U.S. Markets open in 8 hrs 5 mins

Edited Transcript of KRNT earnings conference call or presentation 12-Feb-19 10:00pm GMT

Q4 2018 Kornit Digital Ltd Earnings Call

Rosh- Ha Ayin Feb 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Kornit Digital Ltd earnings conference call or presentation Tuesday, February 12, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Guy Avidan

Kornit Digital Ltd. - CFO

* Ronen Samuel

Kornit Digital Ltd. - CEO

================================================================================

Conference Call Participants

================================================================================

* Brian Paul Drab

William Blair & Company L.L.C., Research Division - Partner & Analyst

* Christopher Paul Moore

CJS Securities, Inc. - Senior Research Analyst

* J. Ho

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Jim Suva

Citigroup Inc, Research Division - Director

* Tavy Rosner

Barclays Bank PLC, Research Division - Head of Israel Equities Research

* Thomas Cook

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, everyone, and welcome to Kornit Digital Ltd. Fourth Quarter 2018 Earnings Conference Call. As a reminder, today's conference call is being recorded. After prepared remarks, we will provide instructions to conduct the question-and-answer. At this time, I'd like to turn the conference over to Tom Cook. Please go ahead, sir.

--------------------------------------------------------------------------------

Thomas Cook, [2]

--------------------------------------------------------------------------------

Thank you, James. Good afternoon, everyone, and welcome to Kornit Digital's Fourth Quarter and Full Year 2018 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. Forward-looking statements are subject to known and unknown risks and uncertainties and are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by the forward-looking statements. The company's actual results could differ materially from those anticipated for many reasons, and 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 March 20, 2018, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this call hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, 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 press release published today, which is posted on the company's Investor Relations site.

On the call today, we have a Ronen Samuel, Kornit's Chief Executive Officer; and Guy Avidan, Kornit's Chief Financial Officer.

At this time, I would now like to turn the call over to Ronen.

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [3]

--------------------------------------------------------------------------------

Thank you, Tom. Good evening, and thank you for joining our fourth quarter and full year 2018 earnings conference call. I will start today by providing a brief overview of our fourth quarter results and overall 2018 performance, provide you with operational highlights as we kick off an exciting 2019 for Kornit as well as share key business updates as we continue to execute to our long-term goals. I will then pass the call to Guy to cover our financials.

We finished 2018 on a very strong growth note, with an impressive 29.1% increase year-over-year without the warrants impact. During the quarter, total revenues were $37.8 million net of $1.4 million of warrants related to Amazon. Our strong performance is an outcome of a widespread growth of our industrial system sales, ink and consumable and services.

Gross margin performance continue to be strong and we anticipate it to remain strong and over 50% in 2019. Our fourth quarter profitability was another highlight as our non-GAAP operating profit increased 160% to $2.9 million net of warrants related to Amazon. Higher profitability was a result of a strong top line growth, improved gross net profit performance versus the fourth quarter of last year and leverage on OpEx.

Business fundamentals in our fourth quarter continue to be encouraging. We had another strong quarter of system demand and sales across our HD platform with continued shift across regions to high throughput systems. Strong demand was generated from some of our existing accounts, expanding their production capacity as well as new accounts.

Digital printing continues to revolutionize the industry as evidenced in thousands of leads and signed LOIs collected by our teams through Q4 '18 across industry shows globally. During the fourth quarter, we continue to execute on our operating strategy with a view of growing our business to $500 million in annual sales. As part of this strategy, we announced in December our move to a full direct model with our customers in North America. As you may have seen in our press release last week, our teams have worked extensively and we have successfully completed the transition significantly ahead of plan. As part of our effort to ensure an excellent customer experience, we have also acquired the relevant Kornit business assets from Hirsch, including the remaining inventory of systems, ink and consumables. With the completion of the assets acquisition on February 7, the distribution agreement with Hirsch was fully terminated.

I would like to thank again the team at Hirsch for many years of joint work, and I look forward to be closer to our customers in North America. Guy will provide additional financial details on the transaction in the financial section of our call.

To summarize 2018, it was an extremely exciting and successful year for all of us here at Kornit and to me personally. I joined this successful company during Q2 2018, and I'm honored to have been given the opportunity to lead it. Upon arrival, I spent many hours with my staff to plan our short- and long-term strategy, and I'm very proud that we are executing as committed.

It was another busy year of market disruption for us, with new and powerful product introduction, which continue to remove market barriers, lower cost and deliver improved quality and performance. This includes full portfolio of HD systems and upgrades, which was instrumental in driving our growth.

Looking into 2019, we feel encouraged with the business momentum that we have -- experiencing since the beginning of the year. Our year started with 2 very powerful product release as we unveiled the Kornit Atlas, the best industrial direct to garment solution in the market. The Atlas is capable of 350,000 annual impressions and is designed for mid to large size screen printers, leading brands and high volume customized design online businesses. With the Atlas, we also revealed to the market the most advanced set of pigment inks available for DTG, the eco-rapid ink. The superior retail level quality and odorless fixation associated to this ink is a game changer in our industry. This new product expands our addressable market, which is critical elements of our growth plan.

In January, we attended the ISS show in Long Beach. Our booth was busy the entire show. And in conclusion, it was one of our most successful trade shows ever in North America. We collected close to 1,000 new leads and received LOIs for more than 15 million. New orders during the show were highlighted by a large order for an important strategic customer, Delta Apparel, a digital pioneer and market leader. After a few months of beta testing our Atlas system, Delta is committed to one of the largest single orders ever received by Kornit for 10 Atlas systems and significant number of HD upgrades.

The lucrative athleisure segments of the apparel industry has been struggling for years with the current technologies available for decorating dyed polyester. As we have shared during our investor event in October of last year, Kornit has been developing a unique solution for digital printing on dyed polyester, with an expected release of early Q2 2019. During the last weeks, and specifically at the ISS event, we shared with key accounts and prospects samples and technical details of this groundbreaking solution, and we received excellent feedbacks. All our proposed beta sites were signed within few hours.

As we unveil our goal for becoming a $500 million company, we specifically highlighted entry into major brands and private label segments as a strategy for our continued organic growth. We feel confident with our positive progress, discussions and evaluation with these prospects in the last few weeks, and believe that we will be able to announce a successful cooperation during the second half of 2019.

2019 is a special year for our industry, with the [affluence] of ITMA in Barcelona. ITMA show is sometimes referred as the Summer Olympics of our industry and an opportunity to showcase the latest and greatest innovations. We plan a substantial presence at this event, and have confidence that it will have a material impact on our business momentum toward the second half of the year and into 2020.

For those who have spent time with me and my staff in the last few months, you know how much importance we place on people at Kornit. As part of our growth execution plan, we shared our intended plans to invest in our go-to-market and on both best industry talents across our customer-facing functions. We continue to make very good progress with strong recruitment across our sales application and service teams at all levels and across all regions.

To conclude, following a record 2018 for Kornit that was highlighted by accelerating growth, enhanced customer interest in our portfolio of new innovative products and investment in our go-to-market strategy, we are very well positioned as we enter 2019. As Guy will detail in our guidance, we expect a strong start to the year and believe that 2019 will pave the way to achieve our long-term goal.

I want to thank all our customers and investors for the confidence in our execution abilities and our global workforce for their dedication to our collective success.

Now I will turn the call over to Guy for a closer look to the numbers and our guidance.

--------------------------------------------------------------------------------

Guy Avidan, Kornit Digital Ltd. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Ronen, and good evening, 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 pro forma results. Our fourth quarter non-GAAP pro forma results reflect adjustments for the following guidance: stock-based compensation expenses, which totaled $1.7 million; amortization expenses relating to the acquisition of intangible assets in previous years in the amount of $266,000; taxes on income related to non-GAAP adjustment in the amount of $186,000; noncash deferred tax benefit in the amount of $5.9 million; and $175,000 for offering costs. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website.

Fourth quarter GAAP revenue, net of $1.4 million attributable to the noncash impact of warrants issued to Amazon, increased by 26.2% to $37.8 million versus $30 million in the prior year and increased 0.5% versus the prior quarter. Revenues grew this quarter versus the previous year, thanks to the strong momentum of the HD product in the U.S. and Europe as well as fruitful continuation of system deployment with one of our major global customers.

Services revenue for the fourth quarter were $4.3 million, accounting for 11.3% of total revenues, an increase of 14.3% from the prior year, an increase of 0.7% from the prior quarter. The amount attributed to the noncash impact of warrants in the fourth quarter was $1.4 million or 3.5% of revenues versus $1.7 million in the previous quarter and $0.4 million or 1.3% of revenues in the fourth quarter of 2017.

The increase in warrants impact this quarter versus the previous year was attributed to higher revenues to Amazon as well as higher share price this quarter. You can see the warrants impact this quarter versus the prior quarter and the previous year on revenues and margins in Slide #17 to 19.

By geography, 57% of our sales were from the Americas; 30% from Europe, the Middle East and Africa; and 13% from the Asia Pacific region in the fourth quarter of 2018 compared to 58%, 30% and 12%, respectively, in the fourth quarter of 2017 net of the warrant impact.

Moving to customer concentration. Our main U.S. distributor contributed 15.5% of our overall revenue compared to 18.6% in the prior year period, and a major customer contributed 15.7% of our overall revenues this quarter compared to 10.1% in the previous year. Our top 10 customers accounted for 59.2% of our overall revenue compared to 51.4% in the fourth quarter of 2017.

For the year, our annual revenue for 2018 was $142.4 million, net of $4.6 million attributable to the noncash impact of warrants, representing an increase of 24.8% versus the $114.1 million in 2017. For the year by geography, 57% of our sales were from the Americas; 32% from Europe, the Middle East and Africa; and 11% from the Asia Pacific region. Our U.S. distributor contributed 15.3% of our overall revenues compared to 18.8% in 2017, and a major customer contributed 17.1% of our overall revenues compared to 12.7% in the previous year.

To align with previous year revenue presentation, we're adding that for 2018, revenues from printing systems contributed 46.2%, revenues from ink and other consumables contributed 42.1% and revenues from services contributed 11.7% compared to 44.3%, 45.1% and 10.6% in 2017, respectively. The revenues for printing systems grew 30.3% year-over-year.

Moving to profitability. Non-GAAP gross margin in the quarter came in at 48.8%, approximately same as the prior year period and decreased from 51.1% in the previous quarter. Margin improvement this quarter versus the year-ago quarter was the result of 115 basis points net increase to impact of the noncash warrants. The decrease in gross margin versus the previous quarter was attributed to inventory write-offs.

On a GAAP basis, gross margin were 48% versus 48.3% in the prior year and 50.3% in the previous quarter. For the year, our annual non-GAAP gross margin increased to 49.8% compared to 48.1% in the prior year. Warrants impact on non-GAAP gross margin was 156 basis points for 2018 versus 129 basis points in the prior year. On a GAAP basis, our annual gross margin increased to 49.1% compared to 47.4% in the prior year.

Moving to our OpEx item. I will discuss these items on a non-GAAP basis, which excludes nonoperating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation in our press release. Adjusted research and development for the fourth quarter was 15.6% of sales or $5.9 million compared to 18.2% of sales or $5.4 million in the prior year. The decrease in R&D expenses as a percentage of sales reflects higher revenue basis versus the fourth quarter of 2017, offset by expensive new product introduction effort versus the previous quarter.

For the year, adjusted research and development was 14.7% of sales or $20.9 million compared to 17.6% of sales or $20.1 million in the prior year. Sales and marketing in the quarter were $6.2 million or 16.5% of sales compared to $4.7 million or 15.5% in the prior year. Higher sales and marketing expenses was the result of increase in headcount and marketing activities as part of our going direct transformation.

For the year, sales and marketing were 16.4% of sales or $23.4 million compared to 16.8% of sales or $19.1 million in the prior year. General and administrative expenses in the fourth quarter were $3.4 million or 8.9% of sales compared to $3.4 million or 11.4% in 2017. For the year, general and administrative expenses were 9.7% of sales or $13.9 million compared to 10.1% of sales or $11.5 million in the prior year.

Year-over-year increase in G&A expenses is predominantly attributed to headcount increase, strengthening of IT infrastructure and expenses related to CEO transition.

Headcount as of December 31 was 444 employees versus 412 employees at the end of 2017. The 8% increase in personnel was across the board and happened in the second half of 2018.

Non-GAAP net income net of $1.4 million noncash impact of warrants for the fourth quarter was $3 million or $0.08 per diluted share, net of $0.04 diluted -- $0.04 attributed to the warrants impact, an increase of $1.4 million versus the year ago quarter. Non-GAAP net income for 2018 was $13.1 million, representing an increase of $9.1 million versus 2017 or $0.37 per diluted share.

GAAP net profit net of $1.4 million noncash impact of warrants was $7 million or $0.19 per share on a diluted basis compared with net loss of $369,000 or minus $0.01 per share for the year ago quarter. Warrants impact in 2017 was $2.9 million. Impact was 129 basis points on gross margin, 239 basis points on operating and net margin and $0.09 on a diluted basis.

For the year, non-GAAP net income, net of $4.6 million noncash impact of warrants was 9.2% of sales or $13.1 million compared to 3.5% of sale or $4 million in the prior year. GAAP net profit was $12.4 million compared to $2 million loss in the prior year. Our financial income this quarter was $341,000.

Next, I'll discuss our adjusted EBITDA. For the fourth quarter 2018, adjusted EBITDA was at $5.2 million compared to $2.3 million for the 3 months ended December 31, 2017, an increase in the adjusted EBITDA of $2.9 million or 133%. Net cash provided by operating activities was $15.7 million this quarter compared to $11 million of cash provided in the prior quarter, net cash provided by operating activities of $11.9 million in the year-ago quarter. Increase in cash was mainly a result of improvement in net profit and a decrease in accounts receivable.

For the year, we generated $33.4 million of cash from operating activities versus $6 million in 2017. During 2018, we used $1.8 million, investing in our Excellence Center in New Jersey and $3.2 million initial investment in our ink factory. Now I'll discuss the company's cash position at December 31, 2018.

Cash balances, including long-term marketable securities and short-term deposit at year-end, were $127.7 million compared to $97.5 million as of December 31, 2017.

Before we move to our guidance for the first quarter, I'll add a few data points that will shed light on our future business as follows. During the first half of 2019, we will accelerate our investment in sales and marketing, seize the opportunities ahead of us. Main items will include investment in changing our go-to-market strategy in North America from distribution to direct, massive launches of 3 significant new product that will concurrently strengthen our position in our market and add new addressable market. We expect increase in our sales and marketing expenses in 2019 due to additional market penetration efforts that will be reduced as a percentage of revenue in 2020.

In the second quarter of 2019, we will participate in ITMA Barcelona, the world's largest international textile and garment technology exhibition that occur once every 4 years. And as mentioned earlier, we are building our modern new ink facility. We expect to use around $11 million cash in this investment during 2019 and to complete the remaining of the investment mid-2020.

On December 13, 2018, we announced changes in our go-to-market strategy in North America, including initiation of end-to-end direct relationship with our customers. The go direct transition includes termination of our Hirsch nonexclusive distributor agreement. As stated earlier, to optimize the transition process, we decided to advance the termination date and to buy Hirsch's relevant assets, including customer data and relationship, backlog and inventory in total gross amount of $4.7 million. And as a result, we expect that going direct will increase our revenues, gross margin and sales and marketing expenses from the Hirsch customers. Forward-looking amortization of goodwill and noncash inventory adjustment in the first and second quarter of 2019 will impact our GAAP reporting and will be adjusted in our non-GAAP pro forma results.

Headcount for 2019, as we have mentioned in previous calls, we expect to continue our investment in go-to-market personnel, to further develop and strengthen our leading position in the market, direct sales strategy and penetration to new markets. We expect to moderate the pace of headcount growth in the second half of 2019.

This quarter, we will recognize a tax benefit paid on an Israeli statutory tax rate in the amount of $5.9 million.

Now moving to our guidance for the first quarter 2019. We expect revenues to be in the range of $36.5 million to $39.5 million. We expect non-GAAP adjusted operating income to be in the range of 4% of revenues to 8% of revenues. These numbers assume no impact of the fair value of issued warrants in the first quarter of 2019. As a reminder, the calculation of warrants per value is based on the combined effect of estimation of future revenues from Amazon, future Kornit share price in unknown date, future stock volatility as well as other variable that currently are not predictable and some of which have no correlation to our business.

Since as of today we are not able to predict these variables, we assume the warrants impact at 0 value for guidance purposes only. I'll now transfer the call to Ronen.

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [5]

--------------------------------------------------------------------------------

Thank you, Guy. And now, we will open the call for any Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we'll take our first question today from Tavy Rosner with Barclays.

--------------------------------------------------------------------------------

Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [2]

--------------------------------------------------------------------------------

Maybe 2 quick ones for Guy, if I may. First on the cost of goods sold. So we noticed that the service portion of the cost of goods sold grew compared to both last quarter and the year ago, but with that much offsetting from the service component. So can you give us any color on that, please?

--------------------------------------------------------------------------------

Guy Avidan, Kornit Digital Ltd. - CFO [3]

--------------------------------------------------------------------------------

So regarding services, we talked before we have service components, including upgrades, agreements and time and material. We're not breaking down the service into any segments.

--------------------------------------------------------------------------------

Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [4]

--------------------------------------------------------------------------------

Okay. And then maybe a quick one also. Something we noticed is an increase in the cash inflow into deferred revenue. And it seems to be one of the highest level it's been for a while. Is there anything specific there?

--------------------------------------------------------------------------------

Guy Avidan, Kornit Digital Ltd. - CFO [5]

--------------------------------------------------------------------------------

So usually we have only agreements, service agreements, specifically for December 31. We have a few upgrades that we started the process and didn't end. We will recognize the revenue based on the deferred on December 31 on the first and second quarter of 2019.

--------------------------------------------------------------------------------

Tavy Rosner, Barclays Bank PLC, Research Division - Head of Israel Equities Research [6]

--------------------------------------------------------------------------------

Okay. That's helpful. And then maybe just a broader one. We saw recently the partnership announced between Fanatics and Walmart. And I was wondering if maybe you can give us a sense of the current Fanatics installed base and where the white space might be out there for additional systems, especially the Atlas one?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [7]

--------------------------------------------------------------------------------

This is very important collaboration between Fanatics and Walmart. As you know, we cannot comment specifically on any customer business. However, we can say that Fanatics is a very loyal partner for us. And based on the solution we provided Fanatics, we believe that their ability to fulfill Walmart's own line demand in the retail space in real time and in high quality based on our solutions.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

We'll now hear from Jim Suva with Citigroup.

--------------------------------------------------------------------------------

Jim Suva, Citigroup Inc, Research Division - Director [9]

--------------------------------------------------------------------------------

For the upcoming major industry tradeshow that you signed, I believe that occurs every -- about 4 years. In the past, has there ever been like a bit of pause ahead of that as companies typically make announcements and so customers may wait a little bit? Or is there any type of cadence we should think about surrounding that events?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [10]

--------------------------------------------------------------------------------

It was very difficult to hear your question. Can you repeat it, please?

--------------------------------------------------------------------------------

Jim Suva, Citigroup Inc, Research Division - Director [11]

--------------------------------------------------------------------------------

Sure. The tradeshow coming up. Do customers ever pause waiting for announcements?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [12]

--------------------------------------------------------------------------------

Well, good question. We didn't see any pause of customer waiting for future announcement. Actually, we are quite open with the industry and our customer with what is coming. We just came out with the Atlas, which is the best DTG product into the market. We announced it few months before we came with it to the market. We are talking very openly about the polyester solution that will come early April to the market. And our wall-to-wall solution that will also come during Q2. So customer is aware. We didn't see customer waiting. Many of them, they need the capacity right away, the market is growing and if they need later on to trade in, so we have special programs for trading in the future if they need it.

--------------------------------------------------------------------------------

Jim Suva, Citigroup Inc, Research Division - Director [13]

--------------------------------------------------------------------------------

Okay. Great. And my other question there is with all the major snowstorms and icing that's been happening and bad weather, has that impacted your supply chain at all or your ability to produce and assemble new products? Or impact on the consumption of the consumables?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [14]

--------------------------------------------------------------------------------

Not that I'm aware of, no. We didn't see any impact as of now.

--------------------------------------------------------------------------------

Jim Suva, Citigroup Inc, Research Division - Director [15]

--------------------------------------------------------------------------------

Great. And my last question. With going direct now, should we expect there to be an increase to your operating margins from that? Or do you have to have more salesperson and such where it becomes more neutral or how should we think about the financial impact of going more direct?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [16]

--------------------------------------------------------------------------------

So we touched that a little bit in the past. Obviously, going direct, let's just assume that nothing happened. We're just going to take the existing customers. So top line will go up because we will recognize the gross revenue. Obviously, gross profit the same. That said, to grow this market and provide better services, we will increase OpEx. On the long run, obviously, we expect higher operating margin from going direct.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Next we'll hear from Jim Ricchiuti with Needham & Company.

--------------------------------------------------------------------------------

James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [18]

--------------------------------------------------------------------------------

I just want to get some clarification with respect to the new products that you're talking about for Q2. Those include the ones you've already alluded to? Or are there other products that you're planning to introduce at this tradeshow?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [19]

--------------------------------------------------------------------------------

We will specifically in this call discuss 2 products, the Atlas that we already launched in January at the ISS show. And we see a great momentum into Q1. And we discussed also the dark poly solution that's coming in April. What I can add on top of that, that we will come, as mentioned in the Investor Day in New Jersey, we will come in Q2 with the wall-to-wall solution. We will unveil it during the quarter and the big launch will be during the show at Barcelona, the ITMA show.

--------------------------------------------------------------------------------

James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [20]

--------------------------------------------------------------------------------

Great. And Ronen, can you say how many Atlas customers you anticipate having in Q2 or looking out to Q3? I'm trying to get a sense. It sounds like you're seeing good interest in it, but I'm just trying to get a sense as to how many different customers you may have for the machine.

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [21]

--------------------------------------------------------------------------------

We are not getting into the details of the number of different customers that we anticipate, the number of units that we anticipate but I can tell you that already in Q1, we are talking more than 2 handful of customers that will buy those machines. So more than 10 customers that will buy those machine already in Q1.

--------------------------------------------------------------------------------

James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [22]

--------------------------------------------------------------------------------

And are these customers that have existing Kornit equipment? I'm assuming these aren't entirely new, are they? For the most part, they're existing. Is that correct?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [23]

--------------------------------------------------------------------------------

So it's a combination. Naturally, in the beginning, we see more of our existing customers, but also tested it, the units, during the beta testing, buying additional units. And our existing strategic accounts, getting into it as well, but we already got orders also for net new customers for the Atlas.

--------------------------------------------------------------------------------

James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [24]

--------------------------------------------------------------------------------

Can you say the type of customer that new customer might be?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [25]

--------------------------------------------------------------------------------

So some of them are big screen printers, some of them are online printers. And what we can say that we are talking and we actually have evaluation of the system being one of the biggest brand of the world, and hopefully it will be successful, we'll be able to release of major projects going forward with them.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Brian Drab with William Blair has our next question.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [27]

--------------------------------------------------------------------------------

The midpoint of the guidance for the first quarter implies revenue growth of 22%, and I don't mean to split hairs, but that's below the 25%-plus that you've talked about for the growth rate going forward. And does that mean that you expect growth to accelerate as we move through the year? Or am I just being -- am I nitpicking?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [28]

--------------------------------------------------------------------------------

As you know, we have the typical seasonality. Our strong quarters are the second quarter and the third quarter. Those are the quarters with also the biggest account ordering the new systems. So it's the typical seasonality, we are starting a bit slower like every year, but actually this year, we're starting strong, and we expect to accelerate in the Q2, Q3 and also Q4.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [29]

--------------------------------------------------------------------------------

So just to be clear, then 2Q, 3Q, 4Q would you expect -- are you aiming for growth above 25%?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [30]

--------------------------------------------------------------------------------

We really cannot relate specifically to the growth, but we will track well to be at what we gave indication that we would like to be at 20%, 23% at $500 million run rate, and we will track into it.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [31]

--------------------------------------------------------------------------------

Okay. And then would you still expect -- I think, you said in the past that you do expect revenue to grow faster than OpEx in 2019. Is that still the case even given the ITMA?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [32]

--------------------------------------------------------------------------------

Yes. You will still see leverage on operating profit in 2019.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [33]

--------------------------------------------------------------------------------

Okay. And then can you give us any sense for how expensive ITMA is?

--------------------------------------------------------------------------------

Guy Avidan, Kornit Digital Ltd. - CFO [34]

--------------------------------------------------------------------------------

It's going to cost more than $1 million.

--------------------------------------------------------------------------------

Brian Paul Drab, William Blair & Company L.L.C., Research Division - Partner & Analyst [35]

--------------------------------------------------------------------------------

Okay. And then last question is when we recognize the revenue in that Delta order, is that over multiple quarters or is that on first quarter?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [36]

--------------------------------------------------------------------------------

It's mainly in the H1 of the year.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

We'll now hear from Patrick Ho with Stifle.

--------------------------------------------------------------------------------

J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [38]

--------------------------------------------------------------------------------

Ronen, first off, in terms of the consumables business and the growth prospects there, with the HD platform you've been able to leverage consumables with it, Atlas you obviously introduced the new ink along with that as well. How do you see the new products that you'll be introducing soon, the dark poly and the roll-to-roll and its ability to leverage the consumables business when they're introduced?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [39]

--------------------------------------------------------------------------------

Yes, so the dark poly will come with totally new set of inks and dedicated for being able to print on polyester. It's actually totally new system, process and ink. It's revolutionizing the polyester industry. And we are very confident that we will see a huge growth in our business coming from this market. If you are talking about the ink specifically, the nice thing about this type of ink is that in this market, the printing of polyester we see a very nice premium in terms of gross margin and the impact on our P&L. On the roll-to-roll, again, we are coming -- yes?

--------------------------------------------------------------------------------

J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [40]

--------------------------------------------------------------------------------

No, go ahead.

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [41]

--------------------------------------------------------------------------------

On the roll-to-roll side, we are coming also with the new ink and we are going to roll it also for the installed base of the Allegro.

--------------------------------------------------------------------------------

J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [42]

--------------------------------------------------------------------------------

Great. Guy, question for you in terms of the services business and your target and you track to get to breakeven sometime before year-end, I believe in 2019 or so. One, can you update the progress on that target? And two, what are some of the key variables or milestones we should be looking for you to get to breakeven in that segment of the business?

--------------------------------------------------------------------------------

Guy Avidan, Kornit Digital Ltd. - CFO [43]

--------------------------------------------------------------------------------

So we said it before. Since Ronen started, we actually made some changes in our services plan. So we postponed the breakeven to the end of the year or early 2020. We are doing many changes in the services that we sell. We changed the warranty period, so obviously, towards the end of this year, we will see more revenue and more profit just because we will sell more agreement and more time and material. In terms of KPI that we would like to track and we will probably start to report it in the coming quarters that the attach rate, meaning the percentage of contract versus industrial machine installed base. And we expect that to grow. Obviously, we expect that to -- has a derivative to increase profits from services.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

(Operator Instructions) We'll now hear from Chris Moore with CJS Securities.

--------------------------------------------------------------------------------

Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [45]

--------------------------------------------------------------------------------

Guy, maybe just can you go back again to the specifics on the Hirsch? I was writing but didn't quite get in terms of the impact from the advanced termination.

--------------------------------------------------------------------------------

Guy Avidan, Kornit Digital Ltd. - CFO [46]

--------------------------------------------------------------------------------

So the deal, we bought few assets, including inventory that -- including ink, consumable and systems. We bought customer lists and relationship. We actually shortened the notice period, which is also in the way we see the migration to direct is also part of the asset. The full amount is $4.7 million. At the same time, we offset the AR from Hirsch for about $2.3 million. The goodwill, we will just report it at the next earnings call. We haven't done any evaluation of the deal yet. We just closed it on February 7. If you really want to see how we report it in the GAAP, non-GAAP, you can see the deal that we did mid -- actually the third quarter of 2016, that was the first time we reported the deal SPSI. So there is some adjustment for the non-GAAP that shows the hidden margin when we resell again the product that we bought from Hirsch. So when we report in the first and second quarter, you will see the adjustment in the non-GAAP reporting.

--------------------------------------------------------------------------------

Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [47]

--------------------------------------------------------------------------------

All right. Maybe just to jump to the new ink for a second. Is the production of the eco-rapid, is that more expensive, less expensive to produce than the kind of traditional NeoPigment? Are the margins much different there?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [48]

--------------------------------------------------------------------------------

Roughly same.

--------------------------------------------------------------------------------

Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [49]

--------------------------------------------------------------------------------

Got it. And the last thing. You talked about kind of the new ink will be retrofitted to existing Kornit HD systems. So is this you sell a slightly different version of the eco-rapid ink to existing HDs that are out there now? Is that right?

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [50]

--------------------------------------------------------------------------------

No, it's same eco-rapid that goes to the Atlas will go to our installed base of HD family, exactly the same set of inks and fixation.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

That will conclude today's question-and-answer. At this time, I'd like to turn the conference over to Ronen Samuel for any additional or closing remarks.

--------------------------------------------------------------------------------

Ronen Samuel, Kornit Digital Ltd. - CEO [52]

--------------------------------------------------------------------------------

Thank you, everyone, for joining today's call, and we appreciate your continued interest in Kornit. I want to thank all of our employees for their hard work and dedication through this exciting time at Kornit. I look forward for speaking with all of you on our first quarter call. Thank you very much.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

That does conclude today's conference call. Thank you for your participation. You may now disconnect.