Good day,
and welcome to the Texas Instruments 4th Quarter and 2013 Year End Earnings Conference Call. At this time, I would like to turn the conference over to Ron Slemmaker. Please go ahead, sir.
Good afternoon and thank you for joining our 4th quarter year end earnings conference call. As usual, Kevin March, TI's CFO is with me today. For any of you who missed the release, you can find it and relevant non GAAP reconciliations on our website 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 statement contained in the earnings release published today as well as TI's most recent SEC filings for a more complete description. The Q4 was a good one and wrapped up a good year. We're entering the Q1 of 2014 feeling better than we did entering the Q1 of 2013. Before I review the quarter, let me provide some information that is important to your calendars.
Starting this quarter, we will not be providing a mid quarter update to our outlook. Our business is now sufficiently diverse across markets and customers that we believe a mid quarter update is no longer necessary. The diversity in our business means that TI's results should mostly reflect broader industry trends as opposed to TI specific considerations such as adjustments in demand from a large customer. In fact, in our last eight updates, we've narrowed to the middle of the range 6 times on a revenue basis. We do plan to hold a call on March 13 to update you on our capital management strategy.
This will be a follow on to the call we did a year ago on this topic. In this call, Kevin March will provide insight into our strategy and also answer some of the most frequent questions that we are asked about this strategy. More details will be forthcoming. Revenue in the 4th quarter was in the upper half of our range of expectations. Once again, cash generation and returns remain strong.
Free cash flow was $3,000,000,000 or 24 percent of revenue for the trailing 12 month period or in this case the full year of 2013. Over that same period, we returned over $4,000,000,000 of cash to investors through a combination of dividends and stock repurchases. This return was 136 percent of free cash flow for the year. Again, our strategy is to return all of our free cash flow to our shareholders except what is needed to repay debt. EPS was at the midpoint of our range.
However, it also included $0.03 of charges for a restructuring action that was not previously included in our guidance. So overall, a good quarter. The restructuring that is underway is a result of our ongoing assessment of our investments and the market opportunities that we are addressing with those investments. 1st, we are reducing costs in certain embedded processing product lines that either have matured or do not offer the return opportunities we are looking for. These changes will accelerate the profit margin improvement in the embedded business while still maintaining its pace of growth.
I'll note that we are not exiting any markets or discontinuing any existing products, but are aligning resources consistent with our updated views of the market opportunities. We are also lowering costs in Japan by reducing resources in that country to levels that are appropriate to the opportunity. Combined, these actions are expected to result in annualized savings of about $130,000,000 by the end of 2014. As a result of these actions, we will eliminate about 1100 jobs. Total charges are estimated to be about $80,000,000 with $49,000,000 included in the 4th quarter results and the remaining charges of about $30,000,000 to be included in the 1st quarter.
These charges are recognized in the other segment. In the 4th quarter results, TI revenue grew 2% from a year ago. Excluding legacy wireless, revenue grew 10% with double digit growth in both analog and embedded processing. Sequentially, revenue declined 7% with half of the decline due to seasonally lower calculator revenue. Analog revenue grew 12% from a year ago and declined 3% sequentially.
From a year ago, all 4 major product lines were up with Power Management leading the growth. Sequentially, all major product lines were down with high performance analog declining the most. Embedded processing revenue grew 11% from a year ago and declined 10% sequentially. From a year ago, the growth was due to strength in microcontrollers. Connectivity revenue grew a single digit percentage rate and processors were about even.
Sequentially, all areas were down with the biggest decline in processors. In our other segment, revenue declined $209,000,000 or 27% from a year ago. The decline was due to legacy wireless dropping $216,000,000 Sequentially, other revenue was down $90,000,000 due to the seasonal decline in calculators. Legacy wireless revenue was $54,000,000 in the 4th quarter and we expect it to be essentially gone in the Q1. Turning to distribution.
Resales declined 3% sequentially, trending about the same as our semiconductor product revenue. Distributors inventory levels were about even with the prior quarter. Let me make a couple of observations about the year overall. For 2013, analog and embedded processing revenue grew a combined 4% with analog up 3% and embedded up 9%. These two key areas were 79% of TI revenue for the year, up from 72% in 2012.
Operating margin for analog was 25.8% and it exceeded 30% during the second half. Operating margin for embedded processing was 7.6%, a level that should increase as we continue to grow and as we execute our restructuring plan to better align resources with the opportunities that we are pursuing. Finally, we are refining descriptions of our end market mix to more closely match our perspective of our markets and investments. Traditionally, we and many other companies have described the markets as communications, computing, industrial, consumer, automotive and education. The real world didn't always align so cleanly and some of the categorizations became blurred.
For example, consumer smartphones were included with infrastructure equipment in the communications market and consumer tablets were included with servers in the computing market. In both of these examples, high volume consumer products were grouped together with enterprise equipment that have very different life cycles and market characteristics. We believe our revised segmentation is more descriptive and reflective of the markets we fell into and therefore more helpful for our understanding of our business. Starting now, we will provide an annual snapshot of our product mix along the following market descriptions: Industrial, which was 24% of revenue in 2013 Automotive, which was 13% of revenue Personal Electronics, which was 37% of revenue and includes subsets, which we call sectors such as notebooks, tablets, mobile phones and consumer products communications equipment, which was 16% of revenue Enterprise Systems, which includes sectors such as servers and projectors, was 6% of revenue and calculators, which was 4% of revenue. We have mapped our product revenue into these markets as well as the sectors and even end equipment levels below that, we find this especially beneficial for the industrial market where the market definition has historically not been very clear and where we have a strong strategic focus.
We now have a reasonably precise profile of where our revenue is shipping that is more accurate than we've had in the past. We've included on our website this 2013 product revenue breakout by market along with the 2011 2012 historical breakouts. We've also identified the sectors below the market to provide you a clear understanding of how we're mapping the revenue. We will not be disclosing our revenue breakout below the market level. We plan to update this for you annually.
Now Kevin will review profitability and our outlook.
Thanks, Ron, and good afternoon, everyone. Gross profit in the quarter was $1,640,000,000 or 54.2 percent of revenue. Gross profit declined 8% sequentially, about the same as the 7% decline in revenue. Gross margin held up very well, slipping only 60 basis points from last quarter's record high. From a year ago, gross profit was up 13%, well above the 2% increase in revenue.
The result was a 5 70 basis point expansion in gross margin. There are a couple of major reasons for gross profit expanding significantly faster than revenue. First, the quality of our portfolio has improved as a higher proportion of our revenue is from analog and embedded processing products. 2nd, our factory utilization has improved as we have increased loadings in our most advanced factories and we have shut down older less efficient manufacturing assets such as our Houston and Hiji 6 inches factories. Moving to operating expenses, combined R and D and SG and A expense of $807,000,000 was down $26,000,000 sequentially and down $48,000,000 from a year ago.
Sequential decline is mostly due to seasonality as employees typically take more vacation and holiday time in the Q4. The decline from a year ago was due to the wind down of our legacy wireless products. Acquisition charges were $84,000,000 almost all of which is on the is the ongoing amortization of intangibles, a non cash expense. Restructuring and other charges were $62,000,000 This included a $49,000,000 charge for the restructuring action that Ron discussed. This was not included in our prior guidance and negatively impacted earnings by $0.03 per share.
Operating profit was $687,000,000 or 22.7 percent of revenue. Our tax rate in the quarter was 25%, a point above the 24% that we had guided. The effective tax rate remained 24%, but we had several small discrete items that pulled the rate up in the quarter. Net income in the Q4 was $511,000,000 or $0.46 per share. Let me now comment on our capital management, starting with our cash generation.
Cash flow from operations was $1,201,000,000 in the quarter. We increased our inventory by $5,000,000 compared with the prior quarter. Inventories days increased by 6 days to 112 days consistent with our model of 105 days to 115 days. Capital expenditures were $107,000,000 in the quarter. I should note this includes our purchase of a 358,000 square foot assembly and test facility in Chengdu, China that is adjacent to our existing wafer fab.
We expect to have this facility equipped and in production by the Q4 of this year. On a trailing 12 months basis, cash flow from operations was $3,380,000,000 Trailing 12 months capital expenditures were $412,000,000 or 3 percent of revenue. As a result, free cash flow was $2,970,000,000 or 24 percent of revenue. This is within our expected range of 20% to 25% of revenue. I'll note that depreciation expense for the full year was $879,000,000 Depreciation exceeded our capital expenditures by $467,000,000 or 3.8 percent of revenue.
Over the next few years, as we continue to hold capital spending to low levels, depreciation will decline to the rate of capital spending and our gross margin will directly benefit. And as we said, strong cash flow, particularly free cash flow means that we can continue to provide significant cash returns to our shareholders. In the 4th quarter, TI paid $326,000,000 in dividends and repurchased $734,000,000 of our stock for a total return of $1,060,000,000 Our capital management strategy is to return all of our free cash flow to shareholders except for what we need to repay debt. In the full year 2013, free cash flow was $2,970,000,000 and we reduced our debt level by $500,000,000 We returned a total of $4,040,000,000 to shareholders or 136 percent of free cash flow. This return was 54% higher than in 2012.
We returned more than our full free cash flow in the year because proceeds from exercises of employee stock options totaling $1,310,000,000 in the year have also been an additional source of cash for the company, all of which was used to repurchase stock. There was an abnormally high level of exercises in the year due to the stock price performance. Although the exercises were somewhat of a headwind for the share count reduction, we more than offset this with stock repurchases. In the end, we reduced our shares outstanding by 25,000,000 shares or 2.3% in 2013 similar to the last couple of years. In total, we have reduced our share count by 37% since the beginning of 2,005 with our repurchases.
Fundamental to our cash return strategy are our cash management and tax practices. We ended the 4th quarter with $3,830,000,000 of cash and short term investments with 82% of that amount owned by TI's U. S. Entities. Because our cash is largely onshore, it is readily available for a variety of uses including paying dividends and repurchasing our stock.
TI's orders declined 10% sequentially and our book to bill ratio was 0.94. Turning to our outlook, we expect TI revenue in the range of $2,830,000,000 to $3,070,000,000 in the 1st quarter. At the middle of this range, revenue would decline 3% sequentially with most of the decline coming from the final step down in legacy wireless revenue, which is now essentially gone and should not be a factor in sequential trends after the Q1. Therefore, if you exclude the legacy wireless revenue from the Q4 of 2013, revenue at the middle of this range will be almost even sequentially. If you exclude it from the Q1 of 2013, growth would be 10%.
We expect 1st quarter earnings per share to be in the range of $0.36 to $0.44 which includes a $0.02 EPS impact from the $30,000,000 of restructuring charges discussed earlier. We expect our effective tax rate in 2014 to increase to 27% and this is the rate you should use in your models for the Q1. This is about 3 percentage points higher than our 2013 effective tax rate, negatively impacting earnings per share by $0.02 in the Q1. This rate is higher due to the expiration of the R and D tax credit at the end of 2013 and our forecast for higher profits in the year. Historically, the R and D tax credit has expired and was later reinstated retroactively to its expiration date.
In summary, we're encouraged that a lot of hard work at TI over the past few years is producing results. Today, we're a company firmly rooted in analog and embedded processing, areas that have strong potential for growth and good profits that require low capital investments and therefore can generate a lot of cash. Although much of the heavy lifting associated with the structural improvement of TI is now behind us, our work is not done. The restructuring action we discussed today is a result of an ongoing process FTI of review and continuous improvement. This process helps ensure that we focus our investments on opportunities that have the best potential for sustainable growth and returns.
With that, I'll turn it back to Rob.
Thanks, Kevin. Operator, you can now open the lines up for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator?
Thank
We We'll take our first question from John Pitzer of Credit Suisse.
Yes. Good afternoon, Ron and Kevin. Congratulations on the good results. I guess, Ron, can you help me understand when you talk about these realignment actions, how big of a revenue pie did these costs kind of cover? And what was sort of the growth hurdle or the gross margin hurdle that you guys used to try to determine this sort of realignment of costs?
Well, I don't know that I can get into all of that detail, John. But clearly, the embedded processing overall runs I think last year was just about 20% of our revenue. The processor piece of that I think we've probably communicated I can update it even for 2013 was 50% of our revenue last year. And again that's where I would say most of the actions in embedded processing are taking place. And again, it's primarily in processors.
I would say secondarily, we're taking some action inside of micro controllers as well. But processors was about half the revenue. And of course, not all of processors is being affected, but certain product lines within that. And then separately the action in Japan, last year Japan was about 9% of our total revenue. And again, this is just more or less an action to on the one hand, we'll be consolidating some of the business activity that was previously in Japan just to other regions of the world where we can do it more efficiently.
But then also we'll be affecting some of the sales and marketing activities in Japan kind of to align those resources with that opportunity that we see in Japan going forward. So do you have a follow on John?
Yes, guys. And just relative to the new segmentation with personal electronics being 37%, I'm just kind of curious should that be an area where we see future realignment? Or do you feel given your cost structure you can still go after the growth in that market at that sort of acceptable returns? How do I think about that 37% over time as a percent of the mix?
John, I would say to you that the if you take a look at that on the website, you'll see that this down a little bit year over year. And really what's going on there is the wind down of the legacy wireless. That's where the handset and the tablet space is coming down. We will continue to be engaged in personal electronics. Make no mistake about it.
The biggest difference is that we'll be driving a lot more aggressively with our catalog products as opposed to custom products. And on the historical basis that catalog products tend to have a much longer life to them and a much better margin profile to them than custom products do. So there won't be any overt change to our approach to personal electronics. It'll just wind down on its own because of the wind down on legacy wireless as the biggest driver of that.
Okay. Thank you, John. Let's move to next caller please.
And we will go next to Doug Friedman of RBC Capital Markets.
Hi, guys. Thanks for taking my question. Can you take a look or give us some insight into how far all of your acquisitions have been integrated? What you're talking about now on your restructuring identify?
Doug, we haven't made an acquisition in a couple of years of any meaningful size. And we've pretty much wound up the, if you will, the synergistic opportunities of that consolidation about a year ago now. So there's not really much in the way of synergy as it relates to acquisitions going forward. What we're doing on this restructuring is just part of an ongoing exercise that we've actually done for a long time. They're usually of a smaller level, in this case a little bit larger.
But that's really looking at where we're spending our research dollars and looking at the market opportunity that those products from that research spend would go into. In this case, we've got some of the markets have matured or about to mature, which means we don't need to have as many teams designing new parts for it. Or in other cases, we may have invested in certain markets where we had anticipated better growth and return opportunities, but those initial expectations have since been changed for a variety of reasons. So there's really no acquisition synergies I can think of to suggest to you. This is just really an ongoing process of dealing with the reality of market changes over time.
Do you have a follow on Doug?
Yes. As my follow-up, there has been some concern in the industry as far as unit growth and the ability to grow revenues sort of above global GDP levels. We saw some interesting data out of the SIA recently showing some pretty steep declines in analog ASPs. Can you comment if you're seeing any change in the way either you or your competitors are approaching the business? I don't know about competitors.
I can say that at TI, we have not reset our expectations downward as you might be suggesting there from a growth standpoint. I think over the last few years global GDP has been certainly below a normalized run rate and that certainly has affected our industry as well. But our view is that the markets that we serve being analog and embedded processing will likely grow on a unit basis and frankly from a revenue basis about 2x global GDP. We believe that for some time. And again, we're looking at longer term trends not what happened over the last 3 years or even 5 years.
And again, our view on that is unchanged. Okay, Doug. Thanks for your questions. Let's move to our next caller please.
We will go next to Christopher Dangerly of JPMorgan.
Hey, thanks guys. Just a question on the restructuring. How much of the cost savings will go into COGS versus OpEx? I mean, what do
you think is going to be the revenue headwind by the end of the year in terms of picking these products up?
Chris, on the cost savings, again, we anticipate by the end of the year, we'll be at about $130,000,000 annualized cost savings as we exit the year. About 65% of that will probably be in R and D, about 20% in SG and A and about 15% in cost of revenue. As it relates to revenue, there should be no impact on revenue. We're not eliminating products. We're not discontinuing products.
We're these are products that have very long lives. What we're really dealing with here is that the rate of change in those markets have matured now in most cases and it no longer makes sense to continue to invest or invest as heavily as we have because there's just not the growth window there. And Chris in many
of these markets that we view are maturing, frankly, you could double, you could triple the investment and not affect the revenue level, not affect the growth rate just because the nature of what the market trend overall is doing. So again, let me just reiterate, we said it in the prepared remarks, but Kevin just said it, there are no products being discontinued and we're not exiting any markets with this action.
Do you
have a follow on Chris?
Yes. Can you guys just maybe give us kind of the status update on your end markets and what you expect to grow maybe the most versus the least for this year?
Okay. I can do part of that, which is the historical view. I don't think we want to try to extrapolate into a forecast for 2014. But let me just and let me just start with Q4 2013. And again, this information really is coming out of the database that I described we've put together for our new market framing.
But again, Q4 most end markets were down sequentially. The biggest driver of our revenue decline though was the seasonal decline in calculators. And I think as we said before, that was half of the sequential dollar decline in 4th quarter. Outside of that, personal electronics declined the most followed by enterprise systems and industrial and all three of those areas declined at single digit percentage rates. Automotive and Communications Equipment were each about even sequentially.
Just a little more color on some of those areas. Industrial, we saw strength in appliances and industrial displays, but that strength was offset more than offset actually by broad based declines elsewhere. In Enterprise Systems, really we saw weakness or declines there due to servers. And in personal electronics, we saw declines in TVs, gaming and printers, and we saw strength sequentially in tablets. Moving to the full year 2013, industrial for TI, this is based for our revenue was up 7%.
That was driven by factory automation, building automation, appliances, medical and motor drive. Automotive was up 14%
for TI in
the year, driven by infotainment systems as well as advanced driver assist systems and safety. Personal electronics revenue was down 18%, due to mobile phones and tablets as we wound down our legacy wireless business followed by much smaller declines in other areas of personal electronics. Communications infrastructure for the year was up 4%, driven by both wireless infrastructure and enterprise switching. Enterprise systems for the year was down 8% driven by servers and projectors and then calculators declined 3% for the year. Okay, Chris.
Thanks for your questions and we'll move to the next caller.
And we will go next to Blayne Curtis of Barclays.
Good afternoon. Thanks for taking my question.
I apologize if you answered this already. The decline in embedded, you had expected decline in processors. Was that greater than you were expecting? And where do you see the trajectory this year for that business? Blaine, let me first of all get some data in front of me.
We saw and it's are you talking about the sequential trend in Q4 there? Sequential decline into the December quarter. It was down double digits. Yes. And so I don't to be honest I don't have the data here on our forecast.
I can't say that was I again reiterate it was down double digits as was connectivity. Microcontrollers was down also, but to a much lesser degree. But I don't have the forecast data on processors to be able to say what it did versus our expectations. Do you have a follow on Blaine? Yes.
I think someone asked this already, but just looking at the March quarter sequentially, do you see any of your segments growing? And if so, which ones? And do you would you point out any segments that are outside of calculators that are down a significant amount? Again, calculators will be typically flattish in the 4th to 1st transition. That's their typical seasonal pattern anyway.
The only area that we really said we expect an additional decline is in legacy wireless where it will go from $54,000,000 in the 4th quarter to be essentially gone in the Q1. I think we described that already. Outside of those two areas, we don't really have comments in terms of end market trends that we expect to evidence in Q1. Okay, Blayne. Thanks for your questions.
Let's move to next caller.
And we will go next to Stephen Chen of UBS.
Hi. Thanks for taking my questions. First question is on the Automotive segment. Based off of the strong 14% growth that you just mentioned for last year, I was wondering if you had any color from downstream customers on the on inventory levels in supply chain and especially given the I think some of the comments from AutoNation last week about relatively high automotive inventories in the U. S.
Is there any comment about momentum there in the first half of this year?
Steve, I don't I probably don't have anything more that we would have from a that would be a unique perspective TI provides. When you have somebody talk like AutoNation talking about inventory of automobiles, you have that data. We don't have any unique perspective. That's several layers below where we're selling into that supply chain. I'll speak more broadly that we believe inventory seems to be pretty well managed currently, if not lean.
You heard my comments on distribution. Distribution inventories remain below 5.5 weeks, which again are lean. But anything in terms of a particular supply chain like automotive, we really don't have that granularity. But again, our general sense is inventory is not at all an issue more broadly into the markets that we're serving.
Do you
have a follow on Stephen?
Yes. My follow-up is on gross margins and sort of relative to where your inventory levels are currently. If I'm not mistaken, in prior quarters, you were able to build a little bit of strategic inventory in some of your longer shelf life products.
And just given
where the inventory levels are currently, would it be safe to say that you would not continue to build any more strategic inventory? Thanks.
Stephen on the inventory, we disclosed the quarter at about 112 days of inventory, which is consistent with the model that we have for ourselves of carrying between 105 115 days. And specifically, if you look at our balance sheet, you'll notice that during the Q4, we drained our work in process and our finished goods increased somewhat. That's just reloading the factories to meet the lowered outlook that we had in the Q4. We do expect in the Q1 to begin to reload the factories as we go forward. Inside that one 112 days is the strategic inventory that you were talking about which is parts that have long shelf lives.
And we've been building that up for a couple of years now and we'll continue to manage that at about its current levels. Okay, Stephen. Thank you for
your question. We'll move to the next caller.
And we will go next to Timothy Arcuri of Cowen and Company.
Thanks a lot. Ron, can you talk given the
savings on the OpEx, can you talk a little bit about how OpEx is going to work its way through the year? Is there sort of anything out of the ordinary other than just how the $130,000,000 gets ratably impacts the P and L through the year? Thanks.
Tim, let me go ahead and comment on that for Ron. The first thing to remember about OpEx is it will seasonally go up in Q1. If you look over the last 3 or 4 years and just compute an average, you can see that on average it probably got about 4% 4th quarter to 1st quarter and you can expect an increase again in this Q1 as we start out 2014. As we flow through the year, the cost savings that we talked about as a result of the restructuring actions will begin to show up in the second half of the year. And by the time we leave the year, we'll have we'll be at about $130,000,000 annualized savings rate at that breakout that I mentioned earlier across R and D, SG and A and cost of revenue.
Okay. Tim do you
have a follow on? I do. Yes. So if I look
at analog share, you've been talking about SBA gaining share this year. And if you just take seasonal December for the SIA, it looks like your share in analog basically was flat in 2013 versus 2012. So is there something that maybe might start to kick in 2014 that is going to cause analog to gain share year over year? Thanks. Well, we'll
see how our 2014 rolls out. I guess for starters based on the WFTS data that's been released through November, we believe we actually gained a small amount of share in analog. And by the way, I should note, if we just look over the last few years, I guess, I have data since 2,009 in front of me, on average, we've gained analog share at probably 30 to 40 basis points on average per year. We've gained in every one of those years. And the range has been pretty broad.
I mean there are some years where we may be, I'll say, 10 basis points of gain and other years during that time period where we've gained over 100 basis points. So I would say it's not necessarily a smooth curve in terms of market share gains, but at least it's consistent from the standpoint of we believe we've gained share every year. And it's our expectation and our intention to continue doing that including 2014. And by the way, everything I think I just said there, I could also apply to embedded processing. Although, I would also say that embedded processing probably in 2013, our share stepped up a little more strongly in embedded processing than it did in analog last year.
But again market share is important to us. Everything I've also described about our market share gains was on an organic basis. So it's not comprehending acquisitions and the impact of National or anything like that. But again, we've been gaining share consistently and we expect to continue that. And I guess that's your that was your follow-up Tim.
Let's move to next caller please.
And we will go next to Jim Cavallo of Goldman Sachs.
Great guys. Thanks so much for taking the question. Recognizing it's a relatively small part of the business, are you managing the 8% year over year declines in servers as if that's a secular issue driven by server virtualization that some of the other companies have also highlighted weakness in that area? Or do you think that was more of a cyclical issue in the server market? Do you expect to bounce back in that area?
Thanks.
Jim, I'll comment on that. I can't say specifically that we're managing servers by itself. We are looking at the entire compute space, notably hard disk drives for example, and noting what's been going on in total demand for hard disk drives and managing accordingly to what looks to be a secular decline as you pointed out Jim in that space. And so we've been adjusting our investment levels in that technology development and our staffing levels and so on to meet what we believe is a smaller market going forward than what we've seen in recent years.
Okay. That's helpful.
Yeah. Thanks. In terms of the
M and A outlook, I know you just mentioned that you hadn't done the deal in a couple of years. And obviously, you guys have been so good about doing these deals over the years and then you kind of integrate it and potentially over time you've looked at others. If you do not do a deal in the next couple of years, do you think it would be because you really don't find one that's for sale that makes sense? Or do you just really not think that incremental deals make sense regardless of whether they're available from here? Thanks.
Jim, I'd say it's more the first not the latter. That is when we take a look at potential acquisitions, we look real hard at the numbers and we've got to be able to make sense of the numbers. And namely, we've got to be able to get a return on that investment that exceeds our weighted average cost of capital in a reasonable time frame, which we define as 3 to 4 years. So if we can't get past the numbers, then we just simply step aside and wait for an opportunity to come at a later date. So really a number is driven analysis as we look at M and A.
Okay.
Thank you, Jim. Let's go to the next caller please.
And we will go next to Ebru Srivastava of Bank of Montreal.
Hi. Thank you. Guys, a question on the diversions. And I know that every quarter both the businesses will not track around the same levels, but embedded was down a lot more on a Q over Q basis versus analog. What was driving that?
Ambrish, I think it's very similar to what you said. I don't know that it's just the markets that embedded cells into. In this case, we noted that the processor area was down more than other areas. Obviously, you're going to have different customers, you're going to have different markets, but they're both very diverse businesses. But they're not uniformly consistent in terms of the customers, the markets that they're selling into.
Beyond that, we don't really we don't have a specific color for you. Do you have a follow on on, Bhrees?
Yes, I did, Ron. Going back to the comments you made earlier on at the top of the call, you mentioned that you're feeling a little more and I don't want to paraphrase the word, but the message was you're feeling better about 2014 than you did heading into 2013. Is that just to do with the new rationalized product portfolio? Or is that a comment based on what you're seeing from
the end markets? Thank you.
I think it's both to be honest. I'll make some comments and Kevin probably has some things as to how he's feeling as well. But I'd say first of all, the strength and position of where we are today in analog and embedded is a big factor. Having those two product lines now making up 82% of our revenue going out of the year in the 4th quarter frankly, is a great feeling and positions us you know as well as any, Ambrish, how long the wind down of that wireless revenue was, having that wind down behind us such that the top line growth of the company can reflect a lot of the good things that we're doing, a lot of the potential that Analog and Embedded have embedded in them is just great. I think also more specifically the overall environment in terms of the markets that we're selling those products into.
And frankly, just areas of strategic focus such as we've said, industrial is really important to us. Automotive is really important to us. The strength of those markets and frankly our position in those markets not that our position is so strong that it's saturated. We like the fact that we have lots of headroom for growth and market share gains, but we also like the design position we have there. And then maybe just a little more tactically, coming out of 4th quarter our book to bill was stronger exiting the year than it was a year ago.
And we also have good backlog coverage coming into Q1 as well. So those are the kinds of things that I know we look at. Kevin, do
you have anything else you would add? Yes. Ambrish, I'd probably just say on a macro level, looking at the total economy, the U. S. Economy clearly seems to be stepping up its growth.
Europe appears to have stopped declining and it appears that China is stabilized. And those are 3 big economic regions of the world. So you got to feel better about that at this stage starting 2014 than we did 12 months ago starting 2013 with the uncertainty we're all staring at in those 3 economies. And then again a bit more tactically to what Ram was talking about. If you look back a year ago, the sum of analog and embedded processing was 74% of TI.
Today it's 82%. A year ago, analog and embedded processing were down quarter over quarter 9% on revenue in 4th quarter and flat year over year. You fast forward to this year and not only is analog embedded processing bigger in percent, it's also bigger in dollar terms, it was only down 5% quarter over quarter and it's up 12% year over year. So we've got real momentum going as we move into 2014. So you take the macro look, you take it TI specific as the portfolio is finishing its restructuring and you got to feel pretty good about how we're going to start 2014 and what the year may hold for us.
Okay, Ambrish. Thank you for those questions. We'll move to the next caller.
We will take our next question from Tore Svanberg of Stifel Nicolaus.
Yes. Thank you. First, I had a capital management question. So last year was pretty unusual, dollars 4,000,000,000 and $1,300,000,000 I think you said came from stock option exercises. I know obviously you don't have a crystal ball on this, but could you just give us a rough sense as we look into 2014 what we can expect as far as free cash regeneration and especially maybe handicapping the stock options exercises?
Yeah. Tory, I do wish I had a crystal ball to help out with that particular question, but like you I'm lacking on that right now. I would say that we would expect that the exercises are going to be lower next year than they were this past year. But I would also just put aside any concern about that because frankly we just use the cash proceeds from those exercises to buy back shares. It doesn't really impact what we've been able to do to share count for our stockholders.
I believe in early March, we're going to have as Ron mentioned, we're going to have a capital management strategy update. And that will be a really good time to ask some of these questions. I'll take you a little deeper into some of what we're thinking on where we're going with capital management at that time.
Yes. That was very helpful. Also do you have any CapEx and R and D estimates for the year? I know in the past sometimes you've at least given the R and D guidance for the year. Just wondering if you're going to do that again this year?
Yeah. I'd say going forward you're not going to be getting that from us anymore, Tore. The CapEx guidance that we'll give you is simply as the band that we talk about around our revenue meaning that our target is 4% to 7% of revenue in any one year. And we expect that given the size of our manufacturing footprint today, we don't expect to be pushing above the lower end of that range. In other words, probably more around the 4% of that range of revenue until we hit about $18,000,000,000 of revenue.
So from a CapEx guidance, that's how I'd suggest you'll hear the modeling from us going forward not a specific number. And on R and D, frankly we're reaching a point now where it's pretty stable and it should probably just kind of grow with paying benefit increases over time and with the top line revenue growth over time. So based upon that, we're not going to be providing R and D guidance going forward. You'll be able to just take a look at our results and it will be pretty straightforward for you to model that going forward.
And I think, Tory, the other one I would comment on is, we've also historically given annual guidance for depreciation. But again given that depreciation is so gapped these days from CapEx And frankly, it's a multi year lagging indicator versus our CapEx trend. So it just doesn't seem to us to be a especially useful number and from a guidance standpoint. And clearly, you guys can go off and make some assumptions on what that may be just given what our capital spending trends have been. Okay, Torrey.
Thank you for those questions and we'll move to our next call.
We'll take our next question from Vivek Arya of Bank of America.
Thank you for taking my question. Actually both my questions are about different end markets. So first on the wireless infrastructure market, if you could give us a sense for whether some of the restructuring you're doing on the processor side, does that impact the ability to benefit from all these 4 gs LTE deployments? Or am I just feeding too much into that and there isn't any connection in that case? What are the trends that you are seeing in that market?
Okay. Vivek, I would say that
first of all, we don't believe anything that we are doing here is going to impact our ability to benefit from LTE deployments. And again a lot of those and that does not mean that the base station area is not an area where we're seeing some resource reductions. It is. But just in general LTE, we are already very well positioned across those various customers. Our system on a chip products have been out in the market for some time.
And so we'd have a great position as LTE continues to deploy. As to the comment, let me just talk maybe more broadly and I'll start at the embedded processing level and then drill down into some of your comps infrastructure question. But let me say again just you heard us give the numbers, but embedded processing has really delivered strong growth this year. That came out of areas like catalog microcontrollers, specifically product lines like the MSP430, the C2000. It came out of areas like connectivity, processors for automotive markets, processors for industrial markets.
So those areas that have been driving and producing growth, we will continue to invest as aggressively as we have in the past. The reductions that we're making are as I said before primarily processors and then secondarily in some of the product areas in MCU. So within processors, I would identify areas like IP cameras and certain areas of communications infrastructure where frankly the future growth just doesn't merit our current levels of investment. Now to specifically kind of your question about LTE and base stations more broadly, I guess I don't want to go into a lot of specifics there except to say again comms infrastructure is an area that will receive fewer resources. And is based on our view that parts of the macro base station market are maturing.
On the flip side, small cell is an emerging opportunity for us and we'll continue to invest accordingly there. But even in the maturing areas of base station, as I started off here, we believe our revenue will continue for a very long time given the breadth of our position and the long lives of the equipment that we're already engaged with there. So hopefully that provides you some color as to what we're doing in comps infrastructure. Do you have a follow on Vivek?
Yes, Ron. Actually I had thought about asking about the PC market, but instead what I'll ask you is in the market it's always about what have you done for me lately. And last year the TI story was about the benefits you got from exiting wireless, the really strong capital returns. And now I think for this year, what we're hitting is sort of the same. So what is really the next catalyst that can help you either outgrow the market or provide much superior returns than what we are seeing from the peer group.
So really what is the value proposition for outsized Invesco over weighting PI this year?
Well, Vivek, I think that there's a number of opportunities in front of us that we've got going on here. You've seen some pretty strong growth rates that we just talked about in the areas we've been focusing our attention on for a number of years now analog and embedded processing. We talk about the fact that we're returning 100% of our free cash flow and that's what we use for debt, but we also have plenty of room to grow with very little need to spend that much more to grow and I'm talking specifically about our manufacturing footprint. If you take a look at the very cost effective factories that we've put into play over the last couple of years and the low level of CapEx it takes for us now to keep those factories going, the incremental margin and cash flow opportunity from those factories is extremely attractive. In addition to that, we've just got the overall growing space in industrial and automotive, which tend to be not only quite long lived revenue profiles, but also quite attractive margin profiles.
And again, those products run across those inexpensive factories and just help generate ample amounts of cash. So I think from an investor standpoint, there are quite a few things to continue to look forward to, which is really our ability to continue to grow at the kind of rates that we're doing now inside the analog and embedded processing and leveraging the very inexpensive factors we put in place to generate a lot of cash.
So Vivek, let me make a couple other comments. I think a lot of our long term oriented investors clearly look through the wireless transition frankly even over the last few years into what TI was becoming and that was the value proposition for them, a company focused on very diverse markets of analog and embedded processing that didn't require a lot of capital that generated a lot of cash. And then as you pointed out, they liked management's commitments to return that cash to them. I would kind of take a different view from what you described with some of the other investors because investors a lot of investors I've talked to last year, the year before, the year before, the response was give me a call. We like what you're doing in wireless.
Give me a call when you're out of it and that no longer represents a headwind for your growth. So for investors that have been sitting on the sideline because of the concern that wireless represented such a significant headwind to growth, I think the value proposition for them is clear. It's no longer there. And the growth that we've been producing in Analog and Embedded is no longer going to be an obstacle for top line growth. And for a lot of those investors that frankly our growth hasn't screened very well in the past that's not going to be an issue going forward.
So just my $0.02 worth on that topic. Okay. Let's move to the next caller operator. And I believe this will we'll see likely will be our last caller.
Very good. And we will go next to Ross Seymore of Deutsche Bank. Hey, Ron. Thanks for squeezing me in. Two quick ones.
What would you say your new targets are if they've changed at all for the growth rate in embedded as well as your operating margin goal in embedded given the restructuring actions?
Okay. I would just say, 1st of all, in terms of growth rate target, absolutely no change. And again, I think Embedded did a good job on growth last year. Frankly, we would have liked to have seen that growth come through at a higher level of profitability overall for the business. But growth has not been an issue.
And to the extent that we've tried to describe for you, our investments in the areas that are growing in embedded will continue unabated. So our expectations for growth embedded, for growth in embedded are absolutely unchanged. And I think you'll continue to see good results there. In terms of profitability and margin objectives, I guess what I would say Ross is, I know we've provided some numbers in the past, but in fact I'll say what we've said in the past because you I'm sure you are you have them in your notes there. I think in September 2012 Investor Meeting, our manager there described that his embedded his gross margin targets were 55% to 60%, operating margin target was about 30%.
What I would say is, in general, a well run company focused on the embedded processing market opportunity, We think has potential for a financial profile consistent with those types of numbers. That being said, I don't think what we're going to do with this segment is very similar to what we've done for analog and not the communicating specific gross margin and operating margin targets and progress going forward. But again, clearly, our objectives are much higher than where that business ran last year and ran 4th quarter. Do you have a follow on, Ross?
I do. I can't let Kevin get away with the whole conference call without somebody asking about the gross margin. Kevin, any help on the puts and takes for the Q1 as we look at the gross margin? It seems to imply at the midpoints of everything that it's down a little bit, but just want to double check on that. Thanks.
Yes, Ross. You're right. I won't give you specific guidance, but I'll give you some high level things to think about. Clearly, as we came through the 4th quarter, we were taking our factory starts down through the quarter. As we go into the Q1, we're taking our factory starts up.
That's on the expectation of a normally stronger second quarter for us. The result of that is going to be that while starts will be higher in the Q1 than they were in the Q4, the average utilization won't really change that much. And so just based upon that and the timing of moving the wafers through the factories and through the assembly test sites, we would probably see a little bit of gross margin headwind as we bring those factories back up, but not a large amount.
Okay. With that, my clock shows it is 5:30. So we are going to wrap up at this point. I'd like to thank you for joining us. A replay of this call is available on our website and good evening.
And this does conclude today's conference call. Thank you again for your participation and have a wonderful day.