Kornit Digital Ltd. (NASDAQ:KRNT) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Greetings, and welcome to Kornit Digital’s First Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to our host Mr. Andrew G. Backman, Global Head of Investor Relations for Kornit Digital. Mr. Backman you may begin.

Andrew G. Backman: Thank you, operator. Good day to everyone and welcome to Kornit Digital’s first quarter 2023 earnings conference call. With me today are Ronen Samuel, Kornit’s, Chief Executive Officer; Lauri Hanover, Kornit’s, Chief Financial Officer; and Amir Shaked-Mandel, EVP of Corporate Development For today’s call, Ronen will provide comments on the first quarter 2023. Lauri will then review the first quarter numbers and provide our second quarter outlook, before we open it up for Q&A. Before we begin, I would like to remind you that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other US securities laws will be made on this call. These forward-looking statements include, but are not limited to, statements relating to the company’s plans, strategies, projected results of operations or financial condition and all statements that address developments that the company expects will occur in the future.

Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by forward-looking statements. I encourage you to review the company’s filings with the Securities and Exchange Commission, including the company’s annual report on Form 20-F filed with the SEC on March 30, 2023, which identifies specific risk factors that could cause actual results to differ materially. Any forward-looking statements are made currently and the company undertakes no obligation to publicly update any forward-looking statements, except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measurements on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in our earnings pres release, which is published today, which is also posted on the company’s Investor Relations website.

At this time, I would like to turn the call over to Ronen. Ronen?

Ronen Samuel: Thanks, Andy and thanks everyone for joining us for today’s call. As we reported earlier today, our first quarter revenues were $47.8 million in line with the guidance provided in February, which as a reminder included the impact from the fair value of issued warrants. Promising indicators emerged during the first quarter in certain parts of our business, despite the persistent macro pressures in the overall operating environment. System sales, supporting our customized design customers, which historically represented about 90% of our business remained challenging during the quarter. However, we see some promising capacity utilization indicator emerge, including double-digit year-over-year impression growth from several of our larger strategic accounts.

This included our global strategic account, who is bringing additional systems online to handle the current and expected volume growth this year. Remember, these systems were shipped last year but experienced installation delays due to site completions. So far, impression momentum continued in the second quarter with several of our customers being a bit more optimistic regarding overall growth at the start of 2023. Customers upgrading to our MAX technology drove a strong quarter for service revenues. During the first quarter, we received orders from several strategic customers for approximately 60 system upgrades from Atlas to Atlas MAX. Customers choosing to upgrade to our MAX technology are making a clear endorsement of its quality, color, vibrancy, durability and enhanced productivity.

We continue to believe, MAX is the new industry standard and expect other large customers to upgrade their systems throughout the remaining of 2023 and in 2024. Overall, while capacity utilization in the customized design market is still not optimal, we believe, we have just scratched the surface of the immense opportunities unfolding within large social, digital, entertainment and content online platform seeking to embrace and monetize the power of on-demand digital production by making it easily accessible from within their platforms to the massive global communities of users creators, artists, merchants and friends. As such, we are not at the same elevated levels experienced during the pandemic. We do expect growth to resume in the customized design category as overall macro conditions stabilize.

Over the past several quarters, we have been making steady progress on our strategy of targeting brands and retailers and their global fulfillment partners, looking to restructure supply chains in order to address new products paid to market, margin expansion, excess inventory liability and regulatory enforcement of sustainable textile production. Our MAX technology in our innovative products are the cornerstones of this strategy, with top retail quality, better cost efficiencies and new product capabilities. For example, our Atlas MAX Poly opens up massive new global fashion at leisure and entertainment apparel markets for Kornit customers enabling them to offer retail quality sportswear and fanwear. In fact, we had a strong first quarter for Atlas MAX Poly mostly with some of our largest strategic customers, in North America, EMEA and in Asia Pacific.

I’m also pleased, to see the progress we have made in direct-to-fabric, which is now starting to contribute more meaningfully to our business. We are penetrating new markets and are building a very good funnel in key textile regions of Latin America, Europe and Asia Pacific. During the first quarter, we added several new customers including one of the prominent printing houses in Italy and in Germany, with an international producer of high-tech functional textiles for a variety of industry, including for some of the world’s highest end brands. We also successfully closed several Presto to Presto MAX upgrades. With our innovative single-step solution, Kornit is the market leader in direct-to-fabric. We continue to strengthen our leading position, with Presto MAX and with new innovation including a revolutionary new ink, we will showcase at the upcoming ITMA tradeshow in Milan, that we believe will accelerate the penetration into the mainstream fashion industry.

It’s an exciting time at Kornit, as we gear up for ITMA, where we intend to demonstrate how digital production goes mainstream and showcase sustainable on-demand manufacturing at scale. We will showcase Kornit industry-leading technology portfolio, which offers the apparel and textile industry, a complete digital transformation solution to on-demand production. At ITMA, we will officially unveil Apollo, our breakthrough platform suitable for longer run production cycles than what Kornit solution has been addressing to date. This brings digital production into the mainstream, and will be a real differentiator. Based on initial feedback from our customers, we are more confident than ever that the Apollo will be a game changer in terms of productivity, automation, quality consistency and total cost of ownership.

In addition to the Apollo, we will showcase our new Atlas MAX PLUS, which will take the Atlas MAX to a new level of productivity. Our new portfolio of smart curing solution based on Tesoma technology, our new RSS pallets as well as our Atlas MAX Poly, Presto MAX and KornitX solutions. We hope you will join us at ITMA, to experience our Kornit’s digital on-demand ecosystem will drive massive needed transformation, in the textile and fashion industry. To summarize, as I mentioned on our last call 2023, is a transition year for Kornit and we remain laser-focused, on executing in three key areas: approach breakeven during the second half of this year, on an adjusted EBITDA and then profitable growth thereafter; successfully launching Apollo, with better trial expected to begin soon; scale KornitX while we are making some good progress, with several demand generators.

I take immense pride, in our entire team’s tireless effort and dedication to move the company. As I stated during our last earnings call, Kornit’s long-term growth drivers remain firmly intact. We are confident that our strategy, product road map and solid balance sheet combined with improvement in overall market condition, position us well to deliver meaningful long-term profitable growth. With that, let me turn the call over to Lauri, for a closer look at the first quarter number and the second quarter guidance. Lauri?

Lauri Hanover: Thank you, Ronen and good day to everyone. As Ronen mentioned, first quarter revenues were $47.8 million, in line with the guidance range we provided in February. As expected, the year-over-year decline in revenues was attributable to meaningfully lower system revenues, primarily in the customized design market. While we did see double-digit growth in impressions from some customers, consumables revenues were essentially in line with the prior year period due in part to the timing of some orders from a large global strategic customer. As Ronen described earlier, services revenues posted very strong year-over-year growth due primarily to customers upgrading systems to our MAX technology, higher contract revenue growth, as well as higher sales of printers and spare parts.

In the Americas, we had a very solid quarter of services growth, while overall system sales in the region remained challenging due to the macro environment, which continues to drive longer sales cycles. Looking at the pipeline in the region, we expect a healthy cadence of customer upgrades throughout the year, which will drive services revenues as well as positive trends in consumables as we see some signs of stabilization emerging. In EMEA, consumables growth was exceptional as compared with the same period last year primarily driven by higher year-over-year volumes and ASPs. As expected, system revenues remain constrained, with customers increasingly seeking financing alternatives for capital expenditures. Our DTF portfolio continues to gain traction in EMEA as we added several high-quality customers during the quarter.

The APAC region delivered robust services growth as compared with the same period last year in addition to strong sales of Atlas MAX Poly systems in South Korea. We continue to focus on developing meaningful opportunities with strategic accounts and partnerships in the region, particularly in India, Japan, Australia and China. For the balance of this year and for 2024 we believe the upcoming ITMA tradeshow in Milan will be a catalyst to, not only close a number of transactions but to also help build a healthy sales funnel of new opportunities across the regions. Moving to margins. Non-GAAP gross margin was 30.2% as compared with 41.5% in the same period last year. The year-over-year decline in gross margin was driven primarily by lower systems volumes and mix.

We continue to expect gross margin improvement throughout the balance of this year given the historical cadence of consumables as a percent of sales being progressively higher heading into the peak season and longer term as sales volumes recover to a run rate that generates operating leverage on our reduced cost structure. Turning to expenses. Total first quarter non-GAAP operating expenses were $32.4 million, down approximately 8% from $35.2 million in the same period last year. The year-over-year decline reflects the impact of our previously completed workforce reductions and additional cost structure improvements we implemented across the board. This includes prioritizing R&D and sales and marketing initiatives and reallocating resources from non-customer-facing activities to developments and customer engagement functions that enable the acceleration of our long-term growth engines.

As a result of the above, adjusted EBITDA loss for the first quarter of 2023 was $14.7 million as compared with adjusted EBITDA of $1.5 million in the same period last year. Adjusted EBITDA margin for the first quarter of 2023 was negative 31% in line with the midpoint of the guidance range we provided in February. Our cash balance, including bank deposits and marketable securities at quarter end was approximately $624 million. Cash used in operations during the first quarter was approximately $14 million, driven primarily by the operating loss and changes in working capital. In this regard, accounts receivable rose due to the timing of collections and a higher level of extended payment terms for system sales to select customers while inventories were modestly higher to reflect the receipt of raw materials from suppliers and additional new systems including Apollo.

Further, during the quarter, we repurchased approximately 338,000 shares under our share repurchase program for an aggregate amount of $6.8 million, representing an average price paid per share of $19.97. As a reminder, we have an authorized share repurchase program for up to $75 million. Given our strong balance sheet, we believe that we can opportunistically repurchase shares without impacting our ability to execute on the company’s growth initiatives. Turning to second quarter guidance. We currently expect revenues for the second quarter of 2023 to be between $54 million and $59 million and adjusted EBITDA margins to be in the negative 19% to negative 27% range. As a reminder, the guidance for revenue and adjusted EBITDA margin includes the impact of the non-cash expense associated with the fair value of the company’s warrants to our largest global strategic account.

As I mentioned on our last earnings call, we expect to generate breakeven operating results on an adjusted EBITDA basis as quarterly revenues reach a run rate of approximately $70 million with gross margins in the mid-40% range, obviously, depending on mix and OpEx in the mid-$30 million range. We continue to expect to turn the corner during the second half of this year and approach breakeven and later on move to profitability, again on an adjusted EBITDA margin basis. And with that, let me turn it back to Ronen.

Ronen Samuel: Thank you, Lauri. Operator now, it’s time to open the call for Q&A.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Tavy Rosner from Barclays. Please go ahead.

Operator: Thank you. Your next question comes from Brian Drab from William Blair. Please go ahead.

Operator: Thank you. Your next question comes from Erik Woodring from Morgan Stanley. Please go ahead.

Operator: Thank you. Your next question comes from Chris Moore from CJS Securities. Please go ahead.

Operator: Thank you. Your next question comes from Jared Maymon from Berenberg Capital Markets. Please go ahead.

Operator: Of course our last question comes from Greg Palm at Craig-Hallum. Please go ahead.

Operator: Thank you. Mr. Backman, there are no further questions at this time. You may proceed.

Andrew G. Backman: Great. Thank you, Sergio and thank you all for joining us today. As always if you have any follow-up questions please do not hesitate to contact me directly. Sergio, will you please close the call?

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.