We've got plenty of room up front. Ron just walked up and said, "Go, we're late." We'll get back on schedule. I want to welcome everybody for joining us here this afternoon. We really are pleased that we've got a chance between Kevin March, our CFO, and myself to really provide an update on three points. That is, first, we want to give you some insight into the strategy, the focusing you've heard us talk about relative to Analog and Embedded Processing. Also, that'll lead to a little bit of insight into things that we still have work to do and areas we've got to focus.
Also, between Kevin and I, we'll try to give you a sense of just how we're thinking about growth, how we're thinking about margins, as well as how that translates through to cash flow, and obviously, it can then lead into return of cash to shareholders. I will tell you, and I'll show you some things as we go through the next about 45 minutes, it is a really exciting time to be inside of TI. If you've followed us for the past five years, you've watched us go through transitions. We said they were going to take some time to get through, and the great news, as we're sitting here partway through 2012, is those transitions are really well on their way to being complete, specifically the baseband ramp down.
The other thing that I just wanted to remind everybody is, this year, Ron Slaymaker and the IR team have really tried to design a different approach for investors to try to get a sense both at the breadth and depth of TI. We're holding today's event. Kevin March and I will be going through today's material. I believe somewhere in late September, we'll have Greg Delagi and Brian Crutcher, I think, back up here in New York to really give you a deeper opportunity, one, to meet Greg and Brian firsthand, but also to understand the Embedded Processing as well as the OMAP and connectivity businesses. Then we'll be hosting, very similar to what we did last year in October, out at the National site or what we've now called the Silicon Valley Analog site in Santa Clara.
Gregg Lowe, who runs our Analog business, will be out there, and he'll have his four major division leads, really giving you a chance to understand with more depth what's happening inside the Analog business. Those will be some of the main events we have this year to give investors some insight into TI, and maybe just as importantly, into the leaders that you're counting on. As I get things started, talking about where we are strategically, I really go back to, in some ways, philosophy of how we run the company, and this may fall into the category of lessons we've learned the hard way. The fact is, you work just as hard in bad businesses that you do working in good businesses.
The biggest difference is that the rewards and the benefits that come out of focusing your time and effort in good businesses really pay. If you take a look at the past 15 years or 13 years, if you have followed us as a company, you can probably recall your most memorable event along that timeline. As a company, we were coming out of the '90s. We had focused down to semiconductors, and many people may recall the sale of memory back in 1998. It was a very simple thought and simple decision, but a very hard thing to do, and that is that the ability to differentiate, the ability to grow, and ability to generate cash was never going to come out of the memory business.
You saw some really what turned out to be fundamental acquisitions in the very late '90s, early 2000, of Unitrode and Burr-Brown. You saw us really spend some time thinking about our capital structure and how were we going to become more capital efficient or a better returner on capital. You saw decisions like the transition to hybrid CMOS manufacturing, it really resulted, by 2007, in us ending leading-edge digital CMOS development. Simple reason, you can get advanced digital CMOS from many suppliers. The ability to differentiate with that and generate a return is low, therefore, invest that money in a wiser way. We had a great business. Our old DSP business, which introduced us to Nokia, which grew in and became a very large driver of growth and earnings with the baseband business.
It did great things for us from the middle '90s to the middle-2000 decade. In 2006 and 2007, when we looked at that business and we looked out over the next five years, we said it wasn't going to end well. We made decisions at that time that the best way to maximize cash, the best way to maximize cash flow, was to wind down the baseband business. In parallel with that, we saw an opportunity to accelerate our investments in analog and embedded processing, and that is literally what we did. We moved resources. You turned around and saw us figure out in 2009, when the world was scared that the sun was never going to come up again, we saw an opportunity to be the first company to manufacture analog integrated circuits on 300-millimeter wafers, which has great benefits.
Kevin will talk about that a little later on. Continuing through 2009 and 2010, world was scared, capacity was available at very low cost, and we were able to pick up some significant wafer fab capacity at deeply discounted levels. Obviously, it wrapped up just a year ago with the announcement of the National acquisition, which further strengthened our analog position, and I'll spend a few minutes talking about that today. Now, the net result of that 13-year period of decisions where you can't be afraid to move your investment to the best opportunities or into the best markets, I'll spend just a minute talking about some of the things that have resulted. You can see earnings per share during that 13-year period grew compound annual growth rate of 18%, and it was all about products, manufacturing strategy, capital intensity, the things that we've just been through.
You take a look at gross profit margin. This is an important element because obviously, this is what generates the margin or the ability to generate a return. You look at our gross margin profile from 1994 to 2012. What you really see are two things. You see across the bottom of this curve, increasing or higher lows. You see at the top line, you see incrementally higher highs. The thing that matters most is that obviously, that has a big impact on average margins continuing to rise. The fact is, cash is generated by average margins, not just peak margins. We still think, and Kevin's going to talk through some things, that we've got opportunities with peak margins. We've got advantages like improving product portfolios. We've got advantages like 300-millimeter manufacturing that's still very early in its ramp.
We've got advantages like diversity of our customer portfolio that continue to come into place. We think that gives opportunity to continue potentially getting some incremental gains on that top line. We're also careful about not saying it will happen nor that it won't. You take a look at gross margins, they matter, but in the long term, revenue growth is going to be the long-term driver of earnings per share for us. Capital expenditures, in some ways, has probably been the most significant change that you've seen out of the TI P&L over 15 years. This was back in the, really leading the last decade of 1999 and 2000. Capital equipment spending for us was sitting in the upper teens, okay? 15%-20%, and you can see actually in some strong years, it got above 20%. You can take a look at that trend line.
Capital expenditures down now literally into the single digits. The thing that I get excited about on this slide is I could take any semiconductor company in the world and I could get the CapEx lowered. The thing that we've been able to do is not just get the capital intensity lowered, but we've actually raised TI's competitive advantages while we've done that. We've got lower capital intensity, yet we're the only company with 300-millimeter analog wafer fab manufacturing. We have a significant footprint to be able to grow. We have process technology that's growing stronger in the analog circuit area. Less capital intensity, but higher competitive advantages. It's the combination that we were really after as we were pushing this. Revenue, back from 1998 through 2011.
If you take a look at that line or the highlighted line across the top of that, I get to a very simple summary of that is modest revenue growth. The reason I say it that way is the revenues that are shown on this slide are as reported. If you go back to that 1998 column, there's nine months or nine and a half months of memory operation in those numbers. There's sensors and controls and different businesses. If you had owned TI stock throughout this time, and you looked at the end of each of those calendar years of what the revenue was for the company at the close of that year, that's where we were. You can also look between 2006 and 2011, that TI's total revenue is actually down slightly.
I will also remind people during that time frame, we had in 2006, a baseband business that was in excess of 20%, a little over $3.1 billion of revenue sitting on baseband during that year. As people know, coming out of 2011, that number was down, I think, about $1 billion as a first quarter. It was down to 3% of revs. You really have to think about that overall trend that I talked about of continuing to move a higher percentage of our revenue into quality markets and quality growth opportunities, because I think that's how we'll generate growth and returns. This now takes that point and starts to get very specific.
I see a number of the faces in the room today that I forget if it was an analyst meeting in 2007 or 2008 when we were starting to talk about this transition, and people really sitting back saying, "My gosh, this baseband thing is going to take five years for it to be unwound." The answer is, it's taking about five years for us to get that thing unwound. It's why, as we enter 2012, it's one of the four things that we're going to talk about during Kevin's and my presentations, that I feel really good about. Back in 2006, Analog, Embedded Processing, and then think of the OMAP and connectivity line as the wireless segment without baseband. Easiest way to go through that math.
52% of Texas Instruments revenues were in those areas that had the ability to grow and had the ability to generate high-quality returns for the long term. I show that data for 2011 fiscal year, you can see that the combination of Analog, Embedded, and OMAP and connectivity, already up to 72% of TI's revenue. The reason we feel as good as we do standing here today is that's the first quarter of 2012 that we got announced just 8, 10 days ago, and Analog plus Embedded, plus OMAP and connectivity, up to 78% of TI's revenue. Analog, I think, over 50% now at 54%. In that journey of continuing to move TI's revenue to better opportunities and better spaces that can grow and earn returns over time, we feel very good about where we are at this point.
Baseband's at 3% of revenues, and it should wind down to zero by first quarter of 2013 like we've been saying for a while, or essentially to zero. The other segment is going to be high profitability, reasonably low growth. I think it can be a strong contributor on the margin side during that time. One of the four that I felt good about, product portfolio, 80% of Texas Instruments can grow and grow in great market opportunity spaces. Second thing that feels great about where we sit today, as I commented, we enjoyed a great business with Nokia. For over a decade, Nokia was our number one customer. Nokia was significantly over 20% of our revenue. You can actually see, this is a plot of TI's top 10 customers back in 2009, and that same data for first quarter of 2012.
The thing that is the greatest change is over there on column one. You no longer have a single large or single dependency on a customer greater than 20% of revenue. In fact, I think it's between 5% and 6% was our largest customer in the first quarter of 2012. It also turns out that our number 1 customer in the first quarter of 2012 wasn't Nokia for the first time in over a decade. Where we're excited, where I get excited because of the amount of time I travel, the vision of us becoming an Analog and Embedded Processing company, this is the long tail of customers that you want to see. It says you're not dependent on any one customer, which, as this room knows, it's a lot of fun on the way up. It's not as much fun on the way down.
What you now have is a business that's not dependent on any one customer, one end equipment, but it's now diversified in terms of its dependencies across its customer base, across regions, and across different end equipment markets. I think this has great implications for what we can do from a growth and a return point of view. Now, I want to take a minute. I just went through two great reasons why we feel good about where we are. Product portfolio, best opportunities it can grow, customer position, not dependent on any single customer at the top of the stack. If people do not follow Texas Instruments closely, I want to go through why Analog and Embedded Processing, we really believe are the two best opportunities in the semiconductor business.
Why are we excited that we have such a high concentration of our revenue moving into these two spaces? To begin with, these are large markets. Analog and Embedded Processing chips are really very specialized semiconductors. Typically, the average consumer never hears about them, and I don't consider that at all a bad thing. They're somewhat out of sight, somewhat out of mind. But if you look inside of anything electronic, anything electronic is going to have at least one Analog chip, and I'll take the bet that usually more than 70% of the equipment in this world that's electronic needs some type of Embedded Processor. What that translates to is that Texas Instruments has an opportunity to sell something to literally every customer that buys chips in the world. It's a statement that very, very few chip companies around the globe can make.
Anybody that's watched 30, pushing 40 years of the semiconductor industry can go off and look at the profit and loss or the margin capability of Analog and Embedded Processing, and it's slightly different reasons that they can earn that margin, but very time-proven. Good strategies well run can generate good P&L's when you're in the Analog and Embedded Processing space. The second thing is that they're time-proven generators of cash. Number 1 reason is they don't manufacture, or they're not manufactured on bleeding edge advanced digital CMOS equipment. As a result, the capital intensity is significantly lower. When we think about capital assets that we put in our manufacturing sites, you literally think in decades, not two-year or three-year time constants for how long that equipment could be in use or in service.
Kevin will give a sense of what we think that's going to do for us. Fragmented competition. This is a really important part about how the market operates, why it's a good margin market, as well as why we think it's going to continue to be. If you look in the analog business, it actually takes 31 different companies to get to 80% of the revenue. That's a highly fragmented market. The embedded processing business, it actually takes 10 different companies to get to 80% of the revenue. Lastly, on why these end up as the two best spaces and the two best spaces for Texas Instruments is even though we've got very strong positions, we're number one in analog, sitting at, I think, 15% share in 2011, number two in embedded processing, sitting a little over 12% share.
Strong positions, yet significant room to still grow and gain share. That's a great combination to have. We haven't tapped out or anywhere near tapped out what the growth potential is for TI in the analog and the embedded processing space. Let me shift to, okay, it's great that those are high-quality opportunities, and it does matter. You've got to be putting the company in the best markets to have an opportunity to earn. What I want to talk through are the three simple reasons or the three simple competitive advantages that we have that no semiconductor company has relative to attacking these two marketplaces, or what really differentiates us, and maybe more directly, why are we going to be able to continue growing faster than the rest of the industry in these markets? The first thing, our breadth and depth of our portfolio.
Best way to think about that is I talked about a fragmented set of analog competitors. The better word instead of fragmented might be specialized. One of our analog competitors might be really good in data converters, but they don't have any power, or they're really good in power management, but they're not in interface or in clocks, for example. Because we have all the major categories of analog, because we have a complete family from low-end microcontrollers to very high-performance multi-core DSPs, we end up with an opportunity when we approach a customer to put more chips on that customer's board. It is a very simple statement.
Open up your tablet, open up your car, and look at the electronics inside of that, open up a motor controller, and we have an opportunity to put more chips on those boards when we visit our customer compared to any of our competitors. Because we have that breadth and depth or that opportunity to put more chips on every board, we in turn can afford and have taken advantage of that and have the largest sales force distributed across the world, three to four times the nearest competitor. That lets us have direct relationships with the most important customers around the globe. The advantage of that is our fragmented competitors typically count on a distribution-based sales model, which they really aren't that concerned about which chip ends up on the board as long as it's one that distributor has.
With a TI sales force, we end up with great control of that relationship. We've invested heavily in China, we've invested heavily in India because those are going to be rapidly growing markets. One of the great anecdotes on this, when we were going through the National transition and the National discussions, and we were discussing sales scale advantage. We had more salespeople in China than National had worldwide. When we talked about unleashing their portfolio through a much larger force, that was when eyes came open when you're inside National and taking a look at what leverage we could bring. That's two of the main competitive advantage. Third one is manufacturing and technology. Some ways, it's good old-fashioned brute force scale. We can afford to do things because of our size that our smaller or more fragmented or more specialized competitors literally cannot do.
It gets talked about a lot. I know we've had a number of investors visit the Renner fab or the RFAB wafer fab down in Dallas. I think people's reaction when they enter that building is first sheer shock at the size, and then they're usually pretty amazed that there's not that many people working in that clean room in terms of the degree of automation. When our National team visited RFAB for the first time, they walked away and said, "We had no chance of competing against this." It was that type of reaction from the engineering management team that saw it. We also have the ability, and this matters, that we continue to invest in differentiated process technology.
You look inside of analog semiconductors, we invest a lot of R&D to make them go faster, be quieter, generate lower power, and that is something that is getting harder for even our largest analog competitors to do because they're tending to go outsourced at their most advanced nodes. We've got the ability to go to our customers with the lineup of fab acquisitions that I talked about, and our customers have a very simple response. They don't believe they can forecast that well. They want to be with a supplier that can react and surge up when the marketplace is going to surge up. To put a frame around the impact of why something like the 300-millimeter analog wafer fab, I believe will never be done at one of our specialized analog competitors.
You can take a couple of our really well-run, good analog competitors, somebody like an Analog Devices, someone like a Maxim, they're two and a half, little under $3 billion a year. You could fit either of those companies in one half of RFAB. What matters on that statement is they just aren't ever going to be able to imagine building a 300-millimeter wafer fab and get the cost benefits out of it because their companies just aren't of that size or of that scale. That's the type of advantage that we can get. This is the third area. Talked about being excited about four things. Product position. We've got 80% of the company can grow. We've got a great customer profile in terms of no concentration at the top, and we have strong competitive advantages that I actually believe are getting stronger every day.
These are not single decisive blows that determine every socket that day. This is a cumulative impact of year after year, we can make progress on this. Let me switch over, and we'll cover the fourth one in a minute, where the advantage is. I want to go through performance and talk about what we've achieved in our major business units and some of the work we still have. This is a slide five years analog market share performance. For those in the audience, we've tried to be very careful. We've broken National or Silicon Valley Analog out in 2011 because it basically had one quarter of contribution in the 2011 year. You can see five years of market share gains by the organic TI analog business.
This is a slide that I think a lot of companies would probably put up in front of an investor community and/or their employees and say, "Doesn't that feel good?" I will tell you, and you can come in and meet the people inside of TI, that's not the discussion we have internally. The goals that we've got inside of TI, and we've talked about these in the past, are to grow significantly faster than the marketplace. We have not performed at the level we want to perform, even during that five-year period. We're busy right now and very focused inside our analog operation, and our metrics and what we drive these businesses on are actually very simple.
The expectation on every analog business unit manager is that you're growing your revenue significantly faster than the market, and you're growing your operating margin significantly faster than the revenue. It's two really simple metrics that are just really hard to do, but that's where we've got the attention. What do they have to do to get better at that in the businesses that aren't growing as fast as we want? We talk about getting back to basics, great roadmaps, great products, designing in your current and new products, and executing well. If you get inside or if you get the chance throughout the year to meet any of our analog business managers when they're out at any of the conferences, you could probably have this discussion, and they'll recognize it pretty closely. That's where the attention is to drive greater growth.
The National step, it was literally, I think, April 4th, just a little over a year ago, that we announced the acquisition of National. We had talked when I got out and met with a lot of investors, that we had really a very simple thesis about what the National acquisition represented. First, we had studied it, and we felt it was an absolutely first-class analog portfolio, 12,000 parts, terrific analog design engineers that had underperformed because of what turned out to be poor or uncompetitive commercial decisions, not for lack of the quality of the portfolio, but for commercial decisions that were being made. We talked about the fact of taking those 12,000 parts and those great designers, taking that capability through our sales force, getting the amplification of that sales force, and thus accelerating revenue.
That we felt we could probably pay back or generate our cost to capital on an ROIC basis in three to four years. As we sit here today, people that had a chance to visit the Silicon Valley Analog back in October, November, I think you had a chance to start to feel the energy, see some of those signs. The progress with customers is really strong. That's about design wins. That's about backlog. That's about ramps that people are getting ready to make for later this year. We continue to see great progress in terms of the thesis that we had, that it's a great portfolio, amplify it through our sales force. It's going to let us accelerate that revenue growth. It looks really positive in terms of where we are today on that.
I've included on here a breakdown, and the way I tend to think of it is the analog market is really made up of a lot of really good stuff, okay? If you get in the analog market, you've got an opportunity to make good money. You can see what happens with the combination of TI and National. We're up, I think it's 17.5%, rounds to 18% share. The reason you saw 15% back a couple of slides ago, that was one quarter's worth of revenue from the fourth quarter of 2011. If you look at that 18%, we're 80% larger than the nearest competitor when you go down that list. Starting to get significant advantage in terms of multiple of size. We've got the ability to do a lot of things through the sales force that we've talked about, size of the sales force.
Cross-selling has really been a powerful thing that we've discovered through this. We've been very pleased with that. As good as the analog business is, and as good as we like this slide, this one even gets more exciting to us. Catalog analog is a subset of that overall analog market. I think somewhere probably 40% of that TAM, $17 billion. The thing that I think most people missed and didn't think of when we talked about adding National to the TI portfolio, we were going from having TI was number 1 in catalog analog at over 20%, but we actually added the number 3 catalog analog company. Today, we've now got 28% of the catalog analog business, which is, think of it as industrial, distribution-based. For your world, you might translate that into higher margin. It is a great space to grow.
It is really the great part of the analog marketplace, we end up with a significant advantage when you look at the combination of those two slices. Let me shift to embedded processing. Talk very quickly about where we are in that business, and if this ends up sounding very similar to the comments that I made on the analog slide, it's because the situation is actually very similar. You can see that we've gained market share over the past five years, and we feel in some ways you could say, "Gee, that's great." On the other hand, this is identical to the analog comment. Our goals internally are higher than this. What are the things that we're working on? Again, it's going to sound very basic. Expectation on the businesses, grow substantially faster than the market, grow your operating margin faster than your revenue.
How do you do it? You focus on the basics. Basics are great compelling roadmaps, great parts, great focus on design-ins, and great execution. The product portfolio inside of embedded processing is something we're very excited about. Historically, this has been a very DSP-centric business. Ron talked, I think, even on the first quarter call, things like base station cellular equipment that make the networks or the plumbing for the mobile broadband world work. We've been a big player in that, but we're really excited about some of the trends to small cell. You can look at things like the microcontroller market. Turns out the microcontroller market is probably 80%, maybe more, of this marketplace. We've been growing from a very small competitor to one that I think is really starting to get attention.
Recently just announced the new family called the Wolverine product, one half the power of the nearest competitor when it comes to a microcontroller. The R&D is getting poured on, great products are coming out, and we feel very good about the trajectory that we can continue to drive on this. Wireless. Spend a minute on it because I think it's the subject of more than a few questions when Ron or Dave or the guys get on a call. If you look at the first quarter of 2012, and it was on the data we showed just a while ago, the wireless segment as reported, about 12% of TI's revenue. 3% of that was baseband, it's going down to zero. 9% of TI's revs are at OMAP and connectivity.
As I commented, it is the source of a lot of questions where people worry, gosh, looks like a highly competitive market. Are you ever going to be able to make money on it long term? You heard several of you that had got a chance to go to Barcelona and heard Greg Delagi talk about a strategy where we're broadening the marketplace in terms of where we take OMAP and where we take connectivity. We'll even hear the comments, "Yeah, we like that direction, but how long will it take to get there?" Just a lot of nervousness or anxiety on the thing. Let me be reasonably direct about three points. First, the philosophy that I started this entire presentation with, which is if a business isn't going to be a better business and contribute to growth and generate return, we will disposition the business at TI.
We don't fall in love with them. We're passionate about them. If they don't make sense over the long term, we'll do something different. This is no exception. The people inside of OMAP and Connectivity know that this is no exception. Second point. I find, and I think if you spend time watching it, the opportunity of the connected cloud and of the Internet of Things, the two trends that Greg talked about, I think they are fascinating opportunities. I think you will find the era of the smartphone is going to be eclipsed, and people are going to talk about the era of the cloud or the interconnected cloud. That's what's coming next.
When you think about that market, having the processor, OMAP, that has the most popular operating systems, Android, potentially Windows 8 or variants of Windows 8, or even QNX, having those high-level operating systems running on your processor gives you an extraordinary advantage out in the marketplace. Because customers that want to embed a high-level operating system because they want their equipment in the future to connect to the cloud, they're actually not making a processor decision, they make an operating system decision. They go looking for what processor gets them to market the fastest. Today, that decision is achieved by selecting OMAP. It's what we see our customers doing. Point two on this, I think it is a highly intriguing opportunity in terms of where we are and where we're heading on that thing. Third point.
I don't have a public, I don't have a private timeframe for a decision on what are we going to do with OMAP and Connectivity. You may get the question, I'll try to get ahead of it. No public, no private timeframe on what are we going to do. I'm impatient, but let me tell you what I'm looking at and what I'm looking for. Should be pretty logical. First, strategic progress. Today, we've got over 100 design wins, customers pulling on these products. That's a good sign. We want to play that out. Second thing I want to look for, stickiness or the ability to have long-term positions at customers. What's that translate to for your world? That's all about the ability to earn margin over time. First one's about growth, second one's about margin.
That's what we will judge as we spend time with customers, as we understand this business. I wanted to hit some of those points pretty direct. I'm sure there may be some questions later on, but I didn't want to avoid that. Now, let me spend a few minutes. In some ways, it goes to a much longer-term view. What I really think this gives you some insight into is how I, how we think about growth, about opportunity, about capacity investment, and the way we're trying to be prepared. Again, Kevin's material will probably tie in a little bit to understanding this. First, let me explain this slide, and I think you've got the graph and the handout material. This is industry data, not TI, industry data back to 1991. Quarterly unit shipments. We've excluded memory.
Memory won't move this curve, but I'll show pricing in a minute. Memory does move the pricing curve on that front. This literally then is a long-term plot of unit shipments quarterly basis across the industry. You take a look at that long-term trend line, and you can see per the block in the upper left, a little over 8% compound annual growth rate, which is why that curve aims up into the right. If it was a log scale, it'd be a straight curve. Correlation, R squared of 0.95 in terms of a trend line that fits to those units. For the analysts in this room, every one of those swerves and curves have been hours of entertainment for the past 20-odd years. Even to a few semiconductor managers, okay.
When you back up away from those swerves and those curves, there's really only three that stand out to me on the south side of this line that get past noise and get past semiconductor cycle and, in fact, become a reaction to an exogenous or an external event. One, some of us remember it well, was the internet bubble. It burst, unit trend line goes 19% below trend line. I know a lot of people in this room remember this one. Okay? Unit shipments 2008, 2009 dropped 36% below trend line. This was in one Q 2009, we weren't sure the sun was coming up again, okay, in terms of where everybody was. And I think your industry might've been more morbid than ours.
The thing that surprised people, surprised us when we did this slide and updated it, is take a look at the fourth quarter of 2011. Okay? Most people don't get that sense. Fourth quarter of 2011 unit shipments had dropped 19% below trend line. I think it gives a good insight that these are not semiconductor cycles of a little inventory building and a little inventory unwinding. This is supply chain overreaction. If you want to look at it, go back and look closely on your slide. From that point, bottom of 2001, if anybody remembers that, two quarters later, 36% unit growth. How many people at the bottom of that trend would've said we're going to grow 36% units in the next two quarters? I didn't, I know that. Okay? You can go sit at the bottom of this one. I think that was one Q 2009.
Two short quarters, 56% or 57% unit growth off the bottom. Okay? How many people in this room had that played in? I didn't. Take a look at that top and take a look at that top and see where the trends come back up. We didn't have a big top in the 2010 cycle, and I see some folks in the room that have written on this. What that translates to, this industry didn't over-invest in capacity in the 2010 cycle. You could actually argue this industry is light of capacity. At this point, coming off of fourth quarter of 2011, price will go back to trend line in two quarters. You can see that trend line is way above what the industry tooled up for, the capacity it put in place just a year ago.
Which is why, when I'll talk about the pricing slide in a minute, you haven't seen pricing really go down. In fact, it's trended up in an otherwise pretty soft market. Takeaways. Why is that curve at 8%? To me, it makes intuitive sense. You got four points for global GDP growth, and you got a 2x multiplier because there's more chips in our lives, tablets, cell phones, automobiles, more electronics going into industrial equipment and infrastructure. I sit back and I say, over the next 20 years, we're going to have global GDP 3%-4%. It's probably not this year. It may not be next year, but it'll get back on that curve. The multiplier is probably going to be about the same thing because there's more electronics coming in our lives.
When we sit back, this curve gives us as much just guidance, how should we plan and how should we think relative to long-term growth and capacity capability? I don't know what this thing's going to do off the bottom. We do not know. We don't believe the industry is tooled up for to try to get back to trend line. What I do know is that TI is fully capable of running this thing back to trend line and then some. That's what we wanted to be in a position to be lined up for on this front. We feel pretty good about the implications of that historical view and thinking about what it could carry forward to. I'll be quick on this slide. Put it in the deck for a very simple reason.
A lot of investors, a lot of people in the semiconductor industry believe that average unit pricing of chips has been down and to the right for 20 years. Fact is, if you wanted to argue, you could say compared to first quarter of 1991, pricing's up. If I picked the middle of 1995 at the top of Windows 3.1 and Pentium ramps, you could say pricing's down. The fact is, because we put more functionality on chips over time, average unit pricing actually tends to be pretty stable. The ups and the downs have a lot more to do with industry capacity investment, and they tend to be four-quarter, five-quarter, six-quarter type trends if the industry has too much or too little capacity, not daily or noisy moving around of pricing. This was the point that I made.
We've had a pretty weak semiconductor industry for four or five quarters. What's the average pricing done during that time frame? I don't think it'll stay up. I think it'll rattle around in this range. The fact is, I think that's a sign of low investment by the overall industry. Translation, slide one, slide two, I think 8% unit growth is as good a way that we can think about long-term growth opportunities, and I think 8% unit growth probably translates through to 8% revenue growth over time. The only thing I guarantee is there'll never be a year with exactly that number, okay? Just to summarize things before we open up for some questions.
I talked about really four reasons why I feel pretty good about where we are today, and it's been a long four years, five years as we've been working through the transition. Number one, 80% of TI is now centered up in the best opportunities with the ability to grow and the ability to grow with returns. Number two, our customer diversity, or maybe said differently, our customer concentration is lower, our diversity is higher. That is going to do good things in terms of our ability to grow and not end up unwinding big positions over the longer term. Three, our competitive advantages, the things that I talked about, breadth of the portfolio, sales, manufacturing, and technology, our competitive advantages grow stronger. Then lastly, our manufacturing growth capability with low capital intensity looks great.
I won't go into any more detail because Kevin's got plenty of material to try to talk through why those things really do look strong. The add up of that is I feel great about our position to grow, and I feel great about our position to actually translate that, not just into earnings, but get that through to cash and get that into cash return to shareholders. With that, I think we've got time for some questions, and Ron is in charge.
I think what we're going to do is, Rich is scheduled to ring the closing bell, and so we're going to excuse him, move on with Kevin, and I promise you'll get a shot at Rich on your Q&A, and you do not get excused that easily. We'll let Rich go and move on to Kevin March here. We asked, but they said they could not be flexible on when they were going to close the markets today.
Good afternoon. Appreciate you all being here. We realize you've got busy schedules, and you've got choices of what you can do with your time, and we're quite flattered that you're interested enough, that many of you want to come and hear what we have to say and tell you about what TI has been doing and what TI is going to do. I've done enough of these presentations in the past that I really hate getting up behind Rich. He covers the universe, and he's pretty energized, and I don't quite present in the same fashion, but I'll try to go ahead and take you through some stuff.
I'm going to focus more on the financial side of things, as Rich alluded to, and take you through, think of the key elements of our financial statements, starting from the top and working your way through, and help you walk away with the conclusion, our focus really is on how do we generate the most cash with the available assets that we have to invest. We believe cash really is what matters at the end of the day. Let me just start out with reminding you or summarizing for you what our key financial goals are. They really aren't any different than what you've been hearing us talk about in the past. There's three of them, and they're in order of importance up here. First and foremost is growth. You heard Rich mention that multiple times, growth.
You've heard us talk about that multiple times, growth. What that means is growing our core product revenue significantly faster than the semiconductor market as a whole. The operative word there is significantly faster. As Rich has already indicated, while we have outgrown our markets, internally, we're not very happy with that because the word significantly doesn't quite fit with our growth rate so far in the last few years. A close second to our growth objectives has to do with growing earnings. When we talk about growing earnings, it's really growing our earnings per share faster than we're growing our revenue, which means being a lot more efficient with the deployment of our available cash for investment in the future and turning that into better returns incrementally over time on average.
We believe that by doing those two things, it allows us to do perhaps what's most important of all, that is to continue providing healthy levels of return to our investors in the form of both dividends and stock buybacks. At the end of the day, it seems that that's what investors really want to see, is that we can actually return value back to them in exchange for actually owning the stock. Let me just go ahead and switch gears here for a second. I'm going to spend a few minutes on the recent history on acquisitions of capacity, because I think it's actually somewhat informative. I know many of you who have followed us the last few years are fairly familiar with the story.
I'm going to go ahead and talk about perhaps a few details that you either may not have been aware of or forgotten, or just never heard of. It'll help you understand, again, what we're thinking. First and foremost, what Rich introduced is what has been driving us to go off and be aggressive about expanding our capacity. That is our belief that over the last few years, it appears to us that the industry, broadly speaking, has been under-investing to the long-term trend levels that we see from a unit consumption standpoint in the industry as a whole. Opportunistic capacity additions that we have made are designed not only just for long-term value, but to meet our long-term growth objectives. It started in 2009, and it began with the bankruptcy of Qimonda Semiconductor. This was early in 2009 when they went bankrupt.
They had opened a state-of-the-art 300-millimeter factory in Virginia, and as a consequence of their bankruptcy, had to go into Chapter 7 liquidation. Despite the fact that it was a very uncertain time, we saw a once-in-a-lifetime opportunity to pick up state-of-the-art equipment at extremely low prices, at prices that we have simply never seen in our experience in the industry. In fact, the equipment that we picked up there was such that we could configure it to put it to use for 300-millimeter analog production. As this chart indicates, the amount of equipment that we bought, in fact, I shouldn't just say equipment, what we bought was not just the equipment in the building, we bought the entire contents of the building.
The equipment, the furniture, the artwork, the forklifts, the wiring, the pipes, everything, and moved it to our Richardson fab on Renner Road in Texas and put it in there to open our first 300-millimeter analog fab. Later that year, also in 2009, again, as a consequence of the bankruptcy of Qimonda, their plant in Dresden, Germany, had a significant amount of 200-millimeter equipment that we were able to acquire, again, for pennies on the dollar. We picked up that 200-millimeter equipment and redeployed it into other factories that we already had around the world. Factories in Dallas, factories in Freising, Germany, and factory in Miho, Japan, to further expand our 200-millimeter manufacturing capability. A little bit later in early 2010, as a result of the bankruptcy of Spansion Japan Limited, we were able to pick up a 200-millimeter operating fab in Aizu, Japan.
Importantly, we also picked up a second 300-millimeter non-operating wafer fab adjacent to that 200-millimeter fab. We actually picked up two factories with that acquisition. One already operating, which we're continuing to run today, and one that was not operating but provides us with a vast amount of clean room space that as we grow into the future, we will be able to expand into without having to invest in the cost of a new building or a new clean room. Later in 2010, due to struggles that Spansion Japan Limited was having with the semiconductor market, we were able to negotiate an extremely attractive purchase of another 200-millimeter operating wafer fab in Chengdu, China, our first wafer fab in China. Similar to the Aizu acquisition, that acquisition also brought us a second non-operating fab. Again, more clean room space that we can expand into.
Those two last points are important because what they really mean is that we have not only operating factories, but we now have ample clean room that we can grow into for probably quite a few years to come. Finally, in last year, as Rich mentioned, we closed on the acquisition of National Semiconductor. With that acquisition, we were able to bring on two 200-millimeter operating wafer fabs and a very large assembly test site. The way this chart is organized is to kind of give you an idea of what was the incremental impact of those acquisitions. What's important is that first column called Equipped Revenue Capacity. What that basically means is that we brought on board revenue-generating capacity on an incremental nature that totals $7 billion through the course of those acquisitions, fully equipped, ready to be filled.
In addition, because of the clean room capacity that we got with some of those acquisitions, we actually have $12 billion worth of incremental clean room capacity, which means our need to actually allocate capital for clean room expansion or additional wafer fabs over the next few years is greatly reduced. Rich had already talked about the fact that we have, through these rather fortuitous acquisitions, generated for ourselves a unique competitive advantage. I would offer to you that it's probably unique on two fronts, both on scale and on technology. So far, I've emphasized my points on these acquisitions to be on the wafer fab side. It's important also to note that we have been expanding our capacity on the assembly test side at the same time, and more on that in a moment.
Rich already talked about the Richardson fab off of Renner Road in the Dallas area in Texas. In that factory, we not only opened the first, but we've opened the world's only 300-millimeter dedicated analog wafer fab. Because of the equipment that we put in there, especially the equipment that we acquired from Qimonda, as well as some of the equipment we acquired from Aizu out of that 300-millimeter factory, we now have the most advanced analog manufacturing equipment in that factory in the industry. The beauty of being on 300-millimeter is that the wafer size alone gives us a greater than 30% cost reduction on our die cost. When you take the die and you send it to an assembly test location for final finished goods packaging. Greater than 30% cost reduction at the die level.
By the time you get to a finished goods level, that's greater than 15% cost reduction versus making those same products on 200-millimeter wafers. A subtlety that is not obvious to everybody is what we've been able to do with redeploying our proprietary manufacturing processes and technology. Those processes have long been inside TI. There's over 75 baseline ones, and there's hundreds of derivatives off those. We have now been able to take and start moving those processes from their mother factory into this new capacity that we bought. That includes RFAB, that includes Aizu, that includes Chengdu, and actually beginning to bring these very differentiated proprietary processes into these very low-cost factories to give us the ability to get further cost reductions on our production going in the future. I mentioned we've also been expanding on the assembly test side.
Importantly, one of the things that we made a decision, we sat around and thought about it a bit, in the first quarter of 2009, in February of 2009, at the depths of the downturn, when it was not clear when the bottom was going to arrive, we made the decision to go ahead and open what has become our largest assembly test site in the world. That is our assembly test site that we opened that's near the old Clark Air Base in the Philippines. This is an enormous factory. Many of you have seen RFAB. If you go and you see Clark, you'll have a similar reaction at the scale of this particular factory.
The reason this is important is because of that scale, we are now able to take our unique packaging and other technologies as it relates to assembly and test and apply those technologies to a much broader swath of our total portfolio. What exactly does all this mean to our revenue-generating capacity? I already mentioned that our view on this is we got it at a very low cost. You've heard us talk pennies on the dollar. I truly do mean it was pennies on the dollar. If we went out and bought this new, it would have cost us considerably more in capital and would have saddled us with considerably more depreciation for an extended period of time. I would offer to you that, in fact, with what we've done, the marginal cost of our growth going forward is extremely low.
This chart is probably one of the best examples I can think of to help illustrate that. Most of you are probably aware that in 2011, we recorded total annual revenues of $13.7 billion. I just described to you incremental capacity that we have brought on board over the last couple of years, totaling $7 billion. That is incremental equipped capacity, already bought and paid for, to generate an additional $7 billion. In a real simple world, what we have is a manufacturing footprint today from a wafer fab standpoint that is equipped to generate about $21 billion worth of revenue.
That is simply taking the $7 billion of recent low-cost incremental capacity put on board and adding it to our existing capacity that we generated last year of $13.7 billion of revenue. We have clean room space equipped today that can support about $21 billion worth of revenue. We have open clean room that with the addition of additional equipment years into the future, can allow us to support up to $26 billion of total revenue. It sounds like a lot, but as Rich pointed out a moment ago, you do not know how fast these snapbacks go back when units come back to their long-term trends. You need to be ready before that demand snaps back, not after it is already come and you are in a catch-up mode. The wafer fab, of course, is just half the semiconductor manufacturing process.
It is really what we call the front end of the manufacturing process. You also have to take care of the back end or the assembly test side, and we have been investing in that side for the last couple of years as well. What comes out of the front end of the wafer fabs has to be assembled and tested in the back end so you can get finished goods to finally ship to your customers. Over the last couple of years, the investments we have put into the back end has an equipped revenue-generating capacity of $18 billion. On a fully balanced capacity footprint that we have today, we have a total of $18 billion of revenue-generating capacity already bought, paid for, installed, and ready for operation. That is about $4.3 billion of incremental revenue already installed over what we just recorded in 2011.
What can that incremental revenue do for us from a gross margin standpoint? I believe that probably the best way to think about this is to take a look at what incremental gross margin does over revenue cycles. By revenue cycles, I am not talking about quarter-over-quarter fall-through on revenue to GPM, to gross profit. I am talking about what happens to gross profit as revenue ebbs and flows from a peak to a floor to a peak. What we have plotted on this chart here is over the last decade or so, decade and a half, the peaks in our revenue, followed by the troughs in our revenue, followed by the peaks, the trough, the peak, and so on again.
What you can see on this is that on the dollars fall-through that you see on gross profit is that we range from 67%-82% gross profit fall-through on each dollar of revenue change through that revenue cycle. That averages to about 75% gross profit fall-through during the course of these cycles. You can see from the chart on the up cycles, the last couple of up cycles plotted on here, for each dollar of revenue growth during the course of that cycle, $0.72 fell through to gross profit. To put that another way, we've got $4.3 billion of fully installed incremental capacity today to support no additional cost to generate revenue.
At our historical fall-through rates of about 75%, you should expect when that $4.3 billion of additional capacity ready today is fully utilized, we should drop through over $3 billion of gross profit to the bottom line. Let me switch gears now to operating expenses. By operating expenses, what we're talking about here is research and development costs, plus selling, general, and administrative costs. Those added together, we watch as a percent of revenue. How much do we spend in those categories? The real news here is that our model hasn't changed, and that is we expect to spend about 25% of our revenues on OpEx over the course of a cycle. That means plus or minus 5% around that mean based upon the revenue cycles.
We've just come through a down revenue cycle, as you would expect, you would see our OpEx moving to the upper end of that range to around 30%. We're now exiting that down cycle, we're moving into a growth cycle again, you should expect to see our OpEx begin to move back down to our target range of around 25%. If we have a strong market, it'll move lower net and get down into the lower end of that 20%-30% range. The main message here is that model we've put in place for a number of years now, we don't expect that to really change as we go forward. Rich already showed you this graph, it's important to, again, take a look at our capital expenditure as a percent of revenue, because it's really quite interesting to take a look at.
You can see in the early part of the timeframe on there, the result of our CMOS strategy that Rich pointed out when we adjusted how we invested in CMOS and what we were doing going forward on that. That significantly reduced our capital appetite, the amount of our revenue that we had to devote to capital expenditures. Then around the middle of this last decade, that's further changed as we've refined the portfolio to be much more analog and embedded processing centric. Our total capital appetite as a percent of revenue has dropped. If you take a look over the last five or six years, we have talked about a target range of CapEx to revenue to be in the 5%-8% kind of range, we've actually performed on that. We're adjusting that now down a little bit.
That target range is now adjusted down to about the 4%-7% range as a result of being near completion of transforming our portfolio to analog and embedded processing. With the $18 billion installed manufacturing footprint we already have today, I think we could reasonably anticipate that over the foreseeable future, for the near term, we'll probably operate closer to the lower end of that target range than to the higher end. That also translates into the depreciation that you see in our books today will be steadily declining as we look out over the next couple of years. What does all this mean to free cash flow?
If you take a look at this plot over time, the adjustments that we've made from a manufacturing standpoint and the adjustments we've made, importantly, from a portfolio standpoint, have been resulting in continual improvements of our free cash flow. We believe free cash flow is a pretty important metric. By free cash flow, we mean operating cash flow minus capital expenditures. That is free cash flow. Really, that's what's left over to spend to help stimulate our growth through acquisitions and, very importantly, to spend to return cash to our shareholders through the form of dividends and stock buybacks.
If you take a look at that $18 billion of installed revenue-generating capacity that we have today, it should drop through about $4 billion of free cash flow, assuming that we're going to operate at roughly the lower end of our target range for CapEx in the near term, bringing us to a new record high of free cash flow generation in probably the not-too-distant future as we take a look at our revenue growth over the next couple of years. I think everybody in this room is aware that we've been pretty active at repurchasing or using that free cash flow to repurchase shares. What you may not realize or may not remember is that we've actually been repurchasing shares for actually many years now.
Our history, up until about 2004, was to repurchase shares just to a level to offset the dilution effect that occurs with stock option exercises. Beginning in 2004, we decided to use more of the free cash flow that we generate to more systematically repurchase shares and repurchase shares in a manner that would start bringing our total share count down. In fact, since 2004, we've spent about $22.5 billion repurchasing about 775 million shares, reducing our total share count outstanding by about 34%. We ended this last quarter with remaining repurchase authorizations of about $5.37 billion. We have quite a bit of authorization to continue doing more of what we've been doing for a number of years now. I think a lot of you might be surprised to hear that Texas Instruments has paid dividends continuously for almost 50 years.
We began paying dividends in the second quarter of 1962. For most of that period, the dividends that we paid were pretty small, and to the extent the dividends were increased, they were increased by a small amount and relatively infrequently. Similar with our decision in 2004 to devote more of our free cash flow to share repurchases, we've also been devoting more of our free cash flow to dividends. Since that period, we've increased our dividends nine times so that our current dividend rate of $0.68 is about eight times higher than it was when we began this journey back in 2004. During that period, we've used about or returned about $3.4 billion to our shareholders in the form of dividend payments.
With what we just saw from the free cash flow plots a few minutes ago, and what our present footprint can do, we should generate plenty of free cash flow going forward to continue more of what we've been doing over the last few years. With that, let me just summarize by just repeating what Rich has said. The transformation of the company is pretty near to complete. Importantly, our core product revenue has been growing faster than our markets, although not at the pace that we'd prefer. Our earnings per share, in fact, have been growing faster than our overall revenue, and the result has been we've been able to return significant levels to our both dividends and repurchases to our shareholders over this time. I would say to you that Rich was talking about looking internally at why we're not growing as fast as we want.
I would say that we are maniacally focused on execution to be sure that we can translate the opportunity that we have today into maximizing our shareholder value and shareholder return over the years to come. With that, I think we're at a point where we can take questions.
Okay. What I would ask is, we're going to start with Q&A with Kevin, and then after a while, we'll bring Rich on as well. These are
Specifically for Kevin, I know a lot of you have questions. So in order to try to get to as many of you as possible, if you could limit yourself to a single question. Then as opposed to the conference call, we will not give you an opportunity for a follow-up. Please give the microphone back to me. Also Dave Pahl back there will be working the back side of the room with his microphone. Tore, I'll let you start.
Thank you, Ron, and thank you Kevin and Rich for doing this. You talked about $4 billion of free cash flow at $18 billion. You almost got to $4 billion, I think, back in 2007 when you did $14 billion. Why should we expect it to be higher?
Actually, there's a footnote in your chart that will help you understand that. Through the vagaries of some accounting rules of what has to go through operating cash flow and other elements of your cash flow, we actually got, in 2007, if I recall, a $400 million multi-year tax refund that by GAAP accounting has to be recorded in your operating cash flow. So that artificially popped it.
Great. Thanks.
Can you see me okay?
Yeah.
Okay, it's Jim. I would've been mad about you guys stealing my trend line if I hadn't stole it from somebody else 10 years ago. I guess the question is, what gross margin do you— or what utilization rate do you need to be at to get to the target gross margin? Because we're 19% below trend, we could have shipments go up 30%, 40%. That would be a cycle. Does that get you to a utilization rate that would get the target gross margin model? In other words, the capacity is very good for the long term. There's no question about that. You talked about when you make these capacity investment, you're thinking about decades, not years.
The utilization rates have gotten so low that I wonder if we couldn't go through a full cycle where we don't get to the target gross margins because we dug ourselves such a hole as an industry in terms of utilization rates. Thanks.
Yeah, Jim, we've taken a look at that question. The last time that we got to our mid-50s kind of gross margins, was back in 2010, and we had utilization rates, call it in the mid-80s kind of range. I just talked about how much capacity that we've added incrementally. If you extend that math, you'd probably be in a similar kind of utilization rate to be at a similar kind of gross margin rate.
I don't know who the next one is.
Hi. Thanks for taking my question, and thanks for organizing the event here in New York, just a 5-minute walk from our offices. The question, how do we reconcile your higher share in catalog analog versus your desire to have your large sales force be a differentiator? If the goal is to get to have a higher share in catalog analog, that's where the company wants to trend to, is there a way to reduce OpEx? Is there a way to take advantage of that trend and have even better operating leverage in the model?
I think that there's probably two things to think about there. One, from the share standpoint, while the catalog analog tends to, the preponderance of it goes to distribution, that's not the only place it goes. Many customers don't use distribution to source, especially our larger customers. They'll tend to buy direct. It tends to be the smaller or more industrial customers that will go through the distribution channel. To hit those larger customers, you're still going to need a sales force to introduce this large portfolio of parts, too. The flip side of the analog space, while we have a large share in the catalog, there's still the lion's share of the market is over in the non-catalog.
As Rich indicated, about 40% of the market's catalog, about 60% is non-catalog, which means there's an awful lot of customers there who don't typically use the distribution channel to source their analog chips from. That's where an extremely large sales force is highly advantageous to be able to reach out to those customers and introduce them to our portfolio.
Just weekly, daily, whatever you're saying. I would actually take your comment and turn it around 12 seconds.
Use your sales force to grow that catalog analog business. You have zero delta R&D for a part, and now you have all high growth margin leverage. By having salespeople out working along with distribution, you have more influence at the point of design. That's where you can start winning more sockets on a board, and that's where the difference actually gains advantage. You don't want to get leverage by less sales. You actually want to spend that money on sales to get more leverage into the operating model, is where that'll happen.
Who has the microphone?
It's back here. Kevin, Ross.
Oh, sorry.
Just to follow up on Jim's question earlier. If you need the same utilization to get to the same gross margin target, about 55%, given that you've added so much capacity, does that really mean you need higher revenues this time around than the last cycle to get to the gross margin?
I think mathematically, that would be correct, yes. Yes. I agree.
It's the cost.
Okay.
See where the microphone is. I'm sorry.
Okay, I'm here.
Why don't you stand up?
Sure, I'll stand up.
We've also got a few folks up front who want to try to get a question.
That's right. I also like the New York venue. If I had to vote, I think Ron's living room. I think I'd pick that as the more appropriate, as the better venue. Another question following on the margins and the slide you're presenting talked about the incremental drop through historically about 75% or so. In this first leg of the recovery, it's run lower than that, and I think that drove some initial concern. Could you address that, perhaps talk about why that was and kind of give us some indication of what you see as we continue through, why we get back to that kind of historic 75% level?
Sure. I think that the important, again, that the fall-throughs that we're talking about are through a complete revenue cycle. It's awful noisy on the way through. It doesn't stay that same % every quarter. If you take a look at probably the more recent quarter, I think we saw fall-throughs that are, based upon our forecast, probably in the upper 60s, is what you're talking about there. In part, that's partly because we actually took our inventory levels up a little bit in anticipation of growth, so we're not coming from quite the floor that you might normally expect. Really, it's a function of where you're starting from that I think is contributing to that perception that maybe it's a little bit lighter at the beginning of this uptick.
If history continues to bear out, and it usually does, we should expect across the revenue cycle to be seeing those higher historical fall-throughs across the revenue cycle, noise along the way.
Hello?
Oh.
You talked about stickiness as something you'd be watching for in the wireless business. At the same time, we've got market growth in wireless, particularly in smartphones, being driven by two players who make their own processors. One of your largest customers is moving over at some point to Intel, which doesn't argue a whole lot for stickiness of that business. What is it exactly that you'll be looking for and what should we be looking for in terms of the health of that wireless business around customer stickiness, around profitability, scale, everything else? How will we know that it's something that you really ought to be in and that's going to be successful?
Yeah. I think the thing that you've got to look at on that is, think the frame of the question you just asked was enormously high volume smartphone, tablet people, as opposed to start going into broader marketplaces of automotive applications where there'll be lower volumes, more investment to be able to make that transition. That'll be the stickiness that you see occurring across a much broader set. When you take R&D and run it against 100 million or a couple of 100 million smartphone socket, I don't care what the R&D bill is, the cost per unit to be able to make a change is going to be low.
You'll find as you go down into lower volume opportunities that have product life cycles of four, five, and six years, as opposed to the smartphone world, that you have product cycles of 12 months, you're going to find very different dynamics occur on that front.
Does the core business deteriorate before the rest of the longer-term stuff?
I'll go back to the comment of, on the timeframe and the question of help me with the transition. I tried to lean into that one pretty direct, okay, in terms of I won't try to predict it, because we're going to be looking for the revenue potential growth and what the strategic hook and the stickiness can look like over time. The transition is going to look like the transition is going to look, and I'm not going to try to predict it.
I'll stand up even though I'm right in front of you. I had a quick question. You talked about your financial goals, they had large 11 change. You want to be aggressive in terms of your revenue growth, and you all also want your earnings per share to grow faster. You had your separate bucket of dividends and share buybacks. There is a linkage between the share buybacks and the earnings per share growth, certainly over the last six years, where at least I estimate a good half of your earnings growth peak to peak was driven by the share buyback.
Given where the debt position is now and the lumps you might have in terms of payments, how do you see the share buybacks evolving over the next year or two, and how much could that contribute relative to what we're used to seeing in terms of that as a contributor to your earnings growth? Thanks.
Sure. We had talked about back when we acquired National Semiconductor that we would make that acquisition through the use of available cash and debt. We also talked about that as a result of taking on that debt, we would begin to moderate our stock buyback, and we in fact have done that over the last few quarters as we begin to build up the necessary cash levels to pay off that debt. We continue to plan to do that, so that the kind of stock buyback levels you may have seen us engage in or the allocation of cash to buy back, say, three or four years ago, I would argue is quite a bit higher than what you'll probably see for the next couple of years as we pay off this debt. Just by way of example, we actually acquired debt when we bought National.
We have $375 million of the debt that we acquired with that acquisition actually due at the end of this quarter, which we intend to pay off. Our expectation is that we will pay down that debt as it comes due. In anticipation of that expectation, our buybacks will be at a more moderate level than what you might've been used to a few years ago. We will continue to buy back, and I would expect we will continue to see the share count gradually reduce over time.
Hi, Kevin. A question on margins again. You talked a lot about the lower incremental cost of the capacity. Rich talked about a better product portfolio mix. Depreciation's going to be a tailwind, giving you a lower CapEx going forward. I guess two questions. Why not raise the margin target? Why won't the incremental gross margin fall through be higher this cycle than the typical 75%?
Yeah, we don't think that. Again, I'm not disagreeing that it'll fall through at rich cycles. We actually saw on the history that it fell through during one upcycle of 72%, another upcycle of 75%. We've got a range going on there. We're simply saying that you should expect that on average, it's going to fall through at about 75%. I would offer to you, if you just take that incremental $4.3 billion of already installed capacity that we've got, it gets utilized, falls through at 75%, that's north of $3 billion of gross profit. Add that revenue, add that growth profit back to what we just recorded in 2011, you'll find that gross margin is doing exactly what you'd expect. It can. We're not raising our model or lowering our model.
What we're saying is that it probably can go above that, it can go below that, we're not trying to manage that. What we're trying to manage is to maximize the gross profit because that turns into operating cash and subsequently free cash so that we can return in dividends and buybacks. You may want to try that math, you'll see that the gross margins actually are pretty attractive on that front.
I'm not sure if you gave us how much capacity utilization you're running at right now.
Well, we didn't right now, but last quarter we said, or in the fourth quarter, we said we were running in the low 50s.
Low 50s. Our experience with the semiconductor, especially the Analog sector, which makes it very attractive, is the design cycle. It takes a long time to
To design something into a socket. I'm not sure that you'd be able to absorb this capacity during this uptick in demand. It just, it's most likely going to take you much longer than, say, in digital. Digital, 8 months, you have a new product. You run the risk of spending two cycles before you can fully utilize this capacity and get to this high incremental margins. It's just very hard for me to believe that you could capture a big share very fast. You will capture it over time, it just takes longer than anything else.
Yeah. Again, we're not trying to predict when we'll fill it up. I would point you back to the chart that Rich showed. We have been, as an industry, significantly under shipping long-term demand now for several quarters in a row. We've seen that several times in the past. We saw it ourselves in the past, a couple of years ago, coming through the 2009 downturn, and a snapback very sharply. It's not a question of having to suddenly win a bunch of designs to have a snapback in units and in revenue. It's the fact that we're under shipping and had been for several quarters our customers' actual end demand, as they've been bringing their inventory levels down. A snapback to use that capacity is entirely reasonable in a fairly short order of time.
The best evidence to go take a look at, 2010, where we saw our revenue leap back at more than 30% year-over-year growth, and we found ourselves significantly capacity constrained. This is installed for the purpose of being able to be ready for long-term growth, those kinds of wins that you're talking about, and the fact that the industry as a whole has been under shipping.
Hey, Kevin. Just a question on the shape of the recovery. Given how much we came down over the last few quarters, it's a little surprising to see your business basically seasonal in Q2. Just curious, what are your thoughts on the recovery thus far relative to what you were thinking at the start of the year?
I'll just kind of reemphasize the guidance that we've given. It does have a range around it. The midpoint, as you point out, is kind of our seasonal. That seasonal, by the way, for the benefit of everybody in the room, we went back and recomputed with National and TI added together to kind of adjust for the fact that that wasn't historically in our actuals. We also adjusted for the fact that baseband has now become very small as a percent of our total revenue. Seasonally, we would expect 2Q to be up about 9% for the company, the combined companies. The range that we've got has us possibly going up higher than that. What we've done to stage inventory to be ready should it snap back sharper than what that seasonal average is.
Beyond that, I don't have any color to give you as to when or how fast the industry will come back to the trend line.
Kevin, I'm not sure if this is a better question for you or Rich, but appreciate the honesty around the fact that despite growing shares since 2006, it's kind of been underwhelming relative to your internal targets. I guess what I'm trying to get a better sense of is, to what extent was that things that were in your control that you just didn't execute as well as you thought you could, versus just the inherent dynamic of the analog industry where share shifts happen really slowly? As we think about earnings growth being more driven by revenue acceleration versus margin, how do we get confident that you guys can start to hit some of your more aggressive internal targets?
I think you captured it in somewhat of a good way of even framing that question. You go down into that, I think I've talked to you in the past, when we really even wrapped up 2011. We're pretty simple people. We break down into the 24 major business units, the 80-something product line P&L levels. Now what number of you guys are outperforming at those levels to both the revenue growth test, but also the fall-through test on that revenue. You've got a good set of them that are doing it. You've got a set that are middle of the pack, you've got some that are down at the bottom, and you get to work on what are the basic reasons that are down inside of that.
Where I get comfortable is that when you look at the businesses inside the Analog business that are performing well, it's not magic. Okay? It's doing the basics well. Great roadmaps, great products. These things are under our control, and that's a good thing to have in this business, is the ability to improve your revenue by fixing things inside. It'll vary depending on the business. Some, they had a strategy that could've been better. Some, they didn't execute where they needed to. You'll find different answers as you go down inside of those businesses. I get it into more of a, I guess, the strategic frame I would give you is when I think about the 78% of the revenue, where it is, the footprint, the competitive advantages, it's a really compelling model that's working.
What we need to do is get it working even better, and that's where the energy's going. That's where the focus is going. We have similar things on the sales force side. In the world, I'd rather be working on internal things like that than, gee, is the fundamental strategy going to work or not work in terms of where we're aiming on that front. That's my best assessment about what you would find looking across that. As I said, you'll get a chance to meet some of these guys and potentially ask me some of those same questions. I do feel pretty good about where we've got people aimed and where things are lined up right now in terms of the longer term.
Rich, why don't you go ahead and officially join Kevin on the stage, and we'll open it up.
You can't leave. He didn't say leave
No, no. Join, and we'll open it up to questions for either of you. I won't have to keep herding these cats.
I'm good. Thanks.
Thanks very much. Earlier on, you emphasized the cost savings of 300-millimeter analog manufacturing. If we look at your capacity and total capacity availability, there's an awful lot of 200-millimeter fab cleanroom that will still be equipped, and of course, you'll be bringing up capacity utilization on your 200-millimeter fab. For the indefinite future, would we expect the ratio of 300-millimeter to 200-millimeter manufacturing to remain about constant, or do you actually move up that ratio?
I would say that as we fill up 300, the R fab, the 300-millimeter wafer fab that we have today, about 40% of that floor space has equipment on it, and probably less than a quarter of that is actually being used to its full capability at this point in time. That just mathematically says, as we release more products onto those pieces of equipment, we're going to see 300-millimeter becoming a larger portion of the revenue-generating parts that we're manufacturing. To your point, though, on the 200, I would point out that the acquisitions of capacity that we've done over the last couple of years, two things. The prices that we paid for it were prices that we simply have never seen in our time in the industry. You've got to still take that price and turn it into depreciation.
If you take a look at our depreciation over many years now, it really hasn't moved that much, yet we increased our capacity substantially. What I was offering to you is our depreciation will probably start going down now as we look into the future. That means that those older 200-millimeter wafer fabs that we had, their depreciation cost is rolling off, so there's not much cost there. These new ones we brought in, they basically kind of backfilled that roll-off of depreciation, but at a much lower starting point. That will roll off also. Recall that we depreciate our fab equipment inside of five years. We're already a couple of years into some of that depreciation window.
David, cheap 200-millimeter wafers are really good, too, is what that translates down to, okay? We want to ramp that stuff. It'll do well.
Hey, thanks, guys. A bit of a long-winded question. You've talked about the increasing mix towards higher margin embedded and Analog over the last five, six, seven years. You're also saying, hey, our peak gross margins may or may not move up in the next cycle. If we look at your product lines, clearly, the profitability in the wireless division has been a big drag. When you talk about wireless basebands almost down to nothing, you guys have said that OMAP remains fairly profitable. Is the only reason that you don't feel confident that margins are going to go higher, the connectivity profitability falling off so badly? Can you specifically talk about or just give us what the plans are to get wireless more profitable? Is it pure revenue growth, or are there any cost-cutting measures you can take there?
Yeah. Chris, let me lean right into it and then get to the wireless thing. You've heard me be pretty direct with you in the past and talk about this, chasing after fixed-point gross margin income lines, I don't think has proven to be a very successful long-term strategy for generating cash and returns. I understand the fun of it and debating peak margins, okay? I'll push on that because I've watched more companies get in trouble saying, "By God, we're going to go set a new gross margin number," and everybody likes it the day they declare it. What type of behavior takes place over the longer term as they're off chasing that around?
What you're hearing is a very, and you've, I think, translated it pretty clearly, is math says we've got the chance to take the fall through above those prior peak margins, okay? At the same time, you don't hear us saying, hammering the shoe on the table if it is going to happen and when it's going to happen on that front. That's not because we don't care, I don't think that's going to be the primary lever that's going to grow earnings and grow cash flow over the long term. Let me just make sure I hit the why you don't hear new declarations and why you won't hear new declarations on that income line statement.
Second thing is bear in mind on wireless, as baseband was winding down, while it was not a great lift on the gross margin line, as you noted, baseband was pretty profitable on the operating lines. It was a contributor on that front. As that thing comes off, that's what you see Greg Delagi in that business dealing with right now. The biggest issue that has to change wireless profitability is revenue and steadiness of revenue as it grows, okay? That'll be what makes that P&L work. It's not a what's the contribution margin look like on the gross margin. It's not a big set of variances between OMAP or connectivity on that front. This is about really, can you establish long-term growth and long-term consistent growth out of both the OMAP and the connectivity businesses?
That'll be what really drives the ability to improve profitability on that front. Ron has taken your microphone from you, Chris, sorry.
Just a follow-up on John's question on the kind of the growth. I've heard now probably for at least the last four or five years that your larger sales force is a competitive advantage. Yet you've really only grown at 1 to 1.5 points, or you've gained about 1.5 points of share in Analog over that time period, and now your goal is to grow roughly 1 point of share per year. Is there a reason now that your larger sales force is going to help you grow that sales or grow that market share faster than the last four or five years?
I think if you take a look during that 2006 to 2011 period, we've been very transparent, we talked about HVAL going through a number of substantial changes, okay? I think we had some pretty direct dialogue. I forget it was the 2007 or 2008 analyst meeting and the work that Dave Heacock had to put in place. That is an all-in, no asterisks, nothing pulled out that hasn't been performing, but we've been pretty transparent. You've watched HVAL go from not performing to really the 6 through 9 period to where it wasn't starting to contribute to really the transition late 2009 and 2010. There's a great example of something that's been underway, getting fixed, getting better inside of that footprint. To me, that's 1 of the top ones that stands out.
I think if you look at that market share growth, okay, and take a look at that overall progress, not many Analog companies are turning in five years of consistent improvement along those lines. I think that's the proof of where you see the sales force combined with the product strategy really working. Do we want to make it work higher? We've been very clear about what the objectives are on that.
I'm wondering if you can help us, how we should think about acquisitions. Capacity you've covered in great detail, I appreciate that, how should we think about acquisitions and business lines, whether in analog or digital, and just how could we frame that?
Yeah. I would frame it, I don't say this completely jokingly, after we announced National, someone said, "It looks like it's every 10 years, you guys do something significant on analog acquisition." It turns out that is accurate, okay, in terms of last set of those was really in 1999 and 2000. The more accurate statement is what we saw with National was a tremendous analog portfolio, in this case, a catalog analog portfolio that we could make sense of the numbers, it made sense to do it. To predict when or how we would do something, it's all going to come back, be it on the analog or the embedded side, is it's got to be something that really represents a high-quality product portfolio, which in turn gives us a high-quality opportunity to grow long term.
It's not a shifting of the focus that we're going to be an acquisition-led growth model. That was a great opportunity to take at that time. Other ones show up, we won't be afraid of doing that, our focus and our energy is on driving and growing these, back to the two questions we just had, executing and growing internally very well.
Yeah. On the unit shipment chart, you show several periods where things came way down, one of which is this euro debt crisis. Did the euro debt crisis really cause this? If so, why?
I think in some ways, we are not trying to title any corrections taking place in the marketplace. History will end up titling them. You saw very clearly across the semiconductor industry, starting in July, a supply chain overreaction that they worried about what was happening on a global basis. Whether that was caused by euro debt crisis and things happening in Europe, whether it was caused by gridlock in Washington, I don't care about the authoring of the title. The data and the reaction is what matters to us on that particular front. I think what's indicative of that is that supply chains do tend to operate on fear. When all of a sudden people were afraid in the third quarter of 2011, they pulled back. You can go into more complex discussions that there was an earthquake back in-
March
in March that led to exuberance through the second quarter, which then had amplified downside due to the fears economically. I'm not going to try to parse all that. I just look at when things drop that significant, history has said they tend to turn around and try to do the opposite, so be poised for that. Doesn't mean we can predict it, but it does mean we want to make sure we can handle it if it occurs.
Rich, I have a quick question for you on your cycle, the discussion that you had earlier on the trend line, on the ASP through the cycle. There's one period in there that I'm kind of confused on. It was roughly 2006-2008, where the industry ASP is declining pretty much over those two years. Yet over those two years, the units are well above your trend line, and I'm just curious on your perspective of why that might be.
I'm careful. We've got some folks even here that have done a lot of studying on that. My best recollection was you came off of a tough 2001, nobody investing CapEx. By the time you got into, somebody here may cite better, 2005 ended up as a strong lift, and 2006 ended up as a very strong lift. I'll bet if you go look, capital investment accelerated with that during that timeframe. If you're trying to ever correlate what's happening, go look for a pretty strong CapEx lift in the two years prior to that, I think you'll find one in 2005 and 2006 that correlates to why all that capacity shows up, you end up with a little lighter period over that longer term.
Question back to the 300-millimeter facility and the margins and strategy. With your 300-millimeter facility, you have really a choice to make, with the 15%-30% lower cost of production. Seems to me you could either allow gross margin to expand, or you could allow prices to fall, and keep gross margins the same. Which one is in your best interest, and what are you thinking about proceeding from here with that lower-cost facility?
I'll go back and, again, I'll put out the offer. You get a chance to meet the Gregg Lowe or the Steve Anderson or the guys running the business units. The objective that we have on them, grow your revenue faster than the market, grow your margin, and in that case, operating margin, faster than your revenue. It's not a case of deploying, go do this with GPM, go do that with GPM, as it is, go run a successful business that's growing and following through at a high level. This discussion of, are you going to trade off gross margin for revenue is actually not one that our machine is going to process. It's not one that our people are going to process on that front.
What we're trying to generate over the longer term is increasing and steady cash flow growth, because I think that really is the economics that matter the most on that front. Trying to predict exactly what the gross margins will do, it's not something that we'll try to put out there.
Can you give us some feeling for how much of the NatSemi synergies that you've been targeting are true cost cuts versus avoided costs, given your SG&A now looks a little higher than it did when you closed the deal, even though some synergies should have hit? I guess on those lines, around that integration, how much growth do you think you need off of where NatSemi is today in order to meet your unchanged goals or targets of seeing ROIC accretion within the next three to four years?
Yeah. Stacy, real quick on the revenue. Kevin will follow up on the G&A. We talked even a year ago that when you think about the assumptions we had put in for the return on invested capital, we actually did not need to get back to National's historic 2008 market share levels that they were at. We've got to grow it, but we actually don't even have to get back to that level to make that happen. As a result, we feel pretty comfortable sitting here today that we're on track to actually be inside or be at that range we've given. Kevin, why don't you?
Yeah, on the OpEx and the synergies that we're going to get, we're feeling pretty good about the progress we're making on the synergies and expect they'll probably turn out to be very close to what we had talked about. I think you need to be careful about which time periods you're looking at. If you're looking at the first quarter versus the fourth quarter and saying, "Gee, your OpEx is going up," well, remember, we always have a seasonal increase in pay and benefits, and we have the seasonal down in the fourth quarter because of vacation time. What is probably a better compare for you to take a look at is we put out on the website, we went back and put the two companies combined, and your better reference point is probably 2Q11.
Based upon the guidance that we gave you for 2Q12, you're seeing that we're probably more like up 1% in total OpEx. We are, in fact, already beginning to see the benefit of those reductions. We will see more as we work through the year. Along the way to that benefit, we do have to spend some money in the form of reprogramming the computer systems, for example, to be able to incorporate National into our computer systems. That will roll off as we get out there. We were very careful to point out that we expected about $100 million of annualized savings beginning in the fourth quarter or the year after the close, and that most of that would come on the OpEx line.
Some of it will come on the other lines as well, but most of it on the OpEx line and most of it in SG&A. Again, if you just take a look at the guidance we gave you for 2Q OpEx, compare that to the 2Q11 of this, what we've got on the website, that's a good compare for you. Keep in mind that average pay and benefits might go up 3%, 4%, 5% per year. We're probably about a 1% delta, we're already beginning to see the benefit of some of the synergy coming through.
It sounds like you still expect SG&A overall, say, by the end of the year to be lower than it is today?
I do, yes.
Okay.
Yeah, sorry. Question here. It's one question, but a two-parter. Kevin, for you, when we look at capacity utilization, is the baseline with the new equipped capacity that gets us to the $20 billion, or is it with the open clean room, the $25 billion? Which is the right baseline to look at? And for Rich, the question back on market share. In the last few years, sometimes the market share that you did take was sometimes coming from National. As you look out the next four or five years, which competitors do you think are vulnerable? Where can your sales force actually help you take market share? Thanks.
From a baseline, you should start from that $18 billion.
Okay
which is our installed line-balanced baseline. That is, we've got about $21 billion of installed clean room capacity, but only about $18 billion of installed assembly test capacity. We essentially don't have to spend much more in the way of CapEx to reach $18 billion of rev other than maintenance and a little bit more line balancing. To get to the 21 equal to the clean room, we'll have to add some assembly test capacity to get there. $18 billion is the baseline you should start from.
Okay.
On the market share one, we talked even as we announced the acquisition back in April, that we did study exactly that question of, gee, if you gained all that share from National, what's the benefit of together? Well, the fact is, if you look at the share gains over that time, National was some of it, but nowhere near the majority. That was something we looked at pretty closely. Where do we think we'll see it? I think we'll actually see it over a pretty broad set of companies. I go back to the fragmentation that I've showed on that and look across that whole lineup of STM and a lot of different companies globally, not of all which are in a go-forward direction right now.
That's where I think you'll see us being able to gain shares, really across markets and across regions. I'll bet it's across multiple different sets of competitors, just because of the breadth of the target markets for them.
Any particular sub-market, power amplifiers, and-
Well, back to I think John's question of if correct, okay, it'll hopefully be out of all those four major sub-markets in terms of what we got folks working on of, we want to be able to be successful in power, signal chain or high-performance Analog, as well as the mixed signal HVAL business. Dave's in the back.
In the back.
Hi. Rich, if I could go back in history a little bit. There was a time that, I think it was when Andrew was the CEO, actually, you were considered the DSPS company, DSP Solutions, right? Let's take a leap forward and say, okay, your catalog business, it's great. You have great strategy there. You can do Embedded Processing, maybe connectivity Analog, that's great. However, the non-catalog businesses are 50% bigger. There are lots of large digital companies that sell expensive digital chips in all these different markets. Lots of acquisitions, mergers going on. It may be a little bit of a stretch, but what if one of these guys decide to do something in Analog? Are you going to have to cede that market? You're not doing baseband anymore. You don't seem to want to be in these high-volume digital concentrated markets. What happens there? Thanks.
I guess I may not have that one fully processed, but I think if I get to the heart of that question, the ability to go become a large Analog company that sells to a broad customer base is a fundamentally different capability than I'm going to guess any of the digital SOC companies you have in your mind, which tend to be very focused vertically, tend to have system knowledge, narrow footprints in terms of what equipments they target, and they don't have process technologies, test technologies, sales forces, product positions. That's a big step for a company that's in the digital SOC business to take. On the scenarios that could occur from a competitive point of view, I don't think that's going to be one that is on there. Could people speculate? Do other companies try to grow bigger in Analog?
I think those are all valid questions that could be asked, but the digital SOC folks that are fabless and narrow, I don't think you'll see that transition occur.
Hi, Shawn again here. Just a question on the other segment, that's, it's about 20% of your revenues, but it's also a very meaningful profit contributor to the firm. Can you share with us your thoughts on looking forward from here on some of the key segments there, Digital Light Processors or what's the growth outlook look like there, and maybe some of the ASIC businesses or just the general thoughts on other things?
Shawn, the simplest one I'd give, if you're trying to model or think about it, is I would go with the other segment net not having any growth or being very low growth. I say that to just try to keep that assumption on the conservative side. What'll take place most likely inside of that segment is DLP will grow. You may have some long-term slowdown on the ASIC front, Those two will probably be about a wash, is my guess. Calculate a reasonably stable royalties, the other major pieces inside of that. If you're just trying to have a rule of thumb of how to think about that's probably a safe way to plan it out. If it does better, we'll like it.
On the National sales synergies that you're expecting, is there any quantification you can give us now in terms of whether it's design wins or what have you, where you can quantify the progress you're making that's in the pipeline that will come out as these designs ramp?
Simple answer is no, that this desire of, give me the best leading metric, best leading metric I know is revenue showing up as a result. If you take a look, you saw the first quarter result, National, the SVA business did grow. It did lead our Analog businesses, but I think Ron very quickly qualified, it also had a pretty easy compare to the fourth quarter. Everything that we see looking out design win wise, revenue plans, ramps, new products that are ramping up at customers looks very encouraging. I've been in the business long enough. Let's get that turned into result, and let's get that turned into something that Ron can report to you guys on a quarterly call.
At the risk of beating a bit of a dead horse here, if you look at the
Swing away, Doug.
If you look at the unit growth forecast that you've given, the 8% trend line, let's say we don't get back to the 8% trend line, that trend line is actually rolling over, which you could draw that chart out on the graph that you've given. You might not see $3 billion in revenue growth this up cycle. At what point do you start to continue to pare back your fab footprint? Can you give us some progress update on the actions you've already announced? I believe there are two of your internal fabs that are for sale. How is that progress going? Give us just your thoughts on working through sort of the bear case scenario.
Doug, let me put it blends a little bit with some answers Kevin had framed before, and just be very direct about where I'd rather be. You can go find some analog companies that are running in the upper 80s of utilization right now, and I don't think that's a very good place to be as a company, okay? I think it's dangerous. I would far rather be sitting where we are in the low utilization, the fixed cost of that is already in the P&L. The variable cost is going to be minimal as we ramp it up, we can now handle a bear case. We can also handle the bull case, the cost of being able to do that is really pretty modest.
That ability to generate growth and revenue fall through, I think is a far superior strategic position to be in than sitting here saying, "Gosh, we've got utilization cranked up to 90%. We've really put screws down," and sitting at the bottom of all those other spikes, everybody had that same feeling, okay? Again, that is not a prediction of what this thing tries to do off the bottom. I'm not trying to say the world looks great, I know we can handle whatever the world wants to do. The two facilities that you referred to that we're closing down are actually six-inch wafer fabs, that was not about capacity utilization or trying to change capacity utilization. It goes back to one of the answers Kevin gave to the 300 mil. That's about having more competitive cost per wafer across the TI footprint.
Those eight-inch wafer fabs that we were talking about in that are just going to be superior on a cost per wafer compared to those six-inch facilities. Schedule-wise, Kevin, we talk where?
We'll probably have the Houston fab wound down by the end of this year and the Hiji Japan fab wound down by the middle of next year.
Okay.
Hey, Rich, just a question about your 300 mm fab. Many of your competitors, not many, few have chosen to go to foundries instead of building their own 300 mm capacity in-house. Do you believe that the rationale of building a 300 mm capacity in-house is still valid? What are the competitive advantages you think you have over the foundry players?
Yeah. I think it's a huge advantage. My best representation is find somebody, yourself or others, and go study 20 years of competitive advantage that people like at Analog Devices or Maxim or LTC have gotten with their own analog process technology, and how that lets their circuits be less noise, faster, lower power, whichever knob you want to turn is the direct result of having control of that process technology. We are sitting here today because we're the one that can do it, able to do that internally. Increasingly, people that have to look to outside wafer fabs are going to find fewer degrees of freedom to be an analog specialist, and that's been an important component of the strategy in the past.
It's, I think, going to be a very long-term and building competitive advantage that TI has in the analog business, one that I look forward to really having on our side.
This is my Rich question. Coming back to cross-selling, I think history tells us that cross-selling has actually not really been that great, especially in the analog side of things. Has anything changed in the industry that would be significant for your strategy there? Has TI even done something internally to change how customers think about that?
Yeah. Tore, I don't know how to question because I don't know your frame of the, "It hasn't worked in the past." In some ways, I don't think it's been really tried in terms of find me the example where the breadth and depth that we've put together has been done. I can't think in my 30 years in the business where that would be. The words may have been used, but it wasn't at the product with sales and all the pieces in place on that. First, I would challenge the overall thesis. Second thing is we have discovered, even via the National, some really fascinating advantages. Some of you, we probably had them. I wasn't at that October session.
Some of the winning combos or killer combos, I think the lawyers changed it to winning combos or something, where when we were getting ready to go out with the National announcement, we were taking their best of breed, combining them with some of our best stuff, and really going out. A lighting winning combo, electric motor control. I forget. I think we're up to 50 or 60 different winning combos. It's really kind of boring, and I think the Street would say, "Gosh, you idiots never figured this out in the past." The response that we've gotten back from the promoting of the, quote, winning combos, where response is measured, and this is where you've got to be careful, back to the leading metric, is customer inquiry, request for samples, things that are nice to see, but not revenue yet.
The response is higher than anything we have ever had on a single new product. This idea of relaunching and relaunching together successful products has really surprised us what we've seen out of the combination on that front. I think some of that's National's got really good stuff, but some of it is we're starting to market and promote different. Other things that you see us doing right now that are fundamentally different is National had a If you were a power designer, okay, you would've known about a product that National had called WEBENCH. It's the ability to actually go on the web, put in your power supply variables, and it tells you what parts and guides you through what you select. We've been busy loading TI products into WEBENCH, you can imagine the simple reason why. Very good tool. Designers love it.
Now let's get more products moving through that. There's just two examples that to some people are like, "Man, that sounds boring," but that's how you get to 90,000 customers. It's how you get to 90,000 customers in a very productive and very leveraged way.
Thank you.
Thanks, guys. I know you've given us a little bit of color in the most recent quarter on the SVA revenue performance. Can you just maybe take us through the SVA revenue performance over the last three quarters, essentially since you guys took over? Also, if you can give us any color on margin trends and what those have been versus your expectations, then what we could expect on the revenue and margin trends of SVA for the rest of this year.
Yeah. Kevin, correct me, we watched National week third.
Right.
Okay. Week third quarter, that was before restated on a calendar basis, that was before closing with TI. We had a comparison in fourth quarter.
It was down a little bit when you adjust for the fact that we canceled a distribution supplier they had.
It was in the same range as the other Analog businesses.
In the same range, yes.
Okay. A reasonable up, it led in Q1, but it was because of the supply change with a distributor in Q4. That's the rough near term piece in terms of where that is, Chris. What I would tell you is when we look at that thing out over time, it's back to, I know Stacy asked the question before, it really is about do we have confidence to get it back on that curve that we had looked at. We looked at a range of high, medium, and low, as you could imagine. That actually does look pretty encouraging. We're not going to break out and forecast what that line looks like because we have enough of them to keep track of. Sitting here today, when we look at the leading indicators, they look pretty encouraging on that front.
Let's get those into results and that's the right way to talk about progress on that front. Margins performing, in some ways, the bad commercial behavior, we are the beneficiary of it. Margins have held well. The products are great. We've really enjoyed it. Utilization will move up on that, so I think we'll see good constructive things on the margin side.
Okay. With that, I think we're going to wind this part of the meeting down. Hopefully, all of you will be able to join us for a reception that will run till about 6:00. Nasdaq has a great room out there overlooking Times Square, literally through those curtains by the beverage center back there. Thank you all for joining us.