.2 million in expected future cost savings related to the closing of our AMTC manufacturing facility in Thailand, which totaled 0.7% of net sales.

Non-GAAP gross margin adjustments include $4.7 million in mostly one-time IPO-related stock compensation charges, transfer pricing of $1.5 million for the Polar fiscal '21 commitment, $0.6 million of one-time costs associated with exiting our AMTC facility and $0.3 million of intangible asset amortization for Voxtel. The strong margin performance occurred despite a rapid acceleration in demand, highlighting the strength of our gross margin profile across all of our product lines. Gross margin improvements also reflect the results of our manufacturing efficiency initiatives, and we just completed the relocation of all production from AMTC ahead of schedule, and we are now in the final wind down phase for this facility. Gross margin was impacted by an increasing mix of wafers supplied by Polar, resulting from the rapid recovery in demand versus our prior expectations.

For the next few quarters, we expect to continue to source a higher mix of wafers from Polar, enabling us to quickly respond to demand, but at a higher cost than wafer source from our Asian foundry partners. That said, we fortunately made strategic investments in additional sources of capacity last year, which will provide some additional supply and cost benefits later in fiscal '22. Taking into consideration all of these factors, we expect non-GAAP gross margin to increase to the 50% to 51% range in fiscal Q4. We continue to anticipate incremental non-GAAP margin improvements throughout FY '22, broadly in line with our prior expectations, resulting from the benefit of the back end manufacturing consolidation noted earlier.

Longer term, we maintain conviction in increasing our non-GAAP gross margin toward the mid-50% range as we augment manufacturing efficiency gains with ongoing revenue mix shifts toward higher-margin and higher growth markets. Total GAAP operating expenses increased sequentially to $98.6 million with R&D of $31 million in SG&A of $67.6 million. The increase includes significant one-time items related to our IPO, including $38 million in stock-based compensation acceleration and $3.7 million in one-time items associated with the transformational activities we've discussed. The result was a GAAP operating loss of $24.2 million in Q3.

Due to our strong performance in the second half, Q3 non-GAAP operating expenses were impacted by a $5 million year-to-date catch up expense for variable compensation, increasing non-GAAP opex to $53.9 million. Fiscal '21 has been a uniquely nonlinear year with revenue in the second half now expected to be 32% higher than the first half. This was not anticipated even quite recently. The catch-up aligns our variable compensation accrual to where we now expect to finish the year.

As a result, non-GAAP R&D investment was $28 million and non-GAAP SG&A expense was $25.9 million. Even with the variable compensation catch up, non-GAAP operating income increased sequentially by 38% or $7.7 million to $27.7 million, representing 16.8% of revenue. Again, this does not include adjustments for the $1.2 million of expected future cost savings related to the closing of our AMTC manufacturing facility in Thailand, which totaled 0.7% of net sales. We expect non-GAAP operating expenses to come down in Q4 to be closer to 31% of revenue, which is below the levels our core business operated at throughout fiscal '20.

We believe this will be the beginning of improved leverage on the step function increase in revenue experienced in Q3. The fiscal Q3 effective tax rate was a negative 85.8% and GAAP net loss for the third fiscal quarter was $5.1 million or $0.04 per diluted share. Non-GAAP net income in Q3 increased to $23 million, which excludes the impact of two months of interest expense on the $300 million of the term loan repayment executed in late November. Only $25 million of that debt remains, and we expect interest expense of about $250,000 to $300,000 per quarter as a result.

The Q3 non-GAAP effective tax rate was 15.9% and is expected to be 15% to 17% in fiscal Q4. Weighted average diluted share count for Q3 was 181.2 million shares as we only had two months of the additional 25 million shares offered in the IPO. This resulted in non-GAAP diluted earnings per share of $0.13 above the high end of our guidance range. Our current diluted share count is about 190.2 million shares, and we expect the diluted share count to increase nominally to 190.5 million in the fiscal fourth quarter.

Our strong execution and business fundamentals continue to be evident in our balance sheet. Cash and equivalents in Q3 were down $44 million sequentially, but operating cash flows exceeded our expectations given the offset of $72 million in net financing cash outflows from the various transactions undertaken in the quarter. We generated $35 million in operating cash flow in the quarter, and our quarter ending cash balance was $164 million, inclusive of restricted cash. Accounts receivable balances were $89 million, and we ended the quarter with DSO of 49 days, which was down two days compared to the second fiscal quarter and consistent with historical norms.

Net inventory decreased sequentially by $11 million to finish at $94 million, reflecting accelerating demand. Channel inventories remain at historic lows, while POS sell-through is at historic highs. In summary, we are approaching spending with a high level of discipline while continue to focus on our long-term objectives related to our business transformation and margin expansion story. Ravi?

Ravi Vig -- President and Chief Executive Officer

Thank you, Paul. Strong third-quarter demand supported the early innings of the market recovery, has put us about a year ahead of our prior internal revenue expectations. As Paul mentioned, our operations team responded well to the rapidly increasing demand, and we were able to maintain good margins. Revenue is at new highs.

We are raising our outlook, and we expect a year-over-year growth that our year-over-year growth will outperform market forecast in fiscal '22. Unique to Allegro will be the benefits of our manufacturing transformation that are expected to reduce our cost and improve our profitability while maintaining our supply flexibility in fiscal '22 and beyond. Coming back to the third quarter. Power IC products were up 8% sequentially and 25% year over year, representing 23% of the revenue.

As you know, we're the market leader in magnetic sensor ICs, which represented 67% of revenue. Third-quarter automotive strength helped drive 27% sequential magnetic sensor IC growth and 19% year-over-year growth. Taking a closer look at our automotive end markets, our revenue was up 27% to $113.9 million. We believe that half of our growth reflects automotive production rates.

industry automotive production forecast increased by about $2 million during the quarter, and the consensus now is that about 23 million cars were produced. Based on our customer history and the relatively low inventories at customers coming into the quarter, we believe that the remainder of our sequential automotive revenue growth reflects market share gains and restocking in about equal measure. Our automotive customer order rates continue to be well ahead of car production suggest of continued restocking into fiscal Q4. While the global recovery provides nice tailwinds, we have focused on long-term sustainable growth, and I'm happy to report that design wins increased over 60% sequentially in Q3 overall and 81% for Automotive.

This type of momentum is indicative of real progress toward our market share and growth objectives. ADAS and xEV represent approximately one-third of our automotive business, and these applications continue to grow at long-term rates that outpace our foundational business in ICE and safety, comfort and convenience. Last quarter, we had some terrific design wins in both ADAS and xEV, securing an electric power steering program for customers in Korea, including both our magnetic sensors and power ICs. We also won new xEV inverter and steering system business at multiple Japanese Tier 1 customers, the global vehicle platforms.

These program wins are expected to start contributing to revenue as soon as the fourth quarter. Our foundational business, ICE and safety, comfort and convenience both grew double-digit sequentially and year over year in Q3. We believe we are gaining share in these applications, giving us further confidence in the longevity of this revenue. We also see market share momentum as we expand our leadership position with our innovative XMR on silicon technology that enhances energy efficiency in powertrains for both electrified and ICE vehicles.

A back bias GMR speed sensor ICs offer market-leading installation flexibility, improving performance and reducing the overall system size, complexity and cost and transmission systems. Last year, we began servicing production and orders for these products, and we believe the rapid adoption of this emerging technology demonstrates we are further distancing ourselves from the competition. Our industrial business was up 9% sequentially and 11% year over year. This includes our strategic focus areas like industry 4.0, green energy, data center and a long tail of business we call broad-based industrial.

Heightened global customer demand across our industrial end markets exceeded our supply and incoming order rates remained strong during the quarter with signs of pent-up demand exiting Q3, Within industrial, broad-based grew nearly 50% sequentially in Q3, addressing a broad range of small customers and applications. This business is mainly serviced through the distribution channel, and we've seen great pull-through, as Paul mentioned, with record POS levels and declining channel inventories. Sequentially, data center and industry 4.0 growth took a pause as expected, but we see continued future momentum. Data center was double the revenue level compared to the same time last year.

This reflects the market share growth resulting from our unique IP and high-voltage capabilities that are perfectly intersecting the demand for higher efficiency and 48 volts in data center cooling. And finally, renewable energy was up 10% sequentially. We also -- we sell our current sensors and motor drivers into renewable energy applications, like solar inverters, photovoltaic, combiner boxes, solar panel tracking systems and wind inverters. These are applications where reduce power dissipation, high-voltage isolation and small form factors are important, exactly where our products shine.

A key element of the industrial story is our market-leading current center family. We recently released the second-generation of our innovative power monitoring chip, which has been a game changer in energy measurements. The new device further simplifies power measurement in AC and DC powered applications, particularly IoT devices, building-at-home automation and even server and telecom power. This product like many in our portfolio supports our mission to leverage technology to deliver a more sustainable future.

In the third quarter, we will acknowledged by the 2020 carbon disclosure project for taking coordinated action on climate and water issues. Allegro is proud to be committed to cleaner skies and, of course, reflect the outperformance for our sector and regional averages. Allegro's Other business was up sequentially by 5%. The near-term growth is due primarily to the end market recovery, with notable growth in IoT applications.

We expect the COVID-specific momentum in printers and peripherals that has contributed to higher run rates in the other business will steadily decline as the end markets normalize. Now, for the fiscal Q4 guidance, as we discussed, we continue to see strong momentum to date in the fourth quarter with record backlog. However, as you know, we are closely monitoring demand and navigating through the supply chain challenges created by the rapid recovery in the industry. Balancing these factors, we expect both automotive and industrial revenue to be up low single digits sequentially, and we expect Other to be flat with company revenue expected to be in the range of $165 million to $169 million.

We expect non-GAAP gross margin to be in the range of 50% to 51%, trending upwards from Q3. We expect non-GAAP operating expenses to decline to $51.5 million to $53 million. We expect non-GAAP diluted earnings per share to be in the range of $0.13 to $0.15 per share. Just to wrap up, we are extraordinarily excited about the team's ability to respond to the increasing demand and contribute to a record quarter.

Good visibility and backlog are giving us confidence in delivering another record quarter in fiscal Q4. With progress on our manufacturing efficiency initiatives, driving margin improvements and strong momentum in our design funnel and continue to believe we are well positioned to deliver on our long-term objectives. Will be -- we will now be happy to take your questions. Katie?

Katie Blye -- Senior Director, Investor Relations

Thank you, Ravi. Operator, will you please review the question-and-answer instructions with our participants.

Questions & Answers:

Operator

[Operator instructions] And your first question comes from the line of Gary Mobley from Wells Fargo. Your line is now open.

Gary Mobley -- Wells Fargo Securities -- Analyst

Everyone, thanks for taking my question and let me extend my congratulations on a strong finish with calendar year. I wanted to start out by asking about gross margin. So Paul, you did a pretty good job of sort of walking us through the variance in the reported December quarter relative to gross margin guide. And you're obviously expecting an improvement.

But I was wondering if you can break down for us, what sort of capacity limitations you have with UMC, how that may be forcing you to take more than your purchase amendments with Polar and how that overall played out in the gross margin impact in the December quarter and into the March quarter? And then I have a follow-up.

Paul Walsh -- Chief Financial Officer

Sure. Thanks, Gary. Yes. We -- one of the drivers for gross margin in the quarter was the mix of wafers toward Polar.

We actually consider ourselves fortunate to be able to have that as a as a safety valve, if you will. And we've indicated that in the coming quarters, we'll rely on a heavier mix from Polar. But long term, we're committed to continuing to expand at UMC and with other foundry partners as well. So I think it's something that we can work through.

We don't have any capacity limitations necessarily that will impede us in our near-term growth. So we feel pretty good about it.

Gary Mobley -- Wells Fargo Securities -- Analyst

OK. As a follow-up and related to the topic, I wanted to ask you guys about your qualification in your eventual transition of manufacturing at TSMC. Could you give us some sort of update there? Thank you.

Ravi Vig -- President and Chief Executive Officer

So Paul, I'll take that.

Paul Walsh -- Chief Financial Officer

Sure.

Ravi Vig -- President and Chief Executive Officer

Yeah, so our TSMC activity has been ongoing. We expect to have revenue from that activity in our next fiscal year in fiscal year '22, getting wafers to supply demand in the second half, and we expect it to ramp up into fiscal '23. This is as expected, given the long qualification cycles that we have in automotive, we had projected this particular stock rate.

Gary Mobley -- Wells Fargo Securities -- Analyst

Appreciate it. Thanks, guys.

Operator

Your next question from Mark Lipacis with Jefferies. Your line is now open.

Mark Lipacis -- Jefferies -- Analyst

Hi. Thanks for taking my questions. So first question on the backlog. So it sounds like the backlog went up a lot.

Paul, can you talk about, to the extent how the profile of that backlog has changed. Maybe like from 90 days ago, to what extent do you have a backlog visibility into -- that goes into the June quarter, two quarters out instead of just the first quarter? And then -- and I think I'm hoping that you can help me reconcile as the backlog is up and there's not -- doesn't -- it's not obvious that there's a lot of constraints from your suppliers, like you're guiding for about 2% growth at the midpoint. And I'm wondering if you could just help me about the difference reconciling strong backlog, growth in the backlog and lower sequential growth outlook? Thanks.

Paul Walsh -- Chief Financial Officer

Thank you, Mark. Yes, we have -- we -- in ordinary times, we have very good visibility into our backlog. We continue to have excellent visibility into what we've seen. Certainly, the demand has accelerated, like everyone has seen.

So we have good visibility, certainly and it gives us great confidence in the current quarter, but we get visibility into the June quarter as well. So I think it gives us a lot of confidence, and it certainly helps with our planning going forward.

Mark Lipacis -- Jefferies -- Analyst

OK, great. That's helpful. And then the -- a lot of times when you get into demand environments like this, people start worrying about double ordering and building inventory, safety stocks are pretty high. Can you give us a sense what kind of visibility do you have into your products once you ship them? Do you have visibility all the way to the production line? Does it end before that? And how you've been through the cycles before, how do you kind of manage or assess when you get to a point where you get concerned about the risk of double ordering and inventories building up out there? That's all I had.

Thank you.

Paul Walsh -- Chief Financial Officer

Sure. Well, I mean, our ordering patterns, our demand patterns and backlog is something we monitor every week. And that's just been a discipline we've had for a long time. The visibility that we have and most do have is we have great visibility into the distribution channel.

And as we alluded to earlier in the call, those inventories are quite lean. And so -- but beyond that into the non-distribution level of customers, I think it's a different -- the visibility is certainly different. I -- and I would probably ask Ravi for -- if you want to shed any color on what we would see there from that from that channel.

Ravi Vig -- President and Chief Executive Officer

Yeah. I think, as Paul said, the -- we have been monitoring our customers. What we know is that we are in constant communication with many of our customers, given the rapid acceleration of the backlog, and we've been trying to monitor the demand signals. We do know that there is a substantial end customer pull at this point.

There is substantial restocking of the end customer, but also their production rates have been increasing. So it really is a blend. But I think as we could extract that in times like this, we've all been through the semiconductor cycles. And in times like this, we do have the risks of of backlog of actually our shipments getting ahead of themselves.

So we monitor this very carefully, and we are very cautious in making sure that to the best of our ability that customers are not getting ahead in terms of their order patterns.

Mark Lipacis -- Jefferies -- Analyst

That's very helpful. Thank you.

Operator

Your next question from Blayne Curtis of Barclays. Your line is now open.

Blayne Curtis -- Barclays -- Analyst

Good afternoon. Thanks for taking my question. Just kind of curious, it's kind of gross margins and inventories. Inventories came down, obviously, you're trying to manage -- I'm assuming some mix of Polar, obviously, it's a headwind to gross margin.

So I'm just kind of curious how you're thinking about managing the inventories back up? And then just a little color as to the improvement you're seeing in the March quarter? And then kind of just if you could help us a little bit more with the trajectory. You get back to some more normalized levels, but can you just give a little more granularity on the timing of when this Polar mix could come off? And when -- if you could, get some better allocations that you would see?

Paul Walsh -- Chief Financial Officer

Sure. Blayne, I'll take that. So yes, inventory came down. It really wasn't a surprise given the acceleration in demand and revenue.

We're very focused on ensuring that we have the appropriate levels of inventory. And so we continue to look at that both for the March quarter and beyond. And book from a capacity perspective with UMC, but also with being able to manage to fill anything we might need from Polar, as we alluded to. Long term, the strategy and as to when that may happen when we would roll off Polar, it's a little unclear at the moment just because of the of the demand environment, but it's not a long-term strategic goal to -- in fact, our long-term strategic goal is to wind -- continue to wind Polar down, which would create a significant a sustainable tailwind on gross margin long term.

Blayne Curtis -- Barclays -- Analyst

OK. And then I do want to ask you -- I know it's a small part of the business, but photonics actually was almost the last two quarters, a little under $1 million. So just any comments on the -- it seems like it's coming in a bit better than at least what I had. Drivers of photonics and kind of any outlook? I know it's a small segment, but it seems like it's tracking a bit better versus what I had.

Ravi Vig -- President and Chief Executive Officer

Yeah. I think photonics is a segment where, at this point, it's really in a reinvestment phase. So we are focused on product development and rearchitecting that business to be more applicable to automotive LIDAR. As we've said in the past, our real metrics for this particular business will come down to product releases and customer engagements on -- in the automotive front.

Yes, we have small revenue. But our real revenue is going to come from, and our real focus is on the automotive LIDAR, which we expect to start progressing in terms of products and design wins over the next couple of quarters.

Blayne Curtis -- Barclays -- Analyst

OK, thank you.

Operator

And your next question from John Pitzer of Credit Suisse. Your line is now open.

John Pitzer -- Credit Suisse -- Analyst

Yeah. Good afternoon, Ravi, Paul. Congratulations on the solid results. Thank you for letting me ask the question.

Paul, I wanted to go back and just revisit the fiscal third-quarter gross margins to make sure I understand the delta that's going on just relative to where the Street was versus where you reported, was most of it the 70 bps from the closure? And if that's it, why couldn't you recognize that in the December quarter? Or is this all being driven by incremental costs from things like Polar?

Paul Walsh -- Chief Financial Officer

Good question, John. Basically, when I think of the revenue guidance range, like we anticipate having this amount, the 70 bps or thereabouts as we entered the quarter. And it was part of what I would characterize as our guidance range of 50% to 51% back November. Without that, I was guiding toward 50%.

So this -- so with 49.6%, we were quite close to the 50s. And the reason we can't really include it because it's viewed much more as more as a pro forma adjustment rather than a non GAAP adjustment. That said, we don't -- I mean, with AMC the Thailand facility being essentially complete with production and in the wind down phase, we really won't have that going forward.

John Pitzer -- Credit Suisse -- Analyst

So effectively, the fiscal fourth-quarter gross margin guidance includes the benefit from the Thailand closure.

Paul Walsh -- Chief Financial Officer

Yes, exactly. Yeah. That's the way.

John Pitzer -- Credit Suisse -- Analyst

Perfect.

Paul Walsh -- Chief Financial Officer

We should see some benefit. We're in the wind down phase, and you know how those things are, there's a little bit of ramp-up, but we should be seeing that.

John Pitzer -- Credit Suisse -- Analyst

And then my second question for Ravi. Just on the auto side, you talked about kind of half of the strength you think being restocking. I'm just kind of curious, I think this is the first time that I can remember where major auto OEMs are being forced to shutter capacity because they can't get semiconductors, which tells you both how cyclically strong things are, but perhaps more importantly, how much more structurally important ships are to building cars. I'm kind of curious, do you think this will change how the auto guys view inventory? And will they just hold structurally more inventory? And especially given that your cost side of the equation is moving up, how do you think about pricing, vis-à-vis, your rising cost and tight supply right now?

Ravi Vig -- President and Chief Executive Officer

Yeah. So I think we're already seeing the impact of the tightening of the Belt buckles and the part of the automotive supply chain in the COVID quarters. And I think inventories got down to extraordinarily low levels. I think this was a trend actually that started in the prior year.

So we came into this year with extraordinarily low inventory levels, and we continued through the COVID quarters with where inventory kept declining. And no one forecasted the recovery, this rebound in Automotive. And this large recovery has completely depleted or it has been depleting the supply chain, the semi supply chain. And as you've rightly stated that semis are becoming more and more critical to the operation of vehicles.

And what we're seeing now, I think we're seeing the backlog trends change as we speak. We're seeing our visibilities go out a couple of quarters, maybe sometimes or more, which is something which is quite unusual for us. So I think there is something going on in the automotive supply -- from the part of our automotive customers, where they are giving us bigger visibility. And I think they are trying to address this shortfall by increasing their restocking.

It doesn't really apply to us. But what you see is that the high end processors are competing against the trends or the demand is created by cellular and 5G. And I think the automotive customers are ending up recognizing this. I'm sorry, what was the second part of your question?

John Pitzer -- Credit Suisse -- Analyst

Sort of your pricing philosophy right now. Can you take pricing up to cover cost increases? Can you take it up beyond that? How are you trying to manage incremental costs with long-term customer relations?

Ravi Vig -- President and Chief Executive Officer

So we -- typically, we are not transactional, both with our suppliers or with our customers. What that means is that we're not a commodity company, and we don't commoditize either our purchasing or selling. So we have long-term agreements with our suppliers at least our critical suppliers in terms of pricing, which we expect will help us whether this -- there's constraints that everybody -- that a lot of companies are seeing. But on the other hand, we also have agreements with our customers that we look at.

And with situations occur that are out of our control, we do have conversations with customers on pricing. We are addressing pricing in a limited fashion right now, while we we continue to monitor the market. We continue to monitor the supply chain and continue to monitor the supply chain cost. So yes, it is a conversation that we're having with our customers -- some of our customers.

John Pitzer -- Credit Suisse -- Analyst

Perfect. Thank you very much.

Operator

Our next question from Srinivas Pajjuri of SMBC. Your line is now open.

Srinivas Pajjuri -- SMBC Nikko Securities America Inc. -- Analyst

And congrats on the -- being a public company and solid execution. Ravi, I just want to go back to your comment about design wins. I think you mentioned your design wins are up about 80% or so. And you also said that your ICE business is up double digits, which is a little bit surprising to me.

So if you could talk about -- give us a bit more color on the design win pipeline and where you're winning these designs. And if these are for ICE versus xEV and ADAS. And also, I think in the past, you said you were optimistic about improving gross margins with the new products. If you could talk about if these new design wins are going to drive any incremental margin opportunity?

Ravi Vig -- President and Chief Executive Officer

Yeah. So in terms of design wins, we were up 60% Q-over-Q. And the bulk of those design wins were in our xEV or ADAS areas. And when I say xEV, it could be hybrid electric or or battery electric.

And some of these design wins are impactful. We expect that they will actually have meaningful revenue impact starting this particular quarter and accelerating beyond so -- and similar to the ADAS wins that we're having. Typically, our xEV and ADAS business is is our emerging business and has higher margins than our ICE business, which is more mature. So we are really happy about this trend that we're seeing where our our xEV and ADAS products being deemed as best-in-class and being picked up by market-leading customers.

And this is worldwide. We're seeing it in Japan. We're seeing it in Korea. We're seeing it in Europe.

So the second part of your question was on ICE. So the ICE quarter-over-quarter growth is really representative of the bounce back in car production. And the restocking that's going on right now. It's not really a content growth at this point.

Srinivas Pajjuri -- SMBC Nikko Securities America Inc. -- Analyst

Got it. And then one for Paul. Paul, gross margin, a lot of questions have been asked on the topic. But if you look beyond the fiscal Q4, as we look out to the next fiscal year, can you talk about the puts and takes of gross margin? I guess what I'm trying to get is if the benefits related to the Thailand factory are fully baked in fiscal fourth quarter.

You still have any additional benefits coming in, in June and beyond? And then if there are any other drivers beyond the next fiscal -- I mean, next quarter? Thank you.

Paul Walsh -- Chief Financial Officer

Sure, Srini. Yes, as Thailand rolls off and we become basically a single back end manufacturing facility in fiscal '22, we expect to see incremental improvements throughout the year, certainly. We're -- so that's a strong tailwind. And the Polar wafer mix is something of a short-term tailwind -- headwind that offsets that.

And I think as we go through like many of our peers, as we look at different areas where costs may be rising, we're looking at how we offset those. And so and we also anticipate just certain efficiencies that would help throughout the next fiscal year.

Srinivas Pajjuri -- SMBC Nikko Securities America Inc. -- Analyst

Got it. Thank you.

Operator

The next question from Vijay Rakesh of Mizuho. Your line is now open.

Vijay Rakesh -- Mizuho Securities -- Analyst

Hi. Ravi and Paul, congrats on a good 2020. A question on your autos. When you look at the combustion engine ICE versus EV, wondering what the split was of that in auto in September and how it trended in December? Is the mix shift significantly or how the shift moved?

Ravi Vig -- President and Chief Executive Officer

Yeah. So Vijay, as we've spoken before, ICE dominates the market in terms of car production and car volumes. So it has a much larger established base. EV is an emerging segment, rapidly growing.

We are extraordinarily excited about it, but it's still coming off a small car production base. So the best thing I can tell you is that our xEV business grew 57% year over year, which for the quarter. So it's talking about extraordinarily strong momentum. We are seeing rapid acceleration in the adoption of our products in this particular area.

We're very excited about some of the new products that we've released, and we will continue to focus our R&D in this particular area.

Vijay Rakesh -- Mizuho Securities -- Analyst

Got it. And then look at the December quarter, it looks like autos, I think you said grew 15% year on year. EBITDA for electrical LVP grew 2% year on year. How would you expect -- as you go forward, any thoughts on how investors should be looking at the outperformance versus LVP? Thanks.

Ravi Vig -- President and Chief Executive Officer

Yeah. It's -- we were looking at this data ourselves. And what is always difficult in as a semiconductor supplier is that our numbers in terms of the clear multiplicity of LVP, they get modified or modulated by supply chain strategies on our customers. So inventory bills tend to boost things up and inventory declines or burn offs tend to pull things down.

So in 2019 calendar year, it was a very large pullback in automotive, especially in the analog and sensor space. And a lot of it was the result of inventory pullback. So some of the data might look a little larger-than-expected because of inventory pullbacks. But we are seeing content growth.

I mean, it is -- just, for example, my xEV statistic, it's a wonderful statement on how we see our things growing. We're seeing growth in ADAS. Again, that's a content story for us. So we do expect to continue to outperform the LVP market.

Obviously, the auto production market statistics.

Vijay Rakesh -- Mizuho Securities -- Analyst

Got it. Thanks.

Operator

And next question from Quinn Bolton of Needham & Company. Your line is now open.

Quinn Bolton -- Needham & Company -- Analyst

Hi. Ravi And Paul, congratulations on the nice revenue and strong backlog. Wanted to ask, Ravi, I think you mentioned in the script that auto production is back to 23 million units in the fourth quarter. If I annualize that, it looks like we're kind of back to pre coved levels.

Wondering, as you look forward into March and June, do you expect some of the semiconductor shortages that are pretty well known. Does that take the auto production down for a couple of quarters until the supply chain can work through those issues. Just wondering if you had any thoughts on kind of where production goes the next couple of quarters?

Ravi Vig -- President and Chief Executive Officer

Yeah. I mean, it's a good question. We follow IHS and LMC, and we use them. We believe that they're probably a little smarter than we are in projecting automotive production.

The expectation for this coming year is still running between 85 million and 88 million. Given that we ended last quarter with a 23 million vehicle quarter, there will be -- they're projecting a little bit of flattening, actually at the projection flattening in terms of the production rates. We're seeing the demand at this point. The auto customers are wanting every product that we can -- every unit that we can ship at this point.

So the demand is strong. We see the visibility out in the next couple of quarters. It's a unique situation right now where the backlog extends is giving us extraordinary visibility beyond our 90-day typical visibility that we have. So it's looking strong for now.

I think there's -- it is a combination of -- for us, a content story that we've got content increasing. It's a combination of some restocking that I believe that's going on. And I don't believe it's an LVP growth story. So it's going to be either flat or just mildly declining, but not of any real significance.

Quinn Bolton -- Needham & Company -- Analyst

Great. And then the follow-up question I had is you mentioned the restocking activity, and it sounds like we've gotten down to very low levels through the supply chain here in the second half of 2020. From your experience going through past auto cycles, how long does that restocking activity typically play out? Is that a two to four quarter kind of phenomenon? Does it come back quicker? Or just any sense on how long that restocking could -- over how many quarters do you think that plays out?

Ravi Vig -- President and Chief Executive Officer

Yes. Well, it's interesting, but I'm not sure that history really applies to this because I think with the increased reliance on semiconductors, I think there may be -- we may be seeing a change in the near term strategy, near to midterm strategy on automotive customers. They may be looking to have higher levels of inventory at this point just to protect themselves against the supply constraints that they're seeing today. I really don't have a better answer than that.

So we're just going to have to wait it out. We're going to have to see how it goes. We don't see it pulling back much throughout this year. We see continued -- we see that our fiscal '22 will be strong.

So we're pretty excited about that. And we're pretty happy about the visibility we have.

Operator

And the last question from Mark Lipacis of Jefferies.

Mark Lipacis -- Jefferies -- Analyst

Thanks for working me back into the queue. So I had a question on the industrial markets. I know when you were doing the roadshows, this is seemed to be like a greenfield opportunity, largely a greenfield opportunity. And you're expecting very healthy growth in that market.

Can you just remind us in this market, to what extent are you're taking chips that you had originally designed for the automotive market and just opportunistically finding opportunities for them in the industrial market versus designing products from scratch for this market? And can you talk a little bit about the sales cycle the sales process here in industrial versus auto? Is it a shorter -- should we think about a shorter sales process there? Thanks.

Ravi Vig -- President and Chief Executive Officer

Yeah. So yeah, it's a great question. Our industrial business is actually a mix of both targeted design products as well as a leverage of products that apply very well across the automotive and industrial spaces. So for example, our current sensors that we do for automotive, they have similar types of requirements in the industrial space.

They are in the solar inverters as well as in the HEV inverters in vehicles. So there is some synergy, there's more synergy than we would expect in in our electrification product portfolio. There's also more synergy that we would expect in our motion control product portfolio. But we are particularly proud of the activities that we've done in data center where we've developed and released a family of quiet motion fan drivers that include embedded algorithms and address the three phase plan cooling leads for data centers and service.

And this particular product line is growing dramatically. It is up substantially year over year. I think it's almost up 200%. And it speaks to both the increased needs of data centers, including needs of data centers, but it also speaks to the adoption of our technology and how well it's been targeted -- targeting this particular market space.

So it's a blend. We see both types of activities. Our 48-volt automotive activities lines up very well with the 48-volt industrial activity. So our wafer technologies lined up very well.

We do not work very deeply in the 5-volt and sub-5 volt levels. So there is a lot of synergy over there. The design cycle certainly are quicker. And what I would say is that once you get designed into a platform at one of these large industrial customers, the selling cycle, then all of a sudden becomes very quick when you win a new project on that same platform, the ramps happen very quickly.

We sometimes get very little notice in this particular space. Katie? Katie?

Katie Blye -- Senior Director, Investor Relations

Great. Operator, I think that was our last call or last question. So thank you all for joining us today.

Paul Walsh -- Chief Financial Officer

And I just want to thank everyone in our first earnings Q&A session as a public company, we're very excited, and we talked a lot today about bookings and our visibility, and it's -- we feel fortunate that this is where we are and having this in our initial launch as a public company. So it's very exciting for us, and we look forward to speaking with you as soon.

Ravi Vig -- President and Chief Executive Officer

And thank you, Paul. And I just wanted to wrap off. I wanted to second Paul's comments, it is an exciting journey that we've been on. And we're particularly proud of the of the quarter we've had.

We're particularly proud of the visibility we have into the next year, both on the top line as well as in gross margin and the continued initiatives that we have that hopefully helps us deliver good quarters in the future. A good and great quarters in the future. Thank you all for attending, and have a great evening.

Paul Walsh -- Chief Financial Officer

Thank you.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Katie Blye -- Senior Director, Investor Relations

Ravi Vig -- President and Chief Executive Officer

Paul Walsh -- Chief Financial Officer

Gary Mobley -- Wells Fargo Securities -- Analyst

Mark Lipacis -- Jefferies -- Analyst

Blayne Curtis -- Barclays -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Srinivas Pajjuri -- SMBC Nikko Securities America Inc. -- Analyst

Vijay Rakesh -- Mizuho Securities -- Analyst

Quinn Bolton -- Needham & Company -- Analyst

All earnings call transcripts

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