Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Knowles Corporation First Quarter 2019 Financial Results Conference Call. [Operator Instructions] With that said, here with opening remarks is Knowles' Vice President of Investor Relations, Mike Knapp. Please go ahead..

Thanks, David, and welcome to our Q1 2019 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, 2018, 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 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 IR section of our website.

Further, I'd like to inform you that the company has filed a definitive proxy statement and certain additional materials with the SEC in connection with the solicitation of proxies for its 2019 annual meeting.

Shareholders are strongly advised to read the company's definitive proxy statements and any other documents filed with the SEC when they become available because they will contain important information.

Shareholders may obtain a free copy of the definitive proxy statement and other documents that the company files with the SEC from the SEC's website at sec.gov or the company's website at knowles.com. We will not comment on the proxy contest with Caligan Partners, Falcon Edge Capital and certain of their affiliates on this call.

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

Jeff?.

Thanks, Mike, and thanks to all of you for joining us today. We had an encouraging start to the year supported by solid execution across the organization, despite facing significant headwinds in the handset market.

Our results underscore the merits of our strategy to invest in high-value differentiated solutions and continue to diversify our end markets and customers.

For Q1, we reported revenue of $180 million, above the midpoint of our guidance range and up from the year ago period due to continued robust demand for Precision Devices and better-than-expected sales of microphones. Gross margins of 39% and earnings per share of $0.13 were both at the high end of the guidance we provided last quarter.

In the Audio segment, Q1 revenue is down from the year ago period due to lower MEMS microphone sales.

As we commute -- communicated to you last quarter, this was primarily the result of a significant inventory correction at a handset customer during the quarter, partially offset by strong sales to Chinese OEMs and increased demand for Ear and IoT applications. Revenue from Hearing Health was stable from the year ago period.

Overall, revenue from Audio comprised 77% of total sales in the first quarter. In the Precision Device segment, sales were up over 25% from the year ago period, hitting record levels for the fifth consecutive quarter due to continued demand for our differentiated products across multiple end markets and a tuck-in acquisition.

Precision Devices represented about 23% of total company revenue in the quarter. I mentioned that Q1 trends in Audio were slightly better than anticipated as we continued to show the benefits of a diversified portfolio of solutions for the Mobile, Ear and IoT markets.

In Mobile, demand for microphones in Q1 was impacted by lower handset volumes at a key customer whose work through -- as a key customer worked through an inventory correction. I believe that the bulk of this excess inventory has been digested by the market, and we are seeing handset demand stabilize.

In addition, we saw a strong year-over-year growth in non-mobile platforms at this customer, which helped offset handset weakness. Sales to Chinese OEMs were better than expected in Q1, almost doubling from the year ago period as we continued to benefit from increasing content within mobile from both MEMS and intelligent audio solutions.

For example, in Q1, Vivo launched its X27 and X27 Pro devices in China, 2 new additions to the company's mid-range handset lineup. Voice Wake is becoming a must have and our smart mic coupled with high performance MEMS mics enables this feature with superior performance at a reasonable cost.

This launch also highlights proliferation of intelligent audio solutions to higher volume, mid-range platforms for our Tier 1 customers.

We remain very optimistic about our intelligent audio solutions as they drive significantly higher audio content per device to higher ASPs and greater share, while driving the need for additional high-performance MEMS microphones.

In Q1, we started sampling a new dual core DSP, which serves as a mid-range offering within our intelligent audio portfolio. With more processing capabilities to our SmartMic and a lower cost than our 4-core solution, this new offering enables more audio features, while appealing to cost-conscious customers looking to differentiate their devices.

Like our other DSPs, it also drives the need for higher performance MEMS mics and allows us to gain share in our core microphone business. In addition to SmartMics, we expect this family of multicore audio edge processors to begin shipping in the headsets to be launched in the back half of the year. Moving to Ear.

Our largest customer recently launched its second generation of popular wireless headphones utilizing multiple digital microphones.

These next-generation headphones deliver longer battery life and, for the first time ever, they now feature the convenience of Voice Wake, making it easier to change songs, make a call, adjust the volume or get directions simply by using your voice. This demonstrates the importance of voice in the Ear market.

This product has revolutionized the wireless audio experience for many users, but there's much more to come. Customers are looking for additional features like noise reduction and active noise cancellation, which to date have been primarily in over-the-ear headphones due to power and size constraints in these products.

Knowles' long history of delivering innovation in the hearing aid market and our broad product offering makes us well suited to solve these unique technical challenges. We expect additional customers to launch products this year.

We have significant content gains driven by adoption of multiple microphones, intelligent audio solutions and balanced armature receivers. I continue to be extremely optimistic about our opportunities in the Ear market. In IoT, we expect continued growth in smart speakers to drive demand for our audio solutions.

In a recent study, Deloitte Global stated that smart speakers will become the fastest-growing connected device category with consumers purchasing 164 million smart speakers this year, up from 98 million units in 2018.

Beyond smart speakers, we continue to pursue voice input opportunities across TVs, bluetooth speakers and a myriad of other connected devices.

The use of more high-performance microphones, coupled with a trend of moving more audio processing to the edge of the network places us in an ideal position to drive strong growth in the IoT end market over the next several years. I want to close the Audio segment discussion with some additional comments around intelligent audio.

I had mentioned in prior quarters that I expect 2019 to be a strong year for revenue in our intelligent audio solutions. We expect sales to be between $30 million and $40 million in 2019, with gross margins above the corporate average.

As our customers implement voice solutions, our audio edge processors are synergistic with our core mic business, allowing us to gain share and demonstrate the value of moving to higher performance mics.

This year, we expect to invest approximately $38 million in R&D to support this opportunity, as I believe our differentiated audio edge processors opens up an incremental $1 billion market for us. Moving on to Precision Devices.

We are excited about the continued prospects for this segment and believe it is a critical platform for Knowles as we increase exposure to fast-growing end markets to enhance shareholder value. There are 2 distinct product categories within Precision Devices, high-performance capacitors and millimeter wave RF solutions.

Our high-performance capacitor products sell to a diverse set of customers for mission-critical applications across electric vehicles, telecommunications, defense, medical and industrial end markets and were responsible for much of the Precision Device growth we experienced in 2018.

These solutions store and discharge energy and are designed for critical applications that are required to operate at high voltage, high-temperature or with high reliability. We believe we are well positioned across these end markets and expect mid-single-digit growth for these products in 2019.

The second product category within Precision Device business is our millimeter wave RF solutions. We have a long history of solving high-frequency filtering challenges for our defense customers, who have been using millimeter wave spectrum for satellite communications and radar for many years.

The rollout of 5G will depend on the use of millimeter wave spectrum in frequencies between 26 and 39 gigahertz. This rollout, which we expect will begin late this year and continue over the next several years, will require filtering techniques similar to what we have been providing our defense customers.

We believe our solutions are uniquely positioned to support millimeter wave 5G due to their small size and high selectivity or [indiscernible] filter portions of the spectrum. We are well positioned with major infrastructure customers that will enable millimeter wave 5G and expect demand for our filters to grow in 2019 and beyond.

In 2018, this product category represented less than $20 million of sales, and I believe it could grow to over $100 million in revenue in 2021. Overall, our strategy of diversifying our markets and customers is working, and the benefits of this strategy are reflected in our financial results over the last 18 months.

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. We reported first quarter revenues of $180 million, above the midpoint of our guidance range and up 1% from the year ago period, driven primarily by increased demand for our Precision Device solutions. Audio revenues of $139 million were down 5% from the year ago period.

As expected, MEMS microphone sales were lower, due primarily to a handset inventory correction at our largest customer in Q1. Higher-than-expected sales to Chinese OEMs and increased microphone demand for Ear and IoT applications helped to offset the decline in handset shipments at our largest customer.

Intelligent audio sales were up slightly, and revenue from Hearing Health products remained stable from the year ago period.

Precision Device delivered record revenues of $41 million, up more than 26% year-over-year as a result of 21% organic growth driven by strong demand for high-performance capacitors in telecom, defense and automotive markets and an acquisition completed early in the first quarter of 2019.

First quarter gross profit margins were approximately 39%, at the high end of our guidance range and up 150 basis points from the year ago period. Audio segment gross profit margins increased by more than 200 basis points due to favorable product mix within microphones and improved factory performance.

Precision Device gross margins were down compared with the first quarter of 2018 due to unfavorable product mix and a benefit recorded in 2018, which did not recur. Operating expense in the quarter was $52 million, in line with our guidance and flat from the year ago period.

For the quarter, adjusted EBIT margin was approximately 9%, at the high end of our guidance range and up 110 basis points from the first quarter of 2018. Non-GAAP diluted EPS was $0.13, also at 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 $41 million at the end of Q1.

For the first quarter, cash utilized from operations was $11 million and capital spending was $15 million, with both metrics favorable to the midpoint of our guidance range. Moving to the second quarter of 2019. We expect total company revenue to be between $185 million and $205 million, up 4% over prior year at the midpoint.

Revenue from the Audio segment is expected to be up slightly from Q2 of 2018 as shipments in the Ear and IoT markets continue to increase and market conditions within the mobile market stabilize.

Precision Device revenue is expected to be up more than 10% over prior year levels, driven by continued strong organic growth across defense, industrial and automotive markets and the impact of an acquisition, which was completed earlier this year.

We project non-GAAP gross margin for the second quarter to be approximately 38% to 41%, slightly above the year ago period, driven by favorable product mix, factory productivity gains and the impact of foreign currency, partially offset by higher raw material cost in our Precision Device segment.

R&D spending in Q2 is expected to be between $23 million and $25 million, up $1 million from prior year levels. Selling and administrative expense is expected to be $29 million to $31 million, flat with the year ago period.

We're projecting adjusted EBIT margin for the quarter to be in the range of 11% to 13% and expect non-GAAP diluted EPS to be within a range of $0.17 to $0.21 per share. This assumes weighted average shares outstanding during the quarter of 95 million on a fully diluted basis.

We are forecasting an effective non-GAAP tax rate of 13% to 17% for the quarter. Please refer to our press release for a GAAP to non-GAAP reconciliation. For the second quarter, we expect cash generated from operations to be between $10 million and $20 million. Capital spending in the quarter is also expected to be $10 million to $20 million.

Full year capital spending is expected to be between 6% and 7% of revenues. 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. As I noted at the outset of the call, our Q1 results reaffirm that our strategy to invest in high-value differentiated solutions and diversify our end markets and customers is driving sales and earnings growth. As we continue through 2019, our company remains well positioned.

In Audio, the macro trends around better performance and edge processing remain favorable and are enabling us to expand our total available market and grow our business. In Precision Devices, we continue to execute our playbook and drive strong revenue growth and operating margin improvement, both organically and through tuck-in acquisitions.

I expect the growth in both segments will drive total company revenue with strong operating leverage in 2019, and I look forward to building on this momentum in the years to come. Today's call provides financial results and Q2 guidance, so we would appreciate if you would keep your questions focused on our business results.

Operator, we can now take questions..

[Operator Instructions] Your first question comes from the line of Suji Desilva with Roth Capital..

So on the growth in the China opportunity, I understand there is share gains helping you offsetting the backdrop.

But if you look maybe a year out, how would you explain the opportunity in terms of the end smartphone demand, content increase in Knowles share because that's been kind of fighting the tide here?.

Yes, I mean, I'm not going to make much comment on the end smartphone demand versus beyond what's out there in the marketplace today. I mean, I think generally speaking, we've said this for a while that handset demand is not going to increase at a significant rate.

What I would say is, specifically China is, in the mobile market, we still have the opportunity for multi-mic adoption. We still have the room for higher performance mics, and we also have the opportunity for intelligent audio in the mobile market.

I would also add that -- to this that what you also see is Ear and IoT are becoming a much more important thing in China as well.

So overall, I think what you see over 2018 and starting into 2019, we've been able to buck the trend of the people who are specifically speaking about how they're doing in mobile through content gains in mobile, coupled with other end markets that are growing at a pretty rapid rate..

Okay. And then questions on intelligent audio. And I think that's how you framed your metrics you provided. On the revenue side, you gave a range of $30 million to $40 million. I think in the past, your percent -- guidance implied more like $25 million.

So I'm wondering what drove the uptick in visibility here? And then on the cost side, the $38 million you talked about, how does that trend the next year or 2? Is most of the investment behind? Or is it have to grow more here to get to where you're going?.

So let me cover the revenue on intelligent audio. So first, what I said was $30 million to $40 million in 2019. And just to say is, I would say, we had talked about the 2% to 4% range in the past, but let me just talk a little about '18. '18 came in significantly stronger than we expected for intelligent audio product revenue.

And to that end, I'd say right now we are trending towards the lower end of that range of 2% to 4%. And that gets us to the midpoint of $35 million in revenue for the quarter -- for the year, sorry, for the year. So that was -- that's how I stated.

And the second question, one more time?.

It was on the expense, you talked about $38 million being used for intelligent audio.

How does that number trend from here? Is a lot of the expense behind? Or is there more investment that needs to be made to get to where you're going?.

Yes, I mean, right now, I would say that as we look out, as a company, we still keep saying we will be in that 11% to 12% range, but we think that $35 million to $40 million range on the spend on IA is going to be flat year-over-year as we go forward..

Your next question comes from the line of Charlie Anderson with Dougherty & Company..

Maybe just I'll start with the big picture, Jeff, relative to a couple of months ago when you last talked to us, maybe what you observed this, has changed relative to the initial view on the year across the various end markets, be it smartphones, be it Precision Devices, looks like you maybe running ahead of schedule on Precision Devices, smartphones, maybe do a little bit better in China.

So maybe just update us on your full year thinking to the extent that you can and I've got a follow-up..

Sure. So let me just start with the major pieces. Let me start with the smartphone market. I don't think we've changed dramatically in our thought process from the last quarter. We said that the inventory correction would be largely behind us by the end of Q1. I think we're reiterating that.

I think the biggest wildcard that I would say in mobile is the back half of the year. I think it's a little tough to predict yet the back half of the year for mobile. Ear and IoT, extremely strong for us. Looking very, very good for the full year. We're very excited about that.

And again, I'd say it's all with mics and intelligent audio cut across all 3 of these markets. Hearing Health, we keep talking about that. That's GDP. There are some good opportunities that we are starting to see where the technology in Hearing Health can be applied to the commercial market.

I don't think these will be huge numbers this year, but I think there is a good opportunity there. And as far as Precision Devices, I would say we're probably slightly better than we were saying a quarter ago. And I think what I would just say is the markets have been quite good for us.

I think if you look at defense, you look at medical, you look at electric vehicle, you look at telecom, they have still been all very strong for us.

And as I look at our markets for Precision Devices, I'm looking at the different markets they're in, and we are not seeing anything that's going to be down year-over-year in any other markets at this point..

Great. And then as a follow up, you mentioned the $1 billion of incremental that IA opens up. I wonder maybe if you can just give us some of your thoughts behind how you get -- how you build up to that number.

And I think you did define as incremental, so you're not saying cannibalization of the current microphone business, it will be in addition to that. Maybe just walk us through how we get to that level of incremental opportunity to make sense..

I need to -- to tell you truth, we went through this in pretty high level of detail. And it's actually over $1 billion. I mean, we just rounded it down to $1 billion. But when you start looking at the mobile market, the Ear market and the IoT market, we look by market.

And I would say, in the shorter term, there is no doubt mobile is probably the larger opportunity for intelligent audio and where this is growing. But in the mid- to longer-term, I would say IoT and Ear become a large -- a very large opportunity for us.

And I think -- just use the Ear as the example, our largest customer introduced their new devices that now have Voice Wake, right? And so what you start seeing is, is that what we've been kind of forecasting for the last few years in Ear, IoT, is starting to come forward.

The second thing is, is that we can maybe see is processing being moved to the edge is a trend that we see across all these markets. So I mean, without going into -- it's a super lot of detail here, we did do a pretty detailed analysis to roll up to that number that's greater than $1 billion..

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

I wanted to start with Precision Devices. Obviously, it's been very strong, you highlighted that, and then, Jeff, you spoke a little bit more about it in your remarks. So thank you for that.

I was hoping you could just expand on what you said, talk a little bit about your competitive position, your competitive advantages and what differentiates your products from your competitors?.

Yes, so I'll break it down into the 2 product categories that we talked about. First is the high-performance capacitors. And I think what -- this has been the traditional area where this business has been.

And the real focus has been on these very unique applications that are mission-critical, areas where they require extremely high voltage in an extremely small package, where they require high temperature or where they have high reliability.

And I'll point you to one of the markets that we have been extremely strong in and continue to grow is, when we say medical, it's primarily implantables. Right? And so we have a lot of business in the implantable market across many different applications, where it's obviously mission-critical. The other area is the millimeter wave RF filtering.

And I would say, we've had this business for a while. The military business that we've had has been operating in the millimeter wave spectrum for many years for high-speed satellite communication, for radar.

And what we're finding is about a couple of years ago, that the millimeter wave 5G that they're talking about rolling out late this year is going to need the exact type -- same type of filtering techniques that we have become experts on over the last 5 to 10 years. And we've got a very unique offering in this area right now.

So when we talk about competition in this space, whether it be high-performance capacitors or it be in this millimeter wave RF filtering, there's really not like one guy we can call out and say is a competitor. There are some people out there, but we do have very unique offering..

Got it. Great. And then just expanding on that. I think you said the base station was $20 million in '18, going to $100 million in 2021.

So just to kind of reiterate that and that's assuming you get the majority of the share going forward since you don't have any significant competitors in that?.

Well, let me be clear, the $20 million that we did in '18 -- less than $20 million is comprised of both telecom, like the millimeter wave 5G, but is also of the military business that we have. So it's the combination of both.

And as we look out, I think our expectation is, it's hard for me to predict more than 3, 4 years out, but our expectation is that we should have very high share in this particular product category over the next 1 to 3 years..

Bob, just to add a little clarity to and granularity, less than half of that $20 million in 2018 was going into the telecom, the 5G market..

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

Nice results and guide. Jeff, can you maybe take us through where you see your average content in the earbud market going on later this year, with especially the Voice Wake, just to remind us kind of average content in Knowles. And then given your positive content share related to Ear wins, normally you have a steep second half ramp.

Any thoughts you can share on if that's greater than on a normal basis for you guys? Or any thoughts would be helpful..

I'm going to take that question first, Tony. So I think it's a little too early to say the back half of the year, what's going to happen in the mobile market. I think -- the one thing I would just draw people's thought process to though is that, that builds don't always track sell-through of the actual end product.

And so if we look back to 2018, obviously, there was a lot more building than there was selling last year, and hence what happened in Q1.

And so if we think about the back half of the year, is that's going to factor in, is that if you take a flat market year-over-year and they overbuilt last year, we do see the handset market being as a headwind overall. So I think that's my say on that. As far as the content, I think we talked a little bit about this with people.

When we get intelligent audio designed in, we can see sometimes 4 to 6 times the amount of revenue in a handset that we had in previous generations. So it's pretty significant, Tony, when we get -- when it's designed in.

And I would add, the one thing that I did mention on the -- in my script is that to date we've been selling the SmartMics into the handset market, but we do expect now to start shipping the multicore DSPs in the handsets in the back half of the year, which is another gain in content..

Just as a follow-up, Jeff, more on the earbud side.

Same question, I guess, content for earbuds not related to handsets?.

Yes, I think there's a couple of things going. I mean, it's actually quite a few things going out in the earbud market. First of all, there is a trend towards more microphones in order to improve the performance.

And we could see the possibility down the road of going, originally there was 1 mic per headset, then it went to 2, and there's 2 per ear, that assumed the possibility of 3 microphones per ear. The second thing I think we see a tend is a move from analog to digital mics in the ear, which I think is very, very positive for us.

The third thing we see in the ear is that there is the opportunity for our balanced armature receivers that are from the hearing aid side, starting to move into some of these applications. And people asked why. It's not necessarily about performance, it's about size in order to be able to fit more content.

Our balanced armature receivers are significantly smaller than the existing technology. It allows you to make a bigger battery or add more sensors to the device. And then last, which I think we see a lot of opportunities in this space is for intelligent audio as more people are starting to introduce products in this space.

I am pretty optimistic about this market. Sorry, I'm very optimistic about this market..

No, I can tell it, it's come across in the script as well. One quickly for John.

How much revenue did you guys book in Q1 from the acquisition?.

In Q1, it was pretty nominal, a couple of million. We're expecting that to be about -- you will see in the Q. Purchase price was $11 million. It's roughly $10 million annually in revenue. It should be -- we expect it to be accretive in 2019..

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

Jeff, I think last time you talked publicly, I think your expectation was that this year would be a growth year.

I'm curious with all that you're seeing and the second quarter guidance out, how you would characterize the full year growth trends as?.

I still think -- I think we're still saying we will have growth this year. I guess, the one thing that I highlighted on the previous question, which is you have to think just about how the handset market is going to work out in the back half of the year.

And I think that's my one hedge, but even I think what you see in the first half or let's even use Q1, there was a significant inventory correction, and we were still able to deliver growth as a company. I think that's a big accomplishment by the organization.

But I think, if you look at the trends, I'm looking at somewhere in the neighborhood of 45% front half, 55% back half. But again, the big caveat I lay out here is, Ear, IoT looking good. Hearing Health, looking good. Intelligent audio, looking good. Precision Devices, both millimeter wave and high-performance capacitors, looking good.

The one caveat I say is, how does the back half of the year develop in terms of handset market..

Very helpful. And then you mentioned that China came back.

I was curious when did you start to see China sort of recover time frame wise? And in your opinion, is the growth in China coming from basically new models or inventory getting cleared or stability at a broad level, multi-mic adoption, IA? What would you say would be the one trumping factor there?.

Well, let me just make this comment. It really started coming back, like for us in Q2 of 2018, is when it started coming back. And it has been no looking back so far. I mean, we have not seen a real slowdown in the last 4 quarters. So Q1 -- sorry, Q2 last year, Q3, Q4 and even Q1 has been pretty strong. So I think -- we have not seen a slowdown.

But again, Harsh, I think the one thing which has come back to is, we got a lot of tailwinds here that don't leave us exposed to how fast the handset market grows alone..

Got it. And my last question, and I'll get off, I promise. So you're talking about audio up slightly in June. And I was wondering if you could maybe provide some color about how you're thinking about China for the June time frame? And then also your largest customer, you mentioned things are stable ex mobile and even the inventory in mobile is stable.

But I'm curious how you characterize, contrast between those 2 are doing?.

I mean, we've been -- here's what I'd say. We've had great net growth in China. I would say that growth rate is going to slowdown in Q2. We're hopeful that -- but this rate of growth, we're doubling last year, it's very hard to maintain that level of growth. So I would say, we see some slowdown in China in Q2..

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

Solid job in the execution, and also thanks for sharing some light on intelligent audio as well as Precision Devices. I wanted to talk about kind of your competitive positioning over a few places in audio.

First, I think part of your China growth story has been share gains, and I wanted to know has that trajectory still been going higher? How do you expect that to continue? Or are you kind of comfortable with where your share is now? And then I'd like to dive in more into intelligent audio in order to address your large TAM.

Where are your products? I want to kind of -- if you could help remind us where your competitive advantages are, maybe for both wired applications such as IoT as well as wireless applications, where maybe power, battery life is more important?.

Sure. So first about China. I would say share gains was part of 2018, but not the whole story. I would sit there and say there was a story, there definitely was an increase in number of microphones per phone in 2018 and even into 2019. I would definitely say there has been an adoption of higher performance microphones.

And again, as I said maybe earlier to one the questions, our IA adoption in China has been faster than expected in 2018. So those 3 things in combination with share have been -- I'm not going to comment where share goes here, but I would just say that those other tailwinds continue to be there for us in 2019 in China.

As far as the competitive positioning of the IA products, I would definitely say that our advantage here is a combination of a couple of things. One is it's the price -- sorry, the price, power/performance curve.

Another words is, we are offering something that can run machine learning algorithms, what you call artificial intelligence at a very reasonable cost, at a very low power.

And so if you look at where the advantages really come out, it's in cost-sensitive applications typically, although we are moving up that curve with the multicore DSPs, where you want to run pretty advanced algorithms in battery operated devices. That's where our real advantage is. The second advantage, I think, we have is that our DSP is open.

In other words is -- we can write algorithms to them, which we do. We have an algorithm partner program, where we have signed up a number of companies that are now porting their algorithms to our device. And now we have multiple customers who actually are writing their own algorithms to this platform.

And what we hear time and time again, Bill, is that, that combination of price to performance to power is very unique coupled with it being open..

Okay. I guess, we've talked in the past, and it sounds like you've characterized the growth and that's helpful for this year. In light of, I guess, kind of a pretty strong competitive position in your core business as well as the initial adoption of IA, can you give us a feel for how we should be thinking about gross margin trajectory this year.

You came in better than expected in March.

How this should -- the trend should come through the rest of the year?.

So I've done a lot of talking, I'll let John answer. I will give some color if I think -- after hearing what he says..

Bill, I'll start with Q1. Our Q1, as I mentioned, was up basically 150 basis points and really driven by the audio segment. And I would say, the audio segment was up 200 basis points. About half of that was due to favorable product mix, higher performing microphones. And then the other half was really improved factory performance.

So a little better than prior year yield, lower factory spending. That really drove the quarter. In terms of full year, I said if you go back to Q4 call, I said we expected for the full year of 2019 to be just a bit above 40%. I'm confident and reiterating that, and kind of Q1 proves it.

If you look at the improvement we had in Q1, 200 basis points in audio, 150 overall, I'm fairly confident that we can exceed 40% for the full year of '19..

Okay. I guess, just trying to decouple the Precision Devices growth because we do have the acquisition. It seems like you're now on pace to maybe even exceed mid-teens for the year. I just wanted to make sure we're in the right -- I think you last time talked about mid- to high single digits, maybe towards the higher end of that.

Just want to try to understand how we should consider the growth for that segment?.

Yes, I mean, when I start looking at the numbers, I mean, I think it's going to be another strong year for Precision Devices. I mean, I don't put a full number on that at this moment, but you take the number we finished at last year in Precision Devices, which was about $145 million.

You add what John said on here, which is about $2 million to $2.5 million of revenue per quarter for an acquisition. You take that base, high-performance capacitors growing at mid-single digits. And then, I think the wildcard for us at this moment, we're going to have a lot of growth in the millimeter wave filtering products.

But the question is how much, and how much is going to come into this year versus next because a lot of these millimeter wave rollouts are kind of really starting to go toward the end of this year. And so you could slip a quarter, it could be pulled in a quarter. So I think that's kind of the wildcard in the back half of the year..

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

Okay, I understand the kind of economics and growth opportunities that you guys are going to get in PD, and it's certainly been impressive. But I'm not exactly sure why it's still strategically core to Knowles. You guys have kind of branded yourself as a audio solutions provider. The growth opportunity here seems pretty outstanding.

And I think you get a nice multiple for this business, particularly for someone who is doing, let's say, filtering, for example, and wants more 5G exposure. So would you consider selling this business? Or are there other factors in which you don't think that someone would be willing to pay the multiple for this thing that you think it's worth.

How do you kind of size up keeping this business versus selling it?.

Well, I'm not going to make a comment about selling a business. We like this business. And I think a couple of things what it does for us, it diversifies our customer base. It's got high-value products. And I would add one other thing that we don't really talk as much, but it does share lot of infrastructure with us.

If you go to our factory in China where we make silicon mics, they are co-located in the same factory where we make these high-performance capacitors. And so to the end, I'm not going to make a comment about buying or selling of any business quite frankly.

But in the end, I think what we've shown is, if you look at the history of this business, when we inherited this business from Dover, it was -- at the spinoff, it had been roughly a flat business for, I would say, 3, 4, 5 years.

And we've demonstrated that as an owner we have been able to drive shareholder value through the ownership of this business, both leveraging the total of Knowles as well as understanding the technology they had and moving the direction that we have with the business..

Great. And then in terms of IA and some of your wins recently. Obviously, the multicore DSP last year was great. And the Vivo win is nice as well.

Do you have any other for single or multicore? When do you expect your first double core win? And out of curiosity, would -- what would multicore DSPs and handsets do you support?.

Yes, I think what you start seeing is multicore handsets, there's a lot of different applications that we can lay out. Starts with Voice Wake and of course, enhancing that. As you have more performance, your Voice Wake performance becomes better, but there is a myriad of different applications.

As far as the multicore design wins for handsets, we are actually starting to ship in the handsets within this quarter for ramp ups that will -- or phones that will be introduced in the back half of the year.

And I think what we saw was, we have the SmartMic, which I would say is the gateway product that gets people interested at a reasonable price that does some functions.

Then we have the 4-core device, which we started shipping last year, which with very high-performance can do many different applications as demonstrated by the customer who used that last year that we talked about.

The dual core device kind of fits in a sweet spot between those 2 in terms of price and performance, for the guy who wants more than the SmartMic, but doesn't really wants to pay the price of the 4-core device.

And we're starting to talk about these more as we call audio edge processors, but what you're starting to see is we are filling up the product category of price and performance.

And we're also attracting a lot of different algorithm companies, third parties, who are porting this to device because they are seeing the level of performance they can get from their algorithms is significantly better than they can get in off-the-shelf DSP..

Your next question comes from the line of Jaeson Schmidt of Lake Street..

Wondering if you can comment if you're seeing anything out of the ordinary from the pricing side within the IoT market?.

Well, I don't see -- I don't have the IoT specifically pricing right in front of me. I would just say that we talked about this in the past that in '16 we had -- or '17, we had close to double-digit ASP erosion on mature products. We cut that down significantly in 2017. In 2018, it was around 4%.

And as we look for the full year 2019, right now, I would say, we're slightly better than that 4% from last year. So the trend continues to keep moving in that direction as a positive.

And so -- it's the combination quite frankly of first, the competitive landscape, which I think has been positive for us, but it's also the introduction of, I would say, differentiated products that puts us in a strong competitive position..

Okay. And looking at intelligent audio. I know, Jeff, you mentioned you're tracking towards that lower end of the 2% to 4% range. Obviously, $30 million to $40 million, a significant jump from 2018's level.

But just curious, what is behind sort of this slightly downshifted outlook? Is that really just timing of launches or assumptions on some of the volumes of these SKUs?.

Yes, I would say there's -- primarily it's the fact that 2018 was significantly better than we expected. I mean, if you were to go back a year ago at this point when we started -- midyear is when we started talking about the 2% to 4%. And the sales of intelligent audio came in significantly higher than we expected.

That, coupled with, I would say, there is a little bit of this, but I would say it's more of the former, is that there are some significant products being launched later this year. But I would say it's more of the former, which is 2018 was a very good year for intelligent audio compared to what we expected at the beginning of the year..

Your next question comes from the line of Suji Desilva of Roth Capital..

You guys were very positive on the Ear segment.

So I just want to be clear on, is their customer concentration today? Or do you have multiple customers that are large already? And if it does grow the way you think, Jeff, are you going to still be exposed to 1 or 2 large customers or will there be diversification in that segment? I thought that was important to understand, given you're very positive..

Well, in our annual report, I think we talked about -- we have 1 customer that's over 10%, which I think everybody knows the name of.

I would say the positive with that 1 customer for us is that the mix is not all in the mobile market, right? And so I would say that's been rough -- running roughly about the same percentage of sales, but what's been happening is, is that we've been getting more business in other products besides just the mobile market.

And besides that, we don't have another customer that's over 10%. And I think -- and that keeps going back to the idea here that we are diversifying our customers. We are diversifying our markets.

And I can't say that, that will last forever, that we won't have another customer over 10%, but within this year, I don't think we see that we will have another customer over 10% to achieve the targets we expect in 2019..

Jeff, sorry, if I wasn't clear. I was asking specifically about the Ear segment..

Sorry, sorry. Yes, I mean, when I look at the Ear, I don't know if I have the breakout here in front of me of the Ear customers, but Ear is relatively fragmented business. I mean, it's not -- when you think of it is, there is not one overly dominant guy besides the one guy everybody knows, but they sell a very limited product portfolio.

So I don't see customer concentration over time is going to be a big deal in the Ear market..

[Operator Instructions] Your next question comes from the line of Harsh Kumar of Piper Jaffray..

Jeff, in Voice Wake, is it mostly you guys at the top of the chain? Or are there other people that compete with you? And then second question was, I get the applications in IoT for dual core, quad core DSPs, but maybe just explain to me what some of the applications are or maybe one of the key applications might be in the dual core DSP within a phone?.

Well, that second question, I know I've been a little elusive, but these phones are not in the market yet. So I can't really speak to that yet, Harsh. But I would say in due time, as the phones are released, we'll talk more about the applications that are running, but they're not in the market yet.

And as far as Voice Wave, I think there is some limited competition in this space, but we do think we have a pretty unique offering for battery-operated devices, want high-performance Voice Wake at a reasonable cost.

And so I feel very comfortable that, that is a gateway application on the way to a bunch of different applications that get people to move to the multicore.

And I think that's kind of the statement I'm trying -- maybe trying to get across, Harsh, is that people start with the SmartMic, then they start adding applications and they quickly run out of performance to just run the SmartMic. And then we say, oh, by the way, we got the 4 core, we got the 2 core, we've got multiple products we can offer..

There are no further questions at this time. I will turn the call back over to the presenters..

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

That concludes today's conference call. You may now disconnect..