Texas Instruments Incorporated (TXN) Management Presents at Bank of America Merrill Lynch Investor Conference (Transcript)

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About: Texas Instruments Incorporated (TXN)
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Earning Call Audio

Texas Instruments Incorporated (NASDAQ:TXN) Bank of America Merrill Lynch Investor Conference June 4, 2019 3:45 PM ET

Company Participants

Dave Pahl - VP, IR

Conference Call Participants

Vivek Arya - Bank of America Merrill Lynch

Vivek Arya

Welcome back. Hope everyone had a nice lunch. I’m Vivek Arya. I cover Semiconductors and Semicon Equipment at Bank of America Merrill Lynch. Glad you could join us, and delighted to have Dave Pahl, Vice President of Investor Relations for Texas Instruments join us. What we’d do is maybe start with some high-level questions about the industry. Then go into some TI specific questions, but please feel free to raise your hands if you have a burning question in between, but welcome Dave. Very happy to have you here.

Dave Pahl

Thanks for having us.

Question-and-Answer Session

Q - Vivek Arya

So maybe Dave as a start, give us your sense of kind of the state of the union, where we are now versus what you thought at the start of the year?

Dave Pahl

Well, maybe I’ll start even higher level that those who are not familiar TI, that, I think we’re a company in semiconductor industry focused on the best products and we think that's analog and embedded and then the best markets inside of that which is industrial and automotive.

Those are the areas that we've been allocating our capital too. There’s lots of natural competitive moats around the Analog and Embedded markets and we think they’re great markets. I think to the question more of the near term, I think as we ran up to the end of the year and up to third quarter we had what was a ten quarters of year-on-year growth. Most of that was double-digit as you know. And all of us in the industry we don’t if that’s going to be ten quarters or 12 quarters or 16 quarters, if you see that growth, but you know at some point it's going to weaken and rollover.

We saw signs of that start in the third quarter. That continued in to fourth -- in the first and obviously our second quarter guidance suggest that will continue. So, we stay out of the game of calling the bottom or predicting how long the cycle will last. And we pay attention to it and operate inside of that. But our thesis on the products and the markets we’re investing in kind of on a three and five-year horizon remain unchanged and we’re keeping our nose down and grinding away.

Vivek Arya

I see. Got it. And you know what's been common to most downturns and it sounds kind of obvious is inventory cycles, right? That the secular aspect of the industry has been there for many years, but what kind of has been driving these cycles that’s really inventory. Do you think that this time around there is anything different about the cycle where inventory more elevated versus what you had seen in prior guidance, whether its on your own balance sheet. Whether it’s at the customer? Like is there anything that you think is different about this that can help us get some clues as to when we might be able to come out of it?

Dave Pahl

Yes. I think and we've talked about this before if you look over the last 30 years. We’ve had nine up cycles and we’re working our way through the ninth down cycle, and some of those are pretty short so you want to dismiss them. And some are unusual for other ways and you want to dismiss those. So now you’re down to handful of cycles to judge which you and I have had enough math both.

Vivek Arya

Right.

Dave Pahl

We know there's not much you can draw statistically from single digit data points, right? So, I'm just careful in trying to predict to any of that. But I think that cycles are driven by human behavior and that's not changed for centuries. So, that’s when operating teams get on Monday morning, they get a note from some other suppliers that lead times are going out. They put in a couple weeks of inventory to protect themselves and that might extend for a couple of quarters and at some point their CFOs going to have to come to the BofA conference and face investors and he’s like, hey, who let this, please get that many weeks of inventory and it goes back down the other direction. And I think that's just the basics of what drives the inventory cycles.

Vivek Arya

Got it. So, if you were to kind of contrast your visibility about. There’s a lot of enthusiasm about the second half. I know, TI doesn't give longer term outlook, but there’s a lot of expectation, enthusiasm, I guess hope that there’s going to be a second half rebound. If you sort of look at your visibility around the second half contrast with prior years, is there anything different or similar?

Dave Pahl

Well, there are some things that are different and if I go back and look at it we got four competitive advantages at the company and you’ve heard us talk about them before of manufacturing and technology, the reach of our market channels, our broad product portfolio and long-lived and diverse positions. And you look at the one of the reach of our market channels, so at any time we’ve got a dozen initiatives that’s going to strengthen those four competitive advantages. And the outcome of one of them that strengthening that reach of channel was the belief that we wanted to have a closer more direct relationship with our customers because we think those that control that interface over time are the ones that'll win economically.

And how that came out of that was our consignment program. So you’ve heard us talk about those things before. And we believe there's strategic value in owning and controlling that inventory that's out in the channel and sitting on our books. So in those arrangements we don't get any advanced order. We don’t carry a backlog. But our customers invest in tying their planning systems into ours. So we can see usually on a daily basis out six months of what they’re planning to build. There's no inventory there. So we get as best visibility as you can get on what they're planning to build. Now our visibility ends at that manufacturing line. We don't see their WIP. We don't see their finished goods. We don’t see down into their channels and always caution don’t confuse visibility with stability because that can change pretty quickly. But yes, so we -- that’s two-thirds of our revenue today. It’s really different than what it was a decade ago.

Vivek Arya

So, as you know you look at in that crystal ball, do you think hopes and enthusiasm about a second half rebound are justified?

Dave Pahl

We’ve tried as hard as we can not to weigh into that debate. We have plenty of peers that provide that entertainment and we’ll just listen to it.

Vivek Arya

So other than being on Twitter 24 hours a day, what else can TI do to plan your business properly? What are you doing differently given this level of uncertainty?

Dave Pahl

Well, I think a couple of things. One, I made the comment with cycles, those are surprises. You just don't know when they’re going to show up. You don't know how long the last you operated them. I mentioned before that our investments haven't changed and our view on the opportunity in automotive and industrial remains unchanged. So the investments there remain unchanged. I think we've got some things going on in China that you have to pay attention to. And in fact, Rich, our CEO had a planned trip to China just two weeks ago.

So, I can't remember when the announcement came out for the stop ship on Huawei. It’s Thursday or Friday, he showed up there the following Monday and just perfect timing, because you can imagine the teams there anxious with all the changes going on and Rich advice to the team was very simple and direct. He’s like you know is your job going to be harder with trade tensions. It's going to be. But when you have a rising power, challenging an established power whether you have a resolution in the short term, are you still to have trade tensions for decades to come, you likely are, so just accept it. And there’s going to be two kind of companies that come out of this, those that figure out how to do well and prosper in that kind of environment and those that can't figure out and we’re going to work really hard to make sure we figure it out. So, I think that that's just the attitude of getting beyond the emotion, the denial, the fear, all of the stuff that comes with that and just get on with things and figure out a way through it.

Vivek Arya

I want to get into China, but just before that from just a clarification perspective, how important is Huawei as a customer for TI?

Dave Pahl

So, last year there were 3%, 4% of our revenue overall, you can imagine with comms equipment space growing as aggressively as it has and the other markets getting weaker, it was a higher percentage than that. So not insignificant, but certainly doesn’t change economics of the company. And I think that's where you come down to that fourth competitive advantage of diversity and longevity. We’re not dependent on any given customer or technology or product at one of our customers for a revenue.

Vivek Arya

And the exposure that is all on the infrastructure side or is it on the phone side?

Dave Pahl

It's a mix of both and they make actually a few other things that we’re in, but those two are the largest and obviously be skewed to the communications equipment side.

Vivek Arya

Okay. So, in China I wanted to discuss and there are aspects to it, right? One is China as part of your cost-base, right, and in terms of whether there is any impact of tariffs. Then there is China as a customer, right. Overall as you’ve heard is just you know if you ever see competition, are there substitutes for what you do from a China perspective. So on the cost side what is the impact of all the tariffs? So do you think that you have managed to kind of offset a lot of those impacts of it?

Dave Pahl

Yes. So the direct impact is real easy to measure and it's a number very close to zero. The way that the law was written in our industry, country of origin is defined pretty much by assembly test. And so it's got to be assembled and tested and we do have assembly test operations in China and then its got to be shipped into the U.S. So, we have a half a dozen assembly test sites, most in Asia, one in Mexico that we can move things around. And the day it was announced that was well less than 1% and we mitigated even that very small percentage. The secondary impacts to customers and things like that just is very difficult to measure, but in general do we think tariffs are bad thing and do they ultimately destroy demand, economic theory says it does. So that’s not something that we’re big fans of obviously.

Vivek Arya

I see. From an assembly and test perspective, hypothetically can you completely move out of China?

Dave Pahl

Well, I think we could, given enough time and energy…

Vivek Arya

Like requalification and those things, will they stand in the way?

Dave Pahl

We could, but I don’t think we’d want to, right. China continues to be an important market. There is more opportunity than threat or problems there. So, as I said earlier we’re going to figure out how to be successful there.

Vivek Arya

Got it. And now from a customer perspective, when we just look at the K from last year, it had China as a 44% customer. I know that's the ship to kind of destination. Give us a sense for what is actually demand from indigenous China and how much is actually just shipped there, but then is exported overseas?

Dave Pahl

Yes. So, and you’ve got stuff going in both directions, right. So as you said 44% is what we ship into China that's just the address, but like a large cell phone manufacturer or 100% of what we shipped to them goes to China and obviously that goes to places around the world. And we could ship something into European Tier 1 automaker that gets shipped into a BMW and put on a ship and sold into Beijing, right. So, you got stuff going in both directions. And given our breadth, number, we’ve got 100,000 customers. Our belief is end consumption is probably reflective of what GDP is a percentage of revenue, so, high teens pushing 20% or so of revenue probably ends up staying there.

Vivek Arya

Got it. You’re not over indexed in anyway, right, versus whatever the GDP contribution?

Dave Pahl

Correct.

Vivek Arya

And last one, I think the assumption is that when we look at China's the internal motivations to kind of be more self-sufficient in semiconductors.

Dave Pahl

Yes.

Vivek Arya

Usually people talk about memory or foundry or more digital and logic. We don't hear about China investment for example in analog. Is that the reality also, and that do you see China being less of a competitor, like, is it harder for them? What is so hard about analog [Indiscernible]?

Dave Pahl

Well, I think when nations or regions are looking at and you just look at history of how Europe entered the semiconductor market and then Japan entered and then Korea entered the pattern was the same, right. They all picked memory. And why do you pick that? I think number one it's a big part of the overall market. There's only a few part numbers that run at any one time. There's 10 customers that make up a large portion of that demand. You figure out how much market share you want to have and how many wafer fabs there is and you put that in place and go knock on the door of those 10 customers and you've got an entry into the business. So, when you look at our business we're the largest player in analog and last year we were about $10 billion, right. So and if you found the largest customer and the largest device at it you're looking at millions of dollars, right. So trying to figure all that stuff out is just a harder thing and not typically where governments go to dump their money.

Vivek Arya

If they had the money and the inclination what is so hard about analog? Why does analog command such good margins?

Dave Pahl

Well, I think there's lot of reasons and those reasons range from -- the products are unique. Many of them can be substituted. But once they're chosen, they're proprietary. And the average selling cost is $0.35. So the switching cost is much higher than any savings that you'd get near term. Those are built on proprietary process technologies at companies by very highly specialized and hard to find design engineers and unique design development tool flows that are tied to those process technologies.

Again, the diversity is a challenge. The support networks, everything you need to be able to get to market is a challenge. It's not showing up at 10 companies and asking how many units they want, right? So, I could go on longer, but those are the types of things that just make it difficult to enter and/or to actually gain share even with incumbents.

Vivek Arya

Got it. Is it a similar situation in microcontrollers, because that seems to be a lot more competitive market; there are suppliers in Asia as well you know in Europe as well.

Dave Pahl

Sure.

Vivek Arya

Microcontroller seems to be a lot more competitive market?

Dave Pahl

Just like an analog you can find pockets of it that are more competitive, those higher volume runners. And if you're entering into microcontrollers and you're chasing high volume opportunities and you're using an ARM processor and building at TSMC and using a OSAT to do your assembly test and there's no differentiation in the peripherals that you've got, you're using third-party design tool chains. That's a pretty ugly place to live, right. There's probably 20 companies that do things like that. But if you just like an analog have, the way you make money and embed it as you have as few of architectures, instruction set architectures as you can, you get as many customers and as much revenue on it, you offer differentiated products. So, the core or the instruction set really becomes like the engine in a car. Does it need to have one? Yes. Is that the reason why one buys a car? No. But it's everything else that sits around it that becomes the differentiation. And you find those things and find their way into all kinds of different devices.

Again, a microcontroller, the average selling price might be somewhere between $0.50 and $0.75. And you got the added software infrastructure that's over it that makes it harder to switch. Can they switch? Sure. But are they going to switch for $0.10 or a nickel. It's just too much work to do. So, you got to be very selective.

Vivek Arya

Got it. So, automotive and industrial are little more than half of your business right now?

Dave Pahl

Yes.

Vivek Arya

Why pick just these areas? So, if for example you know long term semiconductor as a GDP plus growth industry, what gives you the confidence that being an automotive and industrial will help you outgrow the industry?

Dave Pahl

It's a simple thesis that three, five, 10, even 20 years that there will be more content and those end markets than what there is today. I think you look at other markets like personal electronics and if you had tablets and PCs and handsets and everything else that we make as an industry about 2.5 billion of those things produced last year, 7.5 billion people on the planet. There’s a three-year replacement cycle stretch into four. That number just isn't going to double in five and 10 years. Same thing in comms equipment, and the enterprise markets only a couple of percent, so it's not meaningful force overall.

Vivek Arya

Got it. And what's also being very unique to TI has been the share gains that you have had just consistently in these industrial and automotive markets. You know 30, 40 basis points doesn't sound like a lot, but when you start compounding it, right, it does start…

Dave Pahl

Decade, it makes a big difference.

Vivek Arya

It shows up.

Dave Pahl

Yes.

Vivek Arya

So what has helped TI get this market share on a consistent basis? Does it have to do with your 300 millimeter strategy or what are the key underlying drivers that has help you stay on this consistent share gain?

Dave Pahl

Yes. I think what I would point to the four competitive advantages as the reason why that we've been able to do it. Manufacturing and technology is one. We talk about 300 millimeter, the most obvious example of that advantage, but there's other advantages and technologies and making the products differentiated. But the other two that are obvious is the product – the breadth of the product portfolio. We just attract more customers. And when we engage with more customers we got more products to be able to sell. And then the reach of our channels, tidot.com just gets more traffic because of the breadth of the portfolio. And those two things work together.

And then the fourth one is somewhat less understood because the diversity means we're not dependent on any model year of launch of a phone or any of one of our customer’s products. Now we'll benefit from that, but we're not dependent on it or think of the 5G cycle. We're still shipping 3G product, right. So, we'll benefit when 5G shows up but we're not counting on it or write it down on a on a date of hey, we have to have that happen to be able to gain share. So we can gain, continue to gain share even as these different cycles elongate or contract, we can we can benefit. So, really is the combination of those four things.

Vivek Arya

Got it. Now, one thing I'm curious about is, so you sell power management products, Maxim, Linear Tech, right, you have you have other competitors. How does a customer choose which of the power management product? Like do they buy more from TI because you might have 20 SKUs? You have just a broader range. Is it easier to order from ti.com? Like what turns a customer towards the TI product versus, because from the outside it looks like there are many companies that do power management. How does a customer go and make that decision?

Dave Pahl

Yes. I think in analog and we're both engineers so engineers are pragmatic and if it's easier to choose something they'll choose it. But in any analog product there could be 100 or 200 different specs that define that, and there may be a handful half a dozen maybe a dozen that really matter. And there are some applications where we'll have the right product that just fits very naturally and we'll have a slight advantage. There may be others and you listed a couple of our peers good companies, they've got great products too and there will be some where they've got the advantage on those few specs.

Now, an engineer can -- if they're approaching the problem differently or designing something else those may be minimized and they could open up the window of what they could choose from. But again these are [$0.35] on average decisions, right. So there's not a committee of people sitting around making the decision that really is that engineer. So once you have an engagement with them typically through the web, we want to make that as easy as possible for that engineer to design in the product that they're looking for but also get other products in front of them that are going to naturally work with that. So now I'm sure our peers are trying to do the same thing. So that's not unique. But doing that, doing it well, doing it consistently having the right products, suggesting the right product at the right time is all part of what makes that engine go.

Vivek Arya

Got it. TI made the decision a few years ago to not use distribution right for demand creation. I think you still use them for demand fulfillment?

Dave Pahl

Sure.

Vivek Arya

In retrospect has that been a good strategy or do you think it has kind of reduce some of the leverage that you might have had otherwise in terms of getting your products to a bigger customer base?

Dave Pahl

Yes. There are few things in life that are so clear that this was a no-brainer. So, we've talked about how we've invested in demand creation and with that engagement of customers we could see the distributors just didn’t play a role in that. So, we stopped paying for a service that we weren't getting. I know there's -- we've got many of our peers that are maybe doubling, even doubling down on their investments there and that may work for them and may be appropriate. But we're probably like you said probably six, seven years into that journey and we have continued to execute and probably have better visibility and better granularity of what we need to do to engage with customers today than what we had back then.

Vivek Arya

Do you think you have more traction with ti.com than your competitors do with their portals?

Dave Pahl

Well, we've been investing in it for quite some time and I think we could give our website to any of our competitors and put their products on it and the processes that we use. And because of the breadth of our product portfolio they're not going to get the traffic across it. They're not going to get the ability and the amount of repetitions if you will, from the analytics engine getting smarter because of that that traffic. So, is it an advantage? Yes. But it's probably not the durable advantage that's out there really is the traffic and the breadth of the portfolio kind of working together that makes the difference.

Vivek Arya

Got it. One other thing that has made TI somewhat unique in the industry has been the early adoption of 300 millimeter. Where does that show up in terms of a relative differentiation? Like, we should it show up in faster sales growth rate, right? Or has it shown up in better gross margins? Or like where has it actually practically shown up in your P&L?

Dave Pahl

Yes. You can see it clearly is I think we qualified 300 millimeter back in 2009 the first products and we got our first revenue in 2010 up through this last year we produced 4.8 billion I believe of revenue, last year on 300, on 300 millimeter. And even if the beauty of going from 200 millimeter, I think kind of 8 inches to 300 or 12 inches the surface area of that wafer is 2.5 times bigger. And so if you're building the same product on that bigger sized wafer you get 2.25 times the number of products. But it doesn't take 2.25 times the number of people or electricity or gas and it just translates into a structurally lower cost.

So you've seen that show up in lower cost, higher gross margins whichever way you want to look at it. And I believe also there is a advantage of controlling those assets and owning them because as we've got 65, 70 product teams, as they have different requirements to make their products differentiated over time we've got more control of those assets. And for going to a foundry partner, trying to convince them to make changes to a standard based process technology. And that's not an advantage and so we’re going to show up on one quarter or probably even one year. But kind of like market share gains, you put that together over five and 10 and 20 years it's going to make a difference on the product portfolio.

Vivek Arya

All right. What percentage of your analog and embedded products are on 300 millimeter today and where do you see them going over the next few years? And I know you're planning to make further investments in 300 millimeter.

Dave Pahl

Yes. So analog roughly 45% of our revenue last year was on 300 millimeter. As you know we've got two wafer fabs that are in the footprint today, and we're in the planning process of the third and we just recently announced at Richardson, Texas would be the site of where we'll build that factory. We’ll probably break ground in the next couple of years. We've got some time to make that decision, but as Rich always says he wants to be two years early and not two months late with that capacity just because it's an asymmetric investment and it's just something that we want to do. So, think of every incremental dollar of analog that's coming in will be built on 300 millimeter. And that's pretty much what we've done over the last decade, embedded probably anything that's at 65 nanometer and below we're actually outsourcing today and we'll continue to outsource that. The most expensive part of our industry's manufacturing footprint is that advanced CMOS, and there's a portion of the product portfolio that will continue to build in-house.

Vivek Arya

So, what proportion of embedded is on 300?

Dave Pahl

Well, I would say most of it's on 300. Its embedded being more of a digitally based technology, the industry went 20, 25 years ago to 300, so that transition is mostly complete.

Vivek Arya

Got it. Make sense. There's access to 300 also give you a competitive advantage. Like when you go and talk with customers, are they more able to trust TI, because you have a lot of your own internal capacity and ways to scale that?

Dave Pahl

I think maybe on the margin as we talked about earlier and you can kind of think of our interaction with customers in two large fee reserves, demand creation and that's where engineers are choosing products and selecting, and then order fulfillment kind of once it goes to manufacturing and it's passed off over here. The order of fulfillment teams, the operations teams that our customers love the fact that we've got plenty of capacity, we've got 11 wafer fabs and our footprint give us any volume of -- we love those kind of problems to go off and solve. But at the same time we're servicing lots of small customers with lots of SKUs.

So you'll see us do programs like building inventory of small volume parts to ensure our lead times and availability remain high even for those types of customers that are in that footprint. So, I think all of those things kind of flow from strengthening those competitive advantages and ensuring that we're taking care of our customers.

Vivek Arya

Got it. Let me see if there are any questions from the audience. Okay. If not let me continue. On gross margins, you know your gross margins have you know are in the kind of low to mid 60s, the fall-through has been 75%. It's actually been higher over the last few years. So you have a good thing to have. So as you increase the amount of loading on 300 millimeter, should we anticipate higher gross margin fall-through?

Dave Pahl

Simple answer is yes. As every dollar comes in it'll just be structurally lower cost. And we've said, we've got in our capital management presentation that we did back in February. We've got an example of a part that sells for dollars at sixty point of gross profit on 200 millimeter you move that over to 300 millimeter and its 800 basis points higher in gross profit. So, we've said just on a blended basis at the company level that a dollar of revenue kind of fall through at 70 to 75 points. And it's not meant to be precisely mathematic but in any quarter it can vary as it often has. And -- but that's a reasonable way to think about that.

Vivek Arya

Got it. Is it fair to think Dave that a lot of the – I shouldn't call them easy pickings, but if I look historically over the last decade you've got automobile, there was a lot of benefit you had because depreciation was higher than CapEx. So, lot of those benefit seem to be in the rearview mirror, right. You're obviously on automobile. Depreciation is now actually equal or actually more than CapEx. So is there some stalling out of gross margins that you see at these levels?

Dave Pahl

Yes. I don't. I don't think so. I think if you -- if we translate into how we think about things, we're trying to optimize free cash flow per share growth over a long period of time. So, if you look at five, 10, 15 years of free cash flow growth it's been 11%, 12% kind of in that low double digit range over those periods of time. And that's for the most of that has been without any revenue growth on top of it. So, if you look going forward and talk about a semiconductor world, if GDP is 3%, semiconductors and you probably have an estimate 4%, 5%, some maybe at 6% but somewhere in that range, right. So if you have that as a starting base we think analog and embedded will grow about the rate of that of the industry overall. Good arguments for faster or slower, but they're big enough that they'll probably grow at the rate of the market.

And then every dollar that comes in falls through at 70 to 75 points, that's going to give you some lift on that free cash flow per share margin and maybe add another point or two. And then if Mr. Market behaves himself and we can continue to buy back shares. Can we reduce share count and grow that at another point or two faster. So, comfortably without twisting that spreadsheet you're probably somewhere in the upper single digits. And if all those things line up you're going to have a shot at something like we've done in the last five and 15 years, right. So that's kind of how we think about that growth overall and the opportunity in front of us.

Vivek Arya

I see. In terms of M&A it's been a few years since TI engaged, right, in any major acquisition. It's interesting that this year despite all the worries about broader cycle in China and environment I think they’ve had seven or eight semiconductor deals announced so far.

Dave Pahl

Crazy times.

Vivek Arya

So, right, crazy times, exactly. So when will TI become crazy the next time?

Dave Pahl

Yes. So we remain disciplined is probably the best way I’d say. And we've talked and it really remains unchanged for sometimes even before we bought National. And so strategically we'd look for an analog company, high quality products, diverse revenues. And I think an easy way to summarize it is would an acquisitions strengthen your competitive advantages or leverage them, and ideally like it to do both. And then kind of the second category is, does it make financial sense as an owner to allocate capital to that. And we'll look at a lot of different financial metrics of kind of the classic is your return on invested capital higher than your lack in a reasonable timeframe.

Some of my favorite are just looking at will our free cash flow per share will be growing faster five and 10 years from now with the acquisition than without it. And so those are kind of some of the hurdles that we've got and that's finding the targets not the difficult part in the equation that really is making sure that it makes financial sense as an owner to allocate the capital that way.

Vivek Arya

I see. So is it that there are not enough targets or is it that they are either too expensive or doesn't -- don't need the financing?

Dave Pahl

There’s plenty of targets out there, right. I don't think that's the issue. I think it's more of does it make financial sense to do.

Vivek Arya

Got it. And one thing we have seen is a lot of excitement in the whole 5G opportunity. I think TI -- you know you're definitely participating but you're not sounding as enthusiastic or jumping up and down about the 5G opportunity.

Dave Pahl

Have you seen us jump up and down about any opportunity, but 5G would be included.

Vivek Arya

But to the extent that there is going to be an upgrade cycle over the next handful of years, how is TI positioned? Which part of 5G do you have competitive differentiation? And do you think it's a real opportunity for you?

Dave Pahl

Yes. So it's clearly a real opportunity. Comms equipment is 11% of our revenue overall last year, and our basic thesis on comms equipment is that if you look at the world, the number of subscribers is saturated. The revenue per user hasn't moved in a very very long time. And you look at the ability of operators to double CapEx over the next five or 10 years just isn't there. And so the spending in that segment we don't believe for the industry overall could move up, sure, but is it going to double? I don't think it's going to double like we've talked about in some of those other markets over any time period that you're looking at.

So, with 5G in particular and if you go back to our capital management strategy and you'll see going back six, seven years is really when we began to invest in 5G. You saw that our digital investments are down and the analog investments are up slightly. Well, why is that? And if you look at the 5G opportunity, is really nothing going on new from the compression technique and what's required on the digital side. So, would we love to see that market continue to grow like it has over last 20 years? Absolutely. But probably more R&D into it, it’s not going to make the market grow.

Now, on the analog side to divide up the area around the base station, we’re just talking of macro based stations now to divide that up spatially, you need to have more than one antenna to steer energy, control more than one antenna you need analog products and that's where we're pointed. So, our revenues grew 30%, I think that's at the top of the list when you look at her peers this past quarter year-on-year. So we’re positioned very well and growing very well. But I also point out that market was declining double digits a year ago, so 30% sounds good. We've had and you look back over the last four years, we’ve had quarters where it declined 40% year-on-year. So I described it as choppy. I think I might use the word lumpy, means the same thing to me. So, it will be a good market. We’ll make good money in there, but might provide some growth, but not a significant growth

Vivek Arya

Got it. Great. I think with that we’re at the end of our time. Thank you so much. Dave. Really appreciate your insights. Thanks everyone for joining us.