Good afternoon, 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. If anyone needs assistance at any time during the conference call, please press the star key followed by zero on your touch-tone phone. 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.
Good afternoon, 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, 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, therefore, we refer you to more detailed discussion of the risks and uncertainties in the company's filings for 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 13th, 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 and non-GAAP terms. 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 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 relation section of Diodes website at www.diodes.com. Now I'll turn the call over to Diodes President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead.
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 previous year. Our ongoing focus on the automotive and industrials sectors result in annual revenue growth from both target and market of 38% and 29% respectively, and a combined 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 the key customer and the gaining shares, not only within product line, but also across multi-applications at the same customer. In fact, some of our largest customer 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 has also provided us greater leverage, creating extended 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 sq ft and has a potential monthly capacity of approximately 256,000 8 in equipment wafers.
As part of the transitions, 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 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 additional wafer fab capacity to support our product growth, in particular, our automotive expansion initiatives. It also provides excellent engineering scale and wafer fab know-how to support our technical and operational performance expectations. This transition meets our criteria for strategic acquisitions, and we expect it to be immediately accretive. The closing of the transition is subject to customary closing conditions and is expected to be completed at the end of the first quarter of 2019.
As we look forward to 2019, we expect to continue gaining market share and achieve growth rates that exceed our served available market, while prioritizing higher margin opportunity across automotive, industrial, and our telecom products. Underpinning our anticipated growth and serving as a key theme for Diodes in the coming year are content gains across connected car, high-end servers and storage, 5G, and IoT. We are well-positioned, both operationally and financially, to drive increasing profit 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 fourth quarter financial results and our first quarter 2019 guidance in more detail.
Thanks, Dr. Lu, 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. 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 in ramp at our Shanghai fabrication facility, 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 from the prior year. GAAP operating expenses for the fourth quarter 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 2018 amounted to $42.8 million, compared to $44.3 in the fourth quarter 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 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 of 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% - 9% of revenue. Turning to our outlook. We expect revenue in the first quarter of 2019 to be approximately $302 million, ±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%, ±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, ±1%. We expect interest expense to be approximately $2 million. Our income tax rate is expected to be 25%, ±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. I will now turn the call over to Emily Yang.
Thank you, Rick, and good afternoon. Looking more closely at fourth quarter revenues, distributor POP was down by 6% and POS decreased 9.8% sequentially. Yet POS was up 16% year-over-year. Outside of Asia, POS remains strong. Channel inventory increased 5.6% sequentially, driven primarily by Asia region in preparation for the pre-Chinese New Year build, 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 continues to secure new design wins across multiple products, including MOSFETs on the brushless DC motor, electric power steering, water pumps, power windows, electric horns, infotainment, battery management, and advanced driver's assistance. USB power delivery is being added to automobiles, which is driving design-ins 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 robust electric discharge protection in the connected cars. We also saw strong demand for daytime running lights 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 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 continue to see strong demand for our FAST products. In fact, with the rapid adoption of high-speed interfaces across multiple end applications in the IoT industry, ESD protection is becoming more important for these data links. Diodes SBR and Schottky product remains 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 synchronous 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 delivery, wireless power charging, augmented reality, panels, earphones, wearables, portable devices, OLED displays, smart speakers, gaming, Bluetooth, as well as Wi-Fi trackers. 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 install base. Our wide signal switching and mux portfolio covers all these applications' needs. Our audio products 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 synchronous controllers for home appliance applications, such as air conditioners, fans, and refrigerators. In communications, Diodes has been actively engaged in this market with our comprehensive small footprint DFN and CSP MOSFET portfolio and has 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 for smartphones, chargers, and adapters. Within communications, mega data center applications are driving the 100G and 400G optical transceiver market to address the bandwidth needs of data communications. High-speed transceivers require high performance and low jitter oscillators as our timing reference.
Diodes' broad portfolio of small form factor, ultra-low jitter XO product positions us well in this growing market. Further, we continue to see strong demand for our MIPI signal 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. Within communication, we are also seeing very strong design win activities in 5G applications with a wide range of Pericom products, including PCIe package switches, clock IC, crystal and crystal oscillators, level shifters, and high-speed muxes, and with Diodes products including low noise LDOs, buck converters, and MOSFETs.
5G is only in the beginning stage of the infrastructure build-outs, 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 aims for PCIe Gen4 products from the Pericom product line, including signal muxes, redrivers, and active mux 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 adopting USB Type-C connector options. For example, the latest docking station for commercial notebooks supporting USB Type-C would require USB and DisplayPort signal muxes. Diodes solutions 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 sensors are also gaining traction in the notebook and tablet applications by reducing power consumption while maintaining reliable performance. Additionally, our broad 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 content at customers. Additionally, our continued focus on automotive, industrial, and our Pericom products has further contributed to our growth, while also offering 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.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. Again, that's star then one on your touchtone telephone to ask a question. If your question has been answered or you wish to remove yourself from the question queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Gary Mobley of Benchmark. Your line is open.
Good afternoon, everybody. Thanks for taking my question. I want to start with a question or clarification for you, Rick. You mentioned in your prepared remarks Q1 revenue guidance of $302 million, in your press release, it reads $305 million. I'm just hoping to pinpoint exactly what it is.
It's $302 million.
$302 million. Okay. 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. Why go out on a limb with that sort of guidance, and if 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?
Okay. I think we always talk about the seasonality somewhere around down 5% -1 0%. Similar to last year, we do see a very strong demand for our product, especially the 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. Even when we see some of the applications do slow down in one quarter, due to the content increase, our effect by seasonality reduced.
Okay. I did have a follow-up question about your GFAB acquisition. Obviously, it perhaps doesn't fit with TI strategy and perhaps it's the reason they're willing to sell it. 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?
Well, I don't want to speak for them, but obviously, they are expanding their 12 in fab, and they are moving to the small geometry. For Diodes, since we do have a need for more capacity for 6 in, but especially, we really don't have enough capacity for our 8 in products. This is just the right match between the two companies when we move the product portfolio into the 8 in. It really suits us from the usage point of view. I think during the speech, you can see we do build significant revenue and profit, GP dollar increase in the futures, and this fab will be able to provide us the people, the skills, the capacity, and all those are going to be very positive adder to Diodes operations.
That's helpful. Thank you, everyone.
Thank you. Our next question comes from Shawn Harrison of Longbow Research. Your line is open.
Hi, everybody. Congratulations on the strong results and guidance.
Thank you, Shawn.
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'm just trying to figure out, did you pay a lot to get the accretion? I know you usually like a bargain.
Number one, we do have agreement with TI. The detail of the purchasing cannot be disclosed, okay. Two things I can tell you. One is it meets my M&A criteria. Remember, one of the key M&A criteria is need to be accretive within one year. Fortunately, this acquisition, it provide immediately accretions. That's what I really pay attention. Number two, we always say this is insignificant on the material.
Yes. It's immaterial.
Immaterial.
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.
Got you. That's helpful enough. On your current 8 in capacity at the FAB 2, where are you at right now in terms of production versus the target level, which is what, 12,000 wafers a month or something like that?
Yeah. If you remember, it start from beginning of last year, or actually we start working on 8 in capacity in SFAB2 since 2017. The first production is in March of 2018, we are able to ramp it up to about 9,000 wafer a month by December 2018. We were hoping, we start to continue ramp it. The maximum capacity in SFAB2 is only 12,000 a month, 8 in capacity. When we're talking about this is 8 in capacity, and it's for MOSFET, for SBR. Typically, somewhere around, probably five, six layers per wafers. Okay. 256,000 wafer, 8 in equipment wafer layers.
Layers.
Layers. It's a good addition to our discrete, especially MOSFET and SBR's capacity increase.
In fourth quarter, the goal was to get to between eight and 9,000, that's actually where we got to in SFAB2.
Yeah.
Okay. 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?
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. Fortunately, on this side, equipment's already there, and we probably need six months to implement the process. It probably take another three months to do qualification, to do this one. We will put it up the product notice to the customer, and let's say probably currently, I expect maybe end of the year, we will start to notify our customer, give them the sample. To officially ramp, the customer need the approval and all this one. It probably take a while. That's why it's important for us to continue supporting TI's need and keep the fab loaded, okay?
The time when TI demand go down, our demand will go up, and it's able to give us accretive immediately and continue.
Right. For the customer qualification, it really depends.
Yeah.
I would say range probably from one quarter to three to four quarter.
Couple year.
Depends on the customer.
Yeah.
It's going to take some time.
Yeah. Especially, this fab, we expect to support automotive and industrial. The design or the ramp of the acceptance for the customer to agree to convert, it take a while.
Yeah.
Okay. Some of the automotive require one year or one and half year. It's really very critical for us to be able to continue support TI while we take the time to ramp our product, so we don't want to run into a problem of the capacity is empty or capacity is wasted.
Got you. Thanks so much.
Thank you.
Thank you.
Thank you. Our next question comes from Tristan Gerra of Baird. Your line is open.
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?
No, I cannot. Tristan, like I said, we cannot disclose, and that we have agreement with TI, the detail of the operation cannot disclose. I'm going to emphasize one more time, it's accretive immediately. Okay?
Okay. 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?
Tristan, like I said, I cannot really give too much of detail, but I can tell you now today, the 8 in is almost loaded, fully loaded. Okay. Some of the 6 in, it probably is not fully loaded. The key thing is, we do not have with the agreement, we are able to accretive immediately. Therefore, any additional will be the gain. Any additional loading from Diodes will be the gain. I probably cannot tell you how much gain because then we have disclosed too much of the detail. Loading from Diodes will be able to show more profit. That's for sure, right.
Tristan, one thing we can disclose, and that GFAB currently has over 8,000 wafers per month of 8 in capacity, plus approximately 13,000 wafers per month of 6 in capacity. 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 in equivalent layers per month. Okay.
I wanted to mention, when we talk about 8,000 wafer, that's using traditional CMOS wafer, like 20 layers. 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. The reason is, the product is different and typically, CMOS analog product, number of layer is much higher. In average, probably 18 to 20 layer, and our discrete, which is much, much less. That's why easier way to use is using the layer.
Okay, that's useful. A quick follow-up, on a earlier question. Is it too early or are you able to see initial order activity, now that the Chinese New Year is over? 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 a bit more capacity than you expected. How is that shaping up relative to demand, basically starting this week with post Chinese New Year?
Okay. Tristan, you can see we give the guidance today that in the Chinese New Year, actually just over a couple days ago. We do already know how many people come back during the Chinese, which means last week. The Chinese New Year is last week. 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. I think that guidance reflects 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.
Okay. Thank you.
Thank you. Once again, to ask a question, please press star one on your touchtone telephone. Again, that's star one on your touchtone telephone to ask a question. Our next question comes from the line of Edgar Roesch of Sidoti. Your line is open.
Yeah. Congratulations on finishing up a terrific year.
Thank you, Ed.
Well, it was great. 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 the like, would be a good bit slower. Could you just speak about how the growth trended throughout 2018 and what you're seeing going into the first quarter here?
Right. This is Emily. Maybe let me address the question, right? 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. With this change, which we've been emphasizing for the last few quarters, we start seeing a lot of content improvement, especially on the diode side. That's really what we're seeing. Now, switching from the traditional to the newer models, even if it's the same function, it really enrich a lot of features and functionality, kind of really helping the content expansion that we've been talking about.
Okay. Terrific. Thanks for that. 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? Would we expect that to maybe grow a little faster than revenue at some point?
You remember, when I go to talking about 2025, we were hoping, we was driving the GP up to 40%, and revenue $2.5 billion. You remember, that is the same we're talking about. During that same, I do intend to increase our model of R&D to 6%. You probably say, "Oh, 1% more." Don't forget, 1% is the 20% of the total R&D numbers. Okay? Number two is, we have the growth on both discrete and analog. Discrete, the R&D will keep the same as the revenue growth. Therefore, I don't see a need of significant increase our R&D from our business model. I think 6%?
7%.
7%. I'm sorry.
7%.
7%. Yeah. From 5% to 7%. It's a good increase, and I think that the key thing really is efficiency of using the R&D money. Okay? You know I've been driving how to more effectively to using R&D money. So far, Diodes is able to efficiently increase our efficient control or using our R&D money. Another thing you look at, we purchased Pericom, and Pericom product, their IC product is in 50%, 60% GP. If you look at Pericom, I'm talking about IC business, Pericom IC, not including frequency control product. In Emily's speech, you already know our Pericom actually grow 24% of the IC. Pericom IC increased 24% last year. 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. To answer your question, I think we are very well to utilize our R&D money.
Yes. Thank you for that. 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 a change in equity ownership structure?
He's talking about the Chengdu equity investment that we talked about in the fourth quarter.
Yeah.
What's that going to be spent on in the future? Expansion or?
Okay. We do have two items. One is constantly CapEx increase to support our need for the capacity expansion. That will still continue. The other big money is the building. If you remember at the beginning when we built Chengdu phase one, we built up one manufacturing building, one R&D building, and one plating building. We kind of using up all the majority of our manufacturing building. We do plan to go to next phase, which is building another five floor of the manufacturing floor. That is the one going to consume a big money. I'm just trying to see we can fully use our space and see, delay a little bit on our building expansions. It's still ongoing, and when we have a need, we'll start building up the next manufacturing building.
Thanks for that. Have a good evening. Thanks.
Thank you.
Thanks, Ed.
Thank you. At this time, I'd like to turn the call over to Dr. Lu for any closing remarks. Dr. Lu?
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.
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.