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Kornit Digital Ltd. (NASDAQ:KRNT) Q4 2023 Earnings Call Transcript

Kornit Digital Ltd. (NASDAQ:KRNT) Q4 2023 Earnings Call Transcript February 14, 2024

Kornit Digital Ltd. beats earnings expectations. Reported EPS is $0.08, expectations were $-0.01. Kornit Digital Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good morning, and welcome to the Kornit Digital Fourth Quarter 2023 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. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Mr. Jared Maymon, Investor Relations for Kornit Digital. Please go ahead, sir.

Jared Maymon: Thank you, operator. Good day, everyone, and welcome to Kornit Digital's fourth quarter and full-year 2023 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel; and Lauri Hanover, Kornit's Chief Financial Officer. For today's call, Ronen will recap the full-year 2023, provide comments on the fourth quarter and then discuss our view on 2024. Lauri will then review the fourth quarter and full year numbers and provide our first quarter outlook before we open it up for Q&A. 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. 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 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 measures 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. Ronen?

Ronen Samuel: Thanks, Jared, and thanks to everyone for joining us on today's call. Before we dive into fourth quarter results, let's take a moment to reflect on the transformative journey of 2023, a year that reshaped not only our industry but also Kornit's spending in the market. In 2023, as the cost of capital rose and consumer preferences continue to shift, the industry continue to recognize the need to reduce inventory, improve time to market, limit dependency on broken offshore supply chains and produce sustainably. The traditional practice of overstocking does not make sense in a market characterized by ever changing consumer preferences. As a result, many retailers spent 2023 working through excess inventories that had piled up since the pandemic, while shifting the focus towards fixing their operating models and supply chains.

The ideal supply chain that these retailers are seeking utilizes lean inventory management and is backed by fast and constant in-season replenishments. Entering 2023, knowing that we were heading into a challenging macro environment, we defined a few key business objectives that would ensure Kornit was best prepared for its next phase of long-term profitable growth. These objectives included strengthening our product portfolio, broadening the application we serve, diversifying our customer base, successfully launching our Apollo platform, expanding our Direct-To-Fabric business and optimizing our operating model. A key pillar in our strategy of transitioning the market from analog to digital production has been to offer a portfolio of innovative digital solutions that deliver a retail quality and efficiency.

After a few years of major R&D investments, we arrived to ITMA 2023 with a remarkably wide portfolio of solutions for on-demand sustainable production. We cemented our leading position with the MAX technology as the new industry standard for quality, introduced the Apollo platform for bulk production, enhance our DTF offering for unprecedented capabilities, expanded the application reach of our Poly offering, Integrated Smart Curing Technology into our mass production solutions, made major software enhancement to the KornitX platform and brought added-value ancillaries like our RSS smart pallet adjustment technology. With our evolutionary solutions, we managed to penetrate new market segments such as bulk apparel, athleisure, fashion, home decor, technical and footwear, and new geographies such as India, Latin America and other key textile production hubs across the globe.

Our diversification efforts extend beyond market segments and geographies. We are also now engaged with new types of customers, such as Tier 1 manufacturers, value-added suppliers and directly with major brands, digital platforms and retailers. Turning to the Apollo. As you may have seen, after successfully installing all three Apollo beta systems for the peak season in Q4, we delivered on our plan of bringing digital apparel production to the mainstream with the launch of the Apollo in January. The feedback from the industry leaders on the Apollo has been outstanding. Customers refer to the release of the Apollo to the start of a new era in direct-to-garment, pushing the boundaries of speed, quality and sustainability further than ever before.

The Apollo represents a quantum leap in direct-to-garment printing technology, ensuring businesses can meet the evolving demands of the fashion and textile industries. Simultaneously with the launch, we hosted customers and prospects at one of our beta sites with North American retailers to demonstrate the system at an industrial scale. The event was very successful, and I'm also pleased to report that one of our beta customers has already disclosed the plan to add several more Apollos to their facilities throughout 2024. In 2023, we also made significant strides in the direct-to-fabric market. Our new ink solution unveiled ITMA, combined with our MAX technology has created a best-in-class solution in the growing digital pigment market. This market is going through a massive transition into just-in-time sustainable production and Kornit is leading the market.

We continue to believe that the direct-to-fabric market represents a significant long-term growth opportunity, especially with global brands and retailers who have committed to move to sustainable production and offer maximum flexibility. Turning to our operations. In 2023, we worked diligently to achieve our goal of returning to breakeven profitability on an adjusted EBITDA basis. And despite a more challenging environment than we anticipated in the second half, we achieved this goal in the fourth quarter. A key factor to this return to profitability was consistently strong growth in consumables through 2023. This year-over-year improvement in both impressions and consumables indicates continued digestion of capacity within our install base, which we view as a positive leading indicator for future systems demand.

Additionally, we have and continued to realign our operating expenses with the current market environment. In 2023, this realignment included cost reduction and efficiency initiatives across our operations. In the first quarter of 2024, we extended this effort through a restructuring and realignment effort designed to prepare Kornit for its next phase of growth. This restructuring, including a meaningful reduction in force, adjustment to our go-to-market strategy, a reorganization of certain business segments, changes to our leadership team and improve operating efficiencies in our supply chain. We expect these proactive measures to contribute to our return to consistent profitability and allow us to protect our robust balance sheet. Lauri will expand on the implications of these cost-saving measures in her prepared remarks.

An industrial printing machine churning out specialized orders for a major client.
An industrial printing machine churning out specialized orders for a major client.

Turning now to the fourth quarter. Today, we reported fourth quarter revenues of $56.6 million, within the range of the guidance we provided in November and adjusted EBITDA margin of 0.3%, which was above the high end of our guidance range. As a reminder, this includes the impact of the fair value of the issues warrants. Despite the persistent macroeconomic headwinds, fourth quarter results were driven by good peak season where we saw double-digit year-over-year growth in impressions and in our consumable revenues. This marks our fourth consecutive quarter of year-over-year impressions growth. Releasing the Apollo is also giving us the opportunity to introduce a creative recurring base revenue model which shift CapEx to OpEx for some customer with this system.

This offering sets minimum level of production, reduced barrier to entry, provides more predictability and visibility for our customer and for us, shortens the sales cycle and improves our opportunity to address screen printers. We expect this revenue model to generate around $1 million in revenue per system per year. With that said, in 2024, we continue to expect modest revenue growth and adjusted EBITDA profitability. Our outlook assumes that the challenging macroeconomic backdrop we experienced in 2023 continues into 2024. Based on the actions we have taken to date to improve our operating efficiency and our working capital position, we now anticipate generating positive cash flow from operations for the full year. So in conclusion, we ended the year on a solid footing.

During the fourth quarter, we experienced a good peak season with nice growth from some of our key customers and work diligently to bring the business back to breakeven results. Entering 2024, we are focused on our key long-term growth drivers, which include further movement into mainstream bulk production, expansion of our direct-to-fabric business, engagement with key demand generators and further penetration of new segments in key textile production regions. We plan to focus on these areas while returning to profitability and cash flow generation on a full year basis. Before I pass the call over to Lauri, as you all know, Israel faced an horrific barbaric attack in the second half of 2023. While some of our people were impacted, we were resilient and continue to fully support our customers throughout the most important time of the year.

We continue to prioritize the safety of our people in Israel and remain confident that our contingency plan secure our business continuity. I want to thank our tremendously dedicated people for their resilience in this difficult time and to thank many of you for your continued support. Now, let me turn the call over to Lauri for a closer look at our fourth quarter and full-year 2023 financials and first quarter guidance. Lauri?

Lauri Hanover: Thank you, Ronen, and good day to everyone. Fourth quarter revenues were $56.6 million, within the guidance range we provided in November. This quarter, we experienced double-digit year-over-year growth in consumable sales, which was more than offset by a decline in systems and services sales as expected. For the full-year 2023, revenues were $219.8 million compared with $271.5 million in 2022. Despite consumables and services demonstrating healthy growth for the full year, the year-over-year decline was primarily attributable to significantly lower system sales in 2023. Moving to margins. Fourth quarter non-GAAP gross margin was 48.6% compared with 36.4% in the same period last year. The year-over-year improvement can be attributed to high-margin consumables comprising the lion's share of total revenues.

For the full-year 2023, the non-GAAP gross margin of 38.4% increased slightly from 38.2% in 2022, driven by higher volumes and ASPs and consumables and solid profitable growth in services. This was offset by the sizable decline in system sales volumes, reflecting the challenging environment we faced throughout 2023, and particularly in the last quarter. Looking at expenses. Total fourth quarter non-GAAP operating expenses were $30.1 million, a decrease of about 9% from $32.9 million in the same period last year. For the full-year 2023, non-GAAP operating expenses decreased about 12% to $127.7 million compared to 2022. The continued reduction in expenses reflects the savings achieved by our ongoing cost savings initiatives. In the fourth quarter, we took decisive actions to advance these cost savings initiatives which resulted in a $19.1 million restructuring charge.

This charge supports our strategy to align our cost structure with our revenue expectations and to enable operating leverage as we return to growth. Included in this restructuring is a meaningful workforce reduction, a consolidation of facilities and a phasing out of our legacy platforms. We expect this restructuring plan to save approximately $20 million in operating expenses during 2024 versus the full-year 2023. Adjusting for these restructuring charges, our adjusted EBITDA was positive in the fourth quarter, marking a significant improvement over the adjusted EBITDA loss of $6.1 million in the same period last year and the adjusted EBITDA loss of $5.6 million last quarter. Adjusted EBITDA margin for the fourth quarter of 2023 was 0.3% at the top end of the guidance range we provided in November, again, reflecting an improvement year-over-year and sequentially.

For the full-year 2023, the adjusted EBITDA loss of $30.9 million was essentially consistent with that of 2022. However, the adjusted EBITDA margin for 2023 decreased to minus 14% compared with minus 11.3% for 2022, primarily due to significantly lower revenues year-over-year. Our cash balance, including bank deposits and marketable securities at quarter end was approximately $556 million. Through cost-saving measures and healthy collections resulting in improvements to working capital, we generated positive cash flow from operations of $2.6 million during the fourth quarter. We remain committed to improving working capital to drive cash conversion. Moving on to our share repurchase program. For the full-year 2023, we repurchased approximately 2.7 million shares, spending an aggregate amount of $55.8 million.

The average price paid per share net of fees was 21.03. On January 17, our second quarter proved share repurchase authorization expired. Subsequently, we applied for and obtained Israeli Court approval for a new 6-month period extending through July, allowing us to use the balance of our previously authorized share repurchase program. This unused balance currently amounts to approximately $19 million. Given our current enterprise value, we plan to continue repurchasing shares in the first quarter. Next, I'd like to take a moment to discuss the operating environment. As we discussed on our last earnings call, the consumer environment remains uncertain, which with regard to system sales impacts our customers' purchasing appetite and thus our visibility.

Additionally, we continue to expect to face a challenging macro environment in 2024, similar to what we faced in 2023. While we will work proactively with our customers, invest in our product portfolio and improve our operating model, we acknowledge that these macroeconomic headwinds will weigh on our ability to convert leads and plan confidently. With that said, we continue to expect modest growth and modest profitability in 2024 on a full year basis. We are also expecting to deliver positive cash from operations in 2024 on a full year basis. Turning to first quarter guidance. We currently expect revenues for the first quarter of 2024 to be between $43 million and $48 million and adjusted EBITDA margin to be in the negative 16% to negative 26% range.

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

Ronen Samuel: Thank you, Lauri. Operator, we are now ready for the Q&A session.

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