Texas Instruments Inc. (NASDAQ:TXN)
May 03, 2012 3:00 pm ET
Richard K. Templeton - Chairman, Chief Executive Officer, President and Member of Special Committee
Ron Slaymaker -
Kevin P. March - Chief Financial Officer, Chief Accounting Officer and Senior Vice President
Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division
Ross Seymore - Deutsche Bank AG, Research Division
Richard K. Templeton
We've got plenty of room up front. Ron just walked up and said go, we're late. So we'll get back on schedule.
I want to welcome everybody for joining us here this afternoon. We really are pleased that we've got a chance between Kevin March, our CFO, and myself to really provide an update on 3 points. And that is first, we want to give you some insight into the strategy, the focusing you’ve heard us talk about relative to Analog and Embedded Processing. We want to spend a little bit of time talking about the results that we've achieved, and also that will lead to a little bit of insight into things that we still have work to do and areas we've got a focus. But also, between Kevin and I, we'll try to give you a sense of just how we're thinking about growth, how we're thinking about margins, as well as how that translates through to cash flow, and obviously, it could then lead into return of cash to shareholders. It is -- I will tell you and I'll show you some things as we go through the next about 45 minutes.
It is a really exciting time to be inside TI. If you followed us for the past 5 years, you've watched us go through transitions. We said they were going to take some time to get through, and the great news is as we're sitting here partway through 2012 as those transitions are really well on their way to being complete, specifically baseband ramp down.
The other thing that I just wanted to remind everybody is this year, Ron Slaymaker and the IR team really tried to design a different approach for investors to try to get a sense both at the breadth and depth of TI. So we're holding today's event, Kevin March and I will be going through today's material. I believe somewhere in late September, we'll have Greg Delagi and Brian Crutcher, I think, back up here in New York to really give you a deeper opportunity, want to meet Greg and Brian firsthand, but also to understand the Embedded Processing, as well as the OMAP and Connectivity businesses.
And then we'll be hosting, very similar to what we did last year on October out at the National site or what we now call the Silicon Valley Analog site in Santa Clara, Gregg Lowe who runs our Analog business will be out there and he'll have his 4 major division leads really giving you a chance to understand with more depth what's happening inside the Analog business. So those would be some of the main events we have this year to give investors some insight into TI, and maybe just as importantly, into the leaders that you're counting on.
So as I get things started, talking about where we are strategically, I really go back to, in some ways, philosophy of how we run the company, and this may fall into the category of lessons we've learned the hard way. But the fact is, you work just as hard in bad businesses that you do working in good businesses. And the biggest difference is that the rewards and the benefits that come out of focusing your time and effort in good businesses really pay.
And if you take a look at the past 15 years or 13 years, and if you have followed us as a company, you can probably recall your most memorable event along that timeline. But as a company, we were coming out of the '90s, we had focused on the semiconductors, and many people may recall the sale of Memory back in 1998. And it was a very simple thought, a simple decision, but a very hard thing to do. And that is that the ability to differentiate, the ability to grow and ability to generate cash was never going to come out of the Memory business.
You then saw some really, what turned out to be fundamental acquisitions in the very late '90s, early 2000, of Unitrode and Burr-Brown. You then saw us really spend some time thinking about our capital structure and how are we going to become more capital efficient or a better returner on capital. You saw decisions like the transition to hybrid CMOS manufacturing, but then it really resulted by 2007, in us ending leading-edge digital CMOS development. Simple reason, you can get advanced digital CMOS from many suppliers, the ability to differentiate with that and generate a return is low, therefore, invest that money in a wiser way.
We had a great business. Our old DSP business, which introduced us to Nokia, which grew in and became a very large driver of growth in earnings with the baseband business did great things for us from the middle '90s to the middle 2000 decade. But in 2006 and 2007, when we looked at that business and we looked out over the next 5 years, we said it wasn't going to end well. And so we made decisions at that time that the best way to maximize cash, the best way to maximize cash flow was to wind down the baseband business.
And in parallel with that, we saw an opportunity to accelerate our investments in Analog and Embedded Processing. And that is literally what we did. We moved resources. You then turned around and saw us figure out in 2009, when the world was scared that the sun was never going to come up again, we saw an opportunity to be the first company to manufacture analog integrated circuits on 300 millimeter wafers, which has great benefits. And Kevin will talk about that a little later on.
Continuing through '09 and '10, world was scared, capacity was available at very low cost, and we were able to pick up some significant wafer fab capacity at deeply discounted levels. And then obviously, it wrapped up just a year ago with the announcement of the National acquisition, which further strengthened our analog position, and I'll spend a few minutes talking about that today.
Now the net result of that 13-year period of decisions, where you can't be afraid to move your investment to the best opportunities or into the best markets, I'll spend just a minute talking about some of the things that have resulted.
You can see earnings per share during that 13-year period grew compound annual growth rate of 18%. And it was all about products, manufacturing strategy, capital intensity, the things that we've just been through. You take a look at gross profit margin. And this is an important element because obviously, this is what generates the margin or the ability to generate a return.
You look at our gross margin profile from 1994 to 2012, and what you really see are 2 things. You see across the bottom of this curve, increasing or higher lows. You see at the top line, you see incrementally higher highs. Now the thing that matters most is that obviously, that has a big impact on average margins continuing to rise.
And the fact is cash is generated by average margins, not just peak margins. Now we still think, and Kevin's going to talk through some things, that we've got opportunities with peak margins. We've got advantages like improving product portfolios, we've got advantages like 300-millimeter manufacturing that's still very early in its ramp. We've got advantages like diversity of our customer portfolio that continue to come into place, and we think that gives opportunity to continue potentially getting some incremental gains on that top line. But we're also careful about not saying it will happen nor that it won't. You take a look at gross margins, they matter, but in the long term, revenue growth is going to be the long-term driver of earnings per share for us.
Capital expenditures in some ways has probably been the most significant change that you've seen out of the TI P&L over 15 years. And this was back in the -- really leaving the last decade of '99, 2000. Capital equipment spending for us was sitting in the upper teens. Okay, 15% to 20%, and you can see actually, in some strong years, it got above 20%.
You can take a look at that trend line, capital expenditures down now literally into the single digits. The thing that I get excited about on this slide is I could take any semiconductor company in the world and I can get the CapEx lowered. The thing that we've been able to do is not just get the capital intensity lowered, but we've actually raised TI's competitive advantages while we've done that.
So we've got lower capital intensity, yet we're the only company with 300-millimeter analog wafer fab manufacturing. We have a significant footprint to be able to grow. We have process technology that's growing stronger in the analog circuit area. So less capital intensity, but higher competitive advantages. It's the combination that we are really after as we are pushing this.
So revenue back from 1998 through 2011. If you take a look at that line or the highlighted line across the top of that, and I get to a very simple summary of that is modest revenue growth. And the reason I say it that way is the revenues that are shown on this slide are as reported. So if you go back to that 1998 column, there's 9 months or 9.5 months of Memory operation in those numbers. There's Sensors & Controls of different businesses, but if you had owned TI stock throughout this time and you looked at the end of each of those calendar years of what the revenue was for the company at the close of that year, that's where we were.
Now you can also look between 2006 and 2011, that TI's total revenue was actually down slightly. I'll also remind people, during that timeframe, we had, in 2006, a baseband business that was in excess of 20%, little over $3 billion, $3.1 billion of revenue sitting on baseband during that year. And as people know, coming out of 2011, that number was down, I think, about $1 billion, as the first quarter, it was down 3% of revs.
So you really have to think about that overall trend that I talked about of continuing to move a higher percentage of our revenue into quality markets and quality growth opportunities, because I think that's how we’ll generate growth and returns.
Now this now takes that point and starts to get very specific. And I see a number of faces in the room today that I forget if it was an analyst meeting in 2007 or 2008, when we were starting to talk about this transition, and people really sitting back saying, my gosh, this baseband thing is going to take 5 years for it to be unwound. And the answer is it's taking about 5 years for us to get that thing unwound. But it's why, as we enter 2012, it's one of the 4 things that we're going to talk about during Kevin's and my presentations that I feel really good about.
Back in 2006, Analog, Embedded Processing, and then think of the OMAP and Connectivity line as the wireless segment without baseband, the easiest way to go through that math. 52% of Texas Instruments' revenues were in those areas that had the ability to grow and had the ability to generate high-quality returns for the long term.
I show that data in -- for 2011 fiscal year, and you can see that the combination of Analog, Embedded and OMAP and Connectivity already up to 72% of TI's revenue. And the reason we feel as good as we do standing here today is that's the first quarter of 2012 that we got announced just 8, 10 days ago, and Analog plus Embedded plus OMAP and Connectivity up to 78% of TI's revenue.
Analog, I think, over 50%, now at 54%. So in that journey of continuing to move TI's revenue to better opportunities and better spaces that can grow and earn returns over time, we feel very good about where we are at this point. Baseband's at 3% of revenues, and it should wind down to 0% by first quarter of '13 like we've been saying for a while, or essentially to 0%. The other segment is going to be high profitability, but reasonably low growth. But I think it can be a strong contributor on the margin side during that time.
So one of the 4 that I felt good about, product portfolio. 80% of Texas Instruments can grow and grow in great market opportunity spaces. Second thing that feels great about where we sit today, as I commented, we enjoyed a great business with Nokia. For over a decade, Nokia was our #1 customer. Nokia was significantly over 20% of our revenue. You can actually see, and this is a plot of TI's top 10 customers back in 2009, and that same data for first quarter of 2012. And the thing that has the greatest change is over there on column 1. You no longer have a singly large or single dependency on a customer greater than 20% of revenue. In fact, I think it's 5%, between 5% and 6% with our largest customer in the first quarter of 2012.
It also turns out that our #1 customer in the first quarter of 2012 wasn't Nokia, for the first time in over a decade. So where we're excited, where I get excited because the amount of time I travel, the vision of us becoming an Analog and Embedded Processing company, this is the long tale of customers that you want to see. It says you're not dependent on any one customer, which, as this room knows, it's a lot of fun on the way up, it's not as much fun on the way down. And what you now have is a business that's not dependent on any one customer, one end equipment, but it's now diversified in terms of its dependencies across its customer base, across regions and across different end equipment markets. And I think this has great implications for what we can do from a growth and a return point of view.
Now I want to take a minute, I just went through 2 great reasons why we feel good about where we are, product portfolio, best opportunities that can grow, customer position not dependent on any single customer at the top of the stack. I want to back up for a minute, and if people do not follow Texas Instruments closely, I want to go through why Analog and Embedded Processing we really believe are the 2 best opportunities in the semiconductor business. Why are we excited that we have such a high concentration of our revenue moving into these 2 spaces?
So to begin with, these are large markets. Analog and Embedded Processing chips are really very specialized semiconductors. Typically, the average consumer never hears about them. And I don't consider that at all a bad thing. They're somewhat out of sight, somewhat out of mind. But if you look inside of anything electronic, anything electronic is going to have at least one analog chip, and I'll take the bet that usually more than 70% of the equipment in this world that's electronic needs some type of embedded processor.
So what that translates to is that Texas Instruments has an opportunity to sell something to literally every customer that buys chips in the world. It's a statement that very, very few chip companies around the globe can make.
Anybody that's watched 30, pushing 40 years of the semiconductor industry can go off and look at the profit and loss or the margin capability of Analog and Embedded Processing. And it's slightly different reasons that they can earn that margin, but very time-proven, good strategies, well-run, can generate good P&Ls when you're in the Analog and Embedded Processing space.
And the second thing is that they're time-proven generators of cash. Number one reason is they don't manufacture or they're not manufactured on bleeding-edge advanced digital CMOS equipment. So as a result, the capital intensity is significantly lower. When we think about capital assets that we put in our manufacturing sites, you literally think in decades, not 2-year or 3-year time constants for how long that equipment could be in use or in service. And Kevin will give a sense of how -- what we think that's going to do for us.
Fragmented competition. This is a really important part about how the market operates, why it's a good margin market, as well as why we think it's going to continue to be. If you look in the Analog business, it actually takes 31 different companies to get to 80% of the revenue. That's a highly fragmented market.
The Embedded Processing business, it actually takes 10 different companies to get to 80% of the revenue. And lastly, on why these end up as the 2 best spaces and the 2 best spaces for Texas Instruments is even though we've got very strong positions, we're #1 in Analog, sitting at, I think, 15% share in '11, #2 in Embedded Processing, sitting a little over 12% share, strong positions, yet significant room to still grow and gain share. And that's a great combination to have. We haven't tapped out or anywhere near tapped out what the growth potential is for TI in the Analog and the Embedded Processing space.
Now let me shift to okay, it's great that those are high-quality opportunities, and it does matter. You've got to be putting the company in the best markets to have an opportunity to earn. But what I want to talk through are the 3 simple reasons or the 3 simple competitive advantages that we have that no semiconductor company has relative to attacking these 2 marketplaces, or what really differentiates us, and maybe more directly, why are we going to be able to continue growing faster than the rest of the industry in these markets.
So the first thing, our breadth and depth of our portfolio. The best way to think about that is I talked about a fragmented set of analog competitors. The better word instead of fragmented might be specialized. So one of our analog competitors might be really good in data converters, but they don't have any power. Or they're really good in power management, but they're not in interface or in clocks, for example.
Because we have all the major categories of analog, because we have a complete family from low-end microcontrollers to very high-performance multicore DSPs, we end up with an opportunity, when we approach a customer, to put more chips on that customer's board. It is a very simple statement. Open up your tablet, open up your car and look at the electronics inside of that. Open up a motor controller, and we have an opportunity to put more chips on those boards when we visit our customer compared to any of our competitors.
Because we have that breadth and depth or that opportunity to put more chips on every board, we, in turn, can afford and have taken advantage of that, and have the largest sales force distributed across the world, 3 to 4x the nearest competitor. That lets us have direct relationships with the most important customers around the globe. The advantage of that is our fragmented customers -- our fragmented competitors typically count on a distribution-based sales model, which they really aren't that concerned about which chip ends up on the board as long as it's one that distributor has. With the TI sales force, we end up with great control of that relationship.
We've invested heavily in China, we've invested heavily in India because those are going to be rapidly growing markets. One of the great anecdotes on this when we were going through the National transition and the National discussions, and we were discussing sales scale advantage, we had more sales people in China than National had worldwide. So when we talked about unleashing their portfolio through a much larger force, that was when eyes came open when you're inside National and taking a look at what leverage we could bring.
So that's 2 of the main competitive advantages. The third one is manufacturing and technology. Some ways, it's good old-fashioned brute force scale. We can afford to do things because of our size that our smaller or more fragmented or more specialized competitors literally cannot do. I guess we talked about a lot, I know we've had a number of investors visit the Renner fab or the RFAB wafer fab down in Dallas. I think people's reaction when they enter that building is first sheer shock at the size. And then they're usually pretty amazed that there's not that many people working in that clean room in terms of the degree of automation.
Okay. When our National team visited RFAB for the first time, they walked away and said, we had no chance of competing against this. It was that type of reaction from the engineering management team that saw it. We also have the ability, and this matters, that we continue to invest in differentiated process technology. So you look inside of analog semiconductors, we invest a lot of R&D to make them go faster, be quieter, generate lower power, and that is something that is getting harder for even our largest analog competitors to do because they're tending to go outsourced at their most advanced nodes.
We've got the ability to go to our customers with the lineup of fab acquisitions that I talked about, and our customers have a very simple response. They don't believe they can forecast that well, they want to be with a supplier that can react and surge up when the marketplace is going to surge up.
Now to put a frame around the impact of why something like the 300-millimeter analog wafer fab, I believe will never be done at one of our specialized analog competitors. You can take a couple of our really well-run good analog competitors, somebody like an Analog Devices, someone like a Maxim, they're $2.5 billion, a little under $3 billion a year. You could fit either of those companies in 1/2 of RFAB.
What matters on that statement is they just aren't ever going to be able to imagine building a 300-millimeter wafer fab and get the cost benefits out of it because their companies just aren't of that size or of that scale. So that's the type of advantage that we can get. So this is the third area.
I talked about being excited about 4 things. Product position. We've got 80% of the company can grow. We've got a great customer profile in terms of no concentration at the top, and we have strong competitive advantages that I actually believe are getting stronger every day. And these are not single decisive blows that determine every socket that day. But this is a cumulative impact of year after year, we can make progress on this.
So let me switch over, and we'll cover the fourth one in a minute where the advantage is. And I want to go through performance and talk about what we've achieved in our major business units and some of the work we still have. This is a slide, 5 years, analog market share performance. For those in the audience, we've tried to be very careful. We've broken Analog -- National or Silicon Valley Analog out in 2011 because it basically had one quarter of contribution in the 2011 year.
You can see 5 years of market share gains by the organic TI Analog business. Now this is a slide that I think a lot of companies would probably put up in front of an investor community and/or their employees and say, doesn't that feel good? I will tell you and you can come in and meet the people inside of TI, that's not the discussion we have internally. The goals that we've got inside of TI, and we've talked about these in the past, are to grow significantly faster than the marketplace. So we have not performed at the level we want to perform even during that 5-year period.
So we are busy right now and very focused inside our Analog operation, and our metrics on what we drive these businesses on are actually very simple. The expectation on every Analog business unit manager is that you're growing your revenue significantly faster than the market, and you're growing your operating margin significantly faster than your revenue.
It's 2 really simple metrics that are just really hard to do. But that's where we've got the attention. What do we have to do to get better at that in the businesses that aren't growing or as fast as we want? We talk about getting back to basics, great roadmaps, great products, designing in your current and new products and executing well. So if you get inside or if you get the chance throughout the year to meet any of our Analog business managers when you're -- they're out at any of the conferences, you could probably have this discussion and they'll recognize it pretty closely. That's where the attention is, to drive greater growth.
Now the National step, it was literally, I think, April 4, just a little over a year ago, that we announced the acquisition of National. And we had talked, when I got out and met with a lot of investors, that we had really a very simple thesis about what the National acquisition represented.
First, we had studied it, and we felt it was an absolutely first-class analog portfolio, 12,000 parts, terrific analog design engineers, that had underperformed because of what turned out to be poor or uncompetitive commercial decisions. Not for lack of the quality of the portfolio, but for commercial decisions that were being made.
And we talked about the fact of taking those 12,000 parts and those great designers, taking that capability through our sales force, getting the amplification of that sales force and thus, accelerating revenue. And that we felt we could probably pay back or generate our cost to capital on an ROIC basis in 3 to 4 years. As we sit here today and people that had a chance to visit the Silicon Valley Analog back in October, November, I think you had a chance to start to feel the energy, see some of those signs, the progress with customers is really strong. That's about design wins, that's about backlog, that's about ramps that people are getting ready to make for later this year. We continue to see great progress in terms of the thesis that we had, that it's a great portfolio, amplify it through our sales force, it's going to let us accelerate that revenue growth. So it looks really positive in terms of where we are today on that.
Now I've included on here a breakdown, and the way I tend to think of it is the analog market is really made up of a lot of really good stuff, okay? If you get in the analog market, you got an opportunity to make good money. You can see what happens with the combination of TI and National. We're up, I think, it's 17.5%, rounds to 18% share. The reason you saw 15% back a couple of slides ago, that was one quarter's worth of revenue from the fourth quarter of '11. But if you look at that 18%, we're 80% larger than the nearest competitor when you go down that list. So starting to get significant advantage in terms of multiple of size.
We've got the ability to do a lot of things through the sales force that we've talked about, size of the sales force. Cross-selling has really been a powerful thing that we've discovered through this. We've been very pleased with that. But as good as the Analog business is, and as good as we like this slide, this one even gets more exciting to us. Catalog analog is a subset of that overall analog market. I think somewhere probably 40% of that TAM, $17 billion.
So the thing that I think most people missed and didn't think of, when we talked about adding National to the TI portfolio, we were going from having -- TI was #1 in catalog analog at over 20%. But we actually added the #3 catalog analog company. So today, we've now got 28% of the catalog analog business, which is, think of it as industrial, distribution-based. For your world, you might translate that into higher margin. It is a great space to grow, it is really the great part of the analog marketplace. And we end up with a significant advantage when you look at the combination of those 2 slices.
Let me shift to Embedded Processing, talk very quickly about where we are in that business. And if this ends up sounding very similar to the comments that I've made on the Analog slide, it's because the situation is actually very similar. You can see that we've gained market share over the past 5 years, and we feel in some ways, you could say, gee, that's great. On the other hand, this is identical to the Analog comment. Our goals internally are higher than this.
So what are the things that we're working on? Again, it's going to sound very basic, expectation on the businesses, grow substantially faster than the market, grow your operating margin faster than your revenue. How do you do it? You focus on the basics. Basics are great compelling roadmaps, great parts, great focus on design ins and great execution.
The product portfolio inside of Embedded Processing is something we're very excited about. Historically, this has been a very DSP-centric business. Ron talked, I think, even on the first quarter call, things like base station cellular equipment that make the networks of the plumbing for the mobile broadband world work. We've been a big player in that. But we're really excited about some of the trends to small sell. You can look at things like the microcontroller market. Turns out the microcontroller market is probably 80%, maybe more, of this marketplace. And we've been growing from a very small competitor to one that I think is really starting to get attention.
We recently just announced a new family called the Wolverine product, 1/2 the power of the nearest competitor when it comes to a microcontroller. So the R&D is getting poured on, great products are coming out, and we feel very good about the trajectory that we can continue to drive on this.
Okay. Wireless. Spend a minute on it because I think it's the subject of more than a few questions when Ron or Dave or the guys get on a call. So if you look at the first quarter of 2012, and it was on the data we showed just a while ago, the Wireless segment has reported about 12% of TI's revenue. 3% of that was baseband, it's going down to 0%, 9% of TI's revs are in OMAP and Connectivity.
So as I commented, it is a source of a lot of questions where people worry, gosh, looks like a highly competitive market, are you ever going to be able to make money on it long term. You heard several of you that had got a chance to go to Barcelona and heard Greg Delagi talk about the strategy where we're broadening the marketplace in terms of where we take OMAP and where we take Connectivity. We leave it here, the comments here. We like that direction, but how long will it take to get there? So just a lot of nervousness or anxiety on the thing.
Let me be reasonably direct about 3 points. First, the philosophy that I started this entire presentation with, which is, if a business isn't going to be a better business and contribute to growth and generate return, we will disposition the business at TI. We don't fall in love with them, but we're passionate about them. But if they don't make sense over the long term, we'll do something different. And this is no exception. And the people inside of OMAP and Connectivity know that this is no exception.
Second point, I find, and I think if you spend time watching it, the opportunity of the connected cloud and of the internet of things, the 2 trends that Greg talked about, I think they are fascinating opportunities. I think you will find the era of the smartphone is going to be eclipsed and people are going to talk about the era of the cloud or the interconnected cloud. That's what's coming next.
And when you think about that market, having the processor, OMAP, that has the most popular operating systems, Android, potentially Windows 8 or variants of Windows 8, or even QNX, having those high-level operating systems running on your processor gives you an extraordinary advantage out in the marketplace. Because customers that want to embed a high-level operating system because they want their equipment in the future to connect to the cloud, they're actually not making a processor decision, they make an operating system decision. And then they go looking for what processor gets them to market the fastest.
Today, that decision is achieved by selecting OMAP. It's what we see our customers doing. So point 2 on this, I think it is a highly intriguing opportunity in terms of where we are and where we're heading on that thing.
Third point. I don't have a public and I don't have a private timeframe for a decision of what are we going to do with OMAP and Connectivity. I may get the question, I'll try to get ahead of it. No public, no private timeframe on what are we going to do. I'm impatient, but let me tell you what I'm looking at and what I'm looking for. It should be pretty logical.
First, strategic progress. Today, we got over 100 design wins. Customers pulling on these products, that's a good sign. We want to play that out. Second thing I want to look for, stickiness with the ability to have long-term positions at customers. What that translates to for your world, that's all about the ability to earn margin over time. First one's about growth, second one is about margin, that's what we will judge as we spend time with customers as we understand this business. So I wanted to get some of those points pretty direct. I'm sure there may be some questions later on, but I didn't want to avoid that.
Well, let me spend a few minutes, and in some ways, it goes to a much longer-term view. What I really think this gives you some insight into is how I, how we think about growth, about opportunity, about capacity investment and the way we're trying to be prepared. And again, Kevin's material will probably tie in a little bit to understanding this.
So first, let me explain this slide. And I think you've got the graph in the handout material. This is industry data, not TI, industry data back to 1991. Quarterly unit shipments. We have excluded Memory. Memory won't move this curve, but I'll show pricing in a minute. Memory does move the pricing curve on that front. And this literally then is a long-term plot of unit shipments, quarterly basis, across the industry. You take a look at that long-term trend line and you can see, further block on the upper left, a little over 8% compound annual growth rate, which is why that curve aims up into the right, and if it was a log scale, it would be a straight curve.
Correlation, [indiscernible] squared to 0.95 in terms of the trend line that fits to those units. Now for the analysts in this room, every one of those swerves and curves have been hours of entertainment for the past 20-odd years, even to a few semiconductor managers, okay? But when you back up away from those swerves and those curves, there's really only 3 that stand out to me on the south side of this slide that get past noise and get past semiconductor cycle, and in fact, become a reaction to an exogenous or external event.
One, some of us remember it well, was the internet bubble. When it burst, unit trend line goes 19% below trend line. I know a lot of people in this room remember this one. Okay, unit shipments '08, '09 dropped 36% below trend line. This was in 1Q '09, we weren't sure the sun was coming up again, okay, in terms of where everybody was. And I think your industry might have been more morbid than ours.
The thing that surprised people, surprised us when we did this slide and updated it, is take a look at the fourth quarter of '11, okay? Most people don't get that sense. Fourth quarter of '11 unit shipments had dropped 19% below trend line. I think it gives a good insight that these are not semiconductor cycles of the little inventory building and a little inventory unwinding. This is supply chain overreaction. And if you want to look at it, go back and look closely on your slide.
From that point, the bottom of '01, if anybody remembers that, 2 quarters later, 36% unit growth. How many people at the bottom of that trend would have said, we're going to grow 36% units in the next 2 quarters. I didn't, I know that, okay? You can go sit at the bottom of this one. I think that was 1Q '09. Two short quarters, 56% or 57% unit growth off the bottom, okay? How many people in this room had that played in? I didn't.
Now take a look at that top and take a look at that top, and see where the trends come back up. We didn't have a big top in the 2010 cycle. And I see some folks in the room that have written on this. What that translates to, this industry didn't over invest in capacity in the 2010 cycle. You could actually argue this industry is light of capacity. So if this point, coming off of fourth quarter of 2011, tries to go back to trend line in 2 quarters, you can see that trend line is way above what the industry tooled up for, the capacity to put in place just a year ago, which is why, when I talk about the pricing slide in a minute, you haven't seen pricing really go down. In fact, it's trended up in an otherwise pretty soft market.
So takeaways. Why is that curve at 8%? To me, it makes intuitive sense. You got 4 points for global GDP growth and you got a 2x multiplier because there's more chips in our lives. Tablets, cellphones, automobiles, more electronics going into industrial equipment and infrastructure. And I sit back and I say, over the next 20 years, we're going to have global GDP 3% to 4%. It's probably not this year, it may not be next year, but we'll get back on that curve. And the multiplier is probably going to be about the same thing, because there's more electronics coming in our lives. So when we sit back, this curve gives us as much just guidance, how should we plan and how should we think relative to long-term growth and capacity capability.
I don't know what this thing is going to do off the bottom. We do not know. We don't believe the industry is tooled up for to try to get back to the trend line. What I do know is that TI is fully capable of running this thing back to trend line and then some. And that's what we wanted to be in a position to be lined up for on this front. So if you're pretty good about the implications of that historical view and thinking about what it could carry forward to.
I'll be quick on this slide, put it in the deck for a very simple reason, a lot of investors, a lot of people in the semiconductor industry believe that average unit pricing of chips has been down into the right for 20 years. The fact is, if you wanted to argue, you could say compared to first quarter of '91, pricing's up, okay? If I pick middle of '95 at the top of Windows 3.1 and Pentium ramps, you could say pricing's down. Fact is, because we put more functionality on chips over time, average unit pricing actually tends to be pretty stable. And the ups and the downs have lot more to do with industry capacity investment. And they tend to be 4-quarter, 5-quarter, 6-quarter type trends if the industry has too much or too little capacity, not daily or noisy moving around of pricing. And this was the point that I made.
We've had a pretty weak semiconductor industry for 4 or 5 quarters. And what's the average pricing done during that timeframe? But I don't think it'll stay up. I think it'll rattle around in this range. But the fact is, I think that's a sign of low investment by the overall industry.
Translation. Slide 1, Slide 2, I think 8% unit growth is as good a way that we can think about long-term growth opportunities. And I think 8% unit growth probably translates through to 8% revenue growth over time. The only thing I guarantee is there'll never be a year with exactly that number, okay? Because that's how the averages tend to work in this business.
Okay. Just to summarize things before we open up for some questions. I talked about, really, 4 reasons why I feel pretty good about where we are today. And it's been a long 4 years, 5 years as we've been working through the transition. Number one, 80% of TI is now centered up in the best opportunities with the ability to grow and the ability to grow with returns. Number two, our customer diversity, or maybe said differently, our customer concentration is lower, our diversity is higher. That is going to do good things in terms of our ability to grow and not end up unwinding big positions over the longer term.
Three, our competitive advantages, the things that I talked about, breadth of the portfolio, sales, manufacturing and technology, our competitive advantages grow stronger. And then lastly, our manufacturing growth capability with low capital intensity looks great. And I won't go into any more detail because Kevin's got plenty of material to try to talk through why those things really do look strong. The adder for that is I feel great about our position to grow, and I feel great about our position to actually translate that, not just into earnings, but get that through to cash and get that into cash return to shareholders.
So with that, I think we've got time for some questions, and Ron is in charge.
I think what we're [indiscernible] Okay. I think what we're going to do is Rich is scheduled to ring the Closing Bell, and so we're going to excuse him, move on with Kevin. And I promise you, you'll get a shot at Rich on your Q&A, and -- you do not get excused that easily. So we'll let Rich go and move on to Kevin March here. We asked, but they said they could not be flexible on when they were going to close the markets today, so.
Kevin P. March
Good afternoon. Appreciate you all being here. We realize you've got busy schedules and you've got choices of what you can do with your time, and we're quite flattered that you're interested enough, that many of you to want to come and hear what we have to say and tell you about what TI's been doing and what TI's going to do.
I've done enough of these presentations in the past and I really hate getting up behind Rich. He kind of covers the universe and he's pretty energized, and I don't quite present in the same fashion, but I'll try to go ahead and take you through some stuff. I'm going to focus more on the financial side of things, as Rich alluded to, and kind of take you through -- think of the key elements of our financial statements, kind of starting from the top, working your way through, and help you kind of to walk away with a conclusion. Our focus really is on how do we generate the most cash with the available assets that we have to invest. Because we believe cash really is what matters at the end of the day.
So let me just start out with reminding you or summarizing for you what our key financial goals are. And they really aren't any different than what you've been hearing us talk about in the past. There's 3 of them, and they're in the order of importance up here. First and foremost is growth. And you heard Rich mention that multiple times, growth. And you've heard us talk about that multiple times, growth. And what that means is growing our core product revenue significantly faster than the semiconductor market as a whole. And the operative word there is significantly faster.
And as Rich has already indicated, while we have outgrown our markets, internally we're not very happy with that because the word significantly doesn't quite fit with our growth rate so far in the last few years. A close second to our growth objectives has to do with growing earnings. When we talk about growing earnings, it's really growing our earnings per share faster than we're growing our revenue, which means being a lot more efficient with the deployment of our available cash for investment in the future and turning that into better returns incrementally, over time, on average. We believe that by doing those 2 things, it allows us to do perhaps what's most important of all, that is to continue providing healthy levels of return to our investors in the form of both dividends and stock buybacks. Because at the end of the day, it seems that, that's what investors really want to see, is that we can actually return value back to them for an exchange for actually owning the stock.
So let me just go ahead and switch gears here for a second. I'm going to spend a few minutes on the recent history on acquisitions of capacity because I think it's actually somewhat informative. I know many of you who have followed us the last few years are fairly familiar with the story. I'm going to go ahead and talk about perhaps a few details that you either may not have been aware of or forgotten or just never heard of. And I'll help you understand, again, what we're thinking. The first and foremost, what Rich introduced is what had been driving us to go off and be aggressive about expanding our capacity. And that is our belief that over the last few years, it appears to us that the industry, broadly speaking, has been under-investing to the long-term trend levels that we see from a unit consumption standpoint in the industry as a whole.
Opportunistic capacity additions that we have made are designed not only just for long-term value, but to meet our long-term growth objectives. It started in 2009, and it began with the bankruptcy of Qimonda Semiconductor. This is early in 2009 when they went bankrupt. They had opened a state-of-the-art 300-millimeter factory in Virginia, and as a consequence of the bankruptcy, had to go into Chapter 7 liquidation. Despite the fact that it was a very uncertain time, we saw a once-in-a-lifetime opportunity to pick up state-of-the-art equipment at extremely low prices, prices that we have simply never seen in our experience in the industry.
In fact, the equivalent that we picked up there was such that we could configure it to put it to use for 300-millimeter analog production. And as this chart indicates, the amount of equipment that we bought, in fact, I shouldn't just say equipment, what we bought was not just the equipment in the building, we bought the entire contents of the building. The equipment, the furniture, the artwork, the forklifts, the wiring, the pipes, everything. We moved it to our Richardson Fab on Renner Road in Texas, and put it in there and opened our first 300-millimeter analog fab.
Later that year, also in 2009, again, as a consequence of the bankruptcy of Qimonda, their plant in Dresden, Germany had a significant amount of 200-millimeter equipment that we were able to acquire, again, for pennies on the dollar. And we picked up that 200-millimeter equipment and we deployed it into other factories that we already had around world, factories in Dallas, factories in Freising, Germany and a factory in Miho, Japan to further expand our 200-millimeter manufacturing capability.
A little bit later in early 2010, as a result of the bankruptcy of Spansion semiconductor company, we were able to pick up a 200-millimeter operating fab in Aizu, Japan. And importantly, we also picked up a second 300-millimeter nonoperating wafer fab adjacent to that 200-millimeter fab. So we actually picked up 2 factories with that acquisition, one already operating, which we're continuing to run today, and one that was not operating, but provides us with a vast amount of clean room space, as we grow into the future, we will be able to expand into without having to invest in the cost of a new building or a new clean room.
Later in 2010, due to struggles that Spansion semiconductor was having with the semiconductor market, we were able to negotiate an extremely attractive purchase of another 200-millimeter operating wafer fab in Chengdu, China, our first wafer fab in China. And similar to the Aizu acquisition, that acquisition also brought us a second nonoperating fab. So again, more clean room space that we can expand into. And those 2 last points are important because what that really means is that we have not only operating factories, but we now have ample clean room that we can grow into for quite a few years come.
Finally, in last year, as Rich mentioned, we closed on the acquisition of National Semiconductor. And with that acquisition, we were able to bring on 2 200-millimeter operating wafer fabs and a very large assembly test site. So really, this chart is organized just to kind of give you an idea over what was the incremental impact of those acquisitions. And what's important is that first column called equipped revenue capacity. What that basically means is that we brought on board, revenue-generating capacity on an incremental nature that totaled $7 billion through the course of those acquisitions, fully equipped, ready to be filled. In addition, because of the clean room capacity that we've got with some of those acquisitions, we can -- they actually have $12 billion worth of incremental clean room capacity, which means our need to actually allocate capital for clean room expansion or additional wafer fabs over the next few years is greatly reduced.
Rich had already talked about the fact that we have, through these rather fortuitous acquisitions, generated for ourselves a unique competitive advantage. And I would offer to you that it is probably unique on 2 fronts, both on scale and on technology. So far, to emphasize my points on these acquisitions to be on the wafer fab side, it's important also to note that we have been expanding our capacity on the assembly test side at the same time. And more on that in a moment.
Rich already talked about the Richardson Fab in -- off of Renner Road in the Dallas area in Texas. In that factory, we not only opened the first, but we opened the world's only 300-millimeter-dedicated analog wafer fab. And because of the equipment that we put in there, especially the equipment that we acquired from Qimonda, as well as some of the equipment we acquired from Aizu out of that 300-millimeter factory, we now have the most advanced analog manufacturing equipment in that factory in the industry.
The beauty of being on 300-millimeter is that the wafer size alone gives us a greater than 30% cost reduction on our die cost. And you take the die and you send it to an assembly test location for final finished goods packaging. Greater than 30% cost reduction at the die level, by the time you get to a finished goods level, that's greater than 15% cost reduction versus making those same products on 200-millimeter wafers.
A subtlety that is not obvious to everybody is what we've been able to do with redeploying our proprietary manufacturing processes and technology. Those processes have long been inside TI, there's over 75 baseline ones and there's hundreds of derivatives off those. We have now been able to take and start moving those processes from their mother factory into this new capacity that we bought. That includes RFAB, that includes Aizu, that includes Chengdu, and actually beginning to bring these very differentiated proprietary processes into these very low-cost factories to give us the ability to get further cost reductions on our production going into the future.
I mentioned we've also been expanding on the assembly test site. And importantly, one of the things that we made a decision, and we sat around and thought about it a bit, but in first quarter of '09, in February of '09, at the depths of the downturn, when it was not clear when the bottom was going to arrive, we made the decision to go ahead and open what has become our largest assembly test site in the world. And that is our assembly test side that we opened that's there at the Clark Field, Clark airbase in the Philippines. This is an enormous factory. Many of you have seen RFAB. If you go and you see Clark, you'll have a similar reaction at the scale of this particular factory. The reason this is important is because of that scale, we are now able to take our unique packaging and other technologies that relates to assembly and test, and apply those technologies to a much broader swath of our total portfolio.
So what exactly does all this mean to our revenue-generating capacity? I already mentioned that we -- our view on this is we got it at a very low cost. You've heard us talk pennies on the dollar, I truly do mean it was pennies on the dollar. If we went out and bought this new, it would have cost us considerably more on capital, and we'll settle this with considerable more depreciation for an extended period of time. I would offer to you that, in fact, with what we have done, the marginal cost of our growth going forward is extremely low. And I think this chart is probably one of the best examples I can think of to help illustrate that.
Most of you are probably aware that in 2011, we recorded total annual revenues of $13.7 billion. I just described to you incremental capacity that we have brought on board over the last couple of years, totaling $7 billion. That's incremental equipped capacity already bought and paid for to generate additional $7 billion. So in a real simple world, what we have is a manufacturing footprint today, from a wafer fab standpoint, that is equipped to generate about $21 billion worth of revenue. That's simply taking the $7 billion of recent low-cost incremental capacity to put on board and adding it to our existing capacity that we generated last year of $13.7 billion of revenue, and we've got clean room space equipped today that can support about $21 billion worth of revenue.
We've got open clean room that with the addition of additional equipment years into the future, can allow us to support up to $25 billion or -- excuse me, $26 billion of total revenue. Now it sounds like a lot, but as Rich pointed out a moment ago, you don't know how fast the snapbacks go back when units come back to the long-term trends. You need to be ready before that demand snaps back, not after it's already coming on a catch-up mode. The wafer fab, of course, is just half the semiconductor manufacturing process. It's really what we call the front end of the manufacturing process. You also have to take care of the back end or the assembly test side, and we've been investing in that side for the last couple of years as well. What comes out of the front end of the wafer fabs has to be assembled and tested in the back end so you can get finished goods to finally ship to your customers.
Over the last couple of years, the investments we've put into the back end has an equipped revenue-generating capacity of $18 billion. So on a fully balanced capacity footprint that we have today, we have a total of $18 billion of revenue-generating capacity already bought, paid for, installed and ready for operation. That's about $4.3 billion of incremental revenue already installed over what we just recorded in 2011. So what can that incremental revenue do for us from a gross margin standpoint? I believe that probably the best way to think about this is to take a look at what incremental gross margin does over revenue cycles. And by revenue cycles, I'm not talking about quarter-over-quarter fall through on revenue to GPM, to gross profit. I'm talking about what happens to gross profit as revenue ebbs and flows from a peak to a floor to a peak. And what we've plotted on this chart here is over the last decade or so, 1.5 decade, the peaks in our revenue, followed by the troughs in our revenue, followed by the peaks, the trough, the peak and so on again. And what you could see on this is that on the dollars fall-through that you see on gross profit, is that we range from 67% to 82% gross profit fall-through on each dollar of revenue change through that revenue cycle. That averages to about 75% gross profit fall-through during the course of these cycles. And you can see from the chart on the up cycles, in the last couple of up cycles plotted on here, for each dollar of revenue growth during the course of that cycle, $0.72 fell through to gross profit. So to put that another way, we've got $4.3 billion of fully installed incremental capacity today to support no additional cost to generate revenue at our historical fall-through rates of about 75%, you should expect when that $4.3 billion of additional capacity ready today is fully utilized, we should drop through over $3 billion of gross profit to the bottom line.
Let me switch gears now to operating expenses. By operating expenses, what we're talking about here is research and development costs plus selling, general and administrative costs. Those added together, we watch as a percent of revenue, how much do we spend in those categories. And the real news here is that our model hasn't changed. And that is we expect to spend about 25% of our revenues on OpEx over the course of the cycle. That means plus or minus 5% around that mean based upon the revenue cycles. We've just come through a down revenue cycle, and as you would expect, you would see our OpEx moving to the upper end of that range to around 30%. We're now exiting that downcycle and we're moving into a growth cycle again, and you should expect to see our OpEx begin to move back down to our target range of around 25%. And if we have a strong market, that will move lower than that and get down into the lower end of that 20% to 30% range. So the main message here is that model, we put in place for a number of years now, and we don't expect that to really change as we go forward.
Rich already showed you this graph and it's important to, again to take a look at our capital expenditures as a percent of revenue because really, really quite interesting to take a look at. You can see in the early part of the timeframe on there, the result of our CMOS strategy that Rich pointed out when we adjusted how we invested the CMOS and what we were doing going forward on that. That significantly reduced our capital appetite, the amount of our revenue that we had to devote to capital expenditures. And then around the middle of this last decade, that's further changed as we've refined the portfolio to be much more Analog and Embedding Processing-centric, our total capital appetite as a percent of revenue has dropped. In fact, if you take a look over the last 5 or 6 years, we have talked about a target range of CapEx to revenue to be in the 5% to 8% kind of range. And we've actually performed on that. We're adjusting that now down a little bit. That target range has now adjusted down to about the 4% to 7% range as a result of being near completion with the transforming of our portfolio to Analog and Embedded Processing.
With the $18 billion installed manufacturing footprint we already have today, I think we can reasonably anticipate that over the foreseeable future, for the near term, we'll probably operate closer to the lower end of that target range than to the higher end. That also translates into depreciation that you see in our books today that will be steadily declining as we look out over the next couple of years.
So what does all this mean to free cash flow? Again, if you take a look at this plot over time, the adjustments that we've made from a manufacturing standpoint and the adjustments we made, importantly, from a portfolio standpoint, have been resulting into continual improvements of our free cash flow. And we believe free cash flow is a pretty important metric. And by free cash flow, we mean operating cash flow minus capital expenditures. That is free cash flow. So really, that's what's left over to spend to help stimulate our growth through acquisitions, and very importantly, to spend to return cash to our shareholders through the form of dividends and stock buybacks.
If you take a look at that $18 billion of installed revenue-generating capacity that we have today, it should drop through about $4 billion of free cash flow, assuming that we're going to operate at roughly the lower end of our target range for CapEx in the near term, bringing us to a new record high of free cash flow generation in probably the not-too-distant future as we take a look at our revenue growth over the next couple of years.
I think everybody in this room is aware that we've been pretty active at repurchasing or using that free cash flow to repurchase shares. What you may not realize or may not remember is that we've actually been repurchasing shares for actually many years now. But our history up until about 2004 was to repurchase shares just to a level to offset the dilution effect that occurs in stock option exercises.
Beginning in 2004, we decided to use more of the free cash flow that we generate to more systematically repurchase shares and repurchase shares in a manner that will start bringing our total share count down. In fact, since 2004, we spent about $22.5 billion repurchasing about 775 million shares, reducing our total share count outstanding by about 34%. We ended this last quarter with remaining repurchase authorizations of about $5.37 billion. So we have quite a bit of authorization to continue doing more of what we've been doing for a number of years now.
I think a lot of you might be surprised to hear that Texas Instruments has paid dividends continuously for almost 50 years. We began paying dividends in the second quarter of 1962. For most of that period, the dividends that we paid were pretty small, and to the extent the dividends were increased, they were increased by a small amount and relatively infrequently.
Similar with our decision in 2004 to devote more of our free cash flow to share repurchases, we've also been devoting more of our free cash flow to dividends. Since that period, we've increased our dividends 9x so that our current dividend rate of $0.68 is about 8x higher than it was when we began this journey back in 2004. During that period, we've used about or returned about $3.4 billion to our shareholders in the form of dividend payments. And with what we just saw from the free cash flow plots a few minutes ago, and what our present footprint can do, we should generate plenty of free cash flow going forward to continue more of what we've been doing over the last few years.
So with that, let me just summarize by just repeating what Rich has said. The transformation of the company is pretty near to complete. Importantly, our core product revenue has been growing faster than our markets, although not at the pace that we prefer. Our earnings per share, in fact, had been growing faster than our overall revenue, and the result has been we've been able to return significant levels to our -- both dividends and repurchases to our shareholders over this time.
I would say to you that Rich was talking about we're looking internally at why we're not growing as fast as we want. I must say that we are maniacally focused on execution to be sure that we can translate the opportunity that we have today into maximizing our shareholder value and shareholder return over the years to come.
With that, I think we're at a point where we can take questions.
Okay. So what I would ask is we're going to start with Q&A with Kevin, and then after a while, we'll bring Rich on as well. So these are specifically for Kevin. And I know a lot of you have questions, and so in order to try to get to as many of you as possible, if you could limit yourself to a single question and then, as opposed to the conference call, we will not give you an opportunity for a follow-up, so please give the microphone back to me. And also, Dave Pahl back there will be working the back side of the room with his microphone. So Tore, I'll let you start.
Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division
You talked about $4 billion of free cash flow at $18 billion. But you almost got to $4 billion, I think, back in '07 when you did $14 billion, so why should we expect it to be higher?
Kevin P. March
Yes. If you -- actually, there's a footnote in your chart that will help you understand that, but through the vagaries of some accounting rules of what has to go through operating cash flow and other elements of your cash flow, we actually got, in 2007, if I recall, a $400 million multiyear tax refund that by GAAP accounting has to be recorded in your operating cash flow. And so that artificially popped it.
Okay, it's Jim. If I would have been mad about you guys stealing my trend line if I hadn't started from somebody else 10 years ago. The -- I guess the question is what gross margin do you -- or what utilization rate do you need to be at to get to the target gross margin? Because we're 19% below trend. We could have shipments go up 30%, 40%, that would be a cycle. Does that get you to a utilization rate that would get the target gross margin amount? In other words, you kind of -- the capacity is very good for the long term, there's no question about that. You talked about when you make these capacity investments, you're thinking about decades, not years. But utilization rates have gotten so low that I wonder if we couldn't go through a full cycle where we don't get to the target gross margins because we dug ourselves such a hole as an industry in terms of utilization rates.
Kevin P. March
Yes, Jim, we've taken a look at that question. And the last time that we kind of got to our mid-50 kind of gross margins was back in 2010, and we had utilization rates, call it, in the mid-80s kind of range. I just talked about how much capacity that we've added incrementally. So if you extend that math, you'll probably be in a similar kind of utilization rate to be at a similar kind of gross margin rate.
So the question, how do we reconcile your higher share in catalog analog versus your desire to have your large sales force be a differentiator? I guess if the goal is to get to have a higher share in catalog analog, that's where the company wants to trend to. Is there a way to reduce OpEx? Is there a way to take advantage of that trend and have even better operating leverage in the model?
Kevin P. March
Yes. I think that there's probably 2 things to think about there, one from a share standpoint. While the catalog analog tends to -- the preponderance of it goes to distribution, that's not the only place it goes. And many customers don't use distribution to source, especially our larger customers. They'll tend to buy direct. It tends to be the smaller or more industrial customers that will go through the distribution channel. So to hit those larger customers, you're still going to need a sales force to introduce this large portfolio of parts, too. But the flip side of the analog space, while we have a large share in the catalog, there's still the lion's share of the market is over on the non-catalog. As Rich indicated, about 40% of the market's catalog, about 60% is non-catalog, which means there's an awful lot of customers there who don't typically use the distribution channel to source their analog chips from. And that's where an extremely large sales force is highly advantageous to be able to reach out to those customers and introduce them to our portfolio.
Just [indiscernible] up. I reference in your comment to turn around while leveraging...
Kevin P. March
You use your sales force to grow that catalog analog business. You have 0 delta R&D, for a part, and now, you have all high gross margin leverage. So by having salespeople out working along distribution, you have more influence at the point of design. And that's where you can start winning more sockets on a board. And that's where the difference actually gains advantage. So you don't want to get leverage by less sales, you actually want to spend that money on sales to get more leverage into the operating model is where that lies.
Ross Seymore - Deutsche Bank AG, Research Division
Kevin, Ross. Just a follow-up on Jim's question earlier. So if you meet the same utilization to get to the same gross margin target, about 55%, given that you've added so much capacity, does that really mean you need higher revenues this time around than the last cycle to get to the gross margin?
Kevin P. March
I think mathematically, that'll be correct, yes.
Another question following on the margins. And the slide you presented talked about the incremental drop through, historically about 75% or so. In this first leg of the recovery, it's run lower than that. And I think that drove some initial concern. Could you address that, perhaps talk about why that was and kind of give us some indication of what you see as we continue through, why we get back to that kind of historic 75% level?
Kevin P. March
Sure. I think that the -- important again that the fall-throughs that we're talking about are through a complete revenue cycle, and it's awful noisy on the way through. It doesn't stay that same percentage every quarter. If you take a look at the probably the more recent quarter, I think we saw fall-throughs, based upon our forecast, probably in the upper 60s is what you're talking about there. And part -- that's partly because we actually took our inventory levels up a little bit in anticipation of growth. So we're not coming from quite the floor that you might normally expect. So really, it's a function of where you're starting from that that I think is contributing to that perception, that maybe it's a little bit lighter at the beginning of this uptick. But if history continues to hold to bear out, and it usually does, we should expect across the revenue cycle to be seeing those higher historical fall-throughs across the revenue cycle, noise along the way.
You talked about stickiness is something you'll be watching for in the Wireless business. But at the same time, we've got market growth in Wireless, particularly in smartphones being driven by 2 players who make their own processors. One of your largest customers is moving over at some point to Intel, which doesn't argue a whole lot for stickiness of that business. What is it exactly that you'll be looking for and what should we be looking for in terms of the health of that Wireless business around customer stickiness, around profitability scale, everything else? How will we know that it's something that you really ought to be in and it's going to be successful?
Richard K. Templeton
Yes, I think the thing that you've got to look out at is, I think the frame of the question you've just asked was, the enormously high-volume smartphone tablet people as opposed to start going into broader market places, into automotive applications where there'll be lower volumes, more investment to be able to make that transition. So that will be the stickiness that you see occur across a much broader set. When you take R&D and run it against the 100 million or a couple hundred million smartphone socket, I don't care what the R&D bill is, the cost per unit to be able to make a change is going to be low. And you'll find as you go down into lower volume opportunities that have product life cycles of 4, 5 and 6 years as opposed to the smartphone world, that you have product cycles of 12 months, you're going to find very different dynamics occur on that front.
But does the core business deteriorate before the rest of the longer term...
Richard K. Templeton
So I'll go back to the comment of -- on the timeframe and the question of help me with the transition. I tried to lead into that one pretty direct, okay, in terms of I won't try to predict it because we're going to be looking for the revenue potential growth and with the strategic fit, kind of the strategic hook, and what the stickiness could look like over time. The transition is going to look like the transition is going to look. And I'm not going to try to predict it.
[indiscernible] I have a quick question. You talked about your financial goals and the large '11 change. You want to be aggressive in terms of your revenue growth and you also want your earnings per share to grow faster. And you had your separate bucket of dividends and share buybacks, but there is a linkage between the share buybacks and the earnings per share growth. Certainly, over the last 6 years, where at least, I estimate, a good half of your earnings growth, peak to peak, was driven by the share buyback. Given where the debt position is now and the lumps you might have in terms of payments, how do you see the share buybacks evolving over the next year or 2? And how much could that contribute relative to what we're used to seeing in terms of that as a contributor to your earnings growth?
Kevin P. March
Sure. So the -- we had talked about, back when we acquired National Semiconductor, that we would -- to pick at acquisitions for the use of on-hand -- on available cash and debt. And we also talked about that as a result of taking on that debt, we would begin to moderate our stock buyback and we, in fact, have done that over the last few quarters as we begin to build up the necessary cash levels to pay off that debt. We continue to plan to do that. So that the kind of stock buyback levels you may have seen us engage in the allocation of cash to buybacks, say, 3 or 4 years ago, I would argue is quite a bit higher than what you'll probably see for the next couple of years as we pay off this debt. By way of example, we actually acquired debt when we bought National. We have $75 million of the debt that we acquired with that acquisition actually due at the end of this quarter, which we intend to pay off. So our expectation is that we will pay down that debt as it comes due. And in anticipation of that expectation, our buybacks will be at a more moderate level than what you might have been used to a few years ago. But we will continue to buy back, and I would expect we will continue to see the share count gradually reduce over time.
Kevin, a question on margins again. You talked a lot about the lower incremental cost of the capacity, and Rich talked about a better product portfolio mix, depreciation is going to be a tailwind given your lower CapEx going forward. So I guess 2 questions, why not raise the margin target? And why won't the incremental gross margin fall through be higher this cycle than the typical 75%?
Kevin P. March
Yes, we don't think that -- again, I'm not disagreeing that the -- it will fall through at which cycles. We actually saw on the history that it fell through during one up cycle at 72%, another up cycle at 75%. We've got a range going on there. We're simply saying that you should expect that, on average, it's going to fall through at about 75%. I would offer to you, if you just take that incremental $4.3 billion of already installed capacity that we've got, it gets utilized. Fall-through is 75%, that's north of $3 billion of gross profit. Add that revenue, add that growth profit back to what we just recorded in 2011, and you'll find that gross margin is doing exactly what you'd expect. It can -- well, we're not raising our model or lowering our model. What we're saying is that it probably can go above that and it can go below that, we're not trying to manage that. What we're trying to manage is to maximize the gross profit because that turns into operating cash and subsequently, free cash. So that we can return in dividends and buybacks. So you might want to try that math and you'll see that the gross margins actually are pretty attractive on that front.
I'm not sure if you gave us how much capacity utilization you're running at right now.
Kevin P. March
We probably didn't right now, but last quarter, we said -- fourth quarter, we said we were running at the low 50s.
The low 50s. Our experience was the -- especially the analog sector, which makes it very attractive is the design cycle. It takes a long time to design something into a socket. So I'm not sure that you'd be able to absorb this capacity during this uptick in demand. Just it's most likely going to take you much longer than, say, in digital. Digital, 8 months you have a new product. So you're on the risk of spending 2 cycles before you can fully utilize this capacity and get to those high incremental margins. Is that something -- it's just very hard for me to believe that you could capture big share very fast. You will capture it over time, but it just takes longer than you -- anything else.
Kevin P. March
Yes, again, we're not trying to predict when we'll fill it up. I would point you back to the chart that Rich showed. We have been, as an industry, significantly into shipping long-term demand now for several quarters in a row. We've seen that several times in the past. We saw it ourselves in the past, a couple of years ago, coming through the 2009 downturn and it snapped back very sharply. So it's not a question of having to suddenly win a bunch of designs to have a snapback in units and in revenue. It's the fact that we're under-shipping and have been for several quarters, our customers' actual end demand as they've been bringing their inventory levels down. So a snapback to use that capacity is entirely reasonable on a fairly shorter amount of time. And again, the best evidence to go take a look at, 2010, where we saw our revenue leap back at more than 30% year-over-year growth, and we found ourselves significantly capacity constrained. So this is installed for the purpose of being able to be ready for long-term growth, those kinds of wins that you're talking about, and the fact that the industry as a whole has been under-shipping.
Kevin, just a question on the shape of the recovery. Given how much we came down over the last few quarters, it's a little surprising to see your business basically seasonal in Q2. And just curious, what are your thoughts on the recovery thus far relative to what you were thinking at the start of the year?
Kevin P. March
I'll just kind of reemphasize the guidance that we've given. It does have a range around it, and the midpoint, as you pointed out, is kind of our seasonal. That seasonal, by the way, for the benefit of everybody in the room, we went back and re-computed, with National and TI added together, to kind of adjust for the fact that, that wasn't historically in our actuals. And we also adjusted for the fact that baseband has now become very small as [indiscernible] our total revenue. So seasonally, we would expect 2Q to be up about 9% for the company, the combined companies. And the range that we've got has us partially going up higher than that. And what we've done is stage inventory to be ready to shoot a snapback sharper than what that seasonal average is. Beyond that, I don't have any color to give you as to when or how fast the industry will come back to the trend line.
Kevin, I'm not sure if this is a better question for you or Rich, but I appreciate the honesty around the fact that despite growing shares and so sick, it's kind have been underwhelming relative to your internal targets. I guess what I'm trying to get a better sense of is to what extent was that things that were in your control that you just didn't execute as well as you thought you could versus just the inherent dynamic of the analog industry, where share shifts happen really slowly? And as we think about earnings growth being more driven by revenue acceleration versus margin, how do we get confident that you guys can start to hit some of your more aggressive internal targets?
Richard K. Templeton
I think you captured it in somewhat of a good way to even frame that question. You go down into that and I think I've talked to you in the past when we really even wrapped up '11. We're pretty simple people. We break down into the -- 24 major business units, the 80-something product line P&L levels, and now, what number of you guys are outperforming at those levels to both the revenue growth test, but also, the fall-through test on that revenue. And you've got a good set of them that are doing it, you've got a set through the middle of the pack and you got some that are out at the bottom. And you get to work on what are the basic reasons that are down inside of that. So where I get comfortable is that when you look at the businesses inside the Analog business, they're performing well. It's not magic, okay? It's doing the basics well, great roadmaps, great products. And if you see that -- so these things are under our control. And that's a good thing to have in this business, is the ability to improve your revenue by fixing things inside. And it will vary depending on the business. Some, they had a strategy that could have been better. Some, they didn't execute where they needed to. But you'll find different answers as you go down inside of those businesses. I get it into more of, I guess, the strategic frame I will give you is when I think about the 78% of the revenue, where it is, the footprint, the competitive advantages, it's a really compelling model that's working. Now what we need to do is get it working even better. And that's where the energy is going, that's where the focus is going. We have similar things on the sales force side. And in the world, I'd rather be working on internal things like that than, gee, is the fundamental strategy going to work or not work in terms of where we're aiming on that front. So that's my best assessment about what you would find looking across that. As I said, you will get a chance to meet some of these guys and potentially ask them some of those same questions. But I do feel pretty good about where we've got people aimed and where things are lined up right now in terms of the longer term.
Rich, why don't you go ahead and officially join Kevin on the stage, and I will open it up...
Richard K. Templeton
You can't leave. He didn't say leave.
No, no, join. And we'll open it up to questions for either of you. Then I won't have to keep herding these guests.
Earlier on, you emphasized the cost savings of 300-millimeter analog manufacturing. But if we look at your capacity and total capacity availability, there's an awful lot of 200-millimeter fab clean room that will still be equipped and, of course, you'll be bringing up capacity utilization on your 200-millimeter fab. So for the indefinite future, would we expect the ratio of 300-millimeter to 200-millimeter manufacturing to remain about constant or do you actually move up that ratio?
Kevin P. March
Well, I was saying that as we fill up 300 -- the RFAB with the 300-millimeter wafer fab that we have today, about 40% of that floor space has equipment on it. And probably less than 1/4 of that is actually being used to its full capability at this point in time. So that just mathematically says as we release more products onto those pieces of equipment, we're going to see 300-millimeter becoming a larger portion of the revenue-generating parts that we're manufacturing. To your point though on the 200-millimeter, I would point out that the acquisitions of capacity that we've done over the last couple of years, 2 things. The prices that we paid for it were prices that we simply have never seen in our time in the industry. So the -- you got to still take that price and turn it into depreciation. If you take a look at our depreciation over many years now, it really hasn't moved that much. Yet, we increased our capacity substantially. And what I was offering to you is our depreciation will probably start going down now as I look into the future. That means that those older 200-millimeter wafer fabs that we have, their depreciation cost is rolling off. So there's not much cost there. And these new ones we brought in, they basically kind of backfilled that roll off in depreciation, but at a much lower starting point. So that will roll off also. And recall that we depreciate our fab if within 7 to 5 years. So we're already a couple of years into some of that depreciation window.
Richard K. Templeton
David, cheap 200-millimeter wafers are really good, too, is what that translates down to, okay? We want to ramp that stuff, but it really need to do well.
A bit of a long-winded question. So you talked about the increasing mix towards higher margin, Embedded and Analog, over the last 5, 6, 7 years. But you're also saying, hey, our peak gross margins may or may not move up in the next cycle. And so, if we look at your product lines, clearly, the profitability in the Wireless division has been a big drag. When you talk about Wireless basebands almost down to nothing, you guys have said that OMAP remains fairly profitable. So is the only reason that you don't feel confident that margins are going to go higher, the Connectivity profitability falling off so badly? And can you specifically talk about it or just give us what the plans are to get Wireless more profitable? Is it pure revenue growth or are there any cost-cutting measures you can take there?
Richard K. Templeton
Yes, and Chris, let me lean right into it and then get to the Wireless thing. And that is -- and you've heard me be pretty direct with you in the past and talk about this. Chasing after fixed point gross margin income lines, I don't think it's proven to be a very successful long-term strategy for generating cash and returns. I understand the fun of them and debating peak margins, okay? And I'm a little -- and I'll push on that because I’ve watched more companies get in trouble saying, my God, we're going to go set a new gross margin number. And everybody likes it the day they declare it, but then what type of behavior takes place over the longer term as they’re off chasing that around. So what you're hearing is a very -- and this, I think, translates just pretty clearly is, math says we've got the chance to take the fall-through above those prior peak margins, okay? But at the same time, you don't hear us saying, hammering the shoe on the table if it is going to happen or when it's going to happen on that front. And it's not because we don't care, but I don't think that's going to be the primary lever that's going to grow earnings and grow cash flow over the long term. So I think just make sure I hit the why you don't hear new declarations and why you won't hear new declarations on that income-wise statement. Second thing, is bear in mind on Wireless, as baseband was winding down, while it was not a great lift on the gross margin line, as you noted, baseband was pretty profitable on the operating line. So it was a contributor on that front. So as that thing comes off, that's what you see Greg Delagi in that business dealing with right now. So the biggest issue that has to change Wireless profitability is revenue and steadiness of revenue as it grows, okay? And that'll be what makes that P&L work. It's not a, what does the contribution margin look like on the gross margin, it's not a big set of variances between OMAP or Connectivity on that front. This is about really, can you establish long-term growth and long-term consistent growth out of both the OMAP and the Connectivity businesses. So that will be what really drives the ability to improve profitability on that front. Ron is taking your microphone from you, Chris.
Just a follow-up on John's question on the kind of the growth. I've heard, now probably for at least the last 4 or 5 years, that your larger sales force is a competitive advantage. Yet, you've really only grown 1 to 1.5 points, or you've gained about 1.5 points of share in Analog over time that period. And now your goal is to grow roughly one point of share per year. Is there a reason now that your larger sales force is going to help you grow that sales or grow that market share faster than the last 4, 5 years?
Richard K. Templeton
Yes. I think if you take a look during that 2006 to 2011 period, we've been very transparent. We talked about HVAL going through a number of substantial changes, okay? And I think we had some pretty direct dialogue, actually it was the 2007 or 2008 analyst meeting when the work [indiscernible] to put in place. So that is an all in, no asterisks, nothing pulled out that hasn't been performing. But we've been pretty transparent. So you watched HVAL go from not performing through really the '06 through '09 period, to where it was and started to contribute to really the transition to late '09 and 2010. So that was a great example of something that's been underway, getting fixed, getting better inside of that footprint. So to me, that's one of the top ones that stands out. I think if you look at that market share growth, okay, and take a look at that overall progress, not many analog companies are turning in 5 years of consistent improvement along those lines. I mean, that's the proof of where you see the sales force, combined with the product strategy, really working. Do we want to make it work higher? We've been very clear about what the objectives are on that.
I'm wondering if you can help us -- how we should think about acquisitions. The capacity you've covered in great detail, and I appreciate that. But how should we think about acquisitions in business lines, whether in analog or digital, and just how could we frame that?
Richard K. Templeton
Yes, I would frame it, and I don't say this completely jokingly, but after we announced National, someone said, it looks like it's every 10 years you guys do something significant on analog acquisition. And it turns out that is accurate, okay, in terms of the last set of those was really in '99 and 2000. The more accurate statement is what we saw with National was a tremendous analog portfolio, in this case, a catalog analog portfolio that we could make sense of the numbers. So it made sense to do it. So to predict when or how we would do something is all going to come back being on the Analog or the Embedded side because it's got to be something that really represents a high-quality product portfolio, which, in turn, gives us a high-quality opportunity to grow long term. And so it's not a shifting of the focus to we're going to be an acquisition-led growth model. That was a great opportunity to take at that time. Other ones show up, we won't be afraid of doing that. But our focus and our energy is on driving and growing these, back to the 2 questions we just had, executing and growing internally very well.
On the unit shipment chart, you show several periods, we were thinking, way down, one of which is this euro debt crisis. Did the euro debt crisis really cause this? And if so, why?
Richard K. Templeton
Well, I think in some ways, we are not trying to title any corrections taking place in the marketplace. History will end up titling them. But you saw very clearly across the semiconductor industry, starting in July, a supply chain overreaction that they worried about what was happening on a global basis. And whether that was caused by a euro debt crisis and things happening in Europe, whether it was caused by gridlock in Washington, I don't care about the offering of titles. The data and the reaction is what matters to us on that particular front. And I think what's indicative of that is that supply chains do tend to operate on fear. And when all of a sudden, people were afraid in the third quarter of '11, they pulled back. You can go into more complex discussions that there was an earthquake back in March that led to exuberance through the second quarter, which then had amplified downside due to the fears economically. I'm not going to try to parcel that. I just look at when things drop that significant, history has said they tend to turn around and try to do the opposite, so be poised for that. It doesn't mean we can predict it, but it does mean we want to make sure we can handle it if it occurs.
I have a quick question for you on your cycle discussion that you had earlier on, on the trend line on the ASP through the cycle. There's one period in there that I'm kind of confused on. So it was roughly 2006 to 2008 where the ASP -- the industry ASP was declining pretty much over those 2 years. Yet over those 2 years, the units are well above your trend line. And I'm just curious on your perspective of why that might be.
Richard K. Templeton
Yes, I'm careful -- we've got some folks even here that have done a lot of studying on that. My best recollection was you came off of a tough '01, nobody invested in CapEx. By the time you got into -- somebody here may cite better. 2005 ended up as a strong lift, and '06 ended up as a very strong lift. And I'll bet if you go look, capital investment accelerated with that during that timeframe. And so if you're trying to ever correlate what's happening, go look for pretty strong CapEx lift in the 2 years prior to that, and I think you'll find one in '05 in '06 that correlates to why all that capacity shows up, and then you end up with a little lighter period over that longer term.
So a question back to the 300-millimeter facility and the margin strategies. So with your 300-millimeter facility, you have really a choice to make with the 15% to 30% lower cost of production. Seems to me you could either allow gross margin to expand or you can allow prices to fall and keep gross margins the same. Which one is in your best interest? And what are you thinking about proceeding from here with that lower-cost facility?
Richard K. Templeton
I'll go back, and again, I'll put out the offer. You'll get a chance to meet the Gregg Lowes or the Steve Andersons or the guys running the business units. The objective that we have on them, grow your revenue faster than the market, grow your margin, and in that case, operating margin, faster than your revenue. So it's not a case of deploying, go do this with GPM, go do that with GPM, as it is go run a successful business that's growing and falling through at a high level. And so this discussion of are you going to trade off gross margin for revenue is actually not one that our machine is going to process. It's not one that our people are going to process on that front. What we're trying to generate over the longer term is increasing the steady cash flow growth. Because I think that really is the economics that matter the most on that front. So trying to predict exactly what the gross margins will do is not something that we'll try to put out there.
Can you give us some feeling for how much of the Nat Semi synergies that you've been targeting are true cost cuts versus avoided cost? Given your SP&A, now it looks a little higher than it did when you closed the deal even though some synergies should've hit. And I guess on those lines, around that integration, how much growth do you think you need off of where Nat Semi is today in order to meet a few unchanged goals or targets of seeing ROIC accretion within the next 3 to 4 years?
Richard K. Templeton
Daniel [ph], [indiscernible] really quick on the revenue and Kevin will follow-up on the G&A. We talked even a year ago that when you think about the assumptions we have put in for the return on invested capital, we actually did not need to get back to National's historic 2008 market share levels that they were at. So we've got to grow it, but we actually don't even have to get back to that level to make that happen. And as a result, we feel pretty comfortable sitting here today that we're on track, actually be inside or be at that range we've given. But, Kevin, won't you...
Kevin P. March
Yes. On the OpEx and the synergies that we're going to get, we are feeling pretty good about the progress we're making on the synergies and expect they'll probably turn out to be very close to what we have talked about. I think it's -- you need to be careful at which time periods you're looking at. If you're looking at the first quarter versus the fourth quarter and say, gee, your OpEx is going up, well, remember, we always have a seasonal increase with paying benefits and we have the seasonal down in the fourth quarter because of vacation time. But it's probably a better compare for you to take a look at, as we put out on the website, we went back and put the 2 companies combined, and your better reference point is probably 2Q '11. And based upon the guidance that we gave you for 2Q '12, you're seeing that we're probably more like up 1% in total OpEx. So we are, in fact, already beginning to see the benefit of those reductions. We will see more as we work through the year. Along the way to that benefit, we do have to spend some money in the form of reprogramming our computer systems, for example, to be able to incorporate National into our computer systems. But that will roll off as we get out there. So we were very careful to point out that we expected about $100 million of annualized savings beginning in the fourth quarter or the year after the close, and that most of that will come on the OpEx line. Some of it will come in the other lines as well, but most of it on the OpEx line and most of it in SG&A. And again, if you just take a look at the guidance we gave you for 2Q OpEx, compare that to 2Q '11 of the slide on the website, that's a good compare for you. And keep in mind that average paying benefits might go up 3%, 4%, 5% per year. We're probably about a 1% delta, so we're already beginning to see the benefit of some of the synergy coming through.
But it sounds like you still expect SG&A over, let's say, by the end of the year to be lower than it is today?
Kevin P. March
I do, yes.
It's one question, but a 2-parter. So Kevin, for you. When we look at capacity utilization, is the baseline with the new equipped capacity, that gets us to the $20 billion or is it with the open clean room, the 25, which is the right baseline to look at? And then for Rich, the question back on market share. In the last few years, sometimes a market share that you take was sometimes coming from National. So as you look out the next 4 or 5 years, which competitors do you think are vulnerable. Where can your sales force actually help you take market share?
Kevin P. March
From a baseline, you should start from that $18 billion, which is our installed line balanced baseline. That is we've got about $21 billion of installed clean room capacity, but only about $18 billion of installed assembly test capacity. So except if we don't have to spend much more on the rev CapEx to reach $18 billion of rev other than maintenance and a little bit more line balancing to get to the 21. Equally, to the clean room, we'll have to add some assembly test capacity to get there. So $18 billion is the baseline you should start from.
Richard K. Templeton
So on the market share, well, we talked even as we announced the acquisition back in April that we did study exactly that question of, gee, if you gained all that share from National, what's the benefit altogether? But the fact is if you look at their share gains over that time, National was some of it but nowhere near the majority. And so that was something we really looked at pretty closely. So where do we think we'll see it? I think we'll actually see it over a pretty broad set of companies. And I go back to the fragmentation that I showed on that. And look across that whole lineup of STM and a lot of different companies globally, not a ball which you're going to go forward direction right now. And so, that's why I think you'll see us being able to gain shares. It's really across markets and across regions. And I'll bet it's across multiple different sets of competitors just because of the breadth of the target markets front.
Any particular submarket? Power, amplifiers?
Richard K. Templeton
Well, back to, I think, Jeff's question if it's correct, okay. It'll hopefully be out of most 4 major submarkets in terms of what we got folks working on if we want to be able to be successful in power, signal chain or High Performance Analog, as well as the mixed signal HVAL business.
Rich, if I could go back in history a little bit, there was a time that -- I think it was when Andrew was the CEO actually. You were concerned with the DSP company, DSP Solutions, right? Let's take a kind of a leap forward and say, okay, your catalog business, it's great. You have great strategy there. You can be Embedded Processing, maybe Connectivity and Analog, that's great. However, the noncatalog business is 50% bigger. There are lots of large digital companies that sell expensive digital chips in all these different markets. Lots of acquisitions, mergers going on. It may be a little bit of a stress, but what if one of these guys decide to do something in analog? Are you going to have to seed that market? You're not doing baseband anymore, you don't seem to want to be in this high-volume digital constrained markets. What happens there?
Richard K. Templeton
I guess I don't -- I may not have that one fully processed, but I think if I get to the heart of that question, the ability to go become a large analog company that sells to a broad customer base is a fundamentally different capability than I'm going to guess any of the digital SoC companies you have in your mind, which tend to be very focused vertically, tend to have system knowledge, narrow footprints in terms of what equipments they target, and they don't have process technologies, test technologies, sales forces, product positions. That's a big, big step for a company that's in the digital SoC business to take. So on the scenarios that could occur from a competitive point of view, I don't think that's going to be one that's on there. But people speculate, do other companies try to grow bigger in analog? I think those are all valid questions that could be asked. But the digital SoC folks that are fab-less and narrow, I don't think you'll see that transition occur.
Shawn again here. Just a question on the other segment. That -- it's about 20% of your revenues, but it's also a very meaningful profit contributor to the firm. Can you share with us your thoughts, looking forward from here, on some of the key segments there, digital-like processors or the -- what does the growth outlook look like there and maybe some of the ASIC businesses or just the general thoughts on other?
Richard K. Templeton
Shawn, the simplest one I'd give, if you're trying to model or think about it, is I would go with the other segment net-net not having any growth or being very low growth. And I say that to just try to keep that assumption on the conservative side. Now what will take place most likely inside of that segment is DLP will grow. You may have some long-term slowdown on the ASIC front, and those 2 will probably be about a wash is my guess. Calculated rule reasonably stable, royalty is the other major pieces inside of that. So if you're just trying to have a rule of thumb of how to think about that, that's probably the safe way to plan it out. And if it does better, then we'll all really like it.
On the National sales synergies that you're expecting, is there any quantification you can give us now in terms of whether it's design wins or what have you, where you can quantify the progress you're making that's in the pipeline that will come out as these designs ramp?
Richard K. Templeton
The simple answer is no, and that this desire of I want to -- give me the best leading metric, best leading metric I know is revenue showing up as a result. And so if you take a look, you saw the first quarter result, National, the SVA business did grow. It did lead our Analog businesses, but I think Ron very quickly qualified and also had a pretty easy compare to the fourth quarter. And so everything that we see looking out, design win-wise, revenue plans, ramps, new products that are ramping up, the customers, looks very encouraging. I've been in the business long enough, so let's get that turned into result, and let's get that turned into something that Ron can report to you guys on a quarterly call.
At the risk of beating a bit of a dead horse here, if you look at the unit growth forecast that you've given, the 8% trend line, let's say we don't get back to the 8% trend line. And that trend line is actually rolling over, which you could draw that chart out on that graph that you've given. You might not see $3 billion in revenue growth this up cycle. At what point do you start to continue to pare back your fab footprint? And can you give us some progress update on the actions you've already announced? I believe there are 2 of your internal fabs that are for sale. How is that progress going? And give us just your thoughts on working through sort of the bear case scenario?
Richard K. Templeton
Doug, let me put it -- and it blends a little bit of some answers Kevin had framed before. And this being very direct about where I'd rather be. You can go find some analog companies that are running in the upper 80s of utilization right now. And I don't think that's a very good place to be as a company, okay? I think it's dangerous. And so I would far rather be sitting where we are in the low utilization, but the fixed cost of that is already in the P&L, the variable cost is going to be minimal as we ramp it up, and we can now handle a bear case, we can also handle the bull case. And the cost of being able to do that is really pretty modest. So that ability to generate growth and revenue fall-through, I think is a far superior strategic position to be in than sitting here saying, gosh, we've got utilization cranked up to 90%. It reaps really put-throughs down, and sitting at the bottom of all those other spikes, everybody had that same feeling, okay? And that is, again, that is not a prediction of what this thing tries to do off the bottom. I'm not trying to say the world looks great, but I know we can handle whatever the world wants to do. The 2 facilities that you referred to that we're closing down are actually 6-inch wafer fabs. And that was not about capacity utilization or trying to change capacity utilization. It goes back to one of the answers Kevin gave to the 300-millimeter. That's about having more competitive cost per wafer across the TI footprint. And so those 8-inch wafer fabs that we were talking about in that are just going to be superior on a cost per wafer compared to those 6-inch facilities. And schedule-wise, Kevin, we talked where?
Kevin P. March
We'll probably have the Houston fab wound down by the end of this year, and the Hiji, Japan plant -- fab wound down by the middle of next year.
Rich, just a question about your 300-mm fab. Many of your competitors, not many, a few have chosen to go to foundries instead of building their own 300-mm capacity in-house. So do you believe that the rationale of building a 300-mm capacity in-house is still valid? And what are the competitive advantages you think you have over the foundry players?
Richard K. Templeton
Yes. I think it's a huge advantage. And my best representation is find somebody, yourself or others, and go study 20 years of competitive advantage that people like on Analog Devices or a Maxim or an LTC have gotten with their own analog process technology, and how that lets their circuits be less noise, faster, lower power, whichever knob you want to turn is the direct result of having control over that process technology. So we are sitting here today because we're the one that can do it, able to do that internally. And increasingly, people that have to look outside wafer fabs are going to find fewer degrees of freedom to be an analog specialist. And that's been an important component of the strategy in the past. So it's, I think, going to be a very, very long-term, and building competitive advantage that TI has in the Analog business, one that I look forward to really having on our side.
Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division
This is my Rich question. Coming back to cross-selling, I think history tells us that cross-selling has actually not really been that great, especially in the analog side of things. Has anything changed in the industry that would be insignificant for your strategy there? Or has TI even done something internally to change how customers think about that?
Richard K. Templeton
Yes, Tore, I don't know how to question because I don't know your frame of the -- it hasn't worked in the past. And in some ways, I don't think it's been really tried in terms of find me the example where the breadth and depth that we put together has been done. And I can't think in my 30 years of the business where that would be. The words may have been used, but it didn't -- it wasn't at the product with sales and all the pieces in place on that. So first off, I would challenge the overall thesis. Second thing is we have discovered, even via the National thing, some really fascinating advantages. So some of you, we probably had -- I wasn't at that October session, some of the winning combos or killer combos. I think the lawyers changed it to winning combos or something, where when we were getting ready to go out with the National announcement, we were taking their best-of-breed, combining them with some of our best stuff and really going out, alighting winning combo, electric motor control, I forget. I think we're up to 50 or 60 different winning combos. And it's really kind of boring, and I think the Street would say, gosh, you idiots never figured this out in the past. But the response that we've gotten back from the promoting of the "winning combos" where response is measured, and this is where you got to be careful, back to leading metric, is customer inquiry, request for samples, things that are nice to see but not revenue yet. The response is higher than anything we've ever had on a single new product. And so this idea of relaunching and relaunching together successful products has really surprised us, what we've seen out of the combination on that front. So I think some of that's National's got really good stuff, but some of it is we're starting to market and promote different. Other things that you see us doing right now that are fundamentally different is National had a -- if you were a power designer, okay, you would have known about a product that National had called WEBENCH. And it's the ability to actually go on the web, put in your power supply variables, and it tells you what parts, guides you through what uses [indiscernible]. We've been busy loading TI products into WEBENCH. And you can imagine the simple reason why. Very good tool, designers love it, now let's get more products moving through that. So there's just 2 examples that to some people are like, man, that sounds boring. But that's how you get to 90,000 customers. And that's how you get to 90,000 customers in a very productive and very leveraged way.
I know you've given us a little bit of color in the most recent quarter on the SVA revenue performance. Can you just maybe take us through the SVA revenue performance over the last 3 quarters, essentially since you guys took over? And also, what the -- if you can give us any color on margin trends and what those have been versus your expectations, and then what we could expect on the revenue and margin trends of SVA for the rest of this year?
Richard K. Templeton
My -- and Kevin, correct me, we watched National weak third, okay, weak third quarter. So that was before restated on a calendar basis, and that was before closing with TI. We had a comparison in fourth quarter, where it was basically...
Kevin P. March
It was down a little bit when you adjust for the fact that we canceled a distribution, some part of that.
Richard K. Templeton
But it was in the same range as the other Analog businesses.
Kevin P. March
In the same range, yes.
Richard K. Templeton
So then a reasonable up. It led in Q1, but it was because of the supply change for the distributor in Q4. So that's the rough near-term piece in terms of where that had coursed. What I would tell you is when we look at that thing out over time, and it's back to, I think it was Stacy who asked the question before, it really is about, do we have confidence to get it back on that curve that we had looked at? We looked at a range of high, medium and low, as you could imagine. And that actually does look pretty encouraging. We're not going to break out and forecast what that line looks like because we have enough of them to keep track of. But sitting here today, when we just look at the leading indicators, they look pretty encouraging on that front. But let's get those into results, and that's the right way to talk about progress on that front. Margins performing, they really -- in some ways, the bad commercial behavior, we are the beneficiary of it. Margins have held well, the products are great, we really enjoyed it. Utilization will move up on that, so I think we'll see good constructive things on the margin side.
Okay. And with that, I think we're going to wind this part of the meeting down. Hopefully, all of you will be able to join us for a reception that will run till about 6:00. NASDAQ has a great room out there, overlooking Times Square, clearly through those curtains by the fabric center back there. So thank you, all, for joining us.