Kevin March – Senior Vice President and Chief Financial Officer Ron Slaymaker – Vice President, Investor Relations.

John Pitzer - Credit Suisse.

Mark Lipacis – Jefferies & Company Doug Freedman – RBC Capital Markets Christopher Danely – JPMorgan Securities Romit Shah – Nomura Securities Ross Seymore – Deutsche Bank Blayne Curtis – Barclays Capital Timothy Arcuri - Cowen & Company Jim Covello - Goldman Sachs Vivek Arya - Banc of America Merrill Lynch Stacy Rasgon – Sanford C.

Bernstein Eric Rasmus – Stifel Nicolaus.

Good day, and welcome to the Texas Instruments First Quarter 2014 Earnings Conference Call. At this time, I'd like to turn the conference over to Ron Slaymaker. Please go ahead, sir..

Good afternoon and thank you for joining our first quarter 2014 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 first quarter was a good start to the year for TI.

Our positions in analog and embedded processing contributed strongly, with combined revenue for these products up 13% from a year ago. As important markets such as industrial and automotive continued to embrace electronics technology, analog and embedded processing products are critical and TI should benefit accordingly.

Revenue of $2.98 billion was in the upper half of our expected range that we communicated in January. Earnings per share of $0.44 was at the top of our expected range. EPS included $0.02 that was not in our prior guidance from sales of a site and other assets associated with previously announced restructuring actions.

Free cash flow was $3.1 billion or 25% of revenue for the trailing 12 months period, right in line with the 20% to 30% range where we expect to operate over time. For those of you who missed our capital management call in March, we raised our expected range for free cash flow margins from 20% to 25% to 20% to 30% in that call.

Also over the past 12 months, we returned over $4 billion of cash to investors through a combination of dividends and stock repurchases.

In the March call, Kevin explained that our updated model for cash returns to shareholders was to return all of our free cash flow less the net debt amount that is retired plus proceeds that we received from exercises of equity compensation. Inclusion of the exercise proceeds was a new addition to the model from what we had previously communicated.

Against this targeted return level, we returned 99% over the past 12 months. In the first quarter, TI revenue grew 3% from a year ago. Excluding legacy wireless, revenue grew 11% with double digit growth in both analog and embedded processing. Analog revenue grew 11% from a year ago with all four major product lines up.

Power management and high performance analog led this growth, and were each up about the same amount. Embedded processing revenue grew 17% from a year ago with micro-controllers leading the way. Our increased investments in this growth area over the past few years are yielding favorable results.

In our other segment, revenue declined $186 million or 28% from a year ago due to legacy wireless which has now declined to the single digit millions of dollars. Turning to distribution, Resales increased 10% from a year ago, while distributors’ inventory remained about the same and it’s just under five and a half weeks.

From an end market perspective, the most growth from a year ago came from communications equipment, followed by industrial and automotive. Enterprise Systems was about even, while revenue in personal electronics declined due to mobile phones and tablets, areas that previously used legacy wireless products from TI.

Now Kevin will review profitability, capital management and our outlook. .

Thanks, Ron, and good afternoon everyone. Gross profit in the quarter was $1.61 billion or 53.9% of revenue. Gross profit increased 17% from the year ago quarter. This was a solid increase in profitability, considering the 3% growth in total revenue.

The 630 basis point expansion in gross margin as a percentage of revenue reflects an improved product portfolio, higher utilization of our manufacturing assets and the efficiency of our manufacturing operations. Moving to operating expenses, combined R&D and SG&A expense of $845 million was down $33 million from a year ago.

The decline reflects restructuring associated with the wind down of our legacy wireless products. As a reminder, we will begin to see the benefit of the previously announced restructuring in a better processing and Japan in the second half of this year.

While we are discontinuing R&D spending in the areas that are no longer able to provide differentiated growth, we continue to invest aggressively in those areas that are providing growth such as analogue where we’ve increased our R&D investments by 77% since 2006, resulting in steady increases in market share.

Or as Ron mentioned, more recently with our stepped up investments in embedded processing, which is now resulting in multiple quarters of year over year revenue growth. Moving on, acquisition charges were $83 million, almost all of which is the ongoing amortization of intangibles and non-cash expense.

Restructuring and other charges included a charge of $32 million for the previously announced restructuring about as we expected. There was also a gain $37 million for sales of the site and other assets associated with earlier restructuring actions.

As Ron mentioned, this gain contributed $0.2 to EPS in the quarter and was not included in our prior guidance. Operating profit was $690 million or 23.1% of revenue. Operating profit was up 75% from the year ago. Again, this was a solid increase considering total revenue was up 3% over this period.

Net income in the first quarter was $487 million or 0.44 per share. Let me now comment on our capital management, starting with our cash generation. Cash flow from operations was $462 million in the quarter. Inventory days were 112, consistent with our model of 105 days to 115 days. Capital expenditures were $77 million in the quarter.

On a trailing 12 months basis, cash flow from operations was $3.49 billion, up 5% from the same period a year ago. Trailing 12 months capital expenditures were $405 million or 3% of revenue. Capital spending for the year ago trailing 12 month period was $476 million or 4% of revenue.

Consequently, free cash flow for the past 12 months was $3.08 billion or 25% of revenue in the middle of our expected 20% to 30% range. This is 8% higher than the free cash flow was a year ago when it was 23% of revenue. Depreciation expense for the past 12 months was $864 million.

Depreciation exceeded our capital expenditures by $459 million or 3.7% of revenue. Our strategy to opportunistically time our purchases of manufacturing equipment has provided us a manufacturing capability today that has sufficient headroom to support growth for years ahead.

Our current level of capital expenditures, provide us with important new manufacturing technologies while also continuing to expand our capacity. Over the next few years, as a result of this strategy, we expect to continue to hold capital spending at low levels or at about 4% of revenue.

Therefore depreciation will decline to the rate of capital spending and our gross margin will directly benefit. As we have said, strong cash flow, particularly free cash flow, means that we can continue to provide significant cash returns to our shareholders.

In the first quarter, TI paid $325 million in dividends and repurchased $720 million of our stock for a total return of $1.05 billion. Historically we have described our capital management strategy was to return all of our free cash flow to shareholders except for what we need to repay debt.

In March we updated this model to also include the return of proceeds that we received from the exercise of equity compensation. In the past 12 months, free cash flow was $3.08 billion. Our debt level was essentially unchanged and we received $1.14 billion of proceeds from exercises. So our target of return model would be about $4.22 billion.

We actually returned $4.18 billion to shareholders on a 99% of the model. So our recent practice has been well [aligned] with the updated model. This percentage will likely move up in the second quarter as we retire debt that is due in May. Total cash returned in the past 12 months was 38% higher than a year ago.

Dividends were up 48% and stock repurchases were up 34%. Fundamental for our cash strategy and our cash management, are our cash management and tax practices. We ended the first quarter with $4.03 billion of cash and short term investments, with 84% of that amount owned by TI’s U.S. entities.

Because our cash is largely on-shore, it is readily available for a variety of uses, including paying dividends and repurchasing our stock. As a reminder, we issued $500 million of debt in the first quarter at an average coupon rate of 1.8% for three and seven year terms. And we plan to retire $1 billion when it comes due in May.

TI’s orders in the quarter were $3.07 billion up 4% from a year ago and our book-to-bill ratio was 1.03. Turning to our outlook, we expect TI revenue in the range of $3.14 billion to $3.40 billion in the second quarter. At the middle of this range, revenue would increase 7% from a year ago.

If you exclude the $148 million of legacy wireless revenue from the year ago quarter, revenue would increase 13%. We expect second-quarter earnings per share to be in the range of $0.55 to $0.63.

Restructuring charges will be essentially nil and acquisition charges will remain about even which is a non-cash amortization charge that will be at this level for the next five years.

We have revised our expectation for our effective tax rate in 2014 to 28%, up a point from our prior estimate, reflecting our high expectation for profitability in the year. This is the tax rate that you should use for the second quarter.

In summary, I think the first quarter provided a glimpse into the potential financial performance that TI should be capable of going forward. Our Analog and Embedded Processing product lines will benefit as the industrial and automotive markets continue to increasingly embrace technology.

These are markets where we’re investing that offer the promise of sustainable growth, solid profitability and good cash flow from operations.

The low capital requirements for Analog and Embedded Processing, combined with our strategy to opportunistically acquire manufacturing assets, also means that we can deliver strong free cash flows, which would allow us to continue to provide strong returns to our shareholders in the form of dividends and share repurchases.

With that, let me turn it back to Ron..

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?.

(Operator Instructions) and we go first to John Pitzer with Credit Suisse..

Good afternoon guys. Thanks for letting me open the questioning. Congratulations on the strong results. Kevin, helpful on giving us topline and bottom line guiding for the June quarter.

I’m just kind of curious, as we think about gross margin and OpEx, how does the OpEx saving kind of [linearly] fold into the model between now and December? And on the gross margin lines, should we just think about sort of that 75% historical incremental gross margin against revenue growth?.

So John, let me start with the OpEx. As you look into the next quarter in particular, recall that in the ... just to step back for a moment. On an annual basis, we typically have our pay and benefit increases occurring in the first quarter. And typically, two of the three months of the first quarter will incur that increase.

So clearly as we go into second quarter, we’ll have a full three months of that increase. But to the point that you were bringing up on some of the savings that we’ll see from the restructuring in Embedded Processing actions, we’ll see a little bit of that savings begin to materialize in the second quarter. So OpEx will probably be fairly flat.

The majority of that savings will occur in the second half of the year. And just to remind everyone else, we’re expecting about $130 million in annualized savings as a result of that announced restructuring. On the gross profit, it’s exactly as you said John.

You should be thinking that over the course of the cycle, our fall through average is about on the way up and on the way down. So that’s a good long term model to be using as you build your model. .

Follow on, John?.

Yeah. Ron, maybe you can help me out a bit.

Given the reclassification of revenue you guys did, I’m just kind of curios, how does a mix influence gross margin? And if you think about the new buckets of revenue, where do you expect to see faster, longer term growth versus slower, longer term growth, either by design or just by market forces?.

Okay. And when you talk about our reclassification of revenue, are you talking about by end market or are you talking by -_.

By end markets specifically, Ron. Thank you. .

Okay. Even though was end market, let me first of all address that more by product line. So the biggest mix change has been as we’ve gotten out of legacy wireless. And even though that’s essentially zero as of first quarter, you’ll still see the impact on the year-on-year comparison through the course of 2014.

And in general the legacy wireless gross margins were lower than corporate average. So getting out of that, those product areas was beneficial to gross margin.

From and end marker stand point probably the way to think about it is that gross margins tend to be highest and this is not unique to TI; you can just look across a broader range of companies, but gross margins tend to be highest where volumes tend to be lowest.

Meaning where -- maybe the better way to say it is where the revenue is most diversified across customers and application areas so for example, industrial.

You can see other companies that are highly focused on industrial and we see it in our own results where you’re selling catalogue products into lots and lots of different customers and different applications within the industrial space and that tends to be at pretty nice gross margins.

Other areas like automotive where there are a lot of special requirements from the standpoint of quality, the design end cycles tend to be long. The product life cycle both in automotive and in industrial tend to be long and that tends to be beneficial for gross margins also.

They probably tend to be lowest in the short cycle, high volume end market areas and that’s partly the nature of the competitiveness of those opportunities, combined with you don’t really have time in terms of the life cycle of the product to engineer in cost reductions, to get gross margins where you would really like to see them over time.

And so there’s lots of examples of that and again you see it in our own results and you would see it probably more broadly with other companies. So if you say where you would expect to see highest growth over time, I would say just make a couple of observations.

I think both industrial and automotive from an application area, from their embracement of electronics technology, they’re at a tipping point where those very likely will be the fastest growing semiconductor markets going forward just by nature of the provision of semiconductor technology inside those applications.

Now I would also say that we have a good position in those markets and we believe analogue and embedded are important. And we also believe frankly our sales force and the breadth sales force is an important competitive advantage for TI in reaching especially in the industrial markets, a broad base of customers there.

So probably not surprisingly and you’ve heard us say for some time now, they are priority areas for TI in terms of investment and in terms of our expected penetration into those markets and applications.

And that doesn’t necessarily mean that their revenue will grow faster as a percentage of TI’s total because you never know what will happen in a particular high volume market.

But over time I think you would expect that our position in those markets get stronger and over time the percent of our revenue that is coming from industrial and automotive will continue to grow as well. Okay. John, thanks for the questions and let’s move to the next caller. .

And we move next to Mark Lipacis with Jeffrey’s..

Thanks for taking my question. Kevin, I apologize if I’m asking you to repeat what you’ve read in your script, but could you just walk through the mechanics of the capital return for this quarter? You have the debt that you’re going to pay down, but you issued some.

So I understand that the free cash flow plus the proceeds from the options minus the debt services is what you expect to return.

So if you have $1 billion, do we just subtract that $1 billion or do we also factor in the $500 million in debt that you issued this quarter as part of that pay down?.

Mark, let me try to get to the way you’re trying to ask that question. Again at the high level, I’ll repeat what you said there. Our cash return strategy is to return 100% of the free cash flow, less any amount used for net debt retirement plus proceeds that we get from stock option exercises.

During this past quarter or during this past 12 months, there was virtually no net debt retirement. So it was really the proceeds from free cash flow plus the stock option exercises was virtually all -- we returned all of that to the shareholders in the last 12 months, 99% of that to the shareholders.

As you move into second quarter, we do have $1 billion of debt that’s coming due on May that we’ll go ahead and pay off. And so when you re-run that math, you’ll see some usage over that trailing 12 months of cash for debt retirement.

And just mathematically that says the percentage we return by the time we get to the end of second quarter will probably be in excess of 100%, probably in excess of 110%. But that’s just timing and as you go through the course of the year that will net itself as we move on through the year..

Let me just ask a clarification, Kevin.

So in a quarter where you pay down debt, does that immediately come right out of repurchases or is it a more smoothing type of application in terms of the way you look at the return formula?.

It’s a more smoothing type of application. It will not affect the timing of our repurchases. We will continue to do repurchases, as you’ve seen us in the past, which is a very steady hand, constant hand as we go through time. And we don’t try to time our repurchases. We just try to be very steady and methodical about it. .

Do you have a follow up, Mark?.

Yeah, I did and thanks for asking that clarification, Ron. I appreciate that. In trying to model the cash flows through the year, normally you have Q1. You have accounts payable and accounts receivable are a big use of cash, which they were this quarter and then in Q4 accounts receivable becomes a nice source of cash.

Is it fair to assume that that typical pattern is what we would expect to see? And is there any other working capital shifts that might happen this year that’s different than what you’ve historically had? Thank you..

Mark, I think you’ve identified that quite well. Typically our first and second quarters are our lowest for cash flow and operating cash flow and free flow cash generation. First quarter we had pay and benefit increases as I mentioned earlier. We also pay out our profit share and our performance bonuses during the first quarter.

Then the second quarter, we of course have estimated tax payments that we have to make for the year that uses some cash, but as we travel through the year, our operating cash and our free cash flow have a tendency to increase, first to second to third to fourth and then decline again.

And I don’t see anything in 2014 that would suggest that would be any different than what we’ve seen for a number of years now..

Okay Mark. Thank you for your question. Let’s move to the next caller. .

We move to Doug Freedman with RBC.

Hi guys. Congrats on the strong results and thanks for letting me ask a question.

If I could, could you dig into a little bit what you’re seeing in terms of the mix of product, whether it be ASPs units, and then a little bit of insight into maybe your back log , what you’re seeing in lead times book-to-bill and maybe the projected turns that you need to meet the mid-point?.

I can maybe give you a little bit on that. In terms of ASPs Mark, Doug, excuses me, I’m really not aware that there’s been any significant shift one way or the other.

And again that just tends to shift that take place on ASPs when you have differentiated products such as we do, tend to be more driven by mix than they would general pricing environment you might say or a competitive pricing environment.

Again no substantial shift there other than when you look over time on, the longer term impact of moving out of legacy wireless. Lead times are generally stable. At any point in time you always have some mixed differences that might cause lead times to move in or out for one product area versus another.

But generally lead times are stable and for TI what that means is the majority of our products are shipping with lead times of less than six weeks..

I’ll comment on backlog. Doug, you asked about that. We came into last quarter with a book-to-bill of 0.94 and we’ve come into this quarter with a book-to-bill of 1.03. So clearly we’ve got a little bit more visibility than we had last quarter or even the quarter before that.

Just to put that in perspective, orders in the quarter -- I think we mentioned earlier we are up about 4% year over year. That works out to being up about 7% quarter over quarter.

So with those combined elements from a backlog standpoint, that leads to expect that we will have pretty reasonable growth in total revenues as we go in second quarter as indicated by the guidance that we’ve included with this release. .

And I know I’ve said this before, but let me just remind you that with the 1.03 book-to-bill, today about 45% of our revenue is supported by consignment and JIT programs. And so for that revenue, book-to-bill is always 1.0. So the 1.03 is a blend of really only the revenue that’s non-JIT or non-consignment which is 55% of our revenue.

So if I just round and call that half of our revenue, the book-to-bill on those products that would be shipping on traditional backlog and order entry type process would be more like a 1.06, the total being a 1.03 because that 1.06 then gets blended with the JIT consignment products at a 1.0 book-to-bill. .

Okay. Hopefully that helped and didn’t further confuse.

Did you have a follow on, Doug?.

Great. Thanks Ron. No. That was excellent color, I really do appreciate it. My follow on is really about sort of the cost of running the business.

I know that you guys have executed your restructuring plan to lower some of the cost, but how should I think about the cost in OpEx going forward in relation to say revenue growth? If revenue growth continues at say double digit pace, does the core OpEx grow with that same double digit pace or is there some leverage there?.

Yeah. Doug, I think that we do have some leverage certainly in 2014 and that is the restructuring that we announced in [beta] processing and Japan. That mostly will kick in during the second half. So again just to remind you, that’s $130 million of annualized savings that we expect to capture by the end of the year.

So as we roll into next year we’ll see it on an annual basis. That $130 million will spread roughly 65% in R&D, 20% in SG&A and the balance of 15% in cost of revenue and cost of goods sold. So we’re kind of spread that way.

Beyond 2014, again I think we’ve commented a couple of times on prior calls our basic model for OpEx is to operate between 20% and 30% of revenue. So it will not go up or down necessarily at the same pace that revenue goes up or down.

It will be more of a steady change over time, but some of these one off anomalies like I just described with the restructuring going on in a [beta] processing and Japan. .

Okay. Doug, thank you. Let’s move to the next caller. .

We move to Christopher Danely with JPMorgan..

Can you give us your thoughts on the relative growth rates of your analogue versus embedded versus your -- I guess your other category this year? And then maybe talk about just the various puts and takes of why embedded was up so much, analogue was up a little bit less and the other was down so much this quarter?.

Chris, are you asking for comments on forward looking or kind of why the historical results were what they were?.

Both will be great. If I had to choose one I’d say forward, but both would be great. .

Okay. Forward will be short discussion because we have -- really I can say legacy wireless will continue down through the rest of this year when compared against the year ago period. But it’s zero already. So I think the reality is it’ll be what it’ll be. You’ll see certain times when Analog grows faster than Embedded.

You’ll see periods where Embedded grows faster than Analog. I think Kevin even in his opening remarks mentioned that. I think it was back in 2010 where we stepped up investments in Embedded because we believed there was a great growth opportunity for TI and microcontrollers.

We have answered questions from you guys for a long time about where’s the growth that goes along with that stepped up investment. And frankly I think we’re starting to see it now.

It make sense because it takes time first of all for that R&D to translate to products and then for products to get designed into customers and them to get their products to the market.

I think what we’re seeing now in Embedded, very specifically in the micro controller area has to do with the stepped up investments that we made a few years ago in microcontrollers. Certainly also what’s helping Embedded is I think we mentioned that from an end market standpoint, we’re seeing strength in communications equipment as well.

And clearly the DSP position, our processor position we have in Embedded across pretty much all of the various OEM’S that ship into that wireless base station market are benefiting now in terms of that market starting to lift for us. In terms of Analog, the same thing. You’ll see over time periods where power grows faster.

In fact probably that would be a trend that you’d say if you look over an extended period of time, meaning five years or so power has pretty consistently led growth in Analog. And we think that’s an opportunity that will just continue in the years ahead.

That has to do with the world wanting to get greener in terms of power efficiency and it has to do with a lot more products in the end market becoming battery power and that’s a great power management opportunity for TI. Our leadership in that market means that as that market lifts, we probably tend to lift more than most other players.

Outside of that, what we’re doing in Silicon Valley Analog, what we’re doing in high performance Analog, both those areas in the industrial market are very clear beneficiaries of the industrial market continuing to lift. So I’ll stop there. Those are some general comments. But again we don’t really try to mention it, Chris.

We have certain areas like industrial and automotive that are important to us, but frankly pretty much every product area, whether it’s application specific products or processors or catalogue analog devices can reach into industrial and can reach into automotive and be beneficiaries of that strategy going forward.

Do you have a follow on, Chris?.

Yeah and I hopped on a little late. So I’m sorry if you already talked about it.

But can you just go over what utilization rates were during the quarter, what you’re expecting them to be this quarter? And then given all the restructuring and fads et cetera, maybe just refresh us on what your sort of peak revenue level is and where you would need to start adding equipment in terms of a utilization level?.

Chris, on utilization again we haven’t disclosed the actual percentage utilization in quite some time. We tend to do that when it’s really a dramatic change, it’s informative.

I will just say that our factory utilization from a stats basis was higher in the first quarter than it was in the fourth quarter, but the average wafers that moved through the factories was about the same in both quarters.

So, consequently the underutilization charge was the same in both quarters, both fourth quarter and first quarter at about $105 million.

With the outlook that we have for the second quarter with the guidance that we’ve offered, clearly we have been and we’ll continue to increase the loadings in the factories to support the increased expected outlook revenue growth in the second quarter.

And then just to the last part of your question there, the installed capacity that we have today is equipped to the point to support we believe about $18 billion of revenue.

As we go forward, we’ll continue to look for opportunities to increase capacity at the lowest possible cost as we have done for a number of years now so that we can remain focused on maximizing continuous free cash flow over time as opposed to trying to maximize factory utilization levels over time. .

Okay Chris, thank you. Let’s move to the next caller..

We move next to Blayne Curtis with Barclays..

Are you there Blayne? Operator, why don’t we move on and if Blayne comes back in maybe we can bring him back up..

We’ll move next to Romit Shah with Nomura..

Yeah. Hi guys. Thanks. So I was just jumping on here a little bit late, but I noticed the guidance for EPS growth is significantly higher than revenue growth.

is capacity utilization -- Kevin I know you’re not going to give us gross margin guidance, but is utilization the biggest factor driving the fast earnings growth?.

I presume that you’re talking in relation to the sequential growth when you’re asking that?.

Yeah, in relation to Q1..

Yeah. I think you’re going to see -- certainly you get some EPS growth just off the revenue growth itself. You will see some improvement on utilization. As I mentioned a moment ago, we’re increasing the loadings in the factories. But you’ll also see a similar improvement as you go to the next quarter just on lower manufacturing cost.

Recall a couple of years ago that we had announced that we were closing two older six inch factories, one in Houston and one in Hiji, Japan and those basically are behind us now. And so that cost saving is finding its way through. So you’ve got a couple moving parts going on inside there. .

Do you have a follow on, Romit?.

Yeah and can you just talk a little about the impact of OpEx on EPS during the second quarter as well? Thank you. .

Romit, I believe that Kevin addressed that earlier and he said basically OpEx should be relatively flat. So instead of repeating that, we’ll move on to the next caller please..

We move to Ross Seymore with Deutsche Bank..

Thanks for letting me ask a question. Ron, a couple of quarters ago there was a lot of talk about seasonality and what that was going to be going forward and I think you chose a three year average for your sequentials in the fourth quarter.

As we look forward is that still as good a boggy as any for the June quarter? And from a sequential perspective by my math, that yields about 8% up. You’re guiding above that.

What’s better than seasonal in what you guys are seeing?.

Ross, I think two months after we gave you that number in fourth quarter, we then started to decline to provide it again. And the reality is seasonality, the number you come up with for call it an average growth for any particularly quarter, will vary so widely based upon the time period that you used to collect that.

And so we’ve decided is instead of us giving you our view -- we’ve historically provided – call it a three year or five average, five year, whatever. The reality is when we threw that number out, it was being perceived as an endorsement of that level of growth for TI and that was never our intentions.

So I think what we’ve decided to do going forward is just let you guys go through that analysis and provide your own estimates on seasonality. If you need help with the math on whether it’s a three year or a five year average, I probably could help on that, but I’m not going to do it for you.

The other thing is and I’ve noted even just looking at reports coming into this current report, I think sell-side analysts I saw had anywhere from call it 4% average for second quarter sequential to up to 9%.

And again, that just reinforces that the range is so wide that from our perspective internally, we really just don’t put much emphasis on seasonal average given how wide that range is. If you think it’s important, then we’re going to let you go through that on your own.

Do you have a follow on, Ross?.

Sure. Maybe I’ll be a little more successful with this one. Embedded Processing seemed like that was the segment that provided the upside in the quarter that you just reported.

As you think about the microcontroller areas starting to deliver growth given the prior investments that you’ve made, can you give us a little bit of color on some of the applications that are driving that growth? And really why did they start taking off finally now? And maybe looking forward what’s the road map from an end market perspective and application? Anything that can give us a little color in helping us to channel check that segment would be helpful.

.

I’d offer a couple of things. Microcontrollers; the beauty of microcontrollers is they tend not to -- they are so, so diversified across applications. And so good luck on that channel check, but they’re very much so in industrial applications. Certainly automotive is a factor there.

The other piece that I would mention for embedded processing that I already mentioned was communications equipment. Base stations clearly was a lift for TI.

The only thing I would caution against is the view that that would draw some significant upside, because the reality is I think for most part analogue and embedded processing came in about as expected. And in fact our revenue overall I think we’re 1% or so above the midpoint of our guidance range.

So again the quarter generally came in about as we expected. But what drove the strength there would probably be a mix of industrial, automotive microcontroller applications as well as communications equipment. But pretty much everything was broadly up in the quarter. I guess that was your follow up, Ross. Thank you and we’ll move to the next caller..

We move to Blayne Curtis with Barclays. .

Guys, can you hear me now?.

We can hear you now. .

Hey. Perfect, sorry about that.

So I apologize also if you mentioned this earlier, but just on the outlook for June, outside of calculators, were there any outliers in terms of products either up or down in your outlook?.

Blayne, we don’t specifically break our forecast out into particular end markets or product areas. But I think what I would be safe in saying is that it’s a pretty broad based traction that is taking place in second quarter and it’s driving that growth.

That doesn’t mean everything is up uniformly the same but it is -- we believe the strength will be pretty broad based for us. And as you pointed out, calculators probably is the one outlier where it just tends to have a good back to school strength in the second quarter and we do expect that as well this second quarter. .

Do you have a follow on, Blayne?.

Yeah. In terms of your restructuring effort that you’ve talked about come, I was just wondering if you’ve taken any other actions now there are product lines. Particularly microcontrollers seems like an area of investment.

Have you kind of reallocated any resources there or any color on if there is any other segments that you’ve paired back on spending? Thanks..

Blayne, last quarter when we discussed the restructuring efforts that we were taking, we included the discussion of embedded processing in Japan. So Japan is clearly one that is underway. It will be complete for the most part by the end of the second quarter or at the end of second quarter.

And that was really to resize our presence in Japan principally from a support standpoint to be more commensurate with the size of the market opportunity there.

As it relates to embedded processing, we did discuss that we were in some cases reducing investments or discontinuing on some areas that were no longer showing growth opportunities and other cases reallocating. And that affected our processor side as well as our microcontroller side to a lesser degree in Embedded Processing.

Beyond those, there’s no other actions that we’ve taken or intend to take that we’d discuss right now. .

Okay. Blayne, thanks for your questions. I’m glad you were able to circle back in and let’s move to the next caller..

We move to Timothy Arcuri with Cowen & Company.

Hi, thanks. Can you just talk about from a big picture perspective, can you -- I don’t know if you tried to segment out how much of your revenue is directly related to internet of things.

But can you try to give us some sense of the percentage of the revenue that’s related to IOT what with a in a large semi-conductor company actually creating that as is independent segment? Thanks..

Boy Tim, we really don’t and frankly we saw in all the hype that the realm the term internet of things. I think if you look at our capability and market position, it probably is second to none. If you look across processors, microcontrollers that are just inherent in connecting the world.

Combine that with our connectivity capability whether Wi-Fi, Bluetooth, ZigBee, those types of capabilities that we have in our embedded business as well. That potential to then go pursue that opportunity of connecting lots of different things, I think is probably second to none.

But that being said, as soon as the world goes and puts a big label on it and tries to calculate how much everybody has and this and that, that’s really not what we are interested in.

We love the diversity of what you are calling internet of things, meaning if lots of different applications, they have different requirements, they are across different customers, the idea of somehow circling it up into a common end market or whatever we think is probably the wrong approach just because there’s not that much in common there from a technology standpoint or from a customer or an end market standpoint.

But again, we’ll just try to stay away from the hype. We’ll keep our heads down and go attack that opportunity.

Do you have a follow on, Tim?.

I did actually, yeah. Sorry, I actually jumped on late, but you might have already talked about this, but can you address the channel inventory, either your inventory, and also inventory in the channel and also maybe remind us of what normal seasonal is for Q3? Thanks. .

We did hit on some of those things. I’ll say channel inventory for TI we described as less than five and a half weeks, really unchanged from where it’s been for some time now. And I would just say if you look more broadly, we think inventory that we would characterize that as lean. We would characterize customer inventory as lean.

Maybe one of the best data points is cancellations from customers are incredibly low right now and we think that reflects a combination of lean inventories as well as the growing demand environment that we are in. But I think both the other pieces there we did address already. Okay Tim, thanks for your questions. We’ll move to the next caller please. .

We move to Jim Covello with Goldman Sachs..

Thanks for taking the question. I appreciate it. I’m going to just ask one with no follow ups since a lot of good questions have been asked. You guys had broken out as you usually do your segments at the beginning of the year in terms of end market exposure. I think it was 37% was consumer.

Kind of a longer term question, is that a number you are comfortable with or is that a number that you’d like to see decline over time through market share growth in segments? Obviously consumer I don’t think is growing as fast on a revenue basis as some of the other markets over time because of pricing pressure and such there.

So just a little perspective on where you would like to see that number three years from now? Thanks a lot..

Okay. Thanks Jim, and that’s a good question. So let me do a couple of things. I’ll also give a little bit of the color of what happened in quarter by end market because nobody has asked that question. But very clearly we do talk about the one end market being personal electronics and in 2013 that was 37% of our revenue.

That is not what you would historically or typically think of as consumer though. It does have products like gaming products in there. It has television in there, set top box, but it also includes mobile phones, notebook computers, printers and also things like tablets.

And so it will go down between 2013 and 2014 largely because of our exit from legacy wireless. So, most of that revenue would have been shipping into the personal electronics space. But again don’t -- and I’ve had a number of questions from analysts over the last few months that imply that a people think of personal electronics as consumer. It’s not.

It’s again mobile phones, notebooks and that space as well. They do tend to be consumer buying decisions as opposed to enterprise, but they are not what you’ve typically thought of in past as consumer electronic. So I think in the prepared remarks we gave a top level overview of what drove revenue from a year ago.

Maybe I can give a little more granularity on that. So I think we talked about communications equipment being the highest contributor of growth from a year ago. That very clearly tied to wireless infrastructure. Next we said industrial.

Interestingly industrial, if you go out to our website, we break that down into multiple sectors, something like 12, 15 different sectors below the industrial level. Pretty much all of them were up in that year-on-year comparison, with most of them up at a double digit growth level, so good strength and broad strength in industrial.

Automotive, similarly. If you go look at the sectors on our website, all of them were up. Infotainment products were the strongest, but all of the sectors inside automotive were up.

Enterprise Systems we said were about even for TI and that really is a combination of growth in projector revenue, which again is primarily DLP for TI, offset by declines in servers and then the last area which we started off with on personal electronics. It was down, but it was down pretty much only due to legacy wireless.

If you would have excluded the legacy wireless revenue out of that comparison, then personal electronics would have been about even from a year ago. So again that’s just a little more color of what happened inside there. Jim, thank you for your questions and let’s move to the next caller..

We move to Vivek Arya with Banc of America Merrill Lynch..

Thank you for taking my question. When I look at your first half growth in Analog and Embedded, I think it’s almost 13%, 14% year-on-year. Very strong, well above what we’ve seen from most of the peer group so far.

Are you worried at all about double ordering anything that suggests that trends could sail off in the second half? Do you have enough visibility in the second half, whether it will be roughly seasonal? Not anything that suggests that the trends are sustainable versus not. .

I’ll make up a comment and Kevin if you have anything to add certainly jumps in. Vivek, we’re not seeing at this point signs of that kind of overheated market. Typically that comes along with crazy expedites and things like that that frankly we just didn’t see in the quarter. We saw customers giving us good visibility into their needs.

We’ve been shipping at the lead times that we’ve been quoting them and our lead times have been stable. In that environment typically, there’s no need for customers to start that double ordering process that you mentioned. So again we really see no signs of that taking place.

In terms of visibility in the second half, again we’ve got customers for the most part trying to give us visibility into their needs. But I would really not say we have -- I would not want to try to provide any specific comments about second half visibility at this point.

Kevin, do you have any other comment?.

Not much different than what you’re saying. I would looking over the numbers here go back to your point. We did have 13% year over year growth in the first quarter when you combine Analog and Embedded processing.

That’s up just a bit from last quarter when it was 12% year-over-year and up a little bit from the prior quarter when it was up to 7% year-over-year. What we’re actually seeing is a slight acceleration in that to it looks like the low teens. And that’s probably consistent with what we talked about at the last earnings release.

We said that we felt 2014 was shaping up to be a better year than 2013. And I think this is just reinforcing that. And the big difference that we see is that in 2014 it appears in the U.S economy is attempting to grow at a faster pace than it has in the last few years.

In 2014 for the first time in a number of years, you’re seeing Europe beginning to grow rather than shrink. You continue to see growth broadly across Asia, albeit at a slightly lower rate, still growing quite strongly.

I think what we’re really seeing here is the result of an improving, broader economy and our efforts of trying to gain market share inside those spaces combined our results and the nice growth for TI. And as Ron said for the second half, we’ll give you that forecast, at least the first part of that forecast in about 90 days. .

Vivek, maybe the other thing that I would just add real quick is, you see our inventory numbers. We have good, healthy inventory. It’s not getting drawn down. And again customers were worried about supply from Texas Instruments, you would see probably some impact on those type metrics and yet we don’t right now.

Do you have a follow on to that?.

Yes. Thanks for answering that first question. You guys are the largest player in this space. That’s really encouraging to see the kind of trends that you’re reporting.

As my follow up question just probably more a math question, but at what revenue level would underutilization charges be behind you? Or asked in a different way, if you’re saying you have installed capacity of $18 billion and your current sales are about, I don’t know say $13 billion, will we continue to see underutilization charges until you use all of your installed capacity? Or how should we think about that underutilization charge number that you report every quarter in relation to the amount of installed capacity that you have and then obviously the implications on how we should model your gross margins going forward?.

Yeah.

Vivek, I would suggest you think about it the way we do and the way most of our investors that we speak with seem to think about it, and that is not what is the underutilization capacity of the current period gross profit margin or next period gross profit margin, but what’s the total free cash flow that we can generate with that available capacity and what’s the cheapest way to bring that capacity in house so that we can maximize cash flow going forward? And that’s exactly how we think about it.

So frankly we do no focus on trying to figure out how to get the utilization charge down to zero.

In fact by definition, with our stated strategy of buying capacity opportunistically when we don’t need it, when prices are relatively low, that by definition means that we will always have open capacity and therefore we’ll always be underutilized in a classic sense.

But from a cash flow standpoint, when we do the math and the trade off on that and the last few years are certainly proving that out, we generate a heck of a lot more cash flow with that kind of behavior than we would if we focused purely on maximizing utilization which puts us at the risk of buying capacity at two expensive of a price.

So that’s the way we look at it. And I’d offer that you maybe think about it on the longer term view like that as opposed to trying to model in near term GPM percent swings and utilization swings. .

Okay Vivek, thank you for your questions. Let’s move to the next caller. .

We move to Stacy Rasgon with Sanford Bernstein.

Hi guys, thanks for taking my question. I apologize if this has been covered. I hopped on a little late, but when I’m looking at your guidance for next quarter and I’m backing into sort of the implications for gross margin, I’m getting something that’s reasonably close to 57%. It’s almost 300 basis points increase.

I think you’d mentioned higher revenue. I think you’d also talked about the six inch fab closures. My understanding was the fab closures that were already in the numbers.

Is this something that happens like as a lump improvement this quarter or any color you can give us on I guess the relative impact of drivers revenue, cost saving and mix would be very helpful.

And I guess just some indication of whether that 57% number is something that you guys are actually are thinking for next quarter?.

Yes. Stacy, on the margins clearly they are going to be up and they are going to be up quite a bit and it’s not dissimilar to what you saw a year ago. If you go to a year ago and take a look you would have seen our gross margins from 1Q to 2Q increased in a similar manner.

And in part that’s just a natural effect of stepping up manufacturing production for a typically stronger second quarter versus one quarter. So if you take a look today on a year over year basis, the best way to think about it is that we continue to have improved product mix. A year ago we still had wireless. Now we have virtually none.

So it’s mostly analog and embedded processing. We have lower manufacturing costs versus a year ago and again this is the Houston and Hiji factories now completely out of the mix. And to a lesser extent we have some lower utilization charges because in fact we are expecting revenue levels this quarter, this 2Q to be higher than they were 2Q a year ago.

And so that will take on a little bit more of our capacity. So there’s a combination of things going on there. And the bottom line is that when you do the math, your gross margins are going to be stepping up rather nicely as you just suggested. .

Got it. And I guess to follow up on that same trend. Presumably you’ll continue to have higher revenues year over year than you had last year. And you are sitting now, I would think it’s close to 600 basis points higher than you were last year.

Does this mean that you could actually maybe even have visibility into the ballpark of 60% exiting the year and going into 2015? Is that something that you guys -- I don’t know if you guys think internally about gross margin targets anymore, but that’s something that – is this something that could actually be plausible at this point?.

Stacey I would say that a lot of numbers are plausible. We don’t really spend time thinking or looking at it in that context. We spend again more time thinking in context of are we taking steps that are going to maximize our free cash flow on a continuous basis. And in doing that then GPM just tends to fall out.

So from that standpoint there’s nothing structural that stops us from getting higher GPMs as we move forward.

In fact if we continue to be successful as we have been in increasing our analog and embedded processing mix, at the same time of keeping very low cost manufacturing underneath that mix, then clearly our margins not only are benefiting as you are computing now, but will continue to benefit as we look into the future. .

Okay Stacy, thanks for your questions and operator I think we have time for one final caller..

We’ll move to Tore Svanberg with Stifel Nicolaus..

Hi, it’s Eric [Rasmus] calling in for Tore. I appreciate you just getting me in here. I know a lot has been talked about the restructuring, but maybe just can you talk about the progress on the Embedded Processing business in boosting those operating margins there? I know last quarter looked like just some out performance and the margins were up.

But is there a target that you’re shooting for internally? Is there something that you can maybe tell us for your end and maybe help us measure the progress there?.

Eric, I think the way to think about the Embedded Processing is that again we’ve been seeing some nice growth in that business. I think if I recall six quarters of year over year growth going on in that business. So we’re beginning to see the payoff of prior investments resulting in real revenue growth. That growth is in the right areas.

It’s where we can -- we’ve got sustainable product revenue streams and very attractive margins. Consequently we’re seeing profit margins beginning to improve rather nicely and that’s even before we see the benefit of the restructuring actions that we talked about for Embedded Processing. That’s not to say that we’re done.

There’s still quite a bit more work to be done, but most importantly with that business is focusing on is growing into its inherent cost base. And so more growth is what’s going to be really important there. And clearly at its current operating profit levels, it’s not anywhere near where we think it can take us to.

I won’t go beyond that on forecasting what margins might be, but I think you know from how we operate the business here we’re focused on free cash flow, which means you’ve got to have some right margins in there. And this business still has quite a bit of work to do to get to where we expect entitlement is. .

Do you have a follow on, Eric?.

Okay, great. Thanks for that. Yeah, CapEx maybe. Where do you see your investments being focused? How do you plan on allocating your CapEx I guess over the next 12 months? Thank you. .

Eric, we did announce that with the 4Q earnings released that we had just acquired an assembly tests site in Chengdu, China. We’ll be spending money on that in 2014 bringing that building up to our standards and bringing the production line up and ready for output in the second half or late this year.

So the majority of our CapEx will tend to go toward our assembly and test operations given that we already have significant capacity in our wafer fab operations..

Okay, great. Eric, thanks for your questions and we’re going to wrap it at this point. Thank you for joining us. A replay of this call is available on our website. Good evening..

This concludes our conference. Thank you for your participation..