Good day everyone and welcome to Kornit Digital Second 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.

Thank you, James. Good afternoon everyone and welcome to Kornit Digital's second quarter 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 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?

Thank you, Tom. Good evening and thank you for joining our second quarter of 2018 earnings conference call. I would like to begin today with a brief overview of our second quarter followed by key observation of my first two months at Kornit. I am pleased to report a very strong second quarter, which is above the high end of our guidance for both sales and operating income. Our top line was up 25.5% year-over-year as a result of a strong demand for our products in the marketplace and the acceleration of the shift to digital in textile. Another highlight of the quarter was our gross margin, which expanded 260 basis points in the quarter. The gross margin story for Kornit is ongoing and we expect that longer-term driver will continue to improve our margin profile over time. The recent improvement is related to a favorable mix of high-volume of industrial systems and increase in ink sales. We also reported a notable uptick in operating leverage. The improved profitability is an outcome of higher revenue, gross margin expansion, and a lower OpEx as a percentage of sales. For the balance of 2018, we expect OpEx to remain within the range that we have previously disclosed, of $15 million per quarter, plus or minus $0.5 million. As we look to the balance of the year, we are very well positioned to continue our growth trajectory with a strong second half. This includes growth across geographies and customers, along with continued execution on the large customer project that was delayed at the end of 2017. Based on conversation we had with customers, we expect strong system demand to continue in the second half and produce a fairly even split of sales between the final two quarters as opposed to our typical seasonal…

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 second quarter non-GAAP pro forma results reflect adjustments for the following items; stock-based compensation expenses which totaled 1.2 million; amortization expenses related 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 minus 93,000; and 118,000 for restructuring expenses in the U.S. 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 Web-site. Second quarter non-GAAP revenue, net of the 1.5 million warrants impact, increased by 25.5% to $35.9 million versus $28.6 million in the prior year and increased 15.3% versus the prior quarter. Revenues grew to record level this quarter, thanks to successful launch of the Avalanche HD in the U.S. and Europe as well as fruitful continuation of systems deployment with one of our major global customers. Services revenues for the second quarter were $3.8 million, accounting for 10.5% of total revenue, an increase of 34.5% from the prior year and a decrease of 13.3% from the prior quarter. The amount attributed to the non-cash impact of warrants in the second quarter was $1.5 million or 4% of revenues versus $42,000 in the previous quarter and $1.4 million or 4.7% of revenues in the second quarter of 2017. You can see the warrant impact this quarter versus the prior quarter and the previous year on revenues and margins in Slide 14. By geography, 50% of our sales were from the Americas; 39% from Europe, the Middle East and Africa; and…

Thank you, Guy. And with that, operator, we'd be happy to take any questions.

[Operator Instructions] Our first question today will come from Joseph Wolf with Barclays.

Welcome, Ronen. I guess I had a question on the geographic mix where it looks like Europe is ticking up specifically as a percentage of sales and as revenues. Can you talk about customer numbers and is your largest customer, is Amazon taking product in Europe right now?

As you know, we cannot disclose customer names and talk about specifically of any customer. But yes, we see overall growth across the regions. Europe specifically had a very, very strong Q2, and we focused also Q3 to be strong for Europe.

Okay. And then I guess you mentioned this briefly, but last quarter towards the end of the quarter there were new product launches and you gave a specific number on the impact of those products into the revenue stream. Even if you are not willing or think you don't want to do that on a quarterly basis, can we just get a sense on the pull-through and how much of the growth is coming from either the actual sales of the new products or the expectation or the capabilities of the new product right now – product set, not specifically product?

So, I cannot get to the numbers for how many units we sold from each model. The only thing that I can refer into is that we see a really strong demand for the HD. We are getting fantastic feedback from our customers and the product mix is turning more and more into the Avalanche HD.

Okay. And then just finally, I think Guy, you mentioned operating leverage, but if we take the commentary about the fourth quarter being sort of in line with the third quarter, is there still room for operating leverage on similar revenues?

Yes, and you can take this quarter and compare it to the second quarter in 2017, you can see some leverage. We mentioned it's going to be some leverage, and at the same time we still plan to increase our investment, especially when it comes to go-to-market, customer facing, et cetera. But you will see leverage.

Okay, perfect. Thank you.

Next we'll hear from Jim Suva with Citi.

This is Jim Yun calling on behalf of Jim Suva. Just a quick follow-up on the customer, the largest customer, I know that you probably won't talk details, but can you maybe just share with us about your progress in terms of their, the second manufacturing side, is it in contract or is it ahead of schedule or is it a little bit behind schedule, as you expected it compared to last quarter?

Again, I cannot relate unfortunately for any specific customer and their internal plan. The only thing I can say is that the relationship with all the strategic customers is extremely good and we see a growth across our strategic customer worldwide.

Got you. And then, a follow-up question on service revenue, I think it grew 35% year-over-year last quarter but declined sequentially. So, I think you mentioned there was a system upgrade revenue during Q1. How should we think about service revenue for the full year and its profitability?

So, we mentioned before that we had a few buckets for the service revenue. One of them is upgrade, and the upgrade is lumpy. The year-over-year, we're still seeing very good growth top line and margin for services. We still expect 2018 that revenues from services will grow and we will see more revenues from upgrades this year.

Do you see that service revenue to be breakeven for the full year 2018?

So, we said that before that because of the lumpiness we will have some quarters that are profitable and some not, and we expect to be profitable for the whole year only next year.

Got you. Thank you.

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

Just want to go back to the European business, I know you can't talk about specific customers, but can you give us a sense as to the makeup of that revenues? Were they concentrated among a few customers or were they fairly diversified among the customer base?

So we see growth across our strategic account and small and medium-sized accounts. That is very similar growth. And what's unique I would say which this quarter is that we see the mix of product changing from the Storm into the Avalanche HD which of course bring in also higher revenues and gross margin.

That's helpful, Ronen. Can you comment on some of your other product line? Can you talk a little bit about where you are with roll-to-roll machine, the Allegro?

Yes. For us, Allegro and the roll-to-roll market is very, very important. We see it very strategic. We are continuing to invest in this market with the current Allegro and future products that we are working on. At this stage we are putting more effort in the go-to-market and expanding our sales coverage across the different regions and expect to see the revenue coming from the Allegro family increasing in the coming quarters.

How would you characterize it in this quarter? And again, I'm not looking for specifics but just relative to other quarters, how are the Allegro revenues?

On track.

Last question for me is, I'm wondering if you can give any kind of an early read on the ink revenues for the new HD products. I guess I'm asking, are you seeing a higher utilization for the machines to offset the overall improvement in ink consumption that you are providing customers?

What we are hearing from our customers, they see the benefit of the HD both in terms of the quality and of course the cost. What we've seen that the customers are by buying, by purchasing the HD, enable to get into longer runs and taking job out of screen. By that, they are increasing the throughput or the capacity and the utilization of the machine and adding additional presses also in the short-term and longer-term.

Okay, thank you.

We'll move on to Brian Drab with William Blair.

So, I think arguably the most important focus on here in your results is the revenue number, and it's convoluted unfortunately by this Amazon warrant situation. On Slide 10 in your deck, you say quarterly non-GAAP revenues of $35.9 million were up from $28.6 million last year. I don't think that that's right. Maybe I'm just the one that's wrong here, but last year non-GAAP revenue was $30 million with $1.4 million of warrants, right? And I'm trying to discern whether $35.9 million is the GAAP number with $37.4 million in the third quarter of this year actually being the correct non-GAAP number?

We amended the numbers. We actually got the comments from the SEC later, meaning after the second quarter 2017. So we amended it after that. So if we're going back to the second quarter of 2017, so you can take the $28.5 million, that's net of the $1.4 million impact, if you connect the two numbers together, you get $30 million. That's the number that you note. So it's sort of adjusting the number of the second quarter to the SEC requirement that came later. Brian, I'll say this in a different way. If you want to look at the businesses and if you want to compare the business Q2 over Q2 without the impact, then you should use the $30 million for the second quarter of 2017 and take the GAAP number that we mentioned this quarter and add $1.5 million.

Meaning, add $1.5 million to $35.9 million?

Exactly.

Okay. That's what I thought. I just wanted to be really clear because I don't think it's perfectly clear on Slide 10, or at least maybe it's clear and it's confusing to me. But I think that revenue [indiscernible]

You are certainly right. Brian, I mean if we confused you, we probably confused everybody. So there is another slide, you can go drill down to Slide 14. Because of all the [reasons] [ph] we mentioned, we added one more slide, that's Slide 14, that will help you see the picture.

Yes, and I had not caught that, so I think that's perfect. Okay, all right, great. I think it's still helpful to get it cleared. And can I just ask two? Then the third quarter, so the third quarter and fourth quarter revenue would be about similar, should we still expect in the fourth quarter consumables to account for a larger proportion of sales given the holiday season and that mix to be kind of similar to the past?

Yes. So, Q4 usually is the peak for our supply business. And what we have seen in marketplace is that Q2 and Q3, our big accounts are strategically investing in systems and less investing it in Q4.

Okay. And then one last question kind of to tie this all together, if the revenue adjusting for the warrants was about $37.5 million this quarter, the guidance midpoint is for $37.5 million in the third quarter. The fourth quarter is to be about similar to the third quarter, kind of 37.5 for the balance of the year. I don't know if you'd like second quarter, third quarter, fourth quarter, without any sequential growth, but could you comment as to why that would be?

Your message is pretty much in line. I mean if you are looking at the mid of the guidance, you are right.

Okay. So, it's [indiscernible] now with guidance but is there any specific lumpiness or order timing that would result in that or is it just potentially conservative guidance?

That's the guidance.

Okay, thank you.

Next we'll hear from Patrick Ho with Stifel.

Good luck, Ronen, on the new position. Maybe as my first question into the HD customer mix, you talked about the strong interest and order flow and obviously the revenues you generated this past quarter. Can you give a little color whether they are coming more from new customers for HD or existing customers who are upgrading to the HD products?

So, it's a mix, and I would say even mix. We can see strategic accounts that are moving to the HD and upgrading the system to the HD, and we can see totally newcomers, small, medium and key accounts entering directly into the HD technology.

Great, that's helpful. Maybe as a follow-up question on the product front, I think you introduced the Storm HD I think late last quarter or early this quarter. Given that you talked about on the call that some small and medium-sized business went straight to the Avalanche HD, is the Storm HD still targeting the small and medium-sized businesses that you originally talked about last quarter?

Yes, we still have a vast amount of potential customer from the low end of the market and midsize of the market, but they cannot afford investing in the Avalanche and they will go for the Storm HD, and this is exactly the target of this machine.

Great. And a final question for me, maybe for Guy, in terms of OpEx, you said you are going to maintain OpEx around that $15 million level for the rest of the year. How do you balance I guess some of the comments you made about I guess building out your services and infrastructure, ramping some of that up, and maintaining those strict OpEx levels?

So we mentioned, and Ronen said it before, that the target is still $15 million, plus or minus $0.5 million. Currently we are under $15 million. So, we still have the margin not to cross the $15.5 million.

Great. Thank you very much.

Next we'll hear from Greg Palm with Craig-Hallum Capital Group.

Ronen, welcome aboard officially I guess. Just about a week ago, your large customer publicly announced the launch of its on-demand print service over in Europe. So, I guess just wanted to confirm or – I mean, should we assume that you have at least participated in the buildout over there, and given the launch today, should we assume the buildout is done for the time being or is there more to come here in Q3?

As I mentioned before, I cannot relate to specific customer news at this stage. Whatever is public is public but I cannot relate to our relationship on that.

Okay. Can you give us some sort of sense in terms of quarterly revenue run rate for your large customer or maybe your large customers in general? Should we assume that Q2 should be kind of the high mark for the year or should we expect something kind of similar in Q3 and Q4? I think you said something like you expect system sales to be spread out over Q3 and Q4 equally, but any more color you can give on how that compares to the rate here in Q2?

I can say that our strategic accounts overall, which can see a peak in Q2 and Q3, they are preparing themselves for the peak season, and Q4 will be more focused on the mid-sized customers rather than strategic accounts, and of course the ink.

Perfect. That's helpful. As it relates to some of the new products, I know you have alluded to in the past, can you give us any more details on sort of timeline, kind of launch dates? I guess I'm really curious whether some of the new products are more focused on or intended on lowering the cost of print, something like the upgrade and the HD or maybe expanding the addressable market opportunity and the specific type of print applications that are out there?

I cannot give any specific dates right now for new product introduction. I can say that we are working on new products introduction both on the DTG market and the roll-to-roll market, and we are working on expanding the market coverage by entering new applications and new capabilities.

Okay, sounds great. I'll leave it there. Thanks.

We'll now hear from Chris Moore with CJS Securities.

Maybe just talk a little bit potentially on the M&A side, is that an area that's kind of filling the pipeline? You are spending much time there and kind of what types of opportunities might you be looking at down the line?

First of all, I always talk about the organic growth because I see a huge potential of organic growth within Kornit, if it's across different territories, is it with our current product, the HD, the roll-to-roll, the Vulcan, is it with new application that we are planning to go to the market. So, organic growth is still our main focus. I am a new CEO coming to the Company. I cannot now relate to inorganic direction. Personally, I strongly believe in inorganic growth as well. We are looking and exploring different direction of inorganic, but I cannot relate to it specifically and I need a bit more time for that.

Got it. So, on the organic side, can you maybe just talk a little bit further about the kind of the timing of the new facility in New Jersey, the new ink plant? And I think you said it was $4 million in CapEx. Just talk about that a little bit further.

So, we are entering the new demo facility and offices in New Jersey mid of September and we are going to open – actually end of August we are entering there and we are going to help the grand opening early October, and we are going to have the analyst investor event in this site. It's going to be exciting. It's a big facility. We are going to demonstrate all our solutions and it would be a great place to bring customers and investors. As for the ink plant, we are still in the planning mode and the project is currently planned for three years, and we are planning to start the project on the ground in December 2018.

Just to add, Chris, cash flow-wise, we expect to pay for the rest of the leasehold improvement in New Jersey in the third quarter, and it's about a quarter of the number we mentioned in the script. And investment in the ink plant, more towards the end of the fourth quarter.

Got it. Appreciate it, guys.

That will conclude today's question-and-answer session. I'll now turn the conference over to Mr. Ronen Samuel for any additional or closing remarks.

Okay. I just would like to thank everyone on the call. Thank you for your questions. I must say that I am very excited to take Kornit to the next level. I see huge opportunity and thank you for your warm support. Hope to see you soon in New Jersey in our Investor Day. Thank you.

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