Knowles Corporation

Good afternoon and welcome to the Knowles Corporation third quarter 2020 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised, today's conference is being recorded.

If you require any further assistance, please press star zero. With that said, here with opening remarks is NOLS Vice President of Investor Relations, Mike Knapp. Please go ahead.

Thanks, Ian, and welcome to our Q3 2020 hearings call. I'm Mike Knapp, and presenting with me on the call today are Jeffrey New, 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 NOLS, 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 end of December 31, 2019, 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 NILS 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 at our website at nils.com. including the reconciliation to the most directly comparable gap measures. All financial references on this call will be on a non-gap continuing operations basis unless otherwise indicated. Also, we've made selected financial information available in webcast slides, which can be found in the IR section of our website. With that, let me turn the call over to Jeff, who will provide some details on the results. Jeff.

Thanks, Mike, and thanks to all of you for joining us today. For Q3, we reported revenue of $206 million, up 35% sequentially, with better-than-expected sales of MEMS microphones and hearing health solutions during the quarter. Gross margins improved 440 basis points to 36.7%, and our earnings per share was above the high end of our guidance range at $0.24. Overall, a very solid quarter where we saw improving demand in audio in combination with solid execution across our businesses. This provides confidence we will be able to raise our earnings and cash flow in 2021 to above pre-COVID levels as we move forward with our strategy to provide high-value solutions to a diverse set of end markets. Let me now provide an update on current customer demand across our end markets. In audio, sales were up 58% from the prior quarter versus our expectations of more than 40%. For hearing health, shipments were higher than expected, and I'm encouraged by the rate of recovery we are seeing in the hearing aid market. To date, improvement in demand has been largely driven by the private market, while the activity levels in government channels, primarily the VA in the US and the NHS in the UK, are still well below normal. Based on our current backlog, we expect sequential sales growth again in Q4. While there is a fair amount of uncertainty with respect to COVID, I expect it will take until sometime in Q1 to return to 2019 revenue run rates. Moving on to MEMS microphones. In Q3, we saw broad-based sequential improvement across mobile, gear, IoT, and computing end markets. In mobile, stronger sales to North American and Korean OEMs drove a significant portion of the increase. Sales into non-mobile end markets also increased sequentially with growth driven by consumer demand from both work from home and remote schooling trends. We anticipate strong sequential growth in microphone sales again in Q4 driven by mobile product launches and continued strength in sales of non-mobile applications. In precision devices, Q3 sales were down 14% sequentially, weaker than the 10% decline we expected going into the quarter. This was due to COVID's impact on defense supply chains and deferred elective procedures in our MedTech markets. While defense has slowed, we still expect full-year growth driven primarily by RF filtering and anticipate that demand in MedTech will return in 2021. Electric vehicles continue to be a bright spot and is still running ahead of 2019 due to new high-voltage capacitor design lists. Altogether, we expect PD revenue for 2020 to be flat with the prior year. In addition, Q3 gross margins in the segment increased 250 basis points sequentially due to operational improvements and price recovery for increased palladium costs, which places gross margins for the segment higher than they were a year ago. I want to take a moment to highlight our cash flow generation, which has been stronger than expected in 2020 despite COVID-19. For the second consecutive quarter, we generated higher than expected cash flow, which has allowed us to pay down a revolver and provides us with increased balance sheet flexibility. I'm also pleased to report that we intend to resume our share buyback program. John will expand on the balance sheet in just a moment. Our team has executed well during these challenging times and I'm more confident about the recovery we're seeing across many of our markets. As we look to Q4, we anticipate another quarter of sequential growth driven by MEMS microphones and hearing health. I believe our company remains uniquely positioned across the markets we serve, and our strategy to deliver high-value, differentiated solutions to a diverse set of growing-in markets will enable us to come out of this pandemic well-positioned to take advantage of future growth. With that, I'll turn it over to John to expand our financial results and provide guidance for the fourth quarter. John? Thanks, Jeff. We reported third quarter revenues of $206 million, up 35% sequentially and above the high end of our guidance range, driven by higher than expected shipments in the audio segment. Audio revenues of $165 million were up almost 60% sequentially due to improving trends in the hearing aid market and increased consumer demand in the mobile, ear, IoT, and computing markets. The precision device segment delivered revenues of $41 million, down 14% sequentially due to project pushouts in defense and the impacts of COVID-19 on the med tech market, particularly implantable devices as elective surgeries have been deferred. Third quarter gross profit margins were 36.7% above the midpoint of our guidance range and up 440 basis points sequentially. In the audio segment, gross margins were up 600 basis points sequentially due to higher capacity utilization and favorable product mix driven by increased shipments into the hearing health market. Precision device gross margins improved 250 basis points driven by reduced palladium usage, lower factory spending, and higher pricing. R&D expense in the quarter was $19 million, down nearly 3% sequentially, primarily driven by reduced spending in intelligent audio. SG&A expenses were $27 million, flat with Q2 levels, as the impact of restructuring activities in intelligent audio was offset by increased incentive compensation costs. For the quarter, we reported earnings per share of $0.24, 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 $139 million at the end of Q3. For the third quarter, cash generated for operations was $28 million, which was above the high end of our guidance range. Capital spending was $6 million in the quarter. In addition, in Q3, we repaid $50 million in borrowings under our revolving credit facility and repaid all remaining bank borrowings early in the fourth quarter. Lastly, we intend to resume our share buyback program. Moving to the fourth quarter, we expect total company revenue to be between $210 and $225 million, up 6% sequentially at the midpoint. Revenue from the audio segment is expected to be up more than 7% from Q3 levels due primarily to increased shipments of microphones into the smartphone market at our largest customer in connection with the introduction of their next generation flagship handsets and a continued recovery in hearing health. Precision device revenue is expected to be flat sequentially. We're projecting gross margins for the fourth quarter to be approximately 36% to 38%, up slightly from Q3 levels as improved capacity utilization in our audio segment is offset by unfavorable product mix. R&D expense in Q4 is expected to be $19 to $21 million and includes a non-recurring supplier payment of $1.3 million related to our conversion to 8-inch mems. We're projecting selling and administrative expense to be between $24 and $26 million, down 6% from Q3 levels. Excluding the non-recurring R&D payment previously mentioned, we expect to exit 2020 with quarterly operating expenses of approximately $44 million. We're projecting adjusted EBIT margin for the quarter to be in the range of 15% to 18%, and expect EPS to be within a range of 27 cents to 33 cents per share. This assumes weighted average shares outstanding during the quarter of 94.1 million on a fully diluted basis. We're forecasting an effective tax rate of 15 to 17 percent for the quarter, as well as the full year. For the quarter, we expect cash generated by operations to be between 40 and 55 million. and capital spending to be approximately $15 million. Despite the challenging market conditions associated with COVID-19, we remain well positioned to serve our customers' needs, generate significant free cash flow, and deliver strong operating leverage over the long term. I'll now turn the call back over to Jeff for closing remarks, and then we'll move to the Q&A portion of the call. Jeff? Thanks, John. Our company remains uniquely positioned across a diverse set of end markets poised to grow over the next several years. We remain the leader in hearing health solutions and expect recovery to 2019 levels over the next three to six months. In MEMS microphones, we expect non-mobile applications to drive future growth and the mobile market to stabilize as 5G phones are introduced. For PD, we expect revenue to be flat from 2019, which is a strong testament to the stability of this business during a challenging 2020. As we look to 2021 and our markets continue to recover, I believe we can drive shareholder value by delivering strong earnings and cash flow above 2019 levels. Operator, I think we can take questions. At this time, if you'd like to ask a question over the phone lines, please press star, then one on your telephone keypad. If you'd like to remove yourself from the queue, please press the pound key. We will now pause for a moment to compile the Q&A roster. Your first question comes from Bob Lubick of CJS Securities.

Your line is open. Good afternoon and congratulations on the next quarter. Thank you. Thanks, Bob. I wanted to start with hearing health. As you said, it's coming back, and so I was hoping you'd give us a little more color there. Is there still, you know, pent-up demand out there? How might that play out? And maybe also if you could talk a little bit about how much of your sales flow into Europe there versus in the U.S. and, you know, with the new lockdowns, are you seeing anything, you know, different yet in Q4?

Yeah, so, you know, at least on the Q4 question, right now the backlog is extremely strong for hearing health. relative, it's above where we were in Q3. What I would say, just if you go back and look, I don't know how much detail we talked about before a year ago, but hearing health actually had a very, very strong Q4 a year ago. And so we're still down, I would say, reasonably significantly, 15 to 20% year over year. But the trends are headed in the right direction. As far as what we've seen, I think there are I think the pent-up demand in the private market has started to catch up. But I think the area that we still see that there is pent-up demand coming is in the VA, Veterans Administration in the U.S., in the NHS in the U.K. And I think, you know, the longer this goes on, it's not people aren't coming in at the VA and the NHS. They're not seeing patients. And so I think there's going to be some pent-up demand. And to kind of give you an idea here, The VA is about 20% of the U.S. market. So, you know, there could be some pent-up demand when this comes back. You know, I think we're being cautious here when we talk about this, you know, that by the end of Q1 it's back to normal. I think that's, you know, what we said, so sometime in Q1 it'll get back to normal. And I think, you know, back to your question, I think, I don't have the exact figures, Bob, but I think it's about 25% is North America, about 40% of Europe goes into Europe, and the rest is the rest of the world. But so far, our backlog looks very good for Q4 right now.

Okay, super. That's great. And then, obviously interrupted by the pandemic, but maybe give us an update on the automated BA line and you know, the benefits that customers are attracted to, what you've learned so far about their needs and kind of where that stands and how you're thinking about that for next year?

Yeah, I think this is, first let me talk about the line itself. I think this is a good news, bad news story here, which is the good news is the line is ready to ship. The bad news is right now the Philippines is not accepting foreign nationals into the country for installation. So we've made the application for visas to get into the country, but right now we don't have a date yet as to when we think we can actually go bring the team of roughly 15 people to the Philippines for six weeks in order to install the lines. So what we're choosing to do for right now, we're keeping the line here in North America, and we'll continue to tweak it to try to improve it even more past the point of being ready to ship. But I can't really at this moment say when it's going to be installed. We still have, I think, I would say a reasonably good pipeline. I think the struggle I'm having is that we're trying to have it hold salespeople back because what we're trying to do in the short term is, meet current demand with manual production, which is not ideal from a couple of perspectives. One is it doesn't allow us to go after really high-volume opportunities with manual production. And number two is it will be at lower gross margins. And so I think we don't want to go too crazy here trying to sell balanced armatures at very low gross margins until we get the line there when the cost essentially goes in half, and then we can get back to 40-plus percent gross margins.

Okay, great. And then last one for me. Obviously, you've done a tremendous job over the last couple of years on the balance sheet, and you announced the, I guess, resumption of your share repurchase. Can you talk about other capital allocation? Are M&A targets there potentially in PD or other areas? What else are you looking at for use of capital going forward?

No, sure, Bob. I mean, not a lot has changed with capital allocation priorities. I mean, they continue to be. We're going to fund all the organic growth opportunities and initiatives that come along. Transition to 8-inch MEMS is one thing. We're going to continue to pay down debt. And then, yes, we are looking at accretive acquisitions, specifically in the precision device segment. And then lastly, return of capital through share repurchases.

Super. All right. Thanks so much.

Your next question comes from the line of Harsh Kumar of Piper Sandler.

Your line is open. Jeff, I had a pretty interesting question for you. So you're doing really well in mobile side, but the iPhone 12 does not have a headset that comes with it. So my understanding is you lost at least two microphones there, but somehow you're able to make up for it. I'm curious if you could give us the puts and takes on what's going on there, and then I have a follow-up.

Yeah, so in the headset that goes in the box, it's typically one mic, and it's one analog mic. So, you know, I think, you know, to the extent that people don't get one in the box and they either go buy, you know, a large customer-branded headset or a third-party headset, I think it's net-net. I think it's a positive for us. So I don't really view that as a big headwind for us. And so, you know, I think, you know, overall, I think what I kind of look at is, you know, how we're doing in terms of, Again, continuing to have growth in the non-mobile market. And I was looking at the numbers. In 2018, about 58% of our microphone business came from mobile, the 42% other. In 2020, we're estimating, assuming the guide that we just are giving, about 49% mobile with 51% other. So we continue to make progress over time, and I think we talked about this, less than 30% of our business as a company now is in mobile.

Interesting. And then, Jeff, on a similar line of utilization and good things, In the past, you've been able to hit 40% margin. I know there's a lot going on. You're hearing health businesses down, and you've got other things going on in PV. But could you maybe just characterize for me the catalyst that would need to happen for you to get back to kind of like 39%, 40% margin range?

I'll let John talk with you for a few seconds, and then I'll kind of add some color then. Okay. Okay. Yeah, harsh and good question. You know, I mean, overall, I'm pleased with the trajectory in our gross profit margins, considering, you know, the COVID related headwinds we've seen this year, which they've never negatively impacted both microphone pricing. and our product mix again we have a little lower sales in terms of percent to total in the hht business as well as implantables in pd which both of those products carry higher than average gross profit margins so a rebound in those areas will definitely help uh yeah so i guess what i would say here harsh is this yeah i think we expect you know number one that current health you know say Q1, which still yet to see when we'll get back to 2019 levels. But the rest of the year, we expect it to be, you know, back to 2019 levels. And same thing with gross margin here in health. We expect that, you know, the next year we'll start to see recovery in the med tech market and PD. That will help gross margin. And then I think the thing that I think John brought up about is microphone pricing. You know, it has been a little bit more difficult this year. You know, I think if we talk about the trajectory in ASPs and microphones, it had been moving very positively in the right direction, you know, from about, I think it was in 18, about 17, 8% down in mature products, and it was less than 4% in 2019. I think we're going to get back on that trajectory as we go into 2021 with new products And when, you know, capacity now becomes more in line with demand. And so I feel pretty good about where our growth margins are going in 2021. Yeah, if I could just add one more thing, Harsh, too. HHT business is recovering. We're still operating or expected to operate at lower than normal capacity utilization for that hearing health business. Mike's is pretty much back to a normal level, but there is still some opportunity for higher utilization in HHT when we get a full recovery, which we're expecting in the first half of next year.

Understood, guys. Congratulations again. Thank you. Thanks, Sebastian.

Your next question comes from the line of Christopher Rowland of Sequentia. Sorry, Sequentia. Your line is open. Chris?

Chris? Yeah, can you guys hear me? Can you hear me?

Okay.

Okay. I guess first, if you could share any thoughts on trends or things that you're seeing in the flagship handset market around audio, anything that can drive, you know, multi-mic adoption, drive ASPs higher, or any sort of additional content share for you. And we'll just be a driver in the next year.

Yeah, what I would say is that, you know, I'm not going to talk about any one specific customer, but what I would just say generally speaking, the move towards 5G phones is a net positive for us. Higher end phones tend to have more audio content. More audio content is good for us. So I would sit there and say generally the trend as more 5G phones are sold is a net positive for us on the overall market. The second trend I think that we hope that continues to move forward over time is a conversion from analog mics to digital mics. globally across most of our customers is still a, you know, I would say a work in progress. We're not there in terms of having a lot of digital. If you think about our other markets, you know, whether it be the ear market or the computing market, or even now we're starting to see in the IoT market, we're getting a lot more move from analog to digital. But we're hopeful that, you know, over the next few years that that's going to drive growth.

Okay, understood. And this is a much more of a bigger picture question here. You know, I understand next year we could return to 2019 levels, but even so revenues are still below where we were in 2016 even. So basically no growth for five years and then arguably gross margins were even higher in 2016. So most investors here are playing for either growth or profitability. And as we look over the next year or two, which one are you favoring? Is it going to be growth or is it going to be profitability? And then what specifically is going to unlock that in your mind? Thank you.

So let me just make a first comment on the growth. I think, remember, we have sold a number of businesses over the period. I just need to be clear. So we have sold a number of businesses over the period. Like we sold over $100 million worth of oscillator business in 16, I believe it was. So, Chris, just to add, to jump in and add you, the revenue on a continuing op space, just if you go back to 16, is about 700, just right around 750 million. So to Jeff's point, you might be looking at something with the timing device business still in it, back in 16. Yeah, yeah. And then, yeah, very good. And then I think, so, you know, I think, you know, what we felt like, you think about at the end of 19, we were above 850 million sales. I thought we were, you know, on a very good path. And unfortunately, COVID happened and really impacted our med business. You know, I would say, you know, as we look forward here, Chris, you know, I think, you know, we're focused on, I would say, the best word I would use is good growth. Another word is, You know, as we think about going forward is, you know, we're not going to chase business just to get back to 2019 levels. Our goal here is to start improving gross margin. We had talked about that at the, you know, the investor day, you know, back in 19, and then COVID hit before we really got a chance to action that. We're getting back on that horse. And so, you know, I think when I think about next year, you know, I think we're focused on high-quality growth.

Great. Thank you, guys.

Your next question comes from the line of Charlie Anderson of Collier Security. Your line is open.

Yeah, good afternoon. Thanks for taking my questions. I want to start on precision devices. I know at your analyst day, you laid out a number of growth drivers there. I wonder maybe if you could just revisit some of those in terms of where they stand timing-wise. As we think about how the next few years play out for precision devices, kind of curious how you see the trajectory of the business.

I mean, I think there was too many growth drivers that we laid out. There was the RF filtering and the EV. Those are the two that we laid out. I would say, let me start off with EV. I think it's doing pretty well. I mean, I think we've had pretty good growth this year, despite the pandemic. I would say we're going to expect to have pretty good growth again next year. And so I think this is headed the right direction, albeit from a small, from a low level. But it's doing pretty well. And so I'm pretty pleased at where we are with EV. I would say, you know, with millimeter wave or RF filtering, it's It's been a little bit more of a mixed bag, you know, and I think we talked about this on previous calls. You know, for the most part, until we've had some, I'd say, short-term pushouts, and defense has been still very strong and growing in our filtering business. But I think if we look into 2021, we think that's going to resume. I think it's been reasonably well-documented that there's been a number of, like, supply chain challenges in the defense supply chains with smaller suppliers relative to COVID that kind of could cause some push-outs on some of what we expect in our programs. Now, a millimeter away for 5G, I would say that, you know, that we've been disappointed by, you know, where this has gone. This hasn't been mass deployment. You know, I think the latest thing that we read is, You wouldn't start seeing, like, mass deployment of millimeter wave probably until 2023 or 2024. And so, you know, I think, you know, we're still, I think, cautious about this market. We're still looking at this market, but it's not come as fast as we want. So overall, if I take this back, you know, I think, you know, same what's happened this year with MedTech, and I guess I'm just going to kind of blow out 2020 based on MedTech and some challenges with pushouts and defense. We still think this mid-single-digit growth, you know, is a number of acquisitions that we should be able to achieve for PD overall.

Male Speaker 1 Okay, great, great. Thank you for all the color. And then I wanted to ask about the China smartphone market. I wonder if you could maybe update us on what portion of revenue that is these days. And, you know, obviously, I think Huawei was not a major contributor for you, but some people have headwinds associated with that. So, I'm just kind of curious how that all plays out with Huawei going away and others picking up share. Yeah, thanks.

I would say that even as we look into Q3 and Q4, China is not recovering to the extent we had hoped. And we're trying to look for third-party data. I don't know if you guys read. The government publishes how many cell phones are sold each quarter. They're still showing significant down demand year over year in the hands of China. And so I think we're pretty aligned to that, that the mobile market can just not come back in China to the extent that people would hope. And that's been one of the headwinds. Now, that said, you're right, Huawei, not a huge customer for us, so it hasn't really impacted. But I think there's one other piece that I think we're starting to see that I mentioned on the script, which is that Samsung has been coming out very strong. And so, you know, I mean, we sit there and say, obviously, Samsung is probably not super strong in China, but to the extent that the Chinese handset vendors are selling outside China, it appears to me that Samsung has been taking share.

Excellent.

Thank you so much. Your next question comes from line of Tristan Guerra of Baird. Your line is open.

Hi, good afternoon. Could you remind us the amount of the decline in your spending for Intelligent Audio this year, year over year, and what we should expect in terms of spending next year relative to this year? What's the strategy there? Are you giving up pretty much that segment, or are you refocusing on the other end markets besides smartphones, where you haven't found the traction that you were expecting initially?

Let me start with, first, the spend. It's well less than $10 million now. I would say it's transitioning. The team is becoming more what we call a solutions team. And the concept here, Chris, is where we are. We've always believed the need to understand the end markets and drive sales of our microphones, our VAs, by creating the actual solutions. And so this team more and more today with our own DSPs that we still have, but also with third-party DSPs, is starting to drive applications. In other words, it's talking to people about, like, here's a next generation application that will, why you should move from one mic to two mics to three mics to four mics. And so, you know, what I would just say is that it's integrated into our thought process of how we grow our overall business. And, you know, it's a relatively small number in 2020, but it will be growing next year in terms of how they're driving microphone sales, fill our DSPs as well as balanced armature receivers.

Okay, great. And then a quick follow-up. So you talked about the good and the bad in balanced armature receivers, and I think previously you had pushed the initial ramp of that automated line from October through year-end. Unless I missed it earlier, are you able to say whether we should expect, despite the delays, a ramp sometime in issue 1 of next year, or at this point you're not providing an update on the timing of that automated line ramp, the initial ramp?

Yeah, I think I kind of already kind of mentioned this, but I'll repeat. We're just not going to give a date at this moment. The line is ready to go. In other words, it's ready to ship. It's ready to be installed, which would mean is if we did it, if we shipped today and we had to have the people go there, it would be up and running in probably eight weeks, eight to ten weeks, up and running producing production parts. But until we can get people to travel to the Philippines to do the installation, it's really hard to give a date of when exactly that will arrive there. Great.

Thank you very much.

Again, if you'd like to ask a question over the phone lines, please press star then 1 on your telephone keypad. Your next question comes from the line of Bill Peterson of JP Morgan. Your line is open.

Yeah, hi, thanks for taking my question and nice job amidst, you know, the pandemic and so forth. My question, I want to get back to the mobile demand. It was asked earlier, but I guess if we think about the from Q3 to Q4, you clearly mentioned your North American customer. Can you help us understand the sequential growth for your Korean customers as well as your China customers? I mean, I understand Huawei may not be as big of a business, but we've seen some of the other ones in China perhaps trying to gain share. And perhaps you can help us understand the share amongst all these players.

Yeah. So I would sit there and say, you know, first the Korean customer, we have very strong sequential growth from Q2 to Q3. We still have growth, again, to Q4. It's not as strong, but it's still definitely we have strong sequential growth. I'd say in China, for the Chinese OEMs as a whole, we do have, you know, planned reasonably strong sequential growth from Q3 to Q4, but albeit off low levels in Q3. I mean, that's what I would say. We did not have sequential growth in China from Q2 to Q3. But it appears to base on our current forecast, there is recovery starting in China. Then lastly, you know, I'm not going to say too much about our largest customer. I mean, you guys know probably more than I know, you know, that obviously the launches were slightly later than expected. I think, you know, kind of how I view this, Bill, is that, you know, I think everybody knows the build plans are set, right? They're pretty set, right? And we're participating. You know, it's a good thing for us. But I think the thing that we're kind of going to start to watch now is what's the sell-through on these phones. I think that's like the next key thing that gets people to come because Q4, in my mind, is kind of set. And so, you know, we're – and we do have strong sequential growth with this customer, again, from Q3 to Q4.

No, that makes sense. And I guess the other part of Mike's I'd like to try to understand, it seems like you had some pretty strong broad-based growth across maybe hearables, IoT, from work from home. How do you see the sequential trends in those businesses following the strong Q3? If you can help us sort of rank the growth projections from, I guess, from headsets or TVs or PCs, tablets, smart homes, other stuff, if you can help us understand.

Yeah, I'm looking at the – Yeah, I mean, I think overall, Bill, I would sit there and say the non-mobile portion of the business still expects reasonably good sequential growth in the Q4. I think it's shifted a little bit. It was a lot more sequential growth from Q2 to Q3 from here. uh and now it's kind of shifting to iot uh uh mobile's kind of been sorry that mobile tablet flash notebook has been flat sequentially but at high levels compared to previous years okay it makes sense if i could just ask someone uh you know housekeeping but you um there's already a question about gross margin trajectory how to get back to the 39 40 40 percent but

Do you still expect that you can operate in the next year? I think you said somewhere close to a $45 million quarterly run rate, or what are the puts and takes associated with that?

Yeah, no, I think that's directionally correct, Bill. I mean, we're going to exit the year I mentioned. We had a one-time or expect to have a one-time payment in Q4 related to R&D. If you exclude that, we're going to have about $44 million of OPEX. in q4 we will have some modest increases next year you know whether it be merit or medical insurance maybe some resumption of travel but i would say i would say 45 46 kind of million a quarter is a good run rate going into to 2021. okay thank you for the insights there are no further questions over the phone lines at this time i turn the call back over to the presenters

Great. Well, 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. Thanks and goodbye.

This concludes today's conference call. You may now disconnect.