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Super Micro Computer Inc (NASDAQ:SMCI)
Q3 2020 Earnings Call
May 7, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

James Kisner -- Investor Relations

Good afternoon and thank you for attending Super Micro'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 that is available to participants in the Investor Relations section of the Company's website under the Events & Presentations tab. We have also published Management 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 Super Micro's future results to differ materially from our expectations. You learn more about these risks in the 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 Super Micro'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 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.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

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 at a few highlights from our Q3 results.

Our third quarter net sales totaled $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 markets, leveraging our unique, building-block-solutions design approach and green computing, resource-saving architecture, that's beneficial to both our customers and the environment.

We have been focusing on four 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, a new 5G, Edge and Telco businesses. Third, large datacenter and public cloud. Fourth, software and global services.

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 ourselves 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 deeper learning applications. We see more AI workloads moving toward the edge, where AI inferencing and 5G is converging and driving up demands for our Intelligent Edge products.

Our second growth driver is 5G, edge and telco, which represent 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, ruggedized IP65 server is perfect for 5G and the outdoor, intelligent edge. We also introduced an optimized, short-depth 2U Ultra SuperServer that provides better features and faster performance, and is ideal for telco and micro datacenter 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 is in the large datacenter and public cloud space. Our new products, such as the CloudDC systems, are purpose-built for hyperscale datacenters 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 services. 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 services 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 enables streamlined and fully automated 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. Now we are very excited with our innovative product pipeline and our new growth drivers, which should help Supermicro reaccelerate our revenue growth and resume our long history of market share gain.

I will now hand the call over to Kevin to review the results for the quarter in more detail.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Thank you, Charles. First, I would like to thank to 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 from 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 toward Taiwan operations from Europe and the United States. Despite this disruption, we successfully managed the last two weeks of March to achieve revenues at the bottom of our original guidance range.

Now 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 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 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 datacenter projects in the December quarter and, is often the case, paused in the March quarters. ASPs increased quarter-on- quarter, but declined year-over-year.

Geographic performance on a year-on-year basis was mixed with the US down 3%, EMEA up 20%, and Asia 10% higher. On a sequential basis, the US 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 dollars, $0.6 million of which reduced cost of sales and $9.5 million that reduced R&D expense. Applying our US 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 to $40 million related to residual clean up matters from our extended blackout period. By direction of our Board of Directors, we sought input in 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 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 $17.5 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 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 settlement fee. Recall, that concluding in our delinquent filings in the December quarter, led to a 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 $2.9 million expense on a non-GAAP basis. In both cases we benefited from reduced tax liabilities in the US 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 a the joint venture was a $1.1 million loss this quarter, as compared to a $1.0 million loss in the previous quarter and a $0.4 million loss in the same quarter a year ago.

Q3 non-GAAP diluted EPS totaled $0.84 per diluted share compared to $0.57 last quarter and $0.49 last year. Cash used in from Operations totaled $21 million as we invested in Inventory as a defensive measure and capex totaled $11 million resulting in free cash out flow 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 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-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 do 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 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 to 150 basis points on a sequential basis.

We also expect to record expense of $16 million to $17 million related to the aforementioned performance awards in the June 2020 quarter. Approximately $20 million to $25 million in cash will be paid in the 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 are unable to predict the extent to which the COVID-19 may further impact our business operations, financial performance and results of operations, we believe we are well positioned financially and strategically in the uncertain business environment.

With that, I'll turn it back to James for Q&A.

James Kisner -- Investor Relations

Operator, we are ready to open the queue for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Your first question comes from the line of Mehdi Hosseini with SIG.

Mehdi Hosseini -- SIG -- Analyst

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? And then on the inventories that went up by about $160 million, 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.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah, 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 in 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 thought and then the 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 could logistic issues.

Mehdi Hosseini -- SIG -- Analyst

Sure. Just a quick follow-up, in your prepayment 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?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah. As you may know, I mean, memory and SSD had been shortage in the market for a few quarter, especially recently. That's why we keep more, memory, I mean, demand here [Phonetic] SSD. As to CPU and GPU, we manage relatively very well. Yes, June quarter, you -- handle high season. That's why we pretty pay out at [Indecipherable], to make sure we want [Indecipherable] to our customer.

Mehdi Hosseini -- SIG -- Analyst

Okay, thank you.

Operator

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Aaron Rakers -- Wells Fargo -- Analyst

Yeah, thanks for taking the questions. Just kind of building on that last question. I'm just curious, 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? And then on that same topic, how are you currently seeing the pricing environment as you build inventory, there is a little bit of a debate out there, whether not memory pricing could start to turn the other direction, meaning decline going into the back half of the year. Just curious, what are you seeing in terms of flash pricing as well as DRAM pricing in your inventory?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

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.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, and that's why we are watched very carefully, it's a daily basis, and then we keep kind of enough SSD and DRAM at this moment. So, I believe our inventory today should be pretty efficient to support our June quarter demand. And also the prices, I mean -- as it depends on coronavirus situation, right, at this moment looks like, kind of an unpredictable. But we kind of keep relatively in very high confidence level. A little bit higher inventory, but we believe we need them either this quarter or in next few months.

Aaron Rakers -- Wells Fargo -- Analyst

Okay, thank you. And then just kind of thinking about, you talked about kind of the growth drivers, the vertical kind of market opportunity that you guys have between AI/ML, and enterprise cloud, 5G, Edge, Telco and then software and services. Is there -- can you help us understand the contributions of those, call it four verticals to the business today? Any thoughts on what you're expecting those to kind of grow as we move forward?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah. Thank you for the question. As you know, we just finished with our [Indecipherable] day and our long-term program. So now we are recovering. I mean that recovering our business to get back to normal positive growth, like what we have in last 25 years. So I mean other than our organic enterprise, service, storage and channel business, we are ready to fully focus on 5G, Edge and Telco market as well. So we have a dedicated team focusing in that area, and believe it will start to grow strongly. And the other area, kind of had large deal is in the public cloud. Yes, before our capacity was limited, especially in USA, And in last few years we extend our capacity pretty successfully in Taipei. So now we have an extra capacity in Taipei and we believe it's beneficial to our sale, our shareholders. To our folks some larger scale cloud and to grow our economical scale. And we will be selective to a growth that deal, and make sure it's positive to Company.

As to software and global services, I believe we shared a couple of time in our quarterly conference call, and it's continual stably growing business, in which software, especially management software, and now -- recent global service, we are able to approach more enterprise customer, cloud, private cloud and public cloud on that, so we feel pretty to come with the Board to recover our growth [Indecipherable].

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah, I think, Aaron that's another area that we hope to be a little bit more discrete about in our Analyst Day. Yeah.

Aaron Rakers -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Ananda Baruah with Loop Capital.

Ananda Baruah -- Loop Capital -- Analyst

Hi, good afternoon guys. Thanks for taking the questions. A couple if I could. Charles and Kevin congratulations on the crisp execution as well. Yeah, two if I could. I guess the 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 how key application adoption, I think you say all which is accelerating in result of COVID, and I was wondering if you could talk with a little more context as to what you're seeing there, with regard to acceleration? And it sounds like you guys are leasing some good follow through. So I'd 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, and any other context you think that will be useful for us? And then I have a quick follow-up. Thanks.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah. Thank you. Very good question. Now coronavirus indeed created a big trouble for people around the world. But it also created some strong demand for people. For example, people will come 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 prepared in 5G, Edge and Telco business, since about last year. So those costs are going to get mature. And we did get have a more customer come in to those product lines. So, I mean, overall, I feel optimistic for our future growth. Although, we had to be very carefully watch the coronavirus. At this moment, I feel basically positive.

Ananda Baruah -- Loop Capital -- Analyst

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 is going to be any degree of structural change, and customer -- not consumer, your customer behavior such that maybe that 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, I know there's a lot of opinions about that. But do you feel like you've been able to develop one? I'd love to hear what it is.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, as you may know, all these impacts, vision has helped us a lot. With a lot we most of our customers specific application or some modification to optimize their structure. We are able to modify from our the block [Phonetic] solution, instead of completely new design that may take people one-year or 6 months. In most of our case, it took us much shorter time frame, two months to three months. We are able to optimize [Indecipherable] customer won. So, including 5G, Edge and Telco market, I just mentioned. So that's why we are able to quickly win some good commitment from certain really large scale customers.

Ananda Baruah -- Loop Capital -- Analyst

That's really helpful. Thanks a lot guys. I'll get back in the queue. Thanks a lot.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Joh Lopez with Vertical GRP.

Jon Lopez -- Vertical Group -- Analyst

Hi, can you guys hear me, right?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, hello Jon.

Jon Lopez -- Vertical Group -- Analyst

Hi, how are you?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Doing OK.

Jon Lopez -- Vertical Group -- Analyst

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? And 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?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

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 first two months, and then we try to predict what the third month was. This year was no different than any other. And 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 the range that we were at. We were able to navigate the last two weeks, as it relates to the disruptions of the workforce. And because of that, we are, 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. So backlog plus shift were a little bit ahead as compared to quarter-over-quarter, year-over-year, but 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.

Jon Lopez -- Vertical Group -- Analyst

Right, that's helpful. But I guess, driving at, 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 now?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

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.

Jon Lopez -- Vertical Group -- Analyst

Yeah, OK. Got you, helpful. My second question and I apologize, you may have covered some of the stuff has an offer a bit, but relative to the backlog and the shippable stuff, are there anything, are they likely -- I know you highlighted logistics, but like other things that would prevent you from shipping that backlog and is that like part of the reason that you're despite having that, excuse me, maybe cautious, opting not to offer guidance, like good backlog be there, but you would not be able to meet it for one reason or another?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

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 is a number of things like that, that are little practical items that we need to go through in greater pain than under normal times.

Jon Lopez -- Vertical Group -- Analyst

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 quantify that, It's like 150 basis points, 200 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?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Well, yeah, we had a pretty good product mix in that quarter. So what we'll see with the product mix is when we get done in the second calendar quarter as well. Got it. You know Jon, now that you're on the phone, I'm going to answer a question, that you're not asking, because I got merged 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 are still believing will apply to 2021. But obviously we had some favorable tax treatment in the March quarter. And for this year, we expect that, because of the fact that we are -- 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. I wanted to clarify that, because...

Jon Lopez -- Vertical Group -- Analyst

No, that was on my list. So, I'm glad you did it. The last one, you'll 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. So, I know there was a lot of one-time stuff in calendar Q1, but is there anything 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?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah, 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.

Jon Lopez -- Vertical Group -- Analyst

Okay, so it sounds like we shouldn't expect opex to come down a lot. Is that a fair way to summarize that?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah.

Jon Lopez -- Vertical Group -- Analyst

Okay. All right. Thanks very much. Appreciate it.

Operator

[Operator Instructions] We have a follow-up from Mehdi Hosseini with SIG.

Mehdi Hosseini -- SIG -- Analyst

Yes, there is 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 higher equity share -- equity compensation and cash award. Can you please just highlight those items, are those all going to be in the COGS or how is it the split between COGS and opex? And beyond the June quarter, how does the opex look like, when these one-time increase go away? And I have a follow-up.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah, sure. So, maybe 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. 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 million in expense this quarter, and in next quarter, I think I said it was about $16 million to $17 million and then there is 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.

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.

Mehdi Hosseini -- SIG -- Analyst

Okay. And 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? Will that be a fair assumption for modeling purposes?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Are you talking about opex growth?

Mehdi Hosseini -- SIG -- Analyst

No, I'm talking about the compensation, the employee compensation in the March quarter was $10 million and then $16 million to $17 million in June. And then is going to come down, you said there is a tailwind. And for purposes of modeling, should I assume that tailwind, it's like a mid-single in September quarter and beyond?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

I'm sorry, I think I missed described it for you. So what I said was is, let me just make sure here and let me just go back and refer to what I said here. I think --

Mehdi Hosseini -- SIG -- Analyst

You said $16 million to $17 million in June, and for March was $10 million.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Right, so that's about $26 million or so. And if you remember, we had estimated it to be about $35 million to $40 million. It's going to be -- in the end it's going to be maybe not quite $35 million.

Mehdi Hosseini -- SIG -- Analyst

Okay. Got it.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Does that help you?

Mehdi Hosseini -- SIG -- Analyst

Yeah. And then I just want to go back to my earlier question, I was trying to figure out how this 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.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Sorry, can say that again?

Mehdi Hosseini -- SIG -- Analyst

Was the server system revenue, -- total revenue minus subsystem, was it flat or down in the March quarter?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

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. And what I said was is that, by looking at what they're doing in the June quarter, they're coming back a little bit.

Mehdi Hosseini -- SIG -- Analyst

Okay, all right. Now...

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Also on, you know that cash award comp, remember we're non-GAAP-ing that out. Don't forget that.

Mehdi Hosseini -- SIG -- Analyst

Okay. I just wanted to go back to, so you did increase inventory by $100 some million [Phonetic], 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. 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?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Basically, yes.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

That's rigth.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah. Unless, second half coronavirus, global situation getting improved. And and we hope so, and then our inventory had to grow again, to me that grows.

Mehdi Hosseini -- SIG -- Analyst

Okay, all right. Thank you guys.

Operator

Your next question is a follow-up from Ananda Baruah with Loop Capital.

Ananda Baruah -- Loop Capital -- Analyst

Hi, thanks. I appreciate the follow-up. Just quickly, another, and it's not really a clarification, but just more context again. In the prepared remarks, you guys mentioned in 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. 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'd love to understand, how should we -- how do you want us to think about what's taking place there with the exposures?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, very good question. Indeed the data center and cloud are not new to us. We have been always have cloud data center business., but before with limited capacity from USA, especially. That's why we are very carefully control to engage with more cloud, large peers in there. But now in last two years, especially, we grow our capacity in Taiwan a lot. So now we have extra capacity and very good [Indecipherable] for cloud, especially, private cloud as well, and now even for public cloud, we have specifically optimized our vision for that. So we are kind of, carefully select some customers, some partner to support them. And [Indecipherable] peak, but will be under careful control.

Ananda Baruah -- Loop Capital -- Analyst

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 out of your Taiwan capacity?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

It can be. We hope so.

Ananda Baruah -- Loop Capital -- Analyst

Okay. And I guess my next question is that, 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, there is solutions into into US hyperscalers, China hyperscalers, I mean China would make sense, because it is being produced so closely. But any context there you could provide would be helpful too. Thanks.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, indeed in both. Indeed in that many -- we have been always have 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.

Ananda Baruah -- Loop Capital -- Analyst

Okay, got it. Okay, that's great. Thanks a lot. I appreciate the context.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, thank you.

Operator

Your next question is follow-up from Jon Lopez with Vertical Group.

Jon Lopez -- Vertical Group -- Analyst

Hi, thanks so much guys. I had two quick ones. The first one is, Intel made some roadmap changes a little earlier. And I'm wondering with 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 are dealing with, but excuse me, did that specific variable impact either bookings visibility or anything over calendar Q1, calendar Q2?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

I don't think so. Not appreciably.

Jon Lopez -- Vertical Group -- Analyst

Okay, great. My second one, there is sort of 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 is any potential impact to you to the extent that those measures move forward?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

We're not quite sure. We'll have to see.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Now what's your question again?

Jon Lopez -- Vertical Group -- Analyst

I'm sorry. There's just, there's sort of some renewed discussion about some tightening of security and export measures between the US and China that may go into effect in a couple of months. And so, it's sort of -- an ITwide phenomenon. That's it.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

In indeed our operation, have a major portion based in Silicon Valley, now since 20 years ago. And then we grew big capacity in Taipei, since about 10 years ago. And now on the capacity in Taipei has been very big. So that's why now our major capacity and operation in USA and Taipei, and then some portion in [Indecipherable]. And in China, indeed a portion has been very limited.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

It's also true of our sourcing as well. Taiwan, richer maybe.

Jon Lopez -- Vertical Group -- Analyst

Perfect, really helpful. Thanks guys, I appreciate it.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Yeah, thank you.

Operator

Your next question is from Aaron Rakers with Wells Fargo.

Aaron Rakers -- Wells Fargo -- Analyst

Yeah, thanks for taking the follow ups as well. Two, hopefully quick questions. Just back on the, 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 can support, with the footprint you have. Is there any anyway you can help us today of how much systems revenue could you support with the capacity you have in place and how much of that expanded just with this expansion in Taipei or Taiwan?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

I can provide a rough picture, and Kevin maybe can provide a more detail. Basically, we have a huge expansion already in both in USA and Taipei. So overall, in Taipei [Phonetic], roughly we have a 30% extra capacity both USA and Taipei. And that's why we are ready to grow significantly in Telco market, even a public cloud market, and especially in Taipei, now we are very aggressively increase our operation in production and service capacity, because as you know, cost from Taipei is relatively less than 50% of the Silicon Valley. So we've for sure like to take that advantage. And it's about right time now. So our actual growth in Taipei can be pretty good [Phonetic].

Aaron Rakers -- Wells Fargo -- Analyst

That's helpful.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah, so Aaron, I think, if you just take it from a revenue perspective, that could be may be 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.

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

$4 billion, and if we share it more communities, it can be $5 billion.

Aaron Rakers -- Wells Fargo -- Analyst

Okay. Thank you.

James Kisner -- Investor Relations

That's all the time we have. Any closing comments form Charles and Kevin?

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Yeah, we wanted to thank all of the investors listening in today as well as the analysts we appreciate you're 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. And 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. So, Charles?

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Thank you, everyone. We are ready to grow faster now. And see you next week -- next quarter, sorry. Thank you.

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Conclude the call, operator.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

James Kisner -- Investor Relations

Charles Liang -- Founder, President, Chief Executive Officer and Chairman of the Board

Kevin Bauer -- Senior Vice President and Chief Financial Officer

Mehdi Hosseini -- SIG -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

Ananda Baruah -- Loop Capital -- Analyst

Jon Lopez -- Vertical Group -- Analyst

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