Kornit Digital Ltd. (NASDAQ:KRNT) Q1 2024 Earnings Call Transcript

Kornit Digital Ltd. (NASDAQ:KRNT) Q1 2024 Earnings Call Transcript May 8, 2024

Kornit Digital Ltd. beats earnings expectations. Reported EPS is $-0.11, expectations were $-0.12. Kornit Digital Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Kornit Digital First Quarter 2024 Earnings Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] and this call is being recorded Wednesday, May 8, 2024. I’d now like to turn the conference over to, Jared Maymon, Global Head of Investor Relations. Please go ahead.

Jared Maymon: Thank you, operator. Good day everyone and welcome to Kornit Digital’s First Quarter of 2024 Earnings Conference Call. Joining me today are Chief Executive Officer, Ronen Samuel; and Lauri Hanover, Kornit’s Chief Financial Officer. For today’s call, Ronen will provide comments on the first quarter of 2024. 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’d 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 the 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 28, 2024, 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 measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company’s earnings release published today, which is also posted on the company’s Investor Relations website.

At this time, I’d now like to turn the call over to Ronen. Ronen?

Ronen Samuel: Good morning, everyone and welcome to our first quarter of 2024 earnings call. Today, we reported revenue of $43.8 million and adjusted EBITDA margin of negative 18%, which is within the guidance range we provided in February. I am pleased to report that we also generated positive cash from operations during Q1 which was ahead of the plan. Overall, while our markets remain challenging, we saw few positive signs in the quarter, including continued year-over-year improvements to utilization, impressions and consumable sales. We also saw a strong reception by our industry on both the Apollo and the initial pilot for a new all-inclusive click or AIC model. First on the Apollo. After announcing general availability in January, we successfully concluded the Beta-programs in all three of our initial Apollo sites.

These customers gave very positive feedback overall on the systems and have all cemented the systems as a permanent piece of their production floor. In addition to this, one of our beta customers has already placed an order for four more Apollo’s in addition to the beta systems. And they have indicated to us that they expect to order another two systems this year. This means by the end of 2024, we expect this customer to have seven Apollo’s on the production floor. This customer is planning to use their Apollo’s to transition mid-size runs from the screen printing business to digital. Last week, another beta customer placed an order for the second Apollo, which is another encouraging sign that the product is adding significant value and is functioning as expected for these customers.

Beyond our beta customers, we have already built a strong pipeline’s of orders from both new and existing customers in 2024. And we have already started to add to our pipeline for 2025. As a result, we are now working with our contact manufacturers to increase production capacity of the Apollo systems for 2024 and beyond. One of the factors helping to build this strong pipeline of the Apollo is the AIC program, which we announced the pilot last quarter. The feedback overall from our industry has been highly positive with both new and existing customers expressing the preference for the model. We’re confident that the introduction of this program even with its initially limited scope has helped us to make strong progress in situations where we would not have been able to traditionally.

After improving our customer success organization, advancing our quality standards, and improving the TCO of our solutions, the last step which we have needed to overcome is removing the barriers to entry and expansion. These barriers have historically included uncertainty in unit economics, and large initial capital investment. Solving these barriers to entry is key in our current market to help our industry continue their digital transformations through challenging macro-economics headwinds. And even more important, longer-term, to help us capture the major digital conversion opportunity that has always been core to our vision. We also see the model as being favorable for us, especially given the volatility in our market today. The minimum volume requirements inherent in the AIC program give us a clear line of sight into the revenue potential of this model which is more predictable than our traditional model due to its recurring nature.

So overall, we believe this is a strong solution for both our customers and us, and we expect to deliver additional systems within the pilot program this year, which we will closely monitor in the field. I’d also like to provide an update on our direct-to-fabric business and expand on the new product announcement we made at FESPA. First our direct-to-fabric business as a strategic pillar of our digital transformation strategy continues to drive revenue diversification for us across our product mix, application served and geographical concentrations. This quarter, we saw in direct-to-fabric production a strong double-digit growth year-over-year in ink and impression. I am also happy to report that we are continuing to progress with our key customer in China in the footwear market, which could be a remarkable opportunity for Kornit in the medium-term.

Lastly, we are in the middle of our beta testing with few customers for the ATLAS MAX plus. The initial feedback is very encouraging, both on the increase in productivity of around 15% to 20% and the improvements in production consistency, flexibility and additional applications. One of these new applications is the new Max Transfer solution, which we have announced at FESPA in March. The solution brings the same level of consistency, quality, and sustainability that our customers have come to expect from Kornit products and adds placement versatility for certain incremental applications that our customers seek to address. We see this as a complementary solution to our customers, which will expand our addressable impressions. We received encouraging feedback on the solution, and we will continue to share updates with you as we work through the developments.

So in conclusion, macroeconomic conditions remain challenging to start the year as expected. However, we saw several positive signs that our new products and models are resonating well with both new and existing customers. Moving forward we’re dedicating our attention and resources to ensuring that we have put all the necessary pieces in place to deliver on our mission of transitioning long-run production to sustainable on-demand production globally. Now, let me turn the call over to Lauri for a closer look at our first quarter financials and the second quarter guidance. Lauri.

Lauri Hanover: Thank you, Ronen and good day to everyone. First quarter revenues were $43.8 million, within the guidance range we provided in February. This quarter consumables grew year-over-year, which was again more than offset by a decline in systems and service sales as expected. Moving to margins. First quarter non-GAAP gross margin was 37.5%, compared with 30.2% in the same period last year. The year-over-year improvement is primarily attributable to a better mix between comparatively higher margin consumables and systems and lower fixed costs due to our restructuring efforts. Looking at operating expenses. Total first quarter non-GAAP operating expenses were $27.1 million, a decrease of $5.3 million, or 16.6% from the $32.4 million in the same period last year.

This reduction in expenses reflects our cost savings and restructuring initiatives. As discussed in our previous call we took decisive action to align our cost structure with our revenue expectations and to enable operating leverage when we return to growth. Included in this restructuring was a meaningful workforce reduction, a consolidation of facilities and a phasing out of our legacy platforms. As such, we incurred additional restructuring charges of $1.7 million for the first quarter as expected. We continue to expect this restructuring plan to save approximately $20 million in expenses during 2024 versus the full year 2023. First quarter adjusted EBITDA loss of $7.8 million was significantly better than the adjusted EBITDA loss of $14.7 million in the same period last year.

Adjusted EBITDA margin for the first quarter of 2024 was negative 17.9% near the top-end of the guidance range we provided in February again reflecting a meaningful improvement year-over-year. Our cash balance, including bank deposits and marketable securities at quarter end was approximately $551 million. This quarter we generated positive cash flow from operations of $4 million. This achievement was primarily the result of a strong collections focus and it underscores our commitment to returning to positive operating cash flow in 2024. As Ronen highlighted, we are encouraged by the response to-date of the AIC offering. There is both a higher level of engagement with targeted customers and a higher ratio of sales closed with the AIC model versus our expectations.

Also, the qualified opportunities now in discussion appear likely to convert to orders in a similarly higher proportion, as we have seen in Q1. Should this be the case it will reduce our revenues in the short-term meaning the second half of this year. We’re committed to tightly monitoring, managing and learning from this pilot program, due in large part to the short-term impact on revenues and cash. Moving on to our share repurchase program. For the first quarter of 2024, we repurchased approximately 424,000 shares spending an aggregate amount of $7.9 million. The average price paid per share net of fees was $18.55. Approximately $11.4 million remains available for share repurchases under our previously authorized program. Turning to second quarter guidance.

We currently expect revenues for the second quarter of 2024 to be between $47 million and $52 million, and adjusted EBITDA margin to be in the negative 10% to 0% range. That concludes our prepared remarks. With that, I will now turn it back over to Ronen to open up the call for Q&A. Ronen?

Ronen Samuel: Thank you, Lauri. Operator, we are now ready to take questions from the audience.

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Q&A Session

Operator: Thank you so much presenters. And ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Greg Palm of Craig-Hallum. Your line is now open.

Greg Palm: Yes. Hi, thanks for taking the questions. Let’s start with Apollo. And maybe this is a two part question. But thanks for the sort of the update and the color there. I guess, Number One, you talked about one of your beta customers and a larger scale order this year. Are they utilizing the AIC model for that? And then just sort of generally speaking, more of a pipeline comment, but what gives you the confidence to already start thinking about increasing capacity later this year and in the [Next] (ph)? Is that just based on feedback? And then to be clear, are you basically out of slots for this year? Have you basically sold all your remaining slots?

Ronen Samuel: Yes. Thanks Greg. I will refer first of all to the Apollo and then a bit about the availability. So first we are really excited about the progress that we have around the Apollo and the feedback we are receiving from our customers. First of all, before I share some of the feedback, we need to understand that Apollo is really opening for us a totally new TAM that we are going after. For years, we were going after the customized design. For the first time, we have a massive opportunity to go after the bulk-apparel. And we start to see our customers that are using the Apollo going after that. So this is the strategic intention. This is a huge shift for the company and a massive opportunity moving forward. As for the beta, all three beta cemented the Apollo, as part of the production flow.

We received very positive feedback from all three of them. First of all, in the productivity, this is the most productive digital solution exists in the planet. In terms of the quality, this is by far the highest quality, equal or better than any screen solution out there. And in terms of automation, it requires only one operator. This is a breakthrough from the feedback that we are getting from our customers. As for the orders we already have received, one of the beta customers already placed an order for four additional Apollo, which one of them we are shipping this quarter. On top of that, he told us that he will place another two systems, actually rushing us to place another two systems this year. So in total, he will have seven systems of Apollo this year, and he’s already talking about next year.

Second customer of beta customer just placed a few days ago an order for the second Apollo. And we expect also the third customer, beta customer to place an order early next year based on our discussion with them. On top of that we need to understand that we’re collecting orders. So we already have order and the pipeline looks very, very strong. The order book looks very strong for 2024. And I can say that the 2024 is full from a pipeline perspective and order book. And what we see that it is open for us not only existing customers, but totally new customers from the bulk apparel that we were targeting as part of this pipeline for 2024. At this stage, we are really building already the pipeline for 2025, and it starts to look very, very promising.

We’re working with our contact manufacturer to increase the production already this year and definitely beyond which we expect acceleration of delivery in 2025. I can tell you, Greg, it is a game changer, it is a real game changer for the industry, it’s a game changer for Kornit. And we are opening our new experience center in two weeks from now in Europe in parallel to the [drupa] (ph) event, and we’re inviting many customers to come and join us for this opening where we are going to show the Apollo, and it will be the center of excellence for the Apollo on a worldwide level. As for your question regarding these customers that are beta customers that order multiple systems, some of those systems are on the CapEx model, some of them are on all-inclusive click model.

Greg Palm: Okay. Great. Thanks for covering everything. I know that was a lot. I guess just my second follow-up has to do with the AIC, with the click model, and you talked about or hinted at maybe some implications for the second half. Can any way to quantify how that might affect the model in any sort of way?

Ronen Samuel: Yes. I will touch on two areas. One of the value of the AIC that we see, and the second what is the implication that we believe that we will have for this year. So on the AIC model, the all-inclusive click model, we’re still in a pilot stage, so it is very early to get into too much detail, but what is the intention behind it? The intention behind it is to increase our TAM, is to go really after large customers, potential customers that now are using analog and printing long runs of jobs, and convert them to digital. Many of them never used digital. They are new to digital. Some of them did, but they are looking to ways of really expanding further to digital. In the last few years, we worked very hard to develop our technology to meet what this market needs in terms of expectation of quality — the print quality, the productivity, the application range, the TCO of our technologies, and we believe that we crossed the line on all of them, and now we have the right fit.

The last milestone was for introducing this program is to solve really the last barrier of entry for those customers. One of the barrier of entry is really addressing the uncertainty of the unique economics. With this model, they know exactly how much it will cost them every impression, every share that they print, every hoodie that they print. They know exactly how much it will cost them, so it is easy for them to compare it to the analog world. It is also limiting, reducing the risk of the initial capital investment, so it is taking off the initial capital investment. Of course, is they’re committing to a minimum specific volume as part of this program. The feedback that we have received from customers till now, customers that are now using it and customers that will use it, is really encouraging.

We already closed a few additional deals, as I mentioned, on this model some of them with existing customers and some of them with totally new customers that in the past we couldn’t penetrate and this model and the Apollo really opened the doors for them. This model is also very favorable for us, as there is a commitment of minimum volume that gives us a clear line of sight on the revenue we are expecting from each system and from each customer. It will give us more predictable revenue than the traditional model. It will provide us better volume, higher utilization. We expect customers to use the system in much higher utilization than they are using today due to the commitment. So it will drive more impression and more ink, and it will open, of course as I mentioned, new customers and new markets for us.

We expect, Greg, to deliver more additional systems as part of the pilot this year with additional customers. And what I can say regarding H2, and it is start looking at where we are in the program and what are our expectations in the program in the next few quarters of 2024, we are actually expecting that revenue, if you look at the revenue of H2 to be between 20% to 25% higher than H1, including the program, so you will see an increase in revenue. Traditionally, H2 is higher than H1. We are going to continue to see H2 higher than H1 in about 20% to 25%. We also expect that OpEx, like you saw in Q1, will be in the same range across all the quarters in 2024. We also expect for the full year positive adjusted EBITDA margin as we promised in the last call.

We’ll be positive — or we are expecting to be positive on adjusted EBITDA margin, and we expect for the full year to be positive cash flow from operations. So while there is some effect, positive and some other effects on the financial we are still committing to deliver the portability, the EBITDA, the cash from operations and the growth in H2.

Greg Palm: Okay, awesome. Appreciate all the color. Thanks and best of luck.

Ronen Samuel: Thank you.

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

Chris Moore: Hi, guys. Thanks for taking. A couple of questions. Maybe we’ll stay with the AIC. So just trying to understand from a longer-term perspective, how the model impacts your gross margins.

Lauri Hanover: Yes. So, first of all, we would not go into this program if we didn’t think it would deliver at least the same gross margins that we are seeing, but we are hoping to see even better gross margins. Part of the reason that we are capturing this as a pilot program is to validate those assumptions and ensure that we have it all bolted down so that we can speak more definitively as we look at the model going forward.

Chris Moore: Got it. That’s helpful. Ronen, you mentioned the ATLAS MAX Plus. Can you maybe just talk a little bit more about the expectations for the system, kind of when it is going to be released, and any specifics around there?

Ronen Samuel: Yes. So we are going to say we are in the beta. We introduced it to the market at FESPA a few months back. We are running a few beta sites right now, and the feedbacks are very encouraging. About — first of all, about the productivity. So this ATLAS MAX Plus will provide additional productivity to our customers, something like between 15% to 20% additional productivity, and this is confirmed by the beta customers that are running it now. The production quality and consistency and flexibility and — is on a different level. So we are taking all those elements of quality and consistency and flexibility to a much higher level, and of course, additional application. One of those applications is what we call MAX Transfer.

The MAX Transfer enables our existing customers to use the ATLAS MAX Plus and to print directly on film and to use it for a placement on a garment, mainly for application of multi-placement on garment. The main differentiator that we are bringing to the market is mainly on the quality, on the consistency, and as you can expect also sustainability, because this is something that we’re driving in every solution that we’re bringing, and this is a breakthrough in terms of sustainability that we’re bringing to this solution. Overall, it is a complementary solution in terms of the ATLAS MAX. We expect to deliver the ATLAS MAX Plus early Q3, and we expect also to start upgrading the install base that we have, the ATLAS MAX installed base doing H2 into ATLAS MAX Plus, which will enable them more application, more productivity, and of course for us as well additional revenue from those upgrades.

Chris Moore: Perfect. Very helpful. I will leave it there. Thanks guys.

Operator: Our next question comes from the line of Brian Drab from William Blair. Please go ahead.

Brian Drab: Hi Ronen, hi Lauri. Thanks for taking my questions. I just wanted to start by trying to reconcile Lauri’s comments in the prepared remarks around the second half where I believe Lauri that you said that there could be some pressure on revenue related to the AIC model. And then, Ronen, your comment, I think that you just made was that you expect total revenue to be 20% to 25% higher in the second half versus the first half. Can you just elaborate on that and reconcile those thoughts for me please?

Ronen Samuel: Yes. So, overall, for the year when we started the year we knew that the year is going to be challenging from a macro perspective and this is exactly what we see overall. So the macro in our market is still a bit soft so — but on the other hand we introduced new technology. We improved many, many aspects of the business. We are entering into new market segments. And of course, we are introducing this new model, which is a recurring revenue model, and each one of those units that we are delivering, we will not see initially the revenue from the system, but we will start seeing the revenue from the clicks from the first day. So to be very clear if you take the H1 revenues that we’re forecasting or guiding for H1, we believe and we expect that H2 will be in the range of 20% to 25% higher than H1.

This is, first of all from the seasonality perspective usually H2 is much larger in terms of in-consumption, but we believe that we will deliver additional systems. Some of them will be on the all-inclusive, but some of them will be as well on the CapEx traditional model.

Brian Drab: So, that 20% to 25% higher is despite having this pressure from the initial deliveries of AIC units?

Ronen Samuel: Correct. Correct.

Brian Drab: And that means that, I mean it seems like it means pretty good things for next year, as those systems ramp up and you deliver more systems, because I mean — I expect for a full year in 2025, these systems that you deliver in 2024, should deliver much more meaningful revenue. Am I thinking about this correctly?

Ronen Samuel: Absolutely. This is the whole intention of the model. It will give us visibility, it will give us predictability, it will start the year much stronger with a clear understanding on those systems, what they are going to deliver for the 2025.

Brian Drab: And then I think Greg asked this, but I’m not sure I caught an answer to it, but is there any limitation on your manufacturing capacity for those units as you look out 18 months?

Ronen Samuel: So, as you know — sorry, as you know the Apollo is a new system. So we’re ramping up the manufacturing. We were planning a specific number of units for 2024. At this stage, we already connected with our contact manufacturing and we are trying to increase the volume, the number of systems for 2024 and even to bring them earlier. And the plan is really to accelerate the growth in number of units into 2025.

Brian Drab: And then just one more please. The customer that is planning to have seven units, are they based in the United States? And can you talk a little bit more about what you mean by bulk clothing manufacturing? Any more specifics around what type of market they’re serving would be helpful? And thanks very much.