Please standby. 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.

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 an inaccurate assumption 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.

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. I’ll provide you with operations highlights as we kick-off an exciting 2019 for Kornit. As well as share key business updates as we continue to execute 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 the 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 2018 across industry shows globally. During the fourth quarter, we continue to execute on our operating strategy with a view of growing…

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 items, stock-based compensation expenses which totaled $1.7 million, amortization expenses relating to 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, non-cash 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 non-GAAP revenue, net of the $1.4 million attributable to the non-cash 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 and increase of 0.7% from the prior quarter. The amount attributed to the non-cash 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…

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

Thank you. [Operator Instructions] And we’ll take our first question today from Tavy Rosner with Barclays.

Hi, thanks for taking my question. Can you hear me okay?

Yes. Good evening.

Great. Maybe two 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 without much offsetting from the service component. So can you give us any color on that, please?

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.

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?

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.

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 install base and where the white space might be out there for additional system, especially the Atlas one?

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 online demand in the retail space in real-time and in high quality based on our solutions.

Okay, that’s helpful. I have a few more questions but I get back to the queue.

Thank you. We'll now hear from Jim Suva with Citigroup.

Thank you very much. For the upcoming major industry tradeshow that you signed, I believe that occurs every about four 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 break a little bit? Or is there any type of cadence we should think about surrounding that events?

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

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

Well, it’s a 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 roll-to-roll 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.

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

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

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 of the financial impact of going more direct? Thank you.

So we touched that a little bit in the past. Obviously, going direct, let's just assume that nothing happened, we just going to take the existing customers. So top line will go up because we will recognize the gross revenue, obviously, gross profit is 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.

Thank you for the details, greatly appreciate it.

Thanks Jim.

Thank you.

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

Hi, thank you. 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?

We will specifically in this call discuss two 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 roll-to-roll solution. We will unveil it during the quarter and the big launch will be during the show at Barcelona, the ITMA show.

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 to many different customers you may have for the machine?

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 two handful of customers that will buy those machines. So more than 10 customers that will buy those machine already in Q1.

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?

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.

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

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. Q - Thank you very much.

Brian Drab with William Blair has the next question.

Hi, thanks for taking my questions. The mid-point 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 like you expect growth to accelerate as we move through the year? Or am I just being – am I nitpicking?

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 and Q3 and also Q4.

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

We 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 runrate and we will track into it.

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

Yes, you will still see a leverage on operating profit in 2019.

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

It is going to cost more than a $1 million.

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

It is mainly the H1 of the year.

Okay, alright, thank you very much.

Thanks Brian.

We will now hear from Patrick Ho with Stifel.

Thank you very much. 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 will be introducing soon, the dark poly and the roll-to-roll and its ability to leverage the consumables business when they're introduced?

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 the gross margin and the impact on our P&L. On the roll-to-roll, again, we have been – we are also coming with new ink and we are going to roll it also for the installed base of that leg.

Great. Guy a 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?

We’ve 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 that in the coming quarters. The attach rate, meaning the percentage of contract versus industrial machine installed base. And we expect that to grow. Obviously, we expect that as a derivative to increase profits from services.

Great, thank you very much.

[Operator Instructions] We will now hear from Chris Moore with CJS Securities.

Hey thanks guys. Yes 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.

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 to 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 as PSI. 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.

And 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?

Roughly same.

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?

No it is the same Eco-Rapid that goes to the Atlas will go to our installed base of our HD family, exactly the same set of inks and fixation.

Got it, alright, appreciate it guys.

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

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 to speaking with all of you on our first quarter call. Thank you very much.

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