SMTC Corporation (SMTX) Q1 2020 Earnings Conference Call May 7, 2020 8:30 AM ET
Blair McInnis - Vice President, Finance
Eddie Smith - President & Chief Executive Officer
Rich Fitzgerald - Chief Operating Officer
Steve Waszak - Chief Financial Officer
Conference Call Participants
Mike Crawford - B. Riley
Christian Schwab - Craig Hallam Capital Group
Steve Kohl - Mangrove
Good day, ladies and gentlemen, and welcome to your SMTC Corporations First Quarter 2020 Financial Results Conference Call. All lines have been placed in a listen only mode and the floor will be open for questions following the presentation. [Operator Instructions]
At this time, it is my pleasure to turn the floor over to Blair McInnis. Sir, the floor is yours.
Thank you. Before we begin the call, I'd like to remind everybody that the presentation will include statements about expected future events and financial results that are forward-looking in nature and subject to risks and uncertainties. The company cautions that actual performance will be affected by a number of factors, many of which are beyond the company's control, and that future events and results may vary substantially from what the company currently foresees.
Discussion of the various factors that may affect future results is contained in the company's Annual Report on Form 10-K, Quarterly Reports on form 10-Q, and subsequent reports on Form 8-K and other filings with the Securities and Exchange Commission. All forward-looking statements are made as of the date of this call, and except as required by law, we do not intend to update this information.
During the call, we will also reference certain non-GAAP measures, including adjusted gross profit, adjusted net income and adjusted EBITDA. Please refer to the press release we issued yesterday for reconciliations between GAAP and adjusted results. Management believes that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics SMTC uses in its financial and operational decision-making.
These Non-GAAP Financial Measures are also frequently used by analysts, investors and other interested parties to evaluate companies in SMTC’s industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and should not be construed as an inference that SMTC’s future results will be unaffected by any items adjusted for in these non-GAAP financial measures. Finally, this conference call will also be available for audio replay in the Investor Relations section of SMTC's website at www.smtc.com.
I will now pass the call over to Eddie Smith, SMTC’s President and Chief Executive Officer.
Thank you, Blair, and good morning ladies and gentlemen. I'm Eddie Smith, SMTC's President and Chief Executive Officer. On this call with me today is Rich Fitzgerald, our Chief Operating Officer, and Steve Waszak, SMTC's Chief Financial Officer.
First, before discussing the quarter and our results which came in better than our internal budgets, I want to acknowledge that as a result of the emergence of the COVID-19 pandemic, we’re living and working in a time that is unlike anything we’ve seen before. I’d like to applaud the dedication and hard work of our entire SMTC team, and the support of our suppliers, our customers, and our partners. I would also like to thank our shareholders for their continued patience and support during these trying times.
I am pleased to report that our focus on operational excellence is paying off as we continue to move our company forward and report a first quarter 5.4% sequential increase in revenue during what is typically a seasonally slow quarter, while at the same time, navigating through the health, safety and supply chain challenges resulting from the emergence of the COVID-19 pandemic.
During the first quarter we were awarded programs from four new customers, plus additional new programs from five existing customers that have the potential of generating in excess of $50 million of revenue over time. We are excited that our new business funnel continues to grow with an additional $7 million in new programs awarded to date during April and May.
On balance, our business remains intact. The SMTC team has demonstrated resilience during these challenging times. Our leadership team, myself included, is in weekly, and in some times daily, contact with our customers to make sure we stay on top of the evolving situation.
While we need to make some incremental investments in the first half of the year to support the launch of new products before they reach volume production later this year and into 2021, we are simultaneously taking other steps to limit our expenses, including putting a pause on hiring for new positions and reducing our Q2 capital expenditure plans which Steve will discuss.
While we are pleased with our growing sales funnel and business prospects, given the unpredictability of the current COVID-19 pandemic environment, we decided it would be prudent to formally withdraw our full year guidance until such time that visibility returns to pre-COVID-19 levels.
We are keeping the lines of communication open to provide reliable and timely information, both internally and externally, and we look forward to the day when the COVID-19 pandemic comes to an end and we can resume providing annual guidance that reflects our confidence in our ability to achieve industry leading financial metrics.
Let me wrap up my introductory remarks by saying that the safety of our employees remains a top priority for SMTC, as we continue to meet our customers’ requirements. Rich Fitzgerald, our Chief Operating Officer, will discuss in detail the actions we have taken to ensure the health and wellness of our employees and their families, and our efforts to keep our production up and running responsibly to meet our customers’ delivery requirements.
After Rich addresses the steps we have taken, Steve Waszak, our CFO, will discuss our first quarter results in more detail, including the investments we are making in support of new programs, and the expenses we have incurred as a result of our efforts to protect the health, safety and wellness of our employees in light of the COVID-19 pandemic. Steve will also share with you our thoughts for the second quarter, before I return with some additional commentary on our business, our goals, and the markets we serve before we open the call to questions.
With that, Rich Fitzgerald.
Thank you Eddie, Good morning. I would like to provide you with an update on SMTC’s COVID-19 global business continuity plan. First, I would like to thank our customers, employees, and channel partners during this time, as everyone has been instrumental in helping SMTC address the challenges that the COVID-19 pandemic presents.
As Eddie said, the health, safety and wellness of our employees and their families has been and continues to be our top priority. The ability to keep our business operations running, while continuing to provide regular communication to all stakeholders has become the regular operating rhythm for the SMTC team. Currently, all of our facilities around the world remain in operation and in accordance with all applicable health and safety regulations.
As early signs of a potential pandemic were emerging in Asia in late January, we quickly began working on global initiatives to pull forward our supply chain and begin working on our business continuity plans. As we began feeling the effects of raw material and logistics challenges, with some of our key suppliers nearing shutdown, we quickly moved most of our ocean freight to air, increasing our freight costs to ensure business continuity for our clients.
We also began conducting daily conversations with our channel partners and customers to align immediate needs versus non-critical demand. This became and continues to be our new paradigm.
Shortly after the California state government announced the first stay-at-home orders in the nation, we quickly responded and implemented a plan to comply with state requirements to protect the health and safety of our Fremont, California employees and developed our business continuity plans for all of our other sites around the globe. This included working with respective governments globally, our customers, and our leadership team to define specific plans for each site.
We quickly defined essential business customers across the globe and worked closely with our clients to ensure we had the proper letters of exemption to continue operations. We then worked with local governments where our operations are located to obtain additional documentation necessary for each of our sites to remain open.
Following closely CDC recommendations, we quickly implemented the following measures at all of our facilities: We immediately stopped all travel for all employees globally. We limited access to all factories to essential employees only. We instructed all non-essential personnel to work remotely. We required all employees with pre-existing conditions, and in Mexico those over the age of 55 to stay at home with pay. We strictly enforced and encouraged anyone who was feeling ill to stay home. We instituted strict rules around hygiene at our facilities, including temperature metering and required the wearing of face masks. We modified shift patterns to ensure social distancing at our sites and limited the number of access points at each site. And we continue to have medical personnel routinely check on our employees and have provided proper personal protective equipment to our employees to support their health and safety and wellness.
Given the current outlook, with a phased approach in the reduced stay-at-home orders being implemented in various locations, we continue to enforce our rigorous standards to protect our employees, while responsibly addressing our customers’ delivery needs. We will continue to align our plans and we bring some of our non-essential employees back to work in a safe and controlled manner. All travel will continue to be halted until further notice. We will continue to communicate with our global employees through videos, and with our world class clients and channel partners through frequent and regular dialogue.
I am extremely proud of the work the team has done to address the challenges of the COVID-19 pandemic and the social responsibility that our employees have demonstrated through donations of goods and supplies to local hospitals to help in the local communities that we all work in.
With that said, stay safe. I’ll turn the call over to Steve.
Thank you, Rich, and thank you for your incredible leadership. And I want to thank all of our SMTC’s employees for their commitment and dedication and our customers and partners who work together to the challenges of this period.
Now, let me discuss the financial results. Revenue for the first quarter 2020 was $95.1 million, up 5.4% compared to the prior quarter, and 7.3% from the first quarter a year ago. During the first quarter of 2020, we had one 10%-plus customer.
Included in our earnings release is a table that breaks down our sales by industry sector. This table shows that nearly all of the markets we serve were relatively stable, with strong growth in our Avionics, Aerospace and Defense business, which increased by 35% to $10.4 million compared to $7.7 million and $7 million in the prior quarter and the same quarter a year ago, respectively.
Our gross profit for the first quarter of 2020 was $9.6 million or 10.1% of revenue, compared to $10.5 million or 11.6% of revenue in the prior quarter and $8.6 million or 8.4% in the same quarter a year ago. The sequential decline in gross profit was primarily due to program management, production certifications and start-up expenses for new customer program start-ups and labor inefficiencies which resulted from the use of temporary staff to replace employees on leave with medical conditions that put them at higher risk for COVID-19, and certain supply chain logistic expenses incurred to meet our customers’ delivery schedules.
Our Q1 2020 adjusted gross profit was $11.7 million or 12.3% of revenue excluding non-cash $1.5 million in Q1 of amortization of intangibles recorded in connection with our acquisition in 2018 of MC Assembly and unrealized foreign currency loss unsettled forward exchange contracts. In comparison, our Q4 2019 adjusted gross profit was $12.2 million or 13.5% of revenue, while adjusted gross profit for the same period a year ago was $10.5 million or 10.2% of revenue.
Selling, general and administrative expenses for first quarter of 2020 was $7.2 million, essentially flat compared to $7.1 million reported in the fourth quarter of 2019 and $6.8 million in the same quarter a year ago. As a percentage of revenue, SG&A expenses decreased to 7.6% in the first quarter of 2020 from 7.9% in the prior quarter.
We reported net income of $775,000 in the first quarter of 2020, compared to $1 million in the prior quarter and $1.2 million in the same quarter a year ago. Adjusted net income in the first quarter of 2020 was $2.2 million. In comparison, we reported adjusted net income of $2.9 in the prior quarter and $707,000 in the same period a year ago.
Adjusted EBITDA in the first quarter of 2020 was $6.2 million, compared to $7.0 million in the prior quarter and $5.5 million in the same quarter a year ago.
Now I'd like to comment on the balance sheet and a few other key financial metrics that we reported in the first quarter. Our cash-to-cash cycle over the quarter averaged 72 days, compared with 80 days in first quarter of 2019, with DSO at 60 days and DPO at 68 days for the first quarter of 2020. Inventory turns were 4.5 turns.
Our de-leveraging focus continues. Net debt at the end of the first quarter was $83.6 million, compared to $82.1 million in the prior quarter and down from $95.9 million from the same quarter a year ago. Net debt as of March 29, 2020 includes a $3.6 million increase for an extension of the facility lease at our Fremont California site.
Net Debt, excluding our financial and operating lease obligations at the end of the first quarter was $68.3 million, compared to $69.7 million at the end of the prior quarter and $81 million at the end of the same quarter a year ago. At the end of the quarter, we had $31.2 million available under asset-based lending credit facility.
To ensure, we manage our cash effectively, in the second quarter we instituted a hiring pause for new positions, reduced our capital expenditures to core needs, which represented a 50% reduction from our internal plans, among other containment measures across the board.
We remain focused on reducing our debt leverage ratio. Since the MC acquisition in Q4 2018, we reduced our debt-to-adjusted EBITDA ratio, excluding lease obligations from 4.67 to 2.68 with proceeds from our rights offering and our registered direct offering, completed in June 2019, as well as from improvements in operating performance. Based on our current projections, we are targeting to achieve a debt-to-adjusted EBITDA ratio of less than 2.20, excluding leases, by the end of 2020
We expect revenues in the second quarter of 2020 to range between $96 million to $99 million and adjusted EBITDA to range between $5.7 million and $6.4 million, which excludes $1.2 million of COVID-19 direct related expenses, based on our current demand and supply chain visibility, and assuming our facilities continue to operate at current levels as outlined by Rich.
Concluding, while we believe we have thus far been successful in mitigating the impact of COVID-19 and are – and very, very encouraged by our success in winning new business, we also recognize the potential for impact -- negative impacts of the COVID-19 pandemic on our business, such as change in customer demand, supply chain or product build-shipment interruptions, new or changing government regulations, impacts on our employees or our manufacturing facilities and lastly the impacts on the global economy.
Thus, as Eddie mentioned, it is prudent to withdraw the guidance we provided on September 19, 2019 and reaffirmed on March 12, 2020 for the full year 2020 until such time that visibility returns to pre-COVID-19 levels.
With that said, I’d like to return it back to Eddie for comments on our business.
Again thank you for participation today.
Thank you, Steve. 2019 was a challenging year where SMTC made great progress. I suspect this year will be similar with challenges to overcome and progress to be made. I believe we were on track for a year of even stronger and more consistent financial performance before the emergence of the COVID-19 pandemic.
At this point in time, our customer demand in our first half looks strong. There remains a fair degree of industry uncertainty regarding the balance of the year. Fortunately, many of our customers are operating in industries deemed essential, including defense, medical devices, and test and measurement systems. As a result, all of our facilities currently remain open and we continue to operate each of our facilities responsibly and in accordance with all applicable health and safety regulations. Where necessary, we are using temporary staff and placing those employees with medical conditions to put them at risk for COVID-19. We've also successfully migrated most of our customers, from the China manufacturing operations. We closed in the fourth quarter and have the final pieces of equipment on boats back to North America to be redeployed upon arrival to our facilities.
During the first quarter, the EMS industry experienced increasingly times from suppliers in China, India, and Italy, due to COVID-19 pandemic related production interruptions, and shelter in place regulations.
Drawing on key supplier relationships that we have developed over the years, and out-of-the box thinking, our supply chain team has done a great job proactively working around many obstacles, expediting materials, setting up new sources of supplies, and anticipating potential component shortages.
Amid the challenges presented by COVID-19 pandemic, we launched 12 new programs, through our Boston and Fremont New Product Introduction facilities. Our engineer and production staffs have been hard at work making sure that these new customer programs, have solid program management in place, have obtained the proper production certifications, and that their start-up processes are working smoothly.
Our sales team has been successful in continuing to gain market share. We continue to grow deeper and wider with our customers. We have already secured a dozen or so new customer programs this year, with the potential of generating revenue in excess of $57 million over time.
We are seeing increased success with our Avionics, Aerospace and Defense business. We expect our Test and Measurement 5G customers, along with our Datacenter and Power and Energy customers, to support our second half 2020 growth. And finally, as I mentioned on our last call, to further reduce costs and improve production efficiencies, we have several ongoing global initiatives including, Lean Sigma programs.
Let me conclude by reiterating what I said in my introductory remarks that we are carefully monitoring the impacts of the COVID-19 pandemic on our business. And as Richard discussed, the team has been proactive in making sure our employees are healthy, safe, and that our customer requirements are met. This remains our top priority.
And finally, we remain committed to further deeper leveraging our balance sheet, achieving industry leading performance metrics including revenue, gross margin, EBITDA margin, and net margin percentage growing our business to become the premier Tier 3 EMS segment leader, making our Erica's company an even stronger company that delights our customers with superior service, taking care of our employees, and rewarding our stockholders and shareholder value.
With that, Steve, Rich, and I will take questions from those of you on the call today.
[Operator Instructions] And our first question will come from Mike Crawford with B. Riley. Please go ahead.
Thank you. Eddie and Steve, can you -- marry if possible, your goal to target 2.2x or less leverage by year end with the fact that you just guided for Q2 only and not for the rest of the year?
Yes. So, first of all, good morning, Mike. How are you? So, we still have a business that's running strong. We still have forecast from our customers. We still have orders from our customers. What we don't know Mike, is what are the governments going to do? When are they going to open up the world again? What is going to happen to the underlying demand as unemployment continues to increase?
And so, we thought it was prudent even though the business was running well and we do get a pretty significant look into our customers' future. We just don't know what's going to happen with some of the big things that we don't control in the macroeconomic world. So, we decided to pull the guidance.
What we do know is what our customers' forecasts are today, what our supply chain is doing today, and that our plants are up and manufacturing with their efficiency in the high 90%.
So, with that being said, we feel comfortable with the year, I just don't feel comfortable with the macro economic environment. And so when you think about the debt to leverage ratio, and you think about our guidance in Q2 versus Q1, so for the first half of the year, even in the middle of this pandemic, we will meet or exceed many of our metrics.
The fact that matter is I just don't know enough about Q4 and Q3 and what the government is going to do.
Okay. Thank you, Eddie. Two more, if you don't mind. So, one, could you just comment on these 12 new programs and the $57 million of potential future work? What's the duration of the of those programs?
And also, how many of those might have already been disclosed in prior releases where you talked about the new aerospace and defense of toys versus a new award subsequent to the last time we had this type of update?
Yes, so it's a great question, because as Rich said, we can't allow people in our factories and so the question is going to become can we virtually get approvals from our customers using GoPros iPads, in terms of the manufacturing process.
So, in a normalized environment, I would tell you that that $57 million is spread over the second half of this year and all of 2021. So, I would tell you it's an 18-month type projection as first.
Second is, a significant portion of this was announced in the one press release we put out in March. So, you heard -- I think we split out the April -- March and April new wins of $7 million. I think most of the $50 million had been announced previously, Mike.
The good part or the fun part of this, more than 75% of it is in the defense and aero business. And as you know, that's not going to be subject to loss government regulation or how the economy does. That's going to be systems that are going to be consistent over a period of time.
Great. Thanks Eddie. And last question is you've been through situations -- well, maybe not with a pandemic, but with a fall off in demand before and then a subsequent rebound in 2008-2009. And at that point, what were some of the leading indicators you saw when your revenue came roaring back in?
Yeah. So, I just had this conversation. This is a pretty phenomenal. Maybe I was born at the wrong year. I tell somebody, I've been through the 2001.com bust when I was a CEO -- I got my first CEO role where revenue went down by 50%. And then a year later went back up. Then you had the 2005 semiconductor industry crisis, the 2008-2009 recession. And in 2008-2009, which asked about specifically, our revenue went from $6.2 billion in four quarters down to $3 billion and then five quarters later, it was back up the $6.2 billion in my division.
So, what I tell people is because people always say, hey, you're pretty calm through all of this. And my answer is, this is going to continue to happen for different reasons, maybe not a pandemic, but we had the tsunami over in Japan, you had the floods in Thailand were shut down.
And exactly what you just said, there are certain things that we see that will trigger us to make decisions. So, in January, when COVID first started, Richard and myself happened to be over, finishing up the completion of closing our China plant and negotiating with the landlords and other people.
And it was clear something was not right. Lead-times had jumped out overnight, people were telling us there were shortages, and business hadn't gone up that much, so why would there be shortages. And it became clear that some factories were being closed.
And so, we immediately pulled in, as Rich said, and moved things from being boat freight to air freight, we pulled in our orders. I think you're going to see some of those same types of things where lead-times are going to jockey around.
If you think about Malaysia, and right now Malaysia is in their shelter-in-place sense of business. There's a lot of semiconductor packaging and test houses there. They're operating at about 60% there was a whole negotiation that went on with the government, they're operating with 60% capacity.
That's probably okay in the marketplace. But when it opens back up, and you need 100% demand and you're only operating 60, lead-times will go up. So Mike, we will continue every day. We put it out on our website, updates once a month, so we will continue to operate watching lead-times daily, watching book-to-bill daily, we get these numbers. And when we start seeing signs that things are coming back, we'll make the appropriate moves.
And then you have what I call all the crazy things that happen in the world we live in, which is because planes are not flying as regularly to China and back, the passenger planes, you have less cargo and you got to work around that. And we've been able to do that with our experience, but we will be able to tell what's going on probably sooner than most.
I just hate to have yearly guidance out when we just don't know what governments are going to do. When you talk about them with trillions of dollars, they pass these laws; we'll just throw out a couple trillion dollars to keep the economy going. What happens if they stopped doing that and those things? So, yeah, we'll have a pretty good handle on what's going on to that. I don't know if that correctly.
No, that's great. So, thank you very much.
And our next question comes from Christian Schwab with Craig Hallam Capital Group. Please go ahead.
Great. Thanks for taking my question. And good morning, guys. So, as we think, Steve, about gross margins through throughout the course of the year and the pluses and minuses of the environment that has already been discussed, how should we be thinking about gross margins? I know you're not giving official guidance, but should it remain in similar levels that that we've been at?
Yeah, Christian. Welcome and thank you. Yes, we believe gross margins in our outlook should remain stable to what we have in the first quarter. We don't see at this point yet the growth because we've got some COVID expenses. There's both direct and indirect costs are really the COVID. What we've done is talk about our direct costs, you know, our redundant labor that we have to have because some people have to stay-at-home, yet we need to stay in full production capacity, things that nature.
There's also some indirect costs around, you know, the inefficiencies of realigning factories and locker rooms and all that stuff that just take time and in that nature, so there's – there's a lot of inefficiency we got. We have to organize more buses for social distancing from our folks.
It just there's – there's those kind of things which we didn't include some of that which will still put some pressure on gross margins, relative to some of these contracts that are coming in that we've announced that have higher margins or higher NDA percentages. So net-net, I would hold the course on margins as we look today at over the next two to three quarters.
Okay, perfect. And then in my last question, any – a follow up to the earlier question regarding the new design winds ramping, the majority of that being in Aerospace and Defense. Last quarter we kind of talked about, you know, reaching production levels in Q3 and Q4 for that majority of those design wins. Is that still the case, or is that been delayed or pushed out for some of the reasons that that we've talked about ramping new products and people may be unable to hit factories? I'm just wondering if that's, you know, part of I guess what I'm really trying to get to is, you know, is that part of the reason why we just want to, you know, not give guidance for the entire year until we could see if these are going to ramp as previously expected, or is that not at all the case?
Yeah, so my hesitation of giving yearly guidance is really not about the Defense, Aero customers, they will stay in fact, they'll keep moving forward. Matter of fact, some of them are trying to push us to move even quicker, because we have been, I believe, more efficient than some other EMS providers, and staying open and producing products.
So I think that, specifically the Aerospace and Defense that has nothing to do with wide guidance but might actually concern of why we pull the guidance, really has to do with more of the macro world. So I would say stick with your original thesis that Q3, Q4, those Defense and Aero customers will come on board.
It's pretty innovative, people get when you can't travel. I never expected in my life to be sitting in a car doing, you know, zoom meetings, or having my engineers were GoPros while they're working on board so that the engineer on the other side can see it. But companies have adapted and so Christian, I don't see a change in Defense and Aero business. I'm more worried about, you know, the consumer type stuff.
If I was to worry, payment systems, this and that, and I actually think long term they will do really well. Because I think people will go away from touching your credit card and wanting to hand things to other people, you'll start seeing in touch with payment systems and all that.
I just don't think you'll see them. today, tomorrow and the last is all of this government money, these trillions of dollars they keep approving, when does it stop? And when is unemployment start going back to a more normalize level. That's really why we pull the guidance doesn't have to do with the customers.
Great. Thank you. No other questions? Thanks, guys.
[Operator Instructions] And we'll move next to Steve Kohl with Mangrove. Please go ahead.
Good morning, guys. Thanks for the call and excellent job and dealing with the most difficult unprecedent environment. I’ve got a few questions. As I'm sure you're not surprised, let me talk a little bit about your customer kind of market exposure.
And I think you mentioned, you know, a bunch of them are deemed essential, I guess, let me rephrase the question a little bit and just talk about what percentage of revenue, custom revenue is deemed essential rather than numbers of customers? May be an opening question. I've got a few follow up.
Yeah. So this, this is a tricky one, because publicly disclosing was essential, what's not, allows people start saying, we don't agree that's essential. So, at this point, I would tell you a significant portion of our business is deemed essential, but I don't believe we're going to give out a percentage of that.
Okay. Let me talk little about on Aerospace and Defense. Just unclear, is all of it or predominantly all of that coming out of Melbourne, so on a $10.7 million number. Is that all Melbourne or is it something out of Fremont or somewhere else in the system?
Most predominance of its Melbourne, but some of it goes through our Boston and Freemont sites. So the good news is we are not just growing in Mexico, we're also growing in the U.S.
Okay. And the expectation still is, when you look at that ramp and Aerospace and Defense in Melbourne for the balance of the year, what are some of the obstacles that you see there, is it a people constrain some business should be doing better or what are some of the you know, you see that being an issue, because if I remember right, we're still looking for a pretty big bounce in Melbourne for the balance of the year?
Yeah, so Melbourne is going to continue to grow through the balance of the year. That's where we do a significant portion of our Military Aerospace business. Getting people has not been the issue, Steve. So we probably have invested before curve. So it's really not an issue in terms of the people’s part of it.
I think the supply chain, even though it's military, aerospace and defense business, the supply chain still is one of the trickier bits of it. And then the last real bit is, a lot of customers, and when you do aerospace defense, you have to do qualification bills, they have to come in, qualify the process, maybe qualify conformal coating, maybe qualify the slot. There is a lot of qualifications done on the aerospace defense.
In particular, when you get into the space type programs that we have, you need the qualification. I think Christian ask a pretty good question about, how do you work around that? Right now we're trying to do with GoPros, iPads, different things. But maybe not all of it can go that way. So when do they lift the requirements, the shelter-in-place and allow people back in our buildings may become critical to us in Q3, Q4.
Q3 longer term and this was a question, I guess a lot of companies were getting at now is over the last several months, obviously, we haven’t travel businesses or having to adjust. You see long-term structural changes that would lead to a lower cost structure with lower travel, lower, you know, where we can take out some costs that we might not have thought we could have done before, or how do you see that going forward?
So the good news is we've been able to win some customers without traveling that much. And so expenses on travel are down. The bad news is, it's all matter what my competitors and other people in the industry. So I think they'll be this new Zoom phenomenon, whatever you want to call it meetings across, I think will clearly lower the cost of travel and it cost to sales, people will do more meetings. I think going forward. I think companies will have more people who work-from-home going forward. So I think there was a initial infrastructure investment. And then I think there'll be a savings in travel.
And last question, could you spend a second just talking about the ebbs and flows within some of the customer and market vertical? So I know that obviously, the fence narrows down, I got the retails a little soft, obviously, the punch line, but have you seen other opportunities with them? I'm just curious about other things come up that you've responded to that maybe protect other opportunities or what's happening in that area, what some of the sales folks are targeting?
Yeah, so we are right now in the process of quoting ventilators in multiple places in the world. And the question is going to be, do all these countries need as many ventilators as they’re talking about? So there is clearly some opportunity there. We also, are operating on some new technologies that were involved in terms of killing these types of viruses and UV light, testing some of those things.
I will tell you so that -- I think there's opportunity on specific products, I think that we're going after, and we're focused on, I think some products will go soft. My experience in all of these prices that we've had, and I walked through them earlier, has been that there's a lumpiness coming out of them, that you have good quarters because you win some new products. Some products won't take off, some products will, and that the marketplace gets much more lumpy coming out of these things than just straight up to the right, or just straight down.
Thank you guys very much. I appreciate the time you've taken the question.
Thanks. Have a good day.
And with that, I'll turn the call back over to Eddie Smith for final comments.
Okay. Well, I want to, first of all thank everybody for their time and focus. So in closing, I want to thank our employees, our leadership team, business partners, distributors, and our stockholders for the continued support and look forward to reporting our progress to our various stakeholders over the next several quarters. And then for all of you for attending, thank you. Have a great day.
And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.