Michael J. Knapp - Knowles Corp. Jeffrey S. Niew - Knowles Corp. John S. Anderson - Knowles Corp..

Harsh V. Kumar - Stephens, Inc. Suji De Silva - ROTH Capital Partners, LLC Bill C. Peterson - JPMorgan Securities LLC Bob J. Labick - CJS Securities, Inc. Jaeson A. M. Schmidt - Lake Street Capital Markets LLC Anthony Joseph Stoss - Craig-Hallum Capital Group LLC Tristan Gerra - Robert W. Baird & Co., Inc. (Broker).

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Knowles Corporation Third Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will host a question-and-answer session and our instructions will follow at that time.

As a reminder to our audience, this conference is being recorded for replay purposes. With that said, here with opening remarks is Knowles' Vice President of Investor Relations, Mike Knapp. Please go ahead..

Thanks, Brent, and welcome to our third quarter 2016 earnings call. I'm Mike Knapp 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 in company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from our 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 a 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 on the Investor Relations section of our website.

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

Jeff?.

Thanks, Mike, and thanks to all of you for joining us today. For Q3, we reported revenue of $243 million, gross margins of 39.4%, and EPS of $0.37. Revenue and EPS were above the high end of our guidance and we delivered gross margins that were above the midpoint of our projected range.

Revenue in our mobile consumer segment came in stronger than expected, up over 70% sequentially; better than expected demand from a North American OEM; and higher microphone shipments to Chinese handset customers fueled this strong sequential growth.

We believe that the upside in demand from our largest customer was primarily the result of orders being accelerated ahead of a Chinese holiday in the first week of October.

Revenue from Chinese OEMs doubled in Q3 from the year ago period on share gains, as these customers continue to introduce new handsets that use higher performance mics and more mics per device. Overall revenue from MCE comprised 58% of total sales in the third quarter.

In the specialty components segment Q3 sales were down 5% quarter-over-quarter, slightly below expectation due to delays with a customer's new product launch, and weaker overall demand from the capacitor market. SC represented about 42% of total company revenue.

As we look to Q4 and 2017, I believe the investments we are making in several areas will drive long-term, profitable growth for our business. Our capabilities around acoustics, signal processing and software position us as a leading audio solutions provider and are yielding many new opportunities.

I think it's helpful to organize some of our primary opportunities by application, specifically handsets, wearables and connected or IoT devices. Handsets remain a critical growth platform for us. Multi-mic adoption, is the single largest opportunity we see in our business over the next 12 months.

As such, we continue to invest in our core business to remain the premier MEMS mic provider in the industry. With our audio capability, we are no longer just a beneficiary of multi-mic adoption, we are actively driving it.

It starts with us benchmarking our customers' products across their existing use cases, such as close-talks and video capture to help illustrate the benefits of using more mics in these applications.

These conversations continue with Knowles demonstrating audio solutions for emerging use cases, such as always-on voice-wake and selfie mode video, all of which require multiple high performance microphones.

Ultimately, this drivers OEMs to use more microphones per device and gives us an opportunity to sell software and signal processing to enable these new use cases. We are beginning to see success in handsets with this approach. In 2016, we believe the Chinese OEMs will increase microphones per phone from 1.54 t0 1.7.

That's roughly 2x the growth rate of the broader market, all while moving to higher performance mics in their flagship models. Just last week Gionee announced it had selected our VoiceIQ smart mic in its new Marathon M6 Plus handset that uses three microphones optimized with Knowles' advanced processing to enhance communication and enable voice-wake.

With our latest smart microphones, we are focused on moving audio features to the microphone to improve overall system performance. Wearables are another key growth platform for Knowles. We've seen a proliferation of wearable devices hitting the market recently, like powered headset and wireless earbuds like the Samsung's IconX.

The move towards powered headsets both wireless and wired open up a large opportunity to add acoustic content as well as audio processing software to enhance performance or enable new applications.

Solutions like Versant advanced voice technology offer new features and are the initial steps toward increasing our dollar content and gross margins in this space. Longer term, we can see the synergy between this market and our hearing health business where we continue to be the number one supplier of acoustic products.

We are also beginning to see an acceleration of connected device shipments that are using more microphones. From Amazon's Echo to Google Home, to the Comcast voice remote, many devices are coming to market that leverage MEMS microphones to enable voice as a user interface.

As an example, Amazon is now selling its Dot voice control device by the six-pack, so you can place them throughout your house to listen to music, order an Uber, or control your smart home system, all by using your voice. This represents a 42 microphone opportunity for Knowles per order.

As a leader in MEMS microphone technology, we expect to be the primary beneficiary of accelerating trends in audio in the IoT space. Overall, I expect growth across these three platforms will drive revenue contributions in 2017. With that, I'll turn it over to John to expand on our financial results and provide our guidance for the fourth quarter.

John?.

Thanks, Jeff. As Jeff mentioned, we reported third quarter revenues of $243.1 million above the high end of our projected range, driven by strength in the mobile consumer electronics segment.

MCE revenues of $140 million were up over 70% sequentially, better than expected, driven by strong MEMS microphone demand from a North American customer that accelerated shipments into the third quarter.

Third quarter revenues also benefited from solid demand, share gains and multi-mic adoption at key Chinese OEMs, with sales to these customers more than doubling from prior year levels.

Specialty components revenues of $103 million, were down 5% sequentially, lower than expected due to delays associated with a customer's new product launch and weaker overall demand across the capacitors markets. Third quarter gross margins were 39.4%, up 40 basis points from the midpoint of our guidance.

This was driven by better than expected yields, our new product introductions and improved factory capacity utilization in our MEMS microphone business. Operating expenses in the quarter were $56 million, down $4 million sequentially, due to the timing of R&D project spending and our continued reduction of selling, general and administrative costs.

For the quarter, adjusted EBIT margin and non-GAAP diluted EPS was 16.4% and $0.37 respectively, 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 $60 million at September 30.

For the quarter, cash flow from operations was $28 million, significantly better than expected due to higher EBITDA and strong customer cash collections. We also received $41 million in the quarter from the sale of our speaker/receiver business.

The sale proceeds and cash generated from operations allowed us to reduce net debt by $58 million in the quarter. Capital spending in Q3 was $11 million, slightly below our estimates. Moving to our fourth quarter guidance.

We expect revenue for the quarter to be between $225 million and $245 million and in line with guidance for the second half of the year. We expect MCE revenue to be down 9% sequentially at the midpoint in Q4 coming off of very strong Q3 and up over 11% from the year ago period.

As I mentioned earlier, shipments to customers in our MCE segment were higher than anticipated in Q3 ahead of a public holiday in China in the first week of October. For Q4, we expect stable demand from Chinese OEMs coupled with continued share gains and we remain cautious on trends at our large Korean OEM.

Specialty components revenue is projected to be up 4% on a sequential basis due to typical seasonal trends in hearing health. In summary, MCE revenues in the second half of the year are expected to be better than our previous forecast driven by higher shipments to a North American customer and Chinese OEMs.

This strength is offset by a reduction in specialty components revenues in connection with a weaker than expected recovery in telecom and weakness across the capacitor markets. We project non-GAAP gross margin for the fourth quarter to be approximately 38% to 41%.

R&D spending in the quarter is expected to be between $23 million and $25 million, up from Q3 levels due to the timing of new product development costs. Selling and administrative expense is expected to be approximately $32 million to $34 million, flat with Q3 levels.

We're projecting adjusted EBIT margin for the quarter to be in the range of 14% to 16% and expect non-GAAP diluted EPS for the quarter to be within a range of $0.29 per share to $0.35 per share. This assumes weighted average shares outstanding during the quarter of just over 91 million on a fully diluted basis.

We are forecasting an effective non-GAAP tax rate of 8% to 12% for the quarter. Please refer to our press release for a GAAP to non-GAAP reconciliation. For the fourth quarter, we expect cash flow from operations to be approximately $40 million to $50 million. CapEx in the fourth quarter is expected to be approximately $12 million.

We expect to further reduce our debt balance in the fourth quarter and exit 2016 with our lowest net debt level since the spin-off in February 2014. I'm very pleased with our financial performance and cash generation in Q3 and expect to deliver on each of the financial goals we've provided for full year 2016 guidance in February of this year.

This includes modest year-over-year revenue growth, non-GAAP gross margins of 39%, and exiting the year at SG&A levels below $35 million for the quarter. I'll now turn the call back over to Jeff for closing remarks and then we'll move to the Q&A portion of the call.

Jeff?.

Thanks, John. We are pleased to deliver our full year goals that we provided in February of this year. Our success was due to taking significant share with Chinese customers, continued multi-mic adoption and outstanding execution with our new products at our largest customer.

As we look to 2017, Knowles' capabilities in acoustics, software and signal processing are solving critical customer problems and pioneering unique audio solutions that will drive growth.

I expect that these capabilities will continue to have a significant impact on our future product roadmap in our target markets, and enable us to drive multi-mic adoption, increase content per device, and expand into new markets. Operator, we can now take questions..

Thank you. Our first question comes from the line of Harsh Kumar with Stephens. Your questions please..

Yeah. Hey, guys. Thank you for an opportunity to ask a question. Jeff, if I can just get to the main thing, I think as I look at your guide, I think, myself and a lot of people are wondering, if you could give us some color on what you saw with your largest customer, the U.S.-based customer as well as Chinese market.

You said things are great, but then I'm looking at your guide, down 9%.

And I'm – the big question I want to ask is, is this something you guys are sort of correctively sort of looking at it, saying because 3Q was so strong, we kind of want to be conservative, or is this something you guys are reading from your order book?.

Yeah. Here is what I'd say, Harsh. As we look – first of all, let's talk about Q3. Q3 we definitely saw a pull forward in the Q3 to cover the Chinese holiday when our customers was closed (15:06) and they were to have stuff – trouble getting things in and out of China. So we did see some pull forward.

And if you kind of notice, our beat in Q3 is kind of equivalent to – what I would say, compared to the consensus, how we guided out in Q4. Now, what I'd say is that, I would say I'm optimistic about Q4, but I'm also being conservative here.

I mean, we've got to see a lot of sell through data, the largest customer on actually how many phones are being sold. And if you remember, last year, there was a big drop off right at the end of the year. So that far out, to talk about the end of the year, we're being a little conservative, I would say. But we are optimistic.

The second thing I would just add is around our Korean customer. There is still a fair amount of volatility here with the changes in the product portfolio. Overall, to date, we don't see this having a significant impact on us. First of all, the product that they've discontinued is not, I would say, the highest volume platform that they sold.

Secondly, to the extent that they're trying to sell other phones, we have good content in those phones. And lastly, if someone decides to buy another phone that's not a Korean phone, we have great content on all those phones as well. But there is a fair amount of volatility, but right now we don't see a big impact.

But again, being conservative, as we look at Q4..

Understood, Jeff. Thank you for that clarity. And then you guys mentioned a delay of a product in the SC market.

I'm curious if you could elaborate on maybe just as much as you can, Jeff, on what the color was? And then also your view of the capacitor market, when do you think it comes back or what's going on there?.

Let me take the capacitor market first just quickly. I'd say there's been some weakness here specifically in industrial markets, defense markets. And, right now, I would say, we don't have a great amount of visibility into when that comes back. I would say there is a slight bit of recovery we're seeing relative to Q3 and Q4, but it's not huge.

So I think – I kind of would say I want to punt into that in the next year and see how those specific markets, industrial and defense, kind of recover in the capacitor markets. I think there's a fair amount of data that some of the peers in the capacitor market have been struggling as of recent – in these similar type markets.

Now, your first question, I think, was relative to the one customer; I think we've talked a little bit about our customers on intelligent audio and that we are reliant on a very small customer base yet. And specifically, in the area of Versant, the one customer that we expected to ramp pretty significantly has ramped slower and been delayed.

So it has somewhat of an impact, more specifically, on the specialty components group, because that's where we report that revenue today. Smart mics, I would say, right kind of the broad design activity with existing products.

I would expect we're going to be introducing new products in the next three months to six months that'll even drive more design activity, lot of great reference designs on smart mics.

So we feel pretty good about that, but we're really reliant on that one customer Versant, and again our hope is, is that, as part of our broader strategy around wearables and what we call it, on the ear, there's a great opportunity and Versant is just the first step..

Hey, Jeff. Thanks again. My last one and then I promise I'll get back in. By the way, I also want to congratulate you guys on paying down debt. It looks like there's more coming over there. But last question is, I think you guys have said publicly many times, you're expecting other customers and Versant probably late this year, early next year.

I wonder if you could just talk about that, if that's still on track..

Well, I'm not going to make any comments just like we have in the past, that we have a customer formally signed up and very close to production; that's what I'd say. I don't have an announcement to make today.

But, again, I think, the broader discussion here around Versant is, it's the first step as a feature of a broader, I would say, strategy around owning the ear and we have some great technology around this space.

And I think we'll start to talk more about that as we get into 2017, because we do expect that with powered wired headsets, what I call, wearable headsets that are Bluetooth-enabled, there's just a really great opportunity that starts with multi-mic adoption and leads to the opportunity to sell both software and signal processing to add new features that don't exist today..

Thank you, guys..

Thank you. Our next question comes from the line of Suji De Silva with ROTH Capital. Your questions please..

Hi, Jeff. Hi, John. So the share gains in China, it seems like your products have an advantage. I'm wondering about the sustainability of that advantage.

Can you talk about the factors that are allowing you to gain share there, and it's a pretty price sensitive, so I was curious on what customers there are looking for?.

Yeah. I would say, we've done a pretty good job, I'd say, in the overall market, number one, just executing on new product development, getting the product out delivering.

But I think what's playing out in China is similar to what's playing out in our other large customers, is that, you start with technology leadership, right, you go to having a very, very broad portfolio of products all the way from low-end basic analog mics now all the way up through smart mics and everything in between which includes digital mics.

You talk about that product launch execution, and then I think the thing that we continue to see is the scale that we have relative to the competitors in this space puts us in a very, very strong position not all that different than we are with our other customers or our other markets where we see opportunities such as again the ear, that I just kind of discussed earlier as well as in the IoT market.

So I think we're in a very, very good position. Obviously, we need to continue to execute. But technology leadership, broad product portfolio, ability to deliver on product launches in high volume, and then just the overall scale of our business allows us to take share..

Okay, great. And then the fourth quarter had a more cautious guidance there.

Are we seeing customers slowing end orders? Or are you seeing inventory builds that are getting worked down? Or it's just kind of looking ahead to what you expect to happen in the fourth quarter from the strong third quarter? Or are you already seeing it sequentially?.

I mean, what I'd say is, when we look at our – what we can see out, we have a, I would say, a reasonably good view of Q4, but there is always risk around inventory builds that have yet to even take place.

And I'm not seeing anything today that gives me pause, but on the reserve side, again, I call it a year ago, a year ago, I didn't see anything that gave me pause about Q4 either and some of the demand just dried up the last couple weeks of the quarter.

And so, again, I'm optimistic, but I think we're better off being conservative in our thought process. And really what we're focused on is getting ready for 2017 and – for a lot of the new products that we're coming out with as well as get execution with these key customers with design wins..

Helpful.

And then the last question on gross margins, are the puts and takes really driven around utilization or are there other factors we should be looking for as the gross margin rolls forward?.

Yeah. I would say, clearly, factory capacity utilization is one factor, but it's also impacted a bit by mix, customer mix specifically, where specifically in China we're aggressively going after share, and we may have a little lower ASP on some of the mature product of the marketplace. But it's really those two factors.

It's capacity utilization and mix. We also in Q3 – we didn't call it out, but we did take an inventory provision in our capacitor business, which had 20 basis points, 30 basis points impact on gross margin..

Yeah. I mean, let me just put a little more color around that. I would say – we've kind of talked about the price erosion and the share price being in the 6% to 10% range.

I would just say in China that, they have, our Chinese customers have a very broad portfolio of products they offer, and they're using mics, all the way from smart mics, all the way down to very basic analog mics.

And our goal, as we think about this, is to be that broad line supplier, and if they're moving up the chain, we're benefiting from it, but a fair amount of their mix is still in the lower end products in their portfolio..

Very helpful. Thanks guys..

Sure..

Thanks, Suji..

Thank you. Our next question comes from the line of Bill Peterson with JPMorgan. Your questions please..

Yeah. Thanks for letting me ask a question. Maybe just kind of piggyback on the last one, if you took your business in China, you talked about the adoption of mics, but can you speak, in more detail, on maybe the overall blended price trends when you start taking to account there's also smart mics in addition to some very older generation mics.

How should we think about just generally of key blended trends in China?.

Yeah. I mean, I always keep thinking about it. I would say, smart mics is not a big enough number to have a significant impact yet. I mean, obviously, our goal, as we go into 2017, that that would change. But thinking of it this way. I think we've said about this before.

Our Korean customer today has been a challenge for us with the fact that they continue to reuse a similar mic. Our goal, obviously, as we go in 2017 is to change that. That they start upgrading to more higher performance mics.

I would say in China the trends are very positive on multi-mic adoption and moving towards higher value mic, but a big portion of that portfolio still uses, I would say, more mature products.

And then the last piece which is our North American OEM, which, I think, for us, especially in the back half of the year, it's really about execution on delivering the product and in delivering the volumes; it's not really about, I would say, the pricing as much. So that's kind of how we kind of see the market. China is positive.

Korea is challenged, but we're hopeful. And North America is really more around just the execution, especially in the ramp up time of the year. The last thing I would just say is, clearly, voice continues to proliferate, right? Whether it'd be – we talk about headset, power headsets, there's going to be more microphones.

If you talk about the Amazon Echo, Google Home, you just see microphones proliferating. And there is a premium being placed on voice quality in terms of – to deliver these features whether it'd be selfie or responding to a Siri-type device, there's just a real focus on improving the quality over time.

So I think that really bodes well for us as we go into 2017 and beyond..

Okay. Sounds good. Switching over to specialty, I guess if you put in (27:07) for mobile, you can kind of see up – kind of low to mid-single digits. Maybe some directionality within that, hearing aids versus telecom versus capacitors versus – the various segments on directionality..

Yeah. I think we continue to think of our hearing health business overall, or within the hearing health portion of the specialty component stable, I mean, that's what I would call it. Our market share remains high. I think we're well-positioned there, especially on the microphone side, very, very well-positioned there.

What I would say is the capacitor business, as kind of we called out, has been weaker and we're hopeful that it'll get a little bit better in Q4, but I wouldn't say we're expecting a massive change in – from where it was in Q3.

And then, just generally speaking, timing compared to what we had hoped for earlier in the year, it is slower in terms of ramping back up than we had anticipated. So that's kind of, I would say, the color around the three pieces..

Okay, great. I'll step back in the queue..

Thank you. Our next question comes from the line of Bob Labick with CJS Securities. Your questions, please..

Good afternoon. Thank you. You've talked about the new product you've introduced a little bit, Versant and the smart mics.

When looking out to 2017 for new product introductions, what should we be thinking about? Will there be more hardware, more software, or how do you think about the roadmap for new products in 2017? And is ultrasonics on the 2017 roadmap or is that still further out?.

the handset market, the ear market, and then increasingly the IoT market as we're starting to see more and more people coming to us and saying, look, we want to add microphones to our device and you're the expert in microphones..

Okay. Got it. Great. And then just switching over to the operating expense side, very good cost controls in the quarter.

And given the sale of speaker/receiver, is there more to come out next year? Or are you at a run rate level now? Or how do you feel about the overall OpEx going forward?.

Yeah, Bob, I can take this one. As you've seen, we've reduced OpEx sequentially since Q2 of this year fairly significantly. We're ahead of the target we had to exit 2016, below $35 million.

I guess, as we look out into 2017, we will have a bit of an uptick in incentive comp costs, but I do think there's going to be other opportunities to further reduce our operating expense line..

Great. Okay. Thank you very much..

You're welcome..

Thank you. Our next question comes from the line of Jaeson Schmidt with Lake Street Capital. Your questions, please..

Hey, guys. Thanks for taking my questions.

Just curious how much China represented of Q3 revenue?.

Give us a second here. I would say it was well over 10% of the full company revenue..

Okay.

And then, wondering if you guys could comment on what you're seeing from a pricing standpoint within the MEMS mic space?.

China, Korea and North America. I think – again, North America is really about execution and delivering new products and delivering them in very high volumes in a very, very short period of time.

I would say Korea is challenged from the perspective that they've been using what we call older microphones for a period of time, and so I think challenged, I would say, Korea.

And then I would say that probably the biggest impact that we kind of talked about within the quarter and going into Q4 is China where the mix is not as favorable as we'd like, again using a fair amount, I would say, of lower end microphones from the perspective that a fair portion of that portfolio is lower end handsets.

But the trends are definitely there to improve audio quality, move to higher end mic, and move to more microphones per phone in order to enable new features..

Okay.

And last one from me, just wondering if you could comment what you're seeing from an inventory standpoint within the Chinese handset market?.

I think – the one thing I just would say is, Mike and I've pulled some data points, we're looking at it. The IDC expects China to grow the handset market by about 3%, is what they are projecting in handset growth this year. Our business is going to be up, I think, about 50% to 60% year-over-year in China.

And I would say is that – we're not seeing a lot of, from our perspective, inventory driving our growth; what we're seeing is multi-mic adoption and share gains is what's driving our growth. So from our perspective, I don't think we see a big risk in 2016 relative to inventory.

Now, 2017, is another story, it's way out, but right now I don't think we see 2016 as a big risk in inventory for China..

All right. Thanks a lot guys..

Jaeson, this is John. Just to give you a little more granularity on China, it was 23% of our mobile consumer business in Q3..

Thank you. Our next question comes from the line of Anthony Stoss with Craig-Hallum. Your questions, please..

Hey, guys. A two-parter for you Jeff on – just curious if there's been any change competitively either, AAC or Goertek either getting in more or trying to exit some of the particular niches. And then, lastly, love to hear your view on Bluetooth earbuds and always-on mics.

If you think the industry is getting closer to fixing the whole power side of things before they go into the always-on within wireless. Thanks..

Yeah. First on the competitive front, I still think without going into – there's fair amount of reports out there from our competitors, because they're public, both Goertek and AAC.

And I guess, what I would say is, there's been less and less information from them about the microphones and what they're doing in that space, at least publicly available data.

And I think from my perspective, again our technology leadership, our product portfolio, our execution and our scale are really coming to bear; even now in China, there people are starting to see this. It's really important. And we have – we're kind of like the leader in all these areas.

So we feel pretty good about where we are relative to the competitors that are in this space. As far as Bluetooth earbuds; there's definitely, I would say, the opportunity in Bluetooth space to add more microphones. And voice-wake is definitely one of the features that could be implemented.

I think the challenge that we're probably facing in that space is that, the Bluetooth community is kind of very tightly controlled by a couple companies in terms of the architecture, but we definitely think there's going to be opportunities as we go into 2017 and beyond for things like voice-wake and other features that we can add..

Okay. Great. Thanks guys..

Thank you. Our next question comes from the line of Tristan Gerra with Robert W. Baird. Your questions, please..

Hi. Good afternoon. Back to the ultrasonic mic; one of your competitor had its Developer Conference last week and they mentioned ultrasonic as one the priorities for them next year. There's also some data showing or predicting that that technology could start ramping fairly significantly next year.

Is the apparent delay or perhaps reduced focus driven by the idea that the technology is not mature, or you don't think it's really critical to your product plan given the opportunities you have elsewhere? If you could just elaborate a little bit on that and whether you still see this as an opportunity?.

Yeah. I think what I would say is, is that, if you think about – we've had ultrasonic mics in the market. Tristan, for, I would say – I don't know, three years or four years we've been selling ultrasonic mics.

I think from our perspective, it's about finding the killer application, or ultrasonic does something better than anything in the marketplace, or enabling a new application that doesn't exist today.

And if I go back, when we used to walk into a customer, we used to walk in and say here's our ultrasonic mic, and they'd say, okay, we'll think about what we're going to do with it.

I think we're now focused on walking in with a mic that's a sensor and say let me demonstrate an application with signal processing and software that does something very, very unique that you may not have seen yet.

And this takes some time, because people have to think a little bit differently, but there's definitely an opportunity here to use microphones as a sensor – but we've been selling, we've been doing this for a while, Tristan. So I'd be interested to talk to you a little bit more about this.

But we're looking for an application that could generate north of $50 million someday of revenue. And that's quite frankly bigger than almost all the competitors in this space that make microphones, every one of them. So that's the type of opportunity size we're trying to pursue.

We're trying to create the demand for the application, not the demand for the sensor itself..

Great. That makes a lot of sense.

Also could you give us a sense of where utilization rates were in the quarter?.

North of 90%..

Yeah. In the MEMS microphone business, we were pretty full out in the MEMS microphone business..

Great. Thank you..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So at this time, I'd like to hand the call back over to Knowles' Vice President of Investor Relations, Mike Knapp for closing comments and remarks.

Sir?.

Great. 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 go Cubs..

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day..