Dave Pahl - IR Kevin March - CFO

Jim Covello - Goldman Sachs Chris Danely - Citi John Pitzer - Credit Suisse Stacy Rasgon - Bernstein Harlan Sur - JP Morgan Ross Seymore - Deutsche Bank Joe Moore - Morgan Stanley Timothy Arcuri - Cowen and Company Romit Shah - Nomura Ambrish Srivastava - BMO Doug Freedman - RBC Capital Blayne Curtis - Barclays

Good day. Welcome to the Texas Instruments 1Q 2015 Earnings Conference Call. At this time, I'd like to turn the conference over to Dave Pahl. Please go ahead, sir.

Good afternoon and thank you for joining our first quarter 2015 earnings conference call. As usual Kevin March, TI's Chief Financial Officer is with me today. For any of you who missed the release, you can find it and relevant non-GAAP reconciliations on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through TI's Web site. 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 notice regarding forward-looking statements contained in the earnings release published today as well as TI's most recent SEC filings for a more complete description. Revenue growth of 6% from a year ago was within the range of expectations we provided in January. Automotive and industrial markets were strong as we expected they would be. However revenue was in the bottom half of the range for two reasons. First was weak demand in the last month of the quarter and our personal electronics market, particularly PCs and our communications equipment market, particularly wireless infrastructure. We believe these markets specific issues were due to delay of investments by carriers and capacity upgrades for wireless infrastructure equipment and a weaker than expected refresh cycle for Windows XP. The second reason was a steep decline in the currency exchange rate for the Euro relative to the U.S. dollar. The Euro dropped about 10% during the quarter an even though only about 5% of TI's revenues transacted in Euros it was a sharp enough drop that it negatively impacted our revenue by about 20 million more than we had anticipated. Even with these pockets of weaknesses our core business of analog and embedded processing turned in their seventh and tenth consecutive quarter of year-over-year growth respectively. Combine these businesses grew 9% and we're 86% of our total revenue. Earnings per share were $0.61 reflecting our continued attention to cost controls although the vast majority of our revenue was transacted in U.S. dollars ROE negatively impacted revenue by 20 million which translated to only about 5 million of impact to earnings and therefore cash flow. This is due to a partial natural hedged against negative currency fluctuations due to our non U.S. based operations. It's nice to have position to be in this when we have almost 90% of our revenue comes outside of the U.S. But that is a backdrop, Kevin and I will move on with our report on business performance that we believe continues to represent the ongoing strength of TI's business model. In the first quarter our cash flow from operations was $609 million. We believe that free cash flow growth especially on a per share basis is most important to maximizing shareholder value in the long term. Free cash flow for the trailing 12 months period was $3.6 billion, up 17% from a year ago. Free cash flow was 27% of revenue consistent with our targeted range of 20% to 30% of revenue. This is a two percentage point improvement from a year ago period and we believe reflects our improved product portfolio and the efficiencies of our manufacturing strategy, which includes our growing 300 millimeter output and the opportunistic purchases of assets ahead of demand. We also believe this free cash flow will be valued only if it’s returned to shareholders or productively invested in the businesses. For the trailing 12 months period we return 4.1 billion of cash to investors through a combination of stock repurchases and dividends. In the first quarter TI revenue grew 6% from a year ago with growth in both analog and embedded processing. Analog revenue grew 11% from a year ago primarily due to power management and high volume analog and logic. Silicon Valley analog and high performance analog also grew. As we mentioned earlier this is the seventh quarter of year-over-year growth for analog. Embedded processing revenue grew 2% from a year ago due to micro controllers and connectivity. Processor revenue declined which was impacted by the weakness in wireless infrastructure and again as I mentioned earlier this is the 10th consecutive quarter of year-over-year growth for embedded processing. In our other segment, revenues declined 10% from a year ago primarily due to custom ASIC products which also are heavy in wireless infrastructure as well as DLP products. In distribution, re-sales increased 11% from a year ago. Weeks of inventory remained at historically low level of just under 4.5 weeks which is a decrease by more than a week from a year ago and is even with the fourth quarter. This level has decreased over the past few years because we have structurally changed how our inventory is managed and the distribution channel with our consignment program. From an end-market perspective versus a year ago, automotive grew with most factors inside this market growing at double digit rates. Industrial had broad-based growth. Personal electronics grew although growth in PCs was lower than we expected. Communications equipment declined due to wireless infrastructure and enterprise systems grew. Kevin will now review profitability, capital management and our outlook.

Thanks, Dave and good afternoon everyone. Gross profit in the quarter was $1.82 billion or 57.7% of revenue. Gross profit increased 13% from a year-ago quarter and gross profit was up almost 4 points. Gross profit reflects higher revenue, increased factory load-ins and benefits from our efficient manufacturing strategy as we built more analog chips on 300 millimeter wafers. Moving to operating expenses, combined R&D and SG&A expense of $777 million were down $68 million from a year ago. The decline primarily reflects the targeted reductions in embedded processing in Japan that were previously announced. As we said that restructuring was essentially complete at the end of last year. Acquisition charges were $83 million almost all of which were the ongoing amortization of intangibles which is non-cash expense. Operating profit was $958 million or 30.4% of revenue. Operating profit was up 39% from the year-ago quarter. Operating margin for analog was 35.4%. Operating margin for embedded processing was 18.3% more than doubling from a year ago as we executed our restructuring plan to better align resources with the opportunities that we are pursuing as we benefit from our investments for growth. Net income in the first quarter was $656 million or $0.61 per share. Let me now comment on our capital management results, starting with our cash generation. Flow from operations was $609 million in the quarter. Inventory days were 124 about three days more than planned due to revenue coming in at the bottom half of our expectations. Capital expenditures were $123 million in the quarter. On a trailing 12 months basis, cash flow from operations was $4.04 billion, up 16% from the same period a year ago. Trailing 12 months capital expenditures were $431 million or 3% of revenue. As a reminder, our long term expectation is for capital expenditures to be about 4% of revenue, which includes our $8 billion, 300 millimeter analog plan discussed in our recent capital management call. Free cash flow for the past 12 months was $3.61 billion or 27% of revenue. Free cash flow was 17% higher than a year ago. As we've said, we believe free cash flow growth especially on a per-share basis is most important to maximizing shareholder value in the long term and will be valued only if it is returned to shareholders or protectively reinvested in the business. As we've noted our intent is to return 100% of our free cash flow plus any proceeds we receive from exercises of equity compensation, minus net debt retirement. In the first quarter, TI paid $356 million in dividends and repurchased $670 million of our stock, for a total return of $1.03 billion. Total cash returned in past 12 months was $4.14 billion. Outstanding share count was reduced by 3.2% 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 first quarter with $3.30 billion of cash in short term investments. TI's U.S. entities owned 82% of our cash. Because our cash is largely onshore, it is readily available for a variety of uses including paying dividends and repurchasing our stock. TI orders in the quarter were $3.21 billion, up 5% from a year ago. Turning to our outlook, we expect TI revenue in the range of $3.12 billion to $3.38 billion in the second quarter. This represents continuing weakness in our communications equipment and personal electronics markets particularly for wireless infrastructure equipment and PCs respectively. We also do not expect a near term rebound in foreign currency exchange rates. We expect second quarter earnings per share to be in the range of $0.60 to $0.70. Acquisition charges which are our non-cash amortization charges will remain about even and hold at about $80 million to $85 million per quarter for the next five years. Our expectation for our annual effective tax rate in 2015 remains about 30% and this is the tax rate you should use for the second quarter and for the year. In summary, we believe that the first quarter demonstrated the strength of TI's business model. While we're not immune to demand in currency changes, their affects are soften by the diversity of our portfolio in our markets. With that, let me turn it back to Dave.

Thanks Kevin. Operator, you can now open the line up for questions. In order to provide as many of as possible and opportunity to ask your question please limit yourself to a single question. After our response we will provide you an opportunity for an additional follow-up. Operator? Q - Jim Covello: Thanks so much for giving me the chance to ask a question. There is so much controversy in the industry today about whether the industry is as cyclical as it used to be less so, et cetera. I look at your year-over-year growth rates, the June quarter represents the first time you’ve had a year-over-year decline at the midpoint of your guidance in a long time. How do you think about that in the context of an industry where many are arguing that we’re not cyclical anymore?

We’re as you know we’ve been pretty guarded at trying to predict the cycle it’s not something obviously that we can control. We really just go to what we can look and what we can measure. So, as you kind of tick through the things that you typically look at from a cyclical standpoint, we look at channel inventories are down a week from a year ago they’re laying at just under 4.5 weeks. Lead time are remaining consistent our cancellations and rescheduled are very low. In addition we’re continuing to deliver on time and very consistently with that. So we’ve got a couple of pockets of weaker than expected demands as we talked about specifically in wireless infrastructure and PCs. At the same time we’re seeing automotive and industrial continuing to be as strong as we expect. So that’s what we know, that’s what we can see, the debates will continue on how cyclical our industry will be and won’t be.

I might just add that we do have several significant competitive advantages. The combination of which we believe is pretty difficult for anybody else to replicate and it helps us deal with any notion of cyclicality or non-cyclicality. And those advantages include that we’ve got the broadest portfolio in the industry. This really means the engineers start their design work by looking at us first. We enjoy very low cost of manufacturing for all the reasons that you’ve heard us talk about for last few years including our 300 millimeter wafer fabs. We have the broadest sales channel in fact probably two to four times larger than our nearest competitor. And we play in an extremely diverse set of markets with long-lived products that enjoy a significant cash returns to our shareholders for long time. So we think that what’s really important to deal with whatever really happened in market cycles and just really make sure that we’re a lot more competitively advantages than anybody else.

Obviously you’re talking about some weakness in PCs and coms. In the industrial segment, we’re starting to see some negative news flow from the customers. Do you see pockets of weakness but there is just other pockets of strength that are offsetting those industrial customers that maybe weak because I know it’s a very broad based customer base? Or do you just not see any weakness at all in that segment at this point? Thanks very much.

Jim, I’ll just say that like you are hinting to its very broad based, so we service over 100,000 customers most of those will reside in industrial. And again I think it’s probably helpful for me to just go through and when we say industrial it means something different than I think, the investment definition of industrial. So, it will include things like factory automation and control and medical, healthcare, fitness products building automations, smart grid, energy test equipment, motor drives, display, space avionics, appliances and other segments, so again very-very broad. Of course we’ll always see pockets of strength and weaknesses but overall that industrial is doing well we’ve seen growth in almost all those sectors that I’ve described.

And we’ll go now to Chris Danely with Citi.

Dave, you did a good job of outlying I guess the relative areas of weakness in Q1 from currency and com and PC. Can you just give us which you think would be a bigger drag in terms of company sales from PC versus communications? And then do you guys expect a negative impact from currency in Q2 as well and if you could give us the magnitude of that negative impact?

So the one that’s pretty straight forward to identify because it’s really just math walking through the numbers is that on year-on-year basis we’ll probably see about a $50 million headwind due to currency exchange rates and obviously we’re not assuming that we see a rebound in those rates. We’ll still see and expect to see the weakness in PCs and wireless infrastructure. And it’s kind of in the -- the balance of the business is as you know there is always puts and takes as an example second quarter a year ago DLP was very strong if you remember, it was benefiting from several world events one of them like the World Cup, that won’t repeat. So, that will be weaker than it was a year ago and will continue for the rest of the year. But inside of that bucket we’ll continue to have puts and takes. The other comment that I’d just make on that that although we see those pockets of weakness if you look at the core businesses and analog and embedded we do believe that those will continue to perform well. You have a follow up Chris?

Yes, actually the couple of clarification, do we expect the PC or the wireless infrastructure to have a bigger drag on your revenue in Q2 or then it almost seems like -- do we need the dollar to weaken again for that impact to go way, i.e. if the dollar remains strong is that going to be like a negative for you guys every quarter.

Chris, I’d say that we probably don’t have enough detail to tell you whether wireless infrastructure or PC which is going to be of a drag, we just don’t expecting them to be recovering in the second quarter. As it relates to ROE recently with -- if you take a look at the just the euro alone versus a year ago it’s down 23%. The yen is down 14%. We roughly average about 5% of our revenue in euros and around 3% in yen. So clearly with that weakness on a year-over-year compare that’s going to continue to be an issue that’s going to just affect that kind of math. It doesn’t affect our ability to sell in those markets. We continue to make very competitive in those spaces and we enjoy on the design wins. But unless the ROE moves back and dollars weaken than certainly with that kind of dramatic decline in those two major currencies that will be at least on the fringes a year-over-year compare headwind for us.

And I will just add to that like we saw in the first quarter where we had an impact of about $20 million, because of natural hedging we’ve got the impact to operating profit and free cash flow is really only about $5 million. So, fairly small on that front. Okay, thanks Chris and we’ll move on to the next caller please.

We now go to John Pitzer with Credit Suisse.

Yes, good afternoon guys. Thanks for to let me ask the question. I guess I don’t want to beat a dead horse, but just on the outlook, when I look at the Q1 it looks like you guys are only missing the mid points of your guide by about 50 million and you explained 20 million of that on currency. As I go to Q2 if I just kind of anchor against seasonality you’re kind of missing it by 150 million to 200 million and I guess sequentially are you expecting anymore kind of headwinds from currency? I understand the year-over-year compare I’m trying to figure out the sequential compare. And when I look at PCs plus comp infrastructure, help me to understand the percent of the business that represents, I’m thinking around 15; maybe I’m wrong with that. I guess I’m trying to get a sense as to why you think that the miss in Q2 is going to be so much larger than those two buckets in the mess in Q1.

John let me, I’ll take the first part of the question and Kevin can add in if he like to. The first, if you look at our PC revenues as a percentage of our total is around 4% if you were to include hard drives into that that will add a few points, so you will be just under 10% in upper single digits. If you look at wireless infrastructure last year it was about 10% of our revenue so obviously combined there you’re in the mid-teen. So that will give you an idea of what that impact is. Again as Kevin kind of walked through the math of like the euros an example, last year 18% of our revenue was down in Europe about a third of that so 5% to 6% is transacted in euro and again sequentially, Kevin if you have any additional comments on the impact of the euro.

Yes, I think just 1Q to 2Q, I think is what you’re trying to ask whether John, the average ROE that we experienced on our billions in 1Q was about -- for the euro was about 1.13 and for planning purposes we’re using 1.06 going into 2Q. This it is going to be little bit of a just a quarter-over-quarter ROE impact, just from that standpoint as it relates to the euro. Right now we’re anticipating it again to be pretty flat.

Any follow on John?

Yes. I know that was in the comp section specifically you guys were doing a little bit of pruning what’s the product portfolio and I’m wondering if any of the pruning that you’ve done is being reflected in kind of either sequential or year-over-year growth rate. So do you feel like that that’s not a factor as you look at the June guide?

Yes, we don’t believe that is a factor John. I think if you look at the impact that wireless infrastructure has, we sell more analog product than we do embedded or the custom ASIC products. So it actually hit both analog, embedded and other. Of course you can see the impact more significantly in embedded and other because it’s a higher percentage of that revenue. But again we’ve got a good position really across to most of the major OEMs there and so what we’re seeing is really a change in chips and demand. Thanks John. And we’ll go to the next caller please.

We’ll go now to Stacy Rasgon with Bernstein.

First I was wondering if you can give us a handle on where you see OpEx going next quarter, given the revenue short fall.

Stacy, OpEx was up about as expected both quarter the first quarter and recall that, in the fourth quarter we typically down a bit on OpEx because of seasonality for holidays and so on. In the absence of those seasonality -- those holidays in the first quarter along with our annual pay and benefit increases; traditionally drives are OpEx up quarter over quarter. Those pay and benefit increases kick it in February so it’s really only two months’ worth inside the OpEx in first quarter. So we'll have the full three months, so you see a just very slight increase going to the second quarter.

Got it, thank you, that's helpful. For my follow up, again on currency, I know you guys are pointing to sort of direct translation effects. We've had other players who have pointed to demand destruction from currency. I was wondering if you can give us your point of view on what you're seeing more broadly in the market. Not just to your revenues but also for your customers, are you seeing any sort of broad based [can] destruction because of the currency moments that we've got?

Yes Stacy, we've talked about that. But there is no way for us to really point to some and demonstrate evidence that that's actually have occurring. Given the entire industry tends to price in dollars for the [indiscernible] of what’s being shipped, it does not allow us other alternatives it would seem for customers from the demand standpoint. But that's not to say that might not be a second order knock on affect like what you’re alluding to and we just don’t see any way that we can quantify that with any confidence.

And there are always pluses and minuses with currency movements, it's really impossible for us to quantify them.

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

We go now to Harlan Sur with JP Morgan.

Good afternoon and thank you for taking my question. Given the timing when you start to see the weakness that you talked about in the March quarter and just given the softer than seasonal Q2 outlook, would you have to ratchet down your wafer manufacturing fab manufacturing activity or wafer structuring in Q2?

Harlan, yes, we'll be lightening up the wafer starts in 2Q. I would caution you though that pulling back on the wafer starts doesn’t necessarily mean that that will have a direct impact on our inventory. As the work in process in 1Q will become finished goods in 2Q, so we would expect our inventory to probably still go up a bit in 2Q, even though we pull back on wafer starts a little bit.

Okay, great, thanks for that. And then analog was up nicely 11% year-over-year, despite the headwinds and embedded was up only 2% which is a pretty significant deceleration year-over-year versus the prior quarter, I'm assuming that, the embedded weakness was primarily driven by DSPs, given the muted wireless infrastructure spending environment?

It's correct. It was impacted by the wireless infrastructure and in fact if you look at the businesses inside of embedded we had good growth in microcontrollers and connectivity both. But processors were down for the exact reason that you identified now. Okay, thank you, we'll go to next caller please.

We now go to Ross Seymore with Deutsche Bank.

One other avenue to get of the broad based demand trends, are you seeing any sort of difference in demand patterns from your distributors, customers relative to the OEM customers, are they getting any more nervous or excited and willing to carry inventory and I realize the weeks of inventory data that you gave before but from a bookings perspective, any color will be helpful.

I think, I'll add just offer on that Ross, is that on year-over-year basis bookings were up by 5%. 60% of our revenue does go through [DSP], so clearly we're seeing one of the bookings coming to the [DSP] channel. The inventory levels are carrying over one and half weeks, just down about a week from a year ago, so they continue to carry lean levels of inventory. And I think largely that's because, they know that we carry Inventory and consignment and we also maintain very short lead times since we have for number of years now and so we get inventory quickly is pretty reliable for them when they order with us. So, I don't -- from those kinds of elements inside that space there is no rule again signs that we can looks at that says, there is demand destruction going on because of ROE, they really can’t [indiscernible] there.

And I have to add Ross that, if you look at our resale overall, that was very consistent with our combined analog and embedded sales. So they were in the upper single digits, very close to the same number. So you're following Ross?

Yeah a quick one, I just to make sure that I have all the moving parts, it sounds like in an answer to your prior question Kevin, you said OpEx will be upper little, you also said, sound like utilization will be down, it seems like putting that together with your earnings guidance, it implies gross margin is going to be down at bit sequentially, is that -- one, is that may directionally correct? Two, is the cause of the gross margin simply utilization or is there some mix effect that I also need to appreciate? Thanks.

You may be missing the mix effects inside there Ross; I don’t expect much change in the margin.

Okay, thank you for that question, Ross. We'll go to the next caller, please.

We go now to Joe Moore with Morgan Stanley.

In the markets that you're seeing weakness in PCs and wireless infrastructure, do you think -- is that an inventory or demand problem and I guess what is -- we seen other suppliers into the PC sector talk about return just sort of better in seasonal second half as you get past inventory correction, where do you stand on that?

Joe, I just say, first of all that the wireless infrastructure market is has been notoriously been very choppy as you look at demand over the number of years. So, there is usually a significant build is -- OEMs are planning to bid for the operators spend and then it typically surprises us and there is an overbuild that occurs, so one kind of begets the other. We think that the wireless infrastructure market obviously long term is a good market for us and we've got a good position in and just as the numbers come down, they will come up again one day. On the PC side that's only a couple of percent of our revenue, so I don't think we really have any unique insight on that we believe that that weaknesses is due to the inventory that’s created because there wasn't as much demand in the XP refresh cycle, but really nothing beyond that and we’ll see how the rest of this quarter goes before we start making predictions on the back half, we’ll just take a one quarter at a time. So you have a follow on?

Yeah and I guess specifically I think John, that you had mentioned the restricting that you did but just specifically you did cut back on R&D and macro based stations and I'm wondering if there is any anything directly that would point to that decision versus revenue seeing ours are completely separate from that.

Yeah. Again I think that when we look at those markets they’re very long tailed in product cycles. We continue to make investments, they are just not at the same rates that we were making five and 10 years ago and that's not unlike what we've done in other markets as they’ve began to mature. So there is other areas of wireless infrastructure that looks like it will be very promising growth, like small cells and we continue to invest very -- at a very high levels there while we have very little revenue today so we would just believe that we've got to throttle that investment based on the opportunity overall. So, thanks for that question and will go to the next caller.

We go now to Timothy Arcuri with Cowen and Company.

I have two questions. I had a question about the channel, did you see any meaningful cancels this quarter and I had a follow up on the inventory?

No. We saw cancellations continue to run very-very low as we’ve seen for a number of quarters now and same is true of reschedules too by the way also very-very low. So no patterns indicating change of demand there.

Okay, great. And then Kevin you said inventory is going to be I think again you said in June despite loadings being down. I guess my question is, what do you think is sort of the -- now that you had a couple of quarters to think about the mix, when do you think is the right normalize level of inventory and do you think that we're going to come back down to that sort of that more normalized level during the back half of the year?

Yeah, Tim. We are going to use 2015 the really kind of monitor the effect of all the changes we've been doing with the portfolio and with our operations to model what we think is a more appropriate overall level of average inventories to carry. What we did conclude was that the prior model which had worked for us quite well of a 105 to 115 days was appropriate giving the mix that we had, but clearly as we moved to more and more consignment, as we move to keeping lead times of very short across the vast abundance of our portfolio, I think faced with that we got to carry more inventory than we have in the past. And so we’ll be using 2015 to run various test on what the appropriate levels of inventories are to meet the service metrics that our customers have come to expect of us and then probably by the time we get to early next year when we do our capital management update we’ll go ahead and appoint a new model at that point in time.

Great. Tim, thank you and will go the next caller. Please?

We now go to Romit Shah with Nomura.

Yes. Thank you. Kevin and Dave. I just I wanted to clarify how these two segments that comprised 15% of revenue are driving what I estimated as a 500 basis point miss relative to seasonality. Are you guys just being conservative in anticipation of may be a fall out in some of your other end markets or and I just not fully incorporating other parts of the equation here?

So I will go ahead and just I think Dave attempted last time, I will give the try. There are several moving parts going on there when we look at 2Q and that compares on a year-over-year basis. So just the ROE alone impacts us about $50 million from a year-over-year compare for growth rate. Then you go beyond that and you've got continuing weakness and wireless infrastructure and PC's and you've also got the absence of the benefit the DLP had a year ago which was meaningful due to the World Cup and other large sporting events. In fact we saw some of that impact of DLP already begin to occur in the first quarter, as we mentioned DLP was down quite a bit in first quarter. So you got those kinds of headwinds, ROE, wireless infrastructure, PC and DLP and then we've got the rest of the portfolio basically doing fine, because it’s simple with what we’re been seeing in the economies for the last few quarters.

Thanks for the clarification Kevin I just wanted to ask you about M&A, there has been as you guys have seen a lot of activity over the last year and when I think about TI, M&A has certainly been part of your DNA over the last 10 to 15 years. Can you just talk about how you are thinking about M&A specifically in this environment relative to buying back your own stock?

Yeah our M&A posture haven’t changed at all. That meaning that most important thing is that to the extent that we considered an acquisition is got to be something that fits into our strategy that's consistent with our portfolio interest and something that we can generate long-term returns on therefore access free cash flow for our shareholders. If it kind of passes the strategy test then it's got to pass the numbers test. And frankly we have a hard time with many of the companies that are out there today making those kind of numbers work. Contrast that to when we bought National back in 2011, at a time when all some [indiscernible] stock prices were considerably lower and you can certainly see in retrospect that was a very good return for our shareholders. So we tend to be very disciplined on that. We’ll continue to be disciplined on that. Buying back our own shares right now especially as long as they trade below the intrinsic value of the Company is that also it continues to be a good return for our shareholders especially from a free cash flow perspective.

We now go to Ambrish Srivastava with BMO.

Kevin, you've mentioned if you look at the portfolio, the rest of the business is doing fine outside of the factor that you've highlighted, if you go back to history and look at such a sharp destruction, just used that word, on the exchange rate when do you expect that to manifest itself in other parts of the business. So for instance the distributors in Europe and other pieces get that [indiscernible] go into for instance in industrial and autos, what does past currency issues tell us on that front? And then I had a quick follow-up.

Ambrish, I had some clever insight on that but I am afraid I don't, just from an experience standpoint, I actually do not recall that my experience in this capacity and I've been in this role for a very long time now, seeing currency drop this sharply in this short of period of time. So I have not history from which to trying to get a reference point to answer your question like that. I think we're just all going to have to wait and see where this takes us. I think the encouraging part is especially in industrial and automotive is that the silicon content going in those spaces continues to increase year-over-year and so despite ROE impacts, I don't think that’s going to slowdown the silicon content increases in those spaces. And frankly, if you look at the pricing of those and equipment’s, the cost of a $0.50 analog chip going into $0.55 is pretty irrelevant to an automotive customer I think. So if you look at the more macro effect and especially where we see growth someone out there in auto and industrial, it doesn't seem likely that we would see a sharp impact in demand caused just because of ROE. There may be other factors that may lead to that kind of difference.

And I'd just to add as many arguments putting pressure on the demand, there is as many arguments that it could help demand on the other side, so it's really tough to be able to quantify each of those into those impacts. Ambrish, you've got follow-up?

And this is a clarification in response to Ross's question, Kevin, did you say gross margin will be flat and if so the way to think about it is that factory loading goes down in the non-300 millimeter and 300 millimeter is continuing to ramp so that offsets that lower factory loading?

That's a safe way to think about it, Ambrish. There is mix going on inside there but clearly we continue to ramp up 300 millimeter which is much more cost effective for us and so in balance we don’t' expect much change in margins.

We go now to Doug Freedman with RBC Capital.

Just to follow on that mixed shift that you're seeing, Kevin, can you possibly give us the utilization on your overall factory base and the utilization that you're seeing in 300 mil? And then I have a follow-up.

Doug, on the utilization, we typically would just talk about that as something drastic has occurred so I won’t go into that right now. I will remind that you on a capital management call, I did discuss for RFAB in particular that we have the majority of the equipment necessary to support the build-out of that factory to a $5 billion revenue level and that into 2014 we had achieved about $2 billion worth of build for revenues in support of that. So call that roughly 40% utilized, but at the same time we're also converting DMOS6 from its exclusive use by embedded processing to also be able to be used by analog, metal add another $3 billion of 300 millimeter analog capacity in DMOS6. So you could say in a sense that our utilization of 300 millimeter may actually decline, but that's not because of loading, that's because of increase in our capacity.

The question really that I have as my follow-up is when you look at the year-on-year growth, last year clearly you had a nice year but with the guidance you've just offered were actually down year-on-year. If we look at the long-term growth of your business, is there a point in time at which you might adjust what you think your long-term growth rate would be such that you felt factory consolidation would be part of the equation to drive higher efficiency?

No Doug, factory consolidation isn’t on our radar. What we're really interested in is very inexpensive factory acquisition with extremely low carrying cost that allows us to grow into it in a very efficient manner. As we've been talking about analog and a better processing combined for an extended period of time now, have been growing at about 9% compound annual growth rate. In fact even combined for this 1Q that we just closed out they grew another on 9% year-over-year. So they continue to grow quite healthy, I would expect that as we move forward in time we’ll look at those factories that provide us the best cost efficiency and cash flow delivery and keep those operating in load and those that probably going to be biased in our note age towards 300 millimeter.

And I just add to that if you look at the growth rates in time just look at what’s happened in second quarter, the overall numbers are very strong, I mean if you look at our gross margins, you look at where our OpEx levels are, our operating margins with that 9% analog and embedded processing growth this quarter we turned in 27% free cash flow. So, our financial performance isn’t predicated on having to hit a certain growth level we can do very well in a low growth environment or if things pick up we can, we are in a good position to build to support that as well. So thank you Doug and we’ll go to the next caller please.

We’ll now go to Blayne Curtis with Barclays.

Maybe just looking back to the weakness in the PC market, you clearly had a fairly seasonal December. And I don’t know if you saw any PC slowdown there, Intel sure didn’t. But then looks like you’ve figured correction in March. So, one, if you could -- I apologize if you already answered this. But within analog which your high performance and Silicon Valley is still up in March and really it was the PC dragging it down, if so would be down probably double-digit. Is that the right way to look at it? And then as you look to June, Intel is up, PC channel starting to turn around. Is it just that you’re working through some inventory or if there is there any way you can quantify that and then kind of just help me with the math as to when do you really start to see that?

Well, let me take a shot at it, and then I’ll let you ask a follow up. Some of that I think we’ve touched on. But again the weakness that we saw, Blayne, was really had manifested in March. And that was both in NPCs and in wireless infrastructure. Obviously, I don’t know how that played out at some of our competitors but we do expect to see that weakness in second quarter obviously our guidance is reflective of that. So, I don’t know if that helps or if there is part of that you’d like to ask a clarification or a follow up?

Maybe I would ask -- obviously I can sign up for a full year forecast, so when you look at the businesses of PC in com, clearly they’ve been down for several quarters here or will be with the June guide, to get full year growth would require a substantial pick up in the second half. Do you see these as headwinds this year for you and if so how much?

Blayne, I’ll just take that. We’ll go ahead and forecast the balance of the year in front of each quarter when we get there. So we could just give you a guide, one quarter at a time. Obviously, I think you guys are probably better equipped than we are to come up with analysis to help figure out what the year might be and we’ll just leave it at that.

Okay, and that we are now out of time. So I’d like to thank you all for joining us today. And a replay of this call is available on our Web site. Good evening.

This concludes our conference. Thank you for your participation.