Mr. Kisner, you may go ahead..

Okay. I thought that you were going to read the intro.

Are we in the call?.

Yes, sir. Go ahead.

Did you not hear the intro?.

No, we did not. Good afternoon and thank you for attending to Supermicro'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 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 Supermicro's future results to differ materially from our expectations. You can learn more about these risks in our press release we issued earlier this afternoon, our most recent 10-K filing for 2019 and our other SEC filings.

All of these items 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..

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; and 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 installed 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 year 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 deep learning applications.

We see more AI workload moving towards the edge, where AI inferencing and 5G in the converging and driving up demand 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 level is perfect for 5G and 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 data center environments.

Just yesterday, we host a highly successful online event with our technology partner, Intel. The 5G live forum brought together leading infrastructure and telco companies from 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 public cloud space. Our new products such as the Cloud DC 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 an increasingly large scale, it's paramount that we supply them with more capable cloud-scale management software that enable streamlined and fully 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. 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 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 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 United States. Despite this disruption, we successfully managed the last 2 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 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 $10.1 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 onetime charges of $35 million to $40 million 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 $10.3 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.

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 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 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 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 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 $0.4 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 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 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 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 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&A..

Operator, we're ready to open the queue for questions..

[Operator instructions] Your first question comes from the line of Mehdi Hosseini with SIG..

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?.

Yes. Mehdi, thanks for the questions. 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 ball game 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 bought 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 logistic issues..

Sure. Just a quick follow-up. In your prepaid 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 CPU?.

Yes. As you may know, I mean, memory and SSD has been shortage in the market for few quarters, especially recently. That's why we shipped more memory -- I mean SSD. As to CPU and GPU, we manage relatively very well. Yes, June quarter, you already have a kind of high season.

That's why we prepare a little bit more to make sure we won't have a shortage to our customer..

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

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'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 on 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 base, and then we keep kind of enough SSD and DRAM as of this moment. So I believe our inventory level today should be pretty efficient to support our June quarter demand. And as for the pricing, I mean, it's hard to say.

It depends on the coronavirus situation, right? At this moment, looks like it's still kind of not predictable, but we kind of keep relatively in a very high confidence level, a little bit higher inventory, but we believe we need them either this quarter or in the next few months..

Okay. 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 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, 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 10K today, kind of a long-term program. So now we are recovering -- I mean recovering in our business, get back to a normal faster growth mode like we had in last 25 years.

So I mean, other than our organic enterprise, service, storage and channel business, we are ready to fully focus on our 5G, Edge and telco market as well. So we have a dedicated team focused 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 U.S.A.. And in the 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 ourselves, our shareholders, to focus on large-scale cloud and to grow our economic scale. And we will be selective to grow that deal and make sure it's a positive for company.

As to software and global service, I believe we shared a couple of times in our quarter end conference call, and it's continued stably growing business. With software, especially management software and our fully efficient global service, we are able to approach more enterprise customer, cloud -- private cloud and public cloud around the world.

So we feel pretty comfortable to recover our faster growth business model now..

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

Yes..

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

A couple, if I could. Charles, Kevin, congratulations on the crisp execution as well. Yes, 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 talked about how 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 acceleration.

And it sounds like you guys are leasing some good follow-through, so would love to get some context around sort of what types of applications you're seeing accelerated. 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 would be useful for us.

And then I have a quick follow-up..

Yes. Thank you. Very good question. The coronavirus indeed created a big trouble for people around the world, but it also created some strong demand for people. For example, people work for home and people stay at 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 part is we have been preparing 5G, Edge and telco business since about last year. So those products are getting mature. And we gained -- getting ever more customer commit to those product.

So I mean, overall, I feel optimistic for our future growth, although it has to be very carefully watched, the coronavirus. As of 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 -- not consumer, 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 on that, I'd love to hear what it is..

Yes. As you may know, our building-blocks solution 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 solution.

Instead of a completely 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 want, so including 5G, Edge and telco market, I just mentioned.

So a lot of that, we are able to quickly win on some good commitment from certain really large-scale customers..

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

So my first question is, would you mind just walking through stepping back the time line or a time frame 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 got into calendar Q2..

Yes. So I kind of shared that we -- first of all, the March quarter is always a 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 2 months and then we try to predict what the third month was. This year was no different than any other.

And as we guide 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.

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 first week of April. Thereafter, as I've said, we've seen continuing demand as compared to our metrics.

So backlog plus shipped 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..

Right. No, that's helpful. But I guess the thing I'm driving at is that 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 a normal fiscal Q4.

So I guess the thing I'm just kind of driving at, 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 and all that 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..

Yes. Okay. Got you. Helpful. My second question, and I apologize, you may have covered some of this stuff. I was on hold for a bit.

But relative to the backlog and the shippable stuff, are there anything -- other like -- and I know you highlighted logistics, but like are there things that would prevent you from shipping that backlog? And is that like part of the reason that you're -- despite having that maybe cautious or opting not to offer guidance, like could backlog be there but you would 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 no attention there.

So 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..

Yes. That makes sense. I got 2 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. It's like 150, 200 basis points relative to calendar Q1.

Is there anything else that we should think about gross margin-wise between calendar Q1 and calendar Q2 other than those logistical headwinds in 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. Jon, 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 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, to get rid of me, the -- 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 onetime-y stuff in calendar Q1.

But 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?.

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 OpEx to come down a whole lot.

Is that a fair way to summarize that?.

Yes..

[Operator instructions] 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 COGS? Or how is it split between COGS and OpEx? And beyond the June quarter, how does the OpEx look like when these onetime 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% 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 the next quarter, I think I said it was about $16 million to $17 million.

And then 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 would 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. 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? 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 to $17 million in June, and then it's going to come down. You said there is 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 sure here, let me go back and refer to what I said here..

I think you said $16 million to $17 million in June. And for March, it was $10 million..

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.

Does that help you?.

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. And 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?.

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. And what I said was that by looking at what they're doing in the June quarter, they're coming back a little bit. Also, on that cash award comp, remember, we're not GAAP-ing that out.

Don't forget that..

Right. Sure. Okay. And I just want to go back to -- so 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.

So when I look at these dynamics, it seems like your inventory should start to come down in the second half of calendar year and some -- as the supply disruption goes away.

Would you agree or not?.

Basically, yes..

That's right..

Yes. Unless in second half, coronavirus global situation really improve, and we hope so, and then our inventory had to grow again to meet the growth..

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

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.

So is there -- are you -- 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. Indeed, the data center and cloud are not new to us. We have been always have a cloud data center business but before with limited production capacity from the U.S.A., especially. That's why we very carefully control to engage with more cloud or large data centers.

But now in the last two years, especially, we grow our capacity in Taiwan a lot. So now we have extra capacity and a very good product for cloud, especially 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 partners to support them.

And the volume can be big, but it 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 out of your Taiwan capacity?.

Can be. 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. hyperscalers, China hyperscalers? I mean, China would make sense because they're being produced so closely.

But any context there you can provide would be helpful, too..

Yes. 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 selected to support them. But now with more capacity available, especially in Taipei, we are ready to be more aggressive to engage with them..

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

I had two quick ones. The first one is, Intel made some road map 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're dealing with.

But 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 yes, 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 sort of an IT-wide phenomenon. Yes. Yes, sorry. No, that's it..

Indeed, our operation have a major portion based in Silicon Valley, right, not since 20 years ago. And then we grew big capacity in Taipei since about 10 years ago. And then our capacity in Taipei has been very big. So that's why now, our major production operation business is still based in the U.S.A.

and then Taipei and then some portion in Netherlands, B.V., right? And in China, indeed, a portion have been very limited..

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

Your next question is from Aaron Rakers with Wells Fargo..

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 a rough view and picture, and Kevin maybe later can provide more detail. Basically, we have a huge expansion already in -- both in U.S.A. and Taipei. So overall, today, roughly, we have 30% extra capacity, both U.S.A. and Taipei. And that's why we are ready to grow significantly in the telco market and even the public cloud market.

And especially in Taipei, now we are very aggressively increased our operation and production and service capacity because as you know, the cost from Taipei is relatively less than 50% of Silicon Valley. So we, for sure, would like to take that advantage, and it's about right time now. So our actual growth in Taipei can be pretty big..

Yes. So Aaron, I think that 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, I think we share with more conservatism. Indeed, it can be $5 billion..

All right. That's all the time we have.

Any closing comments, Charles and Kevin?.

Yes. We wanted to thank all of the investors listening in today as well as the analysts. We appreciate you walking this journey through with 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?.

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

Thank you for the call, operator..

Thank you. This concludes today's conference call. You may now disconnect..