Kornit Digital Ltd.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Greetings. Welcome to Kornit Digital Limited First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . Please note, this conference is being recorded. I would now turn the conference over to your host, Monica Gould Investor Relations for Kornit Digital. You may begin.

[Monica Gould:]

Thank you, operator. Good morning everyone and welcome to Kornit Digital's first quarter 2021 earnings conference call. 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 U.S. Securities laws will be made on this call. These forward-looking statements include but are not limited to statements relating to the company's objectives, plans, strategies, statements of preliminary or projected results of operations or our financial condition and all statements that address activities, events or developments that the company intends, expects, projects, believes or anticipates will or may occur in the future.

[Ronen Samuel:]

Thank you, Monica and thank you all for joining us this evening on our earning call. I'm excited to share with you a strong start to the year an outstanding first quarter results. We significantly exceeded our guidance on top line and profitability and our outlook for the year is very strong. As the world moves into the post-pandemic era, the textile industry is in desperate need to accelerate its digital formation and mass adoption of digital sustainable on demand production. The business opportunity ahead of us is enormous. And we are laser focused on introducing continuous innovation and scaling our business on all fronts. Our first quarter results are another steps on our path to become a 500 million revenue run rate business ahead of plan. Total revenue increased by 152% year-over-year to 66.1 million net of 3.1 million in warrants related to a global strategic account. We experienced another record quarter of shipments for mass production systems spread headed by the Atlas and the Presto. Our recurring consumable business continue to scale and we continue to outperform our profitability goals on services. During the second half of the last year we discuss engagements on major global expansion projects with multiple strategic accounts which we are now rolling out. In March we announced that Printful will purchase more than 50 Atlas systems during 2021 as part of its global expansion plan and the rollout began this quarter. As an early adopter of Kornit technology Printful has grown from a small print operation in their merging customers design segments to become a global leader in taking digital creative concepts and making them real. Their growth demonstrates the overwhelming potential of digital transformation by creating a mega marketplace that empowers digital natives to conceive and scale the brands. We are proud to help Printful reach the next stage of their journey.

[Alon Rozner:]

Thanks Ronen and good morning everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP results. A full reconciliation of our results on a GAAP to non-GAAP basis is available in the earnings press release issued earlier today and on the investor section of our website.

[Ronen Samuel:]

Thank you Alon. With that, we are ready to open the call for questions.

[Operator:]

At this time, we will be conducting a question and answer session. Our first question is from Jim Suva with Citigroup Investment Research. Please proceed with your question.

[Jim Suva:]

Thank you, and congratulations on really strong results and a good outlook. As the world starts to kind of hopefully get back to some type of post-COVID normalcy in the countries that say are ahead of some of the larger countries those that are larger on site more ahead of the timeline recovery the pandemic of the United States, whether it be Israel or certain parts of Europe, can you talk about the behavior of your customers in those regions? Are they phasing in production? Are they doing older machines and using more ink consumption? Are they looking at newer solutions and your workflow processes? I'm just kind of wondering because it seems like Israel has gotten the higher vaccination rates than the U.S. What the trends have been there versus say pre-pandemic actions? Thank you.

[Ronen Samuel:]

Yes. Thank you Jim . Great question. I actually will refer more into North America where majority of our customers and revenues coming from and where they'll also advance in terms of vaccinations what we hear from our customers so for the last one and a half years or one year after the pandemic hit us they see a peak season. They see a huge demand coming both from a licensed ASOS from a retail, from brands directly to them. In terms of the workflow, we are working very closely with our customers, the fulfiller, but also with brands and licensed ASOS and retails to connect between them. The trends in the market is moving into own demand production, onshore or nearshore production to demand production to order leveraging Kornit technology and our fulfillers, Kornit introduce the custom gateway solution a few months back. We see great traction, both within our installed base fulfillers and also with retails and licenses ASOS and brands, as I mentioned that looking to change the supply chain into on demand manufacturing leveraging this workflow.

[Jim Suva:]

Great. Thank you so much. And I appreciate it. And congratulations.

[Ronen Samuel:]

Thank you.

[Alon Rozner:]

Thank you.

[Operator:]

Our next question is from Rod Hall with Goldman Sachs. Please proceed with your question.

[Rod Hall:]

Yes, hi, guys. Thanks for the question. I wanted to check a couple of things. First of all, are you able to give us a book to build number? It sounds like the backlog is really high. But I was just curious how high? And then I also wanted to on Printful just check the I mean, that's a lot of systems they're taking. I'm curious what you think the outlook for demand there is for systems? That sounds like it could be very substantial. So just wondering if you could talk a little bit more about Printful? Thanks.

[Ronen Samuel:]

Yes. So in terms of the backlog, we are not specifying the level of backlog we have. We specify specifically the deferred revenue that we have. The only thing I can mention that the backlog is growing. And it's in its peak, ever, in terms of backlog of orders, we have strong-strong visibility for the entire year. And we are building a backlog already for 2022. In terms of Printful as they mentioned, we are working from the beginning, when they had two employees and we were going together from Latvia, to the U.S. to Barcelona and other parts of the world, Canada and Mexico and many other parts. And they're growing tremendously. They're very successful and adding capacity. As we mentioned, they acquired the purchase 50 Atlas systems. We are in the implementation phase. We just started it in Q1, but you will see the implementation going for the entire 2021 and we will believe that this is just the beginning of continue growth for Printful.

[Rod Hall:]

Okay, and then I just wanted to double check something with you on the polypro technology. I think that you're calling it the Max printer. But I just curious on the supplies there. Are those supplies, the same sort of value and margin of other supplies? Are there anything special about that? And it seems like it could be a little bit different supplies story as you start to roll those printers out in. Are you still on, just double checking, you're still on track for kind of this summer for beginning to ship those systems. Thanks.

[Ronen Samuel:]

Yes. So as for the Max technology, we are going to roll the Max technology to different platforms. We announced that first order, which is the Atlas Max, and the next week on our conference calls -- our investor conference call we are going to share a bit more information on the future products that we are going to unveil within them as you mentioned is the poly, we are going to bring the Max technology into the poly leveraging also the Atlas platform. This will be a breakthrough technology. I don't want to share more information about it because I would like to leave some of it for next week. Yes, in terms of the consumable, this is totally different consumable. The value proposition and the value added that we are bringing to the market is immense. We actually going to transform the market totally from analog to digital leveraging our technology. And for that we believe we can gain better margin both on the system side, on the ink and also on the workflow.

[Rod Hall:]

Okay, great. Thanks a lot.

[Ronen Samuel:]

Thank you.

[Operator:]

Our next question is from Brian Drab with William Blair. Please proceed with your question.

[Brian Drab:]

Hi, good morning. Thanks for taking my questions. You mentioned during the prepared remarks that and I'm listening to two different calls at the same time. So I apologize if I didn't hear clearly. You said sequential growth throughout 2021 in terms of revenue, I think is going to be better than you originally expected. Can you put a finer point on that? And what were you originally expecting? Can you remind us what you said? And what does that means for the year I guess your guidance for second quarter is $76 million to $80 million. So we're looking for something well north of that, I guess, in the back half of the year is the quarterly run rate.

[A – Speaker:]

Yes. Brian So as you know, we are guiding is only one quarter ahead. We are not giving a annual guidance. The statements that we are mentioning is that from the beginning and we mentioned that there's going to be a very strong year. We had a very strong backlog for the order, also from bigger budget with strategic accounts. Whatever we thought is going to be strong is becoming stronger. So this is the message whatever we thought, but we are not providing guidance for the year at this stage.

[Brian Drab:]

Okay, so you did not say anything about sequential growth from second to third quarter third to fourth?

[Ronen Samuel:]

No, no, I just mentioned we gave the guidance for Q2.

[Brian Drab:]

Okay. All right. Thanks. And then I guess we'll talk about this more next week. But the gross margin kind of hovering around 50% and I think that your expectation is still longer term for gross margin to move above that level maybe even to the mid or at one point, the goal was to get in the high 50% range. Is that still possible? And can you help kind of break from 50 that's to where you're trying to get to?

[Ronen Samuel:]

Yes, so first of all, again, we were going to relate to it next week. And our long term goals in terms of gross margin Alon is going to share in details where we see ourselves in long term from now. We are committed to close to 50% growth margins we said in the past. What you've seen this quarter usually Q1, in terms of gross margin is the lowest quarter in terms of gross margin due to the mix between supplies to systems usually Q1 supplies revenue is the lowest during the year and the Q4. The seasonality is that the supplies portion is the highest our gross margin supplies is higher than the system. In Q1, this specifically Q1, what you can see as well that we had a very-very strong growth on our system side, which also impact the bit on the gross margin. But you saw the gross margin we are very happy with the gross margin of Q1 versus last year and even when you look in 2019. Alon do you want to add anything?

[Alon Rozner:]

So I think you covered it well. The two main factors that impacting the gross margin are the continuous improvement that we see and we push this business as the quantities go up operational leverage and we plan to continue and increase the gross margin. And the second one is this one I mentioned is the product mix. We had a very high mix towards systems in Q1. And typically the second half of the year is more going towards the consumables where we have higher margins there.

[Brian Drab:]

Okay, thanks very much, and congrats on the new product introductions in the results.

[Ronen Samuel:]

Thank you very much Brian.

[Alon Rozner:]

Thank you.

[Operator:]

Our next question is from Patrick Ho with Stifel. Please proceed with your question.

[Patrick Ho:]

Thank you very much and congrats on a nice quarter start of the year. Ronen maybe first off, you delivered really well in terms of systems during the quarter. I mean you talked about the strong backlog you have even given some of the issues out there in your supply chain overall how are you looking at any potential constraints and how are you managing through any of those potential situation, particularly as 2021 progresses?

[Ronen Samuel:]

Yes, maybe I just want to would like to add something before while the mix between supplies and hardware was tending into systems in Q1, we saw a huge growth from the supplies and actually it was a record quarter in terms of supplies a growth. So we see also a very strong supply growth as for this supply chain and the issue that we all familiar outside there. So first of all, we don't have any availability issues looking forward for this year. There is no significant impact also on cost. We negotiated well in advance with our supplies on course we don't see any significant impact on cost. Of course, there is a pressure on lead time because of availability of goods. But because we had a very good visibility for the entire year and for the order we place the orders with our suppliers well in advance and we don't see any issue with supply chain at this stage.

[Patrick Ho:]

Great that's helpful. Maybe as my follow up question in terms of gross margins. But maybe looking at it more from the system's perspective you're posting better and better results in terms of the hardware solutions. Can you discuss maybe one aspect of it particularly in the cost out program? As your systems become more mature you're taking costs out at some of your newer products come out. You can take costs out of that. Can you describe some of the costs out efforts that are helping long term gross margins?

[Ronen Samuel:]

Yes. Of course, there's a cost to both effort on cost cutting and cost leverage economical of scale, and we can see it. But when you are a growth business, like where we are today, we are pushing stronger and stronger on the growth elements, which will impact much more on the gross margin overall. But, of course, our operational teams working day night to improve the cost structure of every element of our solution. Alon anything from your side?

[Alon Rozner:]

No, I think that I mean, we see very good results on gross margin in systems. Again, Ronen mentioned, we are driving many cost reduction plans within the product and on the supply chain itself. Again quantity is an operational leverage. And we see that we had very good results even when taking into account the mix within the systems between DTF and DPG.

[Patrick Ho:]

Great, thank you very much.

[Speaker:]

Thank you.

[A – Speaker:]

Thank you.

[Operator:]

Our next question is from Jim Ricchiuti with Needham & Company. Please proceed with your question.

[Jim Ricchiuti:]

Hi, thank you. Just want to go back to your comments, Ronen about the acceleration that you're seeing in the business. I mean, it sounds like it's across the board. But what I'm trying to understand is, are there particular areas that are performing exceeding your expectations? I mean, you highlighted a few areas Presto, being stronger, the brands potentially moving faster. Can you give us a little better feel for what in particular are the biggest drivers to the acceleration that you're seeing in the business?

[Ronen Samuel:]

So Jim great question. As you mentioned, we sit across the board and the drivers is that we were talking about all those market trends for many-many years. People could see the future. The future becomes the presence. Today, people would like to have self expression, e-commerce becoming the main vehicle for self. Consumer would like to have a variety of products. And you need to change the supply chain. You don't want to have inventory. You don't want to get to have waste and to throw 30% of your production because nobody's selling it. To do that you have to move into on demand manufacturing, and we see it both in DTG and DTF. We see it in a workflow business which was designed exactly for that. We see it in the service business. It's growing tremendously and is very profitable now. And as you remember, we promised to be profitable for the first time in Q4. We bought it already in Q3, 2020. And look where we are today. And our supplies in is peak in terms of the growth because we're installing so many systems and our customers are in peak season all the time. So overall we're driving the goals of the mega trends that just now really, in beginning of acceleration, and I believe it will continue for many years to come.

[Jim Ricchiuti:]

Alon maybe as a follow up. This is I think, probably a question for you. It appears obviously based on the Q2 guidance being as strong as it is, you gave clearly operating margin targets that I think were higher than most people were modeling. But as you see this growth accelerating, do we have to think in terms of potentially layering in higher operating expense in the back half of the year? Or do you feel that there is enough of an investment that you've made in customer support, and as well as product development to be able to see this kind of leverage looking at the backup, not looking for specific guidance, but just trying to gauge whether we need to think about higher operating expense levels as the business is scaling?

[Ronen Samuel:]

So we said that we will have leverage all the time and you should see expansion on operating margin as well. Next week Alon is going to share more data long term operating margin that we expect from the business. So we don't want to share more on that call but Alon?

[Alon Rozner:]

Yes. we are keep investing, and we will continue to invest and grow OpEx actually I mean, we have good recruitment plans and mostly in R&D and strengthening the go to market. So we are doing it and we will continue recruiting people and investing across the board also in the remainder of the year.

[Jim Ricchiuti:]

Okay. Thanks a lot. Congrats for the quarter.

[Ronen Samuel:]

And this is, the investment is very important. We just in the beginning of the project we have of Kornit, the market is infinite from our perspective we are only 1% and to capture to grab the market now we need to invest in more people in the field in more R&D and you will see this investment but we are committed to all of you that you will see the leverage into the bottom line.

[Jim Ricchiuti:]

Got it. Thanks again.

[Operator:]

Our next question is from Greg Palm with Craig-Hallum Capital Group. Please proceed with your question.

[Greg Palm:]

Yes, thanks and then I'll add my congrats as well. Maybe just to start off, it'd be I'd be curious to know, can you disclose how many global strategic customers they have at this point? I know, in the past, we've focused on one major lot, and we're talking about the Printful expansion now, but are there others? I mean, presumably, this has been a pretty big driver, but curious how you're thinking about this dynamic? Is more of your customers, sort of shift from regional providers to global ones?

[Ronen Samuel:]

Yes. So let's be clear, and define clearly what we mean by global strategic plan. So we have many global strategic accounts. Okay. And we are not providing any specification of how many, but when we are referring to the global strategic account, this refer to Amazon. Okay. We are not specifying specifically Amazon, but this refers to Amazon, the global strategic account but we see expansion in our strategic account and expanding globally. So Printful is a great example of starting in Europe in Latvia, expanding to Americas, also expanding to Asia and going in every continent.

[Greg Palm:]

Got you. But I guess my question is, is how much of the recent growth has been due to that, due to customers that maybe before were just selling in the Americas, but now they're expanding globally or sort of vice versa. Has that been a big driver? I guess I'm really looking for some kind of commentary kind of going forward as more of those customers branch out globally as well.

[Ronen Samuel:]

Yes. It's becoming a big influence on our growth. We can see it with, as I mentioned, many of our key accounts, strategic account expanding globally. We will provide a bit more information on that on our call next week.

[Greg Palm:]

Okay great. And then and then notice that the warrant impact for this quarter was unusually high, at least quite a bit higher than the most recent run rate. Is that a direct attribution to higher activity associated with that big global strategic? Are there other variables I know it's impacted by stock price and a bunch of other stuff. So it's just curious.

[Ronen Samuel:]

Yes, the answer is yes. I mean, the warrant at the end of the day are linked to the level of business. And when business goes high, then the warrant goes as well, to the same direction.

[Greg Palm:]

Okay, make sense. All right, thanks so much.

[Ronen Samuel:]

Thank you.

[Alon Rozner:]

Thanks.

[Operator:]

And our next question is from Chris Moore with CJS Securities. Please proceed with your question.

[Chris Moore:]

Hey, good morning. Yes, just maybe start on ink. So as Presto really gains traction here. Just kind of want to revisit the incubation in DTG versus DTF. How would you compare the typical ink usage in the Atlas versus the Presto and the margins any different?

[Ronen Samuel:]

Yes. The use of ink on the Presto is much higher than the Atlas. We will provide a bit more information on that next week on our call and compare between the two. The margin is different between those markets. The margin on the Presto are lower on the ink versus the Atlas.

[Chris Moore:]

Got it. And just as my follow up, keep on that theme. So you have talked in the past kind of a basic metric is for $1 of system sales you can do $2 follow on consumables and services over the next five years. Does that math, is that math the same for Presto?

[Ronen Samuel:]

For Presto, it is bigger and we will provide more information on that next week.

[Chris Moore:]

All right. Appreciate it. Thanks, Ronen.

[Ronen Samuel:]

Thank you very much.

[Operator:]

Our next question is from Brian Drab from William Blair. Please proceed with your question.

[Brian Drab:]

Hi, Ronen I'm not trying to be difficult, but my email inbox lit up with about six or seven emails, after I asked my first question around sequential growth throughout 2021. I think in your prepared script, at least based on all the clients that are telling me they heard the exact same thing I did that you said, you expected sequential growth throughout 2021 and I just wanted to give you another opportunity to address that given I think it was in the prepared remarks. And not only did you say, sequential growth throughout the year, but I think he said better than accelerating more than previously expected as well. If I just heard that wrong, or we all heard that wrong in the prepared script, I just wanted to make sure we clarify on public call?

[Ronen Samuel:]

No, no. So you probably heard this right, that, as I mentioned that the sequential you will see sequential growth moving forward every quarter which will be higher than what we anticipated before. We didn't share before what we anticipated because we are not guiding for the year regarding only one quarter. So you can see that the guidance for example, for Q2 is probably much higher than what the market expected and also much higher than what we had expected initially for Q2. The same thing we see right now for Q3 and 4 which would be higher than what we anticipated when we enter to the year.

[Brian Drab:]

Okay and are we saying though, that we expect sequential growth from the second quarter to the third quarter or that I guess that seems obvious, but I just want to make sure that I'm getting correctly. You wouldn't expect that third quarter or fourth quarter would be down as we moved through the year sequentially, would you?

[Ronen Samuel:]

I would say like this. Again, we are not providing guidance for the year, but you should assume the H2 will be higher than H1.

[Brian Drab:]

Yes. Okay. Thanks for clarifying that. Appreciate it.

[Ronen Samuel:]

Thank you.

[Operator:]

And we have reached the end of the question and answer session. I will now turn the call over to CEO Ronen Samuel of Kornit for closing remarks.

[Ronen Samuel:]

So I want to thank everyone for joining us this morning. We are very pleased with our first quarter results which exceeded our expectation for top line growth and profitability. We believe that the remainder of 2021 will be no less exciting for Kornit. We look forward to sharing our strategy, execution plans and groundbreaking innovation at our upcoming investor event and hope to see many of you virtually next week. Thank you very much.

[Operator:]

And this concludes today's conference and you may disconnect your lines.