Knowles Corp (KN) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Knowles Corporation first-quarter 2016 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

With that said, here with opening remarks is Knowles Vice President of Investor Relations, Mike Knapp. Please go ahead.

Thanks Laurel, and welcome to our first-quarter 2016 earnings call. I'm Mike Knapp, Vice President of investor relations, and presenting with me on the call today are Jeff Niew, our President and Chief Executive Officer, and John Anderson, our Senior Vice President and Chief Financial Officer.

Our call today will include remarks about future expectations, plans and prospects for Knowles which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable Federal securities laws. Forward-looking statements in this call will include comments about demand for Company products, anticipated trends in Company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The Company urges investors to review the risks and uncertainties in the Company's SEC filings, including but not limited to the annual report on Form 10-K for the fiscal year ended December 31, 2015, periodic reports filed from time to time with the SEC, and the risks and uncertainties identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Knowles disclaims any duty to update such statements except as required by law.

In addition, pursuant to Reg. G, any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at Knowles.com, including a reconciliation to the most directly comparable GAAP measures. All financial references on this call will be on a non-GAAP continuing operations basis unless otherwise indicated. Also, we've made selected financial information available in webcast slides which can be found in the Investor Relations section of our website.

With that, let me turn the call over to Jeff, who will provide some details on our first-quarter results. Jeff?

Thanks Mike, and thanks to all of you for joining us today.

For Q1, we were pleased to report revenue of $185 million, gross margin of almost 38% and EPS of $0.08. Revenue and gross margins came in above the midpoint of our guidance and we delivered EPS that was above the high end of our projected range.

Revenue in our mobile consumer segment was down 27% from Q4, better than our projections, due to higher microphone shipments to North American and Korean handset customers. Sales to Chinese OEMs were largely in line with our expectation as were sales from intelligent audio solutions. Overall, revenue from MCE comprised 45% of total sales for the first quarter.

In our MEMS microphone business, we saw stronger-than-expected demand from a North American OEM during the quarter. We also benefited from the launch of new high-end headsets at a Korean customer which was better received than originally expected. Additionally, we gained share in this customer's low and midrange handsets.

In Q2, we expect volumes at North American and Korean customers to be down. This is expected to be offset by significant sequential growth from Chinese OEMs and highlights the benefit of our diversified customer base. As we look to the second half of 2016, we are well-positioned in microphones and optimistic that our second-half growth will be driven by our customers' new product launches, share gains and normal seasonality.

In intelligent audio, our new capabilities in software and digital signal processing are being embraced by all of our acoustic businesses. These capabilities are changing the DNA within Knowles as we work across different business units to deliver complete solutions to enhance our customers' products. This has resulted in an expansion in the number of opportunities we can address to increase our content and enable new applications in different end markets, including hearing aids, handsets, earphones, hearables, and Internet of Things. We are beginning to see early adoption of these solutions and recently secured our first high-end earphone design win that uses our Versant solution, leveraging hardware and software to improve voice capture. Before our solution-based approach, this opportunity may have resulted in the sale of just one microphone. Now, with our complete audio capabilities, our solution includes multiple microphones, two balanced armature speakers and software. This level of content would not have been available to us prior to our investment in audio signal processing and algorithms.

We also expect to start shipping VoiceIQ, our always on, always listening mic to Chinese handset OEMs during the quarter. I'm very excited about these opportunities that we are pursuing in different markets.

Additionally, we continue to make significant progress in achieving our cost take-out targets. I am pleased to report that we successfully hit our goal of $25 million in annualized savings by the end of Q1.

Voice as a user interface continues to gain traction in the market. Recently, at a keynote address, Microsoft's CEO emphasized the company's efforts to foster conversation as a platform, the idea that users will talk with devices to launch programs, search the Web and load data. He highlighted the notion that we need to infuse intelligence about the user and their content into the devices which in turn will make voice commands more precise. Whether voice as a user interface or conversation as a platform, both are big ideas that start with the microphone. We remain the market leader. High-quality sound capture at the mic level is critical and enhanced by multi-mic adoption.

In addition, our newly acquired expertise in software and digital signal processing advances our capabilities to add value to our customers' products and increase our content per device. Overall, we expect continued design win traction around intelligent audio in anticipate revenue to increase in Q3 2016.

Before moving to specialty components, let me provide you with a brief update on our proposed sale of our MCE speaker and receiver business. While we don't have anything specific to announce today, we are currently in discussions with multiple parties interested in this product line and we remain committed to exiting the speaker receiver business in the current quarter.

In the specialty components segment, Q1 sales were down 7% quarter-over-quarter, in line with expectations and represented about 55% of total Company revenue. Hearing health was down seasonally, as expected, while precision device sales were stable.

We recently participated in the American Academy of Audiology tradeshow where we met with every one of our major customers in hearing health. The conversations made me optimistic for the future of the industry and confident in our position within the market.

In addition to discussing important trends these customers are focused on, like greater connectivity, improved aesthetics, superior sound quality and advanced software features, we also announced a major milestone. We have now shipped over 10 million MEMS microphones into the hearing aid marketplace. While relatively small compared to the scale of our consumer business which has just announced over 8 billion mics shipped, it represents mainstream adoption of an Knowles-specific product in this important market and it validates our leadership position in the industry and in MEMS microphones. More importantly, it reflects the collaboration across our business segments to deliver solutions to our existing markets.

I'm also excited to leverage our expertise in hearing health, MEMS microphones and signal processing to address other markets such as premium headsets and hearables.

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

Thanks Jeff. As Jeff mentioned earlier, we reported first-quarter revenues of $185 million, near the high end of our projected range. Mobile consumer electronic revenues of $83 million were down 27% sequentially, better than expected, primarily due to higher than anticipated microphone shipments to both North American and Korean handset customers. Revenues from Chinese OEMs and intelligent audio were in line with our expectations for the quarter.

Specialty component revenues of $102 million were down 7% sequentially due to normal seasonal trends and in line with our expectations.

First-quarter gross margins were 37.7%, near the high end of our guidance, due to better capacity utilization and favorable product mix, specifically higher microphone shipments. Operating expenses in the first quarter were $59 million, $3 million lower than expected. R&D expense was $25 million, at the low end of our prior projections as we reduced spending on non-core R&D projects. SG&A of $34 million was below the low end of the guidance range as we continue to tightly control discretionary costs. Lastly, we achieved our goal of $25 million in annual cost savings associated with the integration of Audience by the end of Q1.

Adjusted EBIT margin was 5.8% in the quarter, and non-GAAP diluted EPS was $0.08 with both metrics above the high end of our guidance range.

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 Knowles.com.

Now I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $44 million at March 31. For the quarter, cash generated from operations was $20 million, near the midpoint of our guidance.

Continuing operations cash flow was slightly below expectations due to timing of shipments within the quarter and related cash collections. This was offset by better-than-expected cash flow in our discontinued operations.

Operating cash flow includes restructuring costs of $6 million. And capital spending in the quarter was $10 million.

Our debt balance was $401 million at the end of the quarter, down $28 million from the prior quarter as we paid down borrowings under our line of credit. Interest expense was approximately $4 million in the quarter.

Now I'll turn to our second-quarter guidance. We expect revenue for the second quarter to be between $180 million and $200 million. MCE revenue is expected to be flat at the midpoint as lower volumes at our North American and Korean handset customers are offset by significant sequential growth from Chinese OEMs.

Specialty component revenue is projected to grow 5% on a sequential basis driven by improved demand in both hearing health and precision device end markets. We project non-GAAP gross margin to be approximately 38% to 40%, up 130 basis points sequentially at the midpoint due primarily to improved capacity utilization, partially offset by unfavorable product mix as we ship more microphones into Chinese mid- and low-end handsets.

R&D spending in the quarter is expected to be between $25 million and $27 million, up slightly from Q1 levels. Selling and administrative expense is expected to be approximately $33 million to $35 million, flat from Q1 levels.

We remain on track to exit 2016 at a level of $140 million in annualized selling and administrative expenses, despite higher incentive comp costs in the second half of the year.

We are projecting adjusted EBIT margin for the quarter to be in the range of 6% to 9%. We expect non-GAAP diluted EPS for the quarter to be within a range of $0.08 to $0.14 per share. This assumes weighted average shares outstanding during the quarter of 91 million on a fully diluted basis. We expect our effective Q2 tax rate to be approximately 5%. Please refer to our press release for a GAAP to non-GAAP reconciliation.

For the second quarter, we expect cash flow used in operations to be approximately $10 million to $20 million. This includes cash utilized in discontinued operations and funding of inventory builds associated with our customers' upcoming product launches in the second half the year.

CapEx in the second quarter is expected to be approximately $16 million.

Lastly, during our fourth-quarter call, we provided 2016 full-year expectations related to continuing operations for revenue, gross margin, and operating expense. Today we are reconfirming those expectations.

I'll now turn the call back over to Jeff for closing remarks, and then we will move to the Q&A portion of the call. Jeff?

Thank you John. We were pleased with our better-than-expected results in a seasonally weak Q1. The first half of 2016 revenue is tracking to our prior projections with margins and EPS tracking slightly ahead. We expect to see an acceleration of revenue and earnings in the second half of the year, driven by our new product launches, shipment of our intelligent audio solutions, and normal seasonal patterns.

Our newly acquired capabilities in software and digital signal processing are creating new opportunities for all of our acoustic-related businesses to enhance their product offerings for new and existing markets. Intelligent audio has become more than a business unit and is starting to demonstrate its ability to solve critical problems for our customers. I expect that these capabilities will continue to have a significant impact on our product roadmap and I'm excited to see the early stages of adoption of these solutions.

Operator, we can now take questions.

(Operator Instructions). Jaeson Schmidt, Lake Street Capital.

Thanks for taking my questions. Wondering if you could talk a little bit about what you are seeing in China, and if you think you're gaining share there as well, or if the strong snapback in Q2 is more a function of market growth.

I think the market growth that we see probably is -- we are getting from the data that we see in the marketplace like everyone else says, which is we expect the Chinese OEMs in terms of handset builds to be up year-over-year, but not as significantly as we see ourselves being up. We do see in China that in, the microphone business, we are taking share, and we expect quarter-over-quarter sequentially that we will be up 30% in Q2.

The second thing I just want to remind -- I think we talked about this before, but from 2013 to 2015, we more than doubled our business in China. So, it's been a real success story for us in China.

And we are very optimistic. I think one last thing I would add is we are optimistic about the adoption of intelligent audio in China. They seem to be some of the early adopters who are looking at it and saying there an opportunity to change a paradigm in how they are viewed in the marketplace. So we are pretty happy about where we are headed in China.

Okay. That's helpful. And wondering if you could breakout the Audience contribution in Q1.

Let me just take this -- John, do you want to take this, or --?

When we look at Q1, I mean, we are not going to break out specifically at this moment, but what I would say is this. It's -- as we go through the year, the Audience investment, or the investment we are making in intelligent audio, is embedded in what we've given in our full-year revenue, gross margin and operating expenses.

Let me just kind of lay this out for you what this means for us. First all, number one is we've achieved the $25 million in cost savings by the end of Q1. That's number one. Number two is we've talked a little bit about it, but we have reduced our investment in non-core R&D over the last quarter or so. Lastly, if you start talking about incremental revenue as we look towards the back half of the year, right now what's embedded in our forecast as we look out is $10 million to $20 million of incremental intelligent audio revenue in the back half of the year.

Now, let me just -- I'm going to spend one more moment here to kind of talk a little more about this. We really view this as transformative, what Audience or what the capabilities that Audience brought to Knowles is doing.

I want to just bring us back to Versant. We've talked about this first customer that we are working with where we would've had potentially one microphone in a solution like this, a premium headset. Now we are talking about multiple microphone, we're talking about two balanced armature speakers, we're talking about software, with content in excess of $5.00 per headset.

So I guess what we keep coming back to is this is a transformative acquisition to allow us to start thinking about not only growing revenue and gross margins, but what we are starting to see is, within our core, there's opportunities to protect ASPs, grow share and then also expand into other markets that we've not been in the past. So we are really excited about where the capability is taking us.

This is John. Just to address specifically the question you had with respect to the 30% sequential growth of our Chinese OEMs, that's a really minimal impact from Audience. That's primarily our MEMS microphone business.

Okay. Thanks. And then last one from me before I jump back into queue. Just wondering if you could talk about some of the reasons why you're gaining share in the low and mid end at your Korean customer.

I think there's a couple if things. Number one is if you look at the shift over time over the last six months, there's been more effort to sell mid- and low-end handsets by the Korean OEM. That's kind of what we see. And to that extent, we are a primary supplier on the high end, and there's no reason why we can't be a primary supplier in the mid and low range. So, I wouldn't say it's more of an area of focus of ours, but where we see the market going is we have to have offerings for this mid- and low-end range. And we've got a very, very strong offering in this space, and the Korean guys will continue to use us.

All right. Thanks a lot guys.

Bob Labick, CJS Securities.

Congratulations on a nice quarter and outlook. I just wanted to follow up on the Audience question. Could you talk a little bit about how Audience is tracking versus your initial expectations? And then obviously as you embed it within your business it's hard to measure, but how do you measure it versus your initial expectations and how is it doing, and how will you continue to track that going forward?

I'll go back and, again, I think what we look at is when we talked in Q4 about what are our expectations for the year, we embedded a fair amount of what our expectations were from Audience for the full year. And cost takeout, I would say we are on target to ahead with some of the non-core R&D that we've taken out.

On the revenue side, what I would say is what we are really pleased about here is that, when we came out, we were talking about primarily smart mics. That was the reason we saw it as a great opportunity and it still is a great opportunity.

What we are starting to see is that -- let's use the example, again back to Versant. I hate to keep going back to this, but when we can go from selling maybe $0.30, $0.40 on a premium headset to selling north of $5.00 on a headset, there's -- at above corporate average gross margins, we are very excited about the opportunity.

I wish I could describe more because we don't want to look too far into this yet before we are ready to announce some of the new products that we are working on for later this year and into 2017. But it's fundamentally transformative for us in thinking about selling a solution to a problem as opposed to just selling a device.

Okay, great, very helpful. And then just moving beyond the intelligent audio and the (technical difficulty) Audience applications, you've talked about in the past your ultrasonics. And that's been a growth initiative for you as well. Can you update us on where that stands and what the potential applications are and how that looks, if it's 2016, 2017 or beyond that you might think there would be some progress there?

Yes, I still say it's very early days here on our products in this category. But let me describe how -- where we were before and where we are today. We've had the capability in terms of microphones to deliver an ultrasonic mic for, I don't know, three years we've had an ultrasonic mic in our catalog. We'd walk into our customers and we'd say here's an ultrasonic mic, what do you want to do with that? And they kind of look at us and say I don't know what we want to do with it.

Now we can walk in with our capabilities in terms of algorithms and signal processing and say here is our ultrasonic mic with software and signal processing to solve a real world problem.

Now, I'm not prepared to expand on what kind of markets we're going to go in with this, but what I would say is it's outside what you're normally thinking in terms of the traditional spaces we've been in. And again, it's a 2017 play, and there's no guarantees that this all works out, but I would say this is the example of how this is transforming Knowles from being a device provider to a solutions provider.

Okay, great. Thanks very much.

Harsh Kumar, Stephens.

Congratulations guys, good numbers. I had a couple of questions. Let me start off with the March quarter. So, you had a very helpful breakdown of revenues, but I noticed that March 2016 was barely up over March 2015. My recollection, and I may be wrong, is that you didn't have so much help from your largest customer last year at the quarter that just ended. Would we not -- should we not have gotten a bigger number, bigger help from that customer? I'm just curious. What were the other moving parts then?

I hate to really go into a tremendous amount of detail here by customer, but generally speaking, our expectations in Q2 from this largest customer of 2016 are I would say relatively modest. It's not from share loss. I would just sit there and say Q2 is a relatively tough quarter. We kind of said on the prepared remarks Korea and North America customer will be down in Q2. And if you remember going back to Q2 2015, we did get back share in Q2 of 2015 at that customer. So I would look at it a little differently from the perspective that what we are seeing is, again, our North American and Korean customer down sequentially, but China coming up to really kind of pick up the slack from what's coming out of those two other -- other customers.

That's fair. And then let me jump on over to the June quarter. I guess you are seeing your largest customer down, Korean customer down, in Q2, like you said, and China basically massively. Are the two large, the Korean and the large customer, is that just seasonal or timing of products shipped? I'm trying to wrap my head around this. And then China, just a significant update. Is that all share gain, or is there some new phones that are being launched that we haven't heard about?

Let me cover China first. So, China is a combination of things. I would say it's share gain. I would say it's multi-mic adoption driving that, as well there are some new phones being introduced, so there is I would say some seasonality in that in phones that are being introduced where we have very strong position. So I think those are the three things. So, there is some seasonality in it with new phones being introduced.

As far as the, again, North American and Korean guys, on the Korean front, Q1 was pretty good for us on the Korean front. I think the expectations were ahead of what we would have said when we gave our guidance for Q1. But now we are kind of in I would say the seasonal lull with the Korean guy before they introduce the next phone in the August/September time frame, the larger phones.

As far as our North American guy, I think it's normal seasonally to be down in Q2. And I think, obviously, we have to wait and hear what was sold, but remember we sell early on in the channel. We talked about before in mics, we have to deliver the mics fairly far ahead of when the final phone builds are done. That's for all of our customers, not just for the North American OEM. And so I think what you start to see is more of this transition to next-generation products. And again, we feel pretty good about our position, or where we feel like we are positioned on next-generation products.

Got it. And I'll ask one more then get back in line. I heard -- I missed part of the answer that you gave earlier to somebody. I think it was in relative context to Audience, $10 million to $20 million revenues. Was that above what you assumed, or is that what you are assuming, or what did I miss there?

What I said was we could see $10 million to $20 million in the back half of 2016 of incremental revenue driven by the capability of intelligent audio.

Thank you guys and I'll get back in line. Thank you.

Anthony Stoss, Craig-Hallum.

Nice gross margins and OpEx controls. Congrats on that. Can you refresh us or just let us know what percentage of revenues China OEMs were in the March quarter? Also if you wouldn't mind sharing kind of what percent of revenues your biggest customer was in Q1? And then lastly, any view on your expectations? It might be a little bit early but kind of your share expectations among your biggest customers for the second half of 2016? Thanks.

Let me take the share question first if that's okay. I would say what our expectations are right now is that we expect some pretty nice share gains in Chinese OEMs throughout the year. And if you look at our expectations in terms of percent on the Chinese OEMs, we are probably seeing Chinese OEMs coming in in the 15% to 20% of MCE revenue is from the Chinese OEMs. That would be Q1, so that's accelerating into Q2.

Now, back to your question relative to share, we see pretty stable share at the North American OEM and at the Korean OEM, pretty stable share in the first and second quarter and, quite frankly, through the year we see pretty stable share. So I think that answers the share question.

And refresh my -- what was the other question again?

Just percent of total revenues your biggest customer in the quarter.

Oh, yes, okay. What I would say is we talked about this before. When we had the speaker receiver business as part of the continuing operations, the North American OEM was a lot higher percentage of our overall revenue. So, what I would sit there and I'd say is if I look at the total Company in the first half of the year, we expect probably our largest customer to be --

In the low teens.

-- low teens, low teens. And obviously that will be higher in the back half of the year when they are ramping production of new products, but obviously significantly less reliance on one customer than we had prior to announcing the proposed sale of the speaker receiver business.

Just to add a little granularity to that, think of it as low teens in Q1 and actually a little under 10% in Q2 (multiple speakers) North American OEM.

Perfect. Nice job guys.

Suji Desilva, Topeka.

Nice job on the quarter here. I just want to dig into the distinction of high-end mics versus low-end microphones. I'm presuming the non-China customers are mostly high-end microphones. I'm curious what percent of China you consider kind of high-end microphones versus kind of low-end as a ballpark.

I don't know if I have those numbers in front of me. We might have to get back to you on this, but generally speaking, what I would say is the flagship phones of most of our customers use higher-end mics. The question is what percentage of their mix is actually flagship phone.

And so if we talk about this past, the North American OEM, there's resets and new products every single year that we work on. In terms of Korea, that has been a little bit more of a challenge. We said that. They've been reusing a similar mic of their flagship for a while.

And then the Chinese OEMs, what I would say is there has been I would say more push on I would say the midtier and low-end phones in the end market, which they tend to use what I would say is products that are more mature. Now, they still use higher-end mics on the flagship, and so it's a question of how much of the flagship gets sold.

So as we kind of talked about in Q2, we are happy to see that overall for the Company the gross margins are going to be up I think 130 basis points at the midpoint held back a little bit by the fact that, since China is increasing quite a bit, it brings down the margin slightly. I wouldn't say a huge amount but it brings down the margins a little bit.

That was kind of what I was trying get at with my questions, so that helps a lot. And then the other question is on intelligent audio. As it initially starts to ramp up here, would you expect a few customers to be the bulk of revenues or are you going to see good, broad customer penetration in intelligent audio right out of the gate?

It depends on the product. I would sit there and say as we look at the Versant product, which is targeted to the premium headset market, I think it's going to be limited to a relatively small number of customers at the beginning. But as you look at smart mics, I think, as we head toward the back half of the year, you'll start to see a more broad-based adoption of smart mics. Albeit we don't expect any massive design (technical difficulty) things that are going to drive like huge volumes in the back half of the year, but there's definitely an acceptance coming across in, quite frankly, the Chinese OEMs.

Great. That's the color I was looking for. Thanks guys.

Tristan Gerra, Baird.

Good afternoon. As a follow-up to the prior question on the Q&A about the year-over-year rev comps in Q1, despite the market share gains that you had at your North American customer this year, how should we look at the core business year-over-year in the second half, so excluding the $10 million to $20 million incremental potential intelligent audio revenue? How should we look at the year-over-year comp? Anything different in terms of ASPs or anything that will lead to an increase year-over-year in that business?

I think what's going to drive year-over-year increase as we look toward the back half of the year is going to be the Chinese OEMs. I think our share from our perspective looks pretty stable across the majority of the other market. I think there are a couple of other headwinds that we are dealing with like the laptop and tablet market, probably not as robust as we would like. You've got multi-mic adoption in the Chinese OEMs coupled with our share gains. And then I think, again, pretty stable, I would say, at the other large -- two large customers that make up a significant amount of our sales.

So as far as --

Tristan, as I mentioned in the guide, if you look sequentially, the MCE business is basically, at the midpoint, going to be flat sequentially and the growth sequentially is really coming from our specialty component business. In there it's pretty broad-based, both our hearing health business and our precision device end markets.

Okay. That's useful. And then as a follow-up, I know you've talked a little bit in the past about the potential ASPs for intelligent audio. Any additional color that you could provide in terms of what we could see in terms of ASPs for the second half this year in intelligent audio, and how does that break down with mics versus the other products that you are selling as part of this?

Let me just take first mics, because I think it's a little bit simpler, we've talked about this. Our expectations are that we would say a relatively significant increase in ASPs over the average. And if you compare it, as an example, an analog microphone sold in a midrange China phone, it's pretty significant the increased possibility over that.

As we get into digital mics and high-end mics, obviously it's going to be a little bit less in terms of the premium we get.

But I think what I would say as far as just to close on the mic is that we are very comfortable that there's value here that people are willing to pay for incrementally over the microphone they were going to buy anyway. It could be anywhere from at the low end probably somewhere in the neighborhood of a 15%, 20% increase up to maybe even a 30% to 40% increase over a traditional analog microphone.

Now, just take a step back, when we talk about products like Versant, which are new markets to us, there's really no ASP to compare to. It's more about the content per device. And this is the easiest one for me to -- I'm sure you guys all understand is when you think about, in a premium headset today, as I said, we would sell one microphone. Maybe it would be like $0.30, $0.40, maybe $0.45 for one microphone. And now we can put content in excess of $5.00 per premium headset. And so the opportunity really is not necessarily about ASPs, but the high (technical difficulty) level of content that we can get.

Great. Thank you very much.

Robert Sassoon, RF Lafferty.

Thanks for taking my question. Last time around, you provided a page in your presentation pack for the full-year 2016 outlook. And you expect -- your expectation was a 40%/60% split between first half and second half in terms of overall revenue from continuing operations. Is that still the case?

Let me take this one. I think what we did in connection with the Q4 earnings call is we gave some expectations regarding certain financial metrics revenues, gross profit, expenses. And what I would say is we performed better than expected in Q1 and our revenues were slightly ahead of the midpoint. Our EPS came in almost $0.05 above the midpoint. I would say, Q2, we raised the guide $0.01 or $0.02 from what the consensus is. I don't see any change for the back half the year at this point. So you can from that kind of imply the full year.

Right. Are you still going by the split of 40%/60%? Is that what you're saying, or is it (multiple speakers)?

I don't have the split here, but what we are still expecting is modest growth for the full year. We're just (technical difficulty) the last call.

Yes, because if I work out the full -- assume that you achieve the midpoint of your second-quarter revenue guidance, the 40%/60% split presumes and assumes -- and I've done this as a quick back-of-the-envelope calculation -- it's 10% growth, which doesn't sound too modest. So does it suggest that (multiple speakers) be consistent with your overall modest growth for the full year -- (multiple speakers)?

I'm not sure (multiple speakers) (technical difficulty) there on the 10% growth. Again, we are reiterating --

For the full year --

A full year --

So, I assume that -- yes -- because the information you provided last time around was that the speakers and receivers business contributed about $235 million in 2015. You strip that out, the continuing operations contributed $850 million for the purchase.

Just to reiterate, think of it this way. We were $5 million above the midpoint in Q1. We are actually a couple million below the guide in Q2, so there's a net call it $2 million or $3 million in the first half, and we are reiterating the back half of the year. So again, modest growth from a full-year standpoint.

Okay. I know you probably won't be able to provide a lot of detail, but on the sale of the process or the sale process of the speakers and receivers business, you are still confident of concluding a sale by -- or at least announcing a sale by the end of this quarter. So does that mean -- could you add a little bit more color to what you've already given in terms of are you in advanced discussions with any of the multiple parties that you've indicated?

Yes, so just to put a little bit more color on it, we have multiple parties interested and we've received more than one letter of intent. So, we are in negotiation and in diligent discussions with a number of parties. And again, we remain committed, as we were at the beginning of the last call, to exit the business by the end of Q2.

All right. And there haven't been any further write-downs in the first quarter on that particular business?

No, no write-downs there. But what I will say is -- I think the question the last call came up, what's the book value of the speaker receiver business? And if you looked at our 2015 10-K, the book value there was just under $400 million.

It's important to note that more than $325 million of that book value relates to goodwill. And we analyze and record goodwill at the mobile consumer segment level. So what I'll call it is the tangible book value of that business is significantly less than that. You'd have to take at 12-31-2015 the $390 million, back out the $330 million of goodwill, so it was roughly $60 million in tangible book value at 12-31-2015. And that's how you get -- if you look at what's in our supplement here, the book value is right around $20 million, the difference being the losses in the quarter and some reductions in working capital. So hopefully that ratchets up.

Okay. Great. Just one more question. You're obviously predicting -- projecting in your budget a big increase in revenue from the Chinese OEMs. How much of that is due to the Moto 2016, which I guess -- I don't know whether it's going to be launched in the current quarter or next quarter, but I believe they're going to contain five microphones?

We really can't comment on any specific platform.

Okay . All right, okay. Thanks so much.

Harsh Kumar, Stephens.

Hey guys. Thanks for a follow-up opportunity. Jeff, I wanted to ask you about that $10 million to $20 million extra revenue or the incremental revenues from intelligent audio. Is this being driven by wins you have already, or is this optimism, or have you got some new wins that you can talk about?

I would sit there and say the majority of what we are projecting is we feel pretty comfortable that we've got the diamonds up. Obviously, some of the products, it depends on how their products sell in the end market, some of this. That's why we are kind of hedging between the $10 million and $20 million. But the range is $10 million to $20 million in the back half of the year, incremental. And so I would sit there and say if their products do better, maybe it's closer to $20 million, and maybe if we get a few more design wins that aren't secured closer to the $20 million, but we feel pretty comfortable about the $10 million, that's why we gave the range.

Got it. If I can ask you just color-wise how -- what is the interest level from the tier 1, the big headset makers? What do they think of this new technology that you guys are showing them?

I'm not going to comment about a specific customer, but I would just generally say, for those of you on the call who seen the demonstration, the reaction, generally speaking, is they don't believe it. So we have to do it live to show how it works. And again, what's very interesting about this, Harsh, is that when we see the only way we could have presented a solution like this was by bringing our microphone, MEMS microphone capability, our balanced armature speaker from the hearing aid side capability, coupled with the algorithm and signal processing capability from -- that we acquired with Audience to come up with the solution. And we're hopeful we will have other ones to talk about, other markets, other products, in the quarters to come, but we're really excited about this opportunity.

Got it. Thanks, Jeff, for that color. If I can ask one more. You talked about the $25 million cost reduction/reorganization. How much more is left? Are we getting to the point where you are flushing out all of the inefficiencies, or you see this as a continuing theme $20 million, $25 million a year the next couple of years?

Yes, I think I would say we are kind of near getting near the tail end of it. We aren't signing up for any more with respect to the Audience integration. We'll always look at opportunities, whether it be footprint consolidation or other opportunities for cost take-out, but right now, I think we are kind of near the tail end of the cost take-out and the focus is really on the top line.

Got it.

Again, Harsh, as John said, whether it be from a manufacturing footprint standpoint or an SG&A standpoint, we are constantly looking at this. But I think we've accomplished what we want to accomplish relative to the Audience integration on the cost side.

Sure. And last one for me. Interest expense, how should we think about it? You paid off a little bit of the debt. I think that's the one line item that wasn't addressed in the guide. Do you have any --?

Harsh, think of it as roughly $4 million a quarter is kind of what we are trending at. We might've been a touch under that, I think $3.8 million, in Q1. But given our debt is floating for the most part with the exception of a $100 million that's fixed, I would say it's safe to assume $4 million a quarter.

Thanks guys.

I'm showing no further questions at this time. I'll now turn the call back to the presenters.

Thanks very much for joining us today. As always, we appreciate your interest in Knowles and look forward to speaking with you on our next earnings call. Thanks and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.