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

Ronen Samuel: Yes, I’ll start with the second question, because it is an easier one. So bulk production — what we mean by that is really replacing the screen, the analog wall, the printing, longer run jobs, not only one-off. We used to be in the customized design market. We are still in the customized. We are the leader in customized design. But we are shifting gear and entering now to the long run, replacing screen, we call it bulk production. So we are going after that. This is new type of customer, new type of job and much, much bigger TAM that we are going after. As for the specific customer at this stage I don’t want to disclose it. I’m sure in one point of time it will be disclosed and the customer will disclose it. So I prefer not to provide a clear answer on that.

Brian Drab: Understood on that. Thank you very much.

Operator: Our next question comes from the line of Jim Ricchiuti from Needham & Company Research Analyst. Please go ahead.

Chris Grenga: Hi, this is Chris Grenga on for Jim. Thank you for taking the question. You had mentioned the opportunity you saw with the potential for the Chinese footwear market. Just curious if you could provide any additional color on what you saw across the regions this quarter and what you’re seeing and maybe some of the puts and takes by geography.

Ronen Samuel: Okay. So in the last few years we worked on diversifying our business both in terms of the different segments that we are going after. As I mentioned before we were focusing very much on the customized design. And now we are going after bulk apparel, home decor, technical, footwear, fashion. And you touched on the footwear. We also expanded our technology, both in terms of quality, like the MAX, the Apollo, the MAX-plus, the Presto, the Dryer, the RSS, the Qualiset, many, many solutions that really addressing those different market technology, both in terms of quality, durability, et cetera. We work very hard on the customer success, being able to support those big type of customers. We are entering to totally new type of customers like this customer in China, in specific, the footwear, but we are entering to retailers and brands across the world.

In terms of territories that you were asking, we see growth coming from India. We see the potential in China, specifically around the segment of the footwear, Latin America becoming more meaningful for us, specific areas in Central Europe. We see a potential with a big event coming in Europe and we expect that it will deliver. And of course, the North America. We’re entering to new business models that will help us to penetrate those new geographies and new type of customers. And today we are a totally different company. We are much more diverse in terms of the customer, in terms of geography, in terms of technology, in terms of segments. So I am really happy to see where we are today and believe that from now on — we see the light and the sky, a bright sky in front of us.

Chris Grenga: Okay. Thank you. And when we consider Apollo versus an existing platform like ATLAS, what do you or how are you thinking about the consumption of inks by volume of the Apollo? And are those ink economics similar to your existing ink economics or is there any difference? And over time would you expect as Apollo’s are fielded and stabilized in the field, could that contribute to any incremental shift in the mix of inks versus systems over time?

Ronen Samuel: It’s a very interesting question. And I can tell you first of all, that we are in an early stage, both on the Apollo and both on the all-inclusive click. So I’d be very careful with the way I’m answering to you. And we need to see we have the average of how much customers are printing on the ATLAS MAX and how much the average customer printed on the Apollo, on the beta customers and what they are committing on the all-inclusive click. I can tell you it is a magnitude difference — a very big magnitude difference. If you compare it to the ATLAS MAX in terms of the volume and what we are targeting in terms of one-to-one comparison on the all-inclusive click on the Apollo, at least five or more times volume than the ATLAS MAX Plus. And when I say volume, volume is impression and ink.

Chris Grenga: Got it. Thank you very much.

Operator: Our next question comes from the line of Erik Woodring from Morgan Stanley Financial Analyst. Please go ahead.

Erik Woodring: Great. Thank you so much for taking my questions guys. I guess I’d maybe like to dig into two of the topics that some of my peers have already brought up. But just on the kind of revenue outlook for the second half — last quarter we talked about modest growth. Your guidance now implies that for the full year revenue is going to decline year-over-year. I guess, it is surprising because you are telling us AIC is only in the pilot stage, so it doesn’t feel very large. So, I guess my specific question is, when we look at the revenue headwind in the second half of the year how much can you attribute to AIC versus how much is actually just weakness in the non-AIC rest of the business? And then I have a follow-up, please. Thank you.

Ronen Samuel: So first of all, it is too early because we are still working on all those AIC systems that we are going to deliver in H2. In general what we see is a general softness in the market. And while impressions and ink is going very nicely, we saw it in Q1 and we believe that it will continue for the year. It is still tough to close systems due to the macro-economics. One of the ways to do that is also the all-inclusive click. And now we need to understand that Apollo, each Apollo that we were planning to sell is around $1.8 million of a system. So each one we’re moving to the all-inclusive click, there is a short-term impact on not recognizing the revenue of the system. But overall, what we see — we see this 2024, as the year of transition you will see that H2 is much stronger than H1 and I gave the indication of how much and we believe that we will enter to 2025 with substantial revenues that will come from the all-inclusive click and with a strong pipeline for the Apollo, and hopefully also the macroeconomics will change.

2025 should be the year that we start seeing substantial growth on our total business.

Erik Woodring: Okay. Thank you for that color. And then the second question, again a bit specific — but when we talk, very good to hear about Apollo pipeline being filled for 2024, you are starting to build the order for 2025. Can you just define exactly what pipeline means? Are these committed non-cancelable orders? Just want to make sure I understand exactly when we talk about the pipeline, how to think about the kind of stickiness of that or the potential that some of that pipeline could maybe not get converted? So I just want to make sure I understand the definition of pipeline. Thank you so much.

Ronen Samuel: When I’m saying that the order books and the pipeline for 2024 is already full, what I mean by that, some of it is PO that we already have in hand, a full commitment and some of it is verbal commitment from customers, seriousness from customers that we believe that it will convert to official PO. We are in the process. It is all very, very fast. But in the coming weeks, we are signing on a few big deals, as part of this pipeline. But our confidence level when we’re saying the pipeline for 2024 is full — is very high.

Erik Woodring: Okay. And maybe just my last question and this is just bigger picture is, obviously a lot of kind of positive forward-looking commentary as we think about new technology, as we think about utilization and impressions and consumables, I guess maybe what my question is — is how much of the system’s weakness is cyclical related to macro and concerns about the broader macro environment, and how much of it could just possibly be the fact that companies have just de-prioritized this type of technology and perhaps over the long run, there is a long-term path to growth, but this has just become lesser of a priority. So maybe from a more kind of secular standpoint, the digital world that you’re playing in has taken a step back.

Do you have any anecdotes that you could help share? It’s outside of Apollo. I understand that, but outside of maybe the new technology, how we can think about or gain comfort that this is just more cyclical rather than secular? And that’s it for me. Thank you so much.

Ronen Samuel: That’s an excellent question. So the way I’d like to answer it is as follows. Look, Kornit, as I mentioned before in the last few quarters, and we worked for that for the last few years, entered to totally new markets, much bigger than the markets we used to serve, much larger customers and much bigger potential both in terms of number of customers and in terms of impressions. So it doesn’t come from lack of potential customers. We believe that mostly it is related to the softness overall in the market, both in terms of the interest rate and the capital constraints that our customers are facing and some of them really looking to increase production trying to utilize, as much as they can the current assets that they have.

We see it very clearly on the install base. We see the utilization of the systems really improving. So we know that they are very close to add additional technology. We believe that we have a value proposition today is stronger than ever in those marketplaces that we are going after both in the DTG and in the direct-to-fabric. So I’d refer most of it into the macroeconomics.

Erik Woodring: Okay, that’s very clear. Thank you so much for all that color Ronen.

Ronen Samuel : Thank you.

Operator: [Operator Instructions] We have a question from Tavy Rosner from Barclays. Please go ahead.

Tavy Rosner: Hi, good afternoon everyone. I apologize. I also have a question about the AIC. I’ll try to make it short. First, from an accounting perspective so Ronen, you mentioned that the price upright would be that $1.8 million. So that is if someone purchases directly. If someone goes through the AIC model over how many years would you take to recognize kind of the same revenue amounts? I understand also the ink and service bundled together. If you just look at the sticker price, how many years will it take to see the same amount recognized over the AIC?