Q4 2019 Earnings Call

First fourth quarter and full year 2019 financial results conference call.

At this time, all participants are in listen only mode.

To the speakers presentation that'd be a question answer session to ask a question. During the session. You want me to press Star one on your telephone if you require further assistance. Please press star zero with that said here with opening remarks isn't always Vice President Investor Relations. Mike now. Please go ahead.

[music], Thanks, Christine and welcome to our earnings call, Mike Napping, presenting with me on the call today, or Jeff, New President and Chief Executive Officer, John Anderson, or senior Vice President and Chief Financial Officer.

Our call today will include remarks about future expectations plans and prospects for norms, 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 FCC filings, including but not limited to the.

Reports on form 10-K for the fiscal year ended December 31st 2018.

The Arctic reports filed from time to time with the FCC and the risks and uncertainties identified in today's earnings release.

All forward looking statements were made the date of this call and old disclaims any duty to update such statements except as required by law.

In addition, <unk> Reg G any non-GAAP financial measures reference during today's conference call can be found in our press release posted on our website at <unk> Dot com, including a reconciliation to the most directly directly comparable GAAP measures.

All financial references on this call will be on a non-GAAP continuing operations basis, unless otherwise indicated.

Also we made selected financial information available and webcast slides, which can be found on the IR section of our website.

With that let me turn the call over to Jeff Who'll provide some details on our results.

Thanks, Mike Thanks to all of you for joining us today for the quarter, we reported revenue of $234 million within our guidance range and up 5% from the year ago period, and strong sales into the year in OTI markets offset by continued soft trends in mobile.

Precision device sales were up double digits year over year. However, I would anticipate operational challenges in this segment pressured gross margins, resulting EPS of 35 cents that was below our guidance range. John will cover this in greater detail in a moment, but we anticipate total company gross metric gross margin improvement in 20 Twond.

You know audio segment Q4 revenue was up 3% from year ago period, driven by strong sell to microphones, increasing shipments a belt I'm in for speakers into the year in our T. markets, partially offset by softer demand for haagen handsets.

In the precision device segment sales were up 13% from the Ergo period as continued demand for our differentiated products across multiple markets and a tuck in acquisition.

Partially offset by timing of shipments, but don't there were no wonder when filters and weakness in the adult industrial demand for our capacitors.

We ended 2019 with total company revenue up 3% and earnings up 6% Dermot your characterized by particularly weak demand for handsets, which highlights the benefits of our strategy to deliver high value differentiated solutions to a diverse set of growing end markets.

Q4 sales an audio demonstrate the benefits of our diversified portfolio of solutions for the mobile ear in I O T markets.

Mobile worldwide shipments of smartphones continue to serve as a headwind so audio business with particular weakness in the premium portion of the Android because ecosystem.

Despite lower handset sales worldwide revenue from our largest customer grew double digits year over year, driven by this Oems nonmobile platforms.

Sales to Chinese Oems were lower from a year ago period on declining handset sales, partially offset by stronger microphone demand for non mobile devices like year, Aiotv and computing platforms.

I'm cautiously optimistic that the mobile market will start to grow again as our customers raw fiveg phones in the second half of 2020.

We are seeing opportunities to increase content per device improved performance through multi mic adoption and higher performance, Mike, including the transition from analog to digital.

And intelligent audio revenue came in below 20 million in 2019 due to weak demand for Android customers high end smartphones that leverage our dsps.

This was it just this was disappointing following a strong 2018, but we continue to believe that intelligent audio represents an opportunity to accelerate sales enhance gross margins well driving demand for our acoustic products.

That said, we are rebalancing our investments across our growth opportunities in 2020, and we plan to shift R&D spending from intelligent audio to some of our other growth opportunities.

Intelligent audio operating expenses are expected to be approximately $15 million lower in 2020 versus 20 lighting.

Moving to figure it out.

As I mentioned earlier significant sales to the Iraqi markets enable our Mems microphone business to grow in 2019.

Microphone sales into these end markets were up almost 50% from the prior year when you're serving as the primary driver growth in 2019.

The true wireless market remains the fastest growing segment of the your phone market in Powerpoint research expects more than 120 million Trust of your book to ship and 20 Twond.

We are beginning to see new customers introduced products that not only use our mems microphones, but also leverage our balanced armature speakers, including price for Amazon anchor Wami and one plus.

Sales of <unk> for consumer your one products grew in 2018 as customers are recognizing the benefits other smaller size power efficiency and superior performance.

As we looked at 2020, we remain on track with our <unk> automated balanced armature line and anticipate accelerated to be a sales in the second half the year at this new capacity goes on line.

In Q4, we were pleased to announce it we acquired M.S. is Mems microphone basic business.

This transaction included intellectual property rights disorder basic wafers for multiple foundry partners and the basic design team.

Amazon has been supplier basics to Nols for many years and we expect this acquisition to resulted in an immediate financial benefit from FERC vertical integration and further enhance our lead possession in the Mems microphone market.

In addition to bringing world class mixed signal Designtex and IP. This transaction will allow us to be more efficient and our R&D activities and provide immediate cost savings, which John will discuss more about in a moment.

We plan to leverage this H design team and IP to develop innovative new products further broadening our industry leading portfolio of Mems microphones.

And our precision device segment, we can you do see sales growth from our high performance capacitors and millimeter wave RF solutions for a diverse set of end markets.

Industrial markets for high performance capacitors continued to be song However, demand remains robust in the defense and Medtech and markets.

In addition, we are seeing new customers for electric vehicles, utilizing our multicolor capacitors as power architectures are requiring more high voltage and high temperature capacitor solutions.

We believe we are uniquely position to grow within this market.

As expected revenue for millimeter wave RF solutions grew to over $30 million in 2019 from less than 20 in 2018, driven by solid demand from the defense end market.

We anticipate that 2020 won't be another year strong growth driven primarily by the defense end markets and we continue see ability to wait fiveg has the potential long term opportunity.

Precision devices is essential to our ability to increase exposure to fast growing and diverse end markets and enhance shareholder value.

Before I turn it over to John I want to take a minute talk about the recent outbreak of the cross device in China.

Similar to other companies that operate in the region, we're keeping our factory shutdown one week longer than we normally expect over the Chinese new year and plan to restart production on February 10th.

This extended shutdown could impact our ability to produce microphone as well as capacitors for the industrial end market.

That said the shutdown does not impact production of millimeter wave filters, Dallas Archer speakers or capacitors for med Tech in defense as determined but I did these are manufactured in operations outside of China.

The current situation in China is it's very fluid and as a result, our Q1 guidance. It's conservative has a wider range. Since we don't have a strong beat on the demand for all your Chinese holiday.

With that I'll turn it over to John to expand on our financial results and provide our guidance for the first quarter John.

Thanks, Jeff.

We reported fourth quarter revenues of 234 million up 5% from a year ago period, driven by increased shipments in both the audio and precision device segments.

Total revenues of 190 million were up 3% from the year ago period with shipments of Mems microphones and balanced armature speakers into the year and I O T markets up more than 60% from the same period a year ago.

The strong growth in here and I O T was partially offset by weaker demand for Mems microphones and intelligent audio solutions for the premium smartphone market.

Hearing health sales were flat with a year ago period.

The precision device segment delivered revenues of 44 million up 13% from the year ago period, which was the result of 6% organic growth driven by continued solid demand across multiple end markets and an acquisition completed early in the first quarter of 2019.

Fourth quarter gross profit margins were 38.9% below our guidance range and down 370 basis points from the year ago period.

Precision device segment gross margins were well below our expectations entering the quarter.

Operational challenges negatively affecting gross margins include unfavorable product mix lower factory output, resulting in reduced fixed overhead absorption and an adjustment to inventory.

In the audio segment gross margins also finished unfavorable to expectations due to higher Mems microphone sales of mature products into mid and low end handsets and lower intelligent audio shipments.

Operating expenses in the quarter were just under 51 million down 4% from a year ago period, and largely inline with our guidance.

The expense reductions were driven by lower R&D spending within the audio segment and a decrease in total company incentive compensation costs.

For the quarter adjusted EBIT margin was 17%.

Lower guidance range and down 200 basis points from a year ago period on lower gross profit margins, partially offset by reduced operating expense and a lower effective tax rate.

EPS in the quarter was 35 sites.

For full year 2019, we increased revenues by 3%.

Improved our EBIT margins by 60 basis points and delivered EPS growth of 6%, despite a weak mobile market.

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 Nols Dot com.

Now I'll turn to our balance sheet and cash flow.

Cash and cash equivalents totaled 78 million at the end of Q4.

Yearend cash balance reflects the impact of the HMS acquisition for 58 million, which closed late in 2019 and was funded with cash on hand.

For the fourth quarter of 2019 cash generated from operations hit a record level at 73 million and was above our guidance range due to lower than expected inventories and better than expected customer collections.

Capital spending was 9 million in the quarter.

For full year 2019 cash generated from operations was 124 million and free cash flow was just under 10% of revenues with both metrics, resulting in record highs.

We exit 2019 with total debt to EBITDA of one while funding to acquisitions during the year for a total of 69 million.

Moving to the first quarter of 2020.

We expect total company revenue to be between 160 and 190 million.

Revenue from the audio segment is expected to be down approximately 4% from Q1 2019 due to lower Mems microphone shipments into the China mobile market and weak demand for intelligent audio products.

Precision device revenue is expected to be up approximately 3% over prior year levels driven by growth in millimeter wave filter shipments to the defense and aerospace markets, partially offset by lower shipments of high performance capacitors due to weak demand in industrial markets.

We project gross margins for the first quarter to be approximately 37.5% to 40.5% up slightly from the year ago period.

Audio segment gross margins are expected to be up 150 basis points driven by the benefits of the HMS acquisition, partially offset by the impact of lower intelligent audio volume.

Gross margins within precision device segment are expected to be down 350 basis points from the same period, a year ago, driven by record high palladium cost, which nearly doubled from a year ago period, partially offset by higher customer pricing.

R&D expense in Q1 is expected to be between 20, and 24 million down slightly from prior year levels due to reduction in spending related to intelligent audio products, partially offset by increased spending in Mems microphones, which is driven largely by the M.S. acquisition.

We also expect modest R&D spending increases in other growth areas, including precision devices and balanced armature speakers.

We are projecting selling and administrative expense to be between 29, and 33 million up 2 million from the year ago period due to higher anticipated legal expense as we aggressively protect our intellectual property.

We expect legal spending to remain elevated throughout the first half of 2020, but decreased significantly in the back half of the year.

We are projecting adjusted EBIT margin for the quarter to be in the range of 7% to 11% and expect EPS to be within a range of eight to 16 cents per share. This assumes weighted average shares outstanding during the quarter of 96.3 million on a fully diluted basis.

We're forecasting an effective tax rate of 13% to 17% for the quarter.

For the quarter, we expect cash utilized by operations to be between five and 15 million and capital spending to be approximately 10 million.

Now I'd like to provide some insight on our financial outlook for full year 2020.

We expect to return to revenue and earnings growth in the second half of the year.

Full year revenue growth is expected to be driven by balanced armature speakers capacitors for the market millimeter wave filters for defense and aerospace and Mems microphones for Fiveg handsets gross margins are expected to improve over 2019 levels by over 100 basis points to more.

And 40% as we realize the benefits of the HMS acquisition.

10, you to scale up our millimeter wave filter business and address operational challenges in the precision device segment.

Operating expense is expected to remain between 23 and 25% of revenues, which includes a significant increase in legal expense in the first half a year.

For full year 2020, we anticipate earnings growth at more than triple the rate of revenue growth.

Full year 2020 capital spending is forecasted to be between five 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 and a portion of the call Jeff. Thanks, John.

We ended 2019 would total company revenue of 3% in earnings up 6% during a year characterize protect by particularly weak demand for handsets.

Our 2019 results reaffirmed our strategy to invest in high value differentiated solutions and diversify our end markets is delivering shareholder value.

I'm pleased with the progress we've made to increase our exposure to growth markets.

Revenues from Nonmobile markets represented over 70% of our total company sales in 2019 going at greater than 10% from the prior year with above corporate average gross margin.

In addition, we delivered record free cash flow, representing nearly 10% of total company sales.

As we enter 2020, our company remains uniquely positioned across the markets we serve.

We expect sales growth to be driven by the year defense electric vehicle and Fiveg handset markets.

Im confident we can continue to deliver shareholder value by driving revenue growth was strong operating leverage and cash flow for full year 2020 and beyond.

Operator, we can now take questions.

Thank you as a reminder to ask a question you'll need to press Star then one on your telephone to withdraw your question press the pound or Heskey. Please standby when we compare Q an eight roster.

Your first question comes from a line of Suji de Silva from Roth Capital. Your line is open.

Hi, Jeff Hi, John and talking about 2020, a guidance you have and.

Laid out the first quarter with the conservatism I'm curious how much of that how much of the quarantine effect.

And the starting on the factory and if you could quantify the impact in the first quarter and then would that affect carried forward to second quarter or is it too early to call that as you talk about the full year end would second half 20 with all the tailwinds be up year over year, just to get some idea of how you're seeing this year shape out versus the prior year, yeah. Yeah. Okay. Sooty. So first I mean, just start with the premise.

You know even before the Corona virus started our China business has been weak.

I think we talked about that last quarter.

It is still weak.

Our business with our largest customer still remains very strong Q1, and I think I think what I guess, what would say is I wouldn't put exact number on how much of our guidance Q1 is related to the krona buyers, but needless to say I think I'll start with the fact that primarily affects our microphone business.

On the production side, which we're going to be shutdown longer than we expected.

And part of the high performance capacitor business, specifically more I'd say the generic more industrial type products. So.

We're still playing to reopen again.

Next Monday and start producing again these facilities I think it's hard to get a read on what the demand looks like and my anticipation and I can only take history sushi is that there's always this risk on timing. If you think back to back to like things like the Sars virus in 2002 2003 demand came back very soon.

Drawn but the question is when it comes back and so I think there it's more about timing and I would hope that the demand would come back. Once this is all resolved in China.

Okay, that's fair enough and there are lot of unknowns.

And then maybe just made comments the second habit ask specifically about.

Bounce or mature and then millimeter wave into Fiveg, what kind of visibility do you happen to design wins have you already secured those are those coming in the first half of this year and.

How confident are you in the tailwind for the second half of those two seconds. So for millimeter wave Fiveg, specifically I would say, we don't see that this being a big growth driver in 2020, we still view. This is a long term opportunity, but in our RF filter business, we still expect strong growth this year I think that.

At year end 2019, we had over $30 million and sales I would project it will be well over $40 million in sales primarily on the basis of defense and aerospace.

With a little bit of Fiveg millimeter wave, but but but but I would say, we still view the millimeter wave Fiveg base station as an opera longer term opportunity. So we still expect strong growth millimeter wave.

Primarily driven by defense, if you look to the balance our merger I would say that.

Right now as I view, the roll up in terms of what we see.

I would say we have a very good opportunity to fill that automated line in the back half the year another words.

As we are starting to talk to customers. There is definitely the demand out there and we will be sampling off that line in Q2.

First off that will start production in Q3 right.

No.

You too we've definitely in Q2 and and for production in Q3 in the meantime, we're going to continue to work to try to to service a lot of these customers with our manual product category balance arbitrage. So you know I would say that.

Automation lies on target.

We're going to have that in house in Q2, bringing it up in Q2 kind of like we've all talked all along and then and the design pipeline asphalt.

Okay.

Last quick question on Dms acquisition, the you talked about having product opportunities from the basic being in house can you differentiate those from what you've already done what things like I age to understand kind of a thumbnail of what the product opportunities can be another different. Thanks sure. So the hey, specifically focused on digital signal processors and.

And the algorithms that would go with it.

What the Amex acquisition brings along with our own design team that we had already.

Is the Hesik that goes in the standard analog and digital Mikes and so I guess, what I would say is there had been some duplication of effort between what how much was doing in what we were doing internally. Although we primarily we're doing digital and Amex was primarily doing the analog Mike I think what we see.

He is having on this now probably about a month or so.

Is that we get to choose the best to both worlds and if we think about what we're focused on we're focused on high single noise ratio analog and digital mikes and extremely low power analog and digital mix and each one of the design centers have certain levels of expertise and we won't be having to duplicate a lot of the so first we're going to gets.

And benefit obviously from buying the wafers directly from the foundry partners, but secondly, we're going to become more efficient and not having to duplicate efforts both internally and externally.

Okay helpful clarification, Thanks, Jeff.

Your next question comes from the line of Christopher Rolland from Subscale Honey. Your line is open.

Hey, guys. Thanks for the question I'm, just trying to understand the.

For Q1, particularly around audio.

I mean that it's pretty well known that your largest customer.

Numbers are coming in from some other guys.

Q1 looks okay.

[music].

You know a better better than this guidance would imply.

You know China has probably been bad for some while now so maybe I don't understand why it's coming in in Q1 show hard.

Maybe you guys can can add any other details I mean, I wasnt, particularly big ticket. So I don't think it'd be responsible for this as well or are there any share shifts or anything else, we should be thinking about thanks.

Yes, Chris So I would start with the premise that before the Corona by restarted China was already down pretty significantly in our forecast for Q1 year over year.

We do agree with you on the demand the largest customer and we do expect ourselves to be up pretty nicely in Q1.

But China is down and if I think about how we look at this going forward relative to the Corona virus concerns.

The largest customer majority of their business is not inside China. So we expect that to demand is as much as they can build we'll be able to supply.

But the other the Chinese customers. The typical names you hear the opposed vivo as those type of guide, we're not really clear yet on what the demand is going to be like and they're primarily providing into the Chinese economy, and so I would say that China is was weak to begin with and that this adds another layer and again you mentioned it it's not huge but into.

Belgian audio is down year over year.

[noise] okay.

On the precision devices side of things you know I think op margin was a little under 19% talk quite a bit from from where it's been.

It seems like for kind of on an up cycle here for a lot of components, including the regular capacitor market.

Maybe talk about what's going on there is it a pricing thing you know how should we figure out the I know, there's clarity of involved but but outside of that you know wire revenues down into the wire margins compressed.

Yes so.

Im looking at the at our numbers for for PD. So our business is going to be up year over year in Q1.

So the revenue is going to be up probably I would say, there's a little bit of that industrial portion the business that comes out of our China facility. There is some.

Some concerns there, but the revenue was up in both high performance capacitors and millimeter wave RF solutions. So I mean, I would say that some of the key designs that we see there are going to production and some of things are really going to start showing up more in Q2.

I would expect that there will be stronger growth in Q2 than Q1.

Thanks, guys.

Your next question comes from line of Bob Labick from C.J. asked Securities. Your line is open.

Afternoon.

Just going back to the guide obviously was wondering if you could remind us how big is China as a percentage of total overall sales and audio maybe annually and maybe seasonally just to get a sense of and that kind of changed Darren and has there been share or price changes or again, just trying to get a sense of you know the underlying.

Marketing, what's changing and driving the you know expected declines, yes, so I will start with last year.

China was about 14% of revenue.

And you know as I look right now to Q1 and this is again the forecast we had before the Corona virus, our China business.

It's probably.

Looking at these numbers is to be sure I got to correct here.

Less than 10 less than 10 in Q1. So it is down pretty significantly I would just say, but the only customer which was not a huge customer, but I would say there has been some share losses why way.

We are qualified there.

And we do have licenses to sell into why way, but I would say that there has been a little bit of a a push to the source more from non U.S. suppliers.

But other than that account I would sit there and say there there has not been share losses, I would say its weakness in the higher end portion of the market, especially typically in handsets and I think what that leads to is is that a lot of the Chinese Oems are set new selling more mid range and low end phones, which typically.

We use less mikes and they also use.

Call mature mikes that have been around for a while so there's a number of headwinds right now in China from demand too.

What phones that they are buying there has been some share loss at wawa.

But I wouldn't say that's the primary driver Thats one of the drivers I would say, it's more the move towards phones that use lots are mikes and more use more mature products.

Got it great and then just a follow up in addition to expected growth in be a in the back half of the or what are the necessary.

Kind of drivers that you need to see to get audio back to growth.

Yes, yes. So that's a good question I would say that that there's probably three things right. We've got to continue to grow our year end aiotv business within the microphone business.

You mentioned the BA and.

Well and we haven't talked touched on this yet we have reduced the amount of spend we have an intelligent audio but the we are expecting that hopefully at sales will be up year over year in the back half the year and so what we've obviously be monitoring that very closely but those are the three things that goes back to growth.

And then of course, I mentioned Fiveg phones, we know there is expectation that fiveg phones will help the.

The the mobile portion of our microphone business.

Got it okay. Thank you very much.

Your next question comes from line of Phil There's some from JP Morgan Your line is open.

Hi, and thanks for taking the questions, maybe maybe sticking on the intelligent audio.

You, obviously had some good design wins last year and few the Chinese makers and also as Google do you have visibility to we see that this repeat in Fiveg easy you mentioned that five you can lead to some more content I think specifically.

In regards to the mikes digital versus analog, but do you see any sort of.

Hey content. In addition to the congressional Mike Comping up lift as we look later in the year.

Well I don't I don't necessarily see fiveg driving additional content, we continue to pursue the customers in the mobile arena, but I guess, what I would say is increasingly bill.

We're seeing a much fuller pipeline on the Aiotv side.

And that that the mobile market.

It's something we're going to continue to pursue more opportunistically. So I think thats, what I would say relative that as far as the Mike business I think I think it's we're in kind of the design phase right now and we're we're hopeful that Thursday, I would say a resurgence of the high end handsets in China do.

To fiveg.

That would have you said you've got some of the customers that we have a lot of them didnt, even introduce like premium handsets in 2019 at all and so we're hopeful at least Fiveg comes out that's a premium handset and the we're getting a lot of request to look at higher performance, Mike to look at more microphones to add more.

Our features to those higher end phones that are fiveg.

Okay. Thanks for that and I guess, the second question is no matter what filters.

I guess the Industrys most of the growth who's going to be in.

And the wireless infrastructure knowledge, it's clearly are kinda, calling for defense that's going to be driving this growth is this is this a matter that these type of photos are being acquired for for millimeter wave or you're not seen the investments made by the carriers I guess, particularly in the U.S. and millimeter wave or is there some competitive things going on that that's just not not going to be in your.

Our business.

I'm just curious on why it's it's not so much.

Contributing this year.

Well I think I think first of all that we're not seeing I would say the rollout that we expected in fiveg, but I've also I would also say is is that that the farther it gets out I think there may be the risk that there is some more competition coming as fade, maybe not of a different technology I don't think we say, we see that for sure today.

But but I think there is there some risk to that but we still see as a great opportunity.

But I would also say that defense is better than we expected. We continue to see extremely strong demand from from on the defense side and that that again, I think we'll be well over $40 million.

From less than 20 in in 2018.

Okay. Thanks.

Your next question comes from line of Anthony Stoss from Craig Hallum. Your line is open.

Hey, guys, Hey, Jeff on the automation side I know your comments where that you're on track.

Can you confirm at this point, you've got a confidence into that you're already out coating lower asps for your potential customers to try to answer any design conversations already.

And then secondly, you you mentioned 15 million in shift in Opex out of intelligent audio why shift in why not just cut and then maybe.

John would have how much is left being spent with intelligent audio and then one last follow up after those.

Yes so.

Your first question lumpy automation I would say that you know, we're we're definitely starting to price forward based on the automation.

But saying that until we're shipping off the automation that it's going to be difficult to support that price. So so we're definitely at that point now we're in the middle of Q1, right and we expect to start handing samples out.

In Q2 design wins in Q2.

With production starting in Q3, so I think we're on one of the good path there and so so I think I feel comfortable right now that we can fill that line in the back half the year I think the next decision point for US Tony is.

When do we went and if we pull the trigger on a second line I don't have any answer on that yet, but but but I think thats going to be the next question.

As far as the Opex and.

Obviously the comment.

We will spend well less than 20 million in R&D.

I am in 2020.

And so if you remember a few quarters ago, we were talking about your numbers in the $35 million range. So so we didnt make cuts in 2019, and we did another cod in at the beginning of 2020, which we're we're talking about right now and I think as I see and John can cover kind of the bridge in the second but the way I see it is.

Is there are some other areas that we want to invest right and invest more and so I think this is a.

Normal process that you that we go through on a regular basis.

Of looking at where we're investing our dollars and that we expect that R&D is going to stay in that 10% to 11% range right and that it quick question is what do we spend that 10% to 11%.

And just to bridge Tony for you I mean, Jeff mentioned in the script that we're going to cut overall spending and I, a little more than 15 million year over year, but theres a couple adds coming in in 2021st of all the M.S. acquisition, while it's accretive by more than five cents, we have significant improvement call. It 200 basis points in in the Microsoft.

Phone and Mems microphone gross margins, but we are taking on about 4 million of R&D expenses. So net accretion, we're very confident at more than 5% in 2025 cents in 2020, So add 4 million of of Opex for little more than 4 million of Opex for the M.S. acquisition on top of that.

I mentioned significant uptick uptick in legal spending in the first half of the year. It's about 3 million in Q1, I'm not going to tell you what the spend will be in Q2, but it could be at similar levels and then we expect it to go down significantly in the back half, but think of it as four to 6 million incremental.

Legal spending in 2020 versus 2019, and then last is incentive comp cost we plan those at the target level and so there's an increase about three or 4 million versus what we're projecting to payout in 2019. So overall.

These are relatively flat one more piece I would add that to John is that our R&D spending in PD is going up as well.

So relatively low as a percentage of the toll sales, but it's going to be up a couple of million dollars year over year over year from 19 to 20.

Then as a follow up Jeff how many units can one might produce in any given year. What are the lead times like on the equipment lets say you started sampling if you do and you realize you need a second line could you get an upcoming tend to have a second line up.

Thank you I'm not going to I'm not going to comment a lead time I think the some competitive information there that I wouldn't want to provide at this moment, but what I would comment as first line depending on yield somewhere around a million units a month, that's what our projection is right now they should be able to build but it will be yield dependent especially at the.

The front end that Tony because I know I anticipate we have that factored into our in what we're thinking is that the yields will be lower at the beginning.

And then my last question for John on the PD for gross margins, how many quarters, you think it'll take to bounce back you did a clear out inventory or.

Perfect utilization.

No. It's a good question and let me just start and give a little more granularity on the Miss for Q4, I mean, our gross margins came in at that as I mentioned, 38.9% versus the guidance range midpoint of guidance range was 41%.

The Miss was really primarily driven by the PD segment, where gross margins were almost 600 basis points below what we expected going into the quarter and the shortfall was really driven by a few things first of all labor and labor inefficiencies and unfavorable fixed overhead absorption. It I think we talked about before.

Within our thin film business, we made major investments and kind of change the the process flow in that business pretty significantly in the second and third quarter of 19, and so we still aren't getting back to the yields in the efficiencies we expect.

But we do think a significant.

Significant improvements have been made already and will be made as we exit Q1, the one headwind we still have those palladium.

The palladium cost are significant up almost double Q1 over Q1, Q1 20 versus Q1 19, we're starting a pretty aggressive action plan to go after whether its surcharges with our customers look at substituting products. So we are expecting.

A pretty significant sequential improvement.

Beginning in Q2, so long answer to get to your original question when will we see the improvement, but we're pretty confident at seeing some improvement in PD margins beginning in Q2 of this year.

Thanks, guys.

Your next question comes from a line of Kristen correct from Baird. Your line is open.

Hi, good afternoon.

Just back on the Q1 revenue guidance you said it was conservative to account for the manufacturing disruptions in China could you give us a sense of where you want your guidance will be without does descriptions.

Yes.

I just I knew were going to get this question I wouldn't say that was like exactly I would just say we built it a little bit more cushion than we normally would because you know I mean, there is a lot normally I just would say normally when we get on this call for Q1, we already have I would say a little bit of.

And surety about what post Chinese new year is going to be this has added a whole motor level up to what what's what's going to happen as they said it earlier I think our largest customer because majority there their sales are not in China I think their demand will come back very strong. Once this is resolved but on the Riverside is what.

I am more concerned about is we have a fair amount of customers, we sell to that sell into the Chinese market right and it's primarily Chinese kind of comes because the consumer demand, it's really hard for us to predict so I'm not going to give an exact number here, but we definitely build more conservatism into the forecast.

Okay and then.

Could you remind us the dollar content opportunity you have full capacitors he knows he just.

Ease.

On a real if I have that in front of the when you take that offline, but but I mean, you know.

That's the dollar content per car, so I'm not sure I have that right in front of me.

Maybe we could take that offline, but but because I don't I don't have the exact number but it's not insignificant we're not talking about here you know like 50 cents or one dollar if I if it recollects me there could be 10 to $15 per car of content, but but don't hold me that maybe we can take that offline I could cover the little bit more if that's okay.

Kristen.

Okay, that's very useful thank you.

Your next question comes from line of Charlie Anderson from Dougherty and company. Your line is open.

Yeah. Thanks for taking my questions I think sort of hurt the the big picture viewing the full year as related to revenue and EPS and opex, but on gross margin I think you guys mentioned sort of a recovery here and then there's a mess acquisition. So I just wondered maybe big picture. If you had any views on gross margin for the year and then.

The cadence of getting to that 42, plus the lender then we'll try and I've got Philip Charlie I in my script I mentioned, improving gross margins. We finished 2019 at about 38.9%. We I mentioned, we're confident we can exceed 40% for full year 2020.

And that's really driven by again addressing the operational issues within PD.

Aggressively pursuing surcharge and recovery Palladium and then it's really scaling up the thin film business, Jeff mentioned going from 30 to 40 million, we don't have to adding new more overhead to do that so you get really good drop through on that business and similarly with the be a business has that kind of scales up that should improve.

With that ability.

Gross margins in the back half of it and again.

Charlie what I'd say is relative to achieving the 42, I mean, I would sit there and say that it does come down a new products right I mean, our new products, whether it be intelligent audio then film.

Mike's for the year and Aiotv.

Balanced our mature in TV, we expect the gross margins to be above the corporate average and the success of those will dictate of how fast we can get to the 42, what I would make the comment more on on.

The short term is a lot of the shortfall in PD was not it's not in the gross margin of high performance capacitors, It's primarily in thin film right with the changes that we've made in manufacturing process. We still have expectations that doesn't film business will be above the corporate average, but it's below the corporate average right now in Q.

In Q4 and in Q1 and so.

As we grow that business, we solve some of the issues that we had operationally in Q4.

That that we will see that that gross margins will improve to be above corporate average.

Okay, great and that for my follow up.

We're spending significantly less than youre, a year ago, and so I wonder.

What does that mean in terms of the product portfolio. There what portions of the portfolio do you have sort of less emphasis on now going forward. Thanks, so much.

Yeah, Here's what I would say I would say, we're definitely not jeopardizing the long term of our thought process, where we want to go.

What we have focused on is reducing the new products that we come out with that are we're going to have impact in 2020.

We are leading the team for 2021 and beyond in terms of the R&D. The second thing is I think we have a fair amount of people who are working on the.

Opportunity today, I think we just right size that those that side, that's more on the like I'd say the algos. The firmware we've right sized that to be more lies with the size and the number of opportunities. We had today. So short term I don't think it has like a big impact our expectations for what we're hoping for in terms of what price.

Next we were going to do longer term were not jeopardizing that but we're set up handled the customers that we see our very engine our product today.

Great. Thank you so much.

There are no further questions at this time Mr., Mike Nap I turn the call back over to you.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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