Q2 2019 Earnings Call
[noise] good afternoon, I'm happy that the name of the conference your call into July .
The Nols at Teekay relaxing earnings call.
Im sorry could you please repeat that.
Mills could and W. Ell, yes.
Thank you.
Now please have the spelling of your first and last name.
Yes, Conor C O R.
Medicaid and see the a b.
Thank you Ma'am you have your company name.
Yeah, Hey, I E R.
Thank you your call is in progress touch on you now.
[noise].
You're welcome.
And expected sales of microphones and continued robust demand for precision devices.
EPS of 22 cents was above the high end of our guidance range driven by higher sales volume.
In our audio segment Q2 revenue was up 5% from the year ago period, due to better than expected Mems microphone sales into the year and Iot markets and stabilized trends in mobility.
Overall revenue from audio comprised 78% of total sales in the second quarter.
In the precision device segment sales were up 24% from the year ago period, hitting record levels for the sixth consecutive quarter due to continued demand for our differentiated products across multiple end markets and a tuck in acquisition.
Precision devices represented about 22% of total company revenue in the quarter.
Q2 sales in audio were better than anticipated as we realize the benefits of our diversified portfolio of solutions for the mobile year and Iot markets.
In mobile demand for microphones improved sequentially in Q2, as we expected following an inventory correction at our largest customer in the prior quarter.
In addition to stabilize mobile trends at this customer we are seeing strong year over year growth in this Oems non mobile platforms and expect full year revenue growth from this customer.
Sales to Chinese Oems were modestly lower than the year ago period.
And while we are seeing a fair amount of volatility in this market the positive macro trends continue to be in place for audio.
Customers in this region are focused on improving audio through higher performance microphones, multi mic adoption as a well as well as enabling new features to our intelligent audio audio offerings.
We expect modest growth in this region in 2019 and are optimistic about China in the future do our due to our opportunities to grow content per device.
Now some details around intelligent audio.
We are expecting to see the debut of handsets, which include our multi core audio which processors later this year.
These processors are best in class in terms of performance and power and together with our high performance acoustic uniquely position us in this growing market.
We will discuss more about the specific features our edge processors enable once these handsets are launched.
We continue to expand our algorithm partner program and are now actively engaged with a broad group of software partners as several large Oems that are developing their own algorithms for this platform.
This enables an impressive set of capabilities and use cases that only our open DSP platform can enable.
Oems placed a premium having high performance and low power offering that is open enables audio new audio use cases. This is exactly what we are delivering.
We remain optimistic about our opportunities for intelligent audio.
That said 2019 revenues have been affected by the weakness in the mobile segment and the timing of handset launches incorporating intelligent audio.
We now expect 2019 intelligent audio revenues to be between 20 and $25 million.
While these delays and product ramps have impacted 29 team. We continue to see very good reception to our audio which processors and look forward to providing deeper context around our DSP architecture and the Tam intelligent audio enables at our analyst day in September .
We now expect to spend $30 million to $35 million in intelligent audio R&D in 2019 down from the previous estimate estimate of $38 million.
We will continue to be disciplined with our R&D investments across the company and believe that intelligent audio is an important growth opportunity, which has synergy with our acoustic products.
Moving to erode our team.
We are pleased to announced last quarter that we developed a new ancillary reference solution to enable our customers to build wireless headsets that allow users to talk directly to Alexa.
The Nols smart like headset development kit for Alexa voice service brings users natural axis by simply saying DLX awake work.
This solution enables the industry's lowest power voice wake, which is necessary in a small battery operated device.
In microphones for that year trends remained strong as customers add more mikes and transition to our digital platforms.
We expect customers to launch products. This year for the air market, where we have significant content gains driven by the adoption of multiple microphones balance amateur receivers and intelligent audio solutions.
Im optimistic about our opportunities in the air market.
In Iowa, we are pursuing input opportunities across Tvs, Bluetooth speakers, Bluetooth speakers and numerous other connected devices.
In our precision device segment, we continue to see strong sales growth from our high performance capacitors and millimeter wave RF solutions for a diverse set of end markets.
This business is playing a central role in our ability to increase exposure to fast growing end markets and enhance shareholder value.
Demand for our high performance capacitors remained strong, particularly in defense medical and telecom end markets.
This despite a broader slowdown in commoditized capacitors are differentiated solutions have been has seen sustained demand because they add significant value to our customers mission critical applications.
Our millimeter wave RF solutions are seeing solid demand from the defense.
Market for radar systems, which has been the primary driver of this product category today.
We are now beginning to see initial orders for Fiveg millimeter wave base stations, which will serve as a large growth opportunity for us over the next several years.
Just last month T mobile now that they had made the first fiveg handsets available to customers to tap into Ltd, and millimeter wave high band spectrum simultaneously.
We are at the very early stages of the Fiveg rollout and and with the continued growth in military demand. We expect revenue for millimeter wave RF solutions to grow to over $100 million in 2021 from less than $20 million in 2018.
Overall, our strategy to invest in high value solutions, and diversify our markets and customers is working and the benefits of this strategy are reflected in our financial results.
With that I'll turn it over to John to expand on our financial results and provide our guidance for the third quarter John .
Thanks, Jeff.
We reported second quarter revenues of $205 million at the high end of our guidance range and up 9% from the year ago period, driven by increased shipments in both the audio and precision device segments.
Audio revenues of $160 million were up 5% from the year ago period, and higher than expected driven by increased shipments of Mems microphones into the year and Iot markets.
Microphone sales into the mobile market also stabilized following an inventory correction at our largest customer in Q1.
Intelligent audio in hearing health sales remained consistent from the year ago period.
The precision device segment delivered record revenues for the sixth consecutive quarter revenues of $45 million were up 24% from the second quarter of 2018, which was the result of 18% organic growth driven by strong demand for high performance capacitors in the defense medical and telecom markets.
And an acquisition completed in the first quarter of 2019.
Second quarter gross profit margins were approximately 30 for 38% at the low end of our guidance range and 130 basis points below the year ago period due to cost associated with the microphone warranty claim and an unfavorable customer and product mix within the audio segment.
Precision device gross margins were down 320 basis points compared with the second quarter of 2018, due to unfavorable product mix and higher raw material cost.
Operating expenses in the quarter were $53 million down 2% from the year ago period, due to reduced R&D and incentive compensation expense within the audio segment.
For the quarter adjusted EBIT margin was approximately 13% at the high end of our guidance range and up more than 130 basis points from the second quarter of 2018, as we continued to deliver strong operating leverage on increased sales volume.
non-GAAP diluted EPS was 22 cents above our guidance range and up more than 20% over the second quarter of 2018.
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 dotcom.
Now I'll turn to our balance sheet and cash flow.
Cash and cash equivalents totaled $54 million at the end of Q2.
For the second quarter cash generated from operations was $22 million above the high end of our guidance range due to better than expected earnings and lower than forecasted inventory levels.
Capital spending was $9 million in the quarter below the low end of our guidance due to timing of spending within the year.
Moving to the third quarter of 2019, we expect total company revenue to be between 225 and $245 million revenue from the audio segment is expected to be between 185 and $195 million down slightly from Q3 2018 due to lower microphone shipments into the smartphone market, partially offset by higher shipments of mikes in the year and Aiotv and increased balance our mature receivers shipments.
Precision device revenue is expected to be between 40 and $50 million up more than 20% over prior year levels, driven by strong organic growth across defense medical and telecom markets and the impact of an acquisition, which was completed earlier this year.
We project non-GAAP gross margin for the third quarter to be approximately 39% to 42% up more than 200 basis points from the year ago period, driven by favorable product mix improved factory capacity utilization and productivity gains, partially offset by higher raw material costs in our precision device segment.
R&D spending in Q3 is expected to be between 20 and $22 million down 2 million from prior year levels due to optimization of R&D spending within the audio segment.
We are projecting selling and administrative expense to be between 29 and $31 million up $1 million from the year ago period due to higher anticipated outside legal expense.
We are projecting adjusted EBIT margin for the quarter to be in the range of 18% to 20% and expect non-GAAP diluted EPS to be within a range of 35 to 41 cents per share.
This assumes weighted average shares outstanding during the quarter of $94.9 million on a fully diluted basis.
We are forecasting an effective non-GAAP tax rate of 13% to 17% for the quarter.
Please refer to our press release for a GAAP to non-GAAP reconciliation.
For the third quarter, we expect cash generated from operations to be between 40, and $50 million and capital spending to be between 10 and $20 million.
Full year 2019 capital spending is expected to be between six and 7% of revenues.
For the full year, we expect low to mid single digit revenue growth with gross profit margins of approximately 40%.
R&D is expected to be slightly more than 10% of revenues down slightly from both previous estimates and prior year levels.
SDMA is expected to be up 1% to 3% and we're forecasting an effective non-GAAP tax rate to be between 13 and 17% for the full year.
I will 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 .
Our twoq results results reaffirm that our strategy to invest in high value differentiated solutions, and diversify our end markets and customers and delivering shareholder value.
As we continue through 2019, our company remains uniquely position.
In audio macro trends around better acoustic performance and edge processing remain positive and are enabling us to increase our content per device.
In precision devices sales reached record levels for the sixth consecutive quarter as we continue to deliver strong revenue and earnings growth, both organically and through tuck in acquisitions.
I'm increasingly confident that we can drive revenue growth with strong operating leverage in 2019 and beyond.
Operator, we can now take questions.
At this time, if you would like to ask a question over the phone lines. Please press Star then one on your telephone keypad, we will now pause for a moment to compile the today roster.
Your first question comes from line of harsh Kumar for line is open.
Yes, Hey, guys. Congratulations seems like you guys are executing just about as well as a company in Canada. This tough environment.
Jeff.
From what I remember this is the first time, it really highlighting BA balance common shares in your guidance kind of seem to talk about it a little bit more in the context of its arriving on it. It has arrived I was curious if.
You can just maybe give us some more color on what you're seeing in that market. If you are actually seeing these things going to handsets or is this pretty much.
I had said sort of a phenomenon.
Yes, so I don't want to steal too much Thunder horse here from our analyst day coming up in September I'll give a little higher ups set there about the analyst day, but but I mean, we've been selling BA and it's it's a near product into the hearing health market and actually into niche high end headsets for many many many years I think what we're seeing changing in the marketplace. Harsh is that there is this move towards these tw as all true wireless headsets in the year that are extremely small in size and the big benefit do you think of these two wireless headsets harsh is that they are starting to look more and more like hearing AIDS and why do you guys use. These deep these devices and hearing AIDS because the sizes. So small, allowing you to pack more stuff in our more technology and more features into each year. So just give a couple of examples that we keep hearing balanced challenges are interesting I can make my battery larger and.
Lengthen the battery life of the device.
Balance amateur smaller I can add more sensors to the device are creating more space. So we're pretty excited about this opportunity now I would say is there's going to be some customers in 2019 that are going to start you're going to start seeing with Valspar reserve, but we really see this as more of a 2020 story that that again, we're going to lay out some pretty good detail on this more detail on that at the analyst day.
Hey, just one more on that one my understanding is you are kind of the leader in this particular space.
Maybe you could give us a sense of competitive as anybody else. That's out there that does this for a living.
Yes, I mean, there are some there are some competitors out there that year that come from the hearing aid side of the business.
And that have been around for a while I think.
I think what makes this kind of different here harsh is that.
We've been selling the commercial space through our Mems microphone business for many many years.
Coupled with our capability understanding that the hearing health market and stop that things are very small in the year. So I mean.
I would say that the way we see the future is there's going to be opportunities for us I'm sure those going to be some competitors in here, but I think we're very uniquely positioned in the fact that we have the balance amateur were very strong on the microphone side, which lets not forget on the microphone side, that's pretty exciting as well we're starting to see.
TWX headset come out with three microphones per year.
So thats pretty exciting and then and now of course, we have the intelligent audio opportunity as well.
Sure.
Great.
And I wanted to ask you about.
China is wow.
Some companies are now beginning to come on Jeff and talk about shipping to China.
You are at these wild way sorry.
Are you able to do so.
And.
To what degree is that baked into the guide.
So.
So harsh a lot of our products that are most of our products are made outside the us and we have been shipping all along to these customers to allow it specifically.
They are not covered by the band for the few product that we have that are made in the us.
We will be applying for licenses and we'll see where that goes but regardless of the outcome on those licenses, we don't see it being material impact on our 2019 revenues. So those all for our perspective is 2019 is business as usual and we don't see it having a big impact on our business understood. Congrats guys I'll get back in queue.
Your next question comes from the line of Suji de Silva Your line is open.
Hi, Jeff Hi, John .
On the intelligent audio programs.
The push outs can you talk about what the drivers there were end on the Conversely, well what the design win pipeline, that's coming to market second half 19 looks like.
In terms of maybe order of magnitude of design wins or things like that thanks.
Yeah. So.
Well first let me say that I would say just genmark generally speaking in a I would say obviously has an impact on the IEI business, but to some extent on the microphone business as well is that what we're seeing is that the high end mobility platforms are not selling that well I mean, we are seeing and there's more demand I would say in the mid and lower tier of falls and as you look at our planned for IEI and within this year, a fair amount of that growth was coming from mobility and in the high end platforms. So what we've kind of seen I would say without going into the customers specifically we've seen.
Delays and introduction of phones, we've actually seen cancellations of entire foam platforms that we're going to enter use the intelligent audio as well as the platforms that we're planning on using it that the demand is down so I mean.
When I think about this is I'll tell you I'm very excited the Multicore DSP will be in a number of handsets.
In the near future next two three months that will be introduced AD and when that comes out we're really excited to talk about what features this is enabling beyond just voice wake and because there's a fair number of features it's enabling so we're quite excited about that we're excited about the opportunities with an idea and I think we're going to take this time at the analyst day.
To really kind of dig in.
With our investors about why we're differentiated wire architectures differentiated and we'll lay out more about the Tam it enables the intelligent audio.
Okay, I will look forward to that certainly and they talk a lot about the headset opportunity there about opportunity.
Is there any way to talk about the Amazon enabled sort of.
A portion of that and its share.
The right way to think about how well you are positioned relative to competitors as harsh harsh just asked about or is there another way to think about how you're positioned in that.
And that here, but market because it is coming up pretty quickly it seems like.
Yes, I mean, I'm not going to comment on any specific customers, especially ones that don't have products in the market.
We're not going to comment about that but I guess, what I would say is this.
If you think about our success in the hearing health market.
Over the last 30 40 years, we make very small speakers and we make very some fall high performance low power microphones for the hearing health market and what we're seeing here is that that demand or that request is coming exactly in the cws.
Headsets and so we really feel that we're uniquely positioned in order to capitalize on this shift from over the year to end the year headsets.
Okay, Alright, thanks, guys.
Suji.
Your next question comes from the line of Anthony Stross stuff. Your line is open.
Hi, guys I'm, John if you haven't had any do you know what percentage of revenues in Q2 was directly from handset.
I had a couple follow ups.
You know, we don't really talk about it from a quarter standpoint, but what we can tell you from a full year standpoint.
I mean, this really kind of a supports our diversification, we think mobile end market will be right around 30% or less of our total revenues for Nols in 2019, and that's coming from you think when we spun it was more than two thirds. So its really growth in year growth in I O T and growth in PD and I think this year is kind of I think add little color to Tony I think we've been expecting this for a while right I mean, the mobile market is not growing now we have content opera gain opportunities in mobile still so I think when we think of it like the peers that are selling to mobile we do have content gain up too. So it's not levels, probably quite not as bad as it is for some of our peers.
But when you start talking about year in Aiotv, you start talking about the balance amateur opportunity on the year, you talk about millimeter wave and the high performance capacitors.
We got a lot of growth factors here that are starting to really take over and drive down. The total amount of sales that we have in mobile without dramatic reductions in mobile I mean, I guess I'd make one other comment Tony we lost as we talk about year and Aiotv as a percentage of our microphone sales.
I think last couple of quarters, we had said it would be over 25% were now thinking it's going to be closer to 30% of our microphones sales will come from year end OTI. So we're really optimistic about those markets.
Perfect segue into BA.
We are big fans of your behavior that a lot of work on it.
Can you help us out what you expect gross margins to be is it accretive to the kind of 40% to 42% you're running right now as you see that ramp also can you help us understand what percentage of your Capex right now is going towards expanded the SBA production and do you think you're going to have enough here kind of late this year and early next.
So I'm going to jump a little color is but let me just make comment I mean, our expectation is is that the BA.
As we ramp.
It will be at or above the corporate gross margin average that would be the what I would sit there and say is is our expectation at this point.
There is a big focus here on making sure that we have the right product at the right cost in order to support what I would call. These higher volume markets. So I think thats, a big focus of ours that the question on Capex.
Maybe John wants anything you want to cover that John in terms of Capex related to expanding our BA capacity.
It will be roughly I mentioned capex this year would be 6% to 7% of revenues think of about 20% of this year's capex would be going to be a capacity expansion that will have in place kind of in end of Q1 of 2020.
And then as a follow up is it fair to assume for the September quarter Guide, what's your North American handset customer you're playing it fairly conservative given what happened last year and I know, it's tough to parse out phones versus others, but any color would be helpful.
I mean, I'm not going to make any specific comments to the customer's forecast I mean, I I would just point to go what analysts expectations are.
Generally speaking and I would say this is not specific to that customer, but generally speaking.
That the high end handset market has been weak.
And so I think I would say you know that.
We are not we don't have overly high expectations from the high end handset market for the rest of the year.
Got it thank you.
Thanks, Tony.
Your next question comes from the line of Bob a little bit your line is open.
Hi, good afternoon, thanks for taking my questions.
I wanted to stick with your market as we've been talking about a lot here can you just help us get some context and maybe.
Take a step back excluding hearing health.
About how big is that earmarked for you right now and kind of what changes over the next you know.
Year, or two would be going into consumer products and stuff and how big can that be.
I'm, having trouble trying to frame your non hearing health.
Your sales if you could give us some.
Some way to think about that.
Well, Okay I just Bob let me just take a step back okay. So we sell microphones in the year.
Not hearing health of course.
And we also sell when he caught BA days into the year non here non hearing health and we also are starting to see some intelligent audio sales into the year not hearing health.
And how we kind of frame that this is that you know again I would say that year in our t. combined will probably be.
No.
In the neighborhood of ill look at the numbers you're on the wall here somewhere between 140 and $150 million.
So that's kind of the number that we're looking at.
Got it okay and.
Roughly equal between those two or as one predominant.
You mean year over year versus Io to correct me there.
They are in the neighborhood of the say they are about similar.
I got it I would say the growth rate, though ear is clearly growing at a more rapid rate I owed keys to flat towing a little bit still growing still growing at a summit at a slower rate.
Okay, and then the opportunity.
You know for year over the next two years as the Cws becomes more mainstream how do you think about that.
I'm going to I'm going to punt on that one to the Investor day, because that's a great topic segue to like where we think this business could go in the next 24 months or so.
Okay sounds good well look forward to hearing event. Thanks.
Your next question comes from Christopher Nolan Your line is open.
Hey, guys its David Haverly on behalf of Chris Ron Thanks for taking my questions and very nice execution, given the current environment.
First question would be kind of a follow up on Wawa has a conflict between the United States and Wawa influence your share there at all yet and how do you think about that long term is there any fears that they'll go more Chinese based microphones for future.
You know I'm not going to comment share the specific customer we typically don't do that.
You know I guess, what I would say is is that you know that.
That.
Why way has been a good customer for us over the years, we continued to ship to them and.
Again, but again as I kind of talked said.
Earlier in the year, they're not a super large customer for us, we've said, they're less than 5% and so I think we offer some unique things that why we needs and we're hopeful that we will continue to ship to them. We are hopeful that maybe we'll get approval on licenses on the stuff that we make in the us, but we expect that we will continue to be able to ship to them.
Got it. Thank you and then on the precision device segment I guess, you guys have really been ramping over the past kind of two years there.
And we've seen pockets of the capacitor market becomes supply constraint and subsequently if that's that's easing.
And we're seeing like reductions in inventory levels I guess, how are inventory levels for your specific precision device capacitors and then also on the precision device segment. How much of this growth is kind of unit driven versus price driven.
Yes, So I think if you think about the business as we've just kind of describe it we've got our millimeter wave RF solutions.
That is not being affected all by that that general marketplace. At all then we have our high performance capacitor business, which is telecom there's medical there is electric vehicle.
Theres defense and then there's industrial I would say there is been a little bit of impact on the industrial business.
But as you can see you know and we talk about it the high performance capacitor business is still growing and we still believe that you know that this is going to continue to grow because the markets that we're in we have some very unique offerings.
That that we are building with in terms of long term contracts, we have the capacity in place whether it be defense, where implant implantable market for medical so we still see growth in the in this market not just the industrial portion has been a little bit weaker which is not a huge portion of the business as far as inventory Jay in terms of inventory inventory. If you look at year over year. So June 30 to June 30 inventory in our precision device business is up but its supporting an increased book to bill and level of bookings. So we still.
I mentioned the guide we still feel very bullish on growth for that any business moving into Q3.
Got it thank you.
Your next question comes from the line of Charlie Anderson Your line is open.
Yes, thanks for taking my questions I wanted to tack on a precision device businesses it sounds like.
Fiveg Rollouts are kind of going as planned I think you continue to sort of articulate the $100 million targeted in a few years I Wonder if you could just maybe give us a little bit color, what's going on there or is everything sort of on schedule. As expected. Then also if you could remind us as you have the mix shifts to more revenue coming from that piece, how that influences gross margins within precision devices, and then I've got a follow up.
So let me let me just make the comment first on Fiveg I would just say the the situation is reasonably volatile yet in terms of what the real slope of this ramp is going to be for millimeter wave fiveg.
We are delivering product right now to a number of customers, but the slope is a little bit unclear yet in terms of what is going to look like so so I think over the long term, we're pretty confident of where this is going.
But theres going to be potentially some you know.
Lumpiness at the beginning is as certainty will rollout, maybe they slowed down a little bit so.
I don't want to say that were negative about it but what I would say is it's just not as clear on the Fiveg now.
I'll add this year the majority of the sales growth that we've had to this point has been from a defense.
And that business continues to perform very very well and so I think there's two pieces to this.
Theres the military side, which is strong and I think there's a wide variance of outcomes over the next two years on fiveg on how fast it ramps now as far as gross margins. The gross margin is your overall, our precision device business for the last.
Two years gross margins had been in the low fortys, so a little bit a little above our corporate average if you get a little more granular from a product line standpoint, the millimeter wave RF that has a higher gross margin than call. It the high performance capacitors I'm not going to go into detail more detail than that but it should be a favorable growth in that business should be favorable to the PD gross margins.
Perfect and then for my follow up you guys did find $5 million of Opex savings.
From a spin on R&D I Wonder if you could maybe just articulate what what's going on there was there sort of are you sort of completing the program to some degree or is this because you've got you don't see in the high end of the market, maybe a little bit weaker you want to pull back there just any additional color there would be helpful. Thanks.
Well I think there's a lot of there's a lot of factors on this first of all you know there has been a lot of more work with third party partners.
In terms of algorithms I think that's been extremely helpful. Secondly, as you know the product portfolio is starting to be more filled out in terms of the product offering.
But I also think that.
The thing is I just would say this generally does not specific to hiring we are very disciplined in how we invest our R&D dollars I mean, it's a very precious asset that we have and were pretty.
On you know.
Discipline and thinking about this so I mean, I think it's a combination of things going on all at the same time.
Great. Thanks, so much.
Your next question comes from the line of Bill Peterson Your line is open.
Yeah, Hi, Thanks for letting me ask the question solid results.
Wanted to ask about seasonality, you've grown precision device business pretty much literally for the last several quarters.
And now it seems to be on pace to grow more than 20%. This year, you've already given the sort of low to mid single digits for the full year, but how should we think about the seasonality in that business, but also offer audio in other words, we've seen sometimes the fourth quarter declined sometimes its up if you can help us understand the seasonality. These businesses to that you come up with your full year view.
Yeah. So first let me talk about precision devices, you know I would say that.
We do not see a lot of seasonality in the business in terms of the high performance capacitors.
I would say in the millimeter wave RF in the short term I wouldn't call it seasonality, but there could be some lumpiness in terms of the growth based on when people are launching you know or rolling out a big build a base stations, but we really haven't seen that it's not large enough yet to have an impact. So so I would say in precision devices, there's not a lot of seasonality in the audio area. Obviously, there is that seasonality that comes in the back half the year.
You know associated with our largest customer and I think that seasonality kind of carries over into the early part of next year.
Prior to Chinese new year, because there is a fair amount of I would say building by our customers in China.
Prior to Chinese new year, and then we kind of like wait till everybody get back from Chinese new year, see where people's inventory levels are and we go from there. So we really kind of enter what I would say this is really uptick seasonality in audio.
From probably about August time that kind of like half starts to tail off you know depending on our largest customer does depending whats going on in China, probably around the end of January .
Okay. That's helpful.
Your gross margins you say you are on target for 14, I believe that's a slight downtick is this is this mainly mix for example, a little bit lower intelligent audio you've referenced a higher raw material costs. This is something that is this going to I guess mitigate itself for or how long should this last any comments on the gross margin you have including affordability of you. Please.
Let me give you a recap on gross margin it's important to look at it segment by segment, because there's different drivers there but.
You mentioned gross margins were 30 acre I mentioned gross margins were 38%. It was 130 basis points below the year ago period and at the low end of our guidance and if you dig in audio was really impacted we had a one time charge relating to a settlement of a warranty claim in the microphone business that had about an 80 basis point impact and then the the other factor was unfavorable customer and product mix within the audio segment, we sold lower I'll call it lower priced.
Older technology to some of the Chinese Oems in Q2, we don't expect that same pattern to recur in the back half of the year. So thats what is driving within audio the big sequential pickup in gross margins. In addition, we expect to run our factory full out in Q3 and Q4 I think our factory utilization in the last I looked at was almost 100% in Q3 and call. It north of 90% in Q4, So we're getting better factory absorption. So that's really driving that improvement within precision devices, we are impacted.
By Palladium and Palladium I don't know how close you are to this but it's currently at record high prices I think it's like 1600, a Troy ounce up from about 900, a year ago that actually is having about a 40% to 50 basis point impact on our overall gross margins we factored in.
That prices stay at this level for the remainder of.
2019 again this is already reflected in our guidance, but that is impacting.
The year over year margins, we do again in that in that capacitor and PD business. We also expect improved sequential margins due to product mix. It just just to give a little color more on that.
Product cost, it's more is not relevant related to millimeter wave, it's more related to the high performance capacitor business specifically.
Yes understood. That's a that's that's perfect color I appreciate that there's been a lot of questions on the wireless headset, but I want to go back to maybe you talked about the content opportunities, maybe even exceeding $10 in the past.
I guess when you break that out what would you say the percentage is let's say microphones versus da versus an intelligent audio I mean is that all together gets to be $10 or all these pieces in your portfolio today or are you need to develop more products to achieve this type of content growth.
No I don't think we did develop more products I think it's we've got the product portfolio. You know if you think about.
The microphones I think we clearly see the opportunity up Bill for you know.
Three microphones per year.
So that six microphones per handset.
Our repair or or two pieces. If you start thinking like maybe one of those are two of those mice could be a smart Mike you could start seeing you know very good content. There based on you know where the Asps. We have we have the balance our merger.
Which if you think about the balance our merger.
You know some people want to use one balance amateur per year, but there is definitely a trend to use to balance our merger.
Speakers burrier, they are actually small enough to fit actually three or even four per year.
And every time that goes up it's not like it goes from X to X plus 50%. It goes X times two times three so there is a pretty big opportunity at people want to get more performance with balance our mature in other words is you have kind of the woolford tweeter type situation, where you have one that focus on base and one that focuses on on the high end and then lastly, the intelligent audio opportunity beyond smart mikes, which might get smart mikes, our mice, but there may be opportunities as we look further out no further multicore dsps in the year. So when you start adding this up you know you can easily see $10 of content.
On on a headset and in and that's it's not too hard to envision and you know what I would say is you'll probably see some of these start to be introduced later this year.
Okay. That's helpful. We look forward to hear more about this in September . Thank you.
Thanks.
Again, if you would like to ask a question over the phone line. Please press Star then one on your telephone Keypad. Your next question comes from the line of Tristan correct.
Your line is open.
Hi, good afternoon.
You've mentioned the 20% of this year's Capex is going to.
BA capacity expansion.
That you're going to have in place by end of Q1, how does that translate in terms of.
Unit capacity by by then.
Yes, Christian I don't I'm not sure we're going to answer that at this point I think there's a lot of factors here, we're bringing up I would say a new way of manufacturing or balanced armature receivers is not just take thats why its taking a little longer it's not just taking the existing valves architectures and just.
Putting more capacity in place. This is a very thoughtful way of bringing more capacity online in order to do couple of things number one, bringing the material costs down and bring the yields up reduced the amount of labor content and overall just bring the overall costs down. So I think it's a little early to talk about what that how that all translates yet, but needless to say it we expect that the it's a pretty good payback on that investment.
Okay, and then you talked about the incremental.
Revenue opportunity that you expect.
In your.
Precision device business any.
The feedback you could give us in terms of the calm the dollar content opportunity.
Full year millimeter wave product type base station.
Yes, I think I would like to leave that little bit for the Investor day to talk a bit about it because I think there is a number of opportunities here within the millimeter wave.
And I think we'll lay that a little bit more detail on the content, but it's not like we're talking about having like a couple of dollars of content per base station. We're talking the tens of dollars per base station of content. So so it's a pretty large number though the content, but we'll lay more about that out at the at the Investor day.
Great. Thank you.
There are no more questions over the phone lines at this time I turn the call back over to the presenters.
Great. Thanks, very much for joining us today as always we appreciate your interest in Knowles and we look forward to speaking with you on our next earnings call and at our Analyst day, Thanks and Goodbye.
This concludes today's conference call you may now disconnect.