Diodes Inc

NASDAQ:DIOD

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, and welcome to Diodes Incorporated's Fourth Quarter and Full Year 2018 Financial Results Conference Call. At this time, all participants are in listen-only mode. At the conclusion of today's conference call instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, February 13, 2019.

I would now like to turn the call over to Leanne Sievers of Shelton Group, Investor Relations. Leanne, please go ahead.

[Leanne Sievers, IR, Shelton Group]

Good afternoon, and welcome to Diodes' fourth quarter and full year 2018 financial results conference call. I'm Leanne Sievers, President of Shelton Group, Diodes' Investor Relations firm. Joining us today are Diodes' President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Rick White; Vice President of Worldwide Sales and Marketing, Emily Yang; and Director of Investor Relations, Laura Mehrl.

Before I turn the call over to Dr. Lu, I'd like to remind our listeners that the results announce today are preliminary as they are subject to the company finalizing the closing procedures and customary quarterly and year-end review by the company's independent registered public accounting firm. As such, these results are unaudited and subject to revision until the Company files its Form 10-K for the fiscal year 2018.

In addition, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we refer you to more detailed discussion of the risks and uncertainties in the company's filings with the Securities and Exchange Commission including Form 10-K and 10-Q. In addition, any projections as to the company's future performance represent management's estimates as of today February 13, 2019. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change except to the extent required by applicable law.

Additionally the company's press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP to non-GAAP term, included in the company's press release are definitions and reconciliations of GAAP to non-GAAP items, which provide additional details. Also throughout the company's press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income.

For those of you unable to listen to the entire call at this time a recording will be available via webcast for 90 days in the Investor Relations section of Diodes website at www.diodes.com.

And now, I'll turn the call over to Diodes President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.

[Keh-Shew Lu, President and CEO]

Thank you, Leanne. Welcome everyone and thank you for joining us today. I'm pleased to report that 2018 represented the best performing year in Diodes' history with the achievement of record financials. 15% organic revenue growth, driven by continued market share gains and a 75% increase in non-GAAP profitability over the prior year. Our ongoing focus on automotive and industrial sectors result in annual revenue growth from those target markets of 38% and 29% respectively and combined is 35% of total revenue.

Additionally, our Pericom business excluding frequency control product grew 24% year-over-year to almost 10% of revenue primarily as a result of our increased content in high-end PC, server, storage, and the data center market. During 2018 we made significant progress on Diodes position at key customers and gaining shares, not only within product line, but also across multi applications at the same customer.

In fact, some of our largest customers use Diodes content in nearly all product they offer, which provide greater diversification for Diodes as well as a deeper relationship with those customers. Our Pericom products have also provided us greater leverage creating extensive opportunity in new end equipment and applications as well as additional cross-selling opportunities for our other product offerings.

More recently, I'm also pleased to have announced the proposed acquisition of Texas Instruments' wafer fabrication facility and operation located in Greenock, Scotland or GFAB. This facility is about 320,000 square foot and has the potential monthly capacity of approximately 256,000 8-inch equipment diodes. Also as a part of the transition, Diodes and TI will enter into a multi-year wafer supply agreement, in which Diodes will continue to manufacture TI's all the products from GFAB, as TI transfers those products into its other wafer fabs.

This proposed acquisition now will with our strategic plan for significant revenue and profit dollar growth over the next several years and offers Diodes additional wafer fab capacity to support our product growth in particularly our automotive expansion initiatives.

It also provides excellent engineering skill and wafer fab knowhow to support our technical and operational performance expectations. Further, the transition meets our material for strategic acquisitions and we expect it to be immediately accretive. The closing acquisition is subject to customary closing conditions and is expected to be completed at the end of first quarter of 2019.

As we look forward to 2019, we expect to continue gaining market share and achieve growth rate that exceeding our served available market, while prioritizing higher-margin opportunity across automobile, industrial and Pericom products. Underpinning our anticipated growth and serving as a key theme for Diodes in the coming year our content gains across connected cars, high-end servers and storage, 5G and IoT.

We are well positioned both operationally and financially to drive increasing profits and cash flow on incremental revenue growth and expect to once again reach new records across our business in 2019.

With that, let me now turn the call over to Rick to discuss our first quarter financial results and our first quarter 2019 guidance in more detail.

[Rick White, CFO]

Thanks, Dr. Lu and good afternoon, everyone. As part of my financial review today, I will focus my comments on a sequential change for the fourth quarter, as well as select full year results, and would refer you to our press release for a more detailed review of our results, as well as the year-over-year and full year comparisons.

Revenue for the fourth quarter 2018 was $314.4 million, a 2% decrease from the $320.9 million in the third quarter 2018. This 2% sequential decrease is significantly below our normal seasonality. For the full year 2018 revenue was a record $1.2 billion, an increase of 15.2% over $1.05 billion in 2017 and well over the growth of our served markets.

Gross profit for the fourth quarter was $114.2 million or 36.3% of revenue compared to $115.2 million or 35.9% of revenue in the third quarter of 2018. The sequential increase in gross margin was primarily due to improved product mix, as well as the continued 8-inch ramp at our Shanghai fabrication facility as SFAB2.

For the full year gross profit increased 22% to a record $435.3 million or 35.9% of revenue as compared to $356.8 million or 33.8% of revenue in the prior year. GAAP operating expenses for the fourth quarter of 2018 were $70.3 million or 22.4% of revenue and $65.8 million or 20.9% of revenue on a non-GAAP basis, which excludes $4.5 million of amortization of acquisition related intangible asset expenses. This compares with GAAP operating expenses in the third quarter 2018 of $69.4 million or 21.6% of revenue and $65 million or 20.3% of revenue on a non-GAAP basis.

Total other expenses amounted to approximately $1 million for the quarter, including $2.3 million of interest expense. Income before taxes and non-controlling interest in the fourth quarter of 2018 amounted to $42.8 million compared to $44.4 million [ph] [Technical difficulty] of 2018.

Turning to income taxes, our effective income tax rates for the fourth quarter and full year 2018 were approximately 29.9% and 29.7% respectively. GAAP net income for the fourth quarter 2018 was $29.5 million or $0.58 per diluted share, compared to $30.9 million or $0.61 per diluted share in the third quarter 2018. The share count used to compute GAAP diluted EPS for the fourth quarter, 2018 was 50.9 million shares. GAAP [Technical difficulty] for the full year was a record $104 million or $2.04 per diluted share, compared with a GAAP net loss for the full year 2017 of $1.8 million or a loss of $0.04 per share, which included the impact of the 2017 Tax Reform.

Fourth quarter 2018 non-GAAP adjusted net income was $33.2 million or $0.65 per diluted share, which excluded net of tax $3.7 million of non-cash acquisition related intangible asset amortization costs. This compares to non-GAAP adjusted net income of $34.5 million or $0.68 per diluted share in the third quarter 2018.

Non-GAAP adjusted net income for the full year 2018 increased 75% to a record $121.3 million or $2.38 per diluted share compared to $69.1 million or $1.37 per diluted share in 2017.

We've included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income, which provides additional details.

EBITDA for the fourth quarter 2018 was $70.5 million or 22.4% of revenue compared with $72 million or 22.4% of revenue in the third quarter 2018. For the full year 2018 EBITDA improved 55% to a record $261.1million or 21.5% of revenue compared with $168.2 million or 16% of revenue in 2017. We have included in our earnings release a reconciliation of GAAP net income to EBITDA, which provides additional details.

Cash flow generated from operations was $61.6 million for the fourth quarter of 2018 and $185.6 million for the full year. Free cash flow was $46.3 million for the fourth quarter, which included $15.3 million of capital expenditures and $98.1 million for the full year which included a $7.5 million of capital expenditures.

Net cash flow in the fourth quarter was a positive $90.7 million including $47.4 million of additional long-term debt to fund a previously committed shareholder equity increase in the company's Chengdu corporate entity. Net cash flow for the full year was a positive $36.6 million, including the pay down of approximately $56.8 million of long-term debt.

Turning to the balance sheet, at the end of the fourth quarter cash and cash equivalents plus short-term investments totaled approximately $248.6 million. Working capital was $480.8 million and long-term debt including the current portion was $213.8 million.

At the end of the fourth quarter inventory decreased approximately $3.7 million from the third quarter 2018 to approximately $215 million. The decrease in inventory reflects a $2.8 million decrease in finished goods, a $2.6 million decrease in raw materials and a $1.7 million increase in work in process. This is the third consecutive quarter of finished goods inventory decreases, reflecting our focus on reducing finished goods inventory.

Finished goods inventory days were 28 in the quarter compared to 30 in the third quarter of 2018. Total inventory days were 100 in the quarter compared to 99 in the third quarter 2018. Capital expenditures on a cash basis for the fourth quarter were $15.3 million or 4.9% of revenue and $87.5 million or 7.2% of revenue for the full year. We expect CapEx for the full year 2019 to remain within our target model of 5% to 9% of revenue.

Now turning to our outlook, we expect revenue in the first quarter of 2019 to be approximately $302 million plus or minus 2.5%. At the midpoint this represents growth of 10% over the prior year period and down approximately 4% sequentially, which is slightly better than typical seasonality.

We expect GAAP gross margin to be 36%, plus or minus 1%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition-related intangible assets are expected to be approximately 21.5% of revenue, plus or minus 1%. We expect interest expense to be approximately $2 million.

Our income tax rate is expected to be 25%, plus or minus 3%, and shares used to calculate diluted EPS for the first quarter are anticipated to be approximately 51.2 million. Please note that purchase accounting adjustments of $3.7 million after-tax for Pericom and previous acquisitions are not included in these non-GAAP estimates.

That said, I will now turn the call over to Emily Yang.

[Emily Yang, SVP, Sales and Marketing]

Thank you, Rick, and good afternoon. Looking more closely at fourth quarter revenue distributor POP was down by 6% and POS decreased 9.8% sequentially. But yes, POS was up 16% year-over-year. Outside of Asia, POS remains strong, channel inventory increased 5.6% sequentially driven primary by Asia region in preparation for the pre-Chinese New Year deals as is typical at this time of year. Outside of Asia, channel inventory was flat.

Looking at global sales in the fourth quarter, Asia represented 79% of the revenue, Europe 10% and North America 11%. In terms of our end markets, industrial was once again our largest representative end market at 25% of revenue. Consumer represented 24%, communication 24%, computing 18% and automotive 9% of revenue.

Starting with automotive market growth continues to be strong especially in Asia, with 2018 revenue increasing almost 38% over 2017 to 9% of total revenue. Diodes continues to secure new design wins across multiple products including MOSFET on the brushless DC motor, electric power steering, water pumps, power windows, electric horn, infotainment, battery management and advanced driving assistance.

In addition, USB power delivers being added to automobiles, which is driving design wins of our solution in infotainment and mobile wire and wireless charging applications. Additionally, our diodes and rectifier products has seen solid momentum in the automotive space, driven by the need for a robust electric discharge protection in the connected cars. We also saw strong demand for day time running light and body control modules as we continue to introduce new products like bipolar junction transistors, and LED linear controllers.

In the industrial market, we also achieved strong full year growth of more than 29%, accounting to approximately 25% of total revenues. During the quarter, we secured multiple new design wins for our normal density trench MOSFET technology, data line platform, hall sensors, short key [ph] SDR and BJT products for our broad range of applications including brushless DC motors, LED lighting, DC fan, power tools and e-lock applications.

We also continue to see strong demand for our SASP products. In fact, with the record adoption of high speed interfaces across multiple end application in the IoT industry. ESC protection is becoming more important for this data links. Diodes' SBR and Schottky product remain strong in the DC fan and lighting market where we offer products suitable for high temperature environments. We also saw strong momentum for our recently introduced Gate Drivers designed into battery test systems, regulators into DC fans, as well as transistors and synchronize controllers into power applications.

In our consumer end market 2018 revenue grew 10% over 2017, as we continue to achieve strong momentum across a wide variety of applications, such as low power USB Type C charging and power deliveries, wireless power charging, argumentative reality, panels, earphone, wearable, portable devices, OLED displays, smart speakers, gaming, Bluetooth as well as Wi-Fi trackers.

In addition, USB Type C is gaining market traction and expanding its footprint to new end products, such as the set-top boxes as well as Type C adapters to convert the Type C battery Type A for the existing install base. Our wide signal switching and market portfolio covers all this application's need.

Additionally, our audio product are achieving significant revenue increases, driven by the high demand for our audio alarming features in the Bluetooth and Wi-Fi tracker applications. We also secured key design wins for our Gate Drivers and synchronize controllers for home appliance applications, such as air conditioner, fans and refrigerators.

In communications, Diodes has been actively engaged in this market with our comprehensive small footprint DFN and CSP MOSFET portfolio and have been achieving design wins and revenue growth. We also continue to expand our portfolio of battery protection MOSFETs to address this market and also see strong demand for LDOs and hall sensors in smartphones to help reduce power consumption and increasing battery life. Our design win activity also continued for AC/DC charging solutions of smartphones, chargers and adapters.

Also within communications, mega data center applications are driving the 100 gig and 400 gig optical transistor market to address the bandwidth need of data communications. High-speed transceivers require high performance and low jitter oscillators as our timing reference. Diodes brought portfolio of small form factor ultra-low jitter XL product, position us well in this growing market.

Further, we continue to see strong demand for our single [ph] switches along with strong demand for applications for ultra-fast recovery rectifier in the low profile package in the mobile phones, base stations, wireless charging applications. Also within communications, we're also seeing very strong design win activities in 5G applications with a wide range of Pericom products, including PCI new packet switches, cross IC, crystal and crystal oscillators, lasso [ph] shifters and high speed MOSFETs and with Diodes product including low noise LDOs, plus converters and MOSFETs. 5G is only in the beginning stage of the infrastructure build out and as Dr. Lu mentioned, we see this area as a key growth opportunity for Diodes in 2019 and beyond.

In Computing, during the quarter we secured new design wins for PCI new gen-4 products from the Pericom product line, including multiplexers, ReDrivers and active marks in the gaming and server applications. We also saw significant opportunities for USB Type C and USB 3.1 ReDrivers in tablet and PC applications. In fact, USB Type C connectors continue to gain market traction, as new applications are adapting USB Type C connector options. For example, the latest stocking station for commercial logos supporting USB Type C would require USB and display port signal masters.

Diodes solution supporting USB Type C alternative mode for signal switching and signal integrity continue to expand our designing activity in tablet, notebook and docking station applications. Hall sensor are also gaining traction in the notebook and tablet applications by reducing power consumption, while maintaining reliable performance. Additionally, our broad portfolio of Schottky retrofire technology continues to win design-ins in applications such as USB Power Delivery and ATF power supply.

In summary, we are very pleased with achievement of record annual results across our product business driven by our past design win momentum, expanded product offerings and increased market share and content at customers. Additionally, our continued focus on automotive industrial and our Pericom products has further constituted to our growth, while also offered additional higher margin opportunities across a wide variety of applications. We expect this strategy will continue driving profitability growth and cash flow for Diodes in the years to come.

With that, we now open the floor to questions. Operator?

[Operator]

[Operator instructions] Our first question comes from the line of Gary Mobley of Benchmark. Your line is open.

[Gary Mobley, The Benchmark Company]

Good afternoon, everybody. Thanks for taking the question. I want to start with a question or a clarification for you, Rick, you mentioned in your prepared remarks Q1 revenue guidance of $302 million, in your press release it reads $305 million, so I'm just hoping to point exactly what it is?

[Rick White, CFO]

Well it's $302 million.

[Gary Mobley, The Benchmark Company]

$302 million. Okay. So to my second question down 4% sequentially is better than seasonal nobody in the industry is doing better than seasonal in the first quarter. So why go on a limb with a sort of guidance and that's truly backed by demand indicators and what not. Could you give us a sense of how you guys are faring so much better than the industry right now?

[Keh-Shew Lu, President and CEO]

Okay. I think we always talking about the seasonality somewhere around down 5% to 10%, but similar to last year we do see a very strong demand for our product especially winning from content increase. I think during the speech you can see we are gaining more shares not just the more new product, but we do actually gain more shares from content increase. So even when we see some of the application to slow line in one Q1, but due to the content increase our effect by the seniority reduced.

[Gary Mobley, The Benchmark Company]

Okay. I did have a follow question about your GFAB acquisition. So obviously perhaps doesn't deal with TI strategy and perhaps it's the reason they're willing to sell it. So I'm just wondering what the arbitrage is that you're betting on here what don't they see in this facility that is going to benefit you strategically or financially?

[Keh-Shew Lu, President and CEO]

I don't want to speak for them, but obviously they're spending their 12-inch fab and they are moving to the smaller geography, but for Diodes since we are - we do have a need for more capacity for 6-inch, but especially we really don't have enough capacity for our 8-inch products. So this is just the right match between the two companies when we move the product portfolio into the 8-inch it really suit us from the usage point of view.

I think during the speech you can see we do build in significant revenue and profit GP data increase in the future and this fab will be able to provide us the peoples, the skill, the capacity and also it's going to be very positive for either to Diodes operations.

[Gary Mobley, The Benchmark Company]

Okay, that's helpful. Thank you everyone.

[Operator]

Thank you. Our next question comes from Shawn Harrison of Longbow Research. Your line is open.

[Shawn Harrison, Longbow Research]

Hi, everybody congratulations on the strong results and guidance.

[Keh-Shew Lu, President and CEO]

Thank you, Shawn.

[Shawn Harrison, Longbow Research]

Dr. Lu, didn't see in the press release for the TI facility that you're acquiring, the purchase price is that something you can provide to us? I'm just trying to figure out that you pay a lot to get the accretion and I know you usually like to bargain.

[Keh-Shew Lu, President and CEO]

Number one, we do have agreement with TI the detail of the purchasing cannot be disclosed. So - but two things I do can able to tell you, one is, it meet my M&A criteria remember my one of the key M&A criteria is need to be accretive within one year and fortunately this acquisition it provide immediately a cushion. So now that's what I really pay attention. Number two, we always say this is insignificant on the material.

[Rick White, CFO]

It's immaterial.

[Keh-Shew Lu, President and CEO]

Immaterial.

[Rick White, CFO]

So from both TI and Diodes perspective were classifying this as immaterial and therefore the contracts and the details of the negotiation will not be disclosed.

[Shawn Harrison, Longbow Research]

Got you. That's helpful enough. On your current 8-inch capacity, the FAB2, where are you at right now in terms of production versus kind of I know that the target level, which is what 12,000 wafers a month or something like that?

[Keh-Shew Lu, President and CEO]

Yes, if you remember it start from beginning of last year or actually we start working on 8-inch capacity in SFAB2 since 2017. The first production is in March of 2018 and we are able to ramp it up to about 9,000 wafer a month by December 2018. And we are hoping - we start to continue ramp it the maximum capacity in SFAB2 is only 12,000 a month 8-inch capacity. And so, when we're talking about this, this 8-inch capacity is for MOSFET for SBR. So typically somewhere around the probably five six days per layers. So 256,000 wafer 8-inch increment layers.

[Shawn Harrison, Longbow Research]

Layers.

[Keh-Shew Lu, President and CEO]

Layers. It's a good addition to our discrete especially MOSFET and SBR capacity increase.

[Rick White, CFO]

So in the fourth quarter the goal was to get to between 8,000 and 9,000 and that's actually where we got to in SFAB2.

[Shawn Harrison, Longbow Research]

Okay. And then how quickly will you be able to port your customer base into that fab and have it qualified. Is it within the first half of this calendar year?

[Keh-Shew Lu, President and CEO]

No, no way. First, we need to develop the process, which may not be taking that long, but if you remember on our SFAB2, we actually take one whole year of 2017 to move in the equipment, develop the process and fortunately on this site equipments already there and we probably need like six months to implement the process, then it probably take another three months to do qualification, to do this one.

And so we'll put it up the product notice to the customer and I may say probably currently I expect maybe end of the year we will start to notify our customer give them the sample. But to future event, the customer need the approval and all this one so it probably take a while. And that's why it's important for us to continue supporting TI, TI's need and keep the fab loaded. Then the time when TI demand go down, our demand will go up and it's able to give us accretive immediately and continue.

[Emily Yang, SVP, Sales and Marketing]

Right. So for the customer qualification it really depends, I would say range probably from one quarter to three, four quarters depends on the customer. So it's going to take some time.

[Keh-Shew Lu, President and CEO]

Yes, and especially, this fab we expect to support automotive and industrial and that call it designing or the grand for the acceptance for a customer to agree to convert it take a while.

And somewhat automotive required one year or one and half year. And so it's really very critical for us to be able to continue support TI, while we take time to bringing our product so we don't want to run into a problem of the capacity is empty or capacity is wasting.

[Shawn Harrison, Longbow Research]

Got you. Thanks so much.

[Operator]

Thank you. Our next question comes from Tristan Gerra of Baird. Your line is open.

[Tristan Gerra, Robert W. Baird]

Hi, good afternoon. Follow-up question on this fab from TI. What's the margin profile for the foundry business that you're offering to them, is that below corporate average?

[Keh-Shew Lu, President and CEO]

No, I cannot. Tristan, like I say we cannot disclose and we have agreement with TI, the detail of the operation cannot disclosed, but I am going to emphasize one more time it's accretive immediately, okay.

[Tristan Gerra, Robert W. Baird]

Okay. And then, once you get full access to that fab, presumably few years what percentage increase does that bring relative to your current total production today? How much incremental capacity percentage wise is this fab going to give you once you have full access in a few years?

[Keh-Shew Lu, President and CEO]

This I cannot - like I say I cannot really give too much of detail, but I can still you now today the 8-inch is almost fully loaded and some of the 6-inch it probably is not fully loaded. But the key thing is we do not have with agreement we're able to accretive immediately. Therefore any additional will be the gain any additional loading from Diodes will be the gain. Now, I probably cannot tell you how much gain because then we are disclose too much of the detail. But loading from Diodes will be able to show more profit, that's for sure. Right.

[Rick White, CFO]

Yes, so Tristan, one thing we can disclose and the GPAD currently has over 8,000 wafers per month of 8-inch capacity plus approximately 13,000 wafers per months of 6-inch capacity. And if you go through that whole process, that's what we put in the press release, which the total capacity is approximately 256,000 8-inch equivalent layers per month.

[Keh-Shew Lu, President and CEO]

And I wanted to mention when we talk about 8,000 wafer that's use traditional CMOS wafer, like 20 layers, but for Diodes product especially for MOSFET and for the SBR is not the same number of layers that's why instead of using wafer, 8,000 wafer are used in total 260 layers a month and the reason is the product is different and typically CMOS all product number of layers is much higher, in average probably 18 to 20 layer to our discrete, which is much, much less, and that's why I give you a way to use in the layer.

[Tristan Gerra, Robert W. Baird]

Okay, that's useful. And then a quick follow-up on an earlier question. Is it too early or are you able to see initial order activity now that the Chinese New Year is over. And specifically what type of backend capacity do you have, last year you had more labor coming back from the Chinese New Year that you expected and therefore you had probably little bit more capacity than you expected. How is that shaping up relative to demand basically starting this week with post Chinese New Year?

[Keh-Shew Lu, President and CEO]

Okay. Tristan, you can see we give the guidance today that in the Chinese New Year actually just over a couple of days ago. And so, we do already know how many people come back during the Chinese, which means last week, the Chinese New Year is last week. And New Year is already over Sunday, last Sunday. So we give the guidance and that guidance is already in consideration of the capacity, the supporting. And so I think that guidance reflect the people performance and the people return from the Chinese New Year. My point is not going to be a big surprise anymore.

[Tristan Gerra, Robert W. Baird]

Okay, thank you.

[Operator]

[Operator Instructions] Our next question comes from the line of Edgar Roesch of Sidoti. Your line is open.

[Edgar Roesch, Sidoti & Company]

Yes. Congratulations on finishing up a terrific year.

[Keh-Shew Lu, President and CEO]

Thank you.

[Edgar Roesch, Sidoti & Company]

Well, this is great. And I wanted to ask you a little bit on the automotive side. Certainly some premium growth being seen in newer systems, whether it's ADAS or connected driving applications. I would assume that more traditional automotive systems like power steering, windows and alike would be a good bit slower. But could you just speak about, how the growth trended throughout 2018? And what you're seeing going into the first quarter here?

[Emily Yang, SVP, Sales and Marketing]

Right. So this is Emily, maybe let me address the question, right. So even with some of the traditional applications that you mentioned, like the power steering, the windows and stuff like that. We also see a lot of change over there implemented brushless DC motor and with this change that which we've been emphasizing for the last few quarters, we start seeing a lot of content improvement, especially on the diode side. So that's really what we've seen.

So now, switching from the traditional to the newer models, even is the same function, but it really enriched a lot of features and functionality kind of really helping the content expansion that we've been talking about.

[Edgar Roesch, Sidoti & Company]

Okay, terrific. Thanks for that. And then Dr. Lu, just as you continue to mix up in the more complex devices, do you see that 7% R&D budget being adequate? Let's say, a couple of years into the future, or would we expect that to maybe grow a little faster than revenue at some point?

[Keh-Shew Lu, President and CEO]

You remember when I go to talking about 2025 we're hoping always driving the GP up to 40% and revenue $2.5 billion you remember that is the same we're talking about, building that same I do intend to increase our motto of R&D to 6%. And you'll probably say 1% more, but don't forget 1% is the print [ph] is that 20% of the total R&D numbers, okay? And number two is, we have to growth on both R&D on both discrete and analog. So discrete, the R&D we'll keep the same as the revenue growth.

And so therefore, I don't see a need of significant increase our R&D from our business model. And I think, 6% - 7%. Yes, from 5%, 7%. So, it is a good increase and I think that the key thing really is efficiency of the use in the R&D money. Okay. I'm doing, I've been driving how to more effectively to use in R&D money. And so far Diodes able to efficiently increase our efficient control of using our R&D money. And another thing that we purchased Pericom, and Pericom product their IC product is in the - in 50%, 60% GP. And if you take the Pericom, I am talking about IC, Pericom IC, now increasing frequency control product and in Emily speech you already know our Pericom actually grow 24% of the IC, Pericom IC increased 24% last year.

So we are not increasing the R&D money, we keep about the same and you can see that even with that we are able to grow 24% last year. So to answer your question, I think we are very well to utilize our R&D money.

[Edgar Roesch, Sidoti & Company]

Yes, thank you for that. And then one last one, I understand that the additional Chengdu investment was kind of prescribed in the agreement. Is it geared towards eventual expansion of any kind or is it just change in the equity ownership structure?

[Rick White, CFO]

He is talking about the Chengdu, equity investment that we talked about in the fourth quarter. What's that going to be spend on in the future expansion?

[Keh-Shew Lu, President and CEO]

Okay, that we do - we have two items, one is constantly CapEx increase to support our need for the capacity expansion. Now we still continue, the another big money is the building. If you remember at the beginning when we Chengdu phase 1 we build up one manufacturing building, one R&D building and one painting [ph] building. And we kind of are using up all the majority of our manufacturing building.

So, we do plan to go to next phase, which is building another five floor of the manufacturing floor. And that is the one going to consume a big money and I am just think try to see we can fully utilize our space and see there a little bit on our building expansion. So, it's still ongoing and when we have a need we will start to building up the next manufacturing building.

[Edgar Roesch, Sidoti & Company]

Thanks for that and have a good evening. Thanks.

[Emily Yang, SVP, Sales and Marketing]

Thank you.

[Rick White, CFO]

Thanks, Ed.

[Operator]

Thank you. At this time I'd like to turn the call over to Dr. Lu, for any closing remarks. Dr. Lu?

[Keh-Shew Lu, President and CEO]

Thank you for your participation on today's call. We are looking forward to providing another update on our business next quarter. Operator, you may now disconnect.

[Operator]

Thank you, sir. Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.