Dave Pahl - VP, Head of Investor Relations Kevin March - SVP and CFO.

John Pitzer - Credit Suisse Ambrish Srivastava - BMO Capital Markets Stacy Rasgon - Sanford Bernstein Harlan Sur - JP Morgan Securities, Inc. Craig Ellis - B. Riley & Co.

Stephen Chin - UBS Securities, LLC Joe Moore - Morgan Stanley Vivek Arya - Bank of America Merrill Lynch Mark Lipacis - Jefferies Blayne Curtis - Barclays Ross Seymore - Deutsche Bank Doug Friedman - RBC Capital Markets William Stein - SunTrust Humphrey Robinson Tore Svanberg - Stifel Nicolaus CJ Muse - ISI Group.

Good day and welcome to the Texas Instruments' Third Quarter 2014 Earnings Conference Call. At this time, I would like to turn the conference over to Dave Pahl. Please go ahead, sir..

Thank you. Good afternoon and thank you for joining our third quarter 2014 earnings conference call. As usual, Kevin Marks, 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 reconciliation 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 more complete description. The third quarter was another quarter that marked strong progress. Our core businesses of analog and embedded processing grew again with combined revenue of 10% from a year ago.

Revenue of $3.5 billion came in solidly in the upper half of our expected range we had communicated to you in July. Earnings per share of $0.76 was at the top of our range as profitability was strong in the quarter. Our cash flow from operations was $1.4 billion.

We continue to believe that free cash flow growth is most important to maximizing shareholder value in the long-term, especially on a per share basis. Free cash flow for the trailing 12 month was almost $3.5 billion, or 27% of revenue consistent with our targeted range of 20% to 30% of revenue.

This is a 300 basis 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 purchasing assets ahead of demand at the stressed prices.

We also continue to believe that free cash flow will be valued only if it's returned to shareholders or productively invested in the business. Over the past 12 months we've returned $4.2 billion of cash to investors through a combination of stock repurchases and dividends paid.

In the third quarter, TI revenue grew 8% from a year ago with growth in both analog and embedded processing. Analog revenue grew 11% from a year ago led by power management. High volume analog and logic, high performance analog, and Silicon Valley analog also grew.

Embedded processing grew 6% from a year ago due to microcontrollers, connectivity and processors each of which grew by about the same amount. Embedded processing delivered its eighth quarter in a row of year-on-year growth.

In our other segment, revenue was about even from a year ago as a decline in legacy wireless products was mostly offset by growth in DLP products. Turning to distribution, resales increased 10% from a year ago consistent with our combined revenue growth in analog and embedded processing.

Weeks of inventory were unchanged at a historically low level of just over four and a half weeks. This level was low because we've structurally changed how inventory is managed in the distribution channel with our consignment program.

This quarter we continue to convert more of our distribution sales to consignment and now support about 55% of our distribution revenue on consignment up about 10 percentage points from a year ago.

With this program, inventory sits on TI's of balance sheet and revenues recognized from distributors pull products from our consignment inventory that is stored at the distributors' locations.

This program minimizes changes in demand due to distribution inventory -- channel inventory and most importantly, allows us greater flexibility to meet customer demand. From an end market perspective, TI revenue growth from a year ago was due to communications equipment, industrial and automotive, each of which grew by about the same amount.

Enterprise systems was also up while revenue and personal electronics declined due to legacy wireless products. Now, Kevin will review profitability, capital management and our outlook.

Kevin?.

Thanks Dave and good afternoon everyone. Gross profit in the quarter was $2.04 billion or 58.4% of revenue. Gross profit increased 15% from the year ago quarter and gross profit margin hit another new record.

This gross profit reflects higher revenue and an improved product portfolio focused on analog and embedded processing that benefits from our efficient manufacturing strategy. Moving to operating expenses, combined R&D and SG&A expense of $795 million was down $38 million from a year ago.

The decline primarily reflects the targeted reductions in embedded processing in Japan that were previously announced as well as continued cost discipline across TI. Acquisition charges were $83 million almost all of which were the ongoing amortization intangibles and non-cash expense.

Restructuring and other charges were $9 million benefit primarily due to gains from sales of assets. Operating profit was $1.18 billion or 33.6% of revenue. Operating profit was up 39% from the year ago quarter. Net income in the third quarter was $826 million or $0.76 per share.

Let me now comment on our capital management starting with our cash generation. Cash flow from operations was $1.38 billion in the quarter. Inventory days were 108 consistent with our model of 105 to 115 days. Capital expenditures were $103 million in the quarter.

On a trailing 12-month basis, cash flow from operations was $3.82 billion, up 17% from the same period a year ago. Trailing 12-month the capital expenditures were $367 million or 3% of revenue. As a reminder, our long-term expectations for capital expenditures to be about 4% of revenue.

Besides inexpensively adding capacity ahead of demand, we have focused on delivering higher levels of customer service. By combining this capacity with continued improvement and how we manage inventory, we're able to keep our lead-times consistently low while continuing to deliver on time.

Free cash flow for the past 12 months was $3.45 billion or 27% of revenue. As we've said, we believe strong cash flow growth particularly free cash flow growth as most important to maximize shareholder value in the long-term that will be valued only if its return to shareholders or productively reinvested in the business.

In the third order, TI paid $319 million in dividends and repurchased $670 million of our stock for a total return of $989 million. As we've noted, our intent is to return all of our free cash flow plus any proceeds that we received from the exercise of equity compensation minus net debt retirement.

Total cash return in the past 12 months was $4.16 billion which was 9% higher than a year ago. In the quarter, we announced a 13% dividend increase in our quarterly cash dividend from $0.30 to $0.34 per share or $1.36 annualized. This marked our 11th consecutive year of increasing dividends and our 52nd year of continuous dividend payments.

Outstanding share count has reduced by 3.5% over the past 12 months and by 39% since the beginning of 2005. These returns demonstrate our confidence in TI's business model and our commitment to return excess cash to our shareholders. Fundamental to our commitment to return cash are our cash management and tax practices.

We ended the third quarter with $3.19 billion of cash and short-term investments up from $2.80 billion at the beginning of the quarter. TI's U.S. entities own 81% 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's orders in the quarter were $3.34 billion, up 6% from a year ago and our book-to-bill ratio was 0.95. This ratio would have been a bit higher except for the effect of the conversion to consignment of some products sold at distribution.

While book-to-bill still would have been below one, this is consistent with the pattern that we're seeing for the past four years. Turning to our outlook, we expect TI revenue in the range of $3.13 billion to $3.39 billion in the fourth quarter. At the middle of this range, revenue would increase 8% from a year ago.

We expect fourth quarter earnings per share to be in the range of $0.64 to $0.74. Restructuring charges will be essentially nil. Acquisition charges which are non-cash amortization charges will remain about even and hold at about $89 million to $85 million per quarter for the next five years.

Our expectation for our effective tax rate in 2014 remains about 28%. This is the tax rate you should use for the fourth quarter. In summary the third quarter demonstrates the growing strength of TI's business model.

Our strategy is anchored in analog and embedded processing and is bolstered by an efficient manufacturing operation and a broad sales channel. The result is diverse and long-lived positions in many markets.

We remain intent on excellence in execution, disciplined in allocating our capital, and firm believers that free cash flow per share is the best long-term indicator of shareholder value. With that let me turn it back to Dave..

Thanks Kevin. Operator you can 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'll provide you an opportunity for additional follow-up.

Danny?.

Thank you, sir. (Operator Instructions) Our first question comes from John Pitzer with Credit Suisse. Please go ahead sir..

Good afternoon guys. Thanks for letting me ask the question. Kevin I guess my first question will be on OpEx. Clearly you are well ahead of sort of your expected annualized savings of $130 million with the restructuring actions.

How do think OpEx will trend sequentially into the December quarter? And if you look at R&D as a percent of rev now below 10%, is that just a structural change in the model and how worried should I be at what scale level you should be investing on R&D for future growth? I understand that you are still spending absolutely a lot more money than most of your peers, but tough to see someone with your gross margins and R&D as a percent below 10%..

Okay, John a think there were a couple in there so let me see if I can remember them all. Starting with OpEx and trends, the -- clearly OpEx was down quarter-over-quarter largely as a result of some of the restructuring actions we previously announced as well as just ongoing cost discipline in all the various businesses across TI.

As you look into fourth quarter, if you just go back and take a look at a year ago that's probably your best gauge to take a look at the fourth quarter and even first quarter for that matter. We typically see that OpEx is lower in the fourth quarter due to holidays and vacations.

In addition this fourth quarter, we expect a further benefit of another $15 million of cost to come out as a result of the restructuring that we announced on the embedded processing that's part of that $130 million of annualized savings that you were mentioning John.

In fact we're probably running ahead of that $130 million of annualized savings right now. We're probably come up to beyond that. From the total R&D spend, as a percent of revenue, again, I think what's more important is not how much you spent, but how well you spent it.

And I think the best indicator and how well you are spending is what's happening to your market share as a result of the products we're introducing into the market. In our case, if you take a look at 2006 through 2013, the last full year periods that we reported on, our total R&D spend is up 77% over that period.

But most importantly, that R&D is a result in products where we have continually gained share. So, again I think John its less a question of how much you spend and a lot more how well you spend it and spend it on things that customers really carry about..

Good.

John you have a follow-up?.

Yeah.

Guys quickly just I know you don't give segment guidance or revenue, when I look at the embedded business in the September quarter, it was up only about 1.1% sequentially which is little bit weaker than I had been modeling and I'm kind of curious as to what you think might have driven that? And given that some of your peers have talked about sort of slowdown in the second half of September from a macro perspective, did any of that play into the embedded business in the September quarter? Thank you..

Okay. So let me take that, John. I think if you look at the growth rates between analog and embedded processing, you can see a lot of quarters they won't grow the same.

And I think if you look at -- both of those businesses they have different end market exposures and really it's those end market exposures that will explain most of the differences in those numbers.

So -- and the second part of our question was, yeah, just -- did -- basically the overall environment impacting the growth that we've seen there and I’d just say, no, that really isn’t in those numbers. Basically that forecast is given off of the orders that we received from our customers. So thank you John.

Can we go to the next caller please?.

Yes sir. Our next caller is Ambrish Srivastava with BMO Capital Markets..

Hi, thank you very much. Just on the overall demand environment. There is a lot of confusion out there, but it seems like things have slowed down, so just wanted your perspective. In the past you guys have given us certain things as you look at such as cancellations and so on and so forth.

And also within that frame of reference, Dave, if you could please just walk us through your disti consignment versus non-consignment? And then how would you compare to somebody who claims that they are sell-through so they see a slowdown before -- a quarter or so before others. And then I had a very quick follow-up..

Okay, so a couple of points in there Ambrish. The first is that, I just point out that all of our distributors provide us with a point-of-sale reporting and we get that information on a very regular basis. So regardless of how the revenue is recognized we see what's going on from a distributor resale standpoint.

The second thing, you touched on the current environment, and we really want to be guarded on trying to take a position for the industry on where that’s going. But we can really point to just what we see. If I kind of step through those, our inventory on our books is at 108 days is within our target model.

If you look at our channel inventories, those were essentially unchanged from last quarter. They are at a very lean level, at just over 4.5 weeks. Our lead-times have been consistent and I would say low. Our cancellations and reschedules remain very low, so nothing changing on that front.

And then probably as we have grown over these last few quarters we've been able to support that growth and keep delivering our products on time at very, very high service levels. So, our operations continue to execute at that high level.

So -- and then I will get to the last part of your question was what percentage of our revenue goes through distribution and what percentage is supported by consignment. So, the first one is, about 55% of our revenues go through the distribution channel and about 55% of that is supported on consignment.

And as we pointed out in our prepared remarks that has increased by about 10% from year ago as we've had a couple of conversions go on this year. And I would say that we are not done with that. We actually expect that additional conversions will happen and -- over the next year or so, so we expect that percentage will actually increase.

So Ambrish you have follow-up?.

Yeah, a quick follow-up, Dave, on the embedded operating margins you guys have had a steady increase, what's the right way to think about how do you get to North of 20%? Is it just a matter of focusing on the right product mix and getting that ramped up or is it something beyond that. Thank you, Dave. .

Sure..

Yeah, Ambrish. I will take that one. On embedded processing there our margins have been continuously improving over these last few quarters and we would expect further improvement.

Recall, I just mentioned earlier in the call that we would expect another $15 million or so of cost to come out of fourth quarter and most of that will come out of embedded processing. I would add that, from this point going forward, and we've talked about this last couple of quarters, the amount of spend inside embedded processing is sufficient.

It doesn’t need to increase anymore. What really the focus is revenue growth and that’s what this is really about. And that entire team has been very focused on that.

I believe they just recorded their eight quarter in a row of year-over-year revenue growth, so they clearly are working on the right metrics to really make that business start to deliver profitability at the level we expected to at TI..

Okay. Thank you, Ambrish. We will go to the next caller please..

Our next question is from Stacy Rasgon with Sanford Bernstein..

Hi guys. Thanks for taking my questions. First I want to dig into the embedded processor margins again just a little bit. You had about $26 million in OpEx come out from Q2 to Q3. You had revenue in the Group, up a little bit or mostly flat. Margins were only up a little bit.

Given all of that cost in theory I would have expected to come out of embedded processing, why weren’t the embedded processing margins up more. It doesn’t seem like all of those cost savings actually flowed through the margins this quarter..

Actually they all flowed through the margins, Stacy, but not all through embedded processing. Recall, those actions incorporate both embedded processing as well as actions in Japan, which drove margins as well. Even with that at the EP level you did see about a 72% fall through on that delta revenue.

So you're seeing it come through, but do keep in mind that Japan start spreading on some of the other businesses as well..

Got it, got it. That’s helpful. So my follow-up, if I can dig into the gross margins little bit, I think both for this quarter and next quarter. So for this quarter you came in a little bit high, I guess, was that only the revenue upside or was there something else in terms of mix or other cost savings that push it up.

And then for next quarter depending on how far you are guiding OpEx down, it feels to me like you are guiding gross margins implicitly flat to up in Q4 and quarter of revenues are down and typically your gross margins will be down in Q4 as well.

So if you could give us any sort of feeling for what the gross drivers for next quarter ought to be in terms of mix offsetting revenue declines that would be very helpful..

Sure, Stacy. I think that, clearly, the extra revenue came through and it was quite rich. We also had a slightly better mix of overall products that were shipped in the quarter. That combined gave us that new record gross profit margin of 58.4%. As we look into fourth quarter, I would not characterize our guidance suggesting that margins go up.

We will be reducing loading some in the fourth quarter on a seasonal basis. Hence you can expect that margins will be down a bit, not very much, but down just a little bit. So depending on how you're building your model there I wouldn’t assume margins increase in fourth quarter. .

Got it. .

Yeah. Thank you Stacy and we will go to the next caller..

Our next caller is Harlan Sur with JP Morgan..

Thank you for taking my question and congrats on the solid quarterly execution. The markets have been focused on Europe and China as sources of potential weakness. At the same time the team has done a solid job on diversification and maybe that’s what it is, the diversity of forging a more stable revenue profile.

But at the margin, can you just talk about the overall health by geographies.

Have you seen any signs of weakening above the normal seasonal trends that you would normally expect during Q3 or Q4?.

Yeah, sure Harlan. I would say if you just look at what happened regionally, year-over-year Asia and Europe were both up while the U.S. was even and Japan was down a little bit. And sequentially all the regions were up with Asia and Europe up the most. And if you look specifically inside of China and how resales had done there, we had looked into that.

And I'd just say that resales really just continued to be solid as we closed out the quarter. So that’s basically what we saw.

You have a follow-up?.

Yes, absolutely. Thank you for that. You gave us some trends in OpEx into the fourth quarter.

How should we think about OpEx as we move into the first half of next year?.

Harlan, I won't comment on first half, but I will give you some thoughts on first quarter. Your best way to analyze that, this could take a look at what happened from fourth quarter to first quarter of the most recent year coming out of 2013, 2012.

We do have seasonal increases in OpEx as we go from fourth to first typically because of an absence of vacations that we have in fourth and the partial implementation of our annual pay and benefit increases that occur in first.

So they will -- you should expect those to be up and you can take a look at -- again this past year to get a rough idea as about how much that increased by in percentage terms. .

Yeah. And I would just add, Harlan, that the -- as we indicated before, Kevin pointed out that we are expecting about $15 million more savings in fourth quarter at that point will be essentially complete on those announced actions. So, we will basically be just have a seasonal impact that Kevin had mentioned. All right, thank you.

We will go to the next caller please..

Next caller is Craig Ellis with B. Riley..

Thanks for taking the question. I will start off with a bigger picture question, Kevin. The company has done a very good job of looking forward and being proactive, taking action to either prune lower margin revenue stream such as wireless or identifying opportunities for cost savings such as the optimization program this year.

As you look ahead how much further room is there for a similar such optimization efforts? Are we really at a point where the TI model is getting very close to being optimized?.

Yeah, Craig. I think that as we look forward from an optimization standpoint, I think the ones you've talked about so far have been more about where we might have trimmed areas that had opportunities perhaps not quite as attractive as other areas.

I think perhaps one of the areas least appreciated as people look at TI on a go forward basis is the impact that continued delta revenue on 300 millimeter analog is going to have for us. The cost structure to build on 300 millimeter is very attractive.

And so incremental revenue going forward on 300 millimeter, we expect to produce not only higher margins, but also higher levels of total cash on that delta revenue..

You have a follow on Craig?.

Yeah, I do. Thank you. Dave, you mentioned the strength in analog power management on year-on-year basis.

Was it similarly strong sequentially and what specifically is driving that strength?.

Yeah. So on a sequential basis if you look at our analog business it was up primarily due to High Volume Analog & Logic, as well as Power Management. Though we did see growth really from all four businesses, High Performance Analog and Silicon Valley also grew. So, you see a little bit of difference there sequentially.

But again power continue to strong in both comparisons. Okay, thank you, Craig. We will go to the next caller please..

Our next question comes from Stephen Chin with UBS Securities, LLC..

Hi. Thanks for taking my questions. I just wanted to draw down little bit on the embedded processing segment, in particular between micro-processors and micro-controllers and I guess DSPs and application processors.

Could you talk about some of the trends that you saw in Q3 especially from any, I guess, communications equipment exposure that you have?.

Okay. So embedded processing, as you know grew 6% from a year ago. That was driven by micro-controllers, connectivity and processors each growing by about the same amount. And again as Kevin pointed out that was the eight quarter in a row of year-over-year growth.

Sequentially, revenue was a little better than even, connectivity was up and processors and micro-controllers were about even sequentially.

So, you have follow on Stephen?.

Yes. In terms of gross margins, I'm just wondering if this year there is an opportunity for you to take advantage of building any strategic inventory for certain products that you know have good turnover and hence maybe further optimize gross margins a little bit in a seasonally slower quarter. Thanks..

Yeah, Stephen, we do that on ongoing basis. That’s one of the ways that we’re able to keep sort of lead-time for the overwhelming majority of our parts to six weeks or less. In fact, we build the stock not necessarily build the order. Meaning, we maintain a stock of inventory such that we can always have short lead-times from our customers.

So from a strategic standpoint that is done. It does have a little bit of ebb and flow. As you point out, when we have lower loadings in certain quarter it gives us chance to build up on feed extra parts on that. But I don’t think there is a whole lot of opportunity to do that just to impact the gross margins.

I think we're really doing that to impact customer service..

Yeah. And I would also add, Stephen that if you take the combined way that we are managing inventory now and we're being very intentional specific targeted programs depending on how quickly that inventory turns.

But you take that plus the open capacity that we've got and the combination of those two things and we've really been able to execute at very high levels and deliver our products on time to customers.

And so we think not only having low lead-times but also delivering product when you make a commitment to a customer, combination of those things are what customers would like to have. Okay. Thank you. We move on to the next caller please..

Next we have Joe Moore with Morgan Stanley..

Great, thank you.

Can you talk about where your fab utilizations are now just qualitatively and there's still an underutilization charge to -- as part of these numbers?.

Joe on the underutilization charges, the answer is yes there are. But we're not really talking about those anymore and the reason is really kind of straight forward.

We found that analysts and some inventories where on a conclusion that because we had underutilization that increase in our utilization would be the maximum amount by which we could increase our overall profitability if we put revenue into those factories, and that’s really an incomplete answer.

Remind you that our stated strategy is to invest in our capacity ahead of demand by definition. That means we will have open capacity and underutilization cost. Our purpose of providing ahead of demand is to purchase that capacity with as little cash as possible.

So the utilization charge is mostly a non-cash charge and it tends to mix the point that our objective is to maximizing free cash flow.

So for that reason you haven't really heard us commenting on or quantifying underutilization charges this past few quarters and unlikely to in the future unless there is some material changes that causes the better understanding of what's going on..

And Joe, I will just add, the last time we had stated our end-to-end capacity, it was in the $18 billion range. So if you want to get a qualitative feel of where capacity is, you can annualize our quarterly revenues and put it against that number and it will get you into the zip code.

So you have a follow on Joe?.

Yeah. Thank you for that. In terms, could you give us an update on the base station market? And I know you said that continue to be strong.

Just anything that you are seeing from that end market?.

Well, if I just look at the communications market overall and I would -- from a year-on-year standpoint it was up primarily due to wireless infrastructure, while sequentially it was down. And basically we just saw that in -- as a seasonal pause in the fourth quarter. So thank you very much….

Thank you..

And we go to the next caller please..

Our next caller is Vivek Arya with Bank of America Merrill Lynch..

Hi Vivek..

Hello. Thank you for taking my question.

You mentioned a very interesting thing on improving output from your 300 millimeter fab and I was wondering if you could give us some more color around what percentage of your starts are moving to that fab? And more importantly what that implies for gross margins? For example in the past you have mentioned about 75% fall through on gross margin.

So as you increase the loading on 300 millimeter, what does that do to that number over the next several quarters or years?.

Yeah, Vivek. I don’t know that I'm prepared to give you a detailed quantification of that nature. What I would just say is that, we've talked in past about -- just from the geometrics alone that the chip cost itself was about 30% lower on 300 millimeter than it is on 200.

Not to mention that you also get better yield results and so on, so you get a number of different benefits.

So what we are seeing happening is proportionally more and more new products that we're releasing are being released on to 300 millimeter, which means as we look out over the next year, two, three, four years, more and more of our revenue will be sourced off of 300 millimeter, which inherently means it's got lower cost which should allow us to incrementally increase our gross margins as well as our importantly our free cash flow.

Beyond that I don’t have any specifics I will give you at this point in time. But I do want to introduce that confidence to people because I think it's been underestimated as to how important that to TI's continued progress..

Got it..

You've got follow on Vivek?.

Yes. Dave, the question is on the end market mix, I believe, you mentioned comps was strong on year-on-year basis. I was wondering if you could just give us your end market mix overall for Q3 and how do you see those trends playing out in Q4? Thank you..

Sure. Yeah. So on a year-on-year basis our revenue growth was due to coms equipment, industrial and automotive, as I mentioned before, each of which grew and contributed to that growth by about the same amount. Our Enterprise Systems was also up while revenue in personnel electronics declined due to legacy wireless products.

So, if you kind of go down one step in each side of -- inside of each one of those, industrial, we've got about a dozen sectors inside of industrial. And as we've talked to different investors over the last few months and as we are traveling around, it becomes clear to us that our definition of industrial probably isn’t as well understood.

And we've got -- years ago we used to define it as what it wasn’t, meaning it wasn’t coms equipment or it wasn’t automotive or it wasn’t other things. But now we've got very intentional definitions. We've got about a dozen different sectors that make that up.

So things like appliances and building automation and displays and point-of-sale products, factory automation, industrial transportation, medical healthcare, fitness, lighting, motor drives, power infrastructure, things like that. So very, very broad, but very specific.

So when you look on year-on-year basis, we had growth in nearly all of those sectors with most of the sectors actually providing double-digit growth. It was actually led by medical and healthcare fitness and factory automation. But, again, we saw that growth very broad based.

Automotive, we've got five sectors inside of that and I'll also just point that those sectors are actually out on our website of people are interested. But we've got double-digit in all the sectors, but led by passive, safety and infotainment. Coms equipment, as I mentioned, was up due to wireless infrastructure.

Personnel electronic was down due to legacy wireless products and if you take that out we did see growth in PC and notebooks and mobile phones and that was partially offset by some weakness that we saw in gaming. And then the enterprise systems, that’s -- part of that is where our DLP products will sit and that was up due to projectors.

So I will stop there. So thank you Vivek.

We have a follow-up question?.

No, that was my….

Yeah, thank you very much. We will go to the next caller. Thanks so much for that..

Our next caller is Mark Lipacis with Jefferies..

Thanks for taking my question. The first question is, historically, when you saw lead-times stretch for some of your competitors, not -- even if you are only time stayed stable, you would see not only double ordering at your competitors, but also double ordering at Texas Instruments as well.

And I'm wondering if you think something is changed structurally with how guys are running the business or how that industrial operates that might have changed that dynamic?.

Yeah, Mark. I don’t know that I will speak for the industry, but I will speak for TI and kind of go back to comment we made earlier. As a result of us taking an approach whereby we intentionally invested capacity before we needed and therefore always have more capacity that was needed for that quarter's business.

It allows us to be able to build inventory in a much more thoughtful fashion than we have in the past.

A consequence of that has been that not only have we've been able to maintain lead-times for the preponderance of our products that’s six weeks or less for several years now, we've also been able to maintain a very high level of on time delivery to our customers against those lead-times.

So when you put that together, what you've really got for TI is it's just a different way whereby we are managing our manufacturing footprint and how we utilize that manufacturing for purposes of managing inventory.

As it relates to double ordering, again, one of the biggest things that tends to be evident when double orderings begins to popup as you start seeing cancellations or reschedulings beginning to ramp up. We do not see that and we have not seen that for some time now.

So I think the strategy whereby we have capacity ahead of demand and we use that thoughtfully to make sure that we can maintain relatively low lead-times is severing well to satisfying our customers at least as it relates to demand for our products..

You have a follow-up Mark?.

Yes, I do. And that’s helpful, Kevin. And the follow-up is actually on that topic about the lead-times. I think earlier in the script you said you're delivering -- you are focused on delivering higher levels of customer service. And then I think you said, you followed that up with saying we are keeping lead-times consistently low.

So, I guess, I'm just trying to reconcile when you say delivering higher levels of customer service, are you -- do you think that you have your lead-times over maybe a longer period of time have come end that they're just structurally shorter? Or are you just delivering them more consistently at a shorter time.

So I just have to reconcile when you said, what is the higher level of customer service? What is the improvement have been? Thank you..

Yeah. Thanks. Thanks for clarification. I think it’s a real good question. So when we referred of that, we look at a bunch of different customer service metrics.

One is just how many line items are we shipping on time and we've had some very intentional initiatives that have been set up to be able to ensure that that is a good solid number and we are taking advantage of both the capacity and our inventory to ensure that we are consistently delivering on time.

And so that’s one of the metrics that we look at and that’s what we mean by customer service, it's not really changing those lead-times, but keeping them stable and then delivering products when we saw that we'll deliver them. It's really the combination of those two things. So thanks Mark, and we will go to the next caller, please..

Our next question comes from Blayne Curtis with Barclays..

Hey, good afternoon. Thanks for taking my question. Just going back, Kevin, on gross margin, if you could just go through what drove the offside versus your guidance, then you're obviously sustaining that going forward. Is there anything that doesn’t repeat in such that --and it sounds like you can grow it off this space.

Just want to make sure I heard that right. .

Yeah, Blayne, the guidance actually -- we are up a little bit from guidance, not a huge amount. But really what we have was little bit more revenue come through. But importantly we also have a slightly better mix of product that we ship to our customer. And so combined that gave us a slightly higher gross margin than previous expected.

And then on a go forward basis, again, that mix continues to be in our favor as we go forward and so consequently as we look into fourth quarter our margins will continue to be quite strong.

And importantly, because of the rather unique situation that we have with 300 millimeter analog manufacturing capacity, we have significant opportunity to continue to drive not just improved margins but importantly good cash flow. Again, I will remind you some of the things that we do. We've got 300 millimeter analog.

I do want to make that point of having it. We've got a lot more of our revenue coming from catalog parts which inherently tend to have more attractive margin characteristics. We have increasing portions of our revenue coming from industrial and automotive spaces and those three concepts are pretty important.

Catalog parts, industrial, automotive tend to have very nice long revenue streams, which means we have plenty of time to figure out and maximize our cost efficiency from production standpoint and maximize our revenue and cash flow off that. Now, we've got increasing customer diversity.

So our dependence on any one customer and therefore of the risk to our loadings or cash flow generation are diminished. And perhaps also very importantly we have a sales force that we estimate to be three to four times larger than our nearest competitors and those folks are becoming increasingly productive.

And so we're beginning to get a lot more revenue per sales person which means we can grow revenue without having to grow OpEx as fast as revenues growing. Those things combined not only will help our margins, but also definitely help our cash flow. .

Okay.

Blayne, you have a follow-up question?.

Yeah, thanks. So just for a big picture level, I think you already answered this, but I just wanted to make sure I missed anything. We've had seen some companies referenced part still weaknesses. I mean, I would say your results are normal, if not even better than normal.

Are you seeing any areas that are weak and you are offsetting that with share gains or strength elsewhere? Just curious your perspective or are you not seeing any weakness at all anywhere?.

Well, yeah, I will let you draw the conclusions from the numbers. I think that, obviously, the results are solid. I think that the outlook is consistent with the orders and our visibility into what customers are telling us they want from a consignment standpoint.

So -- and from a share gain standpoint, I think that we've had multiple years now where we have had gain share, think it's always hard to tell in any one particular quarter that you're picking up share, but I think when you look back over a year, you can see that trend.

So, we believe in our numbers, there share gains, but I'd be careful and anyone quarter to be able to point that out. So, thank you Blayne. And we'll go to the next caller please..

Our next question comes from Ross Seymore with Deutsche Bank..

Hi guys, thanks for letting me ask a question. I guess the one segment nobody has asked about thus far is other, did a bit better than I had expected. Dave you broke down what was the year-over-year and sequentials with the sub buckets in the other two segments.

Can you do that for the other segment as well? And if it is DLP, give us a little description on is there some seasonality in that that we need to appreciate going forward? Thanks..

Sure, sure. Thanks Ross. Yeah, so on a year-on-year basis, again, other was even. We saw a decline in legacy wireless products and that was mostly offset by the growth in DLP products. On a sequential basis -- let me just finish year-on-year.

If you look beyond that, calculators as well as custom ASIC business were up and royalties were down just slightly. So sequentially, revenue was up due to growth in calculators and DLPs. Royalties were flat and custom ASIC was down a little bit.

So, I'd say that all of those businesses are performing well and if you look at DLP, they are typically stronger in the back half of the year in third quarter, but I would say that business is just executing well. When we look at that business longer term, I describe that it's got several wildcard growth opportunities.

If you look at most of the business today, it will be centered up in the front projectors that you'll typically see in offices and schools and government buildings, but -- and it also has a solid cinema business, but from a broader standpoint, it's some opportunities inside of automotive as well as some embedded opportunities there as well..

Pico as well..

Yeah, the Pico projectors as well.

So, thanks Ross, do you have a follow-up?.

I do. Kevin you were helpful in giving us some balance around the OpEx and looking at prior years and how things have dropped seasonally due to vacations et cetera in both the fourth and in the first quarter doing the other direction.

Can you give us a little bit of a harder number on what that typical percentage changes quarter-to-quarter? Looking back in the past you guys have had a number of restructuring programs that make it a little bit difficult to parse out what seasonality and what is restructuring driven in both the fourth of the first quarter? Thank you..

Yeah, Ross I actually pointed to the last fourth to first transition with the idea, that's a good one for you to look at because in fact the timing of the announcement for the embedded process and Japan restructuring, you may remember we announced that in January of this past year, so we hadn't even begun the activities yet inside the first quarter.

So, the underlying cost in there is fairly clean from a competitive standpoint between fourth and first and so I'd use that as your figure of (merit) [ph] to trying to figure where we go in 2014..

Okay. Thanks Ross. That was helpful clarification. And we'll go to the next caller please..

Our next caller is Doug Friedman with RBC Capital..

Great. Thanks for taking my--.

Hi Doug..

Hi guys, thanks for taking my question. Congrats on a real strong results here. If I could Kevin maybe attack really high level one. You guys have been in the past very acquisitive so much so that you really rebuild your whole business model through acquisitions.

Can you maybe talk about your appetite to maybe add some debt onto your already leveraged balance sheet? And what it would take for you to look at another significant deal?.

Okay, Doug it's not like may be there's two ideas in your question, one on M&A, one on debt.

Clearly, on the M&A front, as you point out, we have been quite willing to take on M&A activities when it makes sense and our definition of what makes sense firstly has to be a strategic fit meaning that it really has to make sense for why we want to take the company.

As we look at potential M&A in the future, it's most likely to be biased towards analog and probably towards items with catalog parts, service the industrial or automotive spaces. There may be others, but those are the most likely areas that we would look at.

If it turns out that it checks off that strategic fit standpoint and of course, we'll have to take a look at the numbers and make sure that the price that we would pay met -- what I mean by that is not necessarily what its market cap is but the market we probably have to pay on top of that, that that total cost would be accretive to our lack or way the average cost of capital in the two to four year timeframe.

So, there's the several test that we go through and we will make a termination on acquisition. As it relates to debt, as you know we have taken on debt to support acquisitions in the past.

We think having the balance sheet available to support those kinds of strategic initiatives are important and a worthwhile thing for us to maintain for maximum flexibility as we move forward and so as we look out in time and even look at the last couple of years, while we have been issuing new debt, we've also been retiring older debt and retiring a little bit faster than what we've been issuing so that we're taking our whole debt levels down that's having the result of generally slowly opening the balance sheet back up to make itself available for any other opportunity that might present itself at some point in the future.

So, that's how we're looking at M&A and that's how debt kind of roles inside that book..

Great. Thanks for all that color..

Do you have a follow-up?.

Yeah, I guess if I could, can you guys pretty much along the same ideas on the balance sheet and how you look at cash return, I might have missed it did you happen to give out the share price at which you bought back shares this quarter? And would you moderate going forward given the share price pullback that we just saw, how we should think about share count going forward?.

Let's see, we bought back $670 million worth of shares this quarter, total of 14.1 million shares, so that's an average price of about $47.62.

I would point out that over the last -- since the end of 2004 beginning 2005, we reduced our total share count by 39% that the average price of those shares that we bought over that time, I believe were about $30.62 give or take.

When we look to buy back shares as we talked about in the past when the intrinsic value we believe was higher than what the market value is, then it makes sense to buyback on a steady, if you will, dollar across averaging kind of basis, that's what we've done for many years and that's what you've seen us do here recently.

In fact, the recent pullback in price is just allowing us to buyback a few more shares with the same number of dollars. So, that's kind of a round the world look at share repurchase if you will.

That answers your question on that Doug?.

Yeah. Thank you, Doug. And we'll go to the next caller please..

Following Doug, we have Will Stein with SunTrust..

Great. Thank you for squeezing me in. I'm hoping you can quantify a comment that you made earlier about the portion of sales on 300 millimeter today and that could increase over time.

Kevin could you talk a little bit about where that number is now and where you'd see going over the next couple of years?.

Yes, Will, I think we're going to try to just hold back and say it is proportionally more than it has -- each period that goes by is proportionally more, but I think that we'll hold at a little while longer till we can get a more comprehensive look and better understanding for everybody on how to think about that 300 going forward.

I just do think that it's -- again the highest level it’s a fairly straightforward competition. 30% lower dye cost which means about 50% lower total -- total IC cost. And as we get proportionally more revenue going on there that will just incrementally benefit our margins on our cash flows as we go forward in time.

That is something that I've become aware of and talking to investors the last couple of quarters that is underappreciated and what's going on inside the portfolio itself..

That's helpful. Appreciate it. And as my follow-up, another comment that was made earlier was about I think the relative strength of analog versus the embedded segment this quarter and I think there was a comment about end markets, the end market mix helping, I am wondering if you could quantify that? Maybe help us understand of the better.

I know analog is very diversified relative to embedded, but maybe talk about if they were maybe some end markets that were a bit more challenging that effectively embedded segment a bit more?.

Yes, I think if you look at embedded, it will have a high exposure to really three different markets. Its communications, equipment, industrial and automotive and like you said our analog business has a much broader exposure including exposure to personal electronics.

It has obviously good exposure to industrial and automotive as well, but it's really those types of differences that will explain that performance. If you look at embedded processing and you look back at the growth rates between the two businesses, you'll note that often times they will grow at different rates.

But if you look over that eight quarter period that embedded processing has been growing year-over-year, the growth rate for both of those businesses are essentially -- exactly the same, so kind of works out that way over a longer period of time. So, thank you Will, and we'll go to the next caller please..

The next question comes from Tore Svanberg..

Yes, good afternoon Dave and Kevin. My first question is on sort of the general environment, Q4 is obviously a seasonally down quarter anyway, it's hard to get a read on what's going on.

But as we sort of -- or as you talk to your customers and we compare now let's say versus 12 months ago, would you classify the forecast in the environment as a better, weaker or about the same?.

Tory I guess I probably say that it's about the same. I wouldn't classify it is better or weaker, I said it about the same in that -- again we have had the same lead-times for several years and customers are ordering consistent with that generally speaking.

You get some of expert from time-to-time because they've under-ordered or have a surprise on their but that was true a year ago and it's probably true today.

And we continue to see customers manage their inventories of our products as they have early as was mentioned earlier and the distribution channel, we're at all-time lows a 4.5 weeks of inventory that's same last quarter and this quarter that's very low.

From a customer standpoint, we see them again ordering lead-time and consistent ordering patterns so that tells us they are order -- they are keeping their inventories very low. So, I think overall I probably characterize it as relatively the same kind of customer demeanor today as what we saw a year ago..

Yes, thanks Kevin, that's very helpful. My follow-up question Dave, if I have one..

Sure. Please..

Yes.

So, your annual growth 10% year-over-year is that the goal internally to continue to grow the analog business 10% every year or was there anything unusual here the last 12 months that kept that growth rate so high?.

Well, I would say that internally we have very aggressive goals to grow the businesses and I just describe that as we want to outgrow the market significantly in analog, so we have got all the business units that are focused up on that.

We do look at the performance of the product lines every quarter and we really look at a three-year compounded annual growth rate and stack that up against all the other businesses both inside of TI as well as competitors externally and that's how we measure it.

So, again as I've said earlier a 10% we believe would represent some share gain, but it would be real cautious to look at anyone quarter and draw the conclusion or try to dice out what percentage of that growth would be from share gains. So, okay thank you Tory and we’ll -- operator, I think we've got time for one more caller..

Yes sir. And we have CJ Muse with ISI Group..

Yes. Thank you for taking my question.

I guess first question it's a point of clarification on the OpEx outlook for Q4 down $15 million, is that all restructuring and then there's gravy on top of that in terms of seasonal savings or is that $15 million include the seasonal savings?.

CJ, the thing here to do is take a look at year ago third quarter, fourth quarter there was a seasonal decrease. On top of that will be another $15 million as the last rest of the EP restructuring is completed..

Okay. That's helpful. And then I guess second question, I was hoping you could talk about inventories downstream.

Clearly relatively healthy on your books, but would love to hear what your thoughts are in terms of -- in particular at the [disty] level?.

Yes. Our inventories really from a day standpoint have remained unchanged at what I would just describe historically low levels, just a little over four and a half weeks. Again, that number is low because of the consignment programs that we have put in place.

Beyond our distributors and into our customers, we do have a good percentage of our revenues on consignment overall and in fact, if you combine what we shipped through distribution as well as what we ship to OEMs on consignment that represents about 50% or about half of our revenues where we actually there is no inventory sitting in front of us and that manufacturing line for those inventories.

So, we know that inventory number and it is zero. So, we have very good visibility into that portion and we do have a balance of the business that's kind of the classic -- I'll describe it as book ship type business where they give us an order and goes on to a backlog and we ship it at lead-time.

So, -- and there we haven't seen any reports of large inventory pockets from customers, we're going through and racking up this quarter's results and we will see what happens on that front but we're not aware of any big pockets that are downstream. So, okay well thank you very much CJ for your question.

Thank you all for joining us today and a replay of this call will be available on our website. Good evening..

Ladies and gentlemen this does conclude today's conference. We appreciate everyone's participation..