Good afternoon, and thank you for attending Supermicro's call to discuss financial results for the third quarter of fiscal 2020, which ended March 31st, 2020. By now, you should have received a copy of the news release from the company that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the Investor Relations section of the company's website under the events and presentations tab. We have also published management's scripted commentary on our website.
Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation, and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. There are a number of risk factors that could cause Superm icro's future results to differ materially from our expectations. You can learn more about these risks in a press release we issued earlier this afternoon, our most recent 10-K filing for 2019, and our other SEC filings. All of these documents are available on the investor relations page of Supermicro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook.
For an explanation of our non-GAAP financial measures, please refer to the accompanying presentation or to our press release published earlier today. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts to ask questions. I'll now turn the call over to Charles Liang, Chairman and Chief Executive Officer.
Thank you, James, and good afternoon, everyone. Today, we have released financial results for our fiscal third quarter 2020. Let's take a look at a few highlights from our Q3 results. Our third quarter net sales total $772 million, up 4% year-over-year. Our Q3 earnings per share was $0.84 compared to $0.49 last year, which was up 71% year-over-year. One area of particular strength in the quarter was our 5G edge and IoT products, which were up more than 30% year-over-year. Before we dive into the financial details, I want to provide you an update on our business vision.
To make it simple, our business strategy is to build the best products for high-growing market, leveraging our unique Building Block Solutions design approach and green computing resource-saving architecture, thus beneficial to both our customers and the environment. We have been focusing on our strategic high-growth market segments and aligning our resources accordingly to speed up growth for the coming quarters and years. These four strategic drivers are, first, our organic enterprise and channel business, including server, storage, and AI, which are our long historical growth areas. Second, the new 5G edge and telco business. Third, large data center and public cloud. Fourth, software and global service. In the enterprise space, we have acquired many brand name enterprise customers over the years, and our plan is to win more new accounts while growing our install base.
To that end, we have our key products such as BigTwin, Ultra, and MP systems, certified by leading enterprise software partners such as SAP, Oracle, VMware, and Red Hat. As an important part of our organic growth, our channel business has remained strong throughout the years, due largely to our Building Block Solutions approach that helps our partners create the most optimized systems for their customers. In the rapidly growing AI and machine learning space, we have established ourself as a premier AI system provider. We have recently introduced the industry's broadest portfolio of validated NVIDIA GPU Cloud or NGC-ready systems optimized to accelerate AI and deep learning applications. We see more AI workload moving towards the edge, where AI inferencing and 5G is converging and driving up demand for our intelligent edge products.
Our second growth driver is 5G, edge, and telco, which present an exciting field of opportunities for Supermicro. We have designed a series of new telco and edge-friendly product lines to help our customers build out their 5G deployments, which enable them to transform their existing proprietary hardware infrastructure to open software-defined x86 standard hardware from Supermicro. For example, our pole-mounted rack-optimized IP65 server is perfect for 5G and the outdoor intelligent edge. We also introduced and optimized short-depth 2U Ultra SuperServer that provides better features and faster performance and is ideal for telco and micro data center environments. Just yesterday, we hosted a highly successful online event with our technology partner, Intel. The 5G Live Forum brought together leading infrastructure and telco companies from around the globe to discuss the latest total solutions for 5G. These sessions are now available on our website.
We believe the transition from 4G to 5G will provide Supermicro significant growth opportunities going forward. The third growth driver we are focusing now is the large data center and private cloud space. Our new products, such as the CloudDC systems, are purpose-built for hyperscale data centers with cost optimization and ease of volume deployment. In preparation to scale for more cloud business, we have already made available 30% extra production and service capacity as of today and are also expanding our global manufacturing facilities, especially in Taipei, where lower operating costs allow us to be more competitive. The last and fourth growth driver is our software and global service. To ensure our server storage and networking products are simple to deploy, easy to manage, and secure to use, we have been investing in our software and global service over the past many years.
In addition, we have certified all the major operating systems and key applications while adding more security capabilities. As more and more customers are deploying data centers at increasingly large scale, it's paramount that we supply them with more capable cloud scale management software that enable streamlined and full automatic data center operations. An enhanced mix of hardware, software, and services revenue will also improve our gross margin over time and provide revenue growth. In summary, we were pleased with our quarterly results despite the disruption caused by COVID-19. At this moment, we do not plan to provide the quarter's revenue guidance, but we are very excited with our innovative product pipeline and our new growth drivers, which should help Supermicro re-accelerate our revenue growth and resume our long history of market share again.
I will now hand the call over to Kevin to review the results of the quarter in more detail.
Thank you, Charles. First, I would like to thank our employees, customers, investors, and partners for their support as we navigate the challenges during the COVID-19 pandemic. Upon the news of the outbreak overseas, our first response was to actively manage our supply chain for potential shortage risk by increasing inventories of critical components. Since that time, we have continued to add to our safety stock for key components such as CPUs, memory, SSDs, and to a lesser extent, GPUs, such that customer orders can be fulfilled as they are received. As a designated essential business, we responded to the directives of Santa Clara County and the state of California regarding shelter in place instructions to combat the spread of COVID-19. Our first priority is the safety of our workforce, and we immediately began to implement numerous health precautions and work practices to operate in a safe manner.
Operating in the critical sector of IT infrastructure, we assessed our customer base to identify priority customers who also operate in critical industries, guiding us in our go-forward strategy. We quickly transitioned most of our indirect labor force to work from home. We also shifted some focus towards Taiwan operations from Europe and the U.S. Despite this disruption, we successfully managed the last two weeks of March to achieve revenues at the bottom of our original guidance range. Let me turn to the financials. Our fiscal third quarter revenue totaled $772 million, which was at the lower end of our initial guidance range given on February 6th and above the midpoint of the guidance range we gave on April 2nd. This reflects an 11% quarter-on-quarter decrease from the second quarter of fiscal year 2020, but a 4% increase from the same quarter of last year.
Systems comprised 74% of total revenue, and volumes of systems and nodes shipped were down sequentially, but up year-over-year. A number of large enterprise customers fulfilled data center projects in the December quarter and, is often the case, paused in the March quarter. ASPs increased quarter-over-quarter but declined year-over-year. Geographic performance on a year-over-year basis was mixed, with the U.S. down 3%, EMEA up 20%, and Asia 10% higher. On a sequential basis, the U.S. market declined 20%, while EMEA grew sequentially by 9%. Asia declined a modest 3% sequentially. There were a number of sizable discrete events in the quarter that I would like to emphasize. First, we received a settlement fee on a joint product development project for $10.1 million, $0.6 million of which reduced cost of sales and $9.5 million that reduced R&D expense.
Applying our U.S. tax rate of 23% would yield a $0.14 benefit to diluted earnings per share on both our GAAP and non-GAAP financials. Second, in our last call, we mentioned that we expected to incur additional one-time charges of $35 million-$40 million related to residual cleanup matters from our extended blackout period. By direction of our board of directors, we sought input on this matter from investors holding approximately 45% of our shares outstanding and incorporated that input to provide cash awards, many of which included performance conditions. This quarter, we recorded $10.3 million in expense, $2.9 million of which increased cost of sales, and $7.4 million that increased operating expense related to the awards. As noted in our last call, we have excluded this item from our non-GAAP measures.
We recorded a provision for an SEC settlement of $17.5 million that we have excluded from our non-GAAP measures. Working down the P&L, gross margin on a non-GAAP basis was 17.7%, 250 basis points higher than last year, driven by lower commodity costs as well as favorable customer, geographic, and product mix, and the aforementioned settlement fee. Q3 operating expenses on a GAAP basis increased 7% quarter-on-quarter to $118 million, mainly due to a $12.5 million increase in salaries and benefits, including previously disclosed performance awards and the related payroll tax withholding, and the $17.5 million provision for an SEC settlement. These expenses were offset by $9.5 million related to the joint product development-related settlement fee. On a non-GAAP basis, operating expenses decreased 15% quarter-on-quarter and increased 8% year-on-year to $87 million.
The sequential decline was due to several factors, including lower audit costs and lower employee costs, including R&D expenses and the joint product development-related settlement fee. Recall that concluding in our delinquent filings in the December quarter led to the sequential reduction of audit fees of approximately $6.5 million. Other income and expense was a $0.9 million gain as compared to a $0.4 million loss last quarter, primarily related to the foreign exchange impact on our Taiwan dollar-denominated term loan. This quarter, our taxes were a $0.9 million benefit on a GAAP basis and a $2.9 million expense on a non-GAAP basis. In both cases, we benefited from reduced tax liabilities in the U.S. and the Netherlands. We continue to expect both our GAAP and non-GAAP tax rate going forward to be approximately 20%.
Lastly, our share of results in the joint venture was a $1.1 million loss this quarter, as compared to a $1 million loss in the previous quarter and a $0.54 million loss in the same quarter a year ago. Q3 non-GAAP diluted earnings per share totaled $0.84 per diluted share compared to $0.57 last quarter and $0.49 last year. Cash used in operations totaled $21 million as we invested in inventory as a defensive measure, and CapEx totaled $11 million, resulting in free cash outflow of $32 million. Our closing cash position, including restricted cash, was $319 million. This quarter, our cash conversion cycle was 92 days, which is slightly above our target of 85-90 days. Days sales outstanding was 41 days payable outstanding totaled 61 days, and inventory days was 112. Turning to the outlook for our business.
Given the uncertainties of COVID-19, we will not be providing guidance for the coming quarter. However, to provide context around our business, we are sharing the following metrics and facts. We continue to see ongoing demand as we enter the fourth quarter of fiscal year 2020 and did not have significant direct exposure to industries such as retail, oil and gas, and travel and leisure that have been impacted the greatest. As time passes, we may discover greater indirect exposure to distressed industries through our channel partners and OEM customers. We note that our shipments plus orders shippable in the June quarter as of the last week are up as compared to the prior quarter, and are also up compared to the same quarter a year ago as well. Looking forward, logistics has emerged as a new challenge as the transportation industry restricts the frequency of departures and increases costs.
We expect increased costs in freight, as well as direct labor costs as we incentivize our employees to continue to work and assist us in serving our customers, many of whom are in critical industries. We expect these incremental costs to reduce gross margin by 100- 150 basis points on a sequential basis. We also expect to record expense of $16 million-$17 million related to the aforementioned performance awards in the June 2020 quarter. Approximately $20 million-$25 million in cash will be paid in June 2020 quarter related to these performance award. Our management team is focused on guiding our company through the unfolding and emerging challenges presented by COVID-19. Although we're unable to predict the extent to which COVID-19 may further impact our business operations, financial performance, and result of operations, we believe we are well-positioned financially and strategically in an uncertain business environment.
With that, I'll turn it back to James for Q&A. Operator, we're ready to open the queue for questions.
Thank you, sir. Ladies and gentlemen, a question and answer session will be conducted electronically. To ask a question, firmly press the star key followed by the one key on your telephone, and we will take your question in the order that you signaled. If you find that your question has been answered before you can ask it, or would like to remove yourself from queue, press the pound key. Also, if you're on a speakerphone, please make sure that your mute function is designated so that your signal may reach our equipment. Finally, we ask that you limit yourself to one question and one follow-up until all the queue have had an opportunity to ask a question. We will then come back to you for additional questions. Again, that is star one if you would like to ask a question.
Your first question comes from the line of Mehdi Hosseini with SIG.
Yes, thanks for taking my question. Two items. One on the P&L and revenue mix. Can you provide some color on how the mix between server system and subsystem was in the March quarter, and how you see it trending into the June quarter? Then on the inventories that went up by about $160 million, are you going to continue to build inventory in the June quarter? If to that extent, how should I think about cash from operation and free cash flow? Thank you.
Yeah, Mehdi, thanks for the question. I think, the first one in terms of systems versus subsystems, we talked a little bit about how sequentially we had some good systems purchases by enterprise customers that were project related in the fourth quarter. Oftentimes we get that in the December quarter and the June quarter, and those were down quarter-over-quarter. That's primarily one of the drivers of systems being down. To your second question as it relates to inventory, yes, we did build quite a bit of inventory during the quarter, as I had described, trying to get ahead of the ballgame in terms of any supply issues that were out there. We will potentially continue to build inventories during the course of this quarter.
I think it all depends on what we've bought and then the success of our sales coming out in this quarter as well. Still in a defensive posture until we feel a little bit more comfortable about seeing the supply situation in terms of lead times coming down a little bit, and then feeling a little bit better about not being bit by any logistic issues.
Sure. Just a quick follow-up. On your preceding remarks, you said you did indeed accumulate more inventory of CPU and I think you said the storage, or you may have said DRAM and SSDs, but you said not as much GPU. How should I think about the mix of inventory that you are accumulating? Why less GPU and more CPU?
Yeah. As you may know, memory and SSD have been a shortage in the market for a few quarter, especially recently. That's why we keep more memory, DIMM module and SSD. As to CPU and GPU, we manage relatively very well. Yes, June quarter usually our kind of high season. That's why we prepare a little bit more, so make sure we won't have a shortage for customer.
Okay. Thank you.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Yeah. Thanks for taking the questions. Just kind of building on that last question. I'm just curious of, I guess first of all, on the constraint side, were you unable to ship to any customer demand this last quarter because of supply constraints or component constraints? On that same topic, how are you currently seeing the pricing environment? As you build inventory, there's a little bit of a debate out there of whether or not memory pricing could start to turn the other direction, meaning decline going into the back half of the year. I'm just curious of what are you seeing in terms of flash pricing as well as DRAM pricing in your inventory?
I'll take the first question, and then I'll let Charles speak to the second question. As it relates to the first question, Aaron, we always exit the quarter with some portion of our demand not being able to be shipped because of shortages. That was true this quarter as well.
Yeah. That's why we watch very carefully. It's a daily basis. Then we keep enough SSD and DRAM at this moment. I believe our inventory level today should be pretty efficient to support our June quarter demand. As the pricing, it's hard to say.
Yep.
It depends on coronavirus situation, right? As of this moment, looks like it's still kind of not predictable, but we keep relatively in a very high confidence level. A little bit higher inventory, but we believe we need them either this quarter or in next few months.
Okay. Thank you. Just thinking about, you talked about the growth drivers, the vertical market opportunities that you guys have between AI, ML, and enterprise cloud, 5G, edge telco, and then software and services. Can you help us understand the contributions of those, call it, four verticals to the business today, and any thoughts on what you're expecting those to grow as we move forward?
Yeah. Thank you for the question. As you know, we just finished the 10-K today, a long-term program. Now we are recovering. We are recovering our business, get back to a normal, faster growth mode like we had in last 25 years. Other than our organic enterprise service storage and channel business, we are ready to fully focus on 5G, edge, and telco market as well. We have dedicated team focusing that area and believe it will start to grow strongly. The other area, like large data center and public cloud, yes, before our capacity was limited, especially in U.S. In last few years, we extend our capacity pretty successfully in Taipei. Now we have extra capacity in Taipei, and we believe it's beneficial to our sale, our shareholder, to focus some large-scale cloud and to grow our economical scale.
We will be selective to grow that deal and make sure it's positive to company. As to software and global service, I believe we share a couple of time in our quarter-end conference call, and it's continual, stably growing business. With software, especially management software, and now pretty efficient global service, we are able to approach more enterprise customer cloud, private cloud and public cloud around the world. We feel pretty comfortable to recover our faster growth beginning this month and now.
Yeah, I think, Aaron, that's another area that we hope be a little bit more discreet about in Analyst Day.
Yep. Okay. Thank you.
Your next question comes from the line of Ananda Baruah with Loop Capital.
Hi. Good afternoon, guys. Thanks for taking the questions. A couple, if I could. Charles, Kevin, congratulations on the crisp execution as well. Yeah, two if I could. I guess the first is, I apologize if you've already spoken to this and I missed it, but Charles, in the press release, you talk about how key application adoption, I think you say all, which is accelerating as a result of COVID. I was wondering if you could talk with a little more context as to what you're seeing there with regards to acceleration. Would love to get some context around sort of what types of applications you're seeing accelerated. Do you think maybe there could be some bit of a structural change, not just a little pull forward?
Any other context you think that would be useful for us. I have a quick follow-up. Thanks.
Yeah, thank you. A really good question. The coronavirus indeed created big trouble for people around the world, but it also created some strong demand for people. For example, people work home and people stay home, so they need a lot of networking service. We saw a large data center communication company and other security-related organization. Their demand indeed are increasing kind of strongly. Good luck is we have been preparing 5G, Edge, and telco business since about last year. Those products are getting mature, and we again getting have a more customer commit to those product lines. I mean, overall, I feel optimistic for our future growth, although have to be very carefully watch the coronavirus. At this moment, I feel basically positive.
That's great. It may be too early to ask this next question, but are you able to develop any sort of opinion on if there's going to be any degree of structural change in customer, your customer behavior, such that maybe the level of dollar spend on those types of applications you benefit from could remain elevated given everything that's taken place? I know it's early, and I know there's a lot of opinions about that, but if you feel like you've been able to develop one, I'd love to hear what it is.
Yeah. As you may know, our Building Block Solutions have been helping us a lot with a lot of customer-specific application or some modification to optimize their data center structure. We are able to modify from our existing Building Block Solutions. Instead of a completely new design that may take people one year or six months. In most of the case, it took us a much shorter timeframe, two months to three months. We are able to optimize exactly the application customer want. Including 5G, Edge, and telco market I just mentioned. That's why we are able to quickly win some good commitment from certain really large-scale customer.
That's really helpful. Thanks a lot, guys. I'll get back in the queue. Thanks a lot.
Thank you.
Your next question comes from the line of John Lopez with Vertical Group.
Hi, can you guys hear me all right?
Yeah. Hello, John.
Hi, how are you?
Doing okay.
Good. My first question is, would you mind just walking through, stepping back the timeline or a timeframe from sort of February through now? I guess what I'm looking at or trying to get a sense for is, I'm assuming things were pretty challenging for a bit there, but I'm wondering if you could describe how the quarter ended and just how things have trended thus far as you've gotten into calendar Q2.
Yeah. I kind of shared that first of all, the March quarter is always a difficult quarter because of the fact that you have Lunar New Year there. Typically, what we see is that it's pretty slow in the first two months and then we try to predict what the third month was. This year was no different than any other. As we got into the March quarter, I'm sorry, in the month of March things turned around. We saw a solid line of sight to be able to hit the bottom of range that we were at. We were able to navigate the last two weeks as it relates to the disruptions of the workforce. Because of that, we're unlike others. At that time, we did not just pull guidance.
We decided to wait and be able to give a new guidance in the first week of April. Thereafter, as I've said, we've seen continuing demand, as compared to our metrics of backlog plus shift. We're a little bit ahead as compared to quarter-over-quarter, year-over-year. The visibility is still very murky out there with COVID-19. We don't know the rate of people going back to work or anything like that. It's still fuzzy.
Right. No, that's helpful. I guess the thing I'm driving at, it's your fiscal Q4. To your point, we all understand these are not normal times. I would imagine your backlog would be building or would be higher in normal fiscal Q4. I guess the thing I'm just kind of driving at is if you could compare to what would be normal, are things more or less back to normal at this point, caveated around the lack of visibility on stuff?
On a year-over-year basis, it is up. That's what I said in terms of our backlog and shipments as of this time.
Yep. Okay. Got you. Helpful. My second question, I apologize, you may have covered some of this stuff. I was on hold for a bit, relative to the backlog and the shippable stuff, are there like, I know you highlighted logistics, are there things that would prevent you from shipping that backlog? Is that part of the reason that you're, despite having that, excuse me, maybe cautious or opting not to offer guidance? Could backlog be there, you'd not be able to meet it for one reason or another?
There are a number of reasons, some of which is that, at this time, especially over the last few weeks, we've had to confirm that our customers are able to receive the products, having people work on the dock to receive it. We can't just ship product to them and have it left on their dock with no attention there. There's a number of things like that that are little practical items that we need to go through in greater pain than under normal times.
Yeah, that makes sense. I got two other real quick ones if you could bear with me. The first one, just on gross margins, you mentioned that you're going to see some headwinds cost-wise from logistics, and I think you quantified that as like 150-100 basis points relative to calendar Q1. Excuse me. Is there anything else that we should think about gross margin-wise between calendar Q1 and calendar Q2, other than those logistical headwinds and costs?
Well, yeah. We had a pretty good product mix in that quarter. We'll see what the product mix is when we get done in the second calendar quarter as well.
Got it. Okay.
You know, John, now that you're on the phone, I'm going to answer a question that you're not asking because I got nudged by someone here, and that is that I wanted to highlight that in my prepared remarks, I said that our going forward tax rate is 20%. That's our long-term going forward tax rate, which we're still believing will apply to 2021. Obviously, we had some favorable tax treatments in the March quarter. For this year, we expect that because of the fact that our employees can now trade their options and sell shares, we're starting to get some stock comp windfall. Also we've been able to conclude on some old tax audits.
For this year, we think the GAAP tax rate for the full year is going to be more like in the mid-teens on a GAAP basis, and maybe as low as 10% on a non-GAAP basis.
Got you.
I wanted to clarify that.
No, that was on my list. I'm glad you did it.
Okay.
The last one, you get rid of me. I understand not giving revenue guidance. I guess the one thing I'm hoping you could talk to a little bit, I mean, you can control OpEx much more readily than you can control revenue. I know there was a lot of one-time stuff in calendar Q1. As you think about the balance of the year, can you just talk through how, even qualitatively, you're planning on handling OpEx until visibility improves a bit?
Yeah. We will be continuing to invest as Charles had outlined. We're still moving to be able to grow, more so in Taiwan than others. Trying to be careful and trying to be smart as the economy reveals itself.
Okay. It sounds like we shouldn't expect OpEx to come down a whole lot. Is that a fair way to summarize that?
Yeah.
Okay. All right. Thanks very much. Appreciate it.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. We have a follow-up from Mehdi Hosseini with SIG.
Just a couple of follow-ups. As a follow-up to the prior question regarding OpEx, Kevin, you mentioned a couple of items in your prepared remarks, like a higher equity compensation and cash award. Can you please just highlight those items? Are those all going to be in the cards, or how is it split between cards and OpEx? Beyond the June quarter, how does the OpEx look like when these one-time increase go away? I have a follow-up.
Yeah, sure. Mehdi, I'll step back and highlight the fact that we said that we reached out to roughly about shareholders that held about 45% of our shares to be able to craft these things. These are cash awards, but because of the fact that most of them have performance conditions, we have to use a Monte Carlo analysis to determine how to spread the expense over time. I think I mentioned that we had roughly about $10 million in expense this quarter, and in next quarter, I think I said it was about $16 million-$17 million. There's going to be after that, I would expect that it's going to come down dramatically and there will be a tail over the course of time that will be far less material as it goes. That's the way that the expense would be spread.
I highlighted the fact that there will be payments that will hit our cash balance in this June as some of those conditions have been successfully met.
Okay. Two follow-ups here. The tailwind, as we look into the second half calendar year, does that imply like a single digit, like a $5 million-ish per quarter? Would that be a fair assumption for modeling purposes?
Are you talking about OpEx growth?
No, I'm talking about the compensation. The employee compensation in the March quarter was $10 million, and then $16 million-$17 million in June, and then it's going to come down. You said there's a tailwind. For purpose of modeling, should I assume that tailwind is like mid-single in September quarter and beyond?
I'm sorry. I think I've misdescribed it for you. What I said was. Let me just make sure here. Let me go back and refer to what I said here.
I think just repeating what you said, $16 million-$17 million in June, and for March was $10 million.
Right. That's about $26 million or so. If you remember, we had estimated it to be about $35 million-$40 million. In the end, it's going to be maybe not quite $35 million.
Okay. Got it. Now that is clear.
Does that help you?
Yeah.
Yeah.
I also want to go back to my earlier question. I was trying to figure out how the server system business tracked in the March quarter, and what should we expect in the June quarter. I didn't quite understand if it was up or down in March.
Sorry, Mehdi. Say that again?
Was the server system revenue, total revenue minus subsystem, was it flat, up, or down in the March quarter?
It was down, Mehdi, and I explained that it was driven by enterprise customers who executed on capacity projects in the fourth quarter, took a pause in the March quarter. What I said was is that by looking at what they're doing in the June quarter, they're coming back a little bit.
Okay. All right.
On that cash award comp, remember we're non-GAAP that out. Don't forget that.
Right. Sure. Okay. I just want to go back to, you did increase inventory by $100-some million, and then June is typically your strongest quarter. Some of the server system that could not be shipped in March is pushed out to June. When I look at these dynamics, it seems like your inventories should start to come down in the second half of calendar year as the supply disruption goes away. Would you agree or not?
Yes.
Basically, yes.
That's right.
Yeah. Unless in second half, coronavirus global situation really improve, and we hope so, our inventory have to grow again to meet the growth.
Okay. All right. Thank you, guys.
Your next question is a follow-up from Ananda Baruah with Loop Capital.
Hi. Thanks. I appreciate the follow-up. Just quickly, another, it's not really a clarification, but just more context again. In the prepared remarks, you guys mentioned public cloud and some of the things you're doing around public cloud. You mentioned it a couple of times. There's also a mention of cloud in the press release. Is there something sort of new that's going on there? It sounds like you sort of teased it out, so I would love to understand, how do you want us to think about what's taking place there and what the exposure is?
Yeah, very good question. Indeed, data center and cloud are not new to us. We have been always have a cloud data center business. Before, with limited production capacity from USA especially, that's why we are very carefully controlled to engage with more cloud or large data center. Now, in last two years especially, we grow our capacity in Taiwan a lot. Now we have extra capacity and very good product for cloud, especially private cloud as well. Now even for public cloud, we have a specifically optimized solution for that. We are carefully select some customers, some partner to support them. The volume can be big, but will be under careful control.
Charles, that's helpful. Should we think of sort of the incremental growth in that area? Should we think of it being served out of your Taiwan capacity?
Can be. We hope so.
Okay. I guess my next question is then, to the extent you can share, can you talk about sort of from a customer perspective, not specific names, would you be on a public cloud basis providing those solutions into U.S. hyperscalers, China hyperscalers? China would make sense because it's being produced so closely, any context there you could provide would be helpful too. Thanks.
Yeah, indeed, both. Indeed, in last many years, we have been always have a large cloud partner. It was just because our capacity was limited, that's why we selective to support them. Now with more capacity available, especially in Taipei, we are ready to be more aggressive to engage with them.
I got it. Okay. That's great. Thanks, all. I appreciate the context.
Yeah. Thank you.
Your next question is a follow-up from John Lopez with Vertical Group.
Oh, hey. Thanks so much, guys. I had two quick ones. The first one is, Intel made some roadmap changes a little earlier, with some impact to the early part of the year. I'm wondering, did that impact you at all? Just in terms of, I know there's a whole bunch of variables you're dealing with, excuse me, did that specific variable impact either bookings, visibility, or anything over calendar Q1, calendar Q2?
I don't think so. Not appreciably.
Okay, great. My second one, there's sort of a new discussion about some security measures being implemented in China. I just wanted to double-check on your exposure there, A, and B, would you think that there's any potential impact to you to the extent that those measures move forward?
We're not quite sure. We'll have to see.
What's your question again?
Oh, yeah, I'm sorry. There's sort of some renewed discussion about some tightening of security and export measures between the U.S. and China that may go into effect in a couple of months. It's sort of an IT-wide phenomenon.
Oh, okay.
Yeah. Sorry. No, that's it.
Indeed. Our operation have a major portion based in Silicon Valley. That's since 20 years ago. We grew a big capacity in Taipei since about 10 years ago. The capacity in Taipei has been very big. That's why now our major production operation indeed is still based in USA and in Taipei, some portion in Netherlands, and in China, indeed the portion has been very limited.
That's also true of our sourcing as well, Taiwan, Richard, maybe.
Perfect. Really helpful. Thanks, guys. I appreciate it.
Thank you.
Your next question is from Aaron Rakers with Wells Fargo.
Yeah. Thanks for taking the follow-ups as well. Two hopefully quick questions. Just back on this whole kind of manufacturing capacity and ability to kind of service more cloud customers. I know several years ago, in the past, you talked about how much actual capacity, how much systems revenue you could support, with the footprint you have. Is there any way you can help us today of how much systems revenue could you support with the capacity you have in place, and how much has that expanded, just with this expansion in Taipei or Taiwan?
I can provide roughly the picture. Kevin maybe later can provide more detail. Basically, we have a huge expansion already, both in USA and Taipei. Overall today, roughly, we have a 30% extra capacity, both USA and Taipei. That's why we are ready to grow significantly in telco market, in even public cloud market. Especially in Taipei now, we are very aggressively increase our operation and production and service capacity. Because as you know, cost from Taipei is relatively less than 50% of Silicon Valley. We for sure like to take that advantage, and it's about right time now. Our extra growth in Taipei can be pretty big.
Yeah. Aaron,
That's helpful.
you just take it from a revenue perspective, that could be maybe getting us to $4 billion or a little bit better. The capacity is there. Obviously, the labor capacity would be increased as needed over time.
$4 billion, and if we ship more computer system, it can be $5 billion.
Okay. All right. That's all the time we have.
Okay. Thank you.
That's all the time we have. Any closing comments from Charles and Kevin?
Yeah.
Well, we wanted to thank all of the investors listening in today, as well as the analysts. We appreciate you walking this journey through us as we continue to go through the challenges of COVID-19. We look forward to talking to you again next quarter. As you all know, we have our annual shareholders meeting coming up, which has a very important vote on it, related to us asking for additional shares for an equity plan that is important, and we seek your support for that. Charles?
Thank you, everyone. We are ready to grow faster now. See you next week. Next quarter, sorry. Thank you.
Thank you.
Thank you.
End the call operator.
Thank you. This concludes today's conference call. You may now disconnect.