Good day, and welcome to the Texas Instruments Capital Management Strategy Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Paul. Please go ahead, sir.
Good morning, and thank you for joining our 2017 Capital Management call. Rafael Lizardi, TI's Chief Financial Officer is with me today. This call is being broadcast live over the web and can be accessed through our website at ti.com/ir. A replay will be available through the web. This call will include forward looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations.
We encourage you to review the notice regarding forward looking statements contained in our most recent earnings release as well as our most recent SEC filings for a more complete description. During today's presentation, we will begin with a quick recap of our capital management strategy and our scorecard for 2016. Then we'll provide a historical summary of our capital allocation as well as deeper insight into specific areas of investment and a view of our free cash flow per share performance. We'll then wrap up with a look at our cash returns. We believe the key points that investors can take away from our discussion today are: 1st, we remain focused on consistent execution of our capital management strategy secondly, our disciplined allocation of R and D is delivering growth from the best markets, industrial and automotive.
We also have great diversity across all of the sectors within these markets. Our 300 millimeter analog manufacturing strategy is a unique advantage and continues to drive free cash flow margin. We remain committed to returning free cash flow to owners. And by the way, our updated dividend model provides a more robust longer term framework for return of free cash flow to owners. These key points are consistent with what we've been doing over the last several years.
As a reminder, we believe TI is in a unique class of companies that can grow, generate and return significant cash. We are focused in the best semiconductor markets, analog and embedded. These are large fragmented markets used across a diverse set of applications and customers. While we have leading positions in both markets, we can continue to expand market share. And obviously, one of the most attractive aspects of these markets is that they are very profitable and can generate significant amounts of cash.
And finally, our strategy is designed around 4 competitive advantages that in combination provide tangible benefits and are difficult to replicate. They are our manufacturing and differentiated technology, the broadest portfolio of analog and embedded products, the reach of our market channels and diverse and long lived positions, which result in a high terminal value. With that, I'll turn it over to Rafael, and he will review our capital management strategy. Rafael?
Thanks, Dave. Good morning. First, I want to remind everyone we have had great consistency with our capital management strategy and that is something that will not change. As the Controller of Texas Instruments over the last four and a half years, I have been an integral part of the design and execution of this strategy. I am a fervent believer that it has worked well and will continue to work well for our company and for our long term shareholders.
As we have said, our capital management objective is to maximize long term growth of free cash flow per share, which I believe is the best metric to judge our financial performance and to drive higher intrinsic value for the owners of the company. We do this through the disciplined allocation of our resources to generate the best returns. As a reminder, our capital management strategy begins with a great business model that focuses on analog and embedded, which as Dave mentioned are the best markets in the semiconductor space. We have designed a business that is capable of growing, generating and returning significant amounts of cash to our shareholders. It comprehends cash availability with an effective tax strategy, a strong balance sheet and investments to strengthen our competitive advantages.
2016 was another year of good progress. For instance, free cash flow margin expanded to 30.5%, consistent with our belief that we can sustain 30% free cash flow margins in good markets. Inventory closed at 126 days within our range. Cash retained in U. S.
Entities closed at about 80%. Cash levels, pensions, our debt are on target and the targets are unchanged. Capital expenditures were on target at about 4% of revenue. And finally, we returned $3,800,000,000 of cash. In summary, our capital management strategy continues to serve us and our owners well.
Free cash flow per share continues to grow steadily, while we continue to invest in our long term competitive advantages. Now I would like to provide additional insight on our capital allocation, and I'll give you updates on several of our important investments. Over the last 10 years, we have allocated about $73,000,000,000 of capital. We think it is helpful to look at all categories to which we allocate capital and to look at our allocations over time to give you some perspective. In this chart, we have summarized 10 years of capital allocation and broken it down into 4 categories: R and D, sales and marketing, CapEx and changes in inventory share repurchases dividends and acquisitions.
The logic behind grouping R and D, sales and marketing CapEx and changes in inventory together is that they are the investments we make to drive organic growth. Combining them together is consistent with our approach of funding strategies, not projects. For simplicity, we have not included changes in net debt, which over this period was $2,600,000,000 There are 2 key points on this slide. First, with $73,000,000,000 of capital allocated over the past 10 years, you can quickly appreciate why capital allocation is a job we take quite seriously and one that has a significant impact on shareholder returns. 2nd, most questions from investors around capital allocation typically focus on the cash used for acquisitions, buybacks or dividends, all of which are important, and we will provide some insight into those investments and returns during today's presentation.
However, like many companies, the largest category of capital that we allocate cash to is R and D, sales and marketing, capital expenditures and inventory. These are the investments we make to generate organic growth. Therefore, we spend significant time ensuring these investments are delivering long term competitiveness and generating returns greater than our cost of capital. We have a clear purpose for these investments. As we already said, R and D, sales and marketing, CapEx and inventory are for organic growth of our business.
Share repurchases are intended to generate the accretive capture of future free cash flow for long term investors. Dividends help us appeal to a broader set of investors. Acquisitions are for inorganic growth. If you drill down to the next level, we also have a very clear focus for each of these investment areas. For R and D, sales and marketing, CapEx and inventory, focus drives significant actions across the company.
We invest in new products like inductive sensing or in new process technologies like FRAM, gallium nitride or new isolation processes with particular focus on the industrial and automotive markets. We invest in capabilities that strengthen our long term competitive advantages. This could be 300 millimeter manufacturing, enhancing ti.com or developing system solutions to help our industrial customers solve their problems and get to market quickly. We invest to expand our product portfolio and adjust our portfolio investments, which will be described later. Finally, we have great focus on execution, which can simply be thought of as getting more output per dollar of input.
This includes continued improvement in product execution or free cash flow generated as a percent of property, plant and equipment plus inventory or sales productivity. Share repurchases are focused on consistent repurchase when the present stock price is below intrinsic value using reasonable growth assumptions. Dividends are focused on sustainability and growth for obvious reasons. And finally, acquisitions are evaluated through 2 primary factors. 1st is strategic match, meaning catalog, analog focus with high exposure to industrial and automotive.
Factoring financial results that generate a return greater than our weighted average cost of capital within about 4 years. With that framework said, let me now examine several of these areas. I will first focus on our broad portfolio of analog and embedded products is an important competitive advantage. This breadth of portfolio brings more customers to ti.com each year than any other competitor's website. But it is also critical that we continually grow and strengthen this portfolio with highly differentiated products that are developed with an eye on the best market opportunities over the next 10 years.
At the highest level, we see growth we see good opportunities in all of our markets, where we believe that industrial and automotive will be the best opportunities over the next 10 years. This is primarily because semiconductor content in industrial and automotive will significantly increase as companies make their equipment smarter, more connected, safer and more efficient. This chart summarizes the direction of our R and D investments across end markets and also provides the revenue breakout for 2013 through 2016. In Industrial and Automotive, we continue to increase investments broadly and we're excited to see the continued progress of revenue growth as this market now comprise more than half of PI's revenue, up from about 42% in 2013. Personal Electronics is an important market and while investment level in down is in total is down, we do invest selectively.
In Communications Equipment, we announced several years ago that we were reducing our embedded investments, but we continue our investment in the analog growth opportunity. Our investments in enterprise systems and other have been flat and at low levels. We will now talk through our manufacturing advantage. On this call 2 years ago, we introduced our plans to have 2 300 millimeter wafer fabs supporting our analog business. When both of these fabs are fully utilized, they will be capable of producing about $8,000,000,000 a year in analog revenue on 300 millimeter.
As a reminder for those who are not familiar with the semiconductor industry, 300 millimeter is a significant competitive advantage and we remain committed to strengthening this advantage for the long term. We made good progress on this plan in 2016, as Demos VI had its 1st year of analog production and we continue to increase factory loadings in RFAB. In 2016, we utilized about 30% of our combined 300 millimeter capacity, which means we have roughly $2,500,000,000 of 300 millimeter analog revenue, up from about $2,200,000,000 in 20.17 in 2015. As a reminder for those not as familiar with the SC industry, a product made on 300 millimeter costs about 40% less than a product built on a 200 millimeter wafer, providing a great competitive advantage. The reason it is an advantage is because 300 millimeter wafer has 2.25 times more area, which in turn means we can get about 2.3 times more chips per wafer.
But the 300 millimeter wafer only costs about 40% more than 200 millimeter. The net result is that a chip built on 300 millimeter wafers costs about 40% less than it built on 200 millimeter. To understand how a 40% less expensive chip impacts gross margin, it is easiest to use an example of a part built on 200 millimeter compared to 300 millimeter. This example shows a theoretical part that sells for $1 with a gross margin of 60%. The chip itself would cost about $0.20 built on 200 millimeter, and this would reduce to $0.12 on 300 millimeter.
In this example, the remaining cost of assembly and test are the same, regardless of the size of the wafer. The net result is that gross margin improves by 8 percentage points. As this simple example illustrates, our 300 millimeter manufacturing capability and the resulting cost structure provide a unique competitive advantage for TI. We will now go through our free cash flow growth and outlook. As we described at the beginning, our overall objective is to maximize long term free cash flow per share.
We believe this is not only the best metric to judge our performance, it is also the one that owners ultimately care about. Over the past 12 years, our free cash flow per share compounded annual growth rate has been 12%. In 2016, free cash flow margin increased 90 basis points to 30.5 percent of revenue. We reduced share count by 1.5 percent and free cash flow per share increased 9%. Going forward, should have 3 drivers to continue the growth of free cash flow per share: top line revenue driven by analog and embedded incremental free cash flow margin increases and additional shurcan reduction depending on the stock price.
Our free cash flow margin also stacks up pretty well against the S and P 500. Over the last 12 months, our free cash flow margin of 30.5% places us in the top 15% of the S and P 500. Generating cash is obviously important, but it is only valued if it is invested wisely, which we've already discussed or it is returned to investors. In comparing our cash returns of dividends and buybacks, we are in the top 10% of the S and P 500 in terms of cash returns as a percentage of revenue. Our objective in buying back shares is the accretive capture of free cash flow for long term investors.
We focus on consistently buying back shares when intrinsic value of the company exceeds its market value. By using realistic discount factors and reasonable growth assumptions to calculate intrinsic stock value, we are aiming to have confidence that investments made in stock buybacks are in fact earning rates of return greater than our cost of capital. While the ultimate assessment of ROI depends on the future cash flow stream, the track record of this approach is encouraging. If you make the very conservative assumption that TI's future free cash flow remains flat for the next 10 years, we will be earning about 10% annualized return on all stock repurchases made to date since 2004. We have reduced shares outstanding 42% since 2004, including the 1.5 reduction in 2016, bringing our share count to fewer than 1,000,000,000 shares or 996,000,000 to be exact.
In fact, we have reduced shares every quarter year on year for 51 consecutive quarters. We ended 2016 with $5,800,000,000 in open authorizations and bought back $2,100,000,000 in 2016, including $475,000,000 in the 4th quarter. We will now move on to dividends. As we commented earlier, our objective with dividends is to appeal to a broader set of investors and our focus is on both growth and sustainability. We have now raised the dividend for 13 consecutive years, including the 32% increase made in 4Q 'sixteen.
We have increased the dividend at a compounded annual growth rate of 23% over the last 5 years, compared with the S and P 500 dividend increase of 8% over the same time frame. To make our decision on dividend increases, we start by looking at our 4 year average trailing free cash flow. This ensures that a single year's results, either good or bad, don't overweight the dividend decision. This approach, combined with our consistent growth of free cash flow, resulted in our dividend in 2016 consuming only 40% of free cash flow, supporting our objective of sustainability and growth of dividends. I will wrap up my prepared remarks with a few summary comments.
TI is in a unique class of companies that can grow, generate and return cash. We are focused on the best parts of the semiconductor business, analog and embedded and the best end markets of industrial and automotive. Our business model is designed around 4 competitive advantages that deliver tangible benefits unique to TI and are difficult to replicate by our competitors: manufacturing and technology, breadth of products, broad reach of our channel and diversity and longevity of products and positions in the market. We focus on growing free cash flow per share. It is the ultimate objective and we believe it leads to the highest growth in shareholder value.
We have a disciplined process and culture to ensure that we are strengthening our competitive advantages and generating the maximum return for the investments we make. Thank you. With that, I'll turn it back to Dave.
Thanks, Rafael. Operator, you can now open up the lines for questions. In order to provide as many of you as possible the opportunity to ask a question, please limit yourself to a single question. After our response, we'll provide you an opportunity for an additional follow-up. Operator?
Thank you. And we'll go first to Ross Seymore with Deutsche Bank.
Hi, guys. Thanks again for doing this call. Rafael, one follow-up on the free cash flow generation side. You mentioned the drivers for free cash flow growth going forward. 1 of the 3 was free cash flow margins increasing.
I know you're slightly above your 30% target rate. Is there a new target that the company has? Or was the word incremental an important part of that statement that you made?
Yes. Thanks for the question, Ross. First, let me highlight the premise in your statement. That is correct. Margins is going to be one of the key drivers for increasing free cash flow per share.
The other 2 are revenue growth. That's the number one driver as we continue to grow our core businesses of analog and embedded. And the other one, Piyvi mentioned, is reducing the share count as we continue to buy back shares to reduce the share count of the company. On your specific question, there's always noise in any one quarter. We're currently at 30%.
We still have plenty of work to do before we feel that is sustainable. So at this point, our focus is to grow free cash flow, particularly on a per share basis because we think ultimately that's what drives higher value to the long term owners of the company.
Yes. And I'll just add, Ross, that when you look at the drivers of that margin and of free cash flow And you look at the manufacturing footprint we've got, as we've just said, we've only used about 30% of our 300 millimeter capacity. So as revenue grows, if we built that even on 200 millimeter, that would help margins expand. But because of the competitive advantage we have with the lower cost, of course, that will be even more accretive. You have a follow-up?
Yes. Just quickly, it's also a
margin related one, but switching over to the R and D side where you guys gave the bucket is the organic investment category. R and D increase or spending has increased the last couple of quarters after a number of years of decreasing. Can you talk a little bit about how you guys measure and strategically put in place those increased dollars as it looks like a little bit of a change in strategy over what we've seen in the last 3 years or so?
Ross, at the end of the day, we're allocators of capital. That's one of the most important things we do. And in this case, on R and D as well as sales and marketing, for example, and CapEx, it's all about organic growth of the business. So we're focusing on the best opportunities. So it could be new products and technologies.
We mentioned Gallium Nitride, for example, and Isolation Technologies. It's also about strengthening the competitive advantages. So demand creation is another one where we're allocating more capital to. We're also improving our execution. And at the end of the day, all of that is just about making TI a stronger company, strengthening our competitive advantages, so we can generate more free cash flow and then return all of that free cash flow to the owners of the company.
Yes. And I'll add too Ross. I think as we focused on industrial and automotive markets, Our product portfolio continues to last longer just by the nature of those markets. So there's actual efforts in place to take existing products and repurpose them into other sectors and sometimes even other markets. And that helps with the sustainability of that portfolio over time.
So, it is, as Rafael saying, going into new technologies and new areas that even some over the horizon type investments, but even more near term investments of repurposing those products.
The other comment I'll add is just in the big scheme of things, OpEx as a percent of revenue, our guidance is 20% to 30%. In Good Times, we can be on the lower end of that. In fact, in both 2015 and 2016, in both years, we were at 23%. So this has just been an allocation of capital, of resources within the company to drive the best results to continue driving higher growth of free cash flow.
Okay. Thank you, Ross. And next caller, please.
And next we'll go to Stacy Rasgon with Bernstein Research.
Hi, guys. Thanks for taking my questions. I wanted to ask first about 300 millimeter capacity. So I was actually a little surprised to see only about $300,000,000 in incremental 300 millimeter revenue in 2016, which suggests that of the gross margin upside that you have seen, very little of it was actually as a result of the mix towards 300 millimeter. I was wondering if you could give us a little more color on how we should think about how that mix shift from 200 to 300 should progress going forward in terms of both, I guess, new products ramping in as well as potentially volume that's currently on 200, maybe ramping down while complementary products are ramping up on 300?
Sure. Yes, I'll start and if Rafael wants to add something, please jump in. But I think Stacy, if you look at how we have been ramping the 300 millimeter capacity, I think this year is consistent with what we've seen in the past. We qualified our fab back in 2000 at the end of 2010. So 2011 was the 1st full year of production.
And since that time, we've put in about 2,500,000,000 dollars of revenue across now RFAB and DMOS 6. So I think that that is being driven primarily by new products and new introductions. And I think as you look forward to our analog growth, you can assume that the majority of that will be on 300 millimeter. We still have capacity available on 200 millimeter. As I talked about earlier, we've taken and continue to take some existing products and repurpose them, so they still get designed into new applications.
So we'll we could still continue to see those assets be very well utilized as well in the footprint.
Yes. I would only add that this is a marathon, not a sprint. So we're looking at the long term and how 300 millimeter will benefit the owners of the company over the long haul. With the example we gave, you can do the math on the follow through and see if we as we continue to grow, in this case, analog, and that growth happens on 300 millimeter, how the incremental benefits will fall right through to the free cash flow bottom line, and we can then continue increasing those over time. And then as always, returning all of that free cash flow to the owners of the company.
Stacy, do you have a follow-up on?
I do. Thank you. To follow-up on those thoughts around organic growth. So I think this is the first one of these calls I've heard in a while where you're putting as much of an emphasis on discussing what you're doing to drive organic growth. And obviously, we've seen the increases in R and D and everything to go along with it.
Can you talk a little bit about how you perceive your organic growth profile going forward? I guess given what seems to maybe be at least an I don't know if it's a new focus on it, but at least a renewed focus on talking about it. Where do you think you can grow, I guess, relative to the analog industry and relative to the market given your product and end market shift and focus at this point?
Yes. So I'll start again, Stacy. I think, hopefully it's not a new focus on growth. I can tell you there's been a tremendous amount of focus on growth here inside of the company. But I think, first of all, I'd start with how you think the overall economy is going to do and because that will obviously drive the opportunity that we see inside of the market.
So we've been in a fairly low growth environment. But if you look inside of our analog and embedded businesses over the last 10 years, they've been growing at about 8% compounded annual growth rate in that neighborhood. So, we've seen consistent growth with that. That hasn't translated into top line growth over that period as well as we shifted our investments to analog and embedded and specifically into automotive and industrial. So I would say that we believe that analog and embedded will grow about the rates of the semiconductor market overall.
And in this low growth environment, I think if you look over a longer period of time, I think most industry analysts would believe the semiconductor market is going to grow somewhere in the low single digits to mid single digits. So if we can continue to gain share, we'd hope to be able to have something and add a few points of growth on top of that. And lastly, I'll just make the comments that we have been shifting our investments for some time over into automotive and industrial markets because we believe that that's really where the superior growth opportunities will come from. And that's just simply due to the increasing semiconductor comment that we've seen there. So you've seen some results of that.
Most recently, automotive grew 23% last year. But I'd just point out that that followed several strong years of growth there, meaning you can already see some evidence of a consistent track record. So that's kind of how we think about growth. And with that, we'll go to the next caller, please.
Next we'll go to Amit Daryanani with RBC Capital Markets.
Amit?
2017, because I think lower depreciation was at least 100 basis points gross margin benefit for you guys in 2016. So just trying to think how does that work in 2017? And is there a CapEx minus D and A tailwind in 2017 as well for free cash flow?
Amit, unfortunately, the first part of your question was cut off. So could you just repeat that for us, please?
Yes, absolutely. I was trying to think how do you think depreciation will track to 2017? Because I think lower depreciation was about 100 basis point tailwind in 2016 for your model. So just trying to think how does that work out in 2017 for you guys?
Yes. High level, you've seen how it has declined over the last several years. We expect another step down in 2017. You can just look at 4Q 'sixteen and almost do the math based on that. But it's just going to be a smaller decline than it was before.
But the key point is depreciation is a noncash event. So we really don't obsess over that. We focus more on free cash flow. And that's the key how we have grown free cash flow year on year and what we're doing to continue growing that free cash flow and then returning it to the owners of the company. Do you have a follow on Amit?
I do. And then I guess just to follow-up, could you talk about the potential for share gains as you go forward, especially given the uptick in R and D that you guys are talking about in markets like auto industrial, but I would almost imagine companies would rather partner with TI versus smaller analog companies. So should we think that share gains could possibly accelerate versus the 30 basis points to 40 basis points that you have historically talked about?
Yes. I think, one of the great qualities of the market opportunities that we have in analog and embedded is the diversity of the markets and its fragmented nature. So it's really hard to consistently gain share and we've been able to do that. So I think if you kind of look at that just the sustainability of what gives us confidence of sustainability to be able to do that, I'd just kind of highlight a few things that we think about when we think about sustainable growth. The first is, are you getting that growth across diverse set of markets and sectors as well as diversity across customers.
Do you have proof that you're able to gain share and the results translate beyond just 1 quarter or 1 year? We're always very cautious not to get too specific on either one of those because we think it they need to show up over a longer period of time. And then in particular markets like automotive and industrial, is there a reasonable logic that that market is expanding? And we think that there is content gains that are going there. It's very obvious to see in the automotive market.
And we believe there's evidence, clear evidence inside of products solve customers' problems uniquely as part of that differentiation? And then lastly, do you have a healthy pipeline of design wins that will continue to fuel that growth? So I think when we look at automotive, when we look at industrial, we feel very confident that we're actually seeing those drivers across the sustainability. So I'd say that, that would translate into us having high confidence that we can continue to gain share and versus looking for some type of inflection point of share gain.
Amit, let me go back to your first question. I want to stress another point is rather I would encourage you rather than looking at depreciation, look at CapEx because that is what the real cash going out the door. And in our case, our target is 4% of revenue. That's what we've done for the last number of years. And that's really what determines how much cash is going out the door.
And then the difference is what's available to return to the owners of the company. So that's how we think of our allocation of capital.
Great. Thank you, Amit, for those questions. We'll go to the next caller, please.
And next, we'll go to Vivek Arya with Bank of America Merrill Lynch.
Thank you for taking my question. First one, what is the right leverage for your balance sheet in this environment? I mean, I can understand being a little cautious if the baseline is that we might be going into a downturn, but I assume that is not the baseline. So why have such an under levered balance sheet when every other part of your business is so well optimized?
Well, so let me take that one. I'll start by saying that in this particular question, reasonable people have different views of this, and I respect that. I'll tell you our view. We think of debt as a strategic tool. You can look at what happened in 2011 with the national acquisition.
We didn't have debt on the balance sheet, and we took on debt in order to make that acquisition happen. And then we've been paying it down over time. So now the balance sheet is opening up for potential strategic options in the future. Now I'll also remind you, we still have debt on the balance sheet. We have $3,600,000,000 which in my book is significant.
So that's how we think about debt. Yes.
Thanks, Dave. So as my follow-up, you mentioned autos and Industry are rather a little bit over half of your business, which is an improvement versus the last few years. At several of your peer group, it's a much higher percentage of sales. And I appreciate that you guys have been doing extremely well in those markets and gaining share. But is there a target mix of autos and industrial?
You think can you get there organically? Or do you think now is the time to look at inorganic options perhaps more than you might have looked at them in the last few years?
Yes, I'll start with that. And quite simply, Vivek, we don't look at trying to find the optimal percentage or an optimal mix. We steer investments where we see the opportunity. We see the opportunity obviously incrementally in industrial and automotive. That said, we're still making investments in personal electronics.
And we'll have personal electronics products shipped. It's probably $2,500,000,000 of them shipped every year, and we'll have that for decades ahead. So we'll find good opportunities inside of there. We'll continue to make investments and same with the other markets that we have. But I think what we try to do is describe incrementally where we see the best opportunities.
Yes. I'll just add to that. You alluded to
M and A, so
let me just comment on that. Our approach to M and A is not changing, and it needs to have 2 components. 1st, the strategic fit. So we look for analog, catalog type of companies. We evaluate those from time to time.
Ideally, focus on industrial and automotive because we think those are the best markets. And then companies with differentiated products that then have a high GBM and high free cash flow. So that's the first part. But then the second part, just as important, the numbers have to work. So over time, they have to be accretive to our cost of capital.
Great. Thank you, Vivek. And we'll go to the next caller, please.
And next we'll go to Tore Svanberg with Stifel.
Yes. Thank you for hosting this call. The first question is on total capacity. I think in the past you've talked about $18,000,000,000 worth of capacity on sort of a brick and mortar perspective. And then you can get to maybe $22,000,000 by adding some CapEx.
Could you maybe update us on those numbers? And what type of CapEx would you need in order to go from 18 to 22?
Yes, Tore, those total numbers haven't changed significantly. We think that we can achieve those levels of production inside of the 4% when you look at the $18,000,000,000 footprint. We essentially have the vast majority of that equipment. There will be places that we need to augment certain flows with certain types of equipment, but that is a fairly small amount and certainly fits inside of that 4%. A large portion of that 4% goes to assembly test and the back end manufacturing overall.
So I think our strategy kind of going back to our 4 competitive advantages and thinking of strengthening our manufacturing and technology, We've been in the market probably every quarter since 2,009 buying some pieces of equipment. And I'd say that we continue to be open to and evaluating opportunities if it presents itself to bring on a larger amount of capacity, if those things present themselves. So it really is about strengthening all four competitive advantages and in this case strengthening the manufacturing and technology. Do you have a follow-up?
Yes. Thanks for that. My follow-up is on M and A. So obviously, it's got 2 elements. It has to be strategic, but it also has the financials have to make sense.
How do you balance those 2? Because obviously, there could be a really nice strategic asset out there, but sometimes the math may not work right away. So how do you balance those 2? Or do you basically just simply wait and you're patient to find the right time from a financial return perspective?
So that latter statement resonates with me. To me, those two factors, there's an end with those, not an or. So they both have to work out. So no matter how good one of them is, if the other one doesn't work, then the whole thing doesn't work.
Yes. And I think it's grounded in a belief that you don't have to be bigger to be better. If you look at some of the M and A that's going on, you've got people trying to move into different markets, you've got people trying to build scale, other reasons that they're moving in those directions. We really have all those pieces in place. So being bigger isn't better.
It really comes down to making sure that we've got and make the right financial decisions. With that, I think we have time for one more caller. Operator?
And we'll go to Ambrish Srivastava with BMO.
Can you hear me? We can hear you now. Thank you.
Okay. Sorry, I'm at the airport. So I apologize for the background noise. Dave, a lot of good questions have been asked. I just had one on market share.
And we've been I think most of us on the call have been using WSTS data as of you for a while. I'm just a little bit confused, actually scratching my head. So just really wanted your perspective. I don't think there's a right answer. Analog for the first time, you guys didn't grow.
Actually, you've been taking share in analog per WSTS for a very long time. So the first time you were below what the industry grew. And then if I look at the embedded, all of a sudden you're so good that you took, per our calculation, 300 to 400 bps of market share. So I'm just struggling with how to reconcile that. Thank you.
Yes. Ambrish, what I would encourage you to do is to look at our performance, look at our peers' performance to what's publicly reported. I think when you look at that information, we believe that we've performed very well in both markets. And so that's what we really look at to measure WSTS will be one input into it, but we'll pay most attention to what's publicly reported. Do you have a follow on, Ambrish?
No, that was it, Dave. Thank you.
Okay. I'll turn it over to Rafael to make some concluding remarks.
Yes. Thanks, Dave. Yes, I just want to thank all of you for taking the time to go through our capital management strategy. To wrap up, I just want to emphasize a few points. We remain focused on consistent execution of this strategy.
Our disciplined allocation of R and D is delivering growth from the best markets, industrial and automotive. We have great diversity across all sectors within these markets. Our 300 millimeter manufacturer analog manufacturing strategy is unique. It's a unique advantage, and it continues to drive our free cash flow margin. And finally, we remain committed and I am committed to returning all free cash flow to the owners of the company.
Thanks, Dave. Thank you all for joining us.
A replay of this call will be available on our website as well as the slides that we used in this call. Additionally, for those of you who have not joined our capital management calls in the past, we'll have a comprehensive summary presentation on our website, which also cover topics discussed in our previous year's calls. Good day.
And that will conclude today's conference call. Thank you everyone for your participation. You may now disconnect.