Good afternoon. And welcome to the Q4 2021, Knowles Corporation Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Sloane Bolun, Investor Relations, you may begin your conference..

Thank you. Welcome to our Q4 and full-year 2021 earnings call. I'm Sloane Bolun and presenting with me on the call today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO. By now, you should have received a copy of our earnings release and webcast slides.

If you have not received both documents they're available on IR section of our website at knowles.com. 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.

Such forward-looking statements include comments about demand for company products, anticipated trends in company sales, expenses and profits, and future financial outlook, and involve a number of risks and uncertainties that cause actual results -- or 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, 2020, periodic reports filed from time-to-time thereafter 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, we have provided both GAAP and non-GAAP financial measures this quarter. All references on this call will be on a non-GAAP continuing operations basis, unless otherwise indicated.

Please see our earnings release and webcast slides available on our website at knowles.com, and in our current report on Form 8-K filed today with the SEC for some reconciliations to the most directly comparable GAAP measures. And with that, let me turn the call over to Jeff, who will provide the details of our results. Jeff..

Thanks, Sloan. And thank you to everyone for joining us today. For those of you who joined us on our investor update in November, we are very pleased to report another strong quarter that demonstrates our progression toward our mid-term financial targets.

As we come to [Indiscernible] the update call, we have made significant strides in transforming the company to focus on the highest growth and markets, with an eye towards improving adjusted EBIT margins and driving strong free cash flow.

As we look back at 2021, and certainly our fourth quarter results, we feel confidence and validation in our strategy and look forward to continued progress and success in '22. With that, let me begin with a summary of our Q4 results.

We generated revenue of 234 million, which came in at the higher end of our guidance range, driven by strong market dynamics in hearing health and precision devices. This result was achieved even with the challenging back -- supply chain backdrop, we noted last quarter.

What is most encouraging about our result was the continued execution on margin expansion. Specifically, our fourth quarter gross margin was over 43% or 130 basis points above the high-end of our guidance range. We also delivered adjusted EBIT margins of 22%, which we believe demonstrates the operating leverage the company has in our business model.

In total, we produced fourth quarter earnings per share of $0.48, also above our guided range. Lastly, we continue to drive impressive free cash flow as John will detail in a minute. To summarize, another quarter, where our strategy to focus on higher-margin products and markets is yielding strong adjusted EBIT margins with exceptional free cash flow.

For our full-year 2021, results were strong as well. And now I'd like to take a minute to highlight our accomplishments. As we noted at our investor update, Knowles is positioned to create shareholder value through top-line growth, margin expansion, and free cash flow generation.

We're proud to say that 2021 is the latest proof-point of execution against our plan, and we believe there is significant runway for more of the same success ahead. Let's start with the shift we have made on product mix, and how has improved margins over the past few years.

As we noted at our investor update, declare byproduct of our strategy can be seen in the growing percentage of our revenues above 40% gross margin. From 2017 to year-end 2021, we increased that percentage from 49% to 70%, an improvement of over 20 points. Now let me detail a few of the key drivers and the actions that drove the improvement.

First, as mentioned, we continued to optimize the mix of our business. In audio, we have a particular focus on growth in non-mobile ear, IOT, and computing applications, as well as our hearing health business. In Precision Devices, our high performance capacitor and RF filtering businesses both continued to expand margins.

John will speak to the margin impact, but I'd note that our opportunity on the top-line for these growing end markets is attractive, especially considering our leading market position. Second, Knowles continues to capitalize on favorable market dynamics and we are gaining share within our hearing health market.

In the fourth quarter and for 2021, Knowles fired on all cylinders in this market with share gains and new product introductions along with strong end market growth. Third, Precision Devices continues to be an out-performer.

Investments in both high performance capacitors, as well as RF filters across a wide variety of markets are paying dividends in revenue growth, margin expansion, and free cash flow. As you can see from our financial results, execution against our strategy since 2017 has shown consistent progress as we have fundamentally transformed the company.

Similar to our investor update, I'd like to highlight the margin free cash flow and earnings growth we've generated despite revenue growth over the same period that was moderated by strategic exits from lower margin business.

We have driven significant operating leverage over the past four years as well and have never been in a better position to drive shareholder value. We have grown our adjusted EBIT margins by more than 500 basis points over the past four years, which has translated into an APF CAGR of 15%.

This was achieved with a revenue CAGR of just under 4%, which is impacted by global supply chain restrictions and our strategy to focus on higher-value products. Equally important, our free cash flow margins have improved by nearly 10 percentage points, which we plan to deploy through future M&A and share repurchases.

In total, we completed 2021 with exceptional adjusted EBIT margins and the highest free cash flow since we have been an independent company. This is certainly something we are proud of, but the exciting takeaway is what the upper ending leverage means for value creation in the quarters and the years to come.

Now let me provide some additional detail on each of our product segments. Starting with precision devices, we continue to outperform with another quarter and full year of record sales for the segment. Total revenues for the year were just north of $201 million or 16% higher compared to 2020.

In the Fourth Quarter, precision device generates very strong results with revenue up nearly 40% compared to a year ago. On its own, the growth is impressive and illustrates our market-leading position across a number of attractive end markets. That said, we're just as proud of the results of our precision device segments posted on profitability.

Specifically segment gross margins were up 630 basis points compared to a year ago, and this is not happening in one product category or end market. It is very diverse across markets such as medical, defense, EV and industrial.

Now let me turn to our audio segment, which as I noted earlier, faced a tougher environment on the top-line, given broader supply chain issues and the timing of customer product launches.

In our MEMS microphone business, revenue was pressured for the reasons mentioned, but gross margins were favorable as we continued to shift our mix away from lower margins, products and markets.

Additionally, we are well-positioned with a number of technology initiatives and new product launches that we expect will augment our revenue growth in the years ahead. Our hearing health business continues to be strong as the global market recovered and our company took additional share.

The hearing health business also benefited as we saw recovery in the audio files demand in the second half, and our recent product launches continue to ramp with our largest customers. Similar to our other businesses, hearing health also drove significant operating leverage, which we believe will continue in 2022.

Overall, despite a tougher environment due to supply issues, I am pleased with the potential for profit expansion we have built into the business when supply chain issues and customer product timing turns more favorable.

John will give you more detail on the Q1 outlook in a minute, but I'll conclude my prepared remarks with a review of our mid-term expectation by highlighting a few things that we spoke about at the investor update. First, I have high conviction that the company can grow our top-line in the mid-to-high single-digits.

Looking at 2021 in retrospect, clearly there are a range of macro factors that impact each of our two segments differently. We have visibility in the mid-term demand dynamics across both segments, and we expect to drive growth opportunities through our market-leading position.

Second, as I have highlighted throughout my remarks, we continue to execute and outperform on our profitability goals. We maintain our conviction to achieve gross margins above 43%. As I mentioned, our shift in mix has already contributed meaningfully to the progress as we expect will continue to be positive in the years to come.

With the background of revenue growth and gross margin expansion, we believe there is continued opportunity to leverage our existing footprint and infrastructure to drive adjusted EBIT margins. This gives us confidence we are on track to achieve our midterm model of 22% to 24% adjusted EBIT margins and 15% to 17% free cash flow margins.

In summary, I'm very proud of 2021 results delivered by the entire Knowles team, and I'm even more excited about the opportunity we have ahead of us to achieve continued progress and drive value for shareholders. With that, let me turn it over to John -- the call over to John to review our financial results.

John?.

Thanks, Jeff. We reported fourth-quarter revenues of $234 million down 4% from the year-ago period, driven by lower shipment volumes in audio, partially offset by higher revenues in precision devices.

Audio revenues of a $176 million were down 13% from the same period a year ago, driven by timing of new customer, new product launches, a challenging supply chain, and our focus on higher-value MEMS microphones in connection with our margin improvement initiatives.

The decline in MEMS microphone revenues was partially offset by increased shipments into the hearing health market. The precision device segment delivered revenues of $58 million, up 40% from prior year, driven by strong organic growth in defense, medtech, and industrial end markets, and an acquisition completed in the first half of 2021.

Fourth quarter gross profit margins were 43.3%, 130 basis points above the high-end of our guidance range and up 530 basis points from the same period a year ago.

Audio segment gross margins improved 290 basis points over 2020 levels, driven by lower factory spending and favorable product mix, related to an increased percentage of shipments into the ear, IOT, and hearing health markets.

Precision Devices segment gross margins were 49.2%, a record for this segment and up almost 13 percentage points from the prior year, driven by productivity gains, improved factory capacity utilization, and an acquisition completed in the first half of 2021, as well as favorable inventory reserve adjustments.

Our gross margin expansion throughout 2021 demonstrates the impact of our strategy to deliver high-value differentiated solutions to a diverse set of end markets. Total company gross profit margins finished at 41.7% for full year 2021, 270 basis points above 2019 pre-COVID levels.

R&D expense in the quarter was $20 million, down $1 million versus the prior year. SG&A expenses were $30 million, $3 million above prior year levels, driven by higher incentive compensation cost and the impact of the acquisition completed in the first half of 2021, partially offset by lower legal expense.

For the quarter, adjusted EBIT margin was 22%, up 370 basis points from the prior year, driven by higher gross profit margins. EPS was $0.48, which was $0.03 above the high-end of our guidance, due to higher gross profit margins and a lower effective tax rate, partially offset by higher incentive compensation cost.

For full-year 2021, we delivered adjusted EBIT margins of 20.1% up 530 basis points from 2019 levels, driven by higher gross margins and improved operating leverage. Now, I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $69 million at the end of the quarter.

We generated cash from operations of $66 million in the Fourth Quarter, 11 million above the high-end of our guidance range due to higher EBITDA and lower than expected net working capital. Capital spending was 20 million in the quarter, and we repurchased 1.1 million shares at a total cost of 25 million.

For full year 2021, free cash flow was $134 million, representing more than 15% of revenues. We repurchased $2.1 million shares in 2021 at a total cost of $44.5 million, fully repaid our convertible notes, and we exited 2021 with essentially no net debt. Moving to our guidance for the first quarter of 2022.

We expect total company revenue to be between $197 million and $203 million, down slightly at the midpoint versus the same period a year ago. Our revenue guidance reflects the potential negative impacts related to continued supply chain constraints and COVID -related absences in our North American manufacturing facilities.

Revenue from the Audio segment is expected to be down approximately 10% from Q1 2021 due to lower demand for MEMS microphones, as we continue to be negatively impacted by global supply chain shortages, partially offset by increased demand in the hearing health market.

Precision Device revenue is expected to be up more than 40% over prior year levels, driven by broad-based strength in defense, medtech, and industrial markets, and the acquisition completed in Q2, 2021.

We estimate gross margins for the first quarter to be between 39% and 41%, up a 100 basis points from the year-ago period, driven by favorable mix as we expect a higher proportion of shipments into non-mobile markets.

R&D expense is expected to be between $18 million and $20 million, down $1 million from prior year levels due to a reduction in incentive compensation cost. We're projecting selling and administrative expense to be between $25 million and $27 million, up $1 million from the year-ago period, driven by the acquisition completed last year.

We're projecting adjusted EBIT margin for the quarter to be in the range of 17% to 18% and expect EPS to be within a range of $0.29 to $0.31 per share. This assumes weighted average shares outstanding during the quarter of $96.8 million on a fully diluted basis.

We're forecasting an effective tax rate of 13% to 17% for the quarter and full year 2022., which is lower than previous expectations. As we recently received an extension to our tax holiday in Malaysia through the end of 2026.

For the quarter, we expect cash generated from operations to range between 0 and 10 million in line with normal seasonal patterns. Capital spending is expected to be approximately $10 million. I will now turn the call back to our Operator to open the line for questions. Operator..

[Operator Instructions] We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Anthony Stoss with Craig-Hallum. Your line is open..

Hi guys. Nice execution of the December quarter. John, let me start with you. For the March quarter gross margin guide down a bit sequentially, even on higher PD and hearing health, can you maybe give me a little bit more detail on why that is.

And then, also any thoughts you might have on gross margins for the remainder of the year, and then I have a follow-up for Jeff..

Sure. Yeah, Tony. In terms of the sequential decline in gross margin, is really two factors, lower capacity utilization in our MEMS microphone business, and then we're actually seeing sequentially some unfavorable mix with lower compute and hearing health and compute nearing out both our above-average gross margin. So it's those two factors..

And just make comment on the compute portion of this, the factor utilization is pretty straightforward, that's kind of a usual thing seasonally that we operate a lower level in Q1 in terms of capacity utilization.

But the computer market [Indiscernible] a little bit weaker for us in Q1, and right now what we see is, is that at returning to, I would say 3 this quarter level in Q2 and the bookings are indicating that that will be an increase in back to normalized levels in compute in Q2..

Yeah. Tony, in terms of the second part of your question too, is what do we see looking out? We do see sequential improvement going into Q2 and over the remainder of the year. And keep in mind, even at the midpoint of our guidance for Q1, it is 100 basis points higher than the year-ago levels.

So while we're really pleased with the gross margin we delivered in 2021, we do think there's room to progress further..

Got it. Thanks. And this is a follow-up for Jeff. Normally, you would comment about the millimeter wave division. I didn't hear anything in your prepared remarks. I'm just curious, your view on that for 5G infrastructure. And then also, love to hear your thoughts on true wireless earbuds and growth of that in your more IOT -type businesses..

Sure. First on the RF filter business. If I look at 2020 to 2021 and 2022, it grew reasonably amount in 2021. I think we had about $35 million in 2020 going to well over $45 million in 2021. And I think we're poised to have a real breakout year in RF filtering in '22. A lot of our growth in PD is going to come for our filtering. But I would just say this.

There is some telecom in this, but the majority here is defense. We've worked -- really got some nice design wins. I'd say our acquisition of IMC that we did in the first quarter or second quarter of last year is really panning out really well. We're really pleased with this acquisition.

Again, it broadened our product portfolio and allowed us to do more stock with more customers. We're starting to see more sales synergy with this -- with the opportunity. And so we're expecting some pretty significant growth out of the RF filtering business.

Specifically, to telecom, I think I'll say what I've said over the last couple of years, which is we've got a number of design wins that are going to production this year. I think the challenge here, Tony, is it's a lot with the second tier people who are working on stuff that's going to go on the home or in the house or in a small cell.

And it's very hard for us to gauge the real roll-out and what they're -- they're telling us big numbers. But I got to be honest with you, I'm skeptical of what -- it's based on what I read the marketplace and what we see about the real roll-outs going on, this is more of a wait-and-see.

But we do have some design wins that could generate, not huge revenue, but $5 to $10 million worth of revenue in telecom in 2022..

Okay, if I can squeeze in one more just on the supply chain issues that everybody is facing. I'm curious your thoughts on when it might ease? Does it keep easing each quarter? Does it last into 2023? Any thoughts would be helpful..

Yeah. Here's how I see it. The supply chain thing is impacting us in Q1 and Q2 for sure based on what we know we got coming in. I think as we go to the back-half, there's a two-pronged approach here that we see. One is we think that the supply chain will get better in the back-half and we will get more wafers.

Now, that being said, we have multiple wafer suppliers, and as we can introduce new products, we're using different wafer suppliers to try to balance the load. So in some places we have enough -- not enough. In some suppliers, we have more than we need.

So I think you're going to start to see as we go into the back-half, even independent of the supply chain disruptions that are caused by -- we have secured enough wafers in total, but we got to make sure the mix with new products comes, so we're maximizing the number of wafers we get..

Got it. Thanks for detail Jeff, I appreciate.

Your next question comes from the line of Tristan Gerra with Baird, your line is open..

Hi, this is Tyler [Indiscernible] for Tristan, thanks for taking my questions. First, could you talk about the puts and takes of what you're seeing in the smartphone market, notably China, which I know is a market that you've de -emphasized in the past few years.

How are inventories there? How do you see the trends developing in the China market for the rest of the year?.

I mean, I think the trends for the China market, I think there's been a lot of discussion that China is doing better. I think the real challenge in the China market -- in the end market has been, with COVID. A lot of the Chinese suppliers are highly focused on the emerging markets like India, Brazil, Indonesia.

They're focused on a lot of these markets and they've been dealing still with fair amount of COVID related issues. So I think -- we're hopeful that it is getting better.

We're hopeful as we look towards the rest of the first half and into the second half, our China business will be better, but I'm going to preface this with the statement that again, I don't want to run mobile under the bus because there may be a day where we come out with products that are high -- very high gross margin and not commoditized in the mobile market, but we are deemphasizing selling to the mobile market.

And just to say this is, in 2021 we had about little over 22% of our total company revenue came from mobile. And that's down pretty significantly. It was over 30 a couple years ago. I would say that we're probably in the neighborhood of 20% this year, maybe even a little lower this year.

And I am going to draw you to Q4, because when you look at the 43% gross margin, I think that's a proxy for where we want to be on an annual basis, and I say this is that the mix was optimal.

In other words, we didn't sell a lot of commoditized mic's, we sold more of our year IOT compute to Precision Devices, hearing, health and you see what it does to our gross margin.

And it's very powerful and so we look at the -- I look at Q4 as -- people will be able to look at it and say, you're at your midterm model ready for a quarter, but that's kind of ideally where we want to be in 2 to 3 years, on an annual basis as we continue to de -emphasize commoditized products..

Great. As my follow-up, maybe you could talk about some of the biggest growth margin drivers you're seeing this year. Maybe it's in some types of products or mix or anything like that..

Yeah. John 's got a good thing in terms of margins that we talked about. Think of our business like four quadrants. You got mobile is one quadrant. You got ear, IOT, compute, and then there's microphones other category. And then you've got the Precision Device quadrant, and then you got the hearing health quadrant.

A year ago, we'd say those were all the roughly the same size. Now actually, mobile's probably the smallest now of those four quadrants. And it's also at this moment the lowest gross margin.

And so as we sit there and look at the other markets, and we've put this in the mid-term update that we gave, or the investor update, we expect those other four quadrants to grow faster than the mobile app above the corporate average gross margins. And we can sit there to continue to see this mix shift.

It's very easy to sit there and go as we talked about mobile growth, 0% to 2% over the 3-year period. And then you can go through the list. What hearing health grows at, what precision device goes at, what [Indiscernible] goes at, that we can get the 43% growth gross margin just through mix shift. And I'll just make -- so mix shift is a big portion.

We're still working on, obviously, productivity improvements to improve gross margin but you could see, again, the Q4 power of mix and how it affects our gross margin and our profitability. And you see it in our EPS and in our operating margins..

Yeah, I would just add the other thing that we're really seeing is obviously we're seeing increases in input costs, whether it's wafers, whether it's labor, whether it's other materials, we've been reasonably affected at passing those costs on through higher pricing, especially in the high-value microphone area and in the PD and HHT businesses.

So that's been another opportunity and action for increase in gross margin..

Thanks so much. I appreciate you taking the questions..

Your next question comes from the line of Bob Labick with CJS Securities, your line is open..

Good afternoon and congratulations on the strong execution. There's been a lot in the news lately, and we've talked about it on previous calls too, but just wanted, kind of, the latest update on the OTC hearing aid market.

Any thoughts on the timing of that market opening up? And maybe you can kind of put it back together with an update on the automated balance armature line. If those -- if those would be ready and we'd go into the OTC market or into a different market..

Yes. Let me give you the VA line update first. Line is operating, not running at full capacity quite yet, but it is operating and producing parts.

We sold parts off the line in Q4 and we'll continue to sell in Q1 and continue to ramp it through the first half, with the goal of hopefully by later this year sometime in the back-half getting to full capacity utilization. I would sit there and say our -- and I'll come all the way around back to the OTC market in a minute.

Obviously, we're pursuing the true wireless market with the balanced armature, and I think we're seeing some success here in terms of design wins and things that will go to production. But we're also seeing that there is interest from the OTC market, as well as some of our hearing health customers in using product off the automated line.

And this is a big technology development for us that is going to pay strong dividends over the years to come. And we're -- it's taken us longer than we expected, but where we are today, going forward, I think this is going to be a contributor.

Now, specifically to the over-the-counter market, I think -- I said it before, we got to see how this develops. I think this is a great opportunity for us. Right? We are very well positioned to take advantage of over-the-counter market. It does not appear to us that the content is lower.

It's so far -- we're seeing people who are doing things like this in terms of the pricing they put to the end market is very similar to the hearing aid, but it's really targeted people who have mild hearing loss, right? And so -- and that is where today there is very low penetration.

I mean, if you look at -- I always giving my pyramid where there's 70%, 80% penetration of people who have profound hearing loss, roughly 50 with moderate, but it's 5% to 10% and there's millions of people who have it so, I think we're pretty optimistic that over the mid-term, the over-the-counter market can develop to bring people with mild hearing loss in, who otherwise wouldn't have had a hearing aid, that's number one.

Number two is once they're brought in, once you lose hearing over over time as you age, they'll get their first real hearing aid from the traditional channel at an earlier age, and this is all going to drive more demand. And so that's why we see our hearing health business is GDP-plus. I mean, that's -- we used to say GDP, now it's GDP-plus.

What that means yet in terms of the absolute numbers, hard to say, but it's definitely an upside to where we are today..

Okay. That's great. Very exciting. Thank you. And then I guess just for my other question, obviously, precision device acquisitions have been a great use of capital for you. So maybe if you could talk a little bit about that pipeline, if there's any expectations this year, and what's the ideal capital structure? Your net debt-free right now.

Is it just using free cash to make acquisitions, what might you lever up, etc..

Well, I think the one challenge I'll say and maybe I'll let John speak a little bit to this a little bit more, but the one challenge is that valuations are quite high in the marketplace. And I got to be honest, we don't see ourselves trying to overpay.

And I would say the things that we're looking at, I don't think we're looking anything that is huge in terms of -- the funnel is okay but I would just say, what you can see is we're starting to generate more cash without that. And Q4 is an indicator.

We paid off the [Indiscernible] convert that we had in cash, we bought a fair number of shares back in the quarter as well. And so I think what you're going to see is going forward -- and I think we'll spend a little bit more time probably on the next call talking about capital allocation and what that means but, we're looking for acquisitions.

And it may not be mutually exclusive that we need to do M&A core share buybacks, or return capital shareholders. We think there's a possibility here with the amount of cash we're generating from our core, that we're capable of doing both. [Indiscernible].

Yes. Just to summarize it. We delivered very strong cash flow in 2021, $133 million or north of 15% of revenues, already close to the range, at the low end of the range of our mid-term financial target. We believe we can continue to deliver similar percentages in 2020 with expansion in the mid-term.

And then in terms of capital deployment, think of 2021. We had three major activities. We repaid our convertible notes that Jeff mentioned. We also spent about $80 million on a key strategic acquisition in our PD business, and we repurchased $44 million worth of our stock. And at the same time, we're exiting 2021 with no financial net debt.

So basically, the debt repayment is behind us, so our priorities really after that are unchanged. We'll continue funding organic growth initiatives and we'll look for creative acquisitions primarily in the PT segment. And then it's a matter of return of capital and through share repurchases.

And as Jeff said, we'll try to outline and get some parameters around that return of capital on the next call..

And I just want to add as one last thing is, I think you've kind of seen with our kind of strategy on our MEMS microphone business of going after higher margin business. What you're seeing is the trending down of CapEx towards the lower end of the ranges that we've given.

You remember 3 or 4 years ago, we used to talk about 6% to 7% or 6% to 8% and we had a year that we're 9%. Now we're kind of trending below that 6% to 8%. We're in the 5% range.

And I think that's another -- just a sense of how we're investing the capital and what we're doing with it and how we're turning now, even as we pay down the debt, we're returning capital to shareholders through share buybacks..

And Bob, the one question that I didn't answer you asked about, what is the ideal leverage? Obviously it will depend on the acquisition opportunities, but we're going to be disciplined and we'll maintain an investment-grade-like balance sheet, so maximum leverage, 25 to 26 range..

Okay. Super. That was great detail. Thank you very much..

Your next question comes from the line of Chris Rolland with Susquehanna. Your line is open..

Hey, guys, thanks for the question. Regarding shortages, I just wanted to drill down there a little bit more.

You mentioned front-end, I was wondering what could your revenues have been, had you been able to get supply? Do you have enough front-end supply to meet everything for the second half when you typically have more volume running through there as well, and then lastly, do you have any back end issues or are you running into customer kitting issues, and can you share some of those anecdotes with us?.

Yeah. Sure. So let me just first cover Q1. I think we're dealing with two issues. One that's probably a little bit more temporary and one that's been around for while. First, the one that's been around for a while and continuing to linger is the supply chain issues and getting enough front-end wafers. I would say, overall, we're getting enough wafers.

I would say, where we have our products is not optimized for where our wafers are being necessarily produced today. We're going to continue to work on that.

And as the year goes by, as I mentioned, we do expect some improvements, but on the reverse side, we also expect that we'll introduce new products that utilize pro -- what you call the front-end material that we'll have more capacity. I think that's going to be a big help and as I see the back-half of the year today, I think.

we're very well-lined. Now, this is within our MEMS microphone business, so this is less than 50% of probably our projections for this year. Within PD and hearing health, we don't have huge problems with supply chain. We're not as reliant on third parties in order to provide. Like for example, we stamp a lot of metal parts.

We have our own stamping operation, that's one example. But we are facing one issue in our PD business. They're having a fabulous first quarter based on the guide, they're up significantly year-over-year.

But the majority of their manufacturing is in North America, and we've been averaging on a weekly basis between 5 and 15 percentage absenteeism in the factories with direct labor. This is definitely impacting the Q1 number. So I got supply chain on MEMS. I got Omicron in North America.

I would say this is probably impacting us probably in the tune to $5 million to $10 million in Q1. And so that's -- Our main issues -- Again, PD and hearing health, we're not seeing a lot of issues relative to supply. I would say my concern in North America right now is relative to Omicron in terms of absenteeism, but that should come to an end.

We're starting to see things come down. We expect that by the end of Q1 that should be taken care of. For the back-half of the year as you asked, I think it's about the mix.

In other words, it's optimizing with our new product introductions that we use the fabs where we have excess capacity versus where we don't, so that we better balance our wafer supply..

Thank you, Jeff, appreciate. And then the next question is, just given these concerns, given that wafer seem a little tougher to get, given we have shortage, everyone's seeing this as well. Does this actually help your pricing dynamic? And then secondly, a quick one, accounts receivable up pretty substantially in December.

Maybe just talk about that as just related to your largest customer..

Let me --why is your comment specific chart? Why does customer agree to that specific, but John can give some comment--?.

These are simply timing issue, Chris. We had a higher percentage of our sales in the last month of the quarter, which will get collected typically 45 to 60 days later. And so that's all it is..

If you look at the shape of Q4, we had a lot of sales in Q4..

In the last month..

Sorry. In December of Q4, sorry. And so it's not been collected yet. I don't think we see that as --.

I don't see any credit risk there, it's just literally timing..

And then in ASP s, I think you brought up pricing, here I might say, I think this follows that four quadrant thing, where you have talked about commoditized Mic, and then you talked about mobile ear IOT, you sit there and you talk about PD and HHT.

In three of the four quadrants, we seem to be reasonably well of ASP s, flat to up, right? And we're able to pass on some of the wage inflation, some of the wafer cost but PD and HHT don't have a lot of wafer costs. I mean, this is more wage inflation that we're trying to pass on.

So in the area where we have more commoditized product, I would sit there and say, it's better than it was before. And I'll give you the one indicator. People always ask me about ASP s. If you remember, '16, '17, we were averaging 8% to 10% reduction in ASPs on mature products. Last year, it was around 3% on mature products.

This year, we're thinking it's going to be sub two on mature product, so you could see this. And to the extent that we have less of this business, that obviously -- it makes it much easier for us to sit there and go, look, here's our price. If you want to buy from us, this is the price..

Awesome. Thanks, guys. Yeah, I had assumed it was linearity. But thanks, guys. Really appreciate it..

Yes. Sure..

Your next question comes from the line of Suji Desilva with ROTH Capital. Your line is open..

Hi Jeff. Hi John. Nice execution on the gross margin here. Maybe you could talk about the hearing health business. I know you talked about the over-the-counter, but the core business, you talked about share gain opportunity.

What's driving that, and is that sustainable?.

Yes, I think it is. I think there's a couple of things driving this. I think one thing; I'm going to throw a shout out [Indiscernible] Suji to our operations team. I mean, they just really done a fabulous job navigating COVID over the last 24 months.

I can't say enough to our facilities in Asia, they have done a fabulous job of navigating this, and in some cases, some of our competitors maybe struggle a little bit more with this type of stuff, and we have always been in the hearing aid market. The strong and steady operational supplier. And so I think that's number one, I think important center.

Secondly, I think one of our things that we did is we think about this reallocation of where we want to be more in our higher gross -- with our higher gross margin markets. Hearing health is above the corporate average. And I would say -- I would also put a shout to our hearing health R&D team.

They have executed really well on new products with our customers. And that's all with the backdrop of the fact that there is -- it's a slow slope, but MEMS microphones are becoming a bigger and bigger portion of the hearing health market. And we have an outsize share in that portion of the market. So you couple all of these three things together.

Great new NPI, new products execution, incredible operational execution, coupled with more shifts on the microphone side towards MEMS microphones, and that will give you one more thing. I think we've done a lot even with the automated line.

I mentioned this before, a lot of the learning on the automated line are now starting to be integrated into the manual lines for balance armature for the hearing aid market, which is making our performance even better. And so, as I said, the guys are hitting on all cylinders and so it's leading to share gains.

And we do think it's sustainable because think of the hearing health market. They introduce a new product, these things typically go for 24 months minimum, as long as 48 month platforms. And we've won a lot of these platforms that started production over the last 2 years that are going to be in production for the next 2 to 3 years..

Okay. Great, Jeff. That's very helpful color. And then, on the notebook market, I'm just curious what metric you think about for the growth opportunity there.

Is it penetration of MEMS mics? Is it your share in the MEMS mics and the notebooks, the number of mics per notebook? What's the growth opportunity there? How should we frame it?.

I would sit there and say, there's some ability to increase the number of mics, but I would say probably more interesting over the mid-term, is higher performance. Again, I go back this takes a little time. Two years ago pre-COVID nobody was using that microphone on that laptop. And people used to put them in.

They'd think, check-the-box, I got a microphone in case you ever want to use it.

Now, everybody's using it and we're seeing customers come to us and talking about high performance mics four other business laptops first, but eventually it's going to be for consumer laptops, right? And so I think over the longer term, there's going to be some ups and downs in this market.

And right now we're kind of going through, I would say a little bit of a slowdown here in Q1, but we're expecting it to rebound in Q2. But the longer-term, I think it's about higher-performance mics. And again, we're very well-positioned to take advantage of that..

Great. Thanks, guys..

Hearing no further questions at this time, I'll turn the call back over to the company for any closing remarks..

Thank you all so much on behalf of Jeff and John. I appreciate everyone's time and follow-ups, please let us know and Investor Relations and we look forward to seeing and talking to you all in the future. Thanks so much..

This concludes today's conference call. Thank you for joining. You may now disconnect..