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

Suji De Silva - ROTH Capital Partners LLC Bill Peterson - JPMorgan Securities LLC Richard Sewell - Stephens, Inc. Robert Labick - CJS Securities Jaeson A. M. Schmidt - Lake Street Capital Markets LLC Tristan Gerra - Robert W. Baird & Co., Inc. Christopher Rolland - Susquehanna Financial Group Gary Mobley - The Benchmark Co. LLC Harsh V.

Kumar - Stephens, Inc..

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Knowles Corporation Fourth Quarter and Full Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

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

Thanks, Krystal, and welcome to our Q4 and year-end 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 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 this 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 on webcast slides, which can be found on the IR section of our website. With that, let me turn the call over to Jeff who will provide some details on our results.

Jeff?.

Mobile, Ear and IoT. As I mentioned last quarter, I believe the largest opportunity for us in Mobile in 2017 is driving accelerated multi-mic adoption.

Our ability to benchmark the performance of our customers' products across many different use cases, like near-field or far-field capture, enables them to understand the benefits associated with greater audio content.

Optimizing performance for certain, use cases allow us to highlight our capabilities around signal processing and software, and allows OEMs to provide their customers with the best possible experience. These efforts to improve performance through multi-mic solutions are yielding meaningful results.

We have seen a number of devices hit the market recently, like Huawei's Mate 9, which has four MEMS microphone, and enables new use cases, and improves performance over prior generations.

Beyond high-performance MEMS mics, we are also excited about our growing product portfolio of smart microphones with our next-generation of solutions scheduled to launch later this year. I'm also pleased to highlight that our audio software has been designed into several Chinese handset platforms, which we expect to begin shipping later this year.

In Mobile, we are anticipating strong growth this year driven by multi-mic adoption, new customer product launches in the second half of the year, and adoption of software and signal processing solutions as OEMs continue to focus on improving voice and audio performance.

Our focus on the Ear starts with our strong position in acoustics for hearing help, and is translated into exciting new opportunities for consumer products, where the demand for high-quality audio solutions are starting to proliferate.

Over the past several months there has been a surge of new high-end headsets announced in the market from Samsung's IconX, and Apple's AirPods to Doppler's Here One and the Jabra Elite Sport. One common theme with all these platforms is they use multiple MEMS microphones.

Beyond the multi-mic opportunity, we also see prospects for balanced armature speakers and audio software. As an example, Bragi recently began shipping its second-generation headphone product, which leverages all these Knowles' technologies.

Powered headsets, whether wired or wireless, are providing us with new opportunities to grow our content per device through multi-mic adoption, signal processing and software. In IoT, I mentioned earlier, how voice is becoming a more prominent user interface for automation, access and consumption of goods and services.

The Amazon Echo has highlighted the power of voice as a primary user interface, and this has driven a significant increased interest from all types of customers. According to a new study by VoiceLabs, in 2017 voice-enabled device shipments will triple from 2016 levels. This rise of connected device is driving the need for more microphones.

In addition, we see potential new customers that do not have expertise in audio for connected home applications in entertainment, security, appliances, environmental and lighting that all want to add voice as a user interface and can benefit from turnkey audio solutions.

Overall, there's a lot of excitement around voice as a UI, and improved voice and audio quality, and I expect growth across these three platforms will drive increased revenue in 2017. With that, I'll turn it over to John to extend on our financial results and provide our guidance for the first quarter..

Thanks, Jeff. As Jeff mentioned, we reported fourth quarter revenues of $241 million at the high end of our projected range, driven by strength in the Mobile Consumer Electronics segment.

MCE revenues of $134 million were down 5% sequentially, better than expected, driven by stronger than anticipated MEMS microphone demand at North American and Chinese OEMs. We continue to see share gains in multi-mic adoption driving our revenue higher at key Chinese customers.

Revenue from Chinese OEMs were up 10% sequentially and more than double prior-year levels. Specialty Component revenues are $107 million or up 4% sequentially, in line with expectations. The increase was driven by typical seasonality in hearing health and increased demand for timing devices in military, aerospace and industrial markets.

Fourth quarter gross margins were 39.2%, slightly below the 39.5% midpoint of our guidance due to higher than expected cost associated with the warranty claim in the Mobile Consumer segment.

Operating expenses in the quarter were $56.7 million in line with expectations and down $9.7 million from the year-ago period as we continue to reduce SG&A and non-core R&D expense. For the quarter, adjusted EBIT margin and non-GAAP diluted EPS was 16.7% and $0.35 respectively, with both metrics at the high end of our guidance range.

For full year 2016, we delivered sales growth and grew our global microphone share, despite lower year-over-year revenues from our two largest microphone customers. In addition, we delivered gross margins of 39%, and reduced our SG&A throughout the year, exiting 2016 at an annualized run rate of less than $140 million.

I'm very pleased that we achieved each of the full year financial targets that we set in February 2016. 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 $66 million at December 31. For the quarter, cash flow from operations was $67 million, a record level due to higher EBITDA, lower working capital and capital spending. In the quarter, we paid down our bank debt by $55 million. For the full year, we reduced net debt by more than $100 million from December 2015 levels.

Capital spending in the quarter was $8 million and $34 million for the full year. Before I move to our Q1 guidance, I'd like to discuss a change to our segment reporting. In the first quarter of 2017, we'll report our hearing health business with our Mobile Consumer business, and refer to this segment as Audio.

The Precision Device segment will consist of capacitors and timing devices. We're seeing more and more overlap between our acoustic, signal processing and software capabilities as we pursue solutions for the Ear. For example, in 2016 more than 25% of microphone shipped to hearing health customers are MEMS microphones.

Another good example of this can be seen with our Versant solution that leverages balanced armature speakers from hearing health with MEMS microphones and software from our Mobile Consumer business. In addition to the market convergence, this segmentation will better align the way we manage our business internally.

A pro forma summary of 2016 Audio and Precision Device financial trends based on the new segmentation can be found in the IR section of our website. Moving to our first quarter guidance, we expect revenue for the quarter to be between $180 million and $200 million.

The midpoint of our guidance reflects a 3% increase from the year-ago period, and continues the trend of year-over-year revenue growth. We expect Q1 Audio revenue to be down 25% sequentially at the midpoint.

In addition to normal seasonality, we expect a later than anticipated launch of a Korean OEM's flagship handset to negatively impact Q1 revenue by more than $5 million. Precision Device revenue is projected to be down 4% on a sequential basis, following strong fourth quarter sales of timing devices.

We project non-GAAP gross margin for the quarter to be approximately 36% to 39%, flat versus prior year levels. We are well positioned with our major customers' new product introductions, which we expect will drive both revenue growth and improved gross margins over the remainder of the year.

R&D spending in Q1 is expected to be between $24 million and $26 million. Selling and administrative expense is expected to be approximately $30 million to $32 million. We're projecting adjusted EBIT margin for the quarter to be in the range of 7% to 9%, and expect non-GAAP diluted EPS to be within a range of $0.08 to $0.14 per share.

This assumes weighted average shares outstanding during the quarter of just over $92 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 first quarter, we expect cash used in operations to be approximately $8 million to $14 million. CapEx in the first quarter is expected to be approximately $20 million as we expand capacity and introduce new products in our MEMS microphone business to support growth in the back half of the year.

We expect CapEx for full year 2017 to be within the range of 6% to 8% of total revenue. As we look at full-year 2017, we believe we are well positioned to grow sales in the mid single-digit range, expand operating margins, and increase EPS over 2016 levels.

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. In 2016, we reinforced our leadership position in our core markets. And as I look to 2017, Knowles is leveraging its capabilities in acoustics, software and signal processing to improve audio quality and to enable consumers to control voice technology via voice.

I expect that mid single-digit revenue growth for full year 2017 to be driven primarily by the mobile market with multi-mic adoption, launch of new customer platforms in the second half of the year, and introduction of new audio products. We also expect to improve operating margins and EPS over 2016 levels.

Longer term, I'm excited to see the positive trends in Ear with the proliferation of powered headsets, as well as an acceleration of shipment of voice-enabled IoT devices focused primarily on the connected home. In the future, these markets will drive increased sales on microphones with the potential for software and signal processing.

With that, operator, we can take questions..

Thank you. And our first question comes from Suji De Silva from ROTH Capital. Your line is open..

Hi, guys.

So on the 2017 revenue growth you have, the mid-single digits; can you talk about the linearity you're expecting? Is it back-half loaded, or is a typical 45%-55% breakout you usually gave first half, second half appropriate?.

Yeah. It's a really good question. I would say that, in this year how we're kind of seeing things is that the shape of the curve will be a little bit more, slightly more dramatic to the back half of 2017 than it was in 2016. So John, maybe you can add a little color..

Yeah. Suji, just to add a little color, you mentioned 45%-55%, if you look at 2016, the split was actually closer to 43%-57%. We'd see something similar to that in 2017, if not even a little more back-end loaded..

Right..

Okay. Great. That's helpful. And then as you look at the gross margin, I'm wondering about the leverage here for secular improvement. It looks like you kind of go between $180 million and $240 million cyclically, and the gross margin goes (18:09) between 37.5%, 39.5%.

Is that the ranges we should expect or are their secular drivers to move that range up over time?.

Well, I think, we've been pretty straight-forward about in our core acoustics business, we don't see a tremendous amount of margin expansion opportunity just in the core acoustics.

Margin expansion is really going to come from sale of what we call these intelligent audio products that we're going to start seeing more sales from through the year and into 2018. So I'd just say that, secondly the big thing that will push margins up if we can be successful would be the software and signal processing solutions..

Okay. Great.

And then last question, 10% customers in the quarter?.

For the full year we have one customer greater than 10%..

Yeah, for the full year..

For full year you're going to see that in the cadence coming out in about a week-and-a-half..

Yes, just one customer over 10%..

As Jeff mentioned, the next largest set of customers is really collectively the Chinese OEMs, which would be above that..

Right. And the Chinese OEMs, there's probably four – don't hold me to this, but four customers probably make up 75% of the sales. There's a whole bunch of other customers in China too, but we kind of love them altogether into one piece, and they're collectively over 10%..

And that largest customer is between 15% and 20% in 2016..

Yeah. I would just add a little color to that. We're pretty happy with the customer diversification that we've gotten over the last year, year-and-a-half, and into 2017 that's going to continue..

Great. Nice job on the quarter, guys..

Thank you..

Thank you. Our next question comes from Bill Peterson from JPMorgan. Your line is open..

Yeah, hi. Thanks for taking the question and solid results in the quarter. Maybe speaking to the full-year revenue guidance as well.

First, can you level set us on what level of intelligent audio sales you achieved in 2016, and how we should think about that business in 2017 based off your design win pipeline?.

Yeah. I mean, I think, I would say we kind of set some expectations for the back half of the year. I think we felt little short of those expectations mainly due to launches of our customers' products. I'd say. It's a little early, too early in the year to really start setting a full-year intelligent audio target.

We're still in early February and we're working on a lot of design wins that should go to production in the back half of the year. But I would say, our expectations are not for significant revenue from this in 2017, but it will be a contributor..

Okay. Thanks on that.

And then, I guess, now that we're past Lunar New Year, how would you characterize the demand environment, and I guess, inventory situation particularly in China? You flagged the large Korean customer, but how should we think about the business in China?.

Yeah. I would say we're past Lunar New Year by like one day or two days. I think it's a little early to kind of make any like broad-based strokes to say how things look post, what you call, Chinese Lunar New Year. But here's kind of how we kind of view the market.

We still expect that in 2017 we have a fair amount of tailwinds with the Chinese OEMs, really around multi-mic adoption, adoption of some of the new products that we've talked about, and some continued share gains in the Chinese OEMs.

So to that extent, if there is, I would say, a short-term slowdown, which I wouldn't say we've seen that yet, I would say, that for the full year it doesn't really give us too much pause.

I would say that as we look to our guidance for Q1, beyond the situation with our Korean customer, there is a little bit of conservatism in our number with the thought process that there is a possibility of some inventory correction. But, right now, we're not seeing that yet..

Okay. Great. If I can sneak one more in, you said in the last call, you were on target to reach, I guess, 1.7 mics per phone on average, which equated around 10% growth. I wanted to see how that turned out, and kind of what your expectation is based off your design pipeline for this year. Thank you..

Yeah. I mean, I think we did achieve that based on our internal data that we collect, we think we've achieved that.

I think, the thing that we're starting to see is that, which is little bit different than previous years, was in the past, we were waiting for customers to come to us and say, we need a second microphone, we need a third microphone, we need a fourth microphone, and here is the specification for the microphone.

What we're starting to see this year is that we have a lot stronger line of sight to increasing number of microphones, especially at the Chinese OEMs because we're spending a lot of time with them talking to them about the use cases, and how we can make them better or enable new ones.

So, I would say, right now, based on what we see, we would expect a similar type of growth in 2017 that we saw in 2016..

Okay. That's helpful. Thank you. I'll jump back in the queue..

Thank you. Our next question comes from Harsh Kumar from Stephens. Your line is open..

Yeah. Thanks, guys. This is Richard in for Harsh. Just wanted a little bit of clarification on the delays at your customer.

Is that only one specific customer, and then would you expect that to start shipping in kind of the June quarter timeframe, or is there any puts and takes there with that customer?.

Well, let me just describe, what we've typically seen with – this is really we're speaking about our Korean customer here, our major Korean customer, normally they've launched their new platform earlier in the quarter than they're doing this year, which means is we're starting production significantly later in the quarter with them, and which is pushing out a fair amount of revenue for us that we've normally would have seen in Q1.

So I think that's what we're referring to.

I think as we talked about kind of on the first question we got, what we're just kind of seeing with this push out, but generally speaking with new products coupled with some product launches by our customers in the back half of the year that we expect again a revenue split for the full year 2016-2017 roughly about the same, but maybe a little heavier in the back half of the year for 2017 than 2016..

That's very helpful. And then, in terms of the uses of cash, you've been paying down your debt here lately.

Is that kind of the big issues to cash right now or are there other uses of cash?.

Yeah. We'll stay the course with respect to debt reduction as I mentioned earlier. I mean, I'm really happy that we were able to reduce our net debt by over $100 million in 2016, and really no changes in terms of capital allocation priorities in 2017. It's pay down debt, maybe a selective bolt-on acquisition, and those are really the priorities.

We'll also continue to look at are there any footprint consolidation opportunities that have a reasonably good payback. So that's no change..

And I would just add little more color, John mentioned it in the script but we're really pleased with the cash generation in 2016, specifically in the back half of the year..

Great. And if I can sneak one more in. In terms of OpEx, how should we think about that? Is there anything that should really see a rise on the SG&A side or the R&D side going in ....

No. Not really. As I said, one of our goals was to exit the year at an annualized run rate of SG&A of less than $140 million. We did that, and I really don't see a need to increase our SG&A in 2017. So to the extent we can get this mid single-digit revenue growth, we're going to have pretty good operating leverage..

Right. Thank you guys, and congratulations..

Thank you..

Thank you. Our next question comes from Bob Labick from CJS Securities. Your line is open..

Good afternoon. Thanks. Obviously, you've discussed the Chinese OEM, multi-mic adoption is a big driver for growth this year.

Can you talk just a little bit more about that? Was this like a one-time catch up, or how long of an opportunity do you have with Chinese OEMs to continue multi-mic adoption? How big of an opportunity is that over time?.

Well, I mean, I think this is obviously more of an opinion for us than fact. I mean, we can't say it for sure, but what I would say is, is that the Chinese OEMs are still, even with the multi-mic adoption that's been done, still significantly behind some of the, I would say, the flagship phones.

And what we're seeing really is, as some of these use cases that require multiple microphones proliferating down into mid range and lower end phones.

So, I mean, if you start thinking of this, Bob, from a perspective of voice control and improved voice quality, we think – I mean, I can put it like this, but if you go back 15 years ago, people used monochrome screens, and eventually everybody went to color screens, and they went to touch screen.

I think this is kind of an inevitable as voice becomes the primary user interface, and supplements in some cases over time replaces touch as one of the primary interfaces. I think you're only going to see more microphones, and it comes across not just in the Mobile area, but it comes across in the Ear, and it comes across also in IoT..

Okay. Great. And then, the two other big drivers you mentioned over time would be wireless powered ear buds and IoT, and anything else.

How would you rank behind multi-mic adoption, the next kind of magnitude of potential growth drivers for you over this and next two years?.

Yeah. I would say, we're on the cusp here in the year, I mean, you've seen a lot of products that come out in the last six months, I mentioned some of those that have multiple microphones on the ear, and we're not even talking yet about wired headsets yet.

And so I think we're right at the very front-end of this in terms of wired and wireless headsets with multi-mic adoptions. So I would hope that as we go into 2018, you'll start to see this being a nice contributor. First of course, we're going to get our fair share in terms of multi-mic adoption of the MEMS microphones.

So we also think there is the opportunity for us with signal processing and software to gain content. IoT, I would say, from our perspective, it's still a little longer term, not that it's not growing very rapidly, but what I would just say is, the rapid growth is coming from such a low base that it's a little longer term.

And I think our challenge here really is that most of the customers beyond the big players in IoT that everyone recognizes, don't have a lot of audio or acoustics experience, and that plays into our hands, but also makes a little bit slower for adoption..

Great. Fine, thank you very much..

Thank you. Our next question comes from Jaeson Schmidt from Lake Street Capital Markets. Your line is open..

Hi, guys. Thanks for taking my questions. Jeff, wondering if you could talk about, if you're seeing any changes from the competitive landscape, and also if you're seeing anything out of the ordinary from a pricing standpoint within the MEMS mic space..

Yeah. The competitive market is kind of interesting, we've talked a lot about this with people. From my perspective is the landscape has changed pretty dramatically over the last 24 months to 36 months.

And I guess, I would sit there and say is, if I go back in time to when we had the problem at our one large customer a couple of years ago, I think the competitors view it as a real opportunity is to take advantage.

And kind of what we found here is, as we look forward is that, we are really have solidified ourselves in 2016 as the leader in the market.

And I don't think you hear as much from the competitor, at least what we hear, that they publicly speak, they don't speak as aggressively about this marketing more from this perspective, it's kind of Knowles and everybody else. So we feel pretty good about our collection.

And I guess the second question, well, you asked about ASPs, I guess, my only comment on ASPs would be is, to the extent that we sell more to Chinese OEMs, they typically, I think we've mentioned this before, use lower ASP products, and mix can be sometimes a challenge.

On the reverse, the Chinese seem to be more apt to incorporate or are more interested in some of the intelligent audio products that we have as well. So I think long-term, we're going to be okay there.

And I guess, the last point I would make, and I think, you kind of see is there is this year going into 2018, a year from now, we do see that there is a lot of demand for MEMS microphone that's exceeding the market unit growth rate.

And again, driven by multi-mic adoption in Mobile, but also by Ear, in IoT we're seeing growth that's significantly faster than the overall device market, which should in our opinion kind of help us to think about, when we have these competitors, that maybe some of the lower margin portion of the market, we can just sit there and say, hey, we're really focused on the higher end of the market..

Okay. That's helpful. And then just curious what you're seeing in the infrastructure market..

Yeah, we've seen a recovery in 2016, albeit not to the levels it was in 2014.

I think from our perspective, I would see it's going to be hopefully we're looking at GDP type growth going forward with the carrot out there of 5G in about three years, four years, right? I mean, that's kind of the next big carrot, and we seem to be reasonably well positioned in 5G..

All right. Thanks a lot guys..

Thank you. Our next question comes from Tristan Gerra from Baird. Your line is open..

Hi. Good afternoon.

How should we look at the balancing act that's increasing capacity this year, which presumably will have an impact on your gross margin unless you're ramping exactly in line with the pick-up in demand? And can you do that pretty much in line with the second half seasonality, and finally talk about what are the potential opportunities for higher margin year-over-year driven by mix..

Yeah. So again, Tristan. I think what we've done, we've made a decision based on what we see over the next 24 months to 36 months, that we are going to add some capacity in 2017 and we feel pretty comfortable. We haven't put, I would say, a new tranche of capacity at significant level in the last couple of years. So we're doing this.

But I think, from our perspective, as the leader in the market, we've got to be prepared to meet the demands in the marketplace, and things look pretty good.

I think, from my perspective, the capacity itself will not probably degrade the gross margin, because the capacity that we add will be offset by leveraging the overhead of the entire organization. So we're not anticipating building new factory, or adding whole new staffs of factory.

So the incremental cost of capacity for us is reasonably low, and that will be offset by some of the leveraging of the rest of the overhead within the organization..

Great. And then, you mentioned some MEMS products ramping in the second half.

Should we make any assumption about strengthening or any type of ASP outlook being different, given that I think your main customer has used a non-MEMS product so far?.

Tristan, I would say that we will expect sequential increases in gross margin throughout the year. Some of that is seasonality, some of that is driven by new product introductions..

Great. Thank you..

Thank you. Our next question comes from Chris Rolland from Susquehanna International Group. Your line is open..

Hey, guys. Thanks for the question. So just wanted to have a quick conversation on capacity and CapEx. It looks like capital intensity maybe going up a little bit year-on-year.

First of all, in terms of what it's being used for, and I assume it's more back-end capacity, but also if you could talk about maybe where utilizations are now, why you decided to put new capacity online as opposed to perhaps building ahead in the first half for demand in the second half? And then, did you guys ever think about just kind of staying capacity constrained and perhaps getting better pricing that way through the market, was that ever an option? Thanks..

No, that's a really good question. And I think you've hit on a lot of key points that we talk about a lot internally. First, let me just kind of frame the back half of last year, which we were running all out the entire back half of last year.

And, in fact, what I would tell you is is that we exited 2016, what I would call is uncomfortable inventory levels. So what we would normally be using to build the first half up in inventory for the back half, we're just trying to get back to comfortable inventory levels in the front half of the year.

As we look to the back half of the year, I 100% agree with you on the idea here that there is going to be opportunity for us to walk away from lower margin business. But the market is growing fast enough in units that it made sense to still add capacity that goes online in the back half of 2017..

Okay. Thank you. And that does make sense. I was wondering, just a quick one, where you think China Inc.

might be as a percentage of revenue as we exit the year?.

Well, I'm going to say it's a little early to predict exactly where China Inc. is going to end up for the full year. But I would just say I'm looking at kind of our forecast in the sales team, which it's a little early for the full year to get an exact forecast, but we do expect not the breakneck pace that we had last year of greater than 50% growth.

But we do expect some pretty significant growth again in 2017 from China..

Great. Thanks so much..

Thank you. Our next question comes from Gary Mobley from Benchmark. Your line is open..

Hi, guys. Thanks for taking my question. Most of my questions have been asked and answered. But I do want to talk a little bit about 2017, some the wildcards that you are contemplating. I'm assuming the two biggest wildcards really fall into your second half, and that relates to your largest North American and Korean customer and their product launches.

Underpinning that assumption of 5% revenue growth in the year, do you have a solid sense of the MEMS count and the specific product perhaps that these top OEMs are utilizing from Knowles, and I guess, really more consideration on the Korean OEM side given that they have historically not cut pace with the industry and perhaps are feeling the pressure to do so..

Yeah. So let me take the Korean customer first. And I would just say is, I'm reasonably optimistic about this Korean customer relative to them kind of starting to hear the message about audio, and I'm not going to go in a great level of detail here. I mean, their products are not out, but I'm reasonably optimistic.

They are starting to understand that audio is really important and to the extent that they do, it should be a benefit for us. As far as our largest customer, I mean, I'm not going to go into a lot of great detail, we work very close with them. We understand forecast. We got to be prepared as we look at the back half of the year.

And I think, overall our mid-single digit growth for 2017, I think, we feel pretty good about that..

All right. That's final question. Thank you guys..

Thank you. And our next question comes from Harsh Kumar from Stephens. Your line is open..

Yeah. Hey, guys. I missed a fair chunk of the commentary. I apologize if this was addressed earlier. But Jeff, with regards to competitive environment that somebody was asking earlier about, with regards to the Chinese competitor, since they don't make the mics themselves, and they are basically subject to prices by the supplier.

What leverage do they have and what is the point of them being in this market for them with the dismal gross margins that they have at this point? Have you guys looked at that, or perhaps can give us some idea about that their pain points?.

Well, I mean, Harsh, you kind of see the things. We don't talk to our competitors directly, very often. I mean, kind of from my perspective is, I think, it's a challenging market for them. I mean, if I was in their position, I would feel pretty challenged. And it's hard for me to say what happens going forward.

I mean, it's very hard for me to say what happens going forward.

What I know is this, is that if you take our leadership position in the core, in MEMS microphones, coupled with our understanding of acoustics and applications and how to put the microphones in, you start adding in our understanding of the use cases, and our ability to deliver signal processing and software, which you start to see is that we're really moving ourselves in our opinion, ahead of the pack in terms of the competitive environment, to really make meaningful improvements in performance or enable meaningful new applications..

That's fair, Jeff. Thank you. And then, again, could you give us an update on wins in Versant? I think you're expected to have one decent kind of size win earlier this year.

Are we still on track for that?.

So we're not going to make any announcements on this call. We didn't make any on conference (40:58) call, but when we have something to tell you, Harsh, we will definitely let you guys know..

Thanks, Jeff.

And then last one from me, with your largest customer, do you typically see all of that revenue in the September quarter, or does it actually start – you start to see some of that in the June quarter? Would you give us an idea how it played out last year, and then maybe how your expectation?.

I'm not going to – I hate to go into too much detail about this, but because it is our large customer, I guess what I would just say is, that we'll typically start seeing revenue in Q2..

End of Q2..

End of Q2 is when we typically see it..

Fair enough, guys. Thank you..

Thank you. And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Mike Knapp for any closing remarks..

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 goodbye..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may now disconnect. Everyone, have a wonderful day..