Texas Instruments Inc (TXN) — Q1 2015 Earnings Call Transcript

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 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 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, there was weak demand in the last month of the quarter in our personal electronics market, particularly PCs, and our communications equipment market, particularly wireless infrastructure. We believe these specific market issues were due to delays in investments by carriers regarding 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, and even though only about 5% of TI's revenues transacted in Euros, it was a sharp enough drop that negatively impacted our revenue by about $20 million more than we had anticipated. Even with these pockets of weaknesses, our core businesses of analog and embedded processing turned in their seventh and tenth consecutive quarter of year-over-year growth, respectively. Combined, these businesses grew 9% and accounted for 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, currency exchange rate negatively impacted revenue by $20 million, which translated to only about $5 million in impact to earnings and therefore cash flow. This is due to a partial natural hedge against negative currency fluctuations arising from our non-U.S.-based operations. It's nice to be in a position where almost 90% of our revenue comes from outside of the U.S. But that's a backdrop. Kevin and I will now 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-month 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 the year-ago period and reflects our improved product portfolio and the efficiencies of our manufacturing strategy, which includes our growing 300-millimeter output and 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 business. For the trailing 12-month period, we returned $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 microcontrollers and connectivity. Processor revenue declined, which was impacted by the weakness in wireless infrastructure, and again, this is the 10th consecutive quarter of year-over-year growth for embedded processing. In our other segment, revenues declined by 10% from a year ago, primarily due to custom ASIC products, which are heavily tied to wireless infrastructure, as well as DLP products. In distribution, re-sales increased 11% from a year ago. Weeks of inventory remained at a historically low level of just under 4.5 weeks, which is a decrease of 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 the 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 expenses 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 due to the ongoing amortization of intangibles, which is a 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-month basis, cash flow from operations was $4.04 billion, up 16% from the same period a year ago. Trailing 12-month 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 productively 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 the 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 in cash and 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 and currency changes, their effects are softened by the diversity of our portfolio in our markets.

Thanks, Kevin. Operator, you can now open the line up for questions. In order to provide as many people as possible the opportunity to ask their question, please limit yourself to a single question. After our response, we will provide you with an opportunity for an additional follow-up. Operator?

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 or less so, etc. I look at your year-over-year growth rates, and 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’ve been pretty guarded about trying to predict the cycle; it’s not something obviously that we can control. We really just go to what we can look at 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, which are down a week from a year ago, laying at just under 4.5 weeks. Lead times are remaining consistent, and our cancellations and reschedules are very low. In addition, we’re continuing to deliver on time and very consistently with that. So we have a couple of pockets of weaker than expected demand as we discussed, 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 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. These advantages include the broadest portfolio in the industry. This means that engineers start their design work by looking at us first. We enjoy very low manufacturing costs for all the reasons that you’ve heard us talk about for the 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. We play in an extremely diverse set of markets with long-lived products that enjoy significant cash returns to our shareholders for a long time. So we think that what’s really important is to deal with whatever really happens in market cycles and just ensure that we’re much more competitively positioned than anybody else.

Obviously, you’re talking about some weakness in PCs and communications. In the industrial segment, we’re starting to see some negative news flow from the customers. Do you see pockets of weakness, but are there just other pockets of strength that are offsetting those industrial customers that may be 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, it’s very broad-based. 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, medical, healthcare, fitness products, building automation, smart grid, energy test equipment, motor drives, display, space avionics, appliances, and other segments, so again very broad. Of course, we’ll always see pockets of strength and weaknesses, but overall, industrial is doing well. We’ve seen growth in almost all those sectors that I’ve described.

Dave, you did a good job of outlining the relative areas of weakness in Q1 from currency and communication 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 expect a negative impact from currency in Q2 as well? If you could give us the magnitude of that negative impact?

So the one that’s pretty straightforward to identify because it’s really just math walking through the numbers is that, on a 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 will still see and expect to see the weakness in PCs and wireless infrastructure. And the balance of the business always contains puts and takes; as an example, in the second quarter a year ago, DLP was very strong, benefiting from several world events, one of them being 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 that bucket, we will continue to have puts and takes. The other comment that I’d like to make is that, although we see those pockets of weakness, if you look at our core businesses in analog and embedded, we do believe that those will continue to perform well. Do you have a follow-up, Chris?

Yes, actually a couple of clarifications. Do we expect the PC or the wireless infrastructure to have a bigger drag on your revenue in Q2, or does it almost seem like do we need the dollar to weaken again for that impact to go away? I.e., if the dollar remains strong, is that going to be 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 will be a larger drag. We just don’t expect them to be recovering in the second quarter. As it relates to ROE, if you take a look at 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. Clearly, with that weakness on a year-over-year comparison, that’s going to continue to be an issue that will affect our math. It doesn’t affect our ability to sell in those markets; we continue to perform very competitively in those spaces and enjoy design wins. But unless the ROE moves back and the dollar weakens, then certainly with that kind of dramatic decline in those two major currencies, that will be at least a fringe year-over-year headwind for us.

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

Yes, good afternoon, guys. Thanks for allowing me to ask the question. I guess I don’t want to beat a dead horse, but just on the outlook, when I look at Q1, it appears you’re only missing the midpoints of your guide by about $50 million, and you explained $20 million of that on currency. As I look to Q2, if I just anchor against seasonality, you’re missing it by $150 million to $200 million. Are you expecting any more kind of headwinds from currency? I understand the year-over-year comparison, I’m trying to figure out the sequential comparison. When I look at PCs plus communications infrastructure, help me 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 the miss in Q2 is going to be so much larger than the two buckets in the miss in Q1.

John, let me take the first part of the question, and Kevin can add in if he likes. If you look at our PC revenues as a percentage of our total, it’s around 4%. If you were to include hard drives into that, that will add a few points, so you’ll 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-teens. So that will give you an idea of what that impact is. Again, as Kevin walked through the math, the Euro’s an example: last year, 18% of our revenue was generated in Europe, and about a third of that was in Euros, so 5% to 6% is transacted in Euros. 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, 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 is going to result in a little bit of 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-up, John?

Yes. I know that was in the comp section specifically you guys were doing a little bit of pruning of the product portfolio, and I’m wondering if any of the pruning that you’ve done is being reflected in 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 guidance?

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 hits 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 across 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.

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

Stacy, OpEx was up about as expected in both the first quarter and recall that in the fourth quarter we typically go down a bit on OpEx because of seasonality for holidays and so on. In the absence of those holidays in the first quarter, along with our annual pay and benefit increases that traditionally drive our OpEx up quarter-over-quarter. Those pay and benefit increases kick in in February, so it’s really only two months’ worth inside the OpEx in the first quarter. So we’ll have the full three months, so you’ll see a slight increase going into 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 demand 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 happening. Given the entire industry tends to price in dollars for the goods 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 there might not be a second-order knock-on effect, as 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.

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 activity or wafer starts in Q2?

Harlan, yes, we will be lightening up the wafer starts in Q2. I would caution you, though, that pulling back on wafer starts doesn’t necessarily mean that that will have a direct impact on our inventory. As the work in process in Q1 will become finished goods in Q2, so we would expect our inventory to probably still go up a bit in Q2, 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?

That's correct. It was impacted by 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 the next caller, please.

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

I would like to add that on a year-over-year basis, bookings increased by 5%. Sixty percent of our revenue comes through the distribution channel, so we are clearly seeing bookings from that channel. Inventory levels are currently carrying over one and a half weeks, which is down about a week from last year, indicating they continue to manage lean inventory levels. This is largely because they understand we carry inventory on consignment and have maintained very short lead times for several years, allowing us to quickly supply inventory. Therefore, from these elements, there are no clear indications of demand destruction due to ROE; they can't identify that.

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 have a follow-up, Ross?

Yeah, quick one. I just want to make sure that I have all the moving parts. It sounds like, in response to your prior question, Kevin, you said OpEx will be up a little. You also said it sounds like utilization will be down. It seems like putting that together with your earnings guidance implies gross margin is going to be down a bit sequentially. Is that 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.

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 do you see? We’ve seen other suppliers in the PC sector talk about return being better in the 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 has been notoriously very choppy as you look at demand over the number of years. So, there is usually a significant build as OEMs are planning to bid for the operators’ spend, and then it typically surprises us, and an overbuild occurs, so one kind begets the other. We think that the wireless infrastructure market is obviously a good market for us long-term, and we've got a good position in that. Just as the numbers come down, they will eventually 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 weakness is due to the inventory created because there wasn't as much demand in the XP refresh cycle, but really, nothing beyond that. We’ll see how the rest of this quarter goes before we start making predictions for the back half; we’ll just take it one quarter at a time.

Yeah, and I guess specifically I think John mentioned the restructuring that you did, but just specifically you did cut back on R&D and macro-based stations, and I'm wondering if there is anything directly that would point to that decision versus revenue seeing or if they’re completely separate from that.

Again, I think when we look at those markets, they’re very long-tailed in product cycles. We continue to make investments, but they are just not at the same rates that we were making five and ten years ago, and that's not unlike what we've done in other markets as they’ve begun to mature. There are other areas of wireless infrastructure that look like they will be very promising growth, like small cells, and we continue to invest at very high levels there, even though we have very little revenue today. So, we believe that we've got to throttle that investment based on the opportunities overall. Thank you for that question, and we'll go to the next caller.

I have two questions. I had a question about the channel; did you see any meaningful cancellations this quarter? I had a follow-up on the inventory.

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

Okay, great. And then Kevin, you said inventory is going to be, I think you said, up again in June despite loadings being down. I guess my question is, what do you think is sort of the—now that you’ve had a couple of quarters to think about the mix, when do you think is the right normalized 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 to really kind of monitor the effect of all the changes we've been making 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 concluded was that the prior model, which had worked for us quite well of 105 to 115 days, was appropriate given the mix that we had. But clearly as we moved to more consignment and kept lead times very short across our extensive portfolio, I think we’re faced with carrying more inventory than we have in the past. We will be using 2015 to run various tests on what the appropriate level of inventories are to meet the service metrics that our customers have come to expect of us; by the time we get to early next year, when we do our capital management update, we’ll go ahead and set a new model at that point in time.

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

Yes. Thank you, Kevin and Dave. I just 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 maybe a fallout in some of your other end markets or am I just not fully incorporating other parts of the equation here?

There are several moving parts going on there when we look at Q2 and that compares on a year-over-year basis. So just the ROE alone impacts us about $50 million from the year-over-year comparison for growth rate. Then you go beyond that, and you've got continuing weakness in wireless infrastructure and PCs. You've also got the absence of the benefit 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 begin to occur in the first quarter, as we mentioned DLP was down quite a bit in the first quarter. So you’ve got those headwinds: ROE, wireless infrastructure, PC and DLP, and then the rest of the portfolio is basically doing fine based on what we’ve 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?

Our M&A posture hasn’t changed at all. That is to say, that to the extent that we consider an acquisition, it has to be something that fits into our strategy that’s consistent with our portfolio interest and something that can generate long-term returns and thus access free cash flow for our shareholders. If it passes the strategy test, then it has to also pass the numbers test. And frankly, we have a hard time with many of the companies that are out there today making those kinds of numbers work. Contrast that to when we bought National back in 2011, at a time when all some stocks 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 in this regard and will continue to be disciplined. Buying back our own shares, especially as long as they trade below the intrinsic value of the Company, is also a good return for our shareholders, especially from a free cash flow perspective.

Kevin, you mentioned that if you look at the portfolio, the rest of the business is doing fine outside of the factors 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? For instance, the distributors in Europe and other parts get that into areas like industrial and automotive. 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 seeing currency drop this sharply in this short of a period of time during my time in this capacity. So, I have no history from which to try and 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. The encouraging part is, especially in industrial and automotive, is that the silicon content going into those spaces continues to increase year-over-year, so despite ROE impacts, I don't think that’s going to slow down the silicon content increases in those spaces. Frankly, if you look at the pricing of those types of equipment—a $0.50 analog chip going into a $0.55 piece of automotive equipment is pretty irrelevant to a customer. So if you look at the more macro effect, and especially where we see growth in automotive and industrial, it doesn't seem likely that we would see a sharp impact in demand caused just by ROE. There may be other factors that lead to that kind of difference.

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

And this is a clarification in response to Ross's question, Kevin. Did you say gross margin will be flat? 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 a mix going on inside there, but clearly we continue to ramp up 300-millimeter, which is much more cost-effective for us. So, in balance, we don’t expect much change in margins.

Just to follow up 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 millimeter? And then I have a follow-up.

Doug, on the utilization, we typically would just talk about that as something drastic that has occurred, so I won’t go into that right now. I will remind you that in our 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 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 used by analog, which will 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 an 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, we're 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 acquiring factories that are very inexpensive with extremely low carrying costs, which allow us to grow into them in a very efficient manner. As we've been talking about analog and embedded processing, they have been growing at about a 9% compound annual growth rate. In fact, even combined for this Q1 that we just closed out, they grew another 9% year-over-year. So they continue to grow quite healthily. I would expect that as we move forward in time, we’ll focus on those factories that provide the best cost efficiency and cash flow delivery and keep those operating in load — those that probably will be biased in our note age towards 300 millimeter.

And I’d just like to add that if you look at the growth rates over time, just look at what happened in the second quarter — the overall numbers are very strong. If you look at our gross margins, our OpEx levels, our operating margins, with that 9% growth in analog and embedded processing 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 perform very well in a low growth environment, and if things pick up, 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.

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 it looks like you’ve figured out a 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 are still up in March, was it really just the PC dragging it down? If so, would it be down probably double digits? Is that the right way to look at it? And then as you look to June, Intel is up, and the PC channel is starting to turn around. Is it just that you’re working through some inventory, or is there any way you can quantify that and then 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, really manifested in March. And that was both in PCs 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 the second quarter; 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 for 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 pickup 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, and we’ll forecast the balance of the year 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 we are now out of time. So I’d like to thank you all for joining us today. A replay of this call is available on our website. Good evening.