Below is transcript of the Texas Instruments Incorporated (NASDAQ:TXN)’s Fourth Quarter and Year-End 2014 Earnings Call, held on Monday, January 26, 2015, at 5:30 pm EST. Kingdom Ridge Capital, Wallace R. Weitz & Co. and Marque Millennium Capital was among Texas Instruments Incorporated (NASDAQ:TXN) shareholders at the end of the third quarter.
Texas Instruments Incorporated (NASDAQ:TXN) designs and makes semiconductors that the Company sells to electronics designers and manufacturers all over the world. The Company has four segments: Analog, Embedded Processing, Wireless and Other. The Company’s products, more than 100,000 orderable parts, are integrated circuits that are used to accomplish many different things, such as converting and amplifying signals, interfacing with other devices, managing and distributing power, processing data, canceling noise and improving signal resolution.
Company Representatives:
Dave Pahl – VP, Head of Investor Relations, Texas Instruments, Inc.
Kevin March – SVP & Chief Financial Officer, Texas Instruments, Inc.
Analysts:
Chris Danely – Citigroup
Ambrish Srivastava – BMO Capital Markets
John Pitzer – Credit Suisse
Harlan Sur – JPMorgan
Stacy Rasgon – Bernstein
Vivek Arya – Bank of America Merrill Lynch
Jim Covello – Goldman Sachs
Joe Moore – Morgan Stanley
Craig Ellis – B. Riley
Mark Lipacis – Jefferies
Timothy Arcuri – Cowen and Company
Doug Freedman – RBC Capital Markets.
Operator
Good day and welcome to the Texas Instrument Fourth Quarter 2014 and 2014 Year-End earnings conference call. At this time, I would like to turn the conference to Dave Pahl, please go ahead sir.
Dave Pahl, VP, Head of Investor Relations
Thank you and good afternoon and thank you for joining our fourth 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 statement contained in the earnings released 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 is important to your calendar. We plan to hold a call on February 4th at 10 o’clock AM Central Time to update our capital management strategy. Similar to what we have done for the last two 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 fourth quarter marked another quarter of strong progress. Our core businesses of analog and embedded processing grew again with combined revenue of 13% from a year ago. Revenue of $3.27 billion came in at the middle of the expected range that we communicated to you in October. Earnings per share was $0.76 and included a $0.05 benefit for the reinstatement of the federal research tax credit and a $0.02 benefit from gains on sale of assets. Without these two items, our earnings would have been in the middle of our expected range.
In the fourth quarter, our cash flow for operations was $1.3 billion. 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 $3.5 billion up, 18% from a year ago. Free cash flow was 27% of revenue, consistent with our targeted range of 20% – 30%. This a 3 percentage point 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 would be valued only if it is returned to shareholders or productively invested in the business. In 2014, we returned $4.2 billion of cash to investors through a combination of stock repurchases and dividends. In the fourth quarter, 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 sixth quarter in a row year-over-year growth for analog. Embedded processing revenue grew 11% from a year ago due to growth in processors, micro controllers and connectivity, each of which increased by about the same amount. It is notable that connectivity grew at the fastest rate as we continue to see more products being connected. This is the ninth consecutive quarter of year-over-year growth for embedded processing.
In our other segment, revenues declined 14% 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 2 years because we structurally changed power inventories management and distribution channel with our consignment program.
This quarter, we continue to support more of our distribution sales from consignment inventory and now have 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 is stored at the distributor’s location. We carry higher loads 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 and markets with better tools and software. On our website, we have included the last 2 years of updated market estimates and we have identified the sectors inside of each those markets for your reference.
Finally, let me make a few observations about the year overall. For 2014, analog and embedded processing revenue grew up combined 12%, with analog up 13% and embedded up 12%. We gained market share in both businesses again in 2014. These two 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 are driving top line growth for the company. TI revenue overall grew 7% in 2014.
Now Kevin will review profitability, capital management and our outlet.
Kevin March, SVP & Chief Financial Officer
Thanks Dave and good afternoon everyone. Gross profit in the quarter was $1.90 billion or 58% of revenue. Gross profit increased 16% from the year ago quarter. This gross profits reflects higher revenue, increased factory loadings and an improved products portfolio focused on analog and embedded processing that benefits from our efficient manufacturing strategy. Moving to operating expenses, combined R&D and SG&A expenses $740 million was down $67 million from the year ago. The decline primarily reflects the targeted reductions of embedded processing in Japan that were previously announced. That restructuring is now essentially complete and we achieved a little more of our estimated annualized savings.
Acquisition charges were $82 million almost all of which were the ongoing amortization of intangibles and non-cash expense. Restructuring and other charges were a $27 million benefit due to gains on sales of assets. Operating profit was $1.10 billion or 33.6% of revenue. Operating profit was up 60% from a year ago quarter. Operating margin for analog was 38.7%. Operating margin for embedded processing was 17.0%, more than double in 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 a solid progress, we still have more to do in this business.
We expect embedded operating margins to continue to increase as our investments in R&D and SG&A will continue to drive top line growth while we hold these expenses flat. Net income in the fourth quarter was $825 million or $0.76 per share. As a reminder, earnings per share included a $0.05 benefit for the reinstatement for 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 $1.27 billion in the quarter. Inventory days were 117, slightly above our model range but a number we are quite comfortable with. It is consistent with the growing portion of our product demands be in support of this consignment inventory versus customer-owned inventory. We believe this 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 distributions 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 update this model in the next year or so.
Capital expenditures were $125 million in the quarter. In 2014 cash flows from operations was $3.89 billion up, 15% from the same period a year ago. For the year, capital expenditures were $385 million or 3% of revenue. As a reminder, our long term expectations is for capital expenditures to be about 4% of revenue. Free cash flow for the year was $3.50 billion or 27% of revenue. Free cash flow was 18% higher than a year ago. As we have said, we believe free cash flow growth, especially on a per share basis is most important to maximizing shareholder value in the long term and will be valued only for if it is returned to shareholders or productively reinvested in the business. As we have noted, our intentions to return 100% of our free cash flow plus any proceeds we receive from exercise of equity compensation minus net debt retirement.
In the fourth quarter, TI paid $356 million in dividends and repurchased $698 million of our stock for a total return from $1.05 billion. Total cash return in 2014 was $4.15 billion 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 2005. These returns demonstrates our confidence in TI’s business model and our commitment to return excess cash to our shareholders. Fundamental to our commitment to return cash in our cash management are our tax practices. We ended the fourth quarter with $3.54 billion of cash and short term investments. TI’s US entities owned 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 $3.81 billion, up 11% from a year ago. Turning to our outlook, we expect TI revenue in the range of $3.07 billion to $3.33 billion in the first quarter. At the middle of this range, revenue would increase 7% from a year ago. We expect first quarter 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 to $85 million per quarter for the next 5 years. Our expectations for our annual effective tax rate in 2015 is about 30% and this is the tax rate you should use for the first quarter and for the year. The rate is higher than last year because of unexpected increase in profits and does not assume the reinstatement of the R&D tax credit.
In summary, our fourth quarter demonstrates the growing strength of TI’s business model. Our strategy is anchored in our analog and embedded processing and is bolstered by an efficient manufacturing operation and a broad sales channel. The result is a diverse and long live positions in many markets. We remain intent on excellence in 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 I will return you back to Dave.
Dave Pahl VP, Head of Investor Relations
Vicki, you can open up the lines for questions. In order to provide as many of you as possible the opportunity to ask a question, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow up. Vicki.
Question and Answer Session
Operator
Thank you. We will take our first question from Chris Danely with Citi.
Chris Danely, Citigroup
Thanks guys, good quarter. Kevin, I guessed 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 to own this fine and roughly seasonal environment or have you seen any changes in visibility of your overall business?
Kevin March, SVP & Chief Financial Officer
Well, 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%, a 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 particular on where our revenue is going. So I think that to summarize our sense, it is more steady as it goes, just like we have seen for the last few years. Our economy just kind of grow in long on a steady basis and we are trying to take advantage and grow little faster than that.
Dave Pahl VP, Head of Investor Relations
And Chris let me add, the other things that we speak, if you look at our inventory, it is in a healthy level. Our channel inventories are actually down a week as I said earlier from a year ago, 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 products on time for customers. Those types of thing are always a good indication for the overall environment too. Do you have a follow up?
Chris Danely, Citigroup
Yes. These all sounds like things are pretty normal, seasonal to this this year. Can you give us any sense of the relative growth rate of your major product lines this year — what you are expecting between analog, embedded and the other stuff?
Dave Pahl VP, Head of Investor Relations
No, we don’t try to forecast out a year on the major product lines or even that, but the company level. I will point out that both of those product lines turned in another year of market share gains. And certainly, we are working really hard to do that for another year and we will just have to see how the year turns out. So thanks Chris and we will go to the next caller please.
Operator
We go next to Ambrish Srivastava, BMO Capital Markets
Ambrish Srivastava, BMO Capital Markets
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 percentage is consignment after [indiscernible] and within that [indiscernible] gives you a 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 you look at the last 5 years and 10 years maybe. And then I have a quick follow up.
Kevin March, SVP & Chief Financial Officer
Ambrish, I do not know that I would necessarily go to improved visibility but we do get, I’d say a much more improved real-time feedback from what is actually going on with true end demand for our products. The real benefit of that is that we can adjust our factories on a real-time basis, whereas as you point out, if we went back a number of years, we carried far few days of inventory but the signal as to how fast our products are actually been consumed in the end market also took a lot longer to get to us so we would respond later. Now we can respond much more quickly. So it is less the question of improved visibility, as it is a question of much more real-time feed backs as to just how fast our products are being consumed.
Ambrish Srivastava, BMO Capital Markets
Okay thanks for that clarification Kevin. This what I meant because we always get into this debate in cycles about sell-in and sell-through. My quick question is, what should we be modelling for CapEx for this year? Thank you.
Kevin March, SVP & Chief Financial Officer
Yes I would continue to recommend that we will average about 4% of our revenues on CapEx, on an average over a multi-year period. Some years might be a little later like it was this past year, were we came in at about 3% in 2014. But on the average, we expect 4% and that is how we built our own internal models.
Dave Pahl VP, Head of Investor Relations
Great. Thanks Ambrish, we will go to the next caller please.
Operator
Next question is from John Pitzer, Credit Suisse
John Pitzer, 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 a good model going into the calendar first quarter. Is that statement still hold? Can you help us understand the puts and take on OpEx going into the March quarter especially around some seasonal costs?
Kevin March, SVP & Chief Financial Officer
Yes, John, you are exactly right. So going from fourth quarter to the first quarter, the best way to model that is to take a look — really last year is a good starting point. We typically are up in the mid single-digits from fourth to first on OpEx and that is because of the absence of the holiday periods that we have on fourth quarter and the annual start-up of fund benefit increase that we have in the first quarter. This year we might be up just a little more than that versus a year ago simply because on higher profitability that we are expecting for the year, we also expect higher variable compensation accruals. And so that may take our first up a little bit higher that what you saw about a year ago.
Dave Pahl VP, Head of Investor Relations
Do you have a follow on John?
John Pitzer, Credit Suisse
Yes I did. Just going back to the analog space, maybe you can give us a little bit more color because it is pretty impressive. You guys put up a double-digit growth year-over-year this quarter against pretty hard compares from the year ago quarter. So I am just kind of curious, to what extent do you think your market share gains could be accelerating around your consignment efforts. If 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?
Kevin March, SVP & Chief Financial Officer
Well yes, I think when you look year-over-year, first of all, it is good to have all four of those businesses contributing to the growth. Certainly power is benefiting from just the secular trend of things wanting run more off of batteries, and things that do get plugged in becoming more efficient. We also have a very strong product line in there too. So I think that those things are helping us to gain share. And we talked about for some time that it is not one thing inside of a business like analog or embedded processing that allows you to gain share. There is a lot of things that you have to do to be a good analog company. We have got a lot of competitors that fit that category, but we have got other things like the scale 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 is just all those things kind of working together.
Kevin March, SVP & Chief Financial Officer
I will probably add one more thing in there too. Our strategy that we discussed for a couple of years now of buying our capacity ahead of our needs and always have an 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 for that system another element that helps us to be able to win market share versus some of the other competitors we are up against.
Dave Pahl VP, Head of Investor Relations
Okay thanks John, we go to the next caller please.
Operator
We go next to Harlan Sur, JPMorgan
Harlan Sur, JPMorgan
Good afternoon and great job on the quarterly execution. Thank you taking us to 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 trend beyond the first quarter? 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?
Kevin March, SVP & Chief Financial Officer
I think the best way to think about that is — we discussed I think it was back in 2011 that on average we would expect our OpEx to run between 20% and 30% of revenue. So like in a weak market it might be at the 30% level and stronger markets it would be in the 20% level. We are in a pretty good. We are performing quite well in the markets right now and so you are seeing that OpEx come down. In fact most recently, the second half of 2014 we were running around 23% of revenue. So I would say that you would want to model us in the lower half of that range, as you try to think of how much our OpEx spend will be in 2015.
Dave Pahl VP, Head of Investor Relations
Do you have follow on Harlun?
Harlan Sur, JPMorgan
Yes thank you for that. Your thoughts directionally on utilization levels here in Q1 given the seasonality in your business? I would assume that it is down again given the book-to-bill ratio and revenue guidance for Q1. Is that also how we should not think directionally about gross margins as well?
Kevin March, SVP & Chief Financial Officer
I think the way you need to think about utilizations is first by definition, because we buy capacity ahead of time, we will be definition be operating under in an under-utilized environment versus our maximum capacity, theoretical capacity. But that aside, because manufacturing cycle times, the materials that we are starting in the first quarter, especially as we move into the second month of the first quarter, really is destined for second quarter shipment. So your utilization tends to pre-stead the quarter you are moving into as to what your expectations are. And as the second quarter for the last three, four, five years now, and normally for us is a growth quarter compared to the first quarter, we will adjust our factory loadings accordingly to our expectation to second quarter revenue expectations.
Dave Pahl VP, Head of Investor Relations
Okay. Thank you Harlun and we’ll go to the next caller please.
Operator
We go next to Stacy Rasgon of Bernstein
Stacy Rasgon, 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 margin is maybe 57%, maybe a little higher, so low 57%, down a little bit. And revenues are down slightly, with inventories a little higher. Could you just give us some feeling of — if you do not want to give numbers, maybe some of the drivers for gross margins in Q1 and in particular, what are you planning to do with the inventory on your own balance sheet? How will that turned [ph]?
Kevin March, SVP & Chief Financial Officer
Yes, I do not know that I’ll necessary have — I am not getting into the GPM, per se. Let me just talk a little bit more about what our inventory levels might look like and how that might drive us. We do not have an inventory forecast per se, but given the growth in consignment in a typically seasonally strong 2Q, we would expect our factory loadings to increase as we move to the quarters, as I mentioned a moment ago. One of the things to keep in mind when you adjust your factory loadings, if your quarterly loadings are really for the following quarters expectations, then if you think about the pattern of movements through the quarter, you take the loadings to come into fourth quarter, our loadings will be dropping coming into the quarter.
And going to the first quarter, our loadings start to increase during the quarter. And so you always going to have a bit of a lag when you try to track the GPM that follows with that, which I think that is what you are 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 margin and higher free cash flow.
Stacy Rasgon, Bernstein
Got it, thank you. That is helpful. For my follow up, just to touch on the tax rate. So, your guidance for next year is 30%, a little higher than your guidance for 2014, which I think was 28%. I just wanted to verify, is the only real source of that just a higher profit versus expectation? I think you had told us before the tax every incremental dollar of profit around — at the incremental tax rate of 35%?
Kevin March, SVP & Chief Financial Officer
Yes, Stacy. That is correct. In fact our tax rate in 2014, our guidance was as you said, came rather down at 28%. It actually came just a little bit higher than that, if it were not for the R&D credit. So we are looking at rounding up the 30% as we move in to 2015. So you are 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 through during the year.
Dave Pahl VP, Head of Investor Relations
And I will just point out too Stacy that that does not assume the reinstatement of the R&D tax credit that we got for 2014.
Kevin March, SVP & Chief Financial Officer
If that does reinstate, that would be between 1 and 2 points of tax benefits.
Dave Pahl VP, Head of Investor Relations
Okay we go to the next caller please.
Operator
We go next to Vivek Arya, Bank of America Merrill Lynch
Vivek Arya, 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 were some shortfall on the other sales which are actually down 6% year-on-year. I think they were down almost 11% last year. I believe you mentioned some loss of ASIC business. I am wondering, what is the right way Kevin, or Dave, to model the segment because it is a very profitable segment for you and it is still decent sized segment. I think in the past you have mentioned that it could be sort of flattish, plus minus 2% or so. So just conceptually, what is the right way to model the segment?
Dave Pahl VP, Head of Investor Relations
Yes if you look back at the other segment, the first thing I would point out is, it has a calculated revenue and the seasonally strong back-to-school season happened in the second and third quarter. So it tend to be the seasonally strongest quarter. Third or fourth 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 described that as the more steady business and one that might have some, we described as wildcards of new opportunities. The vast majority of that business is in front projectors today as well as in cinema and we got some what we call pico projectors or small form factor projectors that make up the revenue.
But there are some opportunities from inside of automotive and other embedded opportunities that could provide growth in the future. The next biggest piece of that revenues is calculators and that business has been, I’d say flat or maybe slightly down overtime. Royalties have run steady, about $40 – $50 million a quarter, and that is probably a good thing to look. And then we will have ASIC that will transition over to EP overtime. That is some business that is in communications infrastructure and we believe that that would move over. So you combine all that stuff together and kind of think that the other segment will be flat maybe up or down a percentage point as we have described in the past.
Kevin March, SVP & Chief Financial Officer
And I think Vivek you also asked about year-over-year. Well, just recall that last year we still have about $55 million or so of wireless revenue in it. And this yer essentially zero. So that is your biggest decline in year-over-year basis.
Vivek Arya, Bank of America Merrill Lynch
So as my follow on, back to your core business. Do you think you have the right scale in your embedded business to take on off margins into the 20s? When I look at the three areas within that business, processors, connectivity, micro controllers. How would you rank TI against the best competitor in that segment? And really, I am 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.
Kevin March, SVP & Chief Financial Officer
Vivek I will leave it to you to analyze the competitors. I will speak to how TI is doing. You may recall back in late ’10 and ’11 time frame, we significantly stepped up our investments in that particular segment in order to accelerate our product introductions and therefore begin to accelerate of revenue growth. And if you take a look at what’s happened over the last — Dave mentioned in his opening remarks nine quarters of sequential or continues year-over-year growth. That strategy has paid off, so those product are really beginning to take. And as you know those kind of products tend to have very long shelf lives. So we expect to see more of the same on that.
Now while we cut spending down this past year as result of the restructuring we announced this time a year ago, we did not eliminate them. The amount that we are investing is still quite high, and that is why the operating profit is still not quite where we think our entitlement will 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 — an expanding product portfolio from heavier levels of investment in the prior few years, have all given us very strong growth net segment and will continue to give us growth, and quite frankly based upon some of the best in class performance that you could look at out there, we had, shall we say, expectations similar to at least as well as those companies are operating.
Dave Pahl VP, Head of Investor Relations
And I would also add, Vivek, if you look at our product portfolio, like inside of micro-controllers, we got two architectures there where we will introduce new products with new interfaces that meet new standards inside of that. A lot of our competitors will have half a dozen or a dozen different architectures where they got to spread their R&D investments over so we can be efficient with that. And in addition, if you remember as part of the wireless restructuring, we brought over those connectivity products that really already have a pretty significant investment in those wireless technologies. So, we are supporting nearly a dozen wireless standards today and that group is really focused on growing to top-line rather than having to develop a fine technology. So that. Thanks for that question Vivek, and we will go to the next caller please.
Operator
We’ll go next with Jim Covello with Goldman Sachs
Jim Covello, Goldman Sachs
Thanks guys. Thanks so much for taking my questions congratulations on good results. A lot of great questions was 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 is coming down. Is the goal really from the segment diversification standpoint that continue to increase in particular that auto-sub category and decrease the personal electronics category say over the next two or three years?
Kevin March, SVP & Chief Financial Officer
Yes, Jim, our goal is not necessarily to try to optimize that mix per se. I would say, if you look inside of personal electronic as an example, we will look for places where we can find sustainable revenue with a differentiated position. If you look at some of our largest customers that we sell products into, we’ll sell some several hundred devices into those customers and those products could be anywhere $0.75 down to a nickel. And often times they may have lives that lives 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. Certainly, from investment — incremental investment profile, if we had an extra dollar to spend and then we had an opportunity to spend that in either industrial or automotive, those products in general does tend to have longer life cycles and better characteristics, so that may see an increase in investment. And then lastly, I think those two markets have the secular transit that you are well aware of. So we will benefit from that, the rest of the industry will, and of course we hope to benefit just proportionately from those investments.
Dave Pahl VP, Head of Investor Relations
Do you have follow on Jim?
Jim Covello, Goldman Sachs
Yes I guess I will stick on that topic. I guess personal electronics has been coming down and but your view is really a function of an intentional effort of the part of Texas Instruments, it is just more a function of the other business that you have or just happen to be better long term growth areas and it is sort of naturally coming down. Is that the right characterization?
Dave Pahl VP, Head of Investor Relations
Well and even more specific than that I think if you backed out legacy wireless you will see that it has 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 will go to the next caller please.
Operator
We go next to Joe Moore with Morgan Stanley
Joe Moore, Morgan Stanley
Hi thank you. I also like to ask about the end market breakdown that you guys provide. If I look at where you were a year ago, and there was probably some reclassification but it looks like industrial went from 24% in 2013 to 31% in 2014, and personal assistance from 37% to 29%, so the swings seem kind of dramatic. I just wanted to see if there were some change in the way you are looking at the breakdown.
Dave Pahl VP, Head of Investor Relations
Yes Joe, we continued to refine our understanding of our customers and markets. Now we got better tools and software. So if you go out to our web now, you will actually see our two years of history that we have out there as well as the identified sectors that those markets made out. Do you have a follow on?
Joe Moore, Morgan Stanley
No that is good enough for me thank you very much.
Dave Pahl VP, Head of Investor Relations
Okay, thank you. Next caller please.
Operator
We go next with Craig Ellis, B. Riley
Craig Ellis, B. Riley
Thanks for taking the question guys and nice job on the quarter. Kevin just a follow up to Vivek’s discussion on embedded processing and expense control, it is really the flip side of that. Can you talk a little bit about what you are looking out at before you would start to invest more in the business? It is clear you want higher operating margins than you have now but what are the things that TI is looking out before it will commit to incremental investment in that business?
Kevin March, SVP & Chief Financial Officer
Yes Craig, I would say we are 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 spending side of that business and driving top line growth. 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 of that space at that point in time, we might entertain our increase in our spending, but not until then.
Craig Ellis, B. Riley
Okay thank you. 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, our calendar ’14 was the first year in the last four or five were embedded processing and analog had similar growth rates and they were both double digits. Philosophically, you should look at this 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 are both closer to operating a more optimal level, should they be fairly similar?
Dave Pahl VP, Head of Investor Relations
Yes I think we began to look longer term at the growth rate and the potentials of those businesses, I would start with whether you believe that the semi-conductor market will grow on. We have held the position that we think the semi-conductor 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 market that they will grow in line with that. If you look at those businesses, certainly over the last five years, they both had continued to gain share and we believe that we are continuing to invest and that we got a lot of room to gain share. In fact in analog we got 18.3% market share and inside of embedded processing we got around 15 percentage points. So lots of headroom to do that. And we have gained probably 30% , 40% sometimes more than that in market share on a given year. We still have to have everyone report before our final numbers are in. But we are confident that we will gain shares again this year. Kevin do you have anything to add to that?
Kevin March, SVP & Chief Financial Officer
Yes Craig, one thing I would be recommending maybe take a look at, if you take a look at those two segments analog and embedded processing, 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 two of them on a year-over-year basis, they are actually are much more correlated than you might expect. They are both gaining share as Dave was mentioning, and they are both going 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 from the last half-dozen quarters or so, I think you might be pleasantly surprised because they go pretty similar at each other.
Dave Pahl VP, Head of Investor Relations
Okay, Craig. Thanks for that question and we go to the next caller please.
Operator
We’ll go next with Mark Lipacis with Jefferies
Mark Lipacis, Jefferies
Thanks for taking my question. Kevin, as you go on to 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?
Kevin March, SVP & Chief Financial Officer
Well Mark, what we’ve talked about on debt — we have debt on the balance sheet today. It will be there until 2023 because that is when the last of the current outstanding balance matures. And our attitude towards debt is that it will continue to be part of the balance sheet when the economics makes sense. And for us that economics making sense means that if we can borrow at interest rates that we pursued to be below what we expect the inflation rates to be, or correspondingly, at less than our dividend yields, then we think that is probably a pretty 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 we carry in the balance sheet and as bonds mature going forward. We do actually have a $1 billion of debt maturing in 2015. We have $250 million maturing in April and $750 million maturing in August of 2015.
Dave Pahl VP, Head of Investor Relations
Do you have follow on Mark?
Mark Lipacis, Jefferies
Yes thank you for that color. So the analog business operating margins are but 2,000 basis points higher than the embedded as we think about the potential profitability of the embedded business. Are there structural reasons why embedded profitability could not equal the analog profitability longer term? Thank you.
Kevin March, SVP & Chief Financial Officer
Mark, I think the simple answer in my mind is difficult for us to find evidence of somebody in the market place outside TI who is able to perform on those kind of levels. I think the economics as such would be very attractive and a very great place for us to be in. But probably get up to par on what you see in analog. I think analog is quite unique in what it can produced for companies and for shareholders who own those companies like we do.
Dave Pahl VP, Head of Investor Relations
Thanks Mark and we go to the next caller please.
Operator
We go next to Timothy Arcuri, Cowen and Company
Timothy Arcuri, 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 are up to 17% but, if you look at some of the well run tiers in that space, they are doing sort of mid-20’s. So maybe ask kind of a little bit different way, is there any reason why you cannot get the embedded margins up to the mid-20’s.
Kevin March, SVP & Chief Financial Officer
No. There is no reason why we cannot do that.
Dave Pahl VP, Head of Investor Relations
Yes we made good progress obviously, Tim, we still have work to do but we believe that we can get into that range with revenue growth and that is what we are planning to do. They got a good start. They have nine quarters in a row of year-on-year growth and are making progress towards moving operating margin higher. Do you have follow on?
Timothy Arcuri, Cowen and Company
I do yes. Relative to the inventory, certainly some of it are 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?
Kevin March, SVP & Chief Financial Officer
Tim that is probably too early for us to call the entire second quarter. Right now we are focused on first quarter. The inventory that we got staged today is designed to support our first quarter needs. And then as we adjust our factory loadings in the first quarter, that inventory that we build will be designed to deal with our second quarter needs. And as I mentioned earlier, we expect we will be ramping up our factories as we go through first quarter in support of second quarter and when we get to the end of the quarter we will find out how much inventory we will hold at that point in time.
Dave Pahl VP, Head of Investor Relations
Thank you Tim. Operator we’ve got time for on more caller.
Operator
We will go with the last question with Doug Freedman, RBC Capital Markets
Doug Freedman, RBC Capital Markets
Hi guys thank very much for taking my question. I guess if I could dig deep into some of the results that you have reported and maybe some of the outlooks that you might have by sort of key markets out there. I think that investors are interested to hear what you are 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 are seeing in the communications market as well? I think those are maybe not that overly material to the TI story but they to investors in
general.
Dave Pahl VP, Head of Investor Relations
Okay Doug, well I can — let me share some market trends that we have seen, I think the that may address some of those issues, maybe not down at the level that you are quite asking. So, I think you were talking about PCs and those that fall in to our personal electronics products, those were on a year-on-year basis. They were up despite the declines that Kevin had mentioned earlier on 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 have been very intentional about how to measure that. And it is different than when investors talk about the industrial market. And the sectors, we 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 have seen that was up led by medical and healthcare fitness, appliance factory automation and smart grid were also up, from a year ago. Comps 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?
Doug Freedman, RBC Capital Markets
Yes 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 are seeing in China from an investment stand point. Is there anything in your market that you are seeing that would point to any change in the competitive landscape?
Kevin March, SVP & Chief Financial Officer
You know Doug, as it relates to China, in particular, because I thought you mentioned it there. We have been in China for a very long time now and we have over a dozen sales and R&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 become a very important supplier to a large number of Chinese companies across a very diverse set of markets. So we see China to continue to be a great opportunity for TI regardless of any of any of the competitive environment environments out there. 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 got a great — shall I say, a long way, we are a long way into there already and we felt pretty good about our position.
Dave Pahl VP, Head of Investor Relations
Okay great. Thanks for that question Doug and thank you all for joining us. We look forward to talking to you again on February 4th Capital Management call. A replay of this call is available on our website. Good evening.
Operator
That does conclude today’s conference. Thank you for your participation.
