Diodes Inc  (NASDAQ:DIOD)

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Q4 2018 Earnings Conference Call
Feb. 13, 2019, 5:00 p.m. ET

Contents:

Prepared Remarks:

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 a 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 K. Sievers -- President, Investor Relations

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 announced 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 Forms 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's statements during this conference call will include discussions of certain measures and financial information, and GAAP and non-GAAP terms. Included in the company's press release are definitions and reconciliations of GAAP to GAAP items, which provide additional details. Also throughout the Company's press release and management statements during this conference call, we will 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 -- Director, President and Chief Executive Officer

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 the automotive and industrial sectors resulted in annual revenue growth from those target end markets of 38% and 29%, respectively, and a combined 35% of total revenue. Additionally, our Pericom business, excluding frequency control products, 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 datacenter markets.

During 2018, we made significant progress on Diodes' positioning at key customers and gaining share, not only within product lines but also across multiple applications at the same customer. In fact, some of our largest customers use Diodes content in nearly all products they offer, which provides greater diversification for Diodes as well as a deeper relationship with those customers. Our Pericom products have also provided us greater leverage, creating expanded opportunities in new end equipment and applications as well as additional cross-selling opportunities for our other product offerings.

More recently, I am 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 a potential monthly capacity of approximately 256,000 8-inch equivalent layers. Also as 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 analog products from GFAB as TI transfers those products into its other wafer fabs. This proposed acquisition aligns well with our strategic plan for significant revenue and profit dollar growth over the next several years and offers Diodes an additional wafer fab capacity to support our product growth, in particularly our automotive expansion initiatives. It also provides excellent engineering skills and wafer fab know-how to support our technical and operational performance expectations. Further this transaction meets our criteria for strategic acquisitions, and we expect it to be immediately accretive.

The closing of the transaction is subject to customary closing conditions and is expected to be completed at the end of the first quarter of 2019. And we look forward to 2019, we expect to continue gaining market share and achieve growth rates that exceed our served available markets, while prioritizing higher-margin opportunities across automotive, industrial and our Pericom products. Underpinning our anticipated growth and serving as a key theme for Diodes in the coming year are 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.

Richard D. White -- Chief Financial Officer and Secretary

Thanks, Dr. Lu and, good afternoon everyone. As part of my financial review today, I will focus my comments on the 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. 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, SFAB 2. 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 2018 was $7.3 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 23% 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. Income before taxes and noncontrolling interest in the fourth quarter 2018 amounted to $42.8 million compared to (technical difficulty) quarter 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 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 this was 50.9 million shares. GAAP net income (ph) 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 is 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 have 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 $261.1 million 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 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 $87.5 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 paydown 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 of 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 -- Vice President, Worldwide Sales and Marketing

Thank you, Rick and afternoon. Looking more closely at fourth quarter revenues, distributor POP was down by 6% and POS decreased 9.8% sequentially, but yet POS was up 16% year-over-year. Outside of Asia, POS remained strong. Channel inventory increased 5.6% sequentially driven primarily by Asia region in preparation for the pre-Chinese New Year payout. 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 the automotive market, growth continues to be strong, especially in Asia, with 2018 revenue increasing almost 38% over 2017 to 9% of total revenue. Diodes continued to secure new designs wins across multiple products, including MOSFETs, brushless DC motor, electric power steering, water pumps, power windows, electric horn, infotainment, battery management and advanced drivers assistance. In addition USB power delivery has been 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 product has seen solid momentum in the automotive space, driven by the need for a robot electric discharge protection in the connected cars. We also saw strong demand for daytime running light and body control modules, as we continued 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 revenue. During the quarter, we secured multiple new design wins for our normal density trench MOSFET technology, data line platform, hall sensors, Schottky, SBR 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 continued 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.

ESP protection is becoming more important for (inaudible). Diodes SBR, and Schottky product remained 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 synchronized controllers into power applications. In our consumer end market, 2018 revenue grew 10% over 2017, as we continued to achieve strong momentum across a wide variety of applications, such as low power USB Type C charging and power delivery, wireless power charging, augmented reality, panels, earphones, wearables, 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 set-top boxes as well as Type C adapters to convert the Type C back to Type A for the existing installed base. Our wide signal switching and smart (ph) portfolio covers all this applications need. Additionally, our audio products are achieving significant revenue increases, driven by the high demand for our audio alarming features in the Bluetooth and WiFi tracker applications.

We also secured key design wins for our gate drivers and synchronous 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 smart footprint, DFM and CFP MOSFET portfolio and have been achieving design wins and revenue growth. We also continued to expand our portfolio of battery protection MOSFET to address this market and also see strong demands for LDOs and hall sensors in smart phones 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 needs of data communications. High speed transceivers require high performance and low jitter operators as our timing reference. Diodes product portfolio of small form factor and ultra low jitter XO products position us well in this growing market.

Further, we continue to see strong demand for our VP signal switches, along with strong demand for applications for ultrafast recovery rectifier in the low profile package in the mobile phones, play stations, wireless charging applications.

Also within communication, we're also seeing very strong design win activities in 5G applications with a wide range of Pericom products, including PCIe Packet Switches, Clock IC, crystal and crystal oscillators, level shifters and high speed MOSFETs and with Diodes products including low noise LDOs, buck 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 PCIe gen 4 product from the Pericom product line, including (inaudible) drives an active mark in the gaming and server applications. We also saw significant opportunities for USB Type C and USB 3.1 drivers in tablet and PC applications. In fact, USB Type C connectors continued to gain market traction as new applications are adapting USB Type C connector options. For example, the latest docking station for commercial mobiles (ph), supporting USB Type C will require USB and DisplayPort (inaudible). Diodes solutions supporting USB Type C alternative model for signal switching, as signal integrity continued to expand our design win activity in tablet, local and docking station applications. Hall sensors are also gaining traction in the local and tablet applications by reducing power consumption, while maintaining reliable performance. Additionally, our broad product portfolio of Schottky rectifier technology continues to win design wins in applications such as USB power delivery and ATX power supply.

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

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Gary Mobley of Benchmark. Your line is open.

Gary Mobley -- The Benchmark Company -- Analyst

Good afternoon, everybody. Thanks for taking my 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 and your press release it reads $305 million. So, I'm just hoping to at this point exactly what it is?

Richard D. White -- Chief Financial Officer and Secretary

Well, it's $302 million.

Gary Mobley -- The Benchmark Company -- Analyst

$302 million. Okay. So still prompts 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 that sort of guidance and it's truly backed by demand indicators and whatnot, could you give us a sense of how you guys are faring so much better than the industry right now?

Keh-Shew Lu -- Director, President and Chief Executive Officer

Okay. I think, we're always talking about the seasonality, somewhere around 9%, down 5% to 10%. But similar to last year we do see a pretty 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 the content increase. So even when we see some of the application to slowdown in 1Q, but due to the content increase, our affect by seasonality reduced.

Gary Mobley -- The Benchmark Company -- Analyst

Okay. I did have a follow-up question about your GFAB acquisition. So obviously, it doesn't -- perhaps it doesn't go with TI strategy and perhaps this is 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 -- Director, President and Chief Executive Officer

Well, I don't want to speak for them, but obviously they are expanding their 12-inch fab and they are moving to the smaller geometry. But 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 and we moved the product portfolio into the 8-inch. It really suits us from the usage point of view. I think during his speech you can see we do build in significant revenue and a profit (inaudible) increase in the futures and GFAB will be able to provide us the people, the skill, the capacity and all those is going to be very positive adder to Diodes' operations.

Gary Mobley -- The Benchmark Company -- Analyst

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 -- Analyst

Hi everybody. Congratulations on the strong results and guidance.

Keh-Shew Lu -- Director, President and Chief Executive Officer

Thank you, Shawn.

Shawn Harrison -- Longbow Research -- Analyst

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

Keh-Shew Lu -- Director, President and Chief Executive Officer

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

Richard D. White -- Chief Financial Officer and Secretary

Yeah, it's immaterial.

Keh-Shew Lu -- Director, President and Chief Executive Officer

Immaterial.

Richard D. White -- Chief Financial Officer and Secretary

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

Shawn Harrison -- Longbow Research -- Analyst

Gotcha. That's helpful enough. On your current 8-inch capacity, the SFAB 2 where you at right now in terms of production versus kind of the target level, which is what 12,000 wafers a month or something like that?

Keh-Shew Lu -- Director, President and Chief Executive Officer

Yeah, if you remember it starts from beginning of last year or actually we start working on 8-inch capacity in SFAB 2 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 to ramp it. The maximum capacity in SFAB 2 is only 12,000 a month, 8-inch capacity. And so when we are talking about this, this 8-inch capacity is for MOSFET, for SBR, so typically somewhere around probably five, six layers per wafers. Okay, so 256,000 wafer, 8-inch equivalent wafer layers. It's a good addition to our discrete especially MOSFET and SBR capacity increase.

Richard D. White -- Chief Financial Officer and Secretary

So in the fourth quarter the goal is to get to between 8,000 and 9,000 and that's actually where we got to in SFAB 2.

Keh-Shew Lu -- Director, President and Chief Executive Officer

Yeah.

Shawn Harrison -- Longbow Research -- Analyst

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

Keh-Shew Lu -- Director, President and Chief Executive Officer

No, no way, first we need to the develop the process, which may not be taking that long, but if you remember our SFAB 2 we actually take one whole year of 2017 to move (inaudible) process and virtually on this site, equipments are 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 a product notice to the customer and they say probably currently I expect maybe end of the year, we will start to notify our customer getting the sample. But to officially ramp the customer need approval and all these ones. So it will 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, OK. Then the time when TI demand goes down, our demand will go up and is able to give us accretive immediately and continue.

Emily Yang -- Vice President, Worldwide Sales and Marketing

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

Keh-Shew Lu -- Director, President and Chief Executive Officer

Yeah, and especially these fab we expect to support automotive and industrial and the design of that ramp for our -- of the acceptance for the customer to agree to convert, it take a while, OK. And some of the automotive require 1 year or 1.5 year. And so it's really very critical for us to be able to continue support TI, while we take time to ranking our product so we don't want to run into a problem of the capacity is empty or capacity is wasted.

Shawn Harrison -- Longbow Research -- Analyst

Gotcha. Thanks so much.

Emily Yang -- Vice President, Worldwide Sales and Marketing

Thank you.

Keh-Shew Lu -- Director, President and Chief Executive Officer

Thank you.

Operator

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

Tristan Gerra -- Baird -- Analyst

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

Keh-Shew Lu -- Director, President and Chief Executive Officer

No, I cannot -- Tristan, like I said, we cannot disclose and we have a agreement with TI. The detail of the operation cannot disclose, but I'm going to emphasize one more time it's accretive immediately, OK.

Tristan Gerra -- Baird -- Analyst

Okay. And then once you get full access to that fab presumably in a 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 -- Director, President and Chief Executive Officer

This -- I cannot -- like I said, I cannot really give too much of detail, but I can tell you now today the 8-inch is almost loaded -- fully loaded, OK and, some of the 6-inch, it probably is not fully loaded. But the key thing is, we do not have with agreement, we are 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 have disclosed too much of the detail, but loading from Diodes, we'll be able to show more profit, that's for sure. Right.

Richard D. White -- Chief Financial Officer and Secretary

Yes, so, Tristan, one thing we can't disclose and -- that GFAB currently has over 8,000 wafers per month of 8-inch capacity, plus approximately 13,000 wafers per month of 6-inch capacity. And if you go through that whole process, that's what we put in the press release, which -- that the total capacity is approximately 256,000 8-inch equivalent layers per month. Okay.

Keh-Shew Lu -- Director, President and Chief Executive Officer

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

Tristan Gerra -- Baird -- Analyst

Okay. That's useful. And then a quick follow-up on the 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 back-end 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 a little bit more capacity than you expected. How is that shaping up call it just the demand basically starting this week with post Chinese New Year?

Keh-Shew Lu -- Director, President and Chief Executive Officer

Okay. Tristan, you can see we give the guidance today that and 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 although 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 it's not going to be a big surprise. anymore.

Tristan Gerra -- Baird -- Analyst

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 -- Analyst

Yeah, congratulations on finishing up the terrific year, (multiple speakers) was 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 application, I would assume that more traditional automotive systems, like power steering, windows and the like would be a good bit slower, but could you speak about how the growth trended throughout 2018 and what you're seeing going into the first quarter here?

Emily Yang -- Vice President, Worldwide Sales and Marketing

Right. So this is Emily, maybe let me address that 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 improvements, especially on the Diodes side. So that's really what we're seeing. So now, switching from the traditional to the newer models even it's the same function, but it really enrich a lot of features and functionality, kind of really helping the contact expansion that we've been talking about.

Edgar Roesch -- Sidoti & Company -- Analyst

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 -- Director, President and Chief Executive Officer

You'd remember when I go through talking about 2025, we are hoping to driving the GP up to 40% and revenue $2.5 billion, you remember that is the same we talking about. During that time I do intend to increase our model of R&D to 6% and probably you probably say, oh, 1% more, but don't forget 1% is the 20% of the total R&D numbers, OK. And number two -- number two is we had a growth on both R&D -- on both discrete and analog. So discrete, the R&D will keep the same as the revenue growth and so therefore, I don't see a need of significant increase of R&D from our business model. And I think 6%...

Richard D. White -- Chief Financial Officer and Secretary

7%.

Keh-Shew Lu -- Director, President and Chief Executive Officer

7%, I am sorry.

Richard D. White -- Chief Financial Officer and Secretary

7%.

Keh-Shew Lu -- Director, President and Chief Executive Officer

7%. Yeah, from 5% to 7%. So it's a good increase and I think that the key thing really is efficiency of using the R&D money, OK. And do -- I have been driving how to more effectively to using R&D money and so far, Diodes is able to efficiently increase -- efficient control or using our R&D money. And other thing you that we purchased Pericom and Pericom product, their IC product is in the 20% -- in 50%, 60% GP and that if you took a Pericom, I am talking about the IC business, Pericom IC, no in cooling frequency or control product. And in Emily's speech you already know our Pericom actually grow 24% of -- the IC -- Pericom IC increased 24% last year. So we are not increasing there 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 your utilize our R&D money.

Tristan Gerra -- Baird -- Analyst

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 toward eventually expansion of any kind or is that just change in equity ownership structure?

Richard D. White -- Chief Financial Officer and Secretary

He is talking about the Chengdu equity investment that we talked about in the fourth quarter.

Keh-Shew Lu -- Director, President and Chief Executive Officer

Yeah.

Richard D. White -- Chief Financial Officer and Secretary

Whether -- what's that going to be spent on in the future, expansion or?

Keh-Shew Lu -- Director, President and Chief Executive Officer

Oh, OK, that we do -- there were two items, one is constantly CapEx increase to support our need for the capacity expansion. Now, we still continue. Another big money is the building. If you would remember at the beginning when we built Chengdu phase one, we build up one manufacturing building, one R&D building and one operating building. And we kind of 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'm just think -- try to see we can fully use our space and see did they add a little bit on our building expansions. So it's still ongoing and when we have a need we will start building up the next manufacturing building.

Tristan Gerra -- Baird -- Analyst

Thanks for that and have a good evening. Thanks.

Emily Yang -- Vice President, Worldwide Sales and Marketing

Thank you.

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 -- Director, President and Chief Executive Officer

Thank you for your participation on today's call. We're 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.

Duration: 51 minutes

Call participants:

Leanne K. Sievers -- President, Investor Relations

Keh-Shew Lu -- Director, President and Chief Executive Officer

Richard D. White -- Chief Financial Officer and Secretary

Emily Yang -- Vice President, Worldwide Sales and Marketing

Gary Mobley -- The Benchmark Company -- Analyst

Shawn Harrison -- Longbow Research -- Analyst

Tristan Gerra -- Baird -- Analyst

Edgar Roesch -- Sidoti & Company -- Analyst

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