KN - Earnings call transcript Q4 2017

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Operator

Good afternoon and welcome to the Knowles Corporation Fourth Quarter and Full Year 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. With that said, here with opening remarks is Knowles' Vice President of Investor Relations, Mike Knapp. Please go ahead.

Michael J. Knapp

to XXXX welcome call. and Emily, our earnings QX Thanks, John on presenting today and I'm Vice and and Financial me and Chief our the Chief President Officer; President Mike Knapp our with call Officer. Senior Niew, are Executive Andersen, Jeff

today Harbor about future will Federal Laws. provisions for under and expectations, purposes for remarks forward-looking constitute applicable which statements include of call plans prospects Our Knowles the Safe Securities

on company this in and products, will include All statements expenses report SEC to time-to-time demand filed reports involve about XX-K and company the call and uncertainties update today's Form XXXX, including in law. of cause uncertainties actual any date fiscal except required risks identified call not comments anticipated and risks such results and for materially by as from for a XX, December this trends company's company The filings, but Knowles year as risks duty to the to forward-looking annual Forward-looking disclaims expectations. urges sales, in the are release. could of review profits uncertainties to made and and ended differ the of periodic limited statements the number current with statements SEC investors from the that in the earnings

at will be some to slides IR GAAP on this that, call on a G, me including of the Jeff? financial unless comparable can made basis, our website. found press provide a financial pursuant Jeff be in the in results. references found referenced most our knowles.com details otherwise the on we've operations section call selected any non-GAAP be the information Reg turn conference to our will webcast available in website addition, can Also, who which over With posted let during continuing indicated. All In non-GAAP financial call reconciliation today's measures measures. directly release to on

Jeffrey S. Niew

for you to Thanks, all Mike, joining of today. us and thanks here

by $X.XX. mind we sales and our largest softness. IoT revenue sales MEMS customer our results weaker QX royalty in increase consistent in we the quarter comprised Keep in just exclude revenue the gross total stronger $XXX into of during period share of fourth in segment, cover will end reported were handset Sales Audio which QX from Device prior of and by with up capacitor from customer the sequentially in million, margins these Overall, China divested segment, strong XX% our and the business, quarter. and market expected For of market. year-ago demand demand In earnings XX% Audio per In a XX% shipments driven due Precision were settlement which the a microphone moment. to greater to to positively impacted John detail improved revenue for than were devices. continued due timing

We robust continue defense, these medical and products. order in for trends driving markets to demand our see industrial

where platforms profile. As revenue non-strategic growth quarter. I the have represented timing sharpened of to and divestiture this the about our in market Precision pleased attractive QX. business company during strong positions total has our we focus complete we The Devices XX% of margin business mentioned, of are sale on

mobile in base now both our as see mentioned the these microphone of prior to diverse voice devices. versus XXXX of quarter, but China markets. handset from market And remained that growth XXXX demand much benefit sales both was for the up driving the demand a challenged continues were in prior enabled weak. MEMS Microphone headset revenue customers I more into segment Audio from markets Our in for sales and doubled year. IoT we

also socket. at multi-mic our on and China of greater smart driving mics each content wins microphones for to for the improve we positive see handsets are need trends performance system and share dollar same digital to mics the drive in OEMs. design across continue will We adoption expect high DSP-based several

wins The flagship driven design of begin in the first largest their customer, of increased by shipments models. these production launch our will new QX. in QX At

range sales quarter, constraints supply due expectations, but the to were of During within upside limited the chain. our was in

continues new share launch we customers better In at It This by we this the use flagship of all Korea, Galaxy anticipate ear new customer of greater shipments second in this performance. launch handset demonstrate consecutive across acoustic after for the microphone, Our their a QX IoT increased across SX the solid year will remained this incorporates customer's placing products high last that growth devices. are handsets, which microphone year-over-year and platform continued momentum quarter. on to strong new expect year. with driven a performance and emphasis

headset solutions, advanced and new This as revenue As new mics, drive value our seeing growth features per doubled in adopting or the ear In finished products. new trend increased margins from are of audio in handset mobile accelerate. year. focused moderates, our A we on processors, content prior higher Where we adoption enabling year multi-core is market, thread are content. growing across mics DSP-based customers into market we digital and market strongly which solutions sales space audio open higher growth the the ASPs common enable value the on increasingly it's device. is are that our higher through they this

to wireless, base important we as powered well like more is very both as active input. suppression, The Powered our the and a positive large market cancellation, noise is small great voice door us. to to to features improved trend and it the for noise for us. relative wired headsets for audio see opens IoT, and revenue headsets, move of become While potential a currently mobile

own for used It's intelligent of keyboard these to can simple a the detection, customers, audio commands greater MEMS or pressing as strong voice our drive has devices activity need wake, many of discussions your and market high across mic design method features other enable All best microphones. tapping solutions leading has button. the voice be features. Smart the number embraced versus to headset around Bluetooth a how as for controlling performance also in been

OEMs with deem most combined audio intelligent to run open, platforms, all they allows Our in them simultaneously. our features core acoustics important and enable capabilities

installed types While and the processing that see CES this more feature market top their we more the XXXX contain of clearly new Sonos expect believes that and That's growing will of the households They a to voice applications. for by these XXXX theme its Juniper shipping than breakout speakers are of fastest soon of headset smart were to more announced require highlighted models wins similar be products. interface. continue a one penetration we of there Max, AI, home, of different in like being the over consumer and Google and power Research at XXX voice number seems smart to One, is input. least million we'd Xiaomi's arrays displays, common speakers, These voice a the a new appliances microphones in solutions. one emerging these and now many include with MEMS million. we today. is are as just all added in devices At use market they It all Mi HomePod. was Baidu's remains shipping or across fragmented, toys, are these design to to total globally. continued better dozen smart features have prime Home, Smart kitchen microphones and the critical XX whether leading share, of command deliver smart enable The Raven, the while products IoT year TVs, will speakers that position Amazon U.S. speaker devices year, see and Mini our Apple

makers We with products demonstrate We targeting the a very microphones can microphones IoT evaluating enable our consumption software manner. our enable IoT having with identify to keywords multi-core control a DSP smart to go of of to at our our several products CES, the devices processing applications. audio without in cloud to These continue cost-effective including and commands. voice for local devices of new intelligent variety low power smart partners to see solutions

quad-core interested our its audio to applications. seeing multi-core sophisticated product large, open audio also DSP multiple designed for We enable teams its processor are capabilities features through in given specifically

a design efficiency. flexibility, for power power getting OEMs are We and from of processing response its because this solution strong

solution understand the consumers our will technology first how customer market the alpha to markets. and around the to target audio three and technology of with it control be across track on input launch Companies our voice remains remain us. with premier Our power of in QX. product interaction supplier We facilitates its

the first our Our core turn in that, to us an John? expand are signal it provide in With financial position voice capabilities processing and unparalleled algorithms enable I'll John and on and for technology. ideal guidance place our results to to acoustics, over quarter. digital

John S. Anderson

Jeff. Thanks,

which Before two impacted low-margin want jumping $XXX business to financial November, our timing million. QX our for comment events, of our In I quarter. completed we on into device results, the divestiture positive

As the as discontinued been we have by QX results the the we reclassified was operations. non-GAAP operations $X.XX, million continuing noted, reduced of transaction, device revenue by $XX when guidance was timing our EPS business reduced closed and to

$XX.X in our with competitors Additionally, one settled segment agreement for Audio December, we of to million. related a dispute a royalty licensing

by Operating business Fourth to up million $XXX quarter For incentive $XXX impact as general years. timing $X to $XX midpoint The of of purposes expectations. in excluded year cost, X% our ongoing lower lower due of impact with quarter these at were of expected X% $XX the offset of China. were expenses, million relate I've our on QX device volume. sequentially results, efforts amounts reduce X% recovered XX%, expenses lower Device expenses compensation the in Fourth expected related and million lower of our to than revenues weaker commentary divestiture unfavorable down quarter administrative sequentially, period. were revenues legal margin expense. million, microphone my were to were revenues million our ago $XX.X Precision was from than and gross up related million, guidance. and $X expected flat prior favorable revenues line gross Audio sequentially, of to margins and from the than lower demand in period the the down legal year-ago million in the

of provided of the For was and year knowles.com. benefit at found $X.XX, the is Further the including and reconciliation in on can to tables the diluted quarter, release a detailed non-GAAP adjusted EBIT margin XX% results non-GAAP today's be royalty our EPS, and also financial of settlement, press excluding information GAAP website respectively. prior

cash I'll December Now, flow. and balance equivalents cash to and million at sheet $XXX totaled our Cash turn XX.

For facility. cash our credit was capital business, leverage revolving significant ended net a device less Dover. from of million. operations million bank totaled operations from in million with timing used flow We the generated net spending portion quarter, since cash the from under combined the to $XXX the The than and $X reduce borrowings spin-off we $XXX million, of proceeds and ratio with was quarter, lowest $XX cash sale a from levels at of XXXX both this metrics of the times, with our debt the and X.X

the want beginning deemed to to Cuts U.S. our will The to moving which on of company QX over in expects Before Jobs taxes in be foreign impact approximately of the historical the Act million XXXX. the eight comment $XX company to to repatriation guidance, of XXXX. I years earnings, and cash payable pay related Tax

effective tax U.S. of profits XX% offshore the with In enacted provisions a we minimum of our to legislation. beginning reflect on the rate addition, other a tax range tax associated tax year, U.S. and to increase future losses, recently will benefits expect future reduced to XX% this

our to guidance. quarter first Moving

by quarter the IoT company the We is from X% $XXX markets segment than expected year between be and for sequentially, seasonal revenue and to trends Audio year closed be projecting devices adjusted expected expenses SG&A We're which margin down be increase for to offset is with of assumes ago gross XX% Please diluted This forecasting North per $XXX EPS million expense tax $X.XX basis. acquisition QX for be R&D of up press expect to in effective $XX increased rate $XX refer to our midpoint expected to to during the in X% within diluted year revenue our the earlier XX% margin of driven range prior period. quarter million. million, and an the a American projecting to expect from XX% share non-GAAP to quarter. increase of of driven the the shipments to customer, the expected and X% and fully the the in X% to be Revenue outstanding between $XX up over better share. typical million to We're approximately to total non-GAAP largest GAAP be in and XX XX% range by China. to million capacitor of period ago XX%. release weighted on demand non-GAAP to an small XX%. capacitor from end in to up Precision this several reconciliation. non-GAAP are We're a a XX% million a and impact average $X.XX continued and sequentially weakness partially $XX across by is an be Device quarter be EBIT to growth million

move first and for to the million fourth quarter $XX the of Jeff? approximately spending $XX operations be we'll remarks for and in planned Capital spending now which of utilized portion call. million. then Q&A was be the of we Jeff $X quarter, quarter to over For the I'll in XXXX. to expect and cash the turn $XX is million back the call million between closing to originally includes expected

Jeffrey S. Niew

we In and doubled headset IoT markets. XXXX, into microphone sales

We line for that open XXXX beyond. growth also DSP introduced in solutions positions and gaining This our a core traction are us markets. of three full across

addition, half the the paying back our of the lowest balance the In us to cash strengthen business lower which generation enabled since our levels exited timing in and by to margin strong delivered sheet debt down spin. we year,

growth XXXX, devices into microphone results. in anticipate we rapid drive coupled headset growth As with in IoT I favorable strong and enter markets, to precision sales

our our Operator, now uniquely leading-edge solutions that questions. deliver of markets provider. are In single algorithms. We remain the our strategy. that can as with addition, seeing and of for our engagement as solutions audio serves and customers to number processing markets best-in-class we intelligent acoustics audio end across our transition quality believe ear audio positioned an traction intelligent across and our input I leverage confirmation digital to audio take we are continue we gaining IoT solutions mobile,

Operator

with Our Company. first the comes question Dougherty from & Charlie line Anderson of

go Please Your line is open. ahead.

Charlie Lowell Anderson

Yeah, thanks Jeff, full any if for wondered I taking offer year. to wanted my the you review on question.

between have You've want wondered the EBIT here any And the all different commentary the of post segments got model gross margin a on if new then lot so the of and you parts to margin. similarly there. of margins, structure, should a new sort moving offer divestiture, sort a you

model then Just have comments any sort might of have? short-term And full a you maybe year follow-up. view operating I or

Jeffrey S. Niew

in thoughts looking to some XXXX on, I correct? terms Yeah. you're assume you're referring of what for

Charlie Lowell Anderson

Correct.

Jeffrey S. Niew

Yeah.

customers standpoint, IoT So showing last this would discuss think continues strong I what I now from XXXX a with and got lot is largest we've us. pieces for couple strong seeing a not multiple it's of this customer. IoT market be We're think devices. traction call, I that of very call, now say are IoT across, growth. I our the very And to just

significant headset segments. see in intelligent two don't audio small expect in Our the a And revenue very I also we revenue, I'm about add market, starting that, coming XXXX. we're in optimistic those market both base. markets, I would going those while headset do

little I one the a is our strong, think space, that about that think largest year-over-year. I we're starting very more largest think bit mentioned, segment off our customer customer I with in I handset QX cautious the QX as I'm

be ear And China. whether all – customer. that IoT mics, There's we to very a products I'd a for But DSP-based strong, only also in a other around and function, that while the digital area so of mics, we're say products. optimism monitor handsets, it we're continue is with are lot audio of largest but that of the trends is one pleased. function products, it's not or that

it China our guidance, and is in in in week. reflected is But guidance. it's reflected think our QX I is

would feel one what's little QX, bit But a overall that what seeing and the I that's I'd wouldn't wait growth. a I'm expect piece say So I negative with China. that we happened more I say going happens to we're about, in see little after say

a let few I'll margins, on gross make that. the On John comments

John S. Anderson

Charlie, with ended little for just we above the up basis, a gross margins a Okay. on reported Yeah XX%. year

divestiture device see almost business. the increased timing amounts think margins I schedules. our overall excluding device XXX are The Those you'll in timing points. of XX.X% by supplemental the business

you from XX% stable. XX%. are margins we gross would think think XXXX, going as should I to pretty to So go be into

rate I see of a range run in over that think good course R&D see continue the R&D, then SG&A to XX% expenses, XXXX. In going of I and operating QX. terms have XX% operating to expenses would rate really the QX, mentioned of run that I at of in as we sales

Charlie Lowell Anderson

quantify constraints could impact and we Great. all? that mentioned kind And I with into of that. where guys that kind Does QX. you persist think follow-up, stand if in then you of supply at what for wonder I some had my XXXX

John S. Anderson

Yeah.

go what but some is improving constraint it QX. was, The would going reflected QX lot So could delivered and I'm the would have have details on specific think not our guidance. been in situation in into think to we it's been definitely huge, more. it in I supply but a of don't more have I

Charlie Lowell Anderson

Okay. Thanks so much.

Jeffrey S. Niew

Charlie. Thanks,

Operator

Our next Capital. ROTH question Desilva the line from with of comes Suji

Your go ahead. line is Please open.

Suji Desilva

Hi, Jeff. John. Hi,

are phones to to term regardless launches? China that here, follow-up have the but if Show OEMs Charlie's I you Just the would near segment of overall into the up outlook. pattern launching you're get on phone the China potential are understand coming that on question concerned the XXXX new and China Barcelona about going, cautious, or demand

Jeffrey S. Niew

Yeah.

our I wins the design our very would what customers. and with China say aligned is Here's are roadmap well product

position where I'm with sell not the customers. market. the So these phones concerned from I I'm Chinese how is know in concerned of perspective more is the our end

Number QX is And ASPs. terms multi-mic us the good more to adoption shipments mics The customers Chinese of our in in OEMs. for in digital market, is in this. I of said, DSP-based which also think I start as to smart excited. China I expand. seeing we a will number adopt China of see mentioned to we're very two We're continues mics

all sell? So cautious audio a and is, many of the really perspective things they phones I'm how well aligning are more on the importance. from What did

Suji Desilva

but then order my designing in of other designs of question's a a out multi-core lead And What's enough. part. that's and adopting the what's already. have it could Fair ways we the have handful DSP the your you're think there terms typical versus customers focused it And cycle, magnitude of Is long it's one on is possible of know on? products? of customers customer I you there product XXXX the ASP opportunity or to really that in just timeframe?

Jeffrey S. Niew

Yeah.

think I bit little a about we talked the ASP the past. in

Our what of work we're we're of versus tier do that this expectation and think to XXXX, at across the have interest. just amount interest we and are with we thinking on getting very, we what what companies go depending multiple my design to going that I getting not would have we're the as to We're And this would in on of kind from number production expressing very mobile, versus is X into multi-core point parties looking getting as engagements starting thinking. IoT algorithm they $X $X. say DSP. is do people in market. third wins is, start-up And and I good. that this and that ear And would the in That's work do, close, neighborhood I we're I would I quality and of at said the say that what anticipate off

Suji Desilva

Jeff. Thank Very you. helpful,

Operator

the from Bob Labick comes of question next CJS Securities. with line Your

Your go line ahead. Please is open.

Robert Labick

Thank you.

to back Just take step a on China. wanted

what XXXX you in And sales kind what you of OEMs how the in can context give of may weakness, how sense fourth And shift? the about XXXX? driver of Chinese of was kind for quarter? if a the some outlook that us much on in give If the of, then was – percent can

Jeffrey S. Niew

Yeah.

the So let first XXXX, full or the remember, in about year. And when talk me if the you in market. me the it's we year, so number, give about let earlier talked well China you XX%

extremely I think I mean strong with strong. we had XXXX them. extremely

this, we of like you If I think XXXX. the in the is in not I to hold would half we're up is now correction half front that XXXX is through, remain lot think of QX. What they a of in we over introduce portfolio say, hoping I in did were products. I were XX% think QX and guidance we I in the for fair not but amount the of over-shipped remember, have they a Suji into suffered XXXX. the referred would that I we're back don't of we're a expecting we a what the seeing factored And fact, think, we're up numbers, handsets say, to of reasonably weak lot, – and inventory what back our to year weak, XXXX continues And expectation these stale is, QX. where that but half in of shipments

Robert Labick

Got it.

mics about And obviously, it growth tie caller I were just now you last two China? volume XX% think in volume in mics is XX% a Could you previously, going your maybe out to on be where you weaker to do expect or said Do lower before about Okay. building so. was slightly and expect additions? do year capacity you you capacity, together? things with this still you stand it And those

Jeffrey S. Niew

Yeah.

on capacity the think we're a of planning So lot mean, adds. doing I I

huge recovery year-over-year. like in back be levels, speak recovery the in the of, I'm to in of I amount X% some specifically year. us but the We're of up That's And in China expect half say, going volume, would recovery X% or include, year. some was planned already That CapEx for in least back terms – the kind a the of I I to mic what would in year, at capacity. XXXX. you XXXX So early China volume in to if of the terms position to a would the expect, not help right that back not half spending though, fair now. would of

what we about I – think think here's is. you got

QX. And our pretty at whereas us looks our is XXXX in largest going actually customer. customer forward, Our forecast we quite in strong positive with for it look largest

is IoT, got You've which in have for microphones. a to significant going growth us

starting have base, I in small China XXXX. You just this going partially that's market, point. at would And pretty a headset to get what that optimistic overly significantly offset we're at guess say I is again, by on but not growing

John S. Anderson

capacity Just the utilization. to add some clarity on

we utilization, year around was of think in closer first half XX% right you of The much impacted full XXX% capacity the some but the were supply were in If had. XXXX, bit running a the XX%, half we by to months. back even year, chain constraints we

a So full right were year, XX%. we at maybe XX%, little –

Robert Labick

one expectations target? one if I to in you great. materially Then, the sheet the could the Obviously, talk what forward cash in. improved cash sneak and looking QX. Okay, just with and leverage going balance last about strong divestiture flow then for you're Can it flow

John S. Anderson

improved mean, from noted balance as XXXX you levels. debt noted, over as net we've significantly. We by I sheet end Yeah. – reduced the $XXX million of

be priorities for to is but our Our XXXX, we times allocation X.X capital as continue ratio exit leverage consistent. below

and I First, do line to funding given microphone higher capacity growth outlook thin MEMS a this positive than film internal it's be which very for initiatives capacitors. expect product year, in and our expansion, normal

So to full for year X% there above of could is where X% normal potential CapEx revenue the range be XXXX. the our

borrowings. will to we bank Second, down continue pay

under We million $XX have our still outstanding revolver.

acquisitions. look at accretive we bolt-on will Third,

acquisition our small we I in quarter. – in capacitor earlier PD this made segment a our As mentioned,

those so allocation. priorities really capital And be continue to the for

Robert Labick

much. Thanks Great. very

Operator

with Kumar Harsh of Jaffray. line the from comes Piper question next Your

ahead. open. line go Your Please is

Harsh V. Kumar

was income a could Yeah. John, will your look sense of us if Hey, line quick give I've this guys questions. of couple I more. you couple that did. wondering post like, interest And paydown you guys. expense then, A got a what

John S. Anderson

Sure. Sure.

down expense around of to think – so that's million can really of of levels. $XX the course XXXX it's increases $X be right over million from the range, rate kind interest or modest XXXX. XXXX And You in about assuming

in, the it, increases, think factor basis outstanding lower reduction the to is really but call XX balances. points due that I would

Harsh V. Kumar

and get And is full Understood. of bit little That's a headache very a to so uptick, CapEx you're the sort you to becomes if to – mean, high-XXs, pretty level the business of helpful. of I back close what which then, with. run XX% a

million $XX helpful. rolls some Maybe, as standalone the for number for should if or CapEx XXXX, of guys million, the but that would CapEx, on along? think basis having You're adds maybe how outside you a I of be $XX year we XQ have capacity a think

John S. Anderson

a it of say but really Harsh, the back there spending of that XXXX half not Yeah. as as range going part than because development to market, closely – the a our of monitoring especially in I'm give we're for early be number the XXXX, XXXX possibility well revenues. X% of that to is would for X% could I year full historic CapEx higher our the

Jeffrey S. Niew

if the case, expect more will well. we'd But that also be growth as

John S. Anderson

Correct.

Harsh V. Kumar

becoming I then And your now you. IoT Thank Sure. is business know last meaningful. thing,

it is, last full headset numbers Your business, is ramping. much it wondering dollar perhaps was business? the us on what or you to then and quarter be even IoT business Jeff, I how want year headset would if slice you however willing to the give

Jeffrey S. Niew

dollars... so numbers me So of kind and give let more percentage exact sales and just you of numbers

Harsh V. Kumar

Sure.

Jeffrey S. Niew

mic guys the ear because was we of and In XXXX, market XXXX, know In we from we've question our X% this IoT gotten about sales. you at before. looked this,

it'll in that We will sales we're go as expect our be XXXX, XX% over if ear mic expecting, be and things of in IoT.

Harsh V. Kumar

Interesting. Wow.

for that's me. Okay Thanks, it guys.

Operator

comes line with Peterson the JPMorgan. of question next Your Bill from

line Please ahead. Your go open. is

Bill Peterson

especially largest due can And the other demand I your in China, that in the maybe in to your questions. overall guess, light presumably How Yeah. still customer but weak strong, products. business fairly handsets? for competitive especially of is environment some you the, characterize environment light uplift is of environment still at weak like sounds Thanks it a guess demand I taking first, for of

Jeffrey S. Niew

Yeah.

just So on let first customer. me just the walk back largest

worthwhile few a it's taking think just here. moments I

content it the is us to as with the same. our is but think customer and I back now across – comes handsets one the largest for maybe differences positive not the in of our past, positive roughly

So the whether same. it generations content be ago, or a is our two generation ago roughly

in per shifts to some It when change cause our may mix, content mix. that if total in constraints there's issues So us minute relative last device. supply really shifts doesn't there's

So I'd that comment make first.

you customer, both these correct in are across some that's of amount do second, in some have our a nice of that driving And we growth have with not year-over-year, those largest segments business the large that other been that QX items. fair The of new past.

the question second competitive about was environment. asked you The

I no you other line one We've in to-date. a is that on the and than of see I lot think on it people longer tried this is to We is, harder and/or quarter-by-quarter about market, us a think this market basis. falling this bottom keep then there's participate still competitor number going to evolving. a this to and you anticipated. primary who I talked market, enter either they're and out defocused saying saying up is

is products our I if Bill. how end in our products what say ASP up? end showing see That's environment And Last so XX%. favorable. would the in our of were does higher that We've terms to work coming what right how X%. the I'd products to of moving that year to X% say out. fall that And And below more I guess, of guess was said – would in talked range, perspective, on on XXXX. range on would the its to competitive past, from about mature X% at now mature seems in it down it's in it And was I ASPs be XXXX, mature is, the how we we was, low

it about new compete more in it increasingly microphones, the suppliers. mics, DSP-based X interfaces, that in competitive the players whether to making add with coming advancements difficult for second-tier would I the are is thing digital, on be environment second The the tier stage it's

one the think do always are people very a think got competitor to is I I we I becoming serious cognizant. We So impact very that tier our have say less, be X take of less seriously, would business. but an what we having on

Bill Peterson

design to guess, flattish I Okay. color. earlier that wins question? think what you And we uplift in account, Why be That's with helpful taking or going some maybe least a that guess to margin? uplift mentioned margin shouldn't reconcile seems at how should if we trying see already China. office gross I back with to smart about into some taking gross mics do, profile modest we maybe And here,

Jeffrey S. Niew

what intelligent where have I you're one would understand I what strong core And we that I terms get on like competitor. margin's market, coming like, that say dollars, say that in still the in is probably is we going we from. meaningful Yeah. of traction until guess gross – to hover we of, in traction said is, the XX%. larger range audio, same

may engagements, with I intelligent XXXX engagements start out design I go getting into think as we and revenue wins, and the as based again, we're especially on of there is seeing expressed Hoover think I confident more forward, the audio, more it. we to improve out, there the some more also I out, is in X core business these to think opportunity opportunity margins. start officially improve fall guys over be the fall to XXXX as beyond of time tier and in

Bill Peterson

Okay.

capacitor business year? you And then And that for you Maybe about about Great. I in Okay. think year-on-year it health. last some trends. much should do this that about one moderate? too I model think growth mentioned we nice showing very potential your should is very business guess XXXX? that I me. hearing I think strong mean, don't business how or and business mean we how to expect

Jeffrey S. Niew

Yeah.

the can I cover okay? capacitor let that's business – So first, if me

Bill Peterson

Sure. Sure.

Jeffrey S. Niew

I would agree you. Yeah, with

we because a QX earlier was number XXXX. in from We business was remember deals lot We very Both this quarter, is of a larger really of broad industrial, – customers capacitor – in and very it. very And in did defense, we it markets extremely of this didn't acquisition doing if Our kind small probably medical, it's a because really strength still well. nice its another or you – it highlight did in just slightly small XXXX, accretive. were mentioned a immediately but one, of acquisition acquisition. business, John in small small across

But So is this. about we're core positive as well. growing real itself the

QX So look the at year-over-year. XX% I when in up we're numbers,

the as about that acquisitions. a Our coming And be should we XX% look up two-thirds range. expectations third through XX% there growth I to coming expectation would is the business of is roughly of from from the sit the it are in say our And and year-over-year core. about that is XXXX,

is of what Now opportunity, say maybe I'd so. there a is, stretch, the bit little a but that's

Bill Peterson

health? hearing And Okay.

Jeffrey S. Niew

Hearing health.

We're we're on win important that quarter-to-quarter is, have I'd seeing sales we stabilized what us. business. here's health are in that say from the our So definitely, three to perspective, key which for us platforms hearing is we that for stable is the on. in got XXXX; the think new one I business. got Number And focused things aid we the relatively hearing

in the XXXX. working that year will new late platforms diligently and into XXXX start we're on So in production

MEMS where technology in on market outside continue strong balanced And armature that hearing our hearing the speakers in penetration the last into piece that receivers, selling health, of the mic then health health into we're have capability and very, to market. a focus we our things like hearables. hearing competitive go work We which advantage very increasing on is

so seeing a be into year some that hearing we the XXXX, to resuming of in And go we I would hope XXXX growth would health say is and business. able I'd start stable, as

Bill Peterson

on color execution. the luck and for Thanks the Okay. good

John S. Anderson

Yes. Thank you.

Operator

of Susquehanna Group. Your next question comes from Rolland the with Christopher line International

open. is line Your

Christopher Rolland

me Yeah Thanks. it's for letting question. Thanks ask Susquehanna. the

So in customers you new of a mic your high-performance prepared about your platform. one to moving remarks, talked

versus just So then we what their is of for And something old that architecture? else solution or DSP there now? higher compare other some is they ASPs do SNR, kind there, want how or

Jeffrey S. Niew

power, to its in all in lower performance reliability. number at areas. moves a is another and So specific I'm going I it probably me robust customer, it's a smaller is terms of is talk guys size, believe, not not platform more really SNR. have it's to but technical It to I It's higher another of believe that in up digital ASPs would hold platform, platform. it to this. digital a it's in It's, my but DSP-based

So does. multiple it's things it got that

about the going ago, with What And you And we the that go in – is now XXXX, hopefully, three we can is is, always we're we feel got the XXXX, be a microphone. microphone. them used work microphone for In get so new to microphone of back what number couple we that to if years is, in had successful, fact going we're we excited got same of and to mics. a increase if work years about of remember, to you customer row. that good really the lamenting if goal on our another another kind were

John S. Anderson

at is higher ASP. it And a

Jeffrey S. Niew

am – sorry. I'd is a it's say ASP. higher It at a at higher I

Christopher Rolland

be great. define you if And you define terms and can think other then, audio, in I a way XXXX, I it aggressive Could build could you revenue? it. of of multi-core or to do you you can on? How Okay, about But what XXXX, to like, Are do want as your XX%? however particularly it, you this it talking, expectations percentage think X%, XX%? define we for any want DSP mean intelligent be guys think

Jeffrey S. Niew

I to say making not this for I long-term. say that's business give I'm would incremental February, that this business investment large prepared in would what revenue is of this right I in is for Well, but we're a XXXX number believe we making now. because amount to be a We're opportunity, that guess the not opportunity, an large there

design at example say mics. a past, of couple the is least two smart would the is I these we that analog seeing In piece that in have. phones starting use second we're The lot of the a impact is how ways, let's mic wins business, to our this, used

DSP-based other or the much mic, move once third to being also sole Now, have. we they're on digital the it's the DSP-based close forced easier starting digital source that a mic then, position to – to they're is which digital very mics, mic. the two share we to And on moving high they're mic, the have because And DSP-based mics. with

that. we're seeing So

things is thing this amount the the a of audio, more we've There's product of a potential exciting artificial has to one area run those but processor, our in significant work functions that to the higher things of about has run of running being we're second ASP, device, audio one this And is more introduced are much the about learning that much The intelligence. this quad-core is the of complicated type this tuned as the is of algorithms. inside specifically around done been on a a areas lot and a we're device. excited

And excited quite actually a are making we small these return. products. we're about investment So this not for

Christopher Rolland

And housekeeping is the a How then the I much one for powered headset revenue that question, side. guess, then great. real And quick Okay, XXXX? question, capacitor real the would drive on then and acquisition.

and I guys you. talk designs for Can have headsets? in power seeing starting terms Apple's to you Type-C. content You of the extra are that of USB Are move guess of in XXXX? kind for those inflect talked about moved kind that eliminate way. you you to driving what you about jack seeing powered the to designs

Jeffrey S. Niew

the take Let headset me question first.

that say say we've so come to Here's headsets. is, market somewhat disappointed I'd with the far say, what of I I'd wired is would been, number products by have powered

seen not have many We we would as like. as

announce referred it allow is I'd order commands. is have really simple the order that in Bluetooth reverse, work make multiple looking power do we're location ready and that what And secondly to to to headsets say not solutions of of kind that's smart is taking about interest that seem keyword but a in we've of adding we're type off to processing. today, what processing function. mics that to well, And you a lot the say voice of really to Bluetooth but headsets, there's lot lot of this smart a headsets, wireless referred market, in seeing Apple wireless the you the I'd microphones in DSP-based headset lot headsets Bluetooth a kind of On thinking to with version. more interest features for detect, microphones, in do And do to what to more a to And people to be and they're input. lot audio more as

that back the for the headset a really embracing idea half we're are market. in And Bluetooth few manufacturers is what mics who quite so the smart that DSP-based early the hopeful toward XXXX of there's

that the look of As far numbers you we're based come. can $XX-million. that growth caps as revenue, kind on mean, talking at could I the what its about sub were

so And sub-$XX it's something million.

John S. Anderson

XXXX be Yeah, $XX a earnings. our than is I the expect little we And in positive think accretive it million. more to to

Christopher Rolland

you, guys. Awesome. Thank

Operator

Craig-Hallum. of from line Stoss question the with comes Your Anthony next

open. is line Your

Anthony Joseph Stoss

questions. couple a Jeff, Hey,

to related you DSP. off, First

customers then You what's you interested really you've and folks so gaining And are two most a from those for showing John. I lot And time. market? it XXXX follow-ups off talked What and on secondly, ear sampling traction. then been a the in about preventing I know event, with being for especially of some potential signing had far it in? them more

Jeffrey S. Niew

the interest mic today. that of again, multi-core DSP. a for initial IoT the say little the a kind the say, would market, ear as smart different ear what mobile with is say, sure, some is more would the the in mic I'd I multi-core there And Yeah. in they're interest DSP-based in and think say is starting interest on is mics, I there smart is, of the on. of well DSP the In from market, market-to-market. question both side is would the lot just DSP the on smart that. I I I In assess interest mics as I in referred it's the to to would market market, smart thought say the last a what there's

hardware. these in to We that devices, ship. It's is, platforms. space or with amount it do within issue I The algorithm the and we down done. ready as think software one is the what of integration not the as start but customers sample what thing hardware's many what their fair is thinking want, requires can think when I could us the about slows number they the a want existing they

getting we're Now there.

to We the expect in DSP, going start QX. that on start stuff multi-core shipping is

We shipping well. QX expect smart microphone, DSP-based as microphones in start

thinking quality in markets and features I is their very they It's systems. now keep they of the of one with a forward good. number how matter and back in this into what of very, moment that integrate moving X tier that it so we have each at and And engagements them about these coming to the how want guys

Anthony Joseph Stoss

tell follow-up. helpful as your And be down much expected a be might in is to Okay. being how It QX? John, you And if then can OpEx China OpEx us continuing sale the sequentially is bit largely tweak of down your a that thoughts are year? and here QX, of in what division, on a just to throughout the down timing kind also

John S. Anderson

typically in the amongst million. you'll do $X there's you really in guidance. I with a comp but lower for in From a by respect sequentially things like, million we no, but pretty SG&A guide our my the $X midpoint again, QX be again kind of QX million for the of QX of QX incentive Again, quarter-over-quarter. range movement was quarters, to have to There's to our think in quarter. remainder with reflected China some good year. higher think expect the rate the like Yeah which And that's taxes I down of it $XX that's run have earnings we payroll match standpoint,

over again, SG&A expect to that I the So be stable would course pretty XXXX. of

Anthony Joseph Stoss

Thanks. Okay.

Operator

Your next question comes from Jaffray. the line of Piper with Harsh Kumar

Your open. line is

Harsh V. Kumar

maybe up the at willing the us commentary if to and the Jeff. you'll maybe least an like shot of rest some apples-to-apples looks with out think at I I'm if any expect growing be all color be ramp would largest year-over-year IoT you see you half, And back curious customer, a at on to that. this I June ask Yeah. on basis? you take to helpful. would model volatility trying full year provide would how like and very things year to wanted And the your could it. I'm Hey, you given with even provide China, be

Jeffrey S. Niew

feeling I this very to optimistic that before, me and all There with say would it this are I'm headset the It's to make happen on hard hate people I but some I what's heard lot can before. me. smart well-positioned me, of come of not And I cautiously with going we're to but this digital you intelligent right. to kind phones burn been but standard than who Harsh, with said be going say DSP-based new launching. I in just of back China mean mic, are for mics. to tell guess, what market very I'm necessarily market. like well-positioned more I where There with this mic, analog call. is referred this I've a them, haven't We're whether beyond. to predict I story are goes we is not the know be kind I it this.

strong what we're largest customer, conservative and to continuing trying with in IoT. outlook our starting ear very so in our knowing be do is year And And the we're that we're here.

aid capacitor We business stable and have our pretty our good. looks business hearing being

So this say, And the this well-positioned. with stage difficult is for happen the but it's are one area we where early at year, I'm to and there what's in to me very cautious. going sit more China

Harsh V. Kumar

Jeff. fair. That's Thanks,

Operator

I'll further call over turn no to have back We this the time. presenters. at the questions

Michael J. Knapp

much very today. for us thanks Well, Great. joining

you interest we look forward earnings on our Knowles next always, goodbye. again speaking and As to your appreciate and with call. in Thanks

Operator

and This now you concludes conference, disconnect. today's may

Knowles (KN) 7 Feb 182017 Q4 Earnings call transcript