Good day, and welcome to the Texas Instruments 4Q 14 and 2014 Year End Earnings Conference Call. At this time, like to turn the conference over to Dave Paul. Please go ahead, sir.
Thank you, and good afternoon, and thank you for joining our 4th quarter and year end 2014 earnings conference call. As usual, Kevin March, TI's Chief Financial Officer, is with me today. For any of you who missed the release, you can find it and relevant non GAAP reconciliations on our web at ti.com/ir. This call is being broadcast live over the web and can be accessed through TI's website. A replay will be available through the web.
This call will include forward looking statements that involve risks and uncertainties that could cause TI's results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in the earnings release published today as well as TI's most recent SEC filings for a more complete description. Before I review the quarter, let me provide some information that's important to your calendar. We plan to hold a call on February 4 10 o'clock a. M.
Central Time to update our capital management strategy. Similar to what we've done in for the last 2 years on this topic, Kevin March will provide insight into our strategy and also answer some of the most frequently asked questions. Turning to our earnings update. The 4th quarter marked another quarter of strong progress. Our core businesses of analog and embedded processing grew again with combined revenue up 13% from a year ago.
Revenue of $3,270,000,000 came in at the middle of the expected range that we communicated to you in October. Earnings per share were 0 point 7 and a $0.02 benefit from gains on sales of assets. Without these two items, our earnings would have been in the middle of our expected range. In the Q4, our cash flow from operations was $1,300,000,000 We believe that free cash flow growth, especially on a per share basis is most important to maximizing shareholder value in the long term. Free cash flow for the year was $3,500,000,000 up 18% from a year ago.
Free cash flow was 27% of revenue consistent with our targeted range of 20% to 30%. This is a 3 percentage point increase improvement from a year ago period. We believe this reflects our improved product portfolio and the efficiencies of our manufacturing strategy, which includes our growing 300 millimeter output and the opportunistic purchase of assets ahead of demand. We also believe that free cash flow will be valued only if it's returned to shareholders or productively invested in the business. In 2014, we returned $4,200,000,000 of cash to investors through a combination of stock repurchases and dividends.
In the Q4, TI revenue grew 8% from a year ago with growth in both analog and embedded processing. Analog revenue grew 14% from a year ago led by power management. High volume analog and logic, high performance analog and Silicon Valley analog also grew. This is the 6th quarter in a row of year over year growth for analog. Embedded processing revenue grew 11% from a year ago due to growth in processors, microcontrollers and connectivity, each of which increased by about the same It is notable that connectivity grew at the fastest rate as we continue to see more products being connected.
This is the 9th consecutive quarter of year over year growth for embedded processing. In our other segment, revenue declined 14 percent from a year ago due to legacy wireless and custom ASIC products. Turning to distribution, resales increased 14% from a year ago, consistent with our combined revenue growth of analog and embedded processing. Weeks of inventory decreased by a week from a year ago to a historically low level of just under 4.5 weeks. This level has decreased over the past few years because we structurally changed how our inventory is managed in the distribution channel with our consignment program.
This quarter, we continue to support more of our distribution sales from consignment inventory and now have about 60% of our distribution revenue on consignment, up about 15 percentage points from a year ago. With this program, inventory sits on TI's balance sheet and revenue is recognized when our distributors pull products from our consignment inventory that's stored at the distributor's location. We carry higher levels of inventory on TI's balance sheet with this program, which has several benefits, such as minimizing impact due to changes in distribution channel inventory and giving us greater flexibility to meet customer demand. Turning to our end markets. In 2014, industrial and automotive combined were 44% of TI's revenue, up a couple of percentage points from last year.
Specifically, industrial made up 31% of TI's revenue, automotive 13% personal electronics 29% communications equipment 17% Enterprise Systems 6% and Other 4%. We continue to refine our understanding of our customers' end markets with better tools and software. On our website, we've included the last 2 years of updated market estimates and we've identified the sectors inside of each of those markets for your reference. Finally, let me make a few observations about the year overall. For 2014, analog and embedded processing revenue grew a combined 12%, with analog up 13% and embedded up 12%.
We gained market share in both businesses again in 2014. These 2 key businesses were 83% of TI's revenue for the year, up from 79% in 2013. Because they now make up more of our revenue, they're driving top line growth for the company. TI revenue overall grew 7% in 2014. Now Kevin will review profitability, capital management and our outlook.
Thanks, Dave
and good afternoon everyone. Gross profit in the quarter was $1,901,000,000 or 58 percent of revenue. Gross profit increased 16% from the year ago quarter. This gross profit reflects higher revenue, increased factory loadings and an improved product portfolio focused on analog and embedded processing that benefits from our efficient manufacturing strategy. Moving to operating expenses.
Combined R and D and SG and A expense of $740,000,000 was down $67,000,000 from a year ago. The decline primarily reflects the targeted reductions in embedded processing in Japan that were previously announced. That restructuring is now essentially complete and we achieved a little more than our estimated annualized savings. Acquisition charges were $82,000,000 almost all of which with the ongoing amortization of intangibles and non cash expense. Restructuring and other charges were a $27,000,000 benefit due to gains on sales of assets.
Operating profit was $1,101,000,000 or 33.6 percent of revenue. Operating profit was up 60% from the year ago quarter. Operating margin for analog was 38.7%. Operating margin for embedded processing was 17.0% more than doubling from a year ago as we benefit from our investments for growth and as we executed our restructuring plan to better align resources with the opportunities that we are pursuing. While this is solid progress, we still have work to do in this business.
We expect embedded operating margins to continue to increase as our investments in R and D and SG and A will continue to drive top line growth, while we hold these expenses flat. Net income in the 4th quarter was $825,000,000 or $0.76 per share. As a reminder, earnings per share included a $0.05 benefit for the reinstatement of the federal research tax credit and a benefit of $0.02 from the gains on sales of assets. Let me now comment on our capital management results starting with our cash generation. Cash flow from operations was $1,270,000,000 in the quarter.
Inventory days were 117, slightly above our model range, but a number that we are quite comfortable with. It is consistent with the growing portion of our product being supported with consignment inventory versus customer owned inventory. We believe these consignment arrangements give us better real time feedback to end market demand, allowing us to better manage our factories and maintain short lead times. We expect consignment inventory to continue to increase over the coming years as distribution becomes a growing portion of our business. We will monitor the appropriateness of our current model of 105 to 115 days of inventory and possibly this model in the next year or so.
Capital expenditures were $125,000,000 in the quarter. In 2014, cash flow from operations was $3,800,000,000 up 15% from the same period a year ago. For the year, capital expenditures were $385,000,000 or 3% of revenue. As a reminder, our long term expectation is for capital expenditures to be about 4% of revenue. Free cash flow for the year was $3,570,000,000 or 27% of is most important to maximizing shareholder value in the long term and will be valued only if it's returned to shareholders or minus net debt retirement.
In the Q4, TI paid $356,000,000 in dividends and repurchased $698,000,000 of our stock for a total return of $1,050,000,000 Total cash returned in 2014 was $4,150,000,000 which is 3% higher than the prior year. Outstanding share count was reduced by 3.3% over the past 12 months and by 39% since the beginning of 2,005. These returns demonstrate our confidence in TI's business model and our commitment to return excess cash to our shareholders. Fundamental to our commitment to return cash and our cash management and our tax practices, We ended the 4th quarter with $3,540,000,000 of cash and short term investments. TI's U.
S. Entities own 82% of our cash. Because our cash is largely onshore, it is readily available for a variety of uses including paying dividends and repurchasing our stock. TI orders in the quarter were $3,180,000,000 up 11% from a year ago. Turning to our outlook.
We expect TI revenue in the range of $3,070,000,000 to $3,330,000,000 in the Q1. At the middle of this range, revenue would increase 7% from a year ago. We expect Q1 earnings per share to be in the range of $0.57 to $0.67 Restructuring charges will be essentially nil. Acquisition charges, which are non cash amortization charges will remain about even and hold at about $80,000,000 to $85,000,000 per quarter for the next 5 years. Our expectation for our annual effective tax rate in 2015 is about 30% and this is the tax rate you should use for the Q1 and for the year.
The rate is higher than the last year because of an expected increase in profits and does not assume the reinstatement of the R and D tax credit. In summary, the Q4 demonstrates the growing strength of TI's business model. Our strategy is anchored and analog in the beta process and is bolstered by an efficient manufacturing operation and a broad sales channel. The result is a diverse and long lived positions in many markets. We remain intent on excellence and execution, being disciplined in allocating our capital and our firm belief that free cash flow per share is the best long term indicator of shareholder value.
With that, let me turn it back to Dave.
Vicki, you can now open the lines up for questions. In order to provide as many of you as possible the opportunity to ask a question, please limit yourself to a single question. After a response, we'll provide you an opportunity for an additional follow-up.
Thank you. We'll take our first question from Chris Danley with Citi.
Hey, thanks guys. Good quarter. Kevin, I guess if you had to characterize the overall environment now versus say a quarter ago or a year ago, would you say broadly speaking not much has changed for us still in this kind of fine roughly seasonal environment? Or have you seen any changes in visibility of your overall business?
No, Chris, I think you said it well. It probably hasn't really changed all that much. There was a slight change in our book to bill on a year over year basis. This quarter was about 0.97 percent. The year ago quarter was 0.94%.
But frankly, because more and more of our orders are coming in on consignment, I think book to bill means less and less about a predictor of where our revenue is going. So I think that if we summarize our sense, it's more steady as she goes just like we've seen for the last few years of an economy just kind of growing along on a steady basis and we're trying to take advantage of a little bit faster than that.
And Chris, let me add just the other things that we see. If you look at our inventory, it's at a healthy level. Our channel inventories are actually down a week as I said earlier from a year ago. It's just under 4.5 weeks. Our lead times remain consistent.
Our cancellations and reschedules remain very, very low. And in addition, we continue to deliver our products on time for customers. So those types of things are always a good indication for the overall environment too. Do you have a follow-up?
Yes. So it sounds like things are pretty normal seasonal to disties too. Can you give us any sense of the relative growth rates of your major product lines this year? What you're expecting between analog embedded and the other stuff?
No. We don't try to forecast out a year on the major product lines or even at the company level. I will point out that both of those product lines turned in another year of market share gains. And certainly, we're working really hard to do that for another year. And we'll just have to see how the year turns So thanks Chris and we'll go to the next caller please.
We'll go next to Ambrish Srivastava with BMO Capital Markets.
Hi. Thank you. On the inventory front, are we to assume now that your visibility now vis a vis in the past is higher also because of higher percentages consignment of the disty and within that that gives you better visibility. Is that the right way to think about it? So the days are going up versus what your targeted range is and really not comparable to if we look at the last 5 year 10 year median?
And then I had a quick follow-up.
Yeah. Ambrish, I don't know that I would necessarily go to improved visibility, but we do get I'd say a much more improved or real time feedback from what's actually going on with true end demand for our products. And the real benefit of that is that we can adjust our factories on a real time basis whereas as you point out, if you went back a number of years, we carried far fewer days of inventory. But the signal as to how fast our products are actually being consumed in the end market also took a lot longer to get to us and so we'd respond later. Now we can respond much more quickly.
So it's less a question of improved visibility as it is a question of much more real time feedback as to just how fast our products are being consumed.
Okay. Thanks for the clarification Kevin. That's what I meant because we always get into this debate in cycles about sell in and sell through. My quick clarification is what should we be modeling for CapEx for this year? Thank you.
Yeah. I'd continue to recommend that you would assume that we will average about 4% of our revenues on CapEx on average over multi year periods. Some years might be a little lighter like it was this past year where we came in at about 3% in 2014. But on average, we expect 4% and that's how we build our own internal models. Great.
Thanks Ambrish. We'll go to the next caller please.
Next question is from John Pitzer with Credit Suisse.
Yes. Good afternoon, guys. Congratulations on the good results. Kevin, 90 days ago when you were talking about OpEx for the December quarter, you said that looking back a year ago and how it flowed a year ago was probably a good model. And you even mentioned that it'd probably be a good model going into the calendar Q1.
Is that statement still hold? Or can you help us understand the puts and takes on OpEx going into the March quarter, especially around some seasonal costs?
Yes, John, you're exactly right. So going from Q4 to Q1, the best way to model that is to take a look through the last year as a good starting point. And we typically are up in the mid single digits from 4th to 1st on OpEx and that's because of the absence of the holiday periods that we have in 4th quarter and the annual startup of PAM benefit increases that we have in Q1. This year, we might be up just a little bit more than that versus a year ago, simply because on higher profitability that we're expecting for the year. We also expect higher variable compensation accruals.
And so that may take our 1st up a little bit higher than what you saw about a year ago.
Do you have a follow on John?
Yes, I do. Just going back to kind of the analog space, Dave, maybe you can give us a little bit more color because it's pretty impressive. You guys put up double digit growth year over year this quarter against pretty hard compares from the year ago quarter. So I'm just kind of curious to what extent do you think your market share gains could be accelerating around your consignment efforts? Or you could just help me understand a little bit better?
I know you talked about power kind of leading the way this quarter. Can you help me understand a little bit more why the growth seems to be doing much better than some of your peers?
Well, yes, I think when you look year over year, first of all, it's good to have all 4 of those businesses contributing to the growth. Certainly, Power is benefiting from just a secular trend of things wanting to run more off of batteries and things that do get plugged in becoming more efficient. We also have a very strong product line there too. So I think that those things are helping us to gain share. And if we've talked about for some time that it's not one thing inside of a business like analog or embedded processing that allows you to gain share.
There's a lot of things that you have to do to be a good analog company and we've got a lot of competitors that fit that category. But we've got other things like the scale of our and reach of our sales force, our presence on the web, our manufacturing footprint, the technology that we bring to bear and the breadth of the product portfolio. So I think it's just all those things kind of working together.
That we've discussed for a couple of years now of buying our capacity ahead of our needs and always having ample capacity quite frankly gives our customers new and old increased confidence that we have adequate capacity to meet their demand requirement. And they see us consistently maintaining short lead times. And so that's just another element that helps us be able to win market share versus some of the other competitors we're up against. Yes. That's good.
Okay. Thanks, John. We'll go to the next caller please.
We'll go next to Harlan Sur with JPMorgan.
Good afternoon and great job on the quarterly execution. Thank you for taking us through the OpEx step up here in Q1. Now with most of the embedded in Japan restructuring kind of behind you, but continued discipline on the team's part, how should we think about the OpEx trends beyond the Q1? I
think Kevin I heard you mentioned your embedded OpEx
kind of holding flattish, but how should we think about the overall business beyond Q1?
So, Harlan, I think the best way to think about that is,
we discussed, I think
it was back in 2011 that on average, we'd expect our OpEx to run between 20% 30% of revenue. So like in a weak market, it might be at the 30% level and stronger would be in the 20% level. We're in a pretty good we're performing quite well in our markets right now. And so you're seeing that OpEx come down. In fact, most recently in the second half of twenty fourteen, we were running around 23% of revenue.
And so I would say that you would want to model us in the lower half of that range
as you try to about how
much our OpEx spend will be in 2015. Great.
Do you have a follow on Harlan?
Yes. Thank you for that. Your thoughts directionally on utilization levels here in Q1 given sort of the seasonality in your business? I would assume that it's down again given the book to bill ratio and the revenue guidance for Q1. Is that kind of also how we should think directionally about gross margins as well?
Well, I think the way you need to think about utilization is first by definition because we buy capacity ahead of time, we will by definition be operating in an underutilized environment versus our maximum capacity theoretical capacity. But that aside, because of manufacturing cycle times, the material that we're starting in the Q1, especially as we move into the 2nd month of the Q1, really is destined for 2nd quarter shipments. And so your utilization tends to proceed the quarter you're moving into as to what your expectations are. And as the Q2 for the last 3, 4, 5 years now and normally for us as a growth quarter compared to the Q1, we will adjust our factored loadings accordingly to our expectation to second quarter revenue expectations. Okay.
Thank you, Harlan. And we'll go to the next caller please.
We'll go next to Stacy Rasgon with Bernstein.
Hi, guys. Thanks for taking my question. I think to follow-up on that gross margin question, looks to me your implied guidance for margins is maybe 57%, maybe a little higher, so low 57% is down a little bit on revenues that are down slightly with inventories a little higher. Could you just, I guess, give us some feeling of if you don't want to give numbers at least some of the drivers for gross margins into Q1? And in particular what are you planning to do with the inventory on your own balance sheet?
How will that trend?
Yes. I don't know that I necessarily have I want to get into the GPM per se. Let me just talk
a little bit more about
what our inventory levels might look like and how they might drive us. We don't have an inventory forecast per se, but given the growth in consignment and the typically seasonally strong 2Q, we'd expect our factory loadings to increase as we move through the quarter as I mentioned a moment ago. One of the things to keep in mind when you adjust your factory loadings, if you're One of the things to keep in mind when you adjust your factory loadings, if your quarterly loadings are really for the following quarter's expectations, then if you think about the pattern of movement through the quarter, you take your loadings coming into 4th quarter, our loadings will be dropping coming into the quarter. And going into the Q1, our loadings start to increase during the quarter. And so you're always going to have a bit of a lag when you try to track the GPM that follows with that, which I think is what you're asking for there, Stacy.
I think more importantly, what we see going forward is that our margins, we expect to continue to improve along with our free cash flow by virtue of the fact that analog and embedded processing continue to become a larger portion of our total revenues and by virtue of the fact that 300 millimeter manufacturing continues to be a larger portion of our total production as we go forward and both of those result in both higher margins and higher free cash flow.
Got it. Thank you. That's helpful. For my follow-up, just to touch on the tax rate. So your guidance for next year 30 percent, a little higher than your guidance for 2014 was which I think was 28%.
I just wanted to verify is the only real source of that just the higher profit versus expectation? I think you had called us before to sort of tax every incremental dollar of profit around at the incremental tax rate 35%?
Yes. Stacy that's correct. In fact our tax rate in 2014 our guidance was as you said they rounded down to 28% and actually came in just a little bit higher than that if it weren't for the R and E credit. And so we're looking at rounding up to 30% as we move in to 2015. So you're exactly right.
As you model what you would expect our earnings and fall through to be, you should tax that at approximately 35% delta profit as it comes to during the year.
And I'll just point out too Stacy that that does not assume the reinstatement of the R and D tax credit
that we got for 2014. Yes. If that does reinstate that'd be between 1 and 2 points of tax benefit.
That's right. Good. Okay. We'll go to the next caller please.
We'll go next to Vivek Arya with Bank of America Merrill Lynch.
Thanks for taking my question. Actually when I look at your Q4 results versus consensus estimates, you did better in your core analog and embedded segment. But there was some shortfall in the other sales, which were actually down 6% year on year. I think they were down almost 11% last year. And I believe you mentioned some loss of ASIC business.
I'm wondering what is the right way Kevin or Dave to model this segment, because it is a very profitable segment for you. It is still a decent sized segment. And I think in the past you have mentioned that it could be sort of flattish plusminus2% or so. So just conceptually what is the right way to model this segment?
Yes. If you look Vivek at the other segment, the first thing I would point out is it has our calculator revenue and the seasonally strong back to school season happens in the 2nd and third quarter. So those tend to be the seasonally strongest quarter. 3rd to 4th that biggest transition sequentially of course is due to the change of that business. If you look overall, you can look at the components that sit inside of other.
The first is DLP. And I'd describe that as a more steady business and one that may have some we describe as wildcards of new opportunities. The vast majority of that business is in front projectors today as well as in cinema. And we've got some what we call Pico projectors or small form factor projectors that make up the revenue. But there's some opportunities inside of automotive and other embedded opportunities that could provide growth in the future.
The next biggest piece of that revenue is calculators. And that business has been I'd say flat maybe slightly down over time. And then royalties have run steady about $40,000,000 to $50,000,000 a quarter and that's probably a good thing to look. And then we will have business that will transition over to EP over time. That is some business that's in Communications Infrastructure and we believe that that will move over.
So you kind of net all that stuff together and we kind of think that the other segment will be flat maybe up or down a percentage point as we've described in the past.
And I think Vivek you also asked about year over year. Just recall that last year still had about $55,000,000 or so of wireless revenue in it and this year is essentially 0. So that's your biggest decline on a year over year basis?
That's correct. Did you have
a Yes. So as my follow on back to your core business, do you think you have the right scale in your embedded business to take op margins into the 20s? So when I look at the three areas within that business processors, connectivity, microcontrollers, how would you rank TI against the best competitor in that segment? And really I'm trying to understand how you can grow that segment, gain share, improve margins, while keeping investments flattish, while all your competitors are all investing in their respective businesses? Thank you.
Vivek, I'll leave it to you to analyze the competitors. I'll speak to how TI is doing. You may recall that back in late 2010 or early 2011 timeframe, we significantly stepped up our investments in that particular segment in order to accelerate our product introductions and therefore begin to accelerate our revenue growth. And if you take a look at what's happened over the last as Dave mentioned in his opening remarks 9 quarters of sequential of continuous year over year growth that strategy has paid off. So those products are really beginning to take.
And as you know those kinds of products tend to have very long shelf lives. So we expect to see more of the same on that. While we took spending down this past year as a result of the restructuring actions we announced this time a year ago, we didn't eliminate them. The amount that we're investing is still quite high And that's why the operating profit is still not quite where we think entitlement would take us to. So we continue to invest at quite a healthy level just not at the level that you saw us invest in, in the prior few years.
So those combined high levels of investment, a expanding product portfolio from heavier levels of investment in prior few years have all given us very strong growth in that segment and will continue to give us growth. And quite frankly based upon some of the best in class performers that you can look at out there, we have, shall we say expectations similar to at least as well as those companies are operating.
Yeah. And I'd also add Vivek, if you look at our product portfolio length inside of microcontrollers, we've got 2 architectures there where we'll introduce new products with new interfaces and that meet new standards inside of that. A lot of our competitors will have half a dozen or a dozen different architectures where they've got to spread their R and D investment over. So we can be very efficient with that. And in addition, if you remember as part of the wireless restructuring, we brought over those connectivity products that really already had a pretty significant investment in those wireless technologies.
So, we're supporting nearly a dozen different wireless standards today and that group is really focused on growing the top line rather than having to develop baseline technologies. That will thanks for that question Vivek and we'll go to the next caller please.
We'll go next to Jim Covello with Goldman Sachs.
Great, guys. Thanks so much for taking my question. Congratulations on good results. A lot of great questions asked already. My one question is just around the long term segment goals that you might have.
Auto is kind of low double digits. Personal electronic is almost 30%, although that's coming down. Is the goal really from a segment diversification standpoint to continue to increase in particular that auto subcategory and decrease the personal electronics category say over the next 2 or 3 years? Yes, Jim, I don't our goal is not necessarily to try to optimize that mix per se. I would say that, if you look inside of personal electronics as an example, we'll look for places where we can find sustainable revenue with a differentiated position.
And if you look at some of our largest customers that we sell products into, we'll sell several 100 devices into those customers. And those products could be anywhere from $0.75 down to a nickel. And oftentimes, they may have lives that live from one generation of a product to another. So those are the types of opportunities that we try to look for in a space like comms equipment. Now certainly from an investment incremental investment profile, if we had an extra dollar to spend and we had an opportunity to spend longer life cycles and better characteristics.
So that may see an increase in investment. And then lastly, I'd just add that those two markets I think have the secular trends that you're well aware of. So we'll benefit from that as rest of the industry will. And of course, we hope to benefit disproportionately from those investments. Do you have a follow on Jim?
Yes. I guess I'll stick on that topic. So I mean I guess personal electronics has been coming down, but your view would be it's not really a function of an intentional effort on the part of Texas Instruments. It's just more a function of the other businesses that you have or just happen to be better long term growth areas and it's sort of naturally coming down. Is that the right characterization?
Well, and even more specific than that, I think if you backed out legacy wireless, you'll see that it's actually been fairly stable as a mix. So that change in percentage is more driven by the strategic decision to exit that one portion of the business. So thank you, Jim. And we'll go to the next caller please.
We'll go next to Joe Moore with Morgan Stanley.
Hi. Thank you. I also want
to ask about the end market breakdown that you guys provide. If I look at where you were a year ago, I just there was probably some reclassification, but it looked like industrial went from 24% in 2013 to 31% in 2014 and personal systems from 37% to 29 percent. Those swings seem kind of dramatic. I just wanted to see if there was some change in the way you were looking at the breakdown?
Yes, Joe. We've continued to refine
our understanding of our customers' end markets.
That's you'll actually see 2 years of history that we have out there as well as the identified sectors that those markets made up. So do you have a
follow on?
No. That's all for me. Thank you very much. Okay. Thank you.
Next caller please.
We'll go next to Craig Ellis with B. Riley.
Thanks for taking the question guys and nice job on the quarter. Kevin, just a follow-up to the VEX discussion on embedded processing and expense control. It's really the flip side of that. Can you talk a little bit about what you're looking at before you would start to invest more in the business? It's clear you want higher operating margins than you have now, but what are the things that TI is looking at before it will commit to incremental investment in that business?
Yes. Craig, I would say that probably we're probably quite a ways off before we even have to entertain a question like that. Our focus for the next few years is managing the total spend inside that and driving top line growth. And frankly, if we begin to see top line growth then begin to net the kind of bottom line results that we can see happening in other players in that space. At that point in time, we might entertain increasing our spending, but not until then.
Okay. Thank you. And then
the follow-up is really taking another swing at something that Chris brought up, which is longer term growth on a segment basis. At least in my model, calendar 2014 was the 1st year in the last 4 or 5 where embedded processing and analog had similar growth rates and they were both double digits. Just philosophically, as you look at those two businesses, which have had very different histories, are there reasons why they should have materially different growth rates going forward? Or given that they're both closer to operating on more optimal levels, should they be fairly similar?
Yes. I think, when I begin to look longer term at the growth rate and the potentials of those businesses, I'd start with what do you believe the semiconductor market will grow at. We have held the position that we think that the semiconductor market roughly grows at twice the rate of GDP. There are some that will violently agree with this and some that will violently disagree with that basic assumption. But whatever that assumption is, we think both analog and embedded processing are big enough portions of the markets that they will grow in line with that.
If you look at those businesses, certainly over the last 5 years, they both have continued to gain share. And we believe that we're continuing to invest and we've got a lot of room to gain share. And in fact, in analog, we've got 18.3% market share and inside of embedded processing, we've got around 15 percentage points. So lots of headroom to do that. So and we've gained probably 30%, 40%, sometimes more than that in market share on a given year.
We still have to have everyone report before all the final numbers are in, but we're confident that we'll gain share again this year. So Kevin, do you have anything to add to that?
Yes. Craig, one thing I'd recommend you maybe take a look at. If you do look at those two segments Analog and Aveda Processes, their quarterly growth rates, I think that was the point you were making, they can vary quite markedly from one another. If you look at the 2 of them on a year over year basis, they actually are much more correlated than you might expect. They're both gaining share as Dave was mentioning and they're both growing quite nicely on year over year basis.
So if you do some measurements for those two segments on year over year growth rates and compare that back over the last half dozen quarters or so, I think you might be pleasantly surprised to see they grow pretty similarly to
each other. Okay, Craig. Thanks for that question. And we'll go to the next caller please.
We'll go next to Mark Lipacis with Jefferies.
Thanks for taking my question. Kevin, as you go into your Capital Management conference call next week, could you just remind us what your historical philosophy has been on levering the balance sheet to drive shareholder value?
Well, Mark, what we've talked about on debt that we have debt on the balance sheet today. It will be there until 2023 because that's when the last of the current outstanding bonds matures. And our attitude towards debt is that it will continue to be part of the balance sheet when the economics make sense. And for us that economics making sense means that if we can borrow at interest rates that we perceive to be below what we expect our inflation rates to be or correspondingly at less than our dividend yield then we think that's probably a good deal on behalf of our shareholders. And so that will be the kind of parameters that we look at as we continue to decide how much debt to carry on the balance sheet and as bonds mature going forward.
We do actually have $1,000,000,000 of debt maturing in 2015. We have $250,000,000 maturing in April and $750,000,000 maturing in August of 2015. You have a follow-up
on Mark?
Yes. Thank you for that color. As we so the analog business operating margins are about 2 1,000 basis points higher than the embedded. As we think about the potential profitability of the embedded business, is there are there structural reasons why embedded profitability could not equal the analog profitability longer term? Thank you.
Marco, I think the simple answer in my mind is difficult for us to find evidence of somebody in the marketplace outside of TI who's been able to perform at those kind of levels. I think the economics are such that they'll be very attractive and it's going to be a great place for us to be in. But it probably doesn't quite get up to par of what you see in analog. I think analog is quite unique in what it can produce for companies and for shareholders who own those companies like we do.
Great. Thanks, Mark. And we'll go to the next caller please.
We'll go next to Timothy Arcuri with Cowen and Company.
Thanks a lot.
Just a question again on gross margin and what the possible headroom is. I guess if you look at the embedded business, you're up to 17 But if you look at some of the well run peers in that space, they're doing sort of mid-20s. So maybe ask kind of a little bit different way. Is there any reason why you can't get the embedded margins up to the mid-20s?
No. There is no reason why
we can't do that. Yes. And we've made good progress obviously, Tim. We still have work to do. And but we believe that we can get into that range with revenue growth.
And so that's what we're planning to do. They've got a good start. We got 9 quarters in a row of year on year growth and are making progress towards moving that operating margin higher. Do you have a follow on?
Okay. I do, yes. And then just relative to the inventory, certainly some of it is structural as you indicated. But is any of the rise in inventory related to your perception that June could be sort of a little bit better than seasonal quarter?
Tim, I would say that it's probably too early for us to call the entire second quarter. Right now we're focused on the Q1. So the inventory that we've got staged today is designed to support our Q1 needs. And then as we adjust our factory loadings in the Q1 that inventory that we build will be designed to start to deal with our 2nd quarter needs. And as I mentioned earlier, we expect we will be ramping up our factories as we go through Q1 in support of the 2nd quarter.
And when we get to the end of the quarter, we'll find out how much inventory we're holding at that point in time.
Okay. Thank you, Tim. And operator, we've got time for one more caller.
We'll go to our last question from Doug Friedman with RBC Capital Markets.
Hi, guys. Thanks so much for
taking my question. I guess if I could dig deep into some of the results that you've reported and maybe some of the outlook that you might have by sort of key markets out there. I think investors are interested to hear what you're seeing in the PC and server power markets as well as maybe
the disk drive markets. And if you could offer some color
on what you're seeing in the communications overly material to the TI story, but they are to overly material to the TI story, but they are to investors in general.
Okay, Doug. Well, I can let me share some end market trends that we've seen. I think that that may address some of those issues maybe not down at the level that you were quite asking. So I think you were talking about PCs and those would fall into our personal electronics products. Those were on a year on year basis they were up despite the declines that Kevin had mentioned earlier in legacy wireless and that growth was led by mobile phones.
If you look at industrial and I want to point out when we talk about industrial, we've been very intentional about how to measure that and it's different than when investors talk about the industrial market. And the sectors, we've got a dozen sectors that make up industrial and they include things like factory automation and control, medical, healthcare, fitness, building automation, smart grid, motor drives, displays those types of things. The full list is out on our website. And we've seen that was up led by medical and healthcare fitness. Appliance factory automation and smart grid were also up from a year ago.
Conn's equipment was up due to wireless infrastructure. And then enterprise systems were up primarily due to projectors. So with that you have a follow on?
Great. I guess for my follow on, just what are you seeing in terms of any shift in the competitive landscape? I know investors are somewhat concerned over what we're seeing in China from an investment standpoint. Is there anything in your markets that you're seeing that would point to any change in the competitive landscape?
Doug, as it relates to China, in particular, because I hope you mentioned that there. We've been in China for a very long time now. We have over, I think, over a dozen sales and R and D sites there. We have both a wafer fabrication facility and an assembly test site there. In addition, we have thousands of customers buying thousands of parts and consequently, we've become a very supplier to a large number of Chinese companies across a very diverse set of markets.
So we see China as continuing to be a great opportunity for TI regardless of any competitive environments out there. And our goal is to operate in China just like we do in the rest of the world, which is to make ourselves an integral part of their success and an indispensable supplier. And we've got a great I'd like to say a long way we're a long way into that already and we feel pretty good about our position.
Okay. Great. Thanks for that question, Doug, and thank you all for joining us. We look forward to talking to you again on our February 4 Capital Management call. A replay of this call is available on our website.
Good evening.