Q4 2021 Knowles Corp Earnings Call

Speaker 1: as of the date of this call and Knowles disclaims any duty to update such statements except as required by law.

This call and Knowles disclaims any duty to update such statements, except as required by law.

Speaker 1: 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 NOLS.com and in our current report on Form 8K filed today with the SEC for reconciliation 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.

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 Dot com and in our current report on form 8-K filed today with the SEC for a reconciliation.

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, Paul Thanks, <unk>, Thank you to everyone for joining us today.

Speaker 2: 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 midterm financial target.

For those of you who joined US at our Investor update in November we are very pleased to report another strong quarter that demonstrates our progression toward our mid term financial targets.

Speaker 2: As we commented during 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 pre-cash flows.

As we come to during the update call. We have made significant strides in transforming the company to focus on the highest growth end 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 'twenty two.

Speaker 2: 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 2022.

Speaker 2: With that, let me begin with a summary of our Q4 results.

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 and hearing health and precision devices.

Speaker 2: 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 device.

This result was achieved even with the challenging back supply chain backdrop, we noted last quarter.

Speaker 2: This result was achieved even with the challenging supply chain backdrop we noted last quarter.

What is most encouraging about our results 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.

Speaker 2: What is most encouraging about our results was the continued execution on margin expansion.

Speaker 2: Specifically, our fourth quarter gross margin was over 43%, or 130 basis points above the high end of our guidance.

Speaker 2: We also deliver adjusted EBIT margins of 22%, which we believe demonstrates the operating leverage the company has in our business model.

We also delivered adjusted EBIT margins of 22%, which we believe demonstrates the operating leverage the company has in our business model.

Speaker 2: In total, we produce board-corp earnings per share of 48 cents, also above our guided range.

In total we produced fourth quarter earnings per share of <unk> 48 also above our guided range.

Lastly, we continue to drive impressive free cash flow as John will detail in a minute.

Speaker 2: Lastly, we continue to drive impressive free cash flow as John will detail in a minute.

Speaker 2: 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.

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 would like to take a minute to highlight our accomplishments as we noted at our Investor update Knowles is positioned to create shareholder value through topline growth margin expansion and free cash flow generation.

Speaker 2: 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 note in our investor update, NOLS is positioned to create shareholder value through top-line growth, margin expansion, and pre-castle generation.

Speaker 2: We are 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.

We are proud to say that 2021 at the latest proof point of execution against our plan and we believe there is significant runway for more of the same sex success ahead.

Speaker 2: Let's start with the shift. We have made on product mix and how has improved margins over the past few years.

Let's start with the shift we have made on product mix and how it's improved margins over the past few years.

As we noted at our Investor update to clear byproduct of our strategy can be seen in the growing percentage of our revenues above 40% gross margin.

Speaker 2: As we noted at our investor update, the clear 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've increased 10% from 49% to 70% an improvement of over 20 points.

Speaker 2: From 2017 to year end 2021, we've increased that percentage from 49% to 70% in improvement of over 20 to 20 points.

Now, let me detail a few of the key drivers and the actions that drove the improvement.

Speaker 2: Now let me detail a few of the key drivers and actions that drove the improvement.

First as mentioned, we continue to optimize the mix of our business and audio we have a particular focus on growth in non mobile ear, Iot and computing applications as well as our hearing health business.

Speaker 2: In precision devices, our high performance capacitor and hard filtering businesses both continue to expand margin.

In precision devices, our high performance capacitor and RF filter businesses, both continued to expand margins.

Speaker 2: John will speak to the margin impact, but I know that our opportunity on the top line for these growing in markets is attractive, especially considering our leading market position.

John will speak to the margin impact, but I would note that our opportunity on the top line for these growing in markets as attractive, especially considering our leading market position.

Speaker 2: Second, Nol's continues to capitalize on favorable market dynamics, and we are gaining share within our hearing help.

Second <unk> continues to capitalize on favorable market dynamics, and we are gaining share within our hearing health market in.

Speaker 2: in the fourth quarter and for 2021. Noles fired on all cylinders in this market with share games and new product introductions along with strong end market growth.

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.

Speaker 2: 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 pre-cash flow.

Third precision devices continues to be an outperformer investments in both high performance capacitors as well as RF filters across a wide variety of markets are paying dividend and revenue growth margin expansion and free cash flow.

As you can see from our financial debt financial results execution against our strategy. Since 2017 has shown consistent progress as we have fundamentally transformed the company.

Speaker 2: 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.

Speaker 2: Similar to our investor update, I'd like to highlight the margin of free cash flow and earnings growth we've generated despite revenue growth over the same period that was moderated by strategic exits from more margin business.

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.

Speaker 2: 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.

<unk> never been in a better position to drive shareholder value.

Speaker 2: We have grown our adjusted EBIT margins by more than 500 basis points over the past four years, which is translated into an APS CAGR of 15%. This was achieved with a revenue CAGR of just under 4%, which is impacted by global supply chain disruptions and our strategy to focus on higher value products.

We have grown our adjusted EBIT margins by more than 500 basis points over the past four years, which is translated into an EPS CAGR of 15%. This was achieved with a revenue CAGR of just under 4%, which is impacted by global supply chain restructuring and our strategy to focus on higher value products.

Equally important our free cash flow margins has improved by nearly 10 percentage points, which we plan to deploy through future M&A and share repurchases.

Speaker 2: 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 repurchase.

Speaker 2: In total, we completed 2021 with exceptional adjusted EBIT margins and the highest pre-cashable since we have been in the independent company. Is it certain, certainly something we are proud of? But the exciting takeaway is what the offer-less airing leverage means for valuation in the quarters and the years to come.

In total we completed 2021 with exceptional adjusted EBIT margins and the highest free cash flow since we have been an independent company is.

There is a certain certainly something we are proud of it but the exciting takeaway is what the <unk> are using leverage means for value creation in the quarters and the years to come.

Speaker 2: Now let me provide some additional detail on each of our product segments.

Now, let me provide some additional detail on each of our product segments.

Starting with precision devices, we continue to outperformed with another quarter and full year of record sales for the segment.

Speaker 2: Starting with precision devices, we continue to outperform with another quarter of a full year of record sales for the second...

Speaker 2: Total revenues per year were just north of 201 million for 16% higher compared to 2020. In the fourth quarter, precision devices generate very strong results with revenue of nearly 40% compared to a year ago.

Total revenues for the year were just north of $201 million or 16% higher compared to 2020.

In the fourth quarter precision devices generated very strong results with revenue up nearly 40% compared to a year ago.

On its own the growth is impressive and it illustrates our market leading position across a number of attractive end markets.

Speaker 2: On its own, the growth is in process and it illustrates our market-ling position across a number of attractive end markets.

Speaker 2: That said, we are just as proud of the results of our precision device segment posted on profitability. Specifically, segment gross margins were of 630 basis points compared to a year ago. And this is not happening in one product category or hand market. It is very diverse across markets, such as medical, defense, EV, and industrial.

That said, we are just as proud of the result of our precision device segment 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 is very diverse across markets, such as medical defense EV and industrial.

Speaker 2: Now let me turn to our audio segment, which as I noticed earlier, face a tougher environment on the top line, given broader supply chain issues in the timing of customer product launch.

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

Speaker 2: In our MEMS microphone business, revenue was pressured for the reason's mention, but gross margins were favorable as we continued to shift our mix away from lower margins, products and markets.

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

Speaker 2: 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.

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.

Speaker 2: 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 a recovery in the audio file demand in the second half and our recent product watches continued ramp with our largest cost.

Our hearing health business continues to be strong at the global market recovered in our company took additional share.

The hearing health business also benefitted as we saw a recovery in the audiophile 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.

Speaker 2: Similar to our other businesses, Herring House also drove significant offering leverage with we believe will continue in 2022.

Speaker 2: 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.

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 midterm expectation by highlighting a few things that we spoke about at the Investor update.

Speaker 2: John will give you more detail on the Q1 Outlook in a minute that I'll conclude my prepared remarks with a review of our midterm expectation by highlighting a few things that we spoke about at the investor update.

Speaker 2: 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.

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 midterm demand dynamics across both segments, and we expect to drive growth opportunities through our market leading position.

Speaker 2: We have visibility in the midterm demand dynamics across both segments and we expect to drive growth opportunities through our market leading position.

Speaker 2: 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 margin above 43%. As I mentioned, our shift in mix has already contributed meaningfully to the progress. As we expect, we'll continue to be positive in the years to come.

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. We expect we will continue to be positive in the years to come.

Speaker 2: 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 even margins. This gives us confidence we are on track to achieve our midterm model of 22 to 24% adjusted even margins and 15 to 17% free cash flow margin.

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 mid term model of 22% to 24% adjusted EBIT margins and 15% to 17% free cash flow margins.

In summary, I'm very proud to 2021 results delivered by the entire Knowles team 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 to call over to John to review our financial results John .

Speaker 2: In summary, I'm very proud of the 2021 results delivered by the entire NOLS team. 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 to review our financial results.

Speaker 2: 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 device.

Thanks, Jeff.

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

Speaker 2: Audio revenues of 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 are focused on higher value MEMS microphones in connection with our margin improvement.

The audio revenues of $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.

Speaker 2: The decline in MEMS microphone revenues was partially offset by increased shipments into the hearing health mark.

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 Med Tech and industrial end markets and an acquisition completed in the first half of 2021.

Speaker 2: The precision device segment delivered revenues of 58 million, up 40 percent from prior year, driven by strong organic growth in defense, medtech and industrial and markets, and in acquisition completed in the first half of 2021.

Speaker 2: Fourth quarter-girls 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.

Fourth quarter gross profit margins were 43, 3%, a 130 basis points above the high end of our guidance range and up 530 basis points from the same period a year ago.

Speaker 2: Audio-fagment gross margins improve 290 basis points over 2020 levels driven by lower factory spending and favorable product mix related to an increased percentage of shipments into the year IoT and hearing health mark

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.

Speaker 2: Decision device segment gross margins were 49.2%. A record for this segment and up almost 13%

Decision 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.

Speaker 2: 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 agent.

<unk> adjustments.

Speaker 2: Our gross margin expansion throughout 2021 demonstrates the impact of our strategy to deliver high value differentiated solutions to a diverse set of end marks.

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.

Speaker 2: Total company gross profit margins finished at 41.7% for full year 2021. 270 basis points above 2019 pre-COVID level.

Total company gross profit margins finished at 41, 7% for full year 2021, 270 basis points above 2019 pre COVID-19 levels.

R&D expense in the quarter was $20 million down $1 million versus the prior year.

Speaker 2: R&D expense in the quarter was 20 million. Down 1 million versus the prior-

Speaker 2: S-GNA expenses were 30 million. Three million above prior year levels driven by higher and higher compensation cost and the impact of the acquisition completed in the first half of 2021. Partially offset by lower legal expense.

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.

Speaker 2: For the quarter, the adjusted EBIT margin was 22 percent, up 370 basis points from the prior year, driven by higher gross profit margin.

For the quarter adjusted EBIT margin was 22% up 370 basis points from the prior year driven by higher gross profit margins.

EPS was <unk> 48, which was <unk> <unk> 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.

Speaker 2: EPS was 48 cents, which was three cents 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 costs.

Speaker 2: 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...

For full year 2021, we delivered adjusted EBIT margins of 21% 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 networking capital cash.

Speaker 2: 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.

Speaker 2: to a higher EBITDA and lower than expected networking cap.

Speaker 2: Capital spending was 20 million in the quarter and we repurchased 1.1 million shares at a total cost of 25 million.

Capital spending was $20 million in the quarter, and we repurchased one 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 two 1 million shares in 2021 at a total cost of $44 5 billion fully repaid our fully repaid our convertible notes and we exited 2012.

Speaker 2: For full year 2021, free cash flow was 134 million, representing more than 15% of revenue.

Speaker 2: We repurchased 2.1 million shares in 2021 at a total cost of 44.5 million. Fully repaid are convertible notes, and we exited 2021 with essentially no net debt.

One with essentially no net debt.

Moving to our guidance for the first quarter of 2022.

Speaker 2: Moving to our guidance for the first quarter of 2022. We expect total company revenue to be between 197 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 facility.

We expect total company revenue to be between 197 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-19 related absences in our north American manufacturing facilities.

Speaker 2: 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 help mark.

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 Med Tech and industrial markets and the acquisition completed in Q2 2021.

Speaker 2: The decision device revenue is expected to be up more than 40% over prior to levels driven by broad-based strength and defense, MedTech and industrial markets and the acquisition completed in Q2 2021.

Speaker 2: We have to make gross margins for the first quarter to be between 39 and 41 percent. It will help 100 basis points from the year ago period driven by favorable mix as we expect to hire proportion of shipments into non-mobile markets.

We estimate gross margins for the first quarter to be between 39% and 41% up 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, and $20 million down $1 million from prior year levels due to a reduction in incentive compensation cost.

Speaker 2: R&D expense is expected to be between 18 and 20 million, down 1 million from prior levels due to reduction in incentive compensation.

We're projecting selling and administrative expense to be between 25 and $27 million up $1 million from the year ago period, driven by the acquisition completed last year.

Speaker 2: We're projecting selling an administrative expense to be between 25 and 27 million, up 1 million from the year ago period driven by the acquisition completed last.

Speaker 2: 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 29 to 31 cents per...

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 29 to 31 per share. This assumes weighted average shares outstanding during the quarter of $96 8 million on a fully diluted basis.

Speaker 2: This assumes weighted average shares outstanding during the quarter of 96.8 million, and a fully diluted

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.

Speaker 2: We're forecasting an effective tax rate of 13 to 17 percent 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 20-20-

Speaker 2: For the quarter, we expect cash generated from operations to range between zero and 10 million, in line with normal seasonal patterns. Capital spending is expected to be approximately 10 million. I'll now turn the call back.

For the quarter, we expect cash generated from operations to range between zero and $10 million in line with normal seasonal patterns capital spending is expected to be approximately $10 million.

I'll now turn the call back to our operator to open the line for questions operator.

At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.

Speaker 3: At this time, I would like to remind everyone in order to ask a question, please press star, followed by the number one on your telephone keypad. We ask that you please limit yourself to one question and one follow-up.

I 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.

Speaker 3: Your first question comes from the line of Anthony Stost with Craig Hallam. Your line is open.

Speaker 4: 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 more detail on why that is? And then also any thoughts you might have on kind of Gross Margin for the remainder of the year and then I'll have a follow up for Jeff.

Hi, guys nice execution in 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 al can you maybe give me a little bit more detail on why that is and then.

So any thoughts you might have on kind of gross margins for the remainder of the year and now I have a follow up for Jeff.

Speaker 2: Yeah, Tony, in terms of the sequential declining gross margin, it's really two factors.

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 in hearing health and compute nearing our both our above average gross margin. So it's those two factors.

Speaker 2: lower capacity utilization in our men's microphone business.

Speaker 2: And then we're actually seeing sequentially some under favorable mix with lower compute and hearing health and computing hearing health both are above average growth margin. So it's those two factors. And so just let me comment on the compute portion of this. The vector 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.

And just let me comment on the compute portion of this factory utilization is pretty straightforward.

Kind of a usual thing seasonally that we operate at a lower level in Q1 in terms of capacity utilization at the compute market is a little bit weaker for us in Q1 and right now what we see is that at returning to I would say of pre this quarter level in Q2, the bookings are indicating.

Speaker 2: But the compute market is a little bit weaker for us than Q1. And right now what we kind of see is, is the ever-turning to, I would say, of pre this quarter level in Q2. The bookings are indicating that we'll be an increase and back to normalize levels in compute in Q2.

That will be an increase in back to normalized levels and compute in Q2, yeah. Tony in terms of your 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 mid point of our guidance for Q1. It is 100 base.

Speaker 2: Yeah Tony, in terms of your 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.

Speaker 2: Even at the midpoint of our guidance for Q1, it is a hundred basis points higher than the year ago level.

This points higher than the year ago levels. So while we're really pleased with the gross margin. We delivered in 2021, we do think Theres room to progress further.

Speaker 2: So while we're really pleased with the gross margin we delivered in 2021, we do think there's room to progress.

Speaker 4: Yeah, thanks. So there's a follow up for Jeff. Normally you would comment about the millimeter wave division. I didn't hear anything and you're prepared of Mars and just curious, you kind of your view on that for 5G infrastructure. And then also, love to hear your thoughts on true wireless earbuds and kind of growth of that in your more IoT type business.

Got it. Thanks, So then as a follow up for Jeff.

Normally you would you would comment about the millimeter wave division I didn't hear anything in your prepared remarks, I'm just curious kind of your view on that for <unk> infrastructure and then also love to hear your thoughts on true wireless earbuds and kind of growth of that in your more Iot type businesses.

Sure.

Speaker 2: So first, I'm the RF filter business. If I look at 2020 to 2021 and 2022, it grew reasonably what it caught amount in 2021. Maybe we had it, like it was about 30, 35 million in 2020 going to...

So first on.

Our filter business, if I look at.

2020.

2021 and 2022.

It grew reasonably well.

Okay.

<unk>.

In <unk> in 2021.

It was about 30 $35 million in 2020 going to well over 45%.

Speaker 2: well over 45 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 from our filtering. But I would just say this, there is some telecom in this, but the majority here is defense. We've really got some nice design wins.

2021.

I think we.

We're poised to have a real breakout year in RF filtering in 'twenty two a lot of our growth in PD is going to come from our filtering, but I would just say that there is some <unk>, but the majority here is is defense.

Okay.

We've worked really got some nice design wins I.

Speaker 2: I'd say our acquisition of IMC that we did in

I'd say our acquisition of IMC that we did in the first quarter second quarter of last year.

Speaker 2: and the first quarter, second quarter of last year, is really panning out, really well. We're really pleased with this acquisition. Again, it brought in our product portfolio and allowed us to do more stuff with more customers. We're starting to see more sales energy with this opportunity.

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 <unk>.

Opportunity and so we're.

Speaker 2: So I work expecting some pretty significant growth out of the RF-3 business. Specifically, the telecom. I think I'll say what I've said over the last couple of years, which is.

We're expecting some pretty significant growth out of the RF filter business, specifically to telecom I think I'll say, what I've said over the last couple of years, which is.

Speaker 2: We've got a number of design wins that are going to production this year.

We've got a number of design wins that are going into production. This year I think the challenge here is Toni it's.

Speaker 2: i think the challenge here is tony is it's it's a lot with the second tier people who are working on uh... uh... you know stuff that could go on the home or in the house or in uh... a small self right it's a very hard for us to get the real roll out and what they're they're they're telling us big number

With the second tier people, who are working on.

Stuff that is going to go on the home or in house or in a small cell right. It's very hard for us to gauge the real rollout and what they're telling us big numbers, but I've got to be honest with you.

Speaker 2: but I got to be honest with you, I'm kind of skeptical of what it's based on what I read the marketplace and what we see of what the real raw is going on. Now this is more of a waste and seed, but we do have some design that could generate, you know, I'm not huge revenue, but you know, five to ten million dollars worth of revenue in Telecom in 2022.

Skeptical of what based on what I read in the marketplace and what we see what the real raws going on so this is more of a wait and see but we do have some design wins that could generate.

Not huge revenue, but $5 million to $10 million worth of revenue in telecom.

In 2022.

Speaker 4: Okay, if I can squeeze in one more, just on the supply chain issues that everybody's facing, I'm curious your thoughts on when it might ease, is it keeping easing each quarter, does it last into 2023? Any thoughts would be helpful.

Okay, if I could squeeze in one more just on the supply chain.

Issues that everybody is facing I'm curious your thoughts on when it might ease it keep easing each quarter does it last into 2023 any thoughts would be helpful.

Yes.

Speaker 2: Yeah. Here's what I kind of see it as 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 waivers. Now, that being said,

Here's I kind of see it is 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.

A two pronged approach here that we see one is we think that the supply chain, we will get better in the back half and we will get more wafers now that being said.

Speaker 2: We have multiple way for suppliers. And as we can introduce new products, we're using different way for suppliers to kind of try to balance the load. So in some places we have not enough.

We have multiple wafer suppliers and as we can introduce new products, we're using different wafer suppliers to kind of try to balance the load. So some places we have enough not enough and some suppliers we have more than we need so I think youre going to start to see as we go into the back half even independent of the supply chain disruptions.

Speaker 2: some suppliers we have more than we need. So I think you're gonna start to see as we go in the back half, even independent of the supply chain disruptions that are caused by we have secured enough vapors in total, but we gotta make sure the mix with new products comes over maximizing the number of vapors we get. Got it. Thanks for the detail, Jim.

That are caused by we have secured enough wafers in total.

Got a mixture of the mix with new product come silver maximizing the number of wafers we get.

Got it thanks for the detail Jeff I appreciate it.

Your next question comes from the line of <unk> <unk> with Baird. Your line is open.

Speaker 3: Your next question comes from the line of Tristan Gera, with there, your line is open.

Hi, This is Tyler on for Tristan. Thanks for taking my questions first could you talk about the puts and takes of what youre seeing in the smartphone market, notably, China, which I know is a market that you've de emphasized in the past few years.

Speaker 3: Hi, this is Tyler on 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 deemphasized 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?

Inventory is there how do you see the trends developing in the China market for the rest of the year.

Speaker 2: Yeah, I mean, I think, you know, the trend for the China market, I think, you know,

Yes, 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.

Speaker 2: There's been a lot of discussion that China is doing better. I think the real challenge in the China market, 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 a fair amount of COVID-related issues. So I think we're hopeful that

The China market the end market has been.

With Covid a lot of the.

Lot of the Chinese suppliers that are highly focused on the.

Emerging markets like India, Brazil, Indonesia, right, they're focused on a lot of these markets and.

<unk> been dealing still with a fair amount of Covid related issues. So I think we're hopeful that that.

It is getting better and 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.

Speaker 2: It is getting better. We're hopeful as we look towards the rest of the first half and then the second half, our China business will be better. But I'm gonna preface this with the statement that, again, I don't wanna run mobile under the bus because there may be a day where we come out with products that are very high gross margin and not commoditized in the mobile market. But we are deemphasizing selling to the mobile market. And just to kind of...

Then I don't want to run mobile onto 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 market and just to kind of say this is in 2021.

Speaker 2: say this is in 2021, we had about a little over 22% of our total company revenue came from

We had about little over 22% of our total company revenue came from mobile.

Speaker 2: And that sound pretty significantly. It was over 30 a couple of 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'm gonna draw you to Q4, right? Because when you look at the 43% gross margin, I think that's a proxy for where we wanna 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 mics.

It's down pretty significantly it was over 30, a couple a couple of 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'm going to drag into Q4 right 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.

I say this is that the mix was optimal in other words, we didn't sell a lot of commoditize mics, we sold more of our out year Iot compute.

Speaker 2: We sold more of the EAR, IOT, compute, precision devices, hearing health, and you see what it does to our gross margin. And it's very powerful. And so, you know, we look at that, I look at it, Q4, as people could look at and say, well, you're at your midterm model ready for a quarter. But that's kind of ideally where we want to be in two to three years on an annual basis as we continue to deemphasize commoditized products.

Precision devices to hearing health and you see what it does to our gross margin and it's very powerful and so we look at that I look at Q4 as people could look at and say well you're at your midterm model ready for a quarter, but that is kind of ideally where we wanted to be in two to three years on an annual basis.

We continued to deemphasize commoditize products.

Great.

Speaker 3: That's 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 types of products or mix or anything like that.

Follow up maybe you could talk about some of the biggest gross margin drivers youre seeing this year, maybe it's new types of products or mix or anything like that.

Speaker 2: Yeah, I mean, I, I, you know, John's got a good thing in terms of margins that we talked about. Think of our business like Fort quadrants.

Yes.

John's got a good thing in terms of margins that we've talked about think of our business like four quadrants right you got.

Speaker 2: Right, you know, you got, um, uh, mobile is one quadrant. Uh, you got ERIOT compute, and then microphones, other category. And then you got, uh, the precision device, uh, quadrant, and then you got the hearing health multiple quadrant. You know, uh, the year ago, we'd say those were all the roughly the same size. Now, actually, mobile is probably the smallest now of those four quadrants.

Mobile is one quadrant.

Got ear Iot compute Mems microphones other category and then you've got.

Precision device.

And then you've got the hearing health quadrant.

A year ago, we'd say those were all roughly the same size now actually mobile is probably the smallest now of those four quadrants and it's also the smallest of both gross margin and so as we sit there and look at the other markets.

Speaker 2: And it's also at this moment the bulls grow margin. And so, you know, we sit there and look at the other markets and, you know, we kind of put this in the midterm updates that we gave or the investor update. You know, we expect those other four quadrants to grow faster than the mobile.

We've kind of put us in the midterm.

Date that we gave at the Investor update we expect that those other four quadrants to grow faster than the mobile app.

Speaker 2: at above the corporate average gross margins. And if we can fit there and continue to see this, mixteft, it's very easy to fit there and go. As we talk about, mobile growth is 0 to 2% over the three year period. And then you can go through the list, what hearing health grows at, what precision device goes at, what year are two growth at. That we can get the 43% growth margin just through mixteft.

Above the corporate average gross margins and if we can sit there and continue to see that mix shift, it's very easy to sit there and go.

<unk> talked about mobile growth zero to 2% over the three year period, and then you can go through the list what hearing health grows at what precision device goes at what <unk> growth that that we can get to 43% growth gross margin just through mix shift and I'll just make so mix shifted a big portion we're still working on obviously productivity improvements to improve.

Speaker 2: And I'll just make some big shifts of the 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 our operating margins. You know, we 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.

Most 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 our and our.

Getting margins I would just add the other thing that we're really seeing is obviously, we are seeing increases in input costs, whether it's wafers, whether it's labor whether it's other materials, we've been reasonably effective at passing those costs down through higher pricing, especially in the high value microphone area and in the PV and Hh.

Speaker 2: Whether it's other materials, we've been reasonably affected at passing those costs down through higher price.

Speaker 2: especially in the high-value microphone area and in the PD and HHT businesses. So that's been another opportunity and action for increasing growth margin.

Businesses. So that's been another opportunity in action for increasing gross margin.

Thanks, So much I appreciate you taking the questions.

Your next question comes from the line of Bob <unk> with CJS Securities. Your line is open.

Speaker 3: and the question comes from the line of Bob LeBic with CJS Securities. Your line is open.

Good afternoon, and congratulations on the strong execution.

Speaker 1: There's not a lot in the news lately. 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 kind of put that together with an update on the automated balance armature line if those...

Well, there's been a lot in the news lately, we've talked about on previous calls too, but just wanted to kind of the latest update on the OTC hearing aid market any thoughts on the timing of that marketing market opening up and and maybe kind of putting.

Put that together with an update on the automated balance armature line if those.

If those would be ready and when we go into the OTC market.

Speaker 1: If those would be ready and would go into the OTC market or into a different...

We're in kind of different market.

Yes, So let me give you the VA line update first so lines operating not running at full capacity it quite yet, but it is operating and producing parts. We sold parts off the line in Q4.

Speaker 2: Yeah, so let me give you the BA line update first. So line is operating, not running a full capacity 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.

And we will 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, we use that utilization.

Speaker 2: with a goal, hopefully by later this year, sometime in the back half, getting to fulfill capacity of the utilization.

Speaker 2: I would just say they are, you know, and I'll come all the way around back to the OTC market a minute. You know, obviously we're pursuing the two wireless market with the balance armature. We think we're seeing some success here in terms of design wins and things will go production, but we're also seeing that there is interest.

I would sit there and say our.

All the way around back to the OTC market in a minute obviously, we're pursuing the true wireless market with the balance armature and we think we're seeing some success here in terms of design wins and things 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.

Speaker 2: from the OTC market as well as well as of our hearing health customers in using product off the automated line. And this is a big technology development for us that it's gonna pay strong dividends over the years to come. And we're, it's taken as long as we expected, but where we are today, go forward, I think this is gonna be a contributor. Now, specifically to the over-the-counter market. I think, I said this before, we gotta see how it's developed.

Customers and using product off of the automated line and.

This is a big technology development for us that it's going to paid strong dividends over the years to come.

It's taken us longer than we expected, but where we are today Gulfport I think this is going to be a contributor now specifically to the over the counter market I think I've said this before.

We've got to see how this develops I think this is a great opportunity for US right. We are very well positioned to take advantages in the over the counter market. It does not appear to us that the content is lower.

Speaker 2: This is a great opportunity for us, right? We are very well positioned to take advantage of this into the overall, over the counter market. It does not appear to us that the confidence...

Speaker 2: It's so far, you know, we're seeing people who are doing things like this in terms of the pricing they put to the market is very similar to hearing aid, but it's really targeted people who have mild

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 rate and so and that is where today. There is very low penetration and I mean, if you look at.

Speaker 2: hearing loss, right? And so and that is where today there's very low penetration. I mean if you look at I've always given my pyramid right where there's you know 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 we're pretty optimistic that over the you know the midterm

Given my pyramid, right, where there is 70% 80% penetration of people who are 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.

Speaker 2: The over-the-counter market can develop to bring people with mild hearing loss and who otherwise wouldn't have had a hearing aid at number one. So, there were two of us once they're brought in.

The over the counter market can develop to bring people with mild hearing loss and who otherwise wouldn't have had a hearing aid. That's number one number two is once they are brought in once you lose hearing over and over time.

Speaker 2: Once you lose hearing over time as you age, they'll get their first real hearing aid from the traditional channel at an earlier age and it's all gonna drive more demand. So that's how kind of why we see our hearing health of this is GDP plus. We used to say GDP, now GDP plus. Now what that means yet in terms of the absolute numbers, it's hard to say, but it's definitely an upside to where we are to.

They will get their first real hearing aid from the traditional channel at an earlier age and this is all going to drive more demand. So that's all kind of why we see our hearing health business is GDP plus I mean, we used to say GDP or GDP plus what that means yet in terms of the absolute numbers hard to say, but.

But it's definitely an upside to where we are today.

Okay.

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.

Speaker 1: Okay, that's great, very exciting, thank you. And then I guess just for my other question, obviously, the 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 kind of what's the ideal capital structure you're netting that free right now, is it just using free cash to make acquisitions what might you lever up, et cetera?

There is.

Any expectations this year and kind of what's the ideal capital structure net debt free right. Now is is it just using free cash to make acquisitions might you lever up et cetera.

Speaker 2: Well, I think the one challenge I'll say, and let me be able to John kind of speak a little bit to this a little bit more, but the one challenge is the evaluations are quite high in the marketplace. And I gotta 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 at anything that is huge in terms of the funnel is okay, but I would just say what you can kind of see is we're starting to generate more cash without debt and Q4 is kind of an indicator.

Well I think.

The one challenge I'll say, let me I'll, let John kind of speak a little bit to this a little bit more but the one challenges the valuations are quite high in the marketplace.

I'm going 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 were looking anything that is huge in terms of the funnel is okay, but I would just say that you can kind of see as we're starting to generate more cash without debt and in Q4 is kind of.

A an indicator we paid off.

Speaker 2: the convert that we had in cash.

The convert that we had in cash.

Speaker 2: We bought a pair of number of shares back in the quarter as well.

We bought a fair number of shares back in the quarter as well and so I think what youre going to see us going forward and I think we'll spend a little bit more time, probably on the next call talking about capital allocation.

Speaker 2: 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 mutual exclusive that we need to do PEMINA or share bybacks or again return capital shareholders. There's possibility here what the monocache we're generating from our core that we're capable of doing both.

What that means but we're looking for acquisitions and it may not be mutual exclusive that we need to do M&A or share buybacks again return capital to shareholders.

There is a possibility here of what the amount of cash we're generating from our core that we're capable of doing both.

Speaker 2: I mean, just to kind of summarize it, we delivered very strong cash flow in 2021, 133 million or more than 15% of revenues.

Common.

Just to kind of summarize we delivered very strong cash flow in 2020 $133 million or north of 15% of revenues.

Speaker 2: already close to the rain, you know, at the low end of the range of our midterm financial target. We believe we can continue to deliver similar percentages in 2020 with expansion in the midterm.

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 'twenty 'twenty. One 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.

Speaker 2: And then in terms of capital deployment, think of 2021. We had three major activities. We repaid our convertible notes to Jeff mentioned.

Speaker 2: We also spent about $80 million on a key strategic acquisition in our PD business, and we repurchased $44 million of our stock.

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.

Speaker 2: And at the same time, we're exiting 2021 with no financial net debt.

Speaker 2: Basically the debt repayment is kind of behind us, so our priorities really after that are unchanged. We'll continue funding organic growth initiatives and we'll look for accretive acquisitions for merely in the PD 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 would just have one last thing is I think you've kind of seen with our kind of strategy and our MEMS microphone business Does that also have, if I can relate to that, the

Basically the debt repayment is kind of behind us. So our priority is really after that are unchanged. We will continue funding organic growth initiatives and we will look for accretive acquisitions, primarily in the PD segment and then it's a matter of return of capital through share repurchases and as Jeff said, we'll try to outline and get some parameters around that return of <unk>.

Capital into on the next call. It averages one less thing is I think you've kind of seen with our kind of strategy in our Mems microphone business.

Going after higher margin business, what Youre seeing is the trending down of capex towards the lower end of the ranges that we've given you remember three or four years ago, we used to talk about six to eight 6% to 700% to 8% and we had a year that we were 9% now we're kind of trending below that six to eight five.

Speaker 2: what you're seeing is the trending down of catbacks towards the lower end of the range is that we've given you remember three four years ago we used to talk about six to eight seven six to eight percent and we had a year that we were nine percent now we're kind of you know trending below that that six to eight were in the five percent range and I think that's another just a sense of like how we're investing the capital right and what we're doing with it and how we're you know we're turning now even as we pay down the debt you're returning what he called capital to shareholders through share by vex and Bob the one question I didn't answer you asked about you know what is the ideal leverage

<unk> range and I think that's another just a sense of like how we're investing the capital right and what we're doing with it and how we're we're turning now even as we pay down the debt returning.

Cause capital to shareholders through share buybacks and Bob the one question I Didnt answer you asked about what is the ideal leverage.

Speaker 2: Obviously, we'll 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.

Obviously, it will depend on the acquisition opportunities, but we're going to be disciplined and we will maintain an investment grade like balance sheet. So kind of maximum leverage two five to $2 six kind of range.

Okay Super that's great detail. Thank you very much.

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

Speaker 3: the line of Chris Roland with Slusquajana, your line is open.

Hey, guys. Thanks for the question.

Speaker 5: Regarding shortages, I just wanted to drill down there a little bit more. You mentioned front end.

Regarding shortages I just wanted to drill down there a little bit more you mentioned front end.

Speaker 5: I was wondering, you know,

I was wondering.

Speaker 5: You know, 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?

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.

Speaker 5: more volume running through there as well and then

More volume running through there as well and then lastly, do you have any backend issues or are you running into customer kidding issues and can you share some of those anecdotes with US yeah. Yeah sure. So let me just cover Q1, I think we're dealing with two issues, one that's probably a little bit more temporary.

Speaker 5: Lastly, do you have any back end issues or are you running into customer kidding issues and can you share some of those anecdotes with us? Yeah, yeah sure. So let me just first cover Q1.

Speaker 2: I think we're dealing with two issues. One that's probably a little bit more temporary and one that's kind of been around for a while. First, the one that's been around for a while and continuing the linger is the supply chain issues getting enough front end wafers. I would say overall, we're getting enough wafers. I would say where are we...

And one that's kind of been around for a while first the one that's been around for a while and continuing to linger is the supply chain issues of getting enough front end wafers I would say overall, we're getting enough wafers I would say about where we have our products is not optimized for where our wafers are being necessarily produce today.

Speaker 2: not optimize for where our waifers are being necessarily produced today. We're going to continue to work on that. And as you know, the year goes by, as I kind of mentioned, you know, we do expect some improvement, but on the upside, we also expect that we'll introduce new products that utilize

We're going to continue to work on that.

A year goes by as I kind of mentioned.

We do expect some improvement but on the reverse side. We also expect that we will introduce new products that utilize.

Speaker 2: What he called front end material where we have more capacity.

What he caught up upfront and material we have more capacity. So 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 aligned now.

Speaker 2: So I think that's going to be a big help. And as I see the back after year today, I think we're very well-lined. This is within our MEMS microphone. So this is less than 50% of probably our projections for this year. With this PDE and hearing help, 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 operations. That's one example.

This is within our Mems microphone business. So this is less than 50% of probably our projections for this year within PD in hearing health.

We don't have huge problems with supply chain, we're not as reliant on third parties in order to provide an example, we stamp a lot of metal parts, we have our own staffing operation, but thats. Just one example, but but but we are facing one issue in our PD business there, having a fabulous first quarter based on the guide they're up significantly year over year.

Speaker 2: But we are facing one issue in our PD business. They're having a fabulous first quarter, based on the guy, they're up significantly year-of-year. But the majority of their manufacturing is in North America. And we've been averaging on a weekly basis between five and 15% of absentee is...

The majority of their manufacturing is in North America, and we've been averaging on a weekly basis between five and 15%.

<unk> is in the factories and with direct labor. This is definitely impacting the Q1 number right. So.

Speaker 2: in the factories and with direct labor. This is definitely impacting the Q1 number. Right? So I got supply chain on them. I got I'm a crown in North America. I would say this is probably impacting is probably been in a tune of five to $10 million in Q1.

So I got supply chain and Mems I got omicron in North America I would say this is probably impacting us probably than the 2% to $5 million to $10 million in Q1.

Speaker 2: So, you know, so that's, you know, that it's so our main issues get PD and hearing help, we're not seeing a lot of issues relative to supply. I would say my concern in North America right now is relative to Amacron, right, in terms of absenteeism, but that should come to an end. We're starting to see things come down, we should expect that, you know, by the end of the Q1 that should be taken care of.

And so so so thats.

So.

Our main issues get PD and 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 right in terms of absenteeism, but that should come to an end and we're starting to see things come down we should expect that by the end of Q1 that should be taken care of.

Speaker 2: For the back after years you asked, I think it's about the mix. Right? In other words, it's optimizing with our new product introductions that we use the fabs where we have access capacity versus where we don't so that we kind of better balance our way for supply.

For the back half of the year as you asked I think it's about the mix right. In other words is optimizing with our new product introductions that we use the fabs, where we have excess capacity versus where we don't so that we kind of better balance our wafer supply.

Speaker 5: Thank you, Jeff, appreciate it. And then the next question is just...

Thank you Jeff I appreciate it and then.

The next question is just given these concerns given that wafer seem a little tougher to get given we have shortages.

Speaker 5: Given these concerns, given that, you know, wafer seem a little puffer to get, given we have shortages.

Speaker 5: Everyone's kind of seeing this as well. Does this actually help your pricing dynamic? And then secondly, a quick one, accounts receivable, up pretty substantially in December .

Everyone's kind of seeing this as well.

Does this actually help your pricing dynamic and then secondly, a quick one accounts receivable.

Pretty substantially in December .

Speaker 5: Maybe just talk about that as just related to...

Maybe just talk about that is just related to you.

Speaker 5: your largest customer.

Your largest customer.

Speaker 2: Well, I don't know if we'll comment specific, or our discussion around, we'll get that specific, but John can give some comment. Yeah, the PR 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 I did. If you look at the shape of 4Q4, we had a lot of sales in Q4.

Ryder will comment specific to our largest customer out of it because that specific but John can give some commentary.

Simply timing issue, Chris we had a higher percentage of our sales in the last month of the quarter, which you'll get collected typically 45 to 60 days later and so that's all of it.

You look at the shape of for Q4, we had a lot of sales in Q4.

Speaker 2: in the last thing. Sorry, in December of Q4, sorry. And so it's not being collected yet. So I don't think, I don't think we see that as there's a lot of any credit risk there. It's just literally tiny. And then an A and P's, you know, I think you kind of brought pricing here and I say is I think this kind of follows that getting four quadrupling where you have talking about commoditized mics and then you talk about mobile ear, I, oh.

In December of Q4, sorry.

So it's not being been collected yet so I don't know.

I don't see that.

Any credit risk there its just literally timing and then I think you've kind of brought pricing here's what I'd say is I think thats kind of follows that four quadrant thing, where you have talked about Commoditized, Mike and then you talk about mobile ear Iot you sit there and you talk about.

Speaker 2: We sit there and talk about what he called PD and HHT. In three of the four quadrants, we've seen to be reasonably well of ASPs, of flat to up, and we're able to pass on. Some of the wage inflation, some of the wafer costs, but PD and HHT don't only 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 products,

What do you call it a PD and HD and three of the four quadrants, we seem to be reasonably well of asps.

<unk> are flat to up right and we're able to pass on some of the wage inflation some of the.

Wafer cost but.

And <unk> don't want to have a lot of wafer cost I mean, this is more wage inflation that we're trying to pass on.

So in the area of work, where we have more commoditized product I would sit there and say it's better than it was before and I will give you. The one indicator you always ask me about Asps. If you remember 16, 17, we're averaging 8% to 10% reduction in Asps on mature products last year it was around.

Speaker 2: I would sit there and say, you know, it's better than it was before. And I'll give you the one indicator, if you always ask me about ASPs. If you remember, 16, 17, we are averaging 8 to 10% reduction in ASPs on mature products. You know, last year it was...

Speaker 2: repersoned on mature products this year we're thinking it's gonna be sub to unmature products so you you can see this and to the extent that we have less of this business that up now obviously it makes it much easier for us to sit there and go look here's our price you know if you want to buy for months we this is the price

3% on mature products. This year, we're thinking it's going to be sub two on mature products. So you can see this and to the extent that we have less of this business.

Obviously, it makes it much easier for us to sit there and go look here's our price.

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.

Speaker 5: Awesome, thanks guys. Yeah, I had assumed there was linearity, but thanks guys really appreciate it

Sure.

Your next question comes from the line of Sushi to Silva of Roth Capital. Your line is open.

Speaker 3: Your next question comes from the line of Suji de Silva, the Roth Capital. Your line is up.

Speaker 3: Hi Jeff, nice execution on the Gross margin here. So maybe you can talk about the hearing health business I talked about the over the counter, but the core business you talked about share gain opportunity. What's driving that and is that sustainable?

Hi, Jeff Hi, John Nice execution on the gross margin here. So maybe you could talk about the hearing health business I 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 theres a couple of things driving this.

Speaker 2: Yeah, I think it is. I think there's a couple things driving this

Speaker 2: you know i think one thing i'm i'm gonna throw a shout out your suji to our operations team i mean they have just really done a fabulous job navigating code over the last twenty four months i can't say enough to you know our facilities in aja they have just done a fabulous job in navigating this and you know in some cases you know those are competitors are you know maybe struggle a little bit more with the type of stuff and and we are we have always been in the here hearing aid market you know

I think one thing I'm going to throw a shout out <unk> to our operations team.

They have just really done a fabulous job navigating COVID-19 over the last 24 months I can't say enough to our facilities in Asia. They have just done a fabulous job of navigating this and in some cases some of our competitors are maybe struggling a little bit more with this type of stuff and we are while we have always been in the hearing aid.

<unk>.

The strong and steady operational portion of it.

Speaker 2: strong and steady operational portion of the supplier. And so I think that's number one. I think, you know, a foreign center. Secondly, you know, 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 growth, with our higher per growth margin markets. You know, hearing help is above the corporate average. And, you know, I would say, I would also put a shout out to our hearing health R&D. And so I think that's number one.

Supplier and so I think that that's number one I think important center secondly, I think one of our things that we did as we think about this reallocation.

Where we want to be more in our higher growth 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.

Speaker 2: They have executed really well on new products with our customers. And so, and that's all of the backdrop of the fact that what he called, that there is, you know,

And that is all of the backdrop of the fact that that would you call. It that there is.

Speaker 2: It's a slow, small, but men's microphones are becoming a bigger and bigger portion of the hearing health market. And we have an outside share in that portion of the market. So you couple all these three things together. You know?

It's a slow slope.

<unk> Mems microphones are becoming a bigger and bigger portion of the hearing health market and we have an outsized share in that in that portion of the market. So you couple all of these three things together.

Speaker 2: great new NPI, new products execution.

Great New <unk>.

NPI and new products execution incredible operational execution cost.

Speaker 2: incredible operation execution, coupled with more shifts on the microphones that I towards, mem's microphones, and I'll give you one more thing. I think we've done a lot, even with the automated line.

Coupled with more shifts on the microphone side towards.

Mems microphones and I'll give you one more thing I think we've done a lot even with the automated line I mentioned before a lot of the learnings from the automated line are now starting to be integrated into the manual lines for balanced armature for the hearing aid market, which is making our performance even better so.

Speaker 2: I mentioned this before, a lot of the learning from the automated line are now starting to integrate into the manual lines for balance, amateur for the hearing aid market, which is making our performance even better. And so, as I said, these guys are hitting in all cylinders, and so it's leading to share games, right? And so, and we do think it's sustainable, because think of the hearing health market, you know, they introduce a new product, these things typically go for 24 months minimum. Let's do that.

As I said these guys are hitting on all cylinders and so it's leading to share gains right and so and we do think it's sustainable because I think of the hearing health market.

Produce a new product. These things typically go for 24 months minimum longest 48 month platforms and we've won a lot of these platforms that start production over the last two years that are going to be in production for the next two to three years.

Speaker 2: The longest 48 month platforms, and we've won a lot of these platforms that start production over the last two years that are going to be in production for the next two to three years.

Okay, Great. That's very helpful color and then on the notebook market I'm just curious what metrics do you think about for the growth opportunity. There is it penetration of Mems mics is it your share in the Mems mics in the notebooks the number of mics per <unk>.

Speaker 6: rich and for a health color and then on the notebook market um... i'm just curious what metric you think about for the growth opportunity there is a penetration of mames mike's is it your share and the mames mike's in the notebooks and number of miche brm notebook what what's the growth opportunity there how should we frame

Notebook whats the growth opportunity there how should we frame it yes, so I would sit there and say is there is some ability to increase the number of mics.

Speaker 2: Yeah, so I would say there's some ability to increase the number of mics.

Speaker 2: But I would say probably more interesting over the midterm is higher performance.

But I would say probably more interesting over the mid term is higher performance.

Speaker 2: You know, again, you know, I go back, this takes a little time, you know, two years ago, be 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 kind of like customers come to us and talking about high performance mics.

Then I go back this takes a little time.

Two years ago, we pre COVID-19 nobody was using that microphone on that laptop and people used to put them in and they check the box I've got a microphone in case you ever want to use it now everybody is using it and we're seeing kind of like customers come to us and talking about high performance mics further business laptops first.

Speaker 2: for their business laptops first, but eventually it's gonna be for consumer laptops, right? And so I think over the longer term, there's gonna be some ups and downs in this market. And right now we're kinda going through, I would say a little bit of a slow down year, Q1, but we're expecting it to rebound in Q2, but for longer term, I think it's about higher performance mics, and again, we're very well positioned to take advantage of that.

But eventually it's going to be for consumer laptops, right and so I think over the longer term there is 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 that the 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.

Okay, great. Thanks, guys.

Speaker 3: There were no further questions at this time. I'll turn the call back over to the company for any closing remarks.

And there are no further questions at this time I will turn the call back over to the company for any closing remarks.

Speaker 1: Thank you all so much on behalf of Jeff and John . I appreciate everyone's time. And if there's follow-ups, please let us know and invest your relations. And we look forward to seeing and talking to you all in the future. Thanks so much.

Thank you all so much on behalf of Jeff and John .

<unk> everyone's time and if there's follow ups. Please let us know on Investor Relations and we look forward to seeing and talking to you all in the future. Thanks, so much.

Speaker 3: This concludes today's conference call. Thank you for joining. You may now disconnect.

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

Okay.