Michael J. Knapp - Vice President-Investor Relations Jeffrey S. Niew - President & Chief Executive Officer John S. Anderson - Chief Financial Officer & Senior Vice President.

Jaeson A. M. Schmidt - Lake Street Capital Markets LLC Robert Labick - CJS Securities, Inc. Harsh V. Kumar - Stephens, Inc. Anthony Joseph Stoss - Craig-Hallum Capital Group LLC Suji DeSilva - Topeka Capital Markets Tristan Gerra - Robert W. Baird & Co., Inc. (Broker) Robert Sassoon - R.F. Lafferty & Co., Inc. (Research).

Good afternoon and welcome to the Knowles Corporation First Quarter 2016 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..

Thanks, Laurel, and welcome to our First Quarter 2016 Earnings Call. I'm Mike Knapp, Vice President of Investor Relations. And presenting with me on the call today are Jeff Niew, our President and Chief Executive Officer; and John Anderson, our Senior Vice President and Chief Financial Officer.

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

Forward-looking statements in this call will include comments about demand for company products, anticipated trends and company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations.

The company urges investors to review the risks and uncertainties in the company's SEC filings including but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 2015, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release.

All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements except as required by law.

In addition, pursuant to Reg G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com, including reconciliation to the most directly comparable GAAP measures.

All financial references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Also we've made selected financial information available in webcast slides which can be found in the Investor Relations section of our website.

With that, let me turn the call over to Jeff who will provide some details on our first quarter results.

Jeff?.

hearing aids, handsets, earphones, hearables, and Internet of Things. We are beginning to see early adoption of these solutions and recently secured our first high-end earphone design win that uses our Versant solution, leveraging hardware and software to improve voice capture.

Before our solution-based approach, this opportunity may have resulted in the sale of just one microphone. Now with our complete audio capabilities, our solution includes multiple microphones, two balanced armature speakers and software.

This level of content would not have been available to us prior to our investment in audio signal processing and algorithms. We also expect to start shipping Voice iQ, our Always on, Always Listening mic to Chinese handset OEMs during the quarter. I'm very excited about these opportunities that we are pursuing in different markets.

Additionally, we continue to make significant progress in achieving our cost take-out targets. I'm pleased to report that we successfully hit our goal of $25 million annualized savings by the end of Q1. Voice as a user interface continues to gain traction in the market.

Recently, at a keynote address, Microsoft CEO emphasized the company's efforts to foster conversation as a platform. The idea that users will talk with devices to launch programs, search the Web and load data.

He highlighted the notion that we need to infuse intelligence about the user and their context into the devices, which, in turn, will make voice commands more precise. Whether voice as a user interface or conversation as a platform, both are big ideas that start with the microphone. But we remain the market leader.

High quality sound capture at the mic level is critical and enhanced by multi-mic adoption. In addition, our newly acquired expertise in software and digital signal processing advances our capabilities to add value to our customers' products and increase our content per device.

Overall, we expect continued design win traction around intelligent audio and anticipate revenue to increase in Q3 2016. Before moving to specialty components, let me provide you with a brief update on our proposed sale of our MCE speaker and receiver business.

While we don't have anything specific to announce today, we are currently in discussions with multiple parties interested in this product line, and we remain committed to exiting the speaker/receiver business in the current quarter.

In the specialty components segment, Q1 sales were down 7% quarter-over-quarter, in line with expectations and represented about 55% of total company revenue. Hearing health was down seasonally, as expected, while precision device sales were stable.

We recently participated in the American Academy of Audiology trade show where we met with every one of our major customers in hearing health. The conversations may be optimistic for the future of the industry and confident in our position within the market.

In addition to discussing important trends these customers are focused on, like greater connectivity, improved aesthetics, superior sound quality, and advanced software features, we also announced a major milestone. We have now shipped over 10 million MEMS microphones into the hearing aid marketplace.

While relatively small compared to the scale of our consumer business, which has just announced over 8 billion mics shipped, it represents mainstream adoption of a Knowles-specific product in this important market and validates our leadership position in the industry and in MEMS microphones.

More importantly, it reflects the collaboration across our business segments, to deliver solutions to our existing markets. I'm also excited to leverage our expertise in hearing health, MEMS microphones and signal processing, to address other markets such as premium headsets and hearables.

With that, I'll turn it over to John to expand on our financial results and provide our guidance for the second quarter.

John?.

Thanks, Jeff. As Jeff mentioned earlier, we reported first quarter revenues of $185 million, near the high end of our projected range. Mobile consumer electronic revenues of $83 million were down 27% sequentially, better than expected, primarily due to higher-than-anticipated microphone shipments to both North American and Korean handset customers.

Revenues from Chinese OEMs and intelligent audio were in line with our expectations for the quarter. Specialty component revenues of $102 million were down 7% sequentially, due to normal seasonal trends and in line with our expectations.

First quarter gross margins were 37.7%, near the high end of our guidance due to better capacity utilization and favorable product mix, specifically higher microphone shipments. Operating expenses in the first quarter were $59 million, $3 million lower than expected.

R&D expense was $25 million, at the low end of our prior projections, as we reduced spending on noncore R&D projects. SG&A of $34 million was below the low end of the guidance range, as we continue to tightly control discretionary costs.

Lastly, we achieved our goal of $25 million in annual cost savings associated with the integration of Audience by the end of Q1. Adjusted EBIT margin was 5.8% in the quarter, and non-GAAP diluted EPS was $0.08, with both metrics above the high end of our guidance range.

Further information, including a detailed reconciliation of GAAP to non-GAAP results is provided in the financial tables of today's press release and can also be found on our website at knowles.com. Now I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $44 million at March 31.

For the quarter, cash generated from operations was $20 million, near the midpoint of our guidance. Continuing operations cash flow was slightly below expectations due to timing of shipments within the quarter and related cash collections. This was offset by better than expected cash flow in our discontinued operations.

Operating cash flow includes restructuring cost of $6 million and capital spending in the quarter was $10 million. Our debt balance was $401 million at the end of the quarter, down $28 million from the prior quarter as we paid down borrowings under our line of credit. Interest expense was approximately $4 million in the quarter.

Now I'll turn to our second quarter guidance. We expect revenue for the second quarter to be between $180 million and $200 million. MCE revenue is expected to be flat at the midpoint as lower volumes in our North American and Korean handset customers are offset by significant sequential growth from Chinese OEMs.

Specialty component revenue is projected to grow 5% on a sequential basis, driven by improved demand in both hearing health and precision device end markets.

We project non-GAAP gross margin to be approximately 38% to 40%, up 130 basis points sequentially at the midpoint, due primarily to improved capacity utilization, partially offset by unfavorable product mix as we ship more microphones into Chinese mid- and low-end handsets.

R&D spending in the quarter is expected to be between $25 million and $27 million, up slightly from Q1 levels. Selling and administrative expense is expected to be approximately $33 million to $35 million, flat with Q1 levels.

We remain on track to exit 2016 at a level of $140 million in annualized selling and administrative expenses despite higher incentive comp costs in the second half of the year. We're projecting adjusted EBIT margin for the quarter to be in the range of 6% to 9%.

We expect non-GAAP diluted EPS for the quarter to be within the range of $0.08 to $0.14 per share. This assumes weighted average shares outstanding during the quarter of 91 million on a fully diluted basis. We expect our effective Q2 tax rate to be approximately 5%, please refer to our press release for a GAAP to non-GAAP reconciliation.

For the second quarter, we expect cash flow used in operations to be approximately $10 million to $20 million. This includes cash utilized in discontinued operations and funding of inventory builds associated with our customers' upcoming product launches in the second half of the year.

CapEx in the second quarter is expected to be approximately $16 million. Lastly, during our fourth quarter call, we provided 2016 full year expectations related to continuing operations for revenue, gross margin and operating expense. Today, we are reconfirming those expectations.

I'll now turn the call back over to Jeff for closing remarks and then we'll move to Q&A portion of the call.

Jeff?.

Thanks, John. We were pleased with our better-than-expected results in a seasonally weak Q1. The first half of 2016 revenue is tracking to our prior projections with margins and EPS tracking slightly ahead.

We expect to see an acceleration of revenue and earnings in the second half of the year, driven by our new product launches, shipment of our intelligent audio solutions, and normal seasonal patterns.

Our newly acquired capabilities in software and digital signal processing are creating new opportunities for all our acoustic related businesses to enhance our product offerings for new and existing markets. Intelligent audio has become more than a business unit and has started to demonstrate its ability to solve critical problems for our customers.

I expect that these capabilities will continue to have a significant impact on our product road map, and I'm excited to see the early stages of adoption of these solutions. Operator, we can now take questions..

Thank you. Your first question comes from the line of Jaeson Schmidt with Lake Street Capital. Your line is open..

Hey, guys. Thanks for your taking my questions.

Wondering if you could talk a little bit about what you're seeing in China and if you're thinking you're gaining share there as well or if the strong snap-back in Q2 is more a function of market growth?.

The market growth that we see probably is – we're getting from the data that we see in the marketplace like everyone else does, which is we expect the Chinese OEMs, in terms of handset builds, to be up year-over-year but not as significantly as we see ourselves being up.

We do see, in China, that in the microphone business, we are, we believe, taking share and we expect quarter-over-quarter, sequentially, that we'll be up 30% in Q2. The second thing I will just remind I think we talked about this before but from 2013 to 2015, we more than doubled our business in China.

So it's been a real success story for us in China. And we are very optimistic – I think one last thing I would add is that we're optimistic about the adoption of intelligent audio in China. They seem to be some of the early adopters who are looking at it and saying there's an opportunity to change a paradigm and how they view the marketplace.

So we're pretty happy about where we're heading in China..

Okay. That's helpful.

And wondering if you could break out the Audience contribution in Q1?.

Well, let me just take this – well, John, do you want to take this or – when you look at Q1, we're not going to break it out specifically at this moment.

But what I would say is this, is as we go through the year, the Audience investment or the investment we're making in intelligent audio is embedded in what we've given in our full year revenue, gross margin, and operating expenses. And let me just kind of lay this out for you, what this means for us.

First of all, number one is we've achieved the $25 million in cost savings by the end of Q1. That's number one. Number two is, we talked a little bit about it, but we have reduced our investment in noncore R&D over the last quarter or so.

Lastly, if you start talking about incremental revenue, as we look towards the back half of the year, right now, what's embedded in our forecast as we look out is $10 million to $20 million of incremental intelligent audio revenue in the back half of the year. Now let me just – just one more moment here to talk a little more about this.

We really view this as transformative, what Audience or with the capability that Audience brought to Knowles is doing. And I want to just bring it back to Versant. We talked about this first customer that we're working with where we would've potentially one microphone in a solution like this, a premium headset.

Now we're talking about multiple microphones. We're talking about two balanced armature speakers. We're talking about software with content in excess of $5 per headset.

So I guess what we keep coming back to, is this is a transformative acquisition to allow us to start thinking about not only growing revenue and gross margins, but what we're starting to see is within our core, there's opportunities to protect ASPs, grow share, and then also expand into other markets that we have not been in, in the past.

So we're really excited about where the capability is taking us..

Jaeson, this is John. Just to address specifically the question you had with respect to the 30% sequential growth of our Chinese OEMs. That's really minimal impact from Audience. That's primarily our MEMS microphone business..

Okay, thanks. And then last one from me before I jump back into queue.

Just wondering if you could talk about some of the reasons why you're gaining share in the low- and mid-end at your Korean customer?.

Well, I think there's a couple things. Number one is, if you look at the shift over time, over the last six months, there's been more effort to sell mid- and low-end handsets by the Korean OEM, and that's kind of what we see.

And to that extent, we are a primary supplier on the high end, and there's no reason why we can't be a primary supplier on the mid and low range. And so I wouldn't say it's more of an area of focus of ours but where we see the market going is we have to have offerings for this mid and low end range.

And we've got a very, very strong offering in the space, and the Korean guys will continue to use us..

All right. Thanks a lot, guys..

Thank you..

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

Good afternoon. Congratulations on a nice quarter and outlook..

Thanks, Bob..

I just wanted to follow up on the Audience question.

Can you just talk a little bit about how Audience is tracking versus your initial expectations? And then obviously as you embed it within your business it's hard to measure, but how do you measure it versus your results initial expectations and how's it doing and how will you continue to track that going forward?.

I'll go back again, I think what we look at is when we talked in Q4 about what our expectations for the year, we embedded a fair amount of what our expectations were from Audience for the full year. And cost take-out I would say we are on target to ahead with some of the noncore R&D that we've taken out.

On the revenue side, what I would say is what we're really pleased about here is that when we came out we were talking about, primarily, smart mics, that was the reason that we saw it as a great opportunity and it still is a great opportunity.

What we're starting to see is that, let's use the example, again back to this Versant, and I hate to keep going back to this, but when we can go from selling maybe $0.30, $0.40 on a premium headset, to selling north of $5 on a headset, there's an above growth corporate average gross margins, we are very excited about the opportunity.

I wish I could describe more because we don't want to go too far into this yet before we're ready to announce some of the new products that we're working on for later this year and into 2017 but it's fundamentally transformative for us in thinking about selling a solution to a problem as opposed to just selling a device..

Okay, great. No, very helpful. And then just moving beyond the intelligent audio and the Audience applications. You've talked about in the past your ultrasonics and that's been a growth initiative for you as well.

Can you just update us on where that stands and what the potential applications are and how that looks if it's 2016, 2017, or beyond that you might think there would be some progress there?.

Yeah. I'd still say it's very early days here on our products in this category, but let me describe how we were before and where we are today. We've had the capability in terms of microphones to deliver an ultrasonic mic for, I don't know, three years we've had an ultrasonic mic in our catalogue.

We'd walk into our customers and we'd say here's an ultrasonic mic, what do you want to do with that? And they kind of look at us and say, I don't know what we want to do with it.

Now we walk in with our capabilities in terms of algorithms and signal processing and say, here is our ultrasonic mic with software and signal processing to solve a real world problem.

Now I'm not prepared to expand on what kind of markets we're going to go into this but what I would say is it's outside of what you're normally thinking in terms of the traditional spaces we've been in.

And again it's a 2017 play in that there's no guarantees that this all works out, but I would say this is the example of how this is transforming Knowles from being a device provider to a solutions provider..

Okay, great. Thanks very much..

Thanks, Bob..

Your next question comes from the line of Harsh Kumar with Stephens. Your line is open..

Hello.

Can you hear me?.

Yeah, Harsh.

How're you doing?.

Yeah. Doing well. Thanks for asking. Congratulations, guys. Good numbers. I had a couple of questions, let me start off with the March quarter, so you had a very helpful breakdown of revenues but I noticed that March 2016, was barely up over March 2015.

My recollection, I may be wrong, is that you didn't have so much help from your largest customer last year at this quarter that just ended, should we not have gotten a bigger number, bigger help from that customer? I'm just curious what were the other moving parts then?.

Korean and North American customer will be down in Q2. And if you remember going back to Q2 of 2015, we did get back share in Q2 of 2015 at that customer.

So, I would look at it a little differently from the perspective that what we're seeing is again our North American and Korean customer down sequentially but China coming up to really pick up the slack from what's coming out of those two other customers..

That's fair. And then let me jump on over to the June quarter. I guess you're seeing your largest customer down, Korean customer down in 2Q like you said, China, basically massively. Are the two large – the Korean and the large customer – is that just seasonal or timing of product shipment? I'm trying to wrap my head around this.

And then China, just a significant uptick.

Is that all share gain? Or is there some new phones that are being launched that we haven't heard about?.

Well, let me cover China first. And so, China's a combination of things. I would say it's share gain. I would say it's multi-mic adoption driving that. As well, there are some new phones being introduced. So there is, I would say, some seasonality in that, in phones that are being introduced where we have very strong position.

So I'd say those are the three things. So there is some seasonality with new phones introduced. As far as, again, the North American and Korean guys, on the Korean front, Q1 was pretty good for us on the Korean front.

I think the expectations were ahead of what we would've said when we gave our guidance for Q1 but now we're kind of in the, I would say the seasonal lull with the Korean guys, before they introduce the next phone in the August/September timeframe, the larger phones.

As far as our North American guy, I mean, I think it's normal seasonally to be down in Q2, and I think obviously we have to wait to hear what was sold. But remember, we sell early on in the channel, right? We've talked about before mics – we have to deliver the mics fairly far ahead of when the final phone bills are done.

That's for all of our customers, not just the North American OEM. And so I think what you start to see is more of this transition to next generation products. And again, we feel pretty good of our position or where we feel like we're positioned on next generation products..

Got it. And I'll ask one more then get back in line. I missed a part of the answer that you gave earlier to somebody. I think it was in relative context to Audience, $10 million to $20 million revenues.

Was that above what you assumed or is that what you're assuming, or what did I miss there?.

What I said was we could see $10 million to $20 million in the back half of 2016, of incremental revenue, driven by the capability of intelligent audio..

Thank you, guys, and I'll get back in line. Thank you..

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

Hi, guys. Nice gross margins and OpEx controls. Congrats on that. Can you refresh us or just let us know what percentage of revenues China OEMs were in the March quarter? Also if you wouldn't mind sharing kind of what percent of revenues your biggest customer was in Q1.

And then lastly, any view on or expectations – might be a little bit early – but kind of your share expectations amongst your biggest customers for the second half of 2016? Thanks..

So let me let me take the share question first, if that's okay, Tony..

Sure..

I would say what our expectations are right now is that we expect some pretty nice share gains in Chinese OEMs throughout the year. And if you look at our expectations in terms of percent on the Chinese OEMs, we're probably seeing Chinese OEMs coming in, in the 15% to 20% of MCE revenue, is from the Chinese OEMs. That would be in Q1.

So that's accelerating in the Q2. Now back to your question relative to now share. We see pretty stable share as North American OEM and at the Korean OEM, pretty stable share in the first, second quarter, and quite frankly, through the year we see pretty stable share. So I think that answers the share question.

And refresh my – what was the other question again?.

Just presented total revenues, your biggest customer in the quarter..

Oh, yeah, yeah, yeah. Okay. What I would say is we talked about before when we had the speaker/receiver business as part of the continuing operations, the North American OEM was a lot higher percentage of our overall revenue.

So I would sit there and I'd say is as I look at the total company in the first half of the year, we expect probably our largest customer to be....

In low teens..

...low teens..

Low teens..

And obviously, that would be higher in the back half of the year when they're ramping production of new products, but obviously, significantly less reliant on one customer than we had prior to announcing the proposed sale of the speaker/receiver business..

Tony, just to add a little granularly to that. Think of it as low teens in Q1 and actually a little under 10% in Q2..

Very helpful..

We have a large (29:59) North American OEM..

Perfect. Nice job, guys. Thanks..

Your next question comes from the line of Suji DeSilva with Topeka. Please go ahead..

Hi, guys. Nice job on the quarter here. I just want to dig into distinction of high-end mics versus low-end microphones. I'm presuming the non-China customers are mostly high-end microphones. I'm curious what percent of China you consider high-end microphones versus kind of low-end as a ballpark..

I don't know if I have those numbers in front of me. I mean we might have to get back to you on this, but generally speaking, what I would say is the flagship phones of most of our customers use higher end mics. The question is, is what percentage of their mix is actually flagship phone.

And so we talked about this in the past, the North American OEM, there's resets and new products every single year that we work on. In terms of Korea, there has been a little bit more of a challenge. We said that. They've been re-using similar mic on their flagship for awhile.

And then the Chinese OEMs, what I would say is that there has been, I would say, more push on the – I'd say the mid tier and low end phones in the end market which they tend to use, what I would say is products that are more mature. Now they still use higher end mics on the flagship. And so it's a question of how much of the flagship gets sold.

So as we kind of talk about in Q2, we're happy to see overall for the company, the gross margins are going to be up, I think, 130 basis points at the midpoint, held back a little bit by the fact that since China is increasing quite a bit, it brings down the margins slightly. I wouldn't say a huge amount, but it brings down the margins a little bit..

Yeah. That was kind of what I was trying to get at with my question, so that helps a lot. And then the other question is on intelligent audio.

As it initially starts to ramp up here, would you expect a few customers to be the bulk of the revenues, or are you going to see good, broad customer penetration of intelligent audio right out of the gate?.

Well, depends on the product. I would sit there and say, as we look at our – the Versant product, which targets the premium headset market, I think it's going to be limited to a relatively small number of customers at the beginning.

But as you look at smart mics, I think as we head toward the back half of the year, you'll start to see a more broad based adoption of smart mics albeit we don't expect any massive designs that are going to drive like huge volumes in the back half of the year but there's definitely an acceptance coming across in quite frankly, the Chinese OEMs..

Great. That's the color I was looking for. Thanks, guys..

Your next question comes from the line of Tristan Gerra with Baird. Please go ahead..

Good afternoon. Hi. As a follow-up to the prior question on the Q&A about the year-over-year Web (32:58) comps in Q1, despite the market share gains that you had at your North America customer this year.

How should we look at the core business year-over-year in the second half? So excluding the $10 million to $20 million incremental potential intelligent audio revenue, how should we look at the year-over-year comp and anything different in terms of ASPs or anything that will lead to an increase year-over-year in that business?.

Well, I think what's going to drive year-over-year increase, as we look toward the back half of the year, is going to be the Chinese OEMs. I think our share from our perspective, looks pretty stable across the majority of the other markets.

I think there are a couple other headwinds that we are dealing with, like the laptop and tablet market, probably not as robust as we would like. You've got multi-mic adoption in the Chinese OEMs, coupled with our share gains.

And then I think, again, pretty stable, I would say, at the other two large customers that make up a significant amount of our sales. So I mean....

Tristan, as I mentioned kind of in the guide, if you look sequentially, the MCE business is basically at the midpoint going to be flat sequentially. And the growth sequentially is really coming from our specialty component business, and there it's pretty broad based, both our hearing health business and our precision device end markets..

Okay. That's useful. And then as a follow-up. I know you've talked a little bit in the past about the potential ASPs for intelligent audio.

Any additional color that you could provide in terms of what we could see in terms of ASPs for the second half of this year in intelligent audio and how does that break down with mics versus the other products that you're selling as part of this..

Well, let me just take first the mics because I think it's a little bit simpler we've talked about this. The expectations are that we would say a relatively significant increase in ASPs over the average. And if you compare it to, example, an analog microphone sold in a mid-range China phone, it's pretty significant, the increase possibility over that.

As we get to the digital mics and high ends mics, obviously, it's going to be a little bit less in terms of the premium we get. But I think what I would say as far as just to close on the mic is that we're very comfortable that there's value here that people are willing to pay for incrementally over the microphone they were going to buy anyway.

And it can be anywhere from, at the low end, probably somewhere in the neighborhood of 15% to 20% increase up to maybe even a 30% to 40% increase over a traditional analog microphone. Now just take a step back, when we talk about products like Versant, which are new markets to us, there's really no ASP to compare to.

It's more about of the content per device. And this is the easiest one for me to make sure you guys all understand is when you think about in a premium headset today, as I said, we would sell one microphone, maybe it'd be like $0.30, $0.40, maybe $0.45 for one microphone. And now we can do content in excess of $5.00 per premium headset.

And so the opportunity really is not necessarily about ASPs but the high level of content that we can get..

Great. Thank you very much..

Your next question comes from the line of Robert Sassoon with R.F. Lafferty. Your line is open..

Hi. Thank you for taking my question. Last time around you provided a page on your presentation pack for the full year 2016 outlook and your expectation was 40%, 60% split between first half and second half in terms of overall revenue from continuing operations.

Is that still the case?.

Yeah. Bob, let me take this one.

I think what we did in connection with the Q4 earnings call is we gave some expectations regarding certain financial metrics, revenues, gross profit, expenses, and what I would say is we performed better than expected in Q1, revenues were slightly ahead of the midpoint, our EPS came in almost a nickel above the midpoint.

I would say Q2, we raised the guide a penny or two from what the consensus is. I don't see any change for the back half of the year at this point. So you can from that kind of imply the full year....

Are you still going by the split of 40%, 60%, is that what you're saying or is it....

We haven't had the split here, but what we're still expecting is modest growth for the full year. We're just – we're reconfirming what we said in (38:16) the last call..

Yeah. Because if I look out the – assume that you achieved the midpoint of your second quarter revenue guidance, then the 40%-60% split presumes, assumes – I've done a quick back of the envelope calculation, it's 10% growth which doesn't sound too modest.

So it doesn't suggest that it will be consistent with your overall modest growth for the full year and you're talking about....

I'm not sure where you get your math there on the 10% growth again, we'll reiterate....

For the full year..

A full year..

I assumed that, because the information you provided last time around was that speakers and receivers business contribute about $235 million in 2015. If you strip that out, the continuing operations seem to be the $850 million from the....

Just to reiterate, think of it this way. We were $5 million above the midpoint in Q1. We're actually a couple million below the guide in Q2. So there's a net, call it, $2 million or $3 million in the first half. And we're reiterating the back half of the year. So again, modest growth from a full year standpoint..

Okay. And I know you probably won't be able to provide a lot of detail, but on the sale process of the speakers and receivers business, you're still confident of concluding the sale by, or at least announcing a sale by the end of this quarter.

So does that mean – could you add a little bit more color to what you've already given in terms of are you in advanced discussion with any of the multiple parties that you've indicated?.

Yeah. So just to put a little bit more color on it. We have multiple parties interested, and we've received more than one letter of intent. So we are in negotiation with and diligence, the discussions with a number of parties. And again, we remain committed, as we were at the beginning of the last call, to exit the business by the end of Q2..

Right.

And there hasn't been any further write-down in the first quarter on that particular business?.

No. No write-downs there, but what I will say is – I think the question on the last call came up – what's the book value of the speaker/receiver business? And if you look at our 2015 10-K, the book value there was just under $400 million.

It's important to note that more than $325 million of that book value relates to goodwill, and we analyze and record goodwill at the mobile consumer segment level. So what I'll call it, is the tangible book value of that business is significantly less than that.

You'd have to take this at 12/31/15 the $390 million, back out to $330 million of goodwill, so it was roughly $60 million intangible book value at 12/31/15.

And that's how you get – if you look at what's in our supplement here – the book value is right around $20 million, the difference being the losses in the quarter and some reductions in working capital. So hopefully I've reconciled....

Okay. Right. Great. And just one more question. You're obviously projecting in your budget a big increase in revenue from the Chinese OEMs.

How much of that is due to the Moto 2016, which I guess – I don't know whether it's going to be launched in the current quarter or next quarter – but I believe that they're going to contain five microphones?.

We really can't comment on any specific platform..

All right. Okay. All right. Okay. Thanks so much..

Thanks, Robert..

Your next question comes from the line of Harsh Kumar with Stephens. Please go ahead..

Hey, guys. Thanks for a follow-up opportunity. Jeff, I wanted to ask you about that $10 million to $20 million extra revenue or the incremental revenues from intelligent audio.

Is this being driven by wins you have already, or is this optimism? Or have you got some new ones that you can talk about?.

I would sit there and say is, the majority of what we're projecting is we feel pretty comfortable that we've got design wins that obviously, some of the products, it depends on how their products sell in the end market – some of those, right? And that's why we're kind of hedging between the $10 million and $20 million.

But the range is $10 million to $20 million in the back half of the year, incremental. And so, I would sit there and say, if their products do better, maybe it's closer to $20 million. And maybe if we get a few more design wins that aren't secure, closer to the $20 million, but we feel pretty comfortable about the $10 million.

That's why we gave the range..

Got it. And if I can just ask you color-wise.

What is the interest level from the Tier 1, the big headset makers, what do they think of this new technology that you guys are showing them?.

Well, I'm not going to comment about a specific customer, but I would just generally say for those of you on the call who have seen the demonstration, the reaction generally speaking is they don't believe it. And so we have to do it live to show how it works.

And again, what's very interesting about this, Harsh, is that when we see the only way we could've presented a solution like this was by bringing our microphone, MEMS microphone capability, our balanced armature speaker from the hearing aid side capability, coupled with the algorithm in single processing capability from – that we acquired with Audience, to come up with a solution.

And we're hopeful that we'll have other ones to talk about, other markets, other products, in the quarters to come, but we're really excited about this opportunity..

Got it. Thanks, Jeff, for that color. If I could ask one more. You talked about the $25 million cost reduction/reorganization.

How much more is left? Are we getting to the point where you're fleshing out all the inefficiencies? You see this as a continuing theme, $20 million, $25 million a year next couple of years?.

Yeah, Harsh, I think I would say we're getting near the tail end of it. We aren't signing up for any more with respect to the Audience integration.

We'll always look at opportunities whether it be footprint consolidation or other opportunities for cost takeout but right now, I think we're kind of near the tail end of the cost takeout and the focus is really on the top line..

I think, Harsh, as John said, whether it be from a manufacturing footprint standpoint or the SG&A standpoint, we're constantly looking at this, but I think we've accomplished what we want to accomplish relative to the Audience integration, on the cost side..

Sure. And last one for me. Interest expense, how should we think about it? You paid off a little bit of the debt? I think that's the one line item that wasn't addressed in the guide. Do you have any....

Yeah, Harsh, think of it roughly $4 million a quarter is kind of what we're trending at. We might have been a touch under that, I think $3.8 million in Q1 but given our debt is floating for the most part, with exception of $100 million that's fixed, I would say it's safe to assume $4 million a quarter..

Thanks, guys..

Thanks, Harsh..

I'm showing no further questions at this time. I'll now turn the call back to the presenters..

Great. Well thanks very much for joining us today. As always, we appreciate your interest in Knowles and look forward to speaking with you on our next earnings call. Thanks and good-bye..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect..