Executive Summary

Q4 2013 delivered solid top-line growth with revenue at $330.3M, up ~6% sequentially from Q3 and ~11% year-over-year, while non-GAAP operating margin moderated to 20.0% from 22.1% in Q3 .
Management set Q1 2014 guidance below Q4 seasonality: revenue $260–$265M, gross margin 34–35%, operating margin 12–13%, citing softer seasonal demand, Nokia/BlackBerry exposure, and timing of a Tier-1 smartphone launch .
2013 mix remained favorable with Mobile Consumer Electronics (MCE) at $778M (64% of sales) and Specialty Components (SC) at $437M (36%); 2013 adjusted EBITDA margins were strong at 32% for MCE and 24% for SC .
Narrative catalysts: integrated audio solutions with Chinese OEMs, footprint migration to Philippines/China targeting $40–$50M in annualized savings, and sustained R&D investment (6–7% of sales) to support content growth and next-gen audio use-cases .

What Went Well and What Went Wrong

What Went Well

Strong Q4 revenue ($330.3M) and non-GAAP operating earnings ($66.0M) with YoY revenue growth versus Q4 2012 ($296.6M) and healthy non-GAAP gross profit ($125.1M) .
Segment positioning: MCE at $778M with 32% adj. EBITDA margin; SC at $437M with 24% adj. EBITDA margin—providing both growth and stability into 2014 .
Management emphasized strategic progress on integrated audio: “We have more opportunities right now to pursue…than we actually have engineering resource…we’re actively hiring” (Chinese OEM design wins, complex speaker box assemblies integrating antennas/mics) .

What Went Wrong

Non-GAAP operating margin contracted sequentially to 20.0% in Q4 (from 22.1% in Q3), reflecting mix/transfer and restructuring dynamics despite strong revenue .
Outlook softness into Q1 2014 due to seasonal demand and legacy exposure: mobile consumer down ~7–9%, Nokia/BlackBerry headwinds and timing of a Tier-1 launch (global roll-out variability) .
Specialty Components saw historical pressure in oscillators; management chose to cede low-end share rather than compress margins further, with recovery tied to telecom stabilization and footprint consolidation .

Financial Results

Metric	Q4 2012	Q2 2013	Q3 2013	Q4 2013
Revenue ($USD Millions)	$296.6	$296.7	$311.6	$330.3
Non-GAAP Gross Profit ($USD Millions)	$115.0	$105.8	$122.0	$125.1
Non-GAAP Gross Profit Margin (%)	38.8%	35.7%	39.2%	37.9%
Non-GAAP Operating Earnings ($USD Millions)	$60.3	$50.2	$68.9	$66.0
Non-GAAP Operating Margin (%)	20.3%	16.9%	22.1%	20.0%
GAAP Operating Earnings ($USD Millions)	$40.8	$27.6	$51.7	$45.6

Segment annual mix (context):

2013 Revenue: MCE $778mm (64%), SC $437mm (36%) .
2013 Adjusted EBITDA: MCE $246mm (32% margin), SC $106mm (24% margin) .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue ($USD Millions)	Q1 2014	Not provided	$260–$265	Initiated
Gross Profit Margin (%)	Q1 2014	Not provided	34–35%	Initiated
Operating Margin (%)	Q1 2014	Not provided	12–13%	Initiated
Mobile Consumer Sales	Q1 2014	Not provided	Down ~7–9% YoY	Initiated
Specialty Components Sales	Q1 2014	Not provided	Flat to up slightly YoY	Initiated

Drivers: “Seasonally weaker first quarter demand,” “exposure to Nokia and Blackberry,” and “timing of new product launches at a Tier 1 customer” .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q-2 and Q-1)	Current Period (Q4 2013)	Trend
Integrated Audio & Content Growth	Multi-mic adoption and content increases; pipeline building through H2’13	Active design wins with Chinese OEM; complex assemblies integrating antennas/mics; hiring to meet demand	Improving
Supply Chain/Footprint	Announced relocations (UK→Suzhou; Suzhou→Philippines) underway; first tranche Jan’14	Q4 benefited from productivity; larger savings ($40–$50M annualized) targeted in 2–3 years	Improving (execution)
Tariffs/Macro & End-Markets	Oscillator weakness (sequester/telecom) in 2012; stabilization in late 2013	Telecom upticks into Q4/Q1; SC hearing health steady; GDP-like growth outlook	Stabilizing
R&D Execution	Sustained 6–7% of sales; expanding absolute spend with revenue growth	2013 R&D >$50M; 18 product launches; roadmap supports digital mics/integrated audio	Improving
Regional/Customer Mix	Legacy concentration at Nokia/BlackBerry easing; broad Tier-1 coverage	Chinese OEM momentum; Samsung content present, timing effects into H1	Mixed near term, positive medium term

Management Commentary

Strategy and positioning: “Knowles has a track record of profitable growth…well positioned in the mobile consumer space…Specialty Component business is a source of stability and cash…footprint optimization…margin expansion” — Jeffrey Niew .
Integrated solutions: “We’re the only guy…that can come up with this end-to-end solution…plug-and-play…speaker, microphone, module…customers are asking for this complete solution” — Jeffrey Niew .
Q1 outlook rationale: “Seasonally weaker first quarter demand…exposure to Nokia and Blackberry…timing of new product launches at a Tier 1 customer” — John Anderson .
Cost program: “Reduce facilities from 18 to 11 by end of 2016…transfer hearing health production to the Philippines…annualized benefit of $8–$10M…targeting $40–$50M savings” — John Anderson .
Share/competition: “We’re somewhere…~70% share in microphones…customers require two sources” — Jeffrey Niew .

Q&A Highlights

Integrated audio momentum: Large Chinese OEM win with integrated speaker box/antenna/mics; substantial pipeline exceeding current engineering capacity; active hiring to scale .
Mix and margins: Decision to avoid low-end oscillator share to preserve margins; expect telecom stabilization and footprint actions to improve SC economics .
Seasonality and launch timing: Q1 softness due to concentrated fall 2013 launch timing and absence of BB10 channel fill; H2 expected to carry more growth seasonality .
IP defense and differentiation: Strong MEMS microphone patent portfolio; readiness to defend; integrated solution capability viewed as hard-to-replicate moat .
R&D and inorganic options: Continued increase in organic R&D; opportunistic tech acquisitions to deepen integrated audio capabilities .

Estimates Context

Wall Street consensus (S&P Global) for Q4 2013 EPS/revenue/EBITDA was unavailable due to data access limitations; as a result, explicit beat/miss vs consensus cannot be assessed here (Values retrieved from S&P Global unavailable).
Directionally, Q4 delivered YoY revenue growth and strong non-GAAP profitability; near-term estimate revisions likely reflect Q1 guidance (revenue $260–$265M; margins down sequentially), legacy customer headwinds, and integrated audio pipeline build .

Key Takeaways for Investors

Q4 executed well on revenue and operating performance, though margins eased sequentially; monitor margin trajectory as footprint savings and mix benefits progress through 2014–2015 .
Near-term softness in Q1 is largely seasonal and customer-specific; the integrated audio opportunity and Chinese OEM traction are medium-term positives that can reset content and ASPs higher .
The cost program (Philippines/China moves, facility consolidation) is material and should expand margins and free cash flow as savings annualize ($40–$50M target); watch execution milestones and savings conversion .
MCE remains the growth engine (~64% of 2013 sales) with ~32% adj. EBITDA margin; SC provides cash and stability (24% margin) while oscillator mix shifts up-market to protect profitability .
R&D intensity and IP portfolio underpin differentiation (digital mics, integrated audio, intelligent modules); this supports share defense and pricing power against fragmented competitors .
Customer concentration risks are normalizing (Nokia/BlackBerry); diversified Tier-1 exposure and new OEM wins should reduce volatility over time .
Trading lens: Expect Q1 guide-driven near-term pressure but look for updates on integrated audio wins, margin savings cadence, and second-half device cycle timing as stock catalysts .

Note on sources:

Q4 2013 and quarterly metrics, GAAP/non-GAAP reconciliations: Knowles 8-K with Exhibit 99.1 (Supplemental unaudited quarterly financial data) filed Feb 14, 2014 .
Investor presentation and Q1 2014 projections: Knowles 8-K filed Feb 19, 2014 (Exhibit 99.1) .
Management commentary and Q&A: Analyst/Investor Day transcript, Feb 19, 2014 –.

Earnings call transcript specific to Q4 2013 was not available in the filings; Analyst/Investor Day materials (Feb 19, 2014) were used to synthesize management tone and responses –.

Knowles Corp (KN)·Q4 2013 Earnings Summary