Mr. Kisner, you may go ahead.
Okay. I thought you were gonna read the intro. Are we in the call?
Yes, sir. Go ahead. Did you not hear the intro?
No. Did not. It could have me and thank you for attending Supermichael's call to discuss financial results for the third quarter of fiscal 2020, which ended March 31, 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 as 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-nineteen on the company's business and results of operations. There are a number of risk factors that could cause Supermichael's future results to differ materially from our 19 and our other SEC filings. All of these documents are available on the Investor Relations page of Supermarket'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 any supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q and 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. Now let's take a look had a few highlights from our Q3 results. Our 3rd quarter net sales totaled $772,000,000, up 4% year over year. Our Q3 earnings per share was 80% compared to 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 blocks solutions design approach and green computing resource saving architecture, not beneficial to both our customers and the environment. We have been focusing on our strategic, high growth market segments and aligning our resource accordingly. To speed up growth for the coming quarters and years.
These 4 strategic drivers are First, our organic enterprise and channel business, including server storage, and AI, which are our long historical growth areas. 2nd, the new 5gh and telco business 3rd, Large Data Center And Public Cloud. And 4th. Solarwear 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 installed base.
To that end, we have our key products such as between Ultra and MP systems certified by leading enterprise Solarwear partners. Such as SAP, Orako, VMware, and Greyhead. As an important part of our organic growth, our channel business had remained strong throughout our years, due largely to our building blocks solutions approach. That helps our partners create the most optimized systems for their customers. In the very growing AI and machine learning space, we have established ourselves as premier AI system provider.
We had recently introduced the industry's broadest portfolio of Medicaid, Nvidia GPU, cloud or NGC ready systems. Optimized to accelerate AI and deep learning applications. We see more AI workload moving towards that edge, where AI conferencing and 5G is converging and driving up demand for our intelligent edge products. Our second growth drive is 5g, H, and telco, which present an exciting feed of opportunities for Super Micro. We have designed a series of new telco and edge friendly product lines to help our customers build out their 5G deployments.
Which enabled them to transform their existing proprietary hardware infrastructure. To open solar defined X86 standard hardware from shippomicro. For example, our pro mounted ruggedized IP65 server is perfect for 5G and outdoor intervision edge. We also introduced and optimized short steps to you Ultra server server that provides better features and faster performance and is ideal for telco and micro data center environments. Just yesterday, we host a highly successful online event with our technology partner, Intel.
The 5G Zai 4n, brought together leading infrastructure and telco Companies from Aroundaglobal to discuss the latest, the total solutions for 5G. These sections are now available on our website. We believe the transition from 4G to 5G we'll provide a Supermaco significant growth opportunities going forward. The solid growth driver we are focusing now is the large data center and public cloud space. Our new products, such as the cloud DC systems, are purpose built for hyperscale datacenters.
With coastal optimization and easy of volume deployment. In preparation to scale for more cloud business, We have already made available 30 percent extra production and service capacity. As of today and also expanding our global manufacturing facilities, especially in Taipei. Where lower operating costs allow us to be more competitive. The last and first 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 the use. We have been investing in our software and global service over the past many years. In addition, we had certified all our major operating systems and key applications, while adding more security capabilities. As more and more customers are deploying data centers at increasingly a large scale. It's paramount that we surprise them with more capable house scale management software that enable streamlined and for automatic telecenter operations.
And enhanced mix of hardware, software and services revenue. We also improve our gross margin over time. And provided revenue growth. In summary, we were pleased with our quarterly results despite the disruption caused by COVID-nineteen. And at this moment, we do not plan to provide the quarterly revenue guidance.
But we are very excited with our innovative product pipeline and our new growth drivers. Which you have Super Michael reaccelerate our revenue growth and redeem our long history of mastery again. I will now hand the call over to Kevin to review the results of our quarter in more detail.
Thank you, Charles. First, I would like to thank our employees, customers, investors and partners for their support as 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 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 questions 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 United States. Despite this disruption, we successfully managed the last 2 weeks of March to achieve revenues at the bottom of Our fiscal third quarter revenue totaled $772,000,000, which was at the lower end of our initial guidance range given on February 6, and above the midpoint of the guidance range we gave on April 2. 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 comprise 74% of total revenue and volumes of systems and nodes shipped were down sequentially, but up year over year. A lot 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 on 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 $10,100,000. $600,000 of which reduced cost of sales and $9,500,000 that reduced R and D expense Applying our U. S. Tax rate of 23 percent would yield a $0.14 benefit to our diluted earnings per share on both our GAAP and non GAAP. Financials.
2nd, in our last call, we mentioned that we expected to incur additional one time charges of $35,000,000 to $40,000,000 related to residual cleanup matters from our extended blackout period. By direction of our board of directors, we saw 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 $10,300,000 in expense, $2,900,000 of which increased cost of sales, and $7,400,000 that increased operating expense related to the awards. As noted in our last call, we have excluded this item from our non GAAP measures. Lastly, we recorded a provision for an SEC settlement of $17,500,000 that we have excluded from our non GAAP measures.
Working down the P and 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 $118,000,000, mainly due to a $12,500,000 increase in salaries and benefits including previously disclosed performance awards and the related payroll tax withholding. And the $17,500,000 provision for SEC settlement. These expenses were offset by $9,500,000 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 87,000,000 The sequential decline was due to several factors, including lower audit costs and lower employee costs including R and 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 $6,500,000. Other income and expense was a $900,000 gain as compared to a $400,000 loss last quarter, primarily related to the foreign change impact on our Taiwan dollar denominated term loan. This quarter, our taxes were a $900,000 benefit on a GAAP basis and a $2,900,000 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 $1,100,000 loss this quarter as compared to a $1,000,000 loss from the previous quarter, and a $54,000 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 $21,000,000, as we invested in inventory as a defensive measure and CapEx totaled $11,000,000, resulting in free cash outflow of $32,000,000.
Our closing cash position including restricted cash was $319,000,000. This quarter, our cash conversion cycle was 92 days, which is slightly above our target of 85 to 90 days. Days sales outstanding was 41 days. Days payable outstanding totaled 61 days and inventory days was 112. Now, turning to the outlook for our business.
Given the uncertainties of COVID-nineteen, we will not be providing guidance for the coming quarter. However, to provide context around our business, 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 shipable in the June quarter as of the last week are up as compared to the prior quarter 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 to reduce gross margin by 100 to 150 basis points on a sequential basis.
We also expect to record expense $16,000,000 to $17,000,000 related to the aforementioned performance awards in the June 2020 quarter. Approximately $20,000,000 to $25,000,000 in cash will be paid in June 2020 quarter related to these performance awards. 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 and
Operator, we're
questions. For questions. You. Also, Finally, we ask that you limit yourself to one question and one follow-up until all the queue have been had an opportunity to ask a question. We will then come back to you for additional questions.
Your question comes from the line of Mehdi Hosseini with SIG.
Yes, thanks for taking my question. 2 items, one on the P and L and the 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? And then on the inventories that went up by about a $160,000,000. Are you going to continue to build inventory in the June quarter?
I mean, to that extent, how should I think about cash from operation and free cash flow. Thank you.
Yes, Mehdi. Thanks for the question. So 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.
So That's primarily one of the drivers of systems being down. And then 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 success of our sales coming out in this quarter as well.
But 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. In your prepared 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're accumulating? Why less GPU and more view?
Yes. As you may know, I mean, memory and SSD have been a shortage in the market for a few quarters. Especially recently. That's why we keep more memory, I mean, demagio and SSST as to CPU and GPU, we manage the availability very well. Yes, during the quarter, usually our kind of high season.
That's why we prepare, a little bit more. So make sure we want to reach out to your customer.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Yes, thanks for taking the questions. Just kind of building on that last question, I'm just curious, 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? And then 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 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?
Well, 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.
Yes. And that's why we are watching very carefully. It's a daily pace. And then we keep kind of enough SSD and CUM at this moment. So I believe our inventory label today should be pretty efficient to support our June quarter demand.
And as the pricing, I mean, it's hard to say. It depends on our coronavirus. Situation, right. And at this moment looks like it's still kind of not predictable, but we kind of a cheaper relative area in a very high confidence level. It will be higher inventory but we believe we needed them either this quarter or in next few months.
Okay. Thank you. And then just kind of thinking about, you talked about kind of the growth drivers, the vertical kind of market opportunities that you guys have between AIML and enterprise cloud, 5G edge telco and then software and services. Is there can you help us understand the contributions of those, call it, 4 verticals to the business today. And any thoughts on what you're expecting those to kind of grow as we move forward?
Yes. Thank you for the question. As you know, we just finished the 10 K today kind of a long term progress. Now we are recovering, I mean, recovering our business. We get back to a normal faster growth mode that we have in last 25 years.
So, I mean, other than our organic enterprise server storage and channel business, we are ready to fully focus on our 5gh and telco market as well. So, we have taken dedicated team folks in that area and believe it will start to grow strongly. And the other area, kind of like a large data center and public cloud, Yes, before our capacity was limited, especially in USA. And in last few years, we extend our capacity, prettier successfully in Type A. So now we have an actual capacity in Type A.
And we believe it's beneficial to ourselves, our shareholders, to focus some a large scale cloud and, to grow our economical scale. And we will be selective to enroll our deal and make sure it's positive to company. Us to store wire and global service, I believe we share a couple of times in our quarter end conference call and it's continued stable growing business with SolarWinds, especially managing the SolarWinds. And now for TD IVs and Global Service, we are able to more enterprise customer, private cloud and public cloud around the world. So we feel pretty comfortable to recover our faster growth being in this model now.
Yes, I think, Aaron, that's another area that we hope be a little bit more discrete about in an Analyst Day.
Yes.
Okay. Thank you.
Your next question comes from the with Loop Capital.
Hi, good afternoon guys. Thanks for taking the questions. A couple of I could. Charles, Kevin, and congratulations on the crisp execution as well. Yes, 2, if I could, I guess, first is, and I apologize if you've already spoken to this and I missed it.
But Charles, in the press release, you talk about, key application adoption, I think you say all of which is accelerating as a result of COVID. And I was wondering if you could talk with a little more context as to what you're seeing there, with regards to a acceleration. And it sounds like you guys are leasing some good follow through. So we'd love to get some text around sort of what types of applications you're seeing accelerated. Do you think maybe there could be some bit of a structural change, just a little pull forward.
And any other context you think that would be useful for us? And then I have a quick follow-up.
Yes, thank you. Really good question. Now coronavirus indeed created a big trouble for people around our world, but it also created some strong demand, for people. For example, people are work home home, and people stay home. So they need a lot of networking service.
So we saw a large data center communication company and other security related organization their demand indeed, increasing, kind of strongly. So good luck is we have been preparing 5gh and telco business since about last year. So those products are getting mature and we gain getting to have a more customer commitment to those product lines. So I mean, overall, I feel, optimistic for our future growth, although I'd be very carefully watching the coronavirus. At this moment, I feel basically positive.
That's great. And 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 not consumer, your customer behavior, such that maybe the the level of dollar spend on those types of applications you benefit from could remain elevated given everything that's taken place. I I know it's early, and I know there's a lot of opinions about that. But if you feel like you're you've been able to develop 1, I'd I'd love to hear what it is.
Oh, yeah. As you may know, our building box solution have been helped as a lot. With a lot of customers pay simpler application or some modification to optimize their data centers structure, we are able to modify from our existing building blocks solution instead of completed new design that may take people 1 year or 6 months. In most of our case, it took us a much shorter time frame. 2 months to 3 months, we are able to optimize exactly the application customer 1.
So including 5g Edge. And telco market I just mentioned. So a lot of that we are able to quickly win some good commitment from a 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 Grp.
Hi. Can you guys hear me alright?
Yes. Hello, John.
Hi, how are you? How are you?
Doing okay.
Good. Good. So 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?
Yes. So I kind of shared that, we first of all, the March quarter is always difficult quarter. Because of the fact that you have lunar new year there. So typically what we see is that it's pretty slow in the 1st 2 months and then we try to predict what the 3rd month was. This year was no different than any other.
And as we got into the March quarter, 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 2 weeks as it relates to the disruptions of the workforce. And, 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 1st 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. But the visibility is still very murky out there with COVID-nineteen 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. But I guess, I think I'm driving that, it's your fiscal Q4. And to your point, we all understand these are not normal times, but I would imagine your backlog would be building or would be higher in normal fiscal Q4. So 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 also?
On a year over year basis, it is up. That's what I said in terms of our backlog and shipments as of time.
Yes. Okay. Got you. My second question, I apologize. You may have covered some of the stuff.
I was on hold for a bit, but relative to the backlog and the shippable stuff, are there anything other like I know you highlighted logistics, but like are there things that would prevent you shipping that backlog? And is that like part of the reason that you're despite having that excuse me, maybe cautious or opting not to offer guidance like could backlog be there, but 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. So we can't just ship product to them and have it left on their dock with with no attention there. So there's a number of things like that that are little practical items that we need to go through in a greater pain than under normal times.
Yes, that makes sense. I got 2 other real quick ones. If you could 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 that as like 150 to 200 basis points relative to calendar Q1.
Excuse me. Is there anything else that we should think about gross margin wise between calendar Q1 calendar Q2 other than those logistical headwinds and costs?
Well, yes, we had a pretty good product mix in that quarter. So we'll see what the product mix is when we get done in the second calendar quarter as well.
Got
you. 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. But obviously, we had some favorable tax treatments in the March quarter and for this year, we expect that because of the fact that we our employees can now trade their options and sell shares, we're starting to get some stock comp windfall.
And also, we've been able to conclude on some old tax audits. So 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.
So I
I wanted to clarify that because
No, that was on my list. That was on my list. I'm glad you did it. I'm glad you did it. The last one you hit rid of me, the I understand not giving revenue guidance I guess the one thing I'm hoping you could talk to you a little bit.
I mean, you can control OpEx much more readily than you can control revenue. So I know there was a lot of one timey stuff in calendar Q1, but as you think about the balance of the year, can you just talk through how even qualitatively you're playing on handling OpEx until visibility improves a bit?
Yes. So 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. But trying to be careful and trying to be smart as the economy reveals itself.
Okay. So it sounds like we shouldn't expect the OpEx to come down a whole lot. Is that a fair way to summarize that?
Yes.
We have a follow-up from Mehdi Hosseini with SIG
Yes. 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 share, 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 distributing cards and OpEx? And beyond the June quarter, how does the OpEx look like when these one time, it's one time increase go away? And I have a follow-up.
Yes, sure. So, Mehdi, I'll step back and highlight the fact that we said that we reached out to roughly about shareholders that held about 45 percent of our shares to be able to craft these things. And so 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 $10,000,000 in expense, this quarter And, in next quarter, I think I said it was about $16,000,000 to $17,000,000. And then there's going to be after that, I would expect that it's come down dramatically and there will be a tail over the course of time that will be far less, material as it goes.
So that's the way that the expense would be spread. And then 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.
2 follow ups here, the tailwind as we look into the second half calendar year, does that imply like a single digit like a 5,000,000 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 $10,000,000 and then $16,000,000 to $17,000,000 in June, and then it's going to come down. He said there's a tailwind. And for purpose of modeling, should I assume that tailwind is like a mid single in September quarter and beyond?
I'm sorry. I think I've misdescribed it for you. So, what I said was, is, let me just make here. Let me go back and refer to what I said here.
You said $16,000,000 to $17,000,000 in June and for March was $10,000,000.
Right. So, that's about $26,000,000 or so. And if you remember, we had estimated it to be about 35 $40,000,000. It's going to be in the end, it's going to be maybe not quite $35,000,000.
Okay. Got it.
That was clear. Does that help you?
Yes. Yes.
And then, 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, what should we expect in the June quarter? I didn't quite understand if it was up or down in March.
Sorry, can you say that again?
Total revenue minus subsystem. Was it flat, up or down in the March quarter?
It was down, Mehdi, and I explained that that it was driven by enterprise customers who, executed on, capacity projects in the fourth quarter took a pause in the March quarter. And what I said was, is that by looking at what they're doing in the June quarters, they're coming back a little bit. Okay. All right. Now also on also on that cash award comp.
Remember, we're non gapping that out. Don't forget that.
Sure. Okay. I just want to go back to so you did increase inventory by 100 some 1,000,000. And then June is typically your strongest quarter. Some of the server system that could not be shipped in March is pushed up to June.
So when I look at these dynamics, it seems like your inventories should start to come down in the second half of calendar year as some as the supply disruption goes away. Would you agree or not?
Yes. Basically, yes.
That's right.
Yes. Unless your second half, coronormirus, the global situation getting improved. And, and we hope so. And then our inventory has to grow again. To me that are, that growth.
Your next question is a follow-up from Ananda Baru with Loop Capital.
Hi, thanks. I appreciate the follow-up. Just quickly, another, it's not really clarification, but just more context, again, In the prepared remarks, you guys mentioned, public clouds and some of the things you're doing around public clouds. You mentioned it a couple of times, There's also a mention of cloud in the press release. So is there, are you guys, 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, well, how should we how do you want us to think about what's taking place there and what the exposure is?
Yes, very good question. You see the data center and cloud, not new to us. We have been always have a cloud datacenter business. But before, with limited, production capacity from USAA And Specialty. That's why we are very carefully controlled to, engage with more crowd or large data center.
But now, in that 2 years as measured. We grow our capacity in Taiwan a lot. So now we have extra capacity. And a very good product for cloud as a patient in private cloud as well. And now even for public cloud, we have, specifically optimized solution for that.
So we are kind of carefully select some customers, some partner to to support it. And, the volume can be big, but will be under careful control.
Charles, that's helpful. And so should we think of sort of the incremental growth in that area? Should we think of it being served of your Taiwan capacity?
Tempe, we hope so.
Okay. And 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, but would you be on a public cloud basis providing that those solutions into U. S? U. S.
Hyperscalers, China hyperscalers, I mean, China wouldn't make sense because it's it's there's so being produced so closely. But any context there you could, you can provide would be helpful too. Thanks.
Yes. And Peter, both, Indeed, in that 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. But now with more capacity available, especially in Taipei, we are ready to be more aggressive to engage with them.
Got it. Okay. That's great. Thanks a lot. I appreciate the context.
Yes, thank you.
Your next question is a follow-up from John Lopez with Vertical Group.
Hey, thanks so much guys. I had 2 quick ones. The first one is, Intel made some roadmap changes, a little earlier And I'm wondering some impacts to the early part of the year. I'm wondering, did that impact you at all? Just in terms of, I mean, I know there's a whole bunch of variables you're dealing with, but 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 and 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 just 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. And it's an IT wide phenomenon. Yes, yes, sorry. No, that's it.
Indeed, our operation, have a major portion facing Silicon Valley. Right, last since, 20 years ago. And then we grew, big capacity in Taipei since about 10 years ago. And now the capacity in Taipei has been very big. So that's why now our major, production operation is geophase on USA and then Type A.
And then some portion in, NAND select, seaweed, right? And in China, and indeed, that a portion have been very the boutique.
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. 2 hopefully quick questions. Just back on this whole kind of 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 what the capacity you have in place and how much of that expanded, just with this expansion in Taipei or Taiwan?
I can provide it roughly the picture and Kevin maybe our data can provide more detail. Basically, we have huge expansion already in both in USA and Taipei. So overall today, roughly, we have a 30% actual capacity, both USA and Taipei. And that's why we are ready to grow significantly than telco market and even a public cloud market. And especially in Type A, now we are very aggressive.
We increase our operation and production and service capacity. Because as you know, the cost from Type A is relatively less than 50% of Silicon Valley. So we've assured a lot to take that advantage. And it's about right time now. So our actual growth in Type A can be pretty big.
You just take it from a revenue perspective, that could be maybe getting us to $4,000,000,000 or a little bit better. The capacity is there. Obviously, the labor capacity would be increased as needed over time.
4,000,000,000, we share more competitiveness easy that can be 5 PDN.
That's all the time we have. Any closing comments from Charles and Kevin?
Yes. Well, I wanted to thank all of the investors, listening in today, as well as the analysts. We appreciate You're walking this journey through it as we continue to go through the challenges of COVID-nineteen. We look forward to talking to you again next quarter. And as you all know, we have our annual shareholders meeting coming up, which has a very important both on it related to us asking for additional shares for an equity plan that is important.
And we seek your support for that. So, Charles?
Thank you, everyone. We are ready to grow faster now and see you next week. Our next quarters are.
Thank you. Thank you. This concludes today's conference call. You may now