Texas Instruments Incorporated (TXN) Q3 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Texas Instruments 3Q 2015 earnings release conference call. At this time, I would like to turn the conference over to Dave Pahl. Please go ahead, sir. Dave Pahl - Vice Present & Head of Investor Relations: Good afternoon, and thank you for joining our third 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 expectation. 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. I'll start with a quick summary. Revenue declined 2% from a year ago. While our overall demand remained weak, most areas were stronger than we had expected, especially wireless infrastructure and industrial. In addition, our demand for automotive continued to be strong. I'll elaborate in a few moments. Even in this environment, each of our core businesses of Analog and Embedded Processing grew year over year. Together, they comprised 85% of third quarter revenue and have delivered nine consecutive quarters of year-over-year growth. Earnings per share were $0.76. With that backdrop, Kevin and I will move on to the details of our performance, which we believe continues to be representative of the ongoing strength of TI's business model. In the third quarter, our cash flow from operations was $1.4 billion. We believe that free cash flow growth, especially on a per-share basis, is most important to maximizing shareholder value in the long term. Free cash flow for the trailing-12-month period was $3.6 billion, up 4% from a year ago. Free cash flow margin was 28% of revenue, up from 27% a year ago, and consistent with our targeted range of 20% to 30% of revenue. We continue to benefit from our improved product portfolio and the efficiencies of our manufacturing strategy, the latter of which includes our growing 300-millimeter analog output and the opportunistic purchase of assets ahead of demand. We also believe that 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 $4.2 billion of cash to investors through a combination of stock repurchases and dividends. Analog revenue, which achieved a record level in the quarter, increased 2% from a year ago. The growth was due to high-volume analog and logic. Silicon Valley Analog also grew. Power management was about even, and high-performance analog declined. Embedded Processing revenue increased by 2% from a year ago due to microcontrollers and connectivity. Processors declined. Our investments in Embedded are translating into tangible results, as this quarter's revenue is also a record. In our Other segment, revenue declined 19% from a year ago, primarily due to custom ASIC products and DLP products. Compared with a year ago, distribution resales increased 6%, and inventory decreased by less than one week to just below four weeks. We believe this inventory level continues to reflect an environment of good product availability due to healthy TI inventories and stable lead times, which together drive high customer service metrics. As a reminder, inventory in our distribution channel has decreased over the past few years because of our consignment program. Now I'll provide some insight into this quarter's revenue performance by end market versus a year ago. Automotive remained strong, with all sectors growing and three of the five sectors growing double digits. Industrial revenue was about even, with about half of the 14 sectors growing and about half declining. Personal electronics was up because of demand from one customer. Excluding that one customer, personal electronics was down. Communications equipment was down, driven by wireless infrastructure, which was down about 30% from a year ago. Although weak, it did grow sequentially. And, finally, enterprise systems declined primarily due to DLP projectors. We continue to focus on making TI stronger through manufacturing and technology, the breadth of our product portfolio, the reach of our market channels, and our diverse and long-lived positions. These four attributes taken together are at the core of what puts TI in a unique class of companies capable of long-term free cash flow growth. Kevin will now review profitability, capital management, and our outlook. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Thanks, Dave, and good afternoon, everyone. Gross profit in the quarter was $2.00 billion or 58.2% of revenue. Gross profit declined 2% due to lower revenue. Operating expenses were a total of $750 million, down $45 million from a year ago, primarily in SG&A. The decline reflects continued cost management across the company, including the previously announced targeted reductions in Embedded Processing and Japan. Acquisition charges were $83 million, almost all of which were the ongoing amortization of intangibles, which is a noncash expense. Operating profit was $1.16 billion or 33.9% of revenue. Operating profit was down 1% from the year-ago quarter. Operating margin for Analog was 37.2%. Operating margin for Embedded Processing was 24.0%, 8 percentage points higher versus a year ago, as we focused our investments on the best growth opportunities. Net income in the third quarter was $798 million or $0.76 per share. Let me now comment on our capital management results, starting with our cash generation. Cash flow from operations was $1.41 billion in the quarter. Inventory days were 111, down 15 days sequentially. This reduction was the combination of lower factory starts, as well as higher-than-expected revenue in the quarter. As our business model evolves, we continue to evaluate our inventory model. We plan to provide an update on our inventory model to you in our capital management call next February. Capital expenditures were $139 million in the quarter. As a reminder, in the second quarter, we retired $250 million of debt and issued $500 million of five-year debt at a coupon rate of 1.75%. In August, we retired an additional $750 million of debt. As a result, we have reduced net debt by $500 million this year, which is consistent with our practice over the past few years. This leaves total debt of $4.125 billion, with a weighted average coupon rate of 2.3%. On a trailing-12-month basis, cash flow from operations was $4.11 billion, up 8% from the same period a year ago. Trailing-12-month capital expenditures were $512 million or 4% of revenue. As a reminder, our long-term expectation is for capital expenditures to be about 4% of revenue, which includes the expansion of our 300-millimeter analog capacity, as discussed in our capital management call earlier this year. Free cash flow for the past 12 months was $3.60 billion or 28% of revenue. Free cash flow was 4% 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's returned to shareholders or productively invested into 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 requirements. In September, we announced a quarterly dividend increase of $0.04 per share, a 12% increase. This was the 12th consecutive year in which we've increased the dividend to our shareholders. We also announced a $7.5 billion increase to our share buyback authorization. In the third quarter, TI paid $348 million in dividends and repurchased $790 million of our stock, for a total return of $1.14 billion. Total cash returned in past 12 months was $4.23 billion. Outstanding share count was reduced by 3.5% over the past 12 months and by 41% since the end of 2004. 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 $2.74 billion of cash and short-term investments, with TI's U.S. entities owning 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 $3.44 billion, up 3% from a year ago. Turning to our outlook, we expect TI revenue in the range of $3.07 billion to $3.33 billion in the fourth quarter, which includes about a $35 million negative impact from changes in foreign currency exchange rates versus a year ago. We expect fourth quarter earnings per share to be in the range of $0.64 to $0.74. Acquisition charges, which are noncash amortization charges, will remain about even and hold at about $80 million to $85 million per quarter until the third quarter of 2019. They will then decline to about $50 million per quarter for two additional years. Our expectation for our annual effective tax rate in 2015 remains about 30%. And this is the tax rate that you should use for the fourth quarter and for the year. In summary, we believe our third quarter results demonstrate the strength of TI's business model. With that, let me turn it back to Dave. Dave Pahl - Vice Present & Head of Investor Relations: Thanks, Kevin. Operator, you can now open the lines up for questions. In order to provide as many of you as possible an opportunity to ask a question, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator?

Thank you. And we'll take our first question from Vivek Arya with Bank of America. Your line is now open.

Thank you for taking my question. I guess for the first one, I'm a little curious, when you said demand was weak but the revenue was strong, and then you mentioned that industrial – I think you said, Dave, was even year on year but was stronger than you expected. If you could just give us some more color around the demand environment, because you have such wide exposure, what is better or worse versus three months ago, and what does it really mean that demand is weak but your revenue is strong? Dave Pahl - Vice Present & Head of Investor Relations: Yeah. Well, what we were saying, Vivek, is that if you look, our revenue declined 2% from a year ago, and we obviously would describe that as a weak demand. That's actually similar to what we saw last quarter. But, inside of that, certainly it was stronger than what we had expected. There were a couple of areas that were stronger than we had expected. Wireless infrastructure and industrial were both stronger than what we had expected. So that's really what we're trying to say. We continue to operate in what we would consider to be just a weaker macroeconomic environment, and that's where we came in. Do you have a follow-up?

Yeah, thanks, Dave. On gross margin, I understand that sequentially they were sort of flattish, because I assume you took some utilization down. But why are they sort of flat to down versus last year? Because I assume throughout this year, there's been a mix shift towards your core Analog/Embedded markets and a mix shift I guess towards more 300-millimeter capacity. So why aren't gross margins up versus last year? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, Vivek, the short answer is that our wafer starts were down in the quarter versus last quarter and also versus last year, and so underutilization was a little bit higher than it was a year ago. Dave Pahl - Vice Present & Head of Investor Relations: Okay. Great. Thank you, Vivek. And we'll go to the next caller, please.

Our next question comes from John Pitzer with Credit Suisse. Your line is now open. John W. Pitzer - Credit Suisse Securities (USA) LLC (Broker): Yeah, good afternoon, guys. Congratulations on the strong result. Kevin, just to follow-up on that gross margin comment. So utilization went down in the third quarter. I know you're saying you're going to update us on your inventory targets, but I think the one that's outstanding right now is about $105 million to $115 million, and you got there pretty quickly sequentially. So I'm kind of curious, how do I think about utilization going into the December quarter, and what kind of impact should I expect on the gross margin line? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, John, as we look into the fourth quarter, we're expecting our wafer starts will probably be roughly flat to what they were this quarter, so no significant change in starts there. And keep in mind that the wafers that we start in fourth quarter, other than for the first few weeks of the quarter, are mostly for what we expect in follow-on quarters. So we build quite a bit forward to our expectation of when that inventory actually gets sold. John W. Pitzer - Credit Suisse Securities (USA) LLC (Broker): That's helpful. And then, Kevin, as my follow-up, you guys probably were one of the first to start the trend of M&A with the acquisition of National several years back. There's been a lot of speculation in the marketplace about more M&A within the semi space. I know you've talked about this in the past, but I'd kind of be curious about kind of getting some updated thoughts from your perspective about the advantage from here given your already-hefty scale of M&A and how you guys are sort of thinking about that? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, John. So I guess it'll take me a second to kind of go through those thoughts there. Of course we acquired National back into 2011, so we probably got ahead of the game versus where people are at today. But we spent the intervening time period really driving hard to accelerate four attributes that we think in combination are pretty unique to TI and differentiate us quite a bit from our competitors, which may, in fact, be impacting some of their thinking about how they approach their markets. And those four attributes are our approach to low-cost manufacturing and advanced technology; the sheer breadth of our overall product portfolio; the reach we have to our customers through our market channels, especially with arguably the largest sales force of anybody out there; and the diversity and long-lived positions that we enjoy in the markets with the products that we have. When we look at what most companies are doing today from an M&A front, it appears that some of them may be changing their focus, and some of them may be trying to build scale. We already have what we believe is a significant scale advantage, and we believe we're focused on the two best opportunities that are out there today, being Analog and Embedded Processing. So those two reasons aren't motivating us to think differently about M&A. When we do think about M&A, our approach is really to focus on the right strategic fit, one that can generate long-term returns and excess free cash flows. So we really do focus on the numbers that that acquisition might lead us to. And by strategic fit, I'm talking really our bias is towards Analog. If we were to look at an acquisition, it would probably be a company that's going to be broad in catalog, have a diverse customer base, have a large percentage of its revenue coming from industrial and automotive, probably have a very talented R&D team. Those would be the sort of attributes we'd look at from a strategic standpoint. From a return standpoint, we'd look at several metrics, including really making sure that the return on our investment is accretive to our weighted average cost of capital within, say, four years or so. And we also want to make sure that whatever we acquire can continue to expand our cash flow. So, with all that said, and we take a look at what's out there, we have been actually buying our favorite semiconductor company – I know you don't like to hear it that way – but through our own stock buybacks. Today, by buying back those shares, we're getting a 7% free cash flow yield on those acquisitions of those shares, and we don't have any integration risk and no banker fees. And just a whole lot easier way to run the business and focus on customers. Dave Pahl - Vice Present & Head of Investor Relations: Okay. Thank you, John. And we'll go to the next caller, please.

Our next question comes from Stacy Rasgon with the Bernstein Research. Your line is now open. Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC: Hi, guys. Thanks for taking my questions. For my first question, I'd like to follow up on the industrial market. You said half of your markets were kind of up year over year; half of them were down. That's pretty similar to – the same as last quarter, but you do seem to be seeing upside versus expectations. Within industrial, can you give us some idea of which end markets you're actually seeing relative strength versus weakness versus those expectations? And talk a little bit about how your end markets within industrial are concentrated or not. Dave Pahl - Vice Present & Head of Investor Relations: Yeah, so great question, Stacy. We've got 14 different sectors that make up our industrial market. And I'll just go through some of those, because I think some investors, if they focus on industrials – we mean something different than that. So it includes things like factory automation and control, medical and healthcare, building automation, smart grid and energy, test and measurement, motor drives, display, space avionics, appliance, power delivery systems, point-of-sale lighting, industrial transportation. And then a bucket of just other really small stuff. So last year, as you know, Stacy, industrial was 31% of our revenues. The largest sector inside of there was 4%. So you can see it gets very, very diverse very quickly. And even inside of each of those sectors we've got multiple end equipments that make each of those up. So it was very similar to last quarter, where we did see about half of the sectors up and the other sectors down, together flat. So there weren't really any really huge movements in either that we would call out to say that it was unusual. So that's what it looked like. Do you have a follow-on, Stacy? Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC: I do. Thank you. Around your OpEx, it seems like you came in fairly light in the quarter versus expectations. Why was that, and where do you see OpEx going next quarter? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: So, Stacy, on OpEx – if you compare it to a year-ago-quarter, that was really when we just had continued cost management going on across the company, and we also had the benefit on a year-ago comparison to the actions that we previously announced in Embedded Processing and Japan. And those are now done. So we get that benefit year over year. As it relates to sequential, even, as you say, coming into the quarter a little bit better than expected, that's really just cost management continuing. And also in second quarter there were a few items that didn't recur in second and third quarter, and so that gave us a good little benefit second to third. Dave Pahl - Vice Present & Head of Investor Relations: Okay. Thank you, Stacy. And we'll go to our next caller, please.

Our next question comes from Harlan Sur with JPMorgan. Your line is now open.

Good afternoon. Thanks for taking my question. In Q2, Embedded was up year over year for the first time. Actually, no, Q2 Embedded was down year over year for the first time, I think, versus the prior 10 quarters. It inflected higher in Q3. I know you guys said MCU and connectivity drove the growth, but what end markets helped to return this business back to year-over-year growth? And also what drove the 450 basis point improvement in operating margins? Dave Pahl - Vice Present & Head of Investor Relations: Okay. So I guess two questions there. I'll take the first one. So, as you said, Embedded Processing was driven by microcontrollers and connectivity, and both of those businesses tend to be very broad market exposures, a high exposure to industrial. We also have some exposure inside of processors to automotive. And what drove the weakness in second quarter and the reason why processors declined year over year was the exposure to wireless infrastructure, is probably the simplest way to say that. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: On operating margin, Harlan, the short answer is we had announced at the end of 2012 some restructuring actions inside Embedded Processing that would wind up last year, and in fact they have. So a lot of that cost is out, and so as a result their operating margins are coming through very nicely.

Great, yeah. Nice job on - Dave Pahl - Vice Present & Head of Investor Relations: And we'll let you squeeze in a third question, but we'll make an exception for you on this one.

I appreciate that. Last quarter you guys indicated you were bringing down utilizations in the third quarter to try and reduce inventories. Looks like you guys executed to that. Should we anticipate gross margins in Q4 down in line with the lower utilizations in Q3? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Harlan, I'm not going to try to forecast individual lines of the P&L, but I'll just bring you back to what I had mentioned when John asked his question. We expect utilization to decline – pardon me, utilization to be about – excuse me, starts to be about even in fourth quarter versus third quarter, so we don't expect starts to actually change. The starts were already down third quarter versus second and third quarter versus a year-ago quarter, and we'll maintain those starts about even going into fourth quarter. Dave Pahl - Vice Present & Head of Investor Relations: Yeah, okay. All right. Thank you. Yeah, and the other – certainly the other consideration with fourth quarter is what happens to revenue overall. So we'll have less revenue, so that'll impact gross margins. Okay. Thank you, Harlan. And we'll go to the next caller, please.

Your next question comes from Chris Danely with Citigroup. Your line is now open.

Great. Thanks, guys. So if we look at just some sort of normal or reasonable projections for Q4, for 2015 your revenue's going be flat but your gross margins will be up and your OpEx will be down. If we assume the sort of bleah environment continues into 2016 and revenue is sort of whatever, around the flattish or something like that, is there any way that gross margins could go up and OpEx go down again? Can you just kind of take us through the puts and pulls for next year on those? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, I'll go ahead and take you through on those sort of things, Chris. First off, I'm hoping that you're wrong in your theory about revenue being flat again next year.

Me, too. I want to keep my job. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: But under that scenario, I doubt that we'd see a whole lot of change in operating expenditures other than just normal annual pay and benefit increases. But on the margin side, on the gross margin side, we'd probably continue to see benefit as we see more and more of our production moving to 300 millimeter, which as you recall gives us about a 40% chip cost production from an overall cost of goods standpoint, so that will certainly benefit our gross margin line. In addition to that, we continue to see an expansion of revenue that's coming out of the industrial and automotive space as a percent of the total, and those tend to come through at higher gross margins, as well as just overall catalog products versus custom products inside our mix. And then the last item is that, as we talked about for a couple years now, our CapEx has been running under our depreciation by a couple of points, and that is slowly beginning to close. In fact, you can even see that gap closing just in this past 12-month comparison period. So as we look out into 2016, you'll see that gap close a bit more. So those in combination will give us continued tailwind on the gross margin line. Should fall all the way through to the operating margin. Dave Pahl - Vice Present & Head of Investor Relations: Yeah, and I'd just add, too, that even with this year, if the revenue projections come in as you said, Chris, that our free cash flow margin continued to expand, and that's really what we're focused on. Do you have a follow-up, Chris?

Yeah. So if we look at what revenue did sequentially in Q3 and what you're projecting for in Q4, it's pretty even with last year. So – and it sounds like even though business is still kind of bleah, it's getting a little bit better. Would you characterize the environment overall as kind of normal? And if it's not normal, then where would be your biggest area of concern or weakness? Dave Pahl - Vice Present & Head of Investor Relations: Yeah, Chris, if you look at the midpoint of our guidance, it would suggest that our revenues would be down 2% from the year-ago. That's similar to the number that we just turned in, as well as what we saw in second quarter. So we just described the environment really hasn't changed very much. We just believe that we're operating in a weak macro environment. And we continue to focus on execution, and I think the business is showing the results of that focus and the strength of the business model. But, in general, that's really what we believe that we're operating in. So, okay. Thanks, Chris. And we'll go to the next caller, please.

Our next question comes from William Stein with SunTrust. Your line is now open.

Great. Thanks for taking my question. I wonder if you had a 10% customer in the quarter or if you had any meaningful change in revenue from a single customer that would have affected the overall trend in the business during the quarter? Dave Pahl - Vice Present & Head of Investor Relations: Yeah, Will, when we had – if we look at last year, we had – our largest customer was 8% of revenue. And we don't give customer size by quarter, but we expect that that customer, as they've done well this year, that they could come in around 10% of our revenue. And I'd say this: As we look at that customer, we sell them hundreds of devices across multiple products. And if I contrasted that to the last time that we had a customer that was more than 10%, most of that revenue was concentrated in just a few parts and a single application. And even more specifically than that, it was really one function that maybe was that different generation. So we really just had one function at that customer. So even inside of this customer we've got quite a bit of diversity. Do you have a follow-on, Will?

Yeah, it's sort of related to this. The company exited the wireless apps processor and baseband business a few years ago. And I suppose the answer is around the concentration at the part number level, but does what looks like a growing exposure to the handset market through at least one but probably multiple customers – does that concern the company, the way that – in a similar way that caused you to exit some products previously? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, Will, I'd say that when you heard Dave's opening remarks that we saw growth in personal electronics and without that one customer growing, personal electronics would've been down, I think that's also telling us that as handsets overall grow, they're really becoming the larger piece of the personal electronics space. And so what's important is to have a lot of different chips that you're selling into, a lot of different customers who sell into that space, and that's exactly what we have. And so from that standpoint, if we're going to participate in personal electronics, you're going to be a – participating in handsets, and there are a lot of very attractive chip opportunities inside handsets, unlike what we had a number of years ago, as you remembered, with baseband and processors, where those parts were basically standardizing and commoditizing, and your ability to differentiate was diminished and therefore your ability to attract profits from selling those parts was diminished. And so consequently, I see this as quite a bit different today given the diversity of products that we're talking about here than the example of when we were baseband and processors five-plus years ago. Dave Pahl - Vice Present & Head of Investor Relations: Yeah, and I'd add to that, if you look across personal electronics and you add smartphones and tablets and PCs and TVs and things like that, you're probably – if you added all those together, you're probably scaring (30:15) 2.4 billion, 2.5 billion units. And even though that unit pool probably isn't going to grow much, there's – as Kevin said, there's opportunities to find products that will live through multiple generations that you can sell to multiple customers and places where we'll continue to try to steer our investments overall. So thank you, Will, and we'll go to the next caller, please.

Our next question comes from Blayne Curtis with Barclays. Your line is now open.

Good afternoon. Thanks for taking my question. Really two related questions. One, I just – a clarification. You said the upside in the quarter came from wireless infrastructure and industrial. It seems like HVAL was up a lot. Was that part of what you're calling industrial? And then maybe bigger picture, from a geographic perspective, there's obviously been some negative data points in kind of the U.S. industrial market. Just any change – over the summer it was China, now you're seeing some U.S. issues. Just any perspective from a geographic basis. Thanks. Dave Pahl - Vice Present & Head of Investor Relations: Okay. So let me answer your first question, which if you look at HVAL, HVAL will have a high exposure to automotive, which will help drive those revenues. It'll also have exposure to personal electronics as well. It does have some industrial exposure, but I think that those are the areas that will drive that revenue. And you had a follow-up?

The question was just what you're seeing from a geographic perspective. Obviously China was weak – yeah. Dave Pahl - Vice Present & Head of Investor Relations: Yeah, so – yeah, if I just look at our regional results year over year, revenue was down in Asia, in Europe, and U.S. In Japan, it was up. If you look at the broader China market, it really wasn't down differently than what the broader Asia was, and that was kind of down consistent with our overall revenue. So really didn't see much different. The second thing I'll add is that, a lot of times we're asked by investors what our exposure to China is or to a particular market, and in our 10-K we give a very precise number of what we ship into, China being 44%. But we always like to point out that if you're looking for what exposure to a particular market is, I think most investors are asking how much of our product is actually consumed there. And so it's a very different number than 44%. It's much lower than that, because obviously some of those products that we ship there end up getting shipped into other regions. I'll also point out that we may ship product into a Tier 2 OEM that gets put into a European automobile in Europe and then shipped into China. So you can't really look at any of our regional results and understand that. So – but overall, probably a good proxy to begin to start an analysis would be to look at what China is as a percentage of GDP, and kind of start an analysis from there. So, okay. Thank you, Blayne, and we'll go to the next caller, please.

Our next question comes from Joe Moore with Morgan Stanley. Your line is now open. Joe L. Moore - Morgan Stanley & Co. LLC: Great. Thank you. I wonder if you could talk a little bit about your customer inventories. You gave us the very helpful disti resale and inventory numbers, but just in general, you had a pretty good year in 2014, a weaker year this year, but my perception is that the customer inventory management, lead time, days held hasn't really changed. Can you just talk about whether you've seen any inflection there in the last few quarters? Dave Pahl - Vice Present & Head of Investor Relations: Sure, Joe. I'd say that of course the distribution inventories, as you said, that we can see very well, we've got 55% of our revenues that are on consignment. So for those portions, which will include 60% of our distributor revenue, but we know for that portion of our revenue there is no inventory, so it's actually zero. So obviously that's in really good shape. And if you look overall, the classic kind of booked/shipped carrying inventory type portion of our revenue is really about 20% of our revenue. And that's where we'll carry backlog, customers will have inventory. So we really don't see any signs that customer inventories are significantly out of whack. I'm sure you can always find pockets here and there. But we believe that they're fairly lean with very few exceptions, such as the wireless infrastructure. So do you have any follow-ons, Joe? Joe L. Moore - Morgan Stanley & Co. LLC: Yeah, and I did want to follow up on wireless infrastructure. You said it was up sequentially, recovering from a lower level. Do you have visibility into whether that's sort of China deployments or Western deployments? And what do you see as the trajectory for that business going forward? Dave Pahl - Vice Present & Head of Investor Relations: Yeah, so, Joe, we have – I'd say that our exposure in wireless infrastructure, if you look at the major OEMs that make up the majority of that market, we'll have a different product exposure, but a fairly consistent exposure across them. So if there's demand in any of the regions, we'll typically participate in that. If you look at by technology – that's oftentimes another cut that people will look at – we've got a strong position in 3G, a slightly stronger position in 4G. And even in newer areas that we expect growth in the future that we've been investing in, as an example like small cells, we've been investing and believe we'll have a very strong position there as well. So our numbers aren't so much impacted by a specific region. Of course, we won't escape it either if there's weakness in any particular region. So, okay. Thank you, Joe. And we'll go to the next caller, please.

Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Hi, guys. Congrats on the strong results. I know in the past, Dave, you gave the year-over-years. I think you mentioned that the wireless infrastructure sequentially was up. I was hoping you could give the sequential direction by the other markets, and I think from the math you gave earlier, for last year, by the end markets, it seemed to imply that the combination of industrial and your comm infrastructure, your wireless infrastructure, must have been up the better part of 15% sequentially. So if you could just comment on the directional color by segment and if those magnitudes are anywhere close, that would be helpful. Dave Pahl - Vice Present & Head of Investor Relations: Okay. Yeah, so I can share with you some color sequentially. The automotive market grew sequentially, led by our ADAS and infotainment sectors. Industrial, again, was about even. And personal electronics was up, with growth in most of the sectors that make up that market. Communications equipment was, up as we talked about earlier, due to wireless infrastructure. And enterprise systems was about even. So – and, as we talked about, most of those areas were stronger than we had expected, but specifically wireless infrastructure and industrial. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, just on the year-over-year growth, though, I'm not sure, Ross, on the numbers you were reciting there, but industrial overall year over year was probably only up about 1%. And then wireless -

Yeah, I'm sorry. I was talking sequentially. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Okay. Yeah, because wireless infrastructure is still down year over year. Sequential industrial was actually down about 1% overall. And then wireless infrastructure was, again, up in single digits. So really not much growth there. Dave Pahl - Vice Present & Head of Investor Relations: Yeah. Okay. And do you have a follow-up, Ross?

Yeah, just a quick one, more housekeeping. I know you're not going to give exact guidance on the gross margin you said earlier, but as far as OpEx directionally in the fourth quarter and first quarter, I know you guys tend to have some year-end phenomenons that impact that. So, Kevin, any sort of color on those two quarters would be helpful. Thanks. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, Ross, it's going to be pretty normal to what you've seen in past quarters. Your memory is quite correct on that. 4Q is typically down low to mid-single digits percentage-wise, just because of seasonality of holidays around Thanksgiving and Christmas. And then first quarter is typically up in a reverse direction. Again, because of the absence of holidays and also because of the implementation of our annual pay and benefits increases. So I think that if you look at the past couple of years, 3Q to 4Q to 1Q, that's probably the best proxy for you to try to model into your spreadsheets for now. Dave Pahl - Vice Present & Head of Investor Relations: Yeah, okay. Thank you, Ross. And we can go to the next caller, please.

Our next question comes from Tore Svanberg with Stifel. Your line is now open. Erik Rasmussen - Stifel, Nicolaus & Co., Inc.: Yeah, thanks. This is Erik calling in for Tore. A lot of questions have been asked, but going back to the 300-millimeter strategy, can you give us an update on that exiting the year, maybe how much of Analog would you expect to be coming out of the fabs to support that? Dave Pahl - Vice Present & Head of Investor Relations: Hey, Erik. I'll just say that we'll give an update to that in our February capital management call. I can just say that part of our plan was to qualify our DMOS6 factory, so that qualification is planned to be done before the end of the year. And so we're still tracking to that. And we've been releasing products to RFAB, or the Richardson fab, for some time, so we're going to continue to do that. And we still have quite a bit of capacity to be able to grow into. So do you have a follow-on? Erik Rasmussen - Stifel, Nicolaus & Co., Inc.: Yeah, no, thank you. That's helpful. The Embedded Processing, obviously the operating margins looked very good this quarter. Going forward – and I know you probably don't want to give too much guidance on this – but what are the expectations for this business? Will it be lumpy in terms of the improvements? Was this a little bit more of an outsized quarter in terms of the improvement, or should we see – what are some of the expectations for that group? Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Yeah, Erik, I'll just tell you, that team's been working pretty hard for a number of years now to grow their revenue. We've talked about their mission over the last couple of years has really been cost containment and growing the revenue, and they are achieving very good results on that now. Importantly, they're a strong contributor to our free cash flow growth. And just as our free cash flow at the company level tends to be weaker in the first couple quarters and stronger in the second couple of quarters, I don't think it's any different than when we take a look at how some of the business units underneath will perform on that metric, being as they're the ones contributing to that free cash flow. We tend to look at these things over a longer period of times, because quarter to quarter can be pretty noisy. But I think that team has done a very good job of getting its margins up to where we think its entitlement is at, and they should be performing at that level for the foreseeable future – in fact the long term is what we expect out of them. Dave Pahl - Vice Present & Head of Investor Relations: Yeah. And I'll just add that, as Kevin mentioned, the growth has been coming through from the investments that we've made. We highlighted that they, as well as Analog, had achieved record levels of revenue as a result of those investments. Together Analog and Embedded have grown for nine quarters in a row year over year. So – and I think there was one quarter where Embedded actually did well but didn't grow year over year, and that was last quarter that had the big headwind from wireless infrastructure. But the other parts of that business obviously did very well. Okay. I think we have time for one last caller. Operator?

And we'll take our last question from David Wong with Wells Fargo. Your line is now open.

Thanks very much. Just a detail of your earlier answer. You noted personal electronics was up because of demand from one customer. What about your broader segments? Would you still have seen year-over-year growth in both Analog and Embedded if it hadn't been for that same one customer? Dave Pahl - Vice Present & Head of Investor Relations: Yeah, I actually don't have that data broken out between the two segments, but I think that personal electronics is mostly inside of Analog. And so our personal electronics business without that customer obviously wasn't up. So that would have impacted Analog. Kevin P. March - Senior VP, Chief Financial & Accounting Officer: Well, let me remind you the other side of that, too, in that we had a significant change in foreign exchange rates at the beginning of (44:03) the year. And so actually in the third quarter, and I think again in the fourth quarter, we saw and expected about a $35 million negative top line impact due to foreign exchange rates. So we can always pick out individual pieces. The beauty of the TI model is that we have tens of thousands of customers buying tens of thousands of parts into almost every electrical and electronic market that's out there, and the diversity is what is really paying off for shareholders in free cash flow generation. Dave Pahl - Vice Present & Head of Investor Relations: That's good -

Great. Thanks very much. Dave Pahl - Vice Present & Head of Investor Relations: And I guess you don't have follow-up, David?

Well, actually one quick one. As you move more to 300 millimeters, are you vacating any specific 200-millimeter facilities you might be able to close down or sell eventually? Dave Pahl - Vice Present & Head of Investor Relations: Yeah, David, we've put in place that 300-millimeter capacity in the Richardson fab and put together the plans inside of DMOS6, the second 300-millimeter factory, to be able to support growth. That's why that's there. It's really releasing new products into those factories. And that's what they're there for, and that'll help us maximize free cash flow. Dave Pahl - Vice Present & Head of Investor Relations: So, okay, well, thank you, David, and thank you all for joining us. I was expecting Marty McFly to actually get in the queue, but he didn't. So a replay of this call is available, and you can find it on our new and improved website. Good evening.