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Knowles Corporation (KN) Q1 2019 Earnings Call Transcript

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Knowles Corporation (NYSE: KN)
Q1 2019 Earnings Call
April 24, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the Knowles Corporation first-quarter 2019 financial results conference call. [Operator instructions]. With that said, here with opening remarks is Knowles Vice President of Investor Relations Mike Knapp.

Please go ahead.

Mike Knapp -- Vice President of Investor Relations

Thanks David and welcome to our Q1 2019 earnings call. I'm Mike Knapp 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's 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, 2018, 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, in those disclaims any duty to update such statements except as required by law. In addition, pursuant to reg. any non-GAAP financial measures referenced during today's conference call can be found in our press release posted on our web site at knowles.com.

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including a reconciliation to the most directly comparable GAAP measures. All 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 lodged which can be found in the investor relations section of our website. Further, I'd like to inform you that the company has filed a definitive proxy statement and certain additional materials with the SEC in connection with the solicitation of proxies or its 2019 annual meeting.

Shareholders are strongly advised to read the company's definitive proxy statements and any other documents filed with the SEC when they become available because they will contain important information. Shareholders may obtain a free copy of the definitive proxy statement and other documents that the company filed with the SEC, from the SECs website at sec.gov, or the company's website at knowles.com. We will not comment on the proxy contest with Caligan Partners, Falcon Edge Capital LP, and certain of their affiliates on this call. With that, let me turn the call over to Jeff, who will provide some details on our results, Jeff.

Jeff Niew -- President and Chief Executive Officer

Thanks, Mike. And thanks to all of you for joining us today. We had an encouraging start to the year supported by solid execution across the organization despite facing significant headwinds in the handset market. Our results underscore the merits of our strategy to invest in high value differentiated solutions, and continue to diversify our end markets and customers.

For Q1, we reported revenue of $180 million, above the midpoint of our guidance range, and up from the year-ago period due to continued robust demand for Precision Devices and better than expected sales of microphones. Gross margins of 39%, and earnings per share of $0.13 for both at the high end of the guidance we provided last quarter. In the audio segment, Q1 revenue is down from the year-ago period to the lower MEMS Microphone sales. As we communicate to last quarter, this was primarily the result of a significant inventory correction at a handset customer during the quarter, partially offset by strong sales to Chinese OEMs, an increased demand for Ear and IoT applications.

Revenue from hearing health was stable from the year-ago period. Overall, revenue from audio comprise 77% of total sales in the first quarter. In the Precision Device segment, sales were up over 25% from the year-ago period, hitting record levels for the fifth consecutive quarter due to; continued demand for different trade products across multiple end markets, and a tuck in acquisitions. Precision Devices represented about 23% of total company revenue in the quarter. I mentioned that Q1 trends in audio were slightly better than anticipated, as it continues show the benefits of a diversified portfolio of solutions for the mobile, Ear and IoT markets. In mobile, demand for microphones in Q1 was impacted by lower handset binds as a key customer work to an inventory.

I believe that the bulk of this excess inventory has been digested by the market and we have seen handset demand stabilize. In addition, we have a strong year-over-year growth in non-mobile platforms at this customer which help offset handset weakness. Delta Chinese OEMs were better than expected in Q1, almost doubling from the year-ago period, as we continue to benefit from increasing content within mobile from both MEMS and Intelligent Audio solutions . For example in Q1, Vivo launched its X27, and X27 pro devices in China. Two new additions to the company's mid-range handset lineup; Voice wake is becoming a must have, and our SmartMics coupled with high performance MEMS Microphone enables this feature with superior performance at a reasonable cost.

This might also highlight proliferation of Intelligent Audio solutions to higher volumes, mid-range platforms for our Tier 1 customers. We remain very optimistic about our Intelligent Audio solutions as they drive significantly higher audio content per device to higher DSPs and greater share will driving the need for additional high performance MEMS Microphones. In Q1, we started sampling a new dual-core DSP which serves as a mid-range offering within our intelligent audio portfolio. With more processing capabilities to our SmartMic, and a lower cost to our four core solution, this new offering enables more audio features while appealing to cost conscious customers looking to differentiate their devices.

Like our other DSPs, it also drives the need for higher performance MEMS Microphones and allows us to gain share in our core microphone business. In addition to SmartMics, we expect this family of multi-core audio wedge processors to begin shipping in the handsets to be launched in the back half of the year. Moving to Ear. Our largest customer recently launched its second generation of popular wireless headphones utilizing multiple digital microphones.

This next generation headphones deliver longer battery life and for the first time ever, they now feature the convenience of Voice Wake; making easier to change songs, make a call, adjust the volume, or get directions, simply by using your voice. This demonstrates the importance of voice in the Ear market. This product has revolutionized the wireless audio experience for many users but there's much more to come. Customers are looking for additional features like; noise reduction, and active noise cancellation which today have been primarily in over-the-ear headphones due to power inside constraints in these products.

Those long history of delivering innovation in the hearing aid market and our broad product offering makes us well suited to solve these unique technical challenges. We expect additional customers to launch products this year. We have significant content gains, driven by adoption of multiple microphones, Intelligent audio solutions, and balanced armature receivers. I continue to be extremely optimistic about our opportunities in the Ear markets. In IoT, we expect continued growth in smart speakers to drive demand for our audio solutions.

In a recent study, Deloitte Global stated that, Smart speakers will become the fastest growing connected device category with consumers purchasing 164 million smart speakers this year, up from 98 million units in 2018. Beyond Smart speakers, we continue to pursue voice input opportunities across TVs, Bluetooth speakers and a myriad of other connected devices. The use of more high performance microphones, coupled with the trend of moving more audio processing to the edge of the network places this in an ideal position to drive strong growth in the IoT end market over the next several years. I want to close the audio segment discussion with some additional comments around intelligent audio.

I've mentioned in prior quarters that I expect 2019 to be a strong year for revenue in our intelligence audio solutions. We expect sales to be between $30 million and $40 million in 2019, with gross margins above the corporate average. As our customers implement voice solutions, our audio edge processors are synergistic with our core mic business, allowing us to gain share and demonstrate the value of moving higher performance Mics. This year, we expect to invest approximately $38 million in R&D support this opportunity, as I believe our differentiated audio edge processors opens up an incremental $1 billion market for us. Moving on to precision devices.

We are excited about the continued prospects for the segment and believe it is a critical platform for Knowles as we increase exposure to fast growing in markets to enhance shareholder value. There are two distinct product categories within precision devices; high performance capacitors, and millimeter wave RF Solutions. Our high performance capacitor products sell to a diverse set of customers for mission critical applications across electric vehicles, telecommunications, defense medical, and industrial end markets, and we're responsible for much of the precision price growth we experienced in 2018. These solutions store and discharge energy in our design for critical applications that are required to operate at high voltage, high temperature or with high reliability.

We believe we are well-positioned across these end markets and expect mid-single digit growth for these products in 2019. The second product category within precision device business is our Millimeter Wave RF solutions. We have a long history of solving high frequency filtering challenges for our defense customers. We have been using Millimeter Wave spectrum for satellite communications and radar for many years. The rollout of 5G will depend on the use of Millimeter Wave spectrum in frequencies between 26 GHz and 39 GHz.

This rollout which we expect will begin late this year and continue over the next several years will require filtering techniques similar to what we have been providing our defense customers. We believe our solutions are uniquely positioned to support Millimeter Wave 5G to the small size, and high selectivity, or billion precisely filter portions of the spectrum. We are well positioned with major infrastructure customers that will enable Millimeter Wave 5G and expect demand for our filters to grow in 2019 beyond. In 2018, this product category represented less than $20 million of sales, and I believe it could grow over $100 million in revenue in 2021. Overall, our strategy of diversifying our markets and customers is working, and the benefits of this strategy are reflected in our financial results over the last 18 months. With that, I'll turn it over to John, to expand on our financial results and provide our guidance for the second quarter.

John.

John Anderson -- Senior Vice President and Chief Financial Officer

Thanks, Jeff. We reported first-quarter revenues of $180 million, above the midpoint of our guidance range and up 1% from the year-ago period, driven primarily by increased demand for our precision device solutions. Audio revenues of $139 million, were 5% from the year-ago period. As expected, MEMS Microphone sales were lower due to, primarily to a handset inventory correction at our largest customer in Q1. Higher than expected sales to Chinese OEMs, an increased microphone demand for Ear and IoT applications helped to offset the decline in handset handset shipments at our largest customer.

Intelligent Audio sales were up slightly, and revenue from hearing aid products remained stable from the year-ago period.Precision device delivered record revenues of $41 million, up more than 26% year over year; as a result of 21% organic growth, driven by strong demand for high performance capacitors in telecom, defense, and automotive markets, and an acquisition completed early in the first quarter of 2019. First quarter gross profit margins were approximately 39% at the high-end of our guidance range and up 1.50% basis points from the year- ago period.

Audio segment gross profit margins increased by more than 2.00% basis points due to; favorable product mix within microphones, and improved factory performance. Precision device gross margins were down compared with the first quarter of 2018 due to, unfavorable product mix, and a benefit recorded in 2018 which did not recur. Operating expense in the quarter was $52 million, in line with our guidance and flat from the year-ago period. For the quarter, adjusted EBITDA margin was approximately 9% at the high-end of our guidance range, and up 1.10% basis points from the first quarter of 2018.

Non-GAAP diluted EPS was $0.13, also at 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 $41 million, at the end of Q1. For the first quarter, cash utilized from operations was $11 million, and capital spending was $15 million, with both metrics favorable to the midpoint of our guidance range.

Moving to the second quarter of 2019. We expect total company revenue to be between $185 million and $205 million, up 4% over prior year at the midpoint. Revenue from the audio segment is expected to be up slightly from Q2 of 2018, as shipments into Ear and IoT markets continue to increase, and market conditions within the mobile market stabilize. Precision device revenue is expected to be up more than 10% over prior year levels, driven by continued strong organic growth across defense, industrial, and automotive markets, and the impact of an acquisition which was completed earlier this year.

We project Non-GAAP gross margin for the second quarter be approximately 38% to 41%, slightly above the year-ago period; driven by favorable product mix ,factory productivity gains, and the impact of foreign currency, partially offset by higher raw material cost in our precision Device segment.  R&D spending in Q2 is expected to be between $23 million and $25 million, up $1 million from prior-year levels. Selling and administrative expense is expected to be $29 million to $31 million, flat with the year-ago period. We're projecting adjusted EBIT margin for the quarter to be in the range of 11% to 13%, and expect Non-GAAP diluted EPS to be within a range of $0.17 to $0.21 per share. This assumes weighted average shares outstanding during the quarter of $95 million on a fully diluted basis.

We're 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 second quarter, we expect cash generated from operations to be between $10 million and $20 million. Capital spending in the quarter is also expected to be $10 million to $20 million. Full-year capital spending is expected to be between 6% and 7% of revenues. I'll now turn the call back over to Jeff, for closing remarks.

And then we'll move to the Q&A portion of the call. Jeff.

Jeff Niew -- President and Chief Executive Officer

Thanks, John. As I noted at the outset of the call, our Q1 results reaffirm that our strategy to invest in high value differentiate solutions, and diversify our end markets and customers is driving sales and earnings growth. As we continued through 2018, our company remains well positioned. In audio, the macro trends around better performance edge processing remain favorable, and are enabling us to expand our total available market and grow our business.

In precision devices, we continue to execute our playbook and drive strong revenue growth in operating margin improvement both organically and through talking acquisitions. I expect the growth in both segments will drive total company revenue with strong operating leverage in 2019, and I look forward to building on its momentum in the years to come. Today's call provides financial results in Q2 guidance, so we would appreciate if you would keep your questions focused on our business results. Operator, we can now take questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions]. Your first question comes from the line of Suji DeSilva with ROTH Capital. Your line is open.

Suji DeSilva -- ROTH Capital Partners -- Analyst

Hi, Jeff. Hi, John. So on the growth in the in the China opportunity, I understand there's share gains helping you offsetting the backdrop. But if you look maybe you're out, how would you explain the opportunity in terms of the end smartphone demand, content increase in Knowles share, because that's been kind of fighting the tide here.

Jeff Niew -- President and Chief Executive Officer

Yes, I mean I'm not going to make much comment on the end smartphone demand versus beyond what's out there in the marketplace today. I mean, I think generally speaking we've said this for a while that handset demand is not going to increase at a significant rate. What I would say is, specifically China is in the mobile market, we still have the opportunity for multi- mic adoption. We still have the room for higher performance Mics.

And we also have the opportunity for intelligent audio in the mobile market. I would also add that to this that what you also see is Ear and IoT are becoming a a much more important thing in China as well. Overall, I think what you see over 2018 and starting to 2019, we've been able to buck the trend of the people who are specifically speaking about how they're doing in mobile through content gains in mobile, coupled with other end markets that are growing at a pretty rapid rate.

Suji DeSilva -- ROTH Capital Partners -- Analyst

OK. And then questions on intelligent audio. I think that's how you framed your metrics you provided. On the revenue side, you gave a range of $30 million to $40 million.

I think in the past, your percent in guidance implied more like $25 million, so I'm wondering what drove the uptick and visibility here. And then on the cost side, the $38 million, you talked about, how does that trend in the next year or two as mostly investment behind or is it have to grow more here to get to where you're going.

Jeff Niew -- President and Chief Executive Officer

Let me cover the revenue entails the audio. First, direct sales $30 million to $40 million in 2019. Just to say is we had talked about the 2% to 4% range in the past. Well let me just talk a little about 18.

18 came in significantly stronger than we expected, offer intelligent audio product revenue. And to that end I'd say right now we're trending toward the lower end of that range of 2% to 4%. And that gets us to the midpoint of $35 million in revenue for the quarter for the year. So that was a that's how I stated.

And then the second question one more time.

Suji DeSilva -- ROTH Capital Partners -- Analyst

On the expenses you talked about $38 million being used for your intelligent audio. How does that number trend from here. There's a lot of the expense behind or is there more investment has been made to get to where you're going.

Jeff Niew -- President and Chief Executive Officer

Yes. I mean right now I would say that as we look out as a company, we still keep saying we'll be in that 11% to 12% range, but we think that you know $35 million to $40 million range on a span of [inaudible] is going to be flat year over year as we go forward.

Suji DeSilva -- ROTH Capital Partners -- Analyst

Very helpful Jeff. Thank you.

Jeff Niew -- President and Chief Executive Officer

Thank you, Suji.

Operator

Your next question comes from the line of Charlie Anderson of [inaudible]. Your line is open.

Unknown Speaker

Yes. Thanks for taking my questions. Maybe just start with the big picture Jeff, relative to a couple of months ago when we last talked to us. What you observed as change relative to the initial view in the year across the various end markets; be it smartphones, be it precision devices.

Looks like you maybe run a schedule on precision devices smartphones maybe do a little bit better in China. And maybe just update us on your full-year thinking to the extent that you can. I mean I've got a follow up.

Jeff Niew -- President and Chief Executive Officer

Sure. Let me just start with the major pieces. Let me start with the smartphone market. I don't think we've changed dramatically in our thought process from the last quarter.

We said that inventory direction would be largely behind us by the end of Q1. I think we're reiterating that, I think the biggest wildcard that I would say in mobile is the back half the year, and I think it's a little pop to predict yet the back half of the year for mobile. Ear and IoT, really strong for us looking very good for the full year. We're very excited about that.

And again, I'd say, it's all with Mic and intelligent audio cut across all three of these markets. Hearing health, we keep talking about that GDP. There are some good opportunities that we are starting to see with the technology in hearing health can be applied to the commercial market. I don't think these will be huge numbers this year, but I think there's a good opportunity there.

And as far as precision devices, Yes, I would say we're probably slightly better than we were saying a quarter ago. And I think what I would just say is the markets have been quite good for us. I think if you look at defense, you look at medical, you look at electric vehicle, you look at telecom they still been all very strong for us. As I look at our markets for precision devices, I'm looking at the different markets that they're in and we're not seeing anything that's going to be down year-over-year at any of their markets at this point.

Unknown Speaker

Great. And then as a follow-up, you mentioned the billion dollars of incremental that IoT opens up. I wonder maybe if you could just give us some of your thoughts behind how you get there you build up to that number and I think you did define as incremental so you're not think cannibalization of the current microphone business would be an addition to that. Maybe just walk us through how we get to that level of incremental opportunity of that kinetics.

Jeff Niew -- President and Chief Executive Officer

I mean to tell you the truth, we went through this in pretty high level of detail and it's actually over $1 billion. I mean we just rounded it down to a $1 billion. But when you start looking at the mobile market, the year market in the IoT market we look by market. And I would in the shorter term there's no doubt mobile is probably the the larger opportunity for intelligent audio in where this is growing, but in the in the mid to longer term, I would say IoT and Ear become a very large opportunity for us.

And just use the Ear as the example, as you know our largest customer introduced they're new devices that now have voice wake, right. And so once you start seeing is that what we've been kind of forecasting for the last few years in Ear IoT is starting to come forward. The second thing is that we can need see, processing being moved to the edge is a trend that we see across all these markets. So without going just a super lot of detail here we, did do a pretty detailed analysis to roll up to that number is greater than a $1 billion.

Unknown Speaker

Great. Thanks so much.

Operator

Your next question comes from the line of Bob Labick with CJS Securities. Your line is open.

Bob Labick -- CJS Securities -- Analyst

Good afternoon. Thanks for taking the questions. I'll start with precision devices. Obviously, it's been very strongly highlighted that.

And then Jeff, you spoke a little bit more about it in your remarks so thank you for that. I was hoping you could just expand on what you said. You talk a little bit about your competitive position, your competitive advantages and what differentiates your products from from your competitors.

Jeff Niew -- President and Chief Executive Officer

So I'll break it down to the two product categories that we talked about versus the high performance capacitors. And I think what this has been the traditional area of where this business had been. And the real focus has been on these very unique applications that are mission critical. Areas where they required extremely high voltage in an extremely small package where they require a high temperature or where they have a high reliability.

And I'll point you to one of the markets that we're been extremely strong in and continue to grow is when we say medical is primarily implantable. Right. And so, we have a lot of business in the implantable market across many different applications where it's obviously mission critical. The other areas of the millimeter wave are filtering.

And I would say you know we've had this business for a while. The military business that we've had has been operating in the millimeter wave spectrum for many years for high speed satellite communication for radar. And what we're finding is about a couple of years ago that the Millimeter Wave 5G that they're talking about rolling out late this year is going to need the exact, same type of filtering techniques that we have become experts on over the last five years to ten years. And we've got a very unique offering in this area right now.

So, when we talk about competition in the space whether it be the high performance capacitors or it be in this this millimeter wave, our filtering there --there's really not like one guy we can call out and say as a competitor. There are some people out there., but we do have very unique offering.

Bob Labick -- CJS Securities -- Analyst

Great. And then just expanding on that I think you said the base station was $20 million in 18 going to $120 million in 2021. So just to kind of reiterate that and that's assuming you get the majority of the share going forward since you don't have any significant competitors in that.

Jeff Niew -- President and Chief Executive Officer

Well let me be clear the $20 million that we did in 18 less the less than $20 million is comprised of both telecom, like the Millimeter Wave 5G but it's also of the military business that we have. So it's the combination of both. And as we look out, I think our expectation is, it's hard for me to predict more than three years to four years out. But our expectation is that we should have very high share in this particular product category over the next one year to three years.

John Anderson -- Senior Vice President and Chief Financial Officer

Bob, just to add a little clarity to granularity. Less than half of that $20 million in 2018 was going into the telecom in IoT market.

Bob Labick -- CJS Securities -- Analyst

Got it. OK, that's great. Perfect. Thank you very much.

Operator

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

Anthony Stoss -- Craig-Hallum Capital Group LLC -- Analyst

Hi, guys. Nice results. Jeff, can you maybe take us through where you see your average content in the earbud market going on later this year especially the voice wake. Just to remind us the average content [inaudible].

Giving your positive comment you're related to your wins, normally you have a steep second half ramp. Any thoughts you can share on if that's your greater than on a normal basis for you guys or any any thoughts to be helpful thanks.

Jeff Niew -- President and Chief Executive Officer

I'm going to take that question first, Tony. I think it's a little too early to say the back half to year, what's going to happen in the mobile market. I think the one thing I would just draw people's thought process too though is that bills don't always track sell through of the actual end product. And so if we look back to 2018, obviously there was a lot more buildings than there was selling last year and hence what happened in Q1.

And so if we think about the back half the year, that's going to factor in. If you take a flat market year-over-year and they overbuilt last year, we do see that the handset market being is a headwind overall. I think that's what's out on that. As far as the content, I think we talked a little bit about this with people.

When we get intelligent audio designed in, we can see sometimes four to six times the amount of revenue in a handset that we had in previous generations. So it's pretty significant, only when we get the web designed. And I would add that's the one thing that I did mention in my script is that year-to-date, we've been selling the SmartMics into the handset market. But we do expect now to start shipping the Multi-Core DSPs in the handsets in the back half the year, which is another gain in content.

Anthony Stoss -- Craig-Hallum Capital Group LLC -- Analyst

This is a follow Jeff more on the earbuds side. Same question I guess content for earbuds not related to handsets. Y

Jeff Niew -- President and Chief Executive Officer

Yes. I think there's a couple of things going actually, quite a few things going out in the in the earbud market. First of all there's a trend toward more microphones in order to improve the performance. We can see the possibility down the road if your going.

Originally, there was one mic for headset then it went two, and there's two per ear that there's even the possibility of three microphones per year. The second thing I think we see a trend is a move from analogue to digital mics in the ear, which I think is very very positive for us. Third thing we see in the ear is that, there is the opportunity for our balanced armature receivers that are from the hearing aid side, starting to move into some of these applications, and people ask why. It's not necessarily about performance, it's about size in order to be able to fit more content.

Our balance our receivers are significantly smaller than the existing technology and allows you to make a bigger battery or add more sensors the device. And the last which I think we see a lot of opportunities in the space is for intelligent audio as more people are starting to introduce products in this space. I'm sorry I'm very optimistic about this market.

Anthony Stoss -- Craig-Hallum Capital Group LLC -- Analyst

I can tell it it's coming across in the script as well. One quickie for John. How much revenue did you guys booked in Q1 from the acquisition.

John Anderson -- Senior Vice President and Chief Financial Officer

In Q1 it was pretty nominal. A couple million and we are expecting that to be about -- you will in the queue. Purchase price was $11 million, it's roughly $10 million annually in revenue. We expected to be accretive in 2019.

Anthony Stoss -- Craig-Hallum Capital Group LLC -- Analyst

Good job guys. Thank you.

Operator

Your next question comes from the line of Harsh Kumar of Piper Jaffray. Your line is open.

Harsh Kumar -- Piper Jaffray -- Analyst

First of all, congratulations on a solid execution. Jeff, I think last time you talked publicly I think your expectation was that this year would be a good year. I'm curious with all that you're seeing in the second quarter guidance out how you would characterize the full-year growth trends as.

Jeff Niew -- President and Chief Executive Officer

Yes. I still think we are civil saying we will have growth this year. I guess the one thing that I highlighted on the previous question which is, you have to think just about how the handset market is going to work out in the back half the year. I think that's my one hedge, but even, what you see in the first half relating to Q1, there was a significant inventory correction and we were still able to deliver growth as a company.

I think that's a big accomplishment by the organization. But I think if you look at the trends I'm looking at somewhere in the neighborhood of 45% from 55% back half. But again the big caveat I lay out here is Ear and IoT , looking good. Hearing Aid, looking good.

Intelligent audio, looking good. Precision devices both Millimeter Wave and high performance capacity, looking good. The one caveat I'd say is is how does the back half the year develop in terms of handsets market.

Harsh Kumar -- Piper Jaffray -- Analyst

Thank, you Jeff. Very helpful. And then you mentioned that China came back, I was curious when did you start to see China recover time-frame wise. In your opinion, is the growth in China coming from basically new models or inventory getting cleared, or stability at a broad level multiple like adoption.

What would you say would be the one trumping factor there.

Jeff Niew -- President and Chief Executive Officer

Well let me just make this comment. It really started coming back like for us in Q2 of 2018, is when it started coming back. And it's been no looking back so far. I mean, we have not seen a real slowdown in the last four quarters.

So you know Q2 last year Q3, Q4 and even Q1 has been pretty strong. So we have not seen a slowdown. But again, Harsh, I think the one thing would just come back to us, we got a lot of tailwinds here that don't leave us exposed to how fast the handset market grows alone.

Harsh Kumar -- Piper Jaffray -- Analyst

And my last question I'll get off I promise. You're talking about audio up slightly in June and I was wondering if you could maybe provide some color about how you're thinking about China for the June timeframe, and then also your largest customer you mentioned things are stable, X mobile and even the inventory in mobile is stable, but I'm curious how you characterize contrast with the windows...

Jeff Niew -- President and Chief Executive Officer

Here as I say, we've had break net growth in China. I would say that growth rate is going to slow down in Q2. We're hopeful but this rate of growth were doubling last year. It's very hard to maintain that lower growth.

So I would say you know we see some slowdown in China in Q2.

Operator

Your next question comes from the line of Bill Peterson from JP Morgan. Your line is open.

Bill Peterson -- J.P. Morgan -- Analyst

Hi. Thanks, for taking the question. Good job on the execution and also thanks for shedding some light on that intelligent audio, as well as precision devices. I wanted to talk about kind of your competitive positioning over a few places in audio.

First, part of your China growth story has been share gains. And I wanted to know is that trajectory still going higher. How do you expect that to continue or are you kind of comfortable with where your share is now. And then I'd like to dive in more to the intelligent audio in order to address your large TAM.

Where are your products. I want to if you can help a minus where your competitive advantages are, maybe for both wired applications such as IoT, as well as wireless applications where maybe power battery life is more important. Thank you.

Jeff Niew -- President and Chief Executive Officer

So first by China, I would say share gains was part of 2018 but not the whole story. I would sit there and say there was a story definitely was an increase in the number of microphones per phone in 2018 and even into 2019. I would definitely say there's been an adoption of higher performance microphones. And again, as I said made earlier when one of the questions, our IA adoption in China has been faster than expected in 2018.

So those three things in combination which share have to happen. And I'm not going to comment where share goes here, but I would just say that those other tailwinds continue to be there for us in 2019 China. As far as the competitive positioning of the IA products, I would definitely say that our advantage here is a combination of a couple of things. One is, it's the price power/performance curve.

In other words is we are offering something that can run machine learning algorithms, artificial intelligence at a very reasonable cost at a very low power. And so if you look at where the advantage is really come out, it's in cost sensitive applications typically, although we're moving up that curve with the multi core DSPs where you want to run pretty advanced algorithms in a battery operated devices. That's where our real advantages. The second advantage I think we have is that our DSP is open.

We can write algorithms to him which we do. We have an algorithm partner program where we've signed up a number of companies that are now, or their algorithms to our device. And now we have multiple customers who actually are writing their own algorithms to this platform. And what we hear time and time again Bill is that combination of price to performance to power is very unique coupled with being open.

Bill Peterson -- JP. Morgan -- Analyst

OK. Thanks for that color. I guess we've talked in the past and it sounds like you characterized the growth and that's helpful for this year. In light of-- I guess kind of a pretty strong competitive position in your core business as well as the initial adoption of IA.

Can you give us a feel for how we should be thinking about gross margin trajectory. You came in better than expected in March, how this trend should come through the rest of the year.

Jeff Niew -- President and Chief Executive Officer

I've done a lot to tackle with John and I'll give you some color. He might be thinking after what he said.

John Anderson -- Senior Vice President and Chief Financial Officer

All right. Hi, Bill. I'll start with Q1. Our Q1, as I mentioned was up based on 1.50% basis points and really driven by the audio segment.

And I would say the audio segment was 2.00% basis points about half of that was due to favorable product mix, higher performing microphones, and then the other half was really improved Factory Performance. So a little better than it and better than prior year yield lower factory spending, that really drove the quarter. In terms of full year, I said if you go back to Q4 call, I said we expected for the full year of 2019 to be just a bit above 40%. I'm confident and reiterating that on Q1 proves it.

If you look at the improvement we had in Q1 2.00% basis points in audio, 1.50% overall. I'm fairly confident that we can exceed 40% for the full year of '19.

Bill Petereson -- JP. Morgan -- Analyst

OK. Thanks for that color. I guess just trying to decouple the precision devices growth, because you do of the acquisition it seems like you're now on pace to maybe even exceed mid-teens for the year. I just want to make sure when the right -- last time talked about mid to high-single digits maybe toward the higher end of that.

Just want to try to understand how we should consider a growth for that segment.

Jeff Niew -- President and Chief Executive Officer

Yes, I mean when I start looking at the numbers I mean I think it's going to be another strong year for precision devices. I mean I don't I don't put a full number on that at this moment. But you take the number we finished on that last year in precision devices which was $145 million, you add what John said on here which is about $250 million of revenue per quarter for an acquisition. You take that base of high performance capacity is growing at mid-single digits.

And then I think the wildcard for us is still at this moment, we're going to have a lot of growth in the millimeter wave filtering products. But the question is how much is going to come into this year versus next, because a lot of these millimeter wave rollouts are really starting to go toward the end of this year. And so, you could slip a quarter it could be pulled in a quarter. So I think that's kind of the wildcard in the back half of the year.

Bill Peterson -- JP. Morgan -- Analyst

Understood. Thanks and a solid job in execution.

Operator

Your next question comes from the line of Christopher Rolland from Susquehanna International Group. Your line is open.

Christopher Rolland -- Susquehanna International Group -- Analyst

Thanks for squeezing me in there guys. OK, I understand the kind of economics and growth opportunities that you guys are gonna get in PD and it's certainly been impressive, but I'm not exactly sure why it's still strategically chord in Knowles. You guys have kind of branded yourselves as the audio solutions provider. The growth opportunity here seems pretty outstanding, and I think you'd get a nice multiple for this business,particularly for someone who is doing let's say filtering for example and once more 5G exposure.

So would you consider selling this business, or are there other factors in which you don't think that someone would be willing to pay the multiple for this thing that you think it's worth. How do you kind of size up of keeping this business versus selling it.

Jeff Niew -- President and Chief Executive Officer

Well I'm not gonna make comments about selling a business. We like this business and I think a couple of things when it does for us, it diversifies our customer base. It's got high-value products. And I would add one other thing that we don't really talk as much.

But it does share a lot of infrastructure with. If you go to our factory in China where we make Silicon mic, they're co-located in the same factory where we make these these high performance capacitors. And so to the end, I'm not gonna make a comment or about buying or selling of any business quite frankly. But in the end I think what we've shown is if you look at the history of this business, when we inherited this business from Dover, it was you a spin off.

It had been at roughly a flat business, I would say three years, four years or five years and we've demonstrated that as an owner we have been able to drive shareholder value through the ownership of this business both leveraging the total of Knowles, as well as understanding the technology they had, and moving the direction that we have with the business.

Christopher Rolland -- Susquehanna International Group -- Analyst

And then in terms of Intelligent Audio (IA) and some of your entry obviously the multicore DSP last year was great. And the Vivo win is nice as well. Do you have any other for single or multicore. When do you expect your first double core win.

And then out of curiosity, what would multicore DSPs handsets be used for. Thanks.

Jeff Niew -- President and Chief Executive Officer

I think what you start seeing is multicore handsets. There's a lot of different applications that we can lay out starts with boys wake. And of course enhancing that As you have more performance, your voice wake performance becomes better. But there's a myriad of different applications.

As far as the multicore design wins for handsets, we are actually starting to ship in the handsets within this quarter in for a ramp up that will our phones that will be introduced in the back at the year. I think you what we saw was, we had a SmartMic which I would say is the gateway product that gets people interested at a reasonable price. It does some functions, and we had the four core device which we started shipping last year which is very high performance that can do many different applications that demonstrate by the customer. Reused that last year that we talked about.

The dual core device kind of fits in a sweet spot between those two in terms of price and provides for the guy who wants more than the SmartMic but doesn't really want to pay the price of the four core device. And we're starting to talk about these more as we call them audio edge processors. But what you're starting to see it we're filling out the product category of price and performance, and we're also attracting a lot of different algorithm companies third party or porting this to the device because they're seeing the level of performance they can get from their algorithms is significantly better than they can get in a off the shelf these big.

Christopher Rolland -- Susquehanna International Group -- Analyst

Great. Thanks for that color.

Operator

Your next question comes from the line of Jaeson Schmidt of Lake Street. Your line is open.

Jaeson Schmidt -- Lake Street -- Analyst

Thanks for taking my questions. Wondering if you can comment if you're seeing anything out of the ordinary from the pricing side within the IoT team market.

Jeff Niew -- President and Chief Executive Officer

Well, honestly I don't have the IoT specifically pricing right in front of me. I would just say that we talked about this in the past that in 16 we had or 17 we had close to double-digit AFP erosion on mature products. We cut that down significantly in 2017. In 2018, it was around 4%, and as we look for the full-year 2018, right now I would say we're slightly better than that 4% from last year.

So the trend continues to keep moving in that direction as a positive. And so in combination quite frankly of first competitive landscape, which I think has been positive for us, but it's also the introduction of I would say differentiated product that puts us in a strong competitive position.

Jaeson Schmidt -- Lake Street -- Analyst

OK. And looking at intelligent audio (IA), I know Jeff, you mentioned you tracking toward that lower end of the 2% to 4% range obviously 30 million to 40 million, a significant jump from 2018 level. But just curious what is behind sort of this slightly downshift in outlook is that really just timing of launches or assumptions on some of the volumes of these skews.

Jeff Niew -- President and Chief Executive Officer

I would say there's primarily is the fact that 2018 was significantly better than we expected. I mean if you were to go back a year ago at this point, when we started mid-year when we started talking about the 2% to 4% and the sales of intelligent audio (IA) came in significantly higher than we expected. That coupled with --there is a little bit of this but I would say it's more of the former is that there are some significant products being launched later this year. But I would say, it's more the former which is 2018, was a very good year for intelligent audio compared to what we expected the beginning of the year.

Jaeson Schmidt -- Lake Street -- Analyst

OK. Thanks a lot guys.

Operator

Your next question comes from the line of Suji DeSilva of ROTH Capital. Your line is open.

Suji DeSilva -- ROTH Capital Partners -- Analyst

Hi, Jeff. Hi, John. Thanks for taking the follow up. You guys are very positive on the ear segments.

I just want to be clear on, is there customer concentration today or do you have multiple customers that are large already. And if it does grow the way you think Jeff, are you going to still be exposed to one or two large customers or will that be diversification in that segment. That is important our stand giving you a very positive.

Jeff Niew -- President and Chief Executive Officer

Well in our in our annual report I think we talk about we have one customer that's over 10%, which I think everybody knows the name. I would say that the positive with that one customer for us is that the mix is not all in the mobile market. Right. And so I would say that's been rough running roughly about the same percentage of sales but, what's been happening is that we've been getting more business in other products besides just the mobile market.

And besides that, we don't have another customer that's over 10%, and I think that keeps going back to that about the idea here that we are diversifying our customers. We are diversifying our markets. And I can't say that will last forever that we won't have another customer over 10%, but within this year, I don't think we see that we'll have another customer over 10% to achieve the targets we expect in 2019.

Suji DeSilva -- ROTH Capital Partners -- Analyst

Jeff, Sorry if I wasn't clear I was asking specifically about the ear segment.

Jeff Niew -- President and Chief Executive Officer

Oh, sorry. Yes, I mean when I look at the ear, I don't know if I have a breakout here in front of me of your customers but ear is relatively fragmented business. I mean it's not when you think of it is, there's not one overly dominant guy besides the one guy everybody knows. But they sell a very limited product portfolio.

I don't see big customer concentration. Overtime it's going to be a big deal in the ear market

Suji DeSilva -- ROTH Capital Partners -- Analyst

That's why I want to hear Thanks guys.

Operator

[Operator instructions]. Your next question comes from the line of Harsh Kumar of Piper Jaffray. Your line is open.

Harsh Kumar -- Piper Jaffray -- Analyst

Hey guys. Thanks for letting me ask another one. Jeff, in voice wake, is it mostly you guys at the top of the chain or are there other people that compete with you. And then second question was, I get the applications in IoT for dual core, quad core DSPs , but maybe just explain to me what some of the applications are or maybe one of the key applications might be in a dual core DSPs within a phone.

Jeff Niew -- President and Chief Executive Officer

Well, that second question, I know I've been a little elusive but these phones are not in the market yet, so I can't really speak to that yet harsh. But I would say in due time when the phones are released, we'll talk more about the applications that are running, but they're not in the market yet. And as far as voice wake,I think there's some limited competition in this space, but we do think we have a pretty unique offering for battery operated devices. What high performance voice wake at a reasonable cost.

I feel very comfortable that that is a gateway application on the way to a bunch of different applications that get people to move to the multicore. And I think you know that's kind of statement of trying and maybe trying to get across. Harsh, people start with the SmartMic, then they start adding applications and they quickly run out of performance to to run the SmartMic. And then -- by the way, we've got the four core, we've got the two core.

We've got multiple products we can offer.

Harsh Kumar -- Piper Jaffray -- Analyst

That is really helpful. Thank you.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Jeff Niew -- President and Chief Executive Officer

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. Thanks and goodbye. 

Operator

[Operator signoff]

Duration: 53 minutes

Call Participants:

Mike Knapp -- Vice President of Investor Relations

Jeff Niew -- President and Chief Executive Officer

John Anderson -- Senior Vice President and Chief Financial Officer

Suji DeSilva -- ROTH Capital Partners -- Analyst

Bob Labick -- CJS Securities -- Analyst

Anthony Stoss -- Craig-Hallum Capital Group LLC -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Bill Petereson -- JP. Morgan -- Analyst

Christopher Rolland -- Susquehanna International Group -- Analyst

Jaeson Schmidt -- Lake Street -- Analyst

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