Kornit Digital Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Kornit Digital Third 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. Jared Mayman, Global Head of Investor Relations for Kornit Digital. Mr.

Operator

Maiman, you may begin, sir. Please go ahead.

Speaker 1

Thank you, operator. Good day, everyone, and welcome to Kourtney Digital's Q3 2023 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel Lorie Hanover, Kornit's Chief Financial Officer And Amir Shaked Mendel, EVP of Corporate Development. For today's call, Ronen will provide comments on the Q3 of 2023. Laurie will then review the 3rd quarter numbers and provide our 4th quarter outlook before we open it up for Q and A.

Speaker 1

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 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.

Speaker 1

I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 20F 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 measures on this call. The reconciliation of these non GAAP financial 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 would now like to turn the call over to Ronen.

Speaker 1

Ronen?

Speaker 2

Thanks, Jared, and thanks, everyone, Thank you for joining us on today's call. Before we go into our Q3 results, I would like to take a moment To address the situation in Israel, I'm sure most of you are aware of the horrific events That has taken place in Israel over the past several weeks. I want to extend my deepest gratitude For the supportive messages we have received from many of you on this call, letting us know that Kornit It's in your thoughts. Your support is greatly appreciated. I also want to stress to everyone That we are committed to the safety, security and well-being of our teams in Israel.

Speaker 2

Additionally, 3 weeks ago, we sent a letter to our customers emphasizing Our commitment to continuity and telling them to expect no disruption in their daily interactions with Kornit. As of today, I'm pleased to report that the situation in Israel has not materially impacted our business. We have also strategically bolstered our regional inventories to meet customer demands, not just for the upcoming peak season, but also for the Q1 of 2024. As this complex situation continues to evolve, we pledge to remain proactive and implement contingencies As needed. Now let me talk about our Q3 results.

Speaker 2

Today, We reported revenues of $59,200,000 which is within the guidance range we provided in August. As a reminder, this includes the impacts of the fair value of issues warrants. Despite a challenging macroeconomics environment, we continue to see consumable sales growth. Impressions also increased year over year, marking our 3rd consecutive quarter of year over year impression growth. We anticipate continued growth in both impressions and consumables sales in the 4th Quarter of 2023 2024.

Speaker 2

However, the macroeconomic situation we saw in the first half of twenty twenty three As continuing the second half, constraining system sales in the 3rd quarter as was expected. Despite these headwinds, System sales improved sequentially as we continue to convert orders from ITMA. We also continue to focus on diversifying our customer base, selling our solution to new customers In key growth regions, including LatAm and Asia Pacific and accelerating our growth into market segments like Screen replacement and retail. We are encouraged to see new key customers leverage our technology In emerging applications, which we believe can generate meaningful growth for our systems and inks. Traditionally, these key customers have used analog technology, but recognize the quality, capabilities And sustainability of our digital solutions.

Speaker 2

Additionally, we continue to see growth In our direct to fabric technology, as evidenced by Q3 being one of the strongest quarters For Presto system sales, we also saw additional upgrades to MAX in Q3, As customers continue to see the value of our MAX technology, which includes enhanced quality, durability and productivity. Following the upcoming peak season in Q4, we anticipate upgrade momentum to resume in 2024. We are seeing strong interest for the Atlas Max Poly in the sports and athleisure market. In October, We attended Printing United in Atlanta, where we built additional momentum for this solution. Our customers are most excited about the system quality and vibrancy when printing on synthetic, natural And Blended Fabrics.

Speaker 2

Moving on to the Apollo. Q3 was the Q1 where initial beta systems We're installed and operational. The feedback we have received from our customers is highly encouraging, And we have seen strong indications on systems uptime, yield, quality and unit economics. As of today, we have 3 systems installed in North America, and we expect these systems to be fully operational for the coming peak season. We continue to target general availability for the Apollo in the Q1 of 2024, and we are building a good pipeline Of existing and new customers.

Speaker 2

In summary, this quarter, we saw a continuation of macroeconomic headwinds. However, We were able to further diversify our customer base, expand into key textile production regions And pursue growth opportunities in new applications. Looking ahead, we will continue to take proactive measures To resume sales growth, while also focusing on enhancing operating efficiencies across our entire company. Our plan is still to approach breakeven on an adjusted EBITDA basis during the Q4 And grow profitably in 2024. Now let me turn the call over to Lori for a closer look To our Q3 financials and Q4 guidance, Laurie?

Speaker 3

Thank you, Ronen, and good day to everyone. As Ronen mentioned, 3rd quarter revenues were $59,200,000 within the guidance range that we provided in August. We saw revenue growth in consumables during the quarter, both year over year and sequentially. Services sales declined slightly year over year due to significant upgrade activity from a key customer in the comparable quarter of 2022. As anticipated, system sales were once again lower on a year over year basis, but were much improved sequentially as we continue to convert orders from ITMA.

Speaker 3

Excluding purchases in EMEA from our global strategic account, Systems sales were up year over year. In the Americas, year over year growth was driven by strong systems sales in Latin America following ITMA. In EMEA, consumables revenue grew nicely as utilization rose and upgrades to MAX continued. Turning to APAC, sales were flat compared with the same period last year. As Ronen described earlier, We continue to develop a meaningful pipeline of long term opportunities in this region.

Speaker 3

Moving to margins. Non GAAP gross margin was 37.4% compared with 35.5% in the same period last year. The year over year improvement is due primarily to comparatively higher margin consumables representing a greater portion of total revenues. We continue to expect gross margin improvement for the balance of this year as consumables typically comprise the highest expenses were $31,100,000 a decrease of 15% from $36,700,000 in the same period last year and down 9% from $34,100,000 last quarter. This year over year improvement in expenses The sequential improvement primarily reflects lower expenses attributable to our participation at the ITMA trade show, which as a reminder was a Q2 event.

Speaker 3

All of this resulted in an adjusted EBITDA loss for the Q3 of 2023 $5,600,000 a significant improvement compared with the adjusted EBITDA loss of $10,500,000 in the same period last year And the adjusted EBITDA loss of $10,700,000 just last quarter. Adjusted EBITDA margin for the Q3 of 2023 was negative 9.5%, again within the guidance range we provided in August and reflects a substantial improvement both year over year and sequentially. Our cash balance, including bank deposits and marketable securities at Quarter end was approximately $569,000,000 Cash used in operations during the Q3 was $7,700,000 driven primarily by the operating loss and changes in working capital. Accounts receivable increased due in part to a higher balance of Other prospective customers are being directed to financing partners, including 2 new partners recently onboarded for extended payment plans. Inventories declined sequentially.

Speaker 3

We continue to remain focused on improving working capital to drive cash conversion. Since the beginning of the year, we have repurchased Approximately 1,600,000 shares under our share repurchase program for an aggregate amount of 36,800,000 representing an average price paid per share of $22.97 The unused balance of our previously announced share repurchase program is approximately $38,000,000 We plan to be more aggressive in our repurchasing efforts given our current enterprise value. Turning to Q4 guidance. As we discussed last quarter, we continue to plan to approach breakeven on an adjusted EBITDA basis in the 4th quarter. We currently expect revenues for the Q4 of 2023 to be between $55,000,000 60,000,000 And adjusted EBITDA margin to be in the negative 6% to 0% range.

Speaker 3

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 Ronen noted earlier, while the pipeline we have built for our solutions coming out of ITMA and PRINTING United is encouraging, We

Speaker 2

continue to

Speaker 3

see macro headwinds weighing on our sales cycle. As we move into 2024, we anticipate that our customers will likely face Similar pressures to those experienced during 2023. These headwinds include constrained CapEx budgets, High interest rates and difficulty in securing financing. Similarly, we see rising risks to discretionary consumer spending, stemming from tightening credit, rising rates, higher energy prices and other such factors. The spending behavior of the end consumer, therefore, could impact the investments our customers are willing to make.

Speaker 3

To date, in 2023, we have worked closely with our key customers to mitigate some of their challenges, while also focusing on improving our own operating model. We have reduced costs and reallocated resources towards long term opportunities with the goal of generating improved returns on invested capital. In 2024, we will continue to proactively work with our customers, invest in our product roadmap as planned and improve our operating model. We are therefore planning to deliver profitable growth for the full year 2024 on an adjusted EBITDA basis. To clarify, our 2024 plan considers the typical seasonality inherent in our business model, which implies that revenue and adjusted EBITDA margin will be stronger in the second half of twenty twenty four as compared to the first half of twenty twenty four.

Speaker 3

That concludes our prepared remarks. And with that, I will now turn it back over to Ronen to open up the call for Q and A. Ronen?

Speaker 2

Thank you, Laurie. And for that operator, we are ready to open the call for Q and A.

Operator

Thank you, sir. Ladies and gentlemen, we will now be conducting a question and answer The first question we have comes from Greg Palm from Craig Hallum Capital Group. Please go ahead.

Speaker 4

Yes, thanks. Hey, everyone. Just first off, wanted to offer my continued support and Sympathies for all of you and all Kornit employees and everyone in Israel. So with that said, can you just talk a little bit about Contingency plans, in light of everything going on, I think you alluded to building some inventories regionally, but what other

Speaker 2

Thanks Greg for the question and Supportive comments. Before I start talking about the contingency plan, just to remind everyone, yesterday it was Exactly 1 month of the horrific event that happened in Israel where more than 1500 people were slaughtered, Many of them children and elderly, and more than 250 people were hostages, still hostages. And thousands of missiles were shooting all over Israel. We are still dealing with this situation With 2 primary focus area, one is the well-being of our employees And supporting the community of the Israeli employees and the families, we have 10 Employees that the families were directly impacted by this horrific event And supporting them and also other employees that are now serving in the Army. And of course, in parallel, we are putting major focus on full business continuity.

Speaker 2

From the first day, our inkland was in full operation. I'm happy to say that it's still in full operation and we don't see any Impact to the production in parallel, we immediately shipped all the needed Ink supplies and spare parts to the regions to be close to the customers and to be ready for the peak season. At this moment, we are actually shipping all the consumables and spare parts already for Q1 and our ink plant is full production. Our contract manufacturers are global companies and they are fully in production and we don't see any issue. In parallel, we have a strong and clear contingency plan in place in case that we will need to move Production out of Israel if necessary.

Speaker 2

So we are working very, very closely with our customers. We sent them e mail explaining the situation already 3 weeks back. And from that moment, we are updating them on a weekly basis. And they know that they have the inks, spare parts and even systems if they need in the regions. And we are committed that they will not feel any impact to their businesses.

Speaker 4

Okay. Well, I appreciate all that color. I guess my second question has to do with kind of your visibility End of 2024 at this point, you made some comments. There's clearly a lot of things outside of your control, but I also think there's some company specific drivers as well, whether that's new products like Apollo, you've got maybe an accelerated upgrade Cycle the MAX pipeline conversions from ITMA. So it sounds like you're still committed to growing in 2024, but can you give us a little bit of

Speaker 2

Yes. So before going down to the bottom line, how do we See Q4, let me give you the background. Of course, we're all familiar with the macroeconomic headwind that we all Suffering interest rate is high. It's very difficult to get financing and sales cycle being longer and customers delay decision And many of them delay decision after the peak season. From a more macro perspective of the textile industry and what we see on our industry, We see the continued momentum into the move of production from offshore to nearshore and to onshore is Very visible.

Speaker 2

Everybody is seeing it. Our customers are seeing it. If it's the fulfiller, but also brands and retailers moving production directly Onshore, and it's a driver of growth for our business. On demand is now everybody is talking about it. And sustainability is a major issue that the brands needs to report on how they produce the products.

Speaker 2

And overall, they are still having high inventory. And in order to reduce the inventory, they have to move into on demand production. When we are looking at our customer base, it's already the 3rd quarters in a row that we see inks grow. We see in core across the board. We see also the impression going and also very important is the Move utilization of systems across the fleet.

Speaker 2

This is a very, very good indication of the health of the business of our customers. In terms of the portfolio, we have by far the strongest portfolio ever. Our MATCH technology has continued to be the mainstream And this is the new standard of the industry. We have in Q3 many upgrades and we expect that the upgrades will continue After the peak season into Q1 2024 from Atlas to Atlas Max. Our Presto Max, it was a very strong, actually the strongest quarter ever for the Presto Coming out of ITMA and also other activities that we had in doing Q3, So Presto Max was a very strong sales.

Speaker 2

Another indication of new products that we've released to the market last Here is the Atlas Max Poly. Finally, we see traction on the Atlas Max Poly. Actually, it was the strongest quarter for the Atlas Max Poly And selling those products to mainly that leisure and sports market, a very good indication. If I would say that the best indication that we have is the diversity in our business. We're really putting a lot of focus on diversifying our our customer base.

Speaker 2

We are entering more and more into the mainstream screen market across the board. Some major players that used to do it in analog now moving into digital using the MAX technology and some of them Using the Apollo and we'll use it more and more and I will touch on the Apollo in a minute. We see the diversification across geographies. LatAm was a very strong quarter for LatAm in Q3 and we are entering Q4 with continued momentum for LatAm. We see new markets that are developing for us like India, It's a very strong market.

Speaker 2

We're entering there to some of the biggest fulfiller textile manufacturer of the world. We installed to one of the biggest textile manufacturer in India. This quarter, we Install at Presto and we expect them to continue to grow and adding more capacity. We can see that major Part of our business is coming actually from retailers and brands that are adopting our technology and buying systems All producing through Kornit X on the global fulfillment network. We actually in percentage, we have a very high percentage Of net new customers versus existing customers that buying new system, we saw it in the last few quarters It's evident in Q3 and we expect the same in Q4.

Speaker 2

As for the Apollo, we are in the middle of the beta. We already installed 3 systems in North America and the indication are very positive from all those 3 betas. They see the values of the Apollo in terms of And now the big advantage that we are hearing from them is The reduced consumption of energy on the system, which and the dryer, which reduced Consumption of energy by about 40%, major advantages. We can see that the funnel and opportunities Are getting stronger for the Apollo. 2024 will be the year that we will Ramp up the Apollo, we are going to commercially release it in Q1 and we are going to ramp up it during the year And the accelerated growth of the Apollo will be in 2025.

Speaker 2

So overall, we are very, very excited on the Apollo And we are starting to convert the opportunities that we have into sales. As for 2024, as I mentioned, Our view is based on the current macroeconomics that we see today. As far, we believe that we need to be Very we need to take the current situation and forecast a modest growth On revenue and modest profitability for 2024. But we are Seeing some upside opportunities ahead of us into 2024 that I didn't touch. One of the opportunities, for example, the potential upgrades of our global strategic customer From the Atlas' to Atlas Max that currently we didn't take it into the account.

Speaker 2

There's other opportunities like we are entering into some Exciting new markets and application. As I mentioned on previous call, we are working with some of the biggest brands of the world that connecting us With their fulfillers, some of them in China, in Vietnam, in Korea, And we see a big potential to get into new application, a new market We already installed few systems at those customers, but now they are testing it And potentially, it can be a growth engine. Again, we didn't take it into account. So we are looking at 2024 more from a conservative approach. We expect modest growth in revenue and to become profitable in a modest way.

Speaker 4

Okay. Appreciate all that. I will hop back in the queue. Thanks.

Operator

Thank you. The next question we have comes from Brian Drab from William Blair. Please go ahead.

Speaker 5

Hi, thanks for taking my questions. Ronan, we've spoken about this. You and the team have my support and really sorry for That said, I have to ask some questions here. So On the upgrades, you just mentioned that you're still hopeful that the large strategic account Might upgrade to MAX. Have you learned anything between the last time you spoke to everyone and today That would give you more or less confidence that, that is a possibility for 2024?

Speaker 2

Yes. So thanks, Brian, again for the supportive messages. And as for our strategic global strategic customers, there is limited information that I can share, but I can tell you that only in the last few months we met several times together, not only about the MAX updates. We have a very close relationship, and we are talking about the plans for next year and even beyond that. The MAX, of course, was evaluated, as I mentioned before.

Speaker 2

And Our strategic our global strategic, they see the value. They still we are still waiting for decision, final decision From their perspective, but as I mentioned, we are not counting on it. It can be in 2024, it can be after. So we cannot put it at this stage in the plan. On top of that, of course, we are working in different angle with them.

Speaker 2

As I mentioned before, they are going to have the Apollo during 2024. They are going to test it. At this stage, we're very excited about the future of the Apollo within their operation, and we believe that 2025 will see Multiple apollos within these strategic customers. Overall, the business is doing well. They are continued to grow.

Speaker 2

And in Q3, we installed all the systems that we have shipped Last year in 2022, so now those systems are ready for fully operational for And of course, we'll see some benefit on the supplies on the ink from their side. And as I mentioned, we are working on potential expansion. But at this stage, we are not taking into account in our plan for 2024, any material investment additional investment in capital in from our strategic global account.

Speaker 5

Okay. Thanks for that. And then can you say anything about what you've seen so far In the Q4, since October 1, in terms of impressions, system utilization, Just to give us a sense for what you're seeing as far as early signs of the holiday season?

Speaker 2

Yes. So of course, we are monitoring very, very closely now on a daily basis. We actually see a very promising growth Both on the ink side and on the impressions across the board. So when we are Talking to our customers, they are very optimistic about Q4, the ordering, the supplies and we can see the traction On the impression, of course, in the coming few weeks are critical and we'll know more. This, of course, peak season is very, very important To many of our customers and also to new customers that now are in the sales cycle and waiting to take the decision if to Acquire additional systems next year after the peak season.

Speaker 2

But all in all, In terms of impressions, it looks very good. The headwind that we still In Q4, very visible is on capital acquisition. Still very tough environment out there, sales cycle getting longer, customers looking for financing solution And payment terms and some of them delayed the decision.

Speaker 5

Okay. Thank you very much. Good luck.

Speaker 2

Thank you. Thank you.

Operator

Thank you. The next question we have comes from Tavy Rosner from Barclays. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for taking my questions. Ronen, you mentioned potentially expanding to new applications. Can you give us an example of the type of new applications that you can see out there and that has scope to Turning to meaningful revenues down the road?

Speaker 2

Thanks, Avi. At this stage, I prefer not to disclose it, Because it's a big potential application there for us. It's a technical area. I can say that it's in the sports market, but I cannot say more than that. What I can tell you that we are working with some of the biggest brands of the world With them and their direct fulfiller, to change the way they are producing some of the technical stuff that they are doing, Leveraging our technology, and we are talking here on a big potential, if we will be able to materialize it.

Speaker 2

There's some technology innovation that we already brought to the table and we are still continuing to developing it. It looks This is why I'm mentioning it today. But at this stage, I don't want to relate to specific application and the specific numbers. Hopefully, in the next call, I will be able to provide a bit more details.

Speaker 6

Okay. Thanks. And then on the operating leverage, Like looking into 2024, do you expect to further reduce the absolute OpEx level or just Growing revenues and as a result, we'll return to profitable growth?

Speaker 2

So at this stage, Of course, we as I mentioned, we are planning to have a modest growth of revenues. But we are taking steps On enhancing our operating efficiency and operating model moving forward. We understand that the dynamic out there is, From our perspective, it's still tough, and we will continue to adjust our operating efficiencies and operating model accordingly To be profitable for the entire year of 2024, as a reminder, there is The seasonality and of course, Q1 is the lowest quarter, while H2 is the strongest quarter of the year, both in terms of growth, revenues and profitability. Laurie, do you want to add anything on that? No, Thank you.

Operator

Thank you. Next question we have comes from Eric Woodrin from Morgan Stanley. Please go ahead.

Speaker 7

Super good morning guys. Thank you for taking my questions and all the support to you guys from T. Morgan Stanley here. Two questions. Maybe Ronen, first for you.

Speaker 7

Some of us saw firsthand how successful the ITMA show was for Kornit. Across the different kind of new systems and or upgrades that you sold, do you still expect convert about 90% of those letters of intent. And second, can you help us understand kind of what And directionally, how much of those deals you believe will convert in 2023 versus What is more so in the pipeline for 2024? And then I have a follow-up. Thank you.

Speaker 2

Yes. So I can tell you that we are working very, very closely on all those opportunities and letter of intent And a PO that we received from ITMA, ITMA was indeed a very successful event. And I can tell you that most of the opportunities that we have are still live and serious. We have already converted close to 20 deals customers out of ITMA And we expect to have a few more in Q4 with the rest coming into H1 2024. So we are working very closely.

Speaker 2

I can tell you that most of the deals Still alive and kicking. Yes, the sales cycle is taking longer than we expected. Atitma, some deals that we closed atitma are still open To deliver the system because the financing is not closed yet, but the customer are serious. We hardly lost any deals out of those opportunities that we had at Itmann.

Speaker 7

No, thank you. That is very helpful color. And then maybe as my follow-up, obviously, it's It's just the nature of the markets today, unfortunately. So maybe my question is, I can sense from you a belief in the products, a belief in the pipeline, Your ability to manage costs more efficiently and you have something like 70% of your market cap in cash and no material debt. So Why aren't you buying back more stock in the near term to send a message of confidence to the market?

Speaker 7

And that's it for me. Thanks so much.

Speaker 3

Hi, Eric. Well, let me just respond to you. If you remember what I said in my prepared remarks, the average execution price Our buyback has been about $22 per share and at that price we believe that the market had meaningfully undervalued us. So now with the stock price just a few dollars away from cash value as you mentioned, we see an even more attractive opportunity to repurchase our shares. Because we do believe that combined with our existing pipeline of investment opportunities, this is a very strong use of a portion of our cash balance.

Speaker 2

Great. Thanks so much for the

Speaker 7

color and good luck guys.

Speaker 2

Thank you, Eric.

Speaker 8

Thank you. The next question is from Chris Moore with CJS Securities. Please proceed with your question.

Speaker 9

Terrific. Thank you. Appreciate taking a couple of questions. Obviously, we talk a lot about the macroeconomic headwinds continue to create uncertainty. Just are there certain products that will likely be less impacted in fiscal 2024 Then others regardless of the macro backdrop.

Speaker 2

So when you relate to the products, I assume you relate to system because part of the products, of course, are the inks and supplies. And supply, as I mentioned, Continued to grow nicely in Q3 and we expect it to grow in Q4 and I'm talking year over year and sequentially of course. And also in 2024, we expect supplies to continue to go as we see the consumption going with our installed base. Also we are entering to new markets and new customers selling additional systems. In terms of systems, Look, the entire dynamic is tough.

Speaker 2

What I mentioned before, the growth we see in the More in the retails and brands, we see those customers getting and understanding that they have to change their business model into on demand They have to change their business model into on demand and to get rid of their inventory to react faster to the market And they have no choice. This is the time for them to change and many of them are jumping into it and Kornit is the only one that can provide them the quality and the productivity And the TCO that's required. So we expect to see the continued growth coming from these places and also from the screen replacement. The DTS, as I mentioned, direct to fabric is another growth engine relative Within Kornit and there we are seeing the growth coming more from places like Latin America, specifically Brazil And India.

Speaker 9

Got it. I appreciate that color. And maybe just as my follow-up. Laurie had mentioned 2 new partners on the financing side. Maybe can you just give a little bit more detail or an update there?

Speaker 9

Was Q3, for example, meaningfully helped by the financing options? Meaningfully helped by the financing options?

Speaker 3

Sure. So as I said earlier, we have on boarded 2 new financing partners. In the Q3, more than 20% of our We certainly hope to expand that in the future. These two new partners, one is in Europe and one is in the U. S.

Speaker 3

So we're covering those areas as best as we can as well.

Speaker 9

Got it. That's a helpful number. Thanks, Laurie.

Speaker 8

Thank you. Our next question is coming from Jim Ricchiuti with Needham. Please proceed with your question.

Speaker 10

Hi, good morning. This is Chris Genga on for Jim. Thank you for taking the questions. You had mentioned that there was a bit of a pause on the upgrades in Q3 as people get ready for peak season. I'm just curious What the runway is for continued upgrades in Q4 and beyond, what if you could elaborate on that

Speaker 2

Thanks, Chris. Let me clarify. Q3 was another good quarter for upgrades from Atlas to So Q1, Q2, Q3 was excellent quarter in terms of upgrades and meeting our And plans for this year. We didn't expect to continue in Q4. Q4, our customers are focusing On Pyxie's end, they need the machines in full productivity and they cannot allow the machine to be upgraded, which take the machine few days off.

Speaker 2

So we don't expect in Q4 and this is the pause on the upgrades. We do expect for Q1, 2004. And as I mentioned, we still didn't receive the order from our global strategic customer for that and this is

Speaker 10

Potentially upside. Got it. Thank you. And maybe just as a follow-up to The question asked earlier about the extended payment plans, have you found that for customers on the margin that this is something that is Making their purchase decision easier and how much uptake do you expect With these financing plans longer term? Thank you.

Speaker 3

I do believe that The opportunity to have extended payment terms on our products is Helpful. In some cases, it does make all the difference for the timing of a customer when they're willing to step up to the plate. As to how much is going to depend in the future, it's unclear to me right now exactly how much that could be, but I do believe that it will

Speaker 8

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

Speaker 4

Yes, thanks. Just a couple of quick follow ups. On the capital allocation front, following up on a previous question, is there anything that would preclude Would you from doing an accelerated share repurchase, would that require that the same kind of a court approval as normal buyback?

Speaker 3

We have the court approval for the buyback that we announced. That court approval will take us all the way through into Q1. So we have that approval. And we can always ask for another

Speaker 4

I guess I'm asking if you were to use that up, it Sounds like you're going to be more aggressive. If you use that up and want to do something like an accelerated share repurchase, are you able to do that? Would that require the same of court approval is a normal buyback?

Speaker 3

Yes. Well, yes, you required the court's approval to do a buyback whether you call it accelerated or not.

Speaker 4

Yes. Okay. Understood. And I guess just you gave some commentary on revenue and OpEx. What about Gross margin for next year, I presume that mix will be Positive if we still assume consumables are a greater portion of mix than in years past, But any other way to sort of qualify how you're thinking about gross margin and the continued improvement there in fiscal 2024?

Speaker 3

Well, let's start at the beginning. So as you mentioned, there's the issue of the mix between products and services and consumables. That certainly has an impact. The second impact is that we have been throughout this year taking cost saving measures In cost of sales, which we hope to also see the benefit, it takes a bit more time to see it, but we do expect to see some benefit. We also have other initiatives aimed at improving efficiencies in matters that affect gross margin.

Speaker 3

But again, the Major benefit that you see from these types of programs usually takes a little bit more time than you can affect in operating expenses And also improvement in gross margin is, of course, in our case, somewhat dependent upon volume. So as volumes improve, we would also see better gross margins.

Operator

Okay. Understood.

Speaker 2

If you understand. And Greg, I will just add on, you should expect in Q4, of And for the overall 2024, we do expect a modest improvement on gross margin as well. Some of it on the efficiency that Laurie was mentioning, some of it is related to volume.

Speaker 4

Yes. Okay. All right. Thanks again for taking the questions.

Speaker 8

Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to Jared Mayman for any additional closing remarks.

Speaker 2

Thank you, operator. Thank you very much, everyone.

Speaker 8

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you

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Key Takeaways

  • The company reported Q3 revenue of $59.2 million—within guidance—with a third consecutive quarter of year-over-year impression and consumables sales growth, while system sales improved sequentially despite macro headwinds.
  • Ongoing macroeconomic pressures—constrained CapEx budgets, high interest rates and financing challenges—continued to weigh on system sales, prompting a push to diversify into new regions (LatAm, Asia-Pacific) and market segments (screen replacement, retail, direct-to-fabric).
  • Initial beta installations of the new Apollo system in North America delivered encouraging results on uptime, yield, quality and unit economics, with general availability targeted for Q1 2024.
  • The company plans to approach break-even on adjusted EBITDA in Q4 2023 and to deliver profitable growth for full-year 2024, supported by cost-efficiency measures and ongoing investments in the product roadmap.
  • Despite the conflict in Israel, operations remain uninterrupted: ink production is at full capacity, regional inventories have been bolstered and contingency plans are in place to ensure business continuity.
A.I. generated. May contain errors.
Earnings Conference Call
Kornit Digital Q3 2023
00:00 / 00:00