Good afternoon and welcome to the Knowles Corporation Third Quarter 2022 Financial Results Conference Call. My name is [Harry] [ph], and I’ll be your operator today. [Operator Instructions] With that said, here with opening remarks is Sloane Bolun, Investor Relations. Please go ahead..

Thank you, harry. Welcome to our Q3 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. Please be advised that today's conference call is being recorded. By now, you should have received a copy of our earnings release and webcast slides.

If you have not received both documents, they are available on the 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’s products, anticipated trends in the company's sales, expenses and profits, and future financial outlook, 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, 2021, 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 non-GAAP on a continuing operations basis, unless otherwise indicated.

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

Jeff?.

Thank you, Sloane, and thank you to everyone for joining us this afternoon. The third quarter was above our expectations, but clearly a difficult one for markets and industries around the world. Before I get into the results, and market commentary, I'd like to highlight the aggressive stance we have taken in response to this backdrop.

As announced on our last call, we are accelerating the strategic repositioning of our MEMS microphone business to further deemphasize our exposure to commodity products. We have been very proactive and are already seeing the benefits of this strategy in our second half results. Now, let me get into the financials for the quarter.

Knowles generated $178 million of consolidated revenue, which was down 24% versus the prior year, driven primarily by very challenging market conditions in the consumer electronics portion of our Audio segment.

In contrast, Precision Devices delivered record revenues of 64 million and grew 16% year-over-year as we continue to see robust demand across most end markets.

While challenging, Audio segment revenue finished largely in-line with our expectations due to factors we cited last quarter, specifically a weak backdrop for consumer electronics demand, access channel inventory across most markets, and persistent COVID-related shutdowns in China.

On a consolidated basis, Knowles delivered against each of our guided performance metrics for the third quarter. Revenue, gross margins, and adjusted EBIT margins were all above the mid-point and EPS was above the guided range.

Cash generated by operations was near the low-end of our range this quarter, due to higher than expected inventories and timing of collections. We anticipate strong sequential improvement in cash flow in the fourth quarter and remain confident in our previously stated view of a faster path to a medium-term free cash flow margin target of 15% to 17%.

Now, I'd like to provide perspective on the current dynamics of each of our end markets. We understand tracking demand of our products is challenging, especially given the diversity of our markets and the crosscurrents such as inventory corrections and strategic mix decisions like the ones we have made in our MEMS microphone business.

Today, I would like to provide additional color to help understand our business. First, in Precision Devices, we continue to see strong end market demand driven by secular trends across defense, medtech and EV. We still see organic growth in the mid-to-high single-digits going forward or an addressable market that is over $1 billion in growing.

In addition to strong growth, this segment continues to show resilience in the base of market uncertainty with bookings in the quarter continuing to exceed expectation.

Both of our product categories, high performance capacitors, and RF filters continue to demonstrate our superior technical capabilities, which provide a competitive advantage for Knowles in markets where we have strong tailwinds today and in the future. Now, I'll turn to our Audio segment.

First, the Hearing Health market continues to be much less volatile in the face of weak consumer demand, similar to the pattern we have observed in previous downturns.

In fact, we remain confident business will provide 3% to 5% annual growth over a cycle and are increasingly optimistic about the over-the-counter hearing aid demand based on recent customer announcements and partnerships.

Given these market dynamics and our strong competitive offering for acoustic solutions, we will continue to invest in Hearing Health and believe it is an underappreciated asset in our portfolio. Now, on to our MEMS microphone business.

While we expect sequential revenue improvement in Q4, the growth is driven primarily by new product introductions by our customers as opposed to positive changes in end market demand or sentiment.

These headwinds are across most end markets and geographies, including PCs and smartphones, Additionally, inventory in the channel is still being worked through, which presents additional obstacles to resume year-over-year growth.

We still validated our decision to move quickly to reposition the MEMS business for the future by further deemphasizing the commodity portion of this business.

I'm pleased to see the impact of our strategy show up in our second half results and I'm confident that the MEMS microphone business is well-positioned to improve our revenue and profitability when the market recovers.

On that point, let me speak to the drivers and considerations that went into our strategic repositioning and why we believe it will add significant value for shareholders in the quarters and years ahead. Over the last few years, we have taken the challenging global market conditions to accelerate our transformation.

This transformation is already delivering results with more than 60% of our revenue coming from products with above the average corporate gross margins.

The strategy to focus on higher value products and markets has been coupled with strong execution and dedication from the Knowles team in the face of significant macro challenges caused by the pandemic and its unpredictable after effects. I want to thank everyone in the organization for their hard work and execution in the face of these challenges.

Our strategy is working, which gives me strong conviction in our ability to achieve the mid-term financial targets we introduced last November, sooner than expected. With that, let me turn the call over to John to provide more detail on our quarter..

Thanks, Jeff. We reported third quarter revenues of 178 million in-line with expectations and down 24% from the same period a year ago, driven by weak demand for microphones, partially offset by continued strength in the Precision Devices segment.

Audio revenues of 114 million were down 36% from the same period a year ago, due primarily to weak global microphone demand for consumer electronics, continued COVID-related lockdowns in China and excess PC and smartphone channel inventory.

In addition, Hearing Health market demand was lower in the quarter as our customers pull-forward orders into the first six months of the year. The Precision Devices segment delivered record revenues of 64 million, up 16% from prior year with growth driven by increased demand in defense, medtech, and EV end markets.

Third quarter gross profit margins were 38.5%, above the midpoint of our guidance range and down 330 basis points from the same period a year ago.

Audio segment gross margins finished 670 basis points, below 2021 levels, driven by lower factory capacity utilization and unfavorable mix in our MEMS microphone business, partially offset by lower factory spending and favorable foreign exchange rate impacts.

Precision Devices segment gross margins were 47.5%, up 50 basis points from the prior year, driven by favorable mix and productivity gains. R&D expense in the quarter was 17 million, down more than 3 million from the prior year, driven by lower incentive compensation costs, restructuring savings, and timing of project spending in MEMS microphones.

SG&A expenses were 26 million, 1 million lower than prior year levels, driven by lower incentive compensation cost.

For the quarter, adjusted EBIT margin was 15.8%, 280 basis points above the high-end of the guided range, driven by the timing of project spending, favorable foreign currency impacts, and higher than expected savings from the restructuring program we announced early in the third quarter.

EPS was $0.25, which was $0.04 above the high-end of our guidance range driven by higher EBIT and a lower than expected share count. Now, I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled 42 million at the end of the quarter.

Cash from operations was 19 million, near the low-end of our expectations, primarily due to higher than expected networking capital. Capital spending was 11 million in the quarter and we repurchased approximately 1.1 million shares at a total cost of 18.6 million. Year to date, we've repurchased 2.3 million share at a cost of 44 million.

Moving to guidance for the fourth quarter. We expect total company revenue to be between 200 million and 220 million, up nearly 20% sequentially, driven by growth in both the Audio and Precision Device segments.

Precision Device segment is expected to deliver another quarter of record revenues and be up more than 3% sequentially, driven by continued strength in medtech and defense.

Audio segment revenues are expected to increase 26% sequentially, driven by the timing of our customers' new product introductions, and typical seasonal patterns in Hearing Health.

We estimate gross margins for the fourth quarter to be approximately 36.5% to 38.5%, down 100 basis points sequentially, driven primarily by lower factory capacity utilization and a higher proportion of microphone sales in our audio segment, partially offset by benefits of the restructuring program announced in the third quarter.

R&D expense is expected to be between 16 million and 18 million and selling and administrative expense is expected to be between 25 million and 27 million. We're projecting adjusted EBIT margin for the quarter to be approximately 17% and EPS to be within a range of $0.31 to $0.35 per share.

This assumes weighted average shares outstanding during the quarter of 94 million on a fully diluted basis. We're forecasting effective tax rate of 12% to 16% for the quarter.

And for the fourth quarter, we expect cash generated from operations to be between 40 million and 50 million, capital spending to be 10 million and we expect to exit 2022 with zero net debt. I'll now turn the call back to our operator to open the line for questions.

Operator?.

Thank you very much. [Operator Instructions] Our first question of the day is from Anthony Stoss of Craig-Hallum. Anthony, your line is now open..

Hi, guys. Nice results, all things considered. Maybe let me start with John.

I'm curious just the moves you're making strategically, can you give us a glimpse into what you think gross margins might look like in 2023 or just a range of how much they might be up, kind of year-over-year? And then after that, Jeff, I'd love to hear, kind of your view on the PD division, the visibility you have for 2023 lead times, anything on order cancellations, etcetera would be helpful?.

Sure. I like to take the first one first, if you don't mind, I'll take the PD question first. I would sit there and say, right now, if you look at what's been happening, the bookings are still exceeding expectation.

Obviously, the bookings can be canceled in some cases, but the reality is, is a lot of our business in defense and med are custom products. So, we received these orders. These are for – like they are non-cancelable orders, really. They maybe slightly pushed out. We're not seeing really anything in that going down.

EV, I would sit there and say, the bookings have been very strong. The deliveries have probably been a little less strong and it's been that we think, but we are hearing a lot of still some chip shortages that are still holding back the demand, but as I look into 2023, our design pipeline for EV looks very good for 2023.

I'd say the only market, I would say that we see, I would say a little bit of weakness is, kind of like, I would say our catch-up which is kind of we call it industrial, which is kind of really other, but I wouldn't say it's dramatic at this point, like we're not seeing like a massive drop-off.

We're just seeing it's not growing at the rate that we would see like earlier in the year. So, overall, if I think about the way bookings are with PD and going into the fourth quarter, I feel very comfortable at least at this point through the first quarter and probably even the second with where things are headed based on the backlog that we have..

Yes, Tony, in terms of gross margins, we reported gross margins of 38.5% in Q3. The mid-point of the guide is 37.5 in Q4. Those are lower than we had prior year. The delta is really related to our MEMS microphone business capacity utilization. We're working down inventory. We're actually in Q3 and Q4. We're running at close to 50% capacity utilization.

If you went back to a more normalized level, it had 200 basis points to 300 basis points to the total company gross margins, you'd see in both quarters, slightly above 40%. That’s really the biggest item and I see that continuing at least in the first quarter of Q1 2023. It's just outside of the MEMS microphone.

I mean, you can see the PD margins are holding steady. Last five quarters, they've been above 45%. I see that continuing and maybe even some potential improvement there. And you don't see it, but our Hearing Health margins to well above the [indiscernible] are stable and well above the corporate average..

Yes, it’s good. If I could just add one more thing. I think as John kind of said that our sales are higher than our capacity would reflect or you had sold are higher than our capacity would reflect, but you could see in our balance sheet the inventory has grown.

We felt it was pretty prudent for us right now and into the first quarter to really, kind of slow down production and work on the inventory situation in our [MEMS microphone business] [ph]..

Got it. And then maybe one last one for John.

When you look at OpEx, say, exiting or the December quarter of 2023, what’s the rough kind of quarterly OpEx ballpark?.

Yes, I mean, I think based on the guide I provided today, we're kind of in that 42 million, 43 million level in Q2 – in Q3 and Q4. In Q1, we will have normalized incentive comp levels. We'll have some merit increases.

I would say like the 45 million range is a good starting point for a run rate going into 2023 and that should be fairly stable over the course of the year. .

Well, 45 million you're saying? So, it's up year-over-year [Multiple Speakers]..

That's 45 million – what's that, Tony? Sorry..

Not down year-over-year. I think you guys were making some moves to try to cut cost..

Well, the incentive comp is the biggest. We have very clear that….

The incentive comp is not going to pay out that well this year. So, we're going to be below plan and we're going to take that back up to the plan in 2023. So, that's why you're seeing kind of this little bit of a rise..

But I still, like, kind of that 45 million run rate is a good range given we will have some merit increases and going back to a more normalized level of incentive comp costs..

Okay. Thanks guys. Appreciate it..

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

Thanks. Good afternoon and congratulations on strong operations in the face of a tough market..

Thanks, Bob..

I wanted to just, maybe dig in a little further on this question in terms of, give us a sense of inventory versus end market demand, kind of when you see the balance and how much impact is, kind of built into expectations for Q4? And I think John, you said, maybe there'll be still a little bit of a headwind in Q1, but give us a sense of like when you see this becoming [imbalance] [ph]?.

Yes. Let me kind of like – I think talk about this. And I guess I would focus a little bit probably back into the PC market because that one's got the data that's most readily available. And I think it's somewhat representative, although something maybe a little bit worse, something maybe a little bit better.

But I think if you look at what the market is saying right now, the PC market itself and unit demand, it's going to be down a little over 20% now. That's what people are saying. And remember, when we started this year, the PC market was planning for 5% to 10% growth. right? And so, they were buying and we were ordering and buying for 5% to 10% growth.

So, our estimate is, there's somewhere probably in the neighborhood of 4 months to 6 months of excess inventory out there. And it's clearly starting to be worked down, but to think the exact data, it all depends on demand. Yes, I guess what I would sit there and say, but right now, what we see is, it's probably going to continue through Q1.

This inventory overhang, that's again our customers' inventory overhangs.

Now, I'll let John comment because our inventory overhang is a little bit different, but why don’t you comment on that?.

Yeah, Bob, you probably haven't had a lot of time to see our Q, but our inventory actually increased about 40 million from the end of 2021. So, we're 150 up to about 194 at the end of Q3. We do expect some reductions to inventory in Q4. So, our selling volume is going to be higher than our production volume as we, kind of work this inventory down.

And so that should be a little tailwind for us in Q4 and cash flow. And I would expect as we go into 2023, we won't have the headwind on inventory that we had this year. Again, we had a, I’ll call it $40 million build and headwind in the first three quarters of this year.

And it's really given that pretty abrupt demand drop starting, kind of in the second quarter and on top of that we have commitments with most of our material suppliers and we were unable to cancel those commitments. So, we still had material coming in. But again, we do expect reductions in inventory beginning this quarter..

But again, I’d just highlight again, I know [indiscernible] important point, that if we were not dealing with this inventory situation and running our capacity at a more optimized level, you would have saw our gross margin as a company look well over 40% in Q4..

Got it. Okay, great.

And then I know we can't really, kind of dig in and see this entirely, but maybe give us a sense of the, kind of the demand expectations for Hearing Health next year and also in another different, but similar, and truly wireless, how's that market evolving and what do you see for it as well for next year in general?.

Yes.

So, I think just to be clear, the two [wireless] [ph], you're talking about the balance [indiscernible] receivers in the [two wireless] [ph], correct? That's what you're referring to?.

Yes. Yes..

Yes, okay.

So first, on Hearing Health, I'm not prepared to give the exact number for Hearing Health, but I think we look at the data pretty regularly and I would sit there and say is, if you go back and I don't have the exact numbers in front of me, but if you go back to 2018 and we look we're going to finish in 2022, the Hearing Health business has been growing at a CAGR above 3% and that's through the pandemic, right.

And so, I'm not going to sit there and say, it won't be – it could be 4%, 4.5%, it could be 2.5, it depends on inventory and channel. There's like what's new products go to production, but I guess, we keep saying that this is a GDP plus business over a cycle. And that's how we've been – and it is very resilient. It's very resilient.

I think the comment, I spent a lot of time with the hearing-aid customers. Their expectations for this year have come down a little bit, but to kind of give you an idea when I talk to our customers, they expected 4% to 6% unit growth this year, now, they're expecting maybe 2% to 3%, right.

So, that's a kind of what we're talking about in terms of instability due to market conditions. So, yes, [GDP plus] [ph] that's kind of what we think about. On the OTC market, also though, I think this could be an upside. I don't know if you saw, there's been a lot of recent announcements.

Walmart, Best Buy, Sony, you can look up some of these announcements, but more and more people are starting to look at this market. We'll see how it develops, but I'm incrementally more optimistic about the next life, a GDP plus where it's grown at GDP in the past.

Last question on the true wireless, I think where we are here is, we've got a number of things in production. I think next year we're focused on trying to fill its capacity, but we're also focused on making sure we keep ASPs high and that the gross margin on the balance armature speakers for the true wireless headsets are high.

So, I think the expectations are probably modest relative in size for the whole Hearing Health business, but it has the ability to be pretty accretive in terms of adding to our gross margin..

Okay, great. Thank you..

Thank you. And our next question is from the line of Tristan Gerra of Baird. Tristan, your line is now open..

This is Tyler on for Tristan. Thanks for taking the questions.

Digging a little deeper into the OTC market, should we expect a potential inventory ramp for retail over the next few quarters?.

Yes. I mean, I would sit there and say, there may be some, but I think the level may be different than you think of like a traditional consumer product.

We do expect as we look at the people who are introducing over the current hearing aids, we think we have probably higher than we shared than we even have in our hearing aid business, based on the design wins that we know about. The content is very similar to what it is in our hearing aid business.

So, we don't see any difference in ASP or gross margin, but yes, there will be a modest inventory ramp in the next year. I think we just have to watch how it develops and how customers take to these over-the-counter hearing aids.

I think one of the things you see on the positive course, you don't have to go to an audiologist, so it's easier for someone to get access, but on the reverse side, you could sit there and see like, if the hearings aids are being introduced, someone enabled a pair for [7.99] [ph], although we’ve a [11.99] [ph].

So, these aren't at a tremendous discount to what you could buy a couple of hearing aids from an audiologist let’s say at Costco in the retail channel..

Great, thanks.

And then as we think about more of the longer-term, how should we look at the potential for M&A?.

Yes, I mean, I think it's – we've shown a definite desire to do M&A through action in our PD organization, our PD group. We've done, I think, now, five acquisitions in 2017. Our last one being about a year and a half ago, we acquired IMC [indiscernible] California.

I would sit there and say, the valuations have been very high and we want to be very disciplined about what we do. But it is a target rich environment and we are continuing on a regular basis to assess.

And if we find something that makes sense strategically for us it fits either expanding our product portfolio, moving us into new markets, we're going to be active. But I'd just be – I [indiscernible] everyone's expectation. We're going to be disciplined in what we buy and making sure that it makes sense from a multiple.

And it fits our profile of what we're looking for..

Yes, Tyler I’d just add, as I mentioned in my script, we're going to exit 2022 with essentially no net debt. We've got very strong expectations for cash flow in 2023.

So, we can continue our stock repurchase program and make strategic acquisitions, it isn't at [either or] [ph]?.

Yes, I mean, that's a good point. I think we've got a fair up because of the fact that we really kept the balance sheet clean. We've got a fair amount of dry powder here to do M&A, but again, that doesn't mean we should. We got to find the right opportunities..

Great. I appreciate it, guys. .

[Operator Instructions] Our next question is from the line of Suji Desilva with Roth Capital. Suji, your line is open..

Hi, Jeff. Hi, John. Can you remind us in the audio microphone business – in the audio microphone business, can you remind us like the gross margin mix dynamic that was unfavorable this quarter? I think with the restructuring, you're going to structurally improve the mix.

So, can you talk about what the near-term audio mix was?.

Yes, there is some mix that's impacting the business. There is some, but I would say, the overwhelming thing that we're really looking at here. And again, the company gross margin would have been over 40% close to 41% without the capacity utilization issues.

So, Suji, when I think about this, we're starting to see some of the benefits, of course, of the restructuring, and the majority will be in there, but when you're running 50% of that capacity, it's very difficult to be super-efficient with your [fixed overhead] [ph]. And so, again, we're selling a lot more mics than that 50% capacity.

And I think again this will go probably into the first quarter as we try to work on inventory, but once this is done, I think we will pick up where we, kind of left off in terms of having the right mix, focusing on higher margin business with new products and we'll have a cost structure that fits that we think we can keep relatively full the whole year..

And just to add just a little bit of clarity, the mobile business, mobile – MEMS microphone for mobile, we expect to be below 20% of total revenues in 2022..

Got it. Okay.

And then switching over to PD, the automotive end market, I'm curious if the nature of customer engagements there are multi-year sort of commitments or whether you kind of have to go year-by-year and if you can start to see programs and pipeline layering on there for visibility, multi-year visibility?.

Yes. I would sit there and say, it is platform based. So, they are kind of – but I think the difference you think of these multi-year visibility. It's a lot more challenging in the EV market than it would be in the traditional combustion engine market. And I'll tell you why, Suji. You sit there and see all the platforms we're working on.

It's a who's who of the automotive industry, but the question is, who is going to be the winners in three or four years? Like who is going to be selling a lot of these EVs? It's much more difficult to predict that right now. Our goal is, we view this as greenfield.

It's a brand new high voltage application that it has not existed even in older versions of EVs. And we're trying to again capture as much of the greenfield as we can in terms of design wins. And I would say, one of our pieces, we also have different levels of content per platform as well.

So, it's a little bit more challenging to look at and say what was this by business wide to look at, to look like. Again, it's going to be a little north of $15 million this year. If you go back couple of years ago, it was half that. We think it can double again in the next two to three years. And I think that's probably on the conservative side..

And that's based on existing designs..

That's based on existing designs. And so, I think if we win with the winners, this could be a lot bigger, but I think, doubling that business in the next two to three years is very realistic on the conservative side..

Okay. Helpful color. Thanks, guys..

Thank you. And our next question is from the line of Christopher Rolland of Susquehanna Group. Christopher, your line is now open..

Thanks. And I'll just piggyback on Suji's for a second there, his question.

So, in Precision Devices, you just gave us EV, but I was wondering if you could talk about, kind of the size of defense and medtech and their relative growth rates for each and how you see it over the next year or two?.

Yes. So, first on defense. The defense is becoming a larger and larger portion of our business. I think it's going to be approaching 40% of PD, about $100 million business now and that's up pretty significantly since [2020] [ph]. The data I have here, it was a little over 70 million, couple of years ago.

So that business has been growing at a pretty rapid rate. And the combination there is, one acquisition in there, but it's also organic. It's organically going up pretty rapidly too.

I'd say, just generally speaking, Chris, the defense market is looking very positive for the type of products we sell, which are our rigor frequency filters for radar, jammers, I mean, it's looking very positive. And so, as we look into next year, we see another strong organic growth year for defense.

And I would say, just from my perspective, this is pretty [banked] [ph]. This is not like there's a lot of risk that these orders are going to come in. And so, we feel pretty good about that. On the [Med business] [ph], I was not counting Hearing Health.

I think this is another business that's been growing pretty rapidly, now I'll caution you; these growth rates are probably a little higher than they will be in the future because remember we kind of had this downward pressure on the business during COVID, that kind of brought that business down, but this was a little over $20 million business in 2020.

It's approaching $40 million in 2022. And so, I wouldn't expect that growth rate going forward, but you could see 5%, 6% growth going forward based on the design wins we have and where we're at. So, I think, it’s very positive the medtech business portion of PD..

I'd just add to Chris, the defense and medical are attractive gross margins..

Yes, very attractive..

For sure. Yes, PD overall is excellent. Thanks guys. And then as a follow-up, first a clarification. You talked in the MEMS microphone business about new product introductions. Wanted to know what the deal there is? Is it just higher SNR or is there something else and are there better ASPs with that? Any details there would be great.

And then just a bigger picture question, what's the kind of next big thing for you guys? I mean, previously we've talked about balance armature speakers or OTC hearing aids, if there was any upside to call it street models or something like that from next year, is there a product or something like that that could accelerate growth for you guys?.

[Indiscernible] specifically in the MEMS microphone business.

In the MEMS microphone business, let's say, we have a concept, a group of introduction, new products, but when I was referring to new product introductions, Chris, I was referring what was driving was our customers' new product introductions as opposed to our new product introductions, but I would just say in terms of new products, I don't want to get too far ahead of ourselves.

We've got some exciting developments in terms of different types of microphones. I'm not sure we're ready to discuss this yet, but we got some exciting stuff that we're working on that. I think hopefully next year we'll be able to begin talking about, but it's a different class of microphone than anything that we do today.

And so, we're working on this very hard in our R&D group. I would say, that's probably of interest. And then the other one is, we still think that there's going to be some opportunity over the next two to three years to grow in [AR] [ph] VR type applications.

They are requiring microphones and they are, in some cases, requiring like a different type of microphone. And so, I think that might be an opportunity for us to have growth in the MEMS microphone business at, I would say, hopefully, very good gross margins..

That's exciting. Thanks, guys..

Great. And we have no further questions registered for today. So, this concludes the Knowles Corporation third quarter 2022 financial results conference call. Thank you all for joining, and you may now disconnect your lines..