Kornit Digital Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 10 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Coronet Digital Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jared Maiman, Investor Relations for Kornet Digital.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good day, everyone, and welcome to Kornit Digital's Q3 2024 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel and Lori Hanover, Hornet's Chief Financial Officer. For today's call, Ronen will provide comments on the Q3 of 2024. Lori 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 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 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.

Speaker 1

Ronen?

Speaker 2

Good morning, everyone, and welcome to our Q3 2024 earnings conference call. Today, I'm pleased to report revenues of $50,700,000 and adjusted EBITDA margin of 2.9%, both within the guidance ranges we set in August. Achieving positive EBITDA and generating cash from operation this quarter underscores our disciplined focus on cost control, working capital improvements and operational infrastructure optimization, all positioning us for sustainable profitable growth. Our gross margin also saw substantial improvement climbing to over 50%. This shift reflects a more profitable sales mix and higher margin products and services, showcasing the operational gains we are realizing as we transform our business model.

Speaker 2

As we discussed during our investor event in September, our revamped go to market strategy is unlocking significant new market opportunities. Outdated fashion supply chains are struggling to keep pace with today demands for speed, creativity and sustainability and brands are urgently seeking agile production solutions. Kornit's offerings meets these needs precisely, and we are seeing accelerating demand for analog screen production to digital conversions. Our Apollo system, coupled with the new all inclusive click or AIC model, is driving this shift, with 12 out of 15 Apollos already shipped this year and the remainder scheduled to deployment before peak season. We are collaborating with industry leaders like Print Palace and T Formation and our pipeline of pure play analog screen businesses interested in Apollo and Max technology continue to grow.

Speaker 2

Our AIC model is a key driver, addressing the multibillion impression analog screen replacement opportunity by lowering the barriers of entry for high volume manufacturers seeking transition to digital production. AIC provides a predictable cost structure while eliminating the need for capital investment, enabling manufacturers to leverage digital agility while meeting the quality demand of global brands and retailers. This quarter, we also shipped multiple Atlas Max systems on AIC model and have added promising new opportunities for AIC on Max into 2025. This combination of our innovative technologies and this powerful business model is expanding our market reach and accelerating the industry transition to on demand digital production. Looking ahead to 2025, we are on track to deliver 30 Apollo systems with approximately 20 expected to be on AIC model.

Speaker 2

We already have a firm visibility on more than half of these systems with some as confirmed orders. This aligns well with our long term financial targets, which includes double digit revenue growth and growing base of recurring revenues from AIC and enhanced profitability. Beyond progress with Apollo and AIC, during the quarter, we upgraded some of the Atlas fleets of our global strategic account to the Atlas MAX. We are also advancing and seeing momentum in the roll to roll business, particularly in the footwear market. In China, we are making significant progress in this market with both existing and new customers.

Speaker 2

A strategic customer already using our technology has received large orders from major brands and is now ramping up production with our Presto Max systems. This growth presents potential for expansion with additional systems early next year. We have also secured a new order from another prominent player in China's footwear market, both of whom supplies 2 major global brands. This progress underscore our competitive edge and positions us for continued success in our roll to roll into 2025. As we enter Q4 peak season, the market is showing continued signs of improvement validated by strong consumable and systems order for Q4 delivery.

Speaker 2

This visibility, paired with the growing momentum of AIC, support our expectation for gradual recovery and the year over year growth in Q4, consistent with our guidance for H2 to be at least 20% higher than H1. In closing, we are seeing good signs of stabilization and recovery, which are driving anticipated improvements in revenue growth and profitability. Kornit is well positioned to lead the digital transformation of the textile industry. Brands and retailers needs agility, and our solutions meet this demand of speed, quality and sustainability. Supported by the recurring revenue from AIC and our industry leadership technology, we are confident in Kornit's path towards 2025, delivering value for our customers, shareholders and employees alike.

Speaker 2

Now let me turn the call over to Lori for a closer look at our Q3 results and guidance for the Q4.

Speaker 3

Thank you, Ronen, and good day to everyone. 3rd quarter revenues were $50,700,000 within the guidance range of $48,000,000 to $52,000,000 we provided in August. As expected, 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 versus the 2nd quarter. Moving to margins.

Speaker 3

3rd quarter non GAAP gross margin reached 50.3% compared with 37.4% in the same period last year. The year over year improvement is largely attributable to a favorable mix shift as high margin consumable sales represented a higher proportion of overall sales, no warrant impact and lower inventory adjustments. Sequential improvement was driven principally by volume gains. Looking at operating expenses. Total third quarter non GAAP operating expenses were $26,800,000 a decrease of $4,300,000 or 14 percent from the $31,100,000 in the same period last year.

Speaker 3

The reduction in expenses reflects continued progress toward our goal of reducing operating expenses by $20,000,000 year over year and is driven primarily by the cost savings and restructuring initiatives implemented earlier this year. Moving to profitability. 3rd quarter adjusted EBITDA was positive $1,500,000 This return to positive adjusted EBITDA is a significant improvement versus the negative $5,600,000 we reported in the same period last year and the negative $1,600,000 we reported last quarter. Adjusted EBITDA margin for the Q3 of 2024 was positive 3%, within the guidance range of 1% to 6% we provided in August. Our balance sheet remains robust with our quarter end cash balance, including bank deposits and marketable securities, increasing to $561,000,000 Operating cash flow, less capital expenditures and investment in long term assets in Q3 was $3,100,000 including $1,500,000 of restructuring outlays and compared with negative $8,700,000 in the same period last year.

Speaker 3

This improvement in year over year free cash flow is attributable to the cost savings and restructuring initiatives implemented earlier this year in addition to strong collections. As we shared at the investor event, growth investments in our AIC program are treated in the consolidated statements of cash flows as investments in long term assets and are presented under cash flow from investing activities. In Q3, approximately $10,000,000 of growth investments in our AIC program were reflected under cash from investing activities. Thus, reported cash flow from operating activities was $13,600,000 in Q3 and investments in long term assets and capital expenditures were $9,700,000 $800,000 respectively. We remain focused on generating positive operating cash flow the full year 2024.

Speaker 3

Moving on to our share repurchase program. According to Israeli law, we were subject to a 30 day waiting period, which concluded during our blackout period ahead of Q3 earnings. As our blackout period concludes following earnings, we will be able to begin repurchasing under our new $100,000,000 repurchase plan. As Ronen mentioned, we are on track to ship 15 Apollo systems by the end of this year, with 10 of those and a growing number of Atlas Max systems using the AIC model. This is expected to provide a solid base of recurring revenue going into 2025.

Speaker 3

Looking ahead, we plan to ship 30 Apollo systems in 2025, 20 of which we expect to be on the AIC model, along with more Atlas Max systems. This will expand our base of recurring revenue, making it a more significant part of our overall revenue. Turning to Q4 guidance. We currently expect to meet our target of at least 20% revenue growth in the second half of this year versus the first half and positive adjusted EBITDA for the full year. Accordingly, for the Q4 of 2024, we currently expect revenues to be between $58,000,000 $63,000,000 and adjusted EBITDA margin to be in the 12% to 16% range.

Speaker 3

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

Speaker 2

Thank you, Laurie. Operator, please open the line for Q and A.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer The first question comes from Chris Moore with CJS Securities. Please go ahead.

Speaker 4

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?

Speaker 2

Yes. Chris, thank you very much for the question. Overall, what it's clearly been seen this quarter is that brands, retailers, the entire market is shifting into on demand production. When you're talking to brands, retailers, they're 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.

Speaker 2

Overall, they need the agility. And the agility, they can get food 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're out of the woods, but we see it clearly both in our customers. We see the impressions growing.

Speaker 2

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're talking about brands are coming back with large orders and we see retailers adopting their on demand production. Overall, I can say that I'm pleased with our operational progress this quarter. We have set clear targets to our business looking into 2024.

Speaker 2

We said very clearly a few months back, we would like to see H2 going by 20% versus H1. We said very clearly that we would like to be on adjusted EBITDA margin positive for the full year and we are tracking very, very well. Q3 set the tone for the year. Overall in Q3, we saw the sequential growth on system. Finally, we start to see system growth.

Speaker 2

We saw a major improvement on the margin. We bought positive EBITDA as we promised. We bought positive cash flow as we promised. And we overall met our expectation in terms of cost structure that we bought and OpEx expenses. Overall for the OpEx as Lori mentioned on the prepared notes, we see $20,000,000 reduction versus last year and this show an excellent execution by the team and setting the business into a continued profitable growth moving forward.

Speaker 2

I'm also very, very pleased this year and specifically in Q3 about the execution, execution on the Apollos, on the new products introduction. This is the 1st year of the Apollo with a great exception by the market. I'm very pleased with the introduction of the MAX Plus and the upgrade across the fleets of our installed base with the Plus. I'm very happy with the momentum that we see in the roll to roll and the upgrades that we are concluding on the Atlas from Atlas to Atlas Max. We also introduced for the first time this quarter the AIC for the Atlases following the AIC for the Apollo and we see a great reception.

Speaker 2

It's opening for us totally new markets, opening for us new customers and they see the benefit of aligning their revenue into the cost of having predictable cost and it's really opening for us new opportunity and we shipped many systems during Q3 both on the Apollos and Atlas Maxes that's going to generate a nice recurring revenue doing already Q4 we'll see some of it, but definitely into 2025. Those technology really open for us massive market opportunities. We are talking about the bulk apparel for the first time we are entering big time there. We see expansion of the sum by $6,000,000,000 impression with the presto marks and the ability to print with white ink on dark fabric with XDI opening for us for fashion, but specific segment like footwear. And footwear is a massive segment when we see advancement there with new customer in China and existing customers that finally is growing and getting into production.

Speaker 2

Opening for us new markets like the home decor and what we see also, we see some recovering of customer in the customized design. We see growth in the customized design and some of them getting into requiring additional capacity and getting into additional systems into their fleet. Overall, we are working very hard to revamp our go to market. We are bringing super talents to our team, moving from selling boxes to selling solutions and helping our customers to grow their impression, the AIC model forcing us to work hand in hand with our customer, which is great, that will drive both benefit to our customers and for Kornit. On top of that in the Q3, I mentioned in our prepared remarks that we started to implement some upgrades to our global strategic account from Atlas to Atlasmart and at this stage it looks very successful.

Speaker 2

On top of that, we see strong momentum in the Apollo's. In Q3 as of today, we already shipped 12 out of the 15 systems. We are planning to ship all the 15 before the peak season and we are already prepared for the 30 units for next year, which we have had commitment for more than half of them already. As I mentioned, the AIC together with the Apollo and together with the Mars is really opening for us new opportunities in the market. All of it is a great achievement of the team and I'm very pleased that we need to understand that with a lot of hard work in front of us, 2025 will be the year of transformative of our business model of the AIC with the CapEx model.

Speaker 2

This will build the recurring revenue and will set us for accelerated growth into 2026 with scaling up of course the Apollo into the market. Kornit is in a turning point right now and with the current market evolving and improving with current technologies that we have, with the new business model and the execution that we showed in 2024, I'm confident that we'll have a solid 2025 and continue acceleration in the coming years.

Speaker 4

Got it. Very helpful. Just one quick follow-up on the Apollo. So it sounds like 2 thirds are going to be shipped both this year and next year under the AIC model. Just trying to understand where is the crossover when it becomes more effective to buy the Apollo upfront versus the AIC model?

Speaker 4

Is it X number of garments per day, per year or just how you or customers think about that?

Speaker 2

Yes. So as I mentioned the AIC is a new business model and we are running it in parallel to the CapEx. We see today some of our customers buying on CapEx, some of them are buying on SE. What differentiate between them in general is that new customers mainly from screen market that getting for the first time into digital, they are looking for predictable cost, which they didn't have an experience before. And the AIC model provide them predictability.

Speaker 2

They know exactly how much every impression will cost them. Also, they have the volume that they know that they can move from analog, from screen to digital, which reduce a lot of their risk on the commitment that they are taking in front of them for the next 5 years on this model. So this model is a great fit for those customers at a bit risk averse on the cost and getting for the first time into digital. On the other end, customers that already using Kornit and digital and they know how to operationalize it efficiently, sometimes they have the volume, They might do the calculation and find that if they take the systems on CapEx and buying separately the ink and the services from us, they might find it a bit cheaper than the AIC model. So it's a great fit for different type of customers.

Speaker 2

And right now, we see a great adoption from on the AIC. We believe this momentum will continue to many net new customers and those that would like to expand further and have some limitation on CapEx. And therefore, at this stage, we are focusing that 75% of our DTG business, mainly from Apollo and Atlas Max's moving forward will be on AIC versus the 25% on CapEx.

Speaker 4

Got it. Very helpful. I'll jump back in line.

Operator

Thank you.

Speaker 2

Thank you.

Operator

The next question comes from the line of Greg Palm from Craig Hallum Capital Group. Please go ahead.

Speaker 5

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 25% 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?

Speaker 2

Yes. Thanks, Greg. So first of all, we gave longer term kind of directional doing our investor event about 1.5 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.

Speaker 2

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, 1, the market is still volatile.

Speaker 2

2nd, we are changing our business model. And we are investing in new salespeople, in education, in 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.

Speaker 5

Yes, understood. I know you got a lot of puts and takes with more of this business going through AIC. So I thought that was a good sort of first question. And then in terms of your global strategic, can you you talked about just initial upgrade orders. Can you just talk give us a little bit more sense on how that went?

Speaker 5

I don't know if it's too early for kind of feedback, but in terms of what plans are for potentially more upgrades and even capacity additions at some point in the future, maybe give us a little bit more color on that as well? Thanks.

Speaker 2

Yes. So definitely I will try to give a bit more color, but I cannot disclose the plans. We are working very closely with our global strategic account and they're sharing with us our longer plans and definitely I cannot share it on this call. What I can say that the overall business is growing very nicely and this quarter we implemented an upgrade to some of their installed base. Those implementations already have been done.

Speaker 2

The initial feedback are positive. Of course, they are going to run it through the peak season. We don't have any commitment at this stage for additional upgrades for next year. Although, we are optimistic that if it will be successful, the peak season will be successful, we hopefully will receive an order next year on additional upgrade. The potential is massive.

Speaker 2

We don't know if they will decide to upgrade some of the fleet, the whole fleet or not at all. At this stage, we are hopeful and we believe there will be momentum into 2025.

Speaker 5

Just curious, at what point might you have better visibility? I mean, is it something shortly after this peak season to kind of figure out the success? Or would it be more like at this point next year or I guess in September when you I guess talked or announced that initial upgrade order?

Speaker 2

So we are in constant engagement with them on a weekly basis. We have our QBRs with them. We have our face to face with them. And they need to close their ear and the financials here. And only then we probably will get indication for next year.

Speaker 2

So I really don't want to get into the timeline. I leave it to them. We have a great partnership with them. Hopefully, we'll be able to come early next year or by the end of this year and to report on some indications that we got or commitment that we got from global strategic customer.

Speaker 5

Okay, great. Best of luck. Thanks.

Speaker 6

Thank you.

Operator

Thank you. The next question comes from the line of Eric Woodring from Morgan Stanley. Please go ahead.

Speaker 6

Great. Thanks so much for taking my questions. I have 2 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.

Speaker 6

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?

Speaker 6

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.

Speaker 6

Thanks.

Speaker 2

Yes. Thanks, Eric. Yes, I'm more 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.

Speaker 2

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.

Speaker 2

So production is moving as close to the consumer and brands and retailers 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 a sustainable way without waste with pigment provide the full agility of the brand.

Speaker 2

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. Ordering more near shore from Mexico as today versus China. So it's a massive shift.

Speaker 2

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 2nd pillar.

Speaker 2

And the 3rd pillar, we ask ourselves how to accelerate the move into digital and we are talking with many screen printers, for them investment of $1,000,000 or $1,800,000 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 a recurring a 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.

Speaker 2

And of course, on top of that is the revamp of our go to market, bringing experts that are coming from the screen market, bringing people that know how to manage big accounts, stick 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 ballast, of T formation, of 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.

Speaker 6

Great. That is really helpful. Thank you for all that color Ronen. Maybe my second question is just kind of taking what you guys have done this year in terms of exhibiting your cost discipline And wondering how much more kind of gas you have in that tank, meaning obviously you kind of responded to the uneven demand environment this year with a renewed focus on profitability and cost. And as you look to next year, I know you're not guiding, but again, your comments are directionally positive.

Speaker 6

And I'm just wondering, is there more cost discipline that you can exhibit to drive leverage in that model? Again, your long term guidance would say so, but I'm just maybe more focused a bit on the next 12 months, how much cost discipline you think you could exhibit and what that might do from an operating leverage standpoint in your model? And that's it for me. Thanks so much.

Speaker 2

So I'll start and maybe Laurie will add something to add on top of me. So again, as you mentioned, we are not guiding for 2025. On our long term model, as we mentioned, we see an improvement in the EBITDA margin, adjusted EBITDA margin into the 25% and gross margin expanding into the 55%. We believe that some of it you are going to see in 2025. You will see improvement in profitability in 2025.

Speaker 2

And we believe that you will see expansion overall in the gross margin for the full year in 2025. But I don't want to color it right now how much we will come on the next call and it will provide some kind of directional for the year. Lori, anything to add?

Speaker 3

Maybe I'll just add one thing. First of all, we have a clear focus on driving as much efficiencies as we can in all parts of our business. But we did say in September that we were looking to reallocate resources from one bucket that served our purpose, let's say, in 2024 to drive those resources to grow our business for 2025 and beyond.

Speaker 6

Okay, very helpful guys. Thanks so much and congrats on the quarter. Good luck.

Speaker 2

Thank you.

Operator

The next question comes from the line of Jim Ricchiuti from Needham and Company. Please go ahead.

Speaker 7

Thank you. Just on the Apollo systems that you're expecting to install next year, the 30 systems, How many of those would represent multi unit customers? And maybe you can tell us how many you would anticipate being entirely new customers?

Speaker 2

Thank you, Jim. It's a good question. As we mentioned for next year, we are planning to deliver 30 systems into the field on top of the 15 of this year. And also we mentioned that out of the 30 system, about 20 of them will be all inclusive. We have a very healthy funnel of net new customer, but also existing customer.

Speaker 2

Now we need to understand that we are targeting with the Apollo and with also the AIC incremental volume. We are targeting really screen printers and we are targeting our own installed base that they have a fleet of carousels that are doing it on screen and now they have the opportunity to shift the volume from screen to digital specifically to Apollo and some Atlas Maxes if it's on AIC or not on AIC. As you were asking about next year, how many of them will be net new, it's too early to say. What we already mentioned in our PR that we have released during the quarter, we have one customer that is going very nicely on the Apollo. This year, we are installing their 7 systems.

Speaker 2

We are actually delivering now the last system that for this year and is already committed for additional 10 system next year. The main focus of this customer is really moving and closing the facility of the screen and moving job from screen into digital. We have other customers like MedEngine and Zoom. Each one of them we believe will continue to grow with additional Apollos and we already mentioned few other names like hybrid, digital, DSS, etcetera that will continue to go with us with the Apollo. On top of that, we have a list of net new customers and we're putting a lot of focus there.

Speaker 2

And the sales cycle is progressing very, very nicely. The aim is that we are building also a strong funnel for 2026. 2026 is the year that we would like to accelerate the number of portals that we are shipping to the field and we need to build it during 2025. Hopefully, I gave you the answer you were looking for.

Speaker 7

It helps, Ronald. Thank you. And just one quick follow-up. What have you said what percentage of the Atlas installed base has been upgraded to MAX out in the field?

Speaker 2

No. We didn't say. We say that most of our installed base already upgraded from Atlas to Atlas Max. Now we are in the process of upgrading our installed base even to Atlas Max Plus which progressing very, very well. The upgrade to Atlas Max Plus, one of the largest fleet that we didn't upgrade yet from Atlas to Atlas Max is of our global strategic customer.

Speaker 2

As I mentioned, we started to do some upgrades during Q3 and hopefully it will be a good indication for next year.

Speaker 7

Got it. Thank you.

Operator

Thank you. The next question is from the line of Chris Rimer from Barclays. Please go ahead.

Speaker 8

Hi. Thanks for taking my questions. I wanted to ask if you could give any color, you did mention in your comments already the traction with the Atlas under the all inclusive model. I was wondering, if you can comment a little more on that, what's the response been? And do you have any capacity constraints?

Speaker 8

Or are you comfortable with your ability to deliver relative to demand? And just Part C, is there did you provide yet a minimum revenue number associated with the AIC model for the MAX machine?

Speaker 2

Yes. Thank you. So let's first of all understand who fits Atlas MAX on AIC versus Apollo on AIC. This differentiation is mainly based on volume, on volume that the customer can commit that they can use the system on an annual basis. So for example, on the Apollo, without getting into impression, the customer need to commit to a $1,000,000 of impression that is moving to Kornit.

Speaker 2

This is the revenue that we see on the Apollo. Not every customer has such a magnitude of business that they can move to digital. There are many, many smaller or small and medium sized screen printers that would like to have the agility and flexibility and the on demand of digital and the quality of Kornit, but they cannot afford to have the volume that's necessary for the Apollo and for that the Atlas Max is a great fit. On the Atlas Max, we gave indication during our investor event that the annual revenue that we will receive from those customers using the Atlas Max will be at the range of $300,000 impression or $300,000 So this is the indication is about 1 third of the volume and the revenues that we will get from the Apollo. We see a great momentum.

Speaker 2

Actually in this quarter, we shipped a nice number of systems, some of them into totally new customers, some of them to existing customers that would like to expand mostly into screen replacement. And the funnel is very healthy moving forward into Q4 and next year. And of course, it will contribute significantly to our recurring revenue into next year.

Speaker 8

Great. Thanks. That's some really good color. Just one more for me around gross margin. You commented that the favorable mix this quarter contributed to the 50% gross margin.

Speaker 8

And just considering your long term at 55% when the all inclusive model is fully ramped, I'm just wondering where do you see maybe some pressure coming in over the next year or so that might change that or is this a new level going forward due to the mix?

Speaker 2

So overall as we said on our investor event, we believe that there is potential for expansion expansion in the next few years into the 55% gross margin. This expansion, some of it will come from the transition of the business to more impressions. So impression is ink and ink is great margin and moving into more impression if it's through AIC or through selling systems with higher capacity will contribute more into the gross margin And this is our focus going after big players with a lot of impressions and capturing those impressions of generating ink with a strong gross margin. We believe that you will see also improvement on gross margin over time on the services and of course selling systems and increasing the volume will improve the gross margin. So increasing volume of number of systems that we will sell on CapEx will improve as well the gross margin.

Speaker 8

Great. Thanks. That's it for me.

Speaker 7

Okay. Thank you.

Operator

The next question comes from the line of Brian Drab from William Blair. Please go ahead.

Speaker 9

Hi, thanks. Most of my questions have been answered. I'm just wondering Ronen, can you say regarding the services revenue and any upgrade revenue, it just looks like it's flat service revenue flat year over year. Are we seeing material upgrade revenue in that number in the 3rd quarter service revenue or will we see that in the 4th quarter?

Speaker 2

Thank you, Brian. So the reason why you see it flat compared to last year is that last year we have significant more upgrades mainly from Atlas to Atlas Max that included in the service and this year you see less upgrades. Some of them we already discussed about our strategic global customer which included in those numbers, but it's significantly less versus last year. And this is why you see it's flat, while other parts of the service like contract is going up. But you can see this quarter an improvement on the margin, gross margin on the services.

Speaker 9

Okay. And then can you just comment at all on how confident you are in the manufacturing capability that you have for the Apollo and the manufacturing partners' ability to make 30 of these machines next year. And if there's any concerns regarding where you're making them and it's obviously unfortunate conflict that's ongoing all around you? Thanks.

Speaker 2

Yes. Thank you. So we have a very strong team working with our contract manufacturers and ramping up the production of the Apollos for next year. We already see a steep increase in number of systems we are producing in Q4 and into Q1 and I have full confidence that we will be able to deliver those 30 systems both from our perspective and our contract manufacturer perspective. As for the situation in Israel, we are taking all the steps to make sure that there is no impact on our customers.

Speaker 2

We build a nice inventory of ink, more than 6 months of ink in the regions. We have the ability to produce our inks and consumables in the U. S. In case that we will need to close the facility here in Israel. Our spare parts are being produced mainly from outside Israel and we can ship them all over the world.

Speaker 2

And our systems, we are working with global contract manufacturers like Flex and Sabina that they have their redundancy plans and other plans around the world where they can shift their production there. Of course, we are not anticipating that will happen. We are taking all the caution and we will continue to produce and deliver what needed to our customers.

Speaker 4

Okay. Thank you very much.

Operator

Thank you.

Speaker 6

Thank you.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would now hand the conference over to Ronen Samuel for his closing comments. Ronen?

Speaker 2

Yes. So thanks everyone for joining today's call. Please reach out to Jared if you have any other question or interested in follow-up calls. Otherwise, we look forward to updating you on the progress again in the New Year and I would like to take the opportunity to thank our team for really great progress on the operational execution and to all of you for being partners and believing in us. Thank you, operator.

Operator

Thank you. The conference of CoreNet Digital has now concluded. Thank you for your participation. You may now disconnect your lines.

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Key Takeaways

  • Kornit reported Q3 revenues of $50.7 million, an adjusted EBITDA margin of 2.9%, and returned to positive operating cash flow, all within the guidance ranges.
  • Non-GAAP gross margin climbed above 50%, driven by a favorable mix shift toward higher-margin consumables and disciplined cost-control and restructuring initiatives.
  • The All Inclusive Click (AIC) model is accelerating digital adoption, with 12 of 15 Apollo systems shipped in 2024 and plans to deploy 30 Apollo units in 2025 (approximately 20 on AIC), positioning the company for growing recurring revenue.
  • Atlas Max upgrades and roll-to-roll solutions gained traction, notably with new Presto Max orders in China’s footwear market and fleet upgrades at a global strategic account enhancing on-demand production.
  • For Q4, Kornit expects $58 million–$63 million in revenue and a 12–16% adjusted EBITDA margin, supported by a robust $561 million cash balance and a new $100 million share repurchase authorization.
A.I. generated. May contain errors.
Earnings Conference Call
Kornit Digital Q3 2024
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