Kornit Digital Ltd. Q3 FY2024 earnings call

• Third quarter revenues of $50.7 million and adjusted EBITDA margin of 2.9% were within guidance ranges set in August. Achieved positive EBITDA and cash from operations.
• Gross margin climbed to over 50%, reflecting a more profitable sales mix and higher margin products/services. Revamped go-to-market strategy is unlocking new market opportunities, with accelerating demand for analog screen production to digital conversion.
• Apollo system coupled with AIC model driving shift, with 12 out of 15 Apollos shipped this year and remainder scheduled before peak season. Pipeline of analog screen businesses interested in Apollo and Max technology growing.
• In 2025, on track to deliver 30 Apollo systems with ~20 expected on AIC model. Upgraded some Atlas fleets of global strategic accounts to Atlas MAX. Momentum in roll-to-roll business, particularly in footwear market, with progress in China and new orders.
• Fourth quarter expected revenues between $58 million and $63 million and adjusted EBITDA margin in the 12% to 16% range, with expectation of at least 20% revenue growth in second half vs first half and positive adjusted EBITDA for full year.

Third quarter revenues were $50.7 million, within the guidance range of $48 million to $52 million. Year-over-year system sales declined, service sales were approximately flat, and impressions and consumable sales grew. Sequential growth was primarily driven by higher system sales. Non-GAAP gross margin reached 50.3% in the third quarter, a significant improvement from 37.4% in the same period last year, due to a favorable mix shift with high-margin consumable sales representing a higher proportion of overall sales, no warrant impact, and lower inventory adjustments.

• Third quarter revenues of $50.7 million were within the $48 million to $52 million guidance range set in August.
• Fourth quarter expected revenues between $58 million and $63 million and adjusted EBITDA margin in the 12% to 16% range.
• On track to ship 30 Apollo systems in 2025, with approximately 20 expected to be on the AIC model.
• Expect H2 to be at least 20% higher than H1 in revenue growth.

• Market risk: Overall market still may be unstable and volatile.
• Operational risk: Potential supply chain issues, geopolitical factors, etc., could impact production and delivery of systems and consumables.

Q: Hey, good morning, good afternoon, guys. Thanks for taking a couple of questions. Maybe we could just start with the overall market, kind of what you're seeing there. Obviously, you've seen lots of momentum on Apollo. Any momentum in the overall market?

A: Yes, Chris, thank you very much for the question. Overall, what is clearly been seen this quarter is that brands, retailers, the entire market is shifting into on-demand production. When you are talking to brands, retailers, they are all talking about bringing products fast to the market, having the flexibility for short run, mid runs, long runs. They need the creativity to bring new SKUs to the market and sustainability becoming more and more important. Overall, they need the agility and the agility they can get through the on-demand which our technology has the perfect fit to meet those needs. We see overall market recovery and stabilization. It's too early to say that we are out of the woods, but we see it clearly both in our customers. We see the impressions growing. They are talking about getting more jobs from screen. We can see movement from screen to digital when we are talking with large manufacturers for brands, they are talking about brands are coming back with large orders and we see retailers adopting their on-demand production.

Q: Yes. Good morning. Thanks for taking the questions and helpful answer on the first answer, Ronen. So thanks for that, a lot of color. When you kind of put that all together, how does that make you feel about 2025 just given ramp up of Apollo, you've got maybe a little bit of a stabilization or recovery in the base business, a couple other sort of one offs in terms of order activity, sort of in light of kind of your longer term mid-teens CAGR. I'm just kind of curious what your thoughts are overall next year?

A: Yeah. Thanks, Greg. So first of all, we gave longer term kind of directional doing our investor event about one and a half months ago. We didn't give specifically guidance for 2025 and I prefer not to get into specific guidance for 2025. You probably will hear more on our next call in December how do we color 2025. However, with all what I explained before, we see growth. We believe in growth. We believe that this year will be a year that we will see profitability, but we need to take it in cautions and the caution is because one, the market is still volatile. Second, we are changing our business model and we are investing in new sales people, in education, changing a lot of the DNA of the company and I would say that 2025 is a transition in terms of business model along the year while you will see some growth and you will see improvement in profitability during the year. We believe that more acceleration will come into 2026 and beyond.

Q: Great. Thanks so much for taking my questions. I have two as well. Ronen, I know a large part of your kind of broader thesis for this business has been about the shift from analog to digital, but it does feel like your conviction in that shift has gotten stronger and I'm just wondering if my interpretation of your comments is right and if so, what is changing? What is driving that higher conviction? What is driving the acceleration in the shift? Is it go-to-market? Is it really AIC? I'm just really trying to understand if you think the momentum is changing. It's what I hear in your voice, but just want to confirm that and if it is, what are the underlying drivers of that change in your mind? And then I have a follow-up. Thanks.

A: Yeah. Thanks, Erik. Yes, I'm super, super confident that this market needs a change and is moving to on-demand, is moving large portion to digital. It will take time. It's not in one day, but we see it. We see it from different angles. One angle of course is the market. When you talk to any brand, any retailer, they will tell you that they cannot anymore wait for a product to be in the market for months. They need it from today to tomorrow. Speed to market is crucial. So production is moving as close to the consumer and brands and retail are placing order from today to tomorrow. Flexibility in terms of orders from brands and retailers is crucial. They don't want to keep inventory. By that they are ordering much shorter runs and moving into shorter runs, mid runs for retailers and brands make a lot of economical sense to move into digital production. Being able to do it in the sustainable way without waste, with pigment provide the full agility of our brand. So from a market perspective we see it's clear and we see the move to onshore and nearshore as I mentioned textile market today in the U.S. are ordering more nearshore from Mexico as today versus China. So it's a massive shift. The other area is of course the technology. In the past, our technology wasn't the right fit to capture mid runs and to meet the quality standards of brands and retailers. With the MAX technology, we are meeting the standard and even above the expectation of brands and retailers. With the Apollo, we are really getting into mid runs and we can shift large quantities out of from screen into digital. So this is the second pillar. And the third pillar we ask ourselves how to accelerate the move into digital and we are talking with many screen printers, for them investment of $1 million or $1.8 million in Apollo, it's a massive. Not everyone has the capital and they are risk averse. Changing our business model and innovating the All-Inclusive Click while leveraging our balance sheet, our strong balance sheet, this is the best way to accelerate the growth of the on demand into digital and the move to digital and creating recurring healthy recurring business moving forward which we believe that it will be very healthy already in 2025 and hopefully as we mentioned from Q1 we will start reporting on the ARR that we signed with our customers and on the systems that are on ARR in the field. Those are all components and of course on top of that is the revamp of our go-to-market bringing expert that are coming from the screen market, bringing people that know how to manage big accounts, speak with the C level and working with them hand-to-hand not about selling boxes, but really moving volume from analog to digital. This is the focus that we are putting right now and we see the result. We see the result with example of Print Palace, of T-Formation, of a Custom Ink that actually is not buying system but is going to transition millions of millions -- tens of millions of impressions into digital and specifically to Kornit. So those are massive opportunities and we see the transition happening.