Good day, everyone, and welcome to the Kornit Digital Ltd., First Quarter 2019 Earnings Conference Call. As a reminder, today's conference call is being recorded. After prepared remarks, we will provide instructions on how you will ask questions during today's question-and-answer session. At this time, I would like to turn the conference over to Tom Cook. Please go ahead, sir.

Thank you, Dori. Good afternoon, everyone, and welcome to Kornit Digital's first quarter 2019 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 26, 2019, 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 first quarter 2019 earnings conference call. I will start today by providing a brief overview of our first quarter performance, update you on our operational highlights, and share key business updates as we continue to execute on our short- and long-term goals. I will then hand the call over to Guy to cover our financials. We are off to a strong start to 2019 with 22.6% year-over-year revenue goals fueled by the strongest ever quarterly revenues from systems sales. Our first quarter of 2019 ended with revenues of $38.2 million net of $1 million of warrants related to Amazon. Our performance was driven by growth across our product portfolio and customer as our mix continued to shift towards industrial and mass production system. This achievement is even more notable given the technical element associated with internalizing our distribution in North America that resulted in the absence of a normal quarterly replenishment order. The effect of this was approximately $2 million to our consumable quarterly revenues and is one-time in nature. Kornit continues to benefit from favorable mega trends that pull industry demand for innovative products and solution. This was another strong quarter of system growth across our HD platform and adoption of our next-generation odorless fixation and Eco Rapid inks. We had remarkable new product introductions this quarter and we feel extremely encouraged with the level of interest and adoption. Importantly, both new and existing customers were enthusiastic with the performance of our new products platforms. The newly launched Atlas, the best industrial DTG system on the market was off to a strong start. This is evidenced by phenomenal feedback and a record breaking number of orders received from a double-digit number of customers. Our order pipeline for the…

Thank you, 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 first quarter non-GAAP pro forma results reflect adjustments for the following items: stock-based compensation expenses, which totaled $1.3 million; amortization expenses relating to the acquisition of intangible assets acquired in previous years in the amount of $108,000; taxes on income related to non-GAAP adjustment in the amount of $489,000; and non-cash deferred tax benefit in the amount of $165,000. Adjustment related to the acquisition of Hirsch’s assets were non-cash inventory adjustment of $1.6 million, amortization expenses related to the acquisition of intangible asset of $46,000, and acquisition and other cost of $85,000. We expect additional $1.2 million inventory adjustment in the second quarter, quarterly $78,000 for amortization of intangible assets acquired for the next quarters of 2019, and an additional total amortization of $0.6 million in the following five years. As the company has significant operating lease liability in foreign currencies, the company incurred foreign exchange gains or losses from the reevaluation of these liabilities. These gain and losses may vary from period-to-period and do not reflect the true financial performance of the company. This quarter foreign exchange losses associated with ASC 842 were $335,000. 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. First quarter revenue net of the $1 million warrant impact increased by 22.6% to $38.2 million versus $31.1 million in the prior year and increased 1% versus the prior quarter. Importantly, given the absence of the U.S. distribution replenishment order in the first quarter resulted from the termination of the…

Thank you, Guy. With that, we are ready to open the call for questions.

Thank you. [Operator Instructions] And our first question comes from Jim Suva with Citibank. Please go ahead.

Thank you very much. I have a couple of questions, but I'll start with one. The news talks a lot about the trade wars and tariffs and sourcing and production and shipping of product. Can you help me remember, I believe my memory might be correct. A lot of your products are actually assembled through EMS and companies in your consumables through non-China suppliers. Can you confirm if that's the case? And also do we need to look into also like sub-sub components or some of your chips coming from China or metal casing, housing or plastics or anything like that? And we're just trying to figure out the impact of tariffs on some of your procurement? Thank you.

Sure. Thanks Jim. So we manufacture our printing system as well as ink in Israel. They were examined several times by the U.S. customs. So they're Israeli and based on the U.S. Israeli, its custom free. There is minor fraction of a percent made out of Israel, but it's still considered to be made in Israel and custom free. Actually the trade war, we're not saying it's a good thing, but it will definitely simulate the reassuring, which is a big driver for printing in the U.S., U.S. is our main market.

Great. And then as a follow-up maybe for your Chief Financial Officer, the cash flow, if I do my numbers correctly, it looks like the cash flow from operations declined year-over-year a fair amount? Can you help us understand about the cash flow dynamics? Was last year boosted a little bit too much or this year was it pulled down, whether it be purchasing or integration of acquisitions or how should we think about the change in cash flow from operations year-over-year?

So first we generate cash from operations this quarter. Yes, less than we did last year. We had some increase in AR due to the growth in the business we did towards the end of the quarter. From annual base perspective, we expect to generate cash this year, cash flow operation.

Okay. Thank you very much for the details.

Yes. Thanks Jim.

And our next question will come from Tavy Rosner with Barclays. Please go ahead.

Hi, thanks for taking my question. I was wondering if you could talk a little bit about Amazon, you mentioned that sales were up. But looking at the cost of warrants a year-ago compared to this year, so they increased significantly, but sales were not that high so I mean, in terms of growth. Is there a timing issue in terms of revenue recognition from Amazon?

Well, actually if you try to do reverse based on the warrants impact. So Q1 versus Q1, if you compare the warrants impact in 2018, it was $42,000. And if you do, we mentioned the percentage was more than $2 million versus more than $3 million this quarter, and the impact was $1 million. And basically the main or the main reason for the increase in impact is due to the increase in share price. So it's not rev rec, it’s share price, which is a good thing.

So what was the growth from Amazon? Is there like a way to [indiscernible]?

Yes. You can look again at the script when we talk about customer concentration, so we mentioned a customer called global customer. And we compare global customer in Q1 this year versus Q1 2018. This way you can extract the revenue from the specific customer you ask about. And the impact of the warrants, we also mentioned this quarter was around 1 million versus 42,000 last year. And most of the increase in impact is due to the increase in share price year-over-year.

Got it. And earlier this year, you mentioned the goal towards reaching $150 million in sales over the five years. Where are you so far and are you still on track to reach that goal?

Yes. We are on track to reach the goal of $500 million run rate of business in 2023. Yes, we are on track and we are confident that 2019 will be on track to reach this goal.

Thank you. And maybe the last one, if I may, a quick one. The product gross margin was down sequentially also down compared to year-ago, is that attributable to the one-time shift that you mentioned in your prepared remarks?

Yes, definitely. So we mentioned that due to the termination of the distribution agreement, we missed the replenishment order which is predominately consumables. And we also mentioned strongly that second quarter we will back to normal rate and we expect gross margin without the impact of the warrants to be above 50%.

Great. Thank you for the color. I’ll get back to the queue.

Thanks Tavy.

Thank you.

Our next question comes from Brian Drab with William Blair. Please go ahead.

Hi, thanks for taking my questions. First on gross margin which I think you’re just touching on there, 45% non-GAAP in this quarter. And just trying to quantify this a little bit more precisely, you have the impact of the $2 million in consumables, I'm calculating that's about a 400 basis point headwind or close to 400 basis points and you have the warrant headwind. So if you add all that back, you get 50.5%, getting close to 51%. And then you have the Poly Pro, which I believe will be the highest margin printer that you'll – that you've ever had in the mix. So as we move through 2019, could we see gross margin on the, 51%, 52%, 53% range as you start to see the Poly Pro gained traction and we take these other one-time issues out of the picture?

So your analysis is pretty good. The warrants impact was 139 basis point, obviously everything that we're doing – we're actually aiming to increase gross margin going direct, the product that you mentioned, but we're not guiding for gross margin.

Okay. And then on the operating expense, and it's confusing I think about the operating expense in terms of percentage of sales because of the warrant issue and how that affects the denominator in that calculation. But if we just look at the non-GAAP operating expense in terms of dollars and specifically the selling and marketing at $6.8 million that was materially below what I was expecting. And then research and development was actually a little bit below what I was expecting is down sequentially. So can you at least just comment on the trajectory of both of those line items in terms of non-GAAP dollars and of course, we understand you've got a step up due to ITMA?

Right. So we mentioned that we will continue to grow our go-to-market, customer-facing, et cetera. And as the result, sales and marketing expenses will continue to grow up in the second quarter with the additional about due to ITMA. In the second half of the year, we expect to moderate this growth. We will see – when we talked about 2019, we talked about sub-leverage that we will see from R&D, SG&A and we're still on track.

Guy, you can say it all if the second half of the year quarterly selling and marketing run rate would resemble what we just saw in the first quarter. Can you put a finer point on moderate?

Moderate means that the growth rate in terms of quarter-over-quarter will go down. In terms of dollars, the numbers will continue to grow in the third and fourth – well third quarter due to the – after ITMA quarter most probably will not go up. But on an ongoing basis, our sales and marketing will continue to grow.

Okay. Sorry, and just to be really clear on that. After ITMA in the second quarter, you would expect it to step back down somewhat in terms of dollars in the third and fourth?

Right, the third quarter. Right. Forward-looking longer-term, there is a lot of opportunities ahead of us and we're investing in sales and marketing to see these opportunities.

Okay. And does R&D kind of stay up this run rate or where do you expect that to be in the second, third and fourth quarter relative to first quarter?

Yes. As usual we are not guiding for more than one quarter. And as we said before, we expect R&D to grow slower than the growth of revenue and obviously slower than the growth of gross profit.

Okay, thanks. That's really helpful. Congrats on a great quarter.

Thanks, Brian.

Our next question comes from Jim Ricchiuti with Needham & Company.

Good evening. And I know you're not giving guidance beyond on the quarter, Guy, but or Ronen if you could. Is there any way to think about the second half? Last year as we looked at the way the year progressed, it was fairly linear. This year, clearly you have new products contributing more meaningfully. So should we think about the second half showing a steeper ramp? And again, I am not trying to pin you down, just trying to think about how the new products could begin to contribute in the second half?

Well, Jim, we are just going to guide for Q2. I think in previous call and this call we gave enough color regarding our expectation. We're very optimistic about all the three products that we announced during the quarter, but we're not going to talk about numbers now.

Wonder if we could dig a little more deeply into Atlas. I think in Q4 call, you mentioned that you had I believe 10 customers for Atlas. This quarter, I think Q1, I think you're talking about double-digit. Can you say whether many of the customers that you took orders from in Q1 were multiple unit customers? I'm trying to get a sense as to how dispersed, how well distributed the orders that you're seeing for Atlas are?

So we'll see the order from Atlas coming from existing customers, but also from a net new customer, some of the existing customers we are talking about multiple units orders that’s coming in and of course, the existing customers, most of them starting with one unit and later on the intention is to go ahead and purchasing more units. But if you are asking, yes in Q1, there was one deal that it was multiple units in one big account.

Thank you, Ronen. I know it's early, still very early for Poly Pro, but can you talk a little bit about the market reception to that? And I'm also curious if you're seeing if you anticipate any cannibalization from the Avalanche product family from Poly Pro.

Okay. So I’ll start with the second question. The Poly Pro is totally a different product, is based on the Avalanche platform, but has totally different ink set, totally different process, totally different software, and it’s going for a different application. So the zero cannibalization between the Avalanche to the Poly Pro. What we – going back to your first question, we’re getting fantastic feedback on the Poly Pro in terms of the quality, durability, functionality of the print. We see net new customers that we never been able to penetrate. Going after the Poly Pro, we see brands, major brands, the top brands of the world testing it, evaluating it, and as soon we'll get into a real production, we see our biggest customers are starting to add into their own portfolio of Avalanche’s and Atlas’ also the Poly Pro. So it's really big, big success. And as I mentioned, it will be a strong influence on our Q2 results and I believe moving forward for Kornit results overall.

Thank you.

Our next question comes from Chris Moore with CJS Securities.

Hey. Thanks guys. Yes, can you maybe just talk a little bit about the opportunity in Japan in terms of – I know there's limited presence at this stage, but kind of your thoughts on that market and the opportunity there?

Yes. So I'll start with Asia Pacific. I have a lot of experience working in Asia Pacific and I believe in this region. And in the last six months to eight months, we started to invest a lot. We did major changes there in the organization. We invested in center of excellence, in the marketing activities, and we are starting to see great results. This quarter specifically, we really grow100% year-over-year and we already saw in Q4 a nice increase. We have a good, very strong pipeline into Q2 and we believe that Q2 will be also a very strong quarter to Asia. Within Asia, of course, there are a few markets that are very important for us and we are focusing on. Obviously China is the biggest market and the biggest opportunity for Kornit. We are going after, we have our own team there, we have our channel partners that you're working very closely. Japan of course is the second biggest market for us in Asia Pacific. We have two channel partners that we are working very, very closely. We have a small team within Japan supporting the channel partner and supporting our customers on a daily basis. We see Japan is a potential growth engine for Asia Pacific and for overall Kornit and we are taking this market very seriously.

Got it. Thank you. That's helpful. And maybe just with respect to the Presto, is the competitive landscape that you will see with that product, is that much different than Allegro? Or is it just – the product itself is just that much more efficient and powerful than the prior…

So first, the product itself – these are major differences between this product to the Allegro product. It’s 2.5x more productive. The ink set is totally new ink set with – the durability of the ink is much stronger, the quality is better, and there's many more attributes to the overall solution. And the issue about competition and the market, so we are focusing with the Presto to go after the home décor. We believe the home décor market will go through the same transition as the direct-to-garment market went through. We are starting to see a lot of customization, personalization and source are coming to the home décor. And we believe we have the best pigment ink in the market and the home décor require pigment ink and therefore we believe that our solution is the best fit for this market segments, which is growing and we intend to capture a major market share within this market segment.

Got it. Very helpful. I’ll jump back in line. Thanks guys.

And our next question comes from Patrick Ho with Stifel. Please go ahead.

Thank you very much. Ronen, maybe as a follow-up to the question on Japan, but Asia in general, are you seeing traction in Asia coming from one specific product or across your product portfolio?

It’s a great question. You might think that in Asia customer will buy the entry level products, the lower end of our portfolio. Actually what we are starting to see both in China and Japan, rest of Asia, customers are buying both the Atlas, we are getting orders also for the Poly Pro and of course, the Avalanche. So we see the trends moving more to the high end also in Asia.

Great. That's helpful. And maybe as my follow-up question. Your services revenue had a really nice uptick both on a quarter-to-quarter and year-over-year basis, should we look at that as kind of the new run rate or will things kind of I guess normalize itself back into the $4 million plus range on a quarterly basis?

Generally speaking, it's still going to be lumpy before – it’s really going to be a big business. For the second quarter, we expect more or less same level of revenues from services.

Okay. And then maybe as a final just as a follow-up to that response. In terms of services, I understand some of the lumpiness that comes on a quarterly basis, what are some of the key longer-term growth drivers that will continue to drive services higher? Is it just simply growing the installed base? What other avenues are there that gets it to the $6 million or higher revenue level mark on a quarterly basis?

So we are changing the entire way we are approaching our service, we call it a customer empowerment program, starting with making sure that the customer are in contract versus time and material. So we see a growing attach rate of contracts to every sales that we are doing. We see conversion from customers that are on time and on material into contracts and by that you will see higher revenues coming to Kornit. Also, we are focusing on providing training, business development activities, and upgrades to our installed base, which will also – will flow the revenue into the service business.

Great. Thanks a lot guys.

[Operator Instructions] We will take our next question from Greg Palm with Craig-Hallum. Please go ahead.

Hi, guys. This is actually Danny Eggerichs on for Greg today. I was just hoping you could – the new customer events you've been doing have seemed to be really good. I was just hoping you could kind of give us a feel on like new interest that you’ve seen from that or opportunities in the pipeline that you've seen resulting from those new events?

Yes. So the open house is an opportunity for customer to have a first look into the technology, to touch the technology, to test it and to speak to the experts that are on the technology both on the application side, on the R&D side, and of course, we have all service and sales team there. We see actually in the open houses that we had both in the U.S. and Europe and Asia mix between net new to existing customers. I would say roughly 70% of the audience are net new account that are coming there and 30% our existing customers that are coming and looking on new technologies that they would like to add to the current solutions that they have.

Okay, great. That's really helpful. And then just the last one here, any update on any changes in the competitive landscape in general in Q1 here?

Not major updates, I would say again, but our main competitor is in the DTG, and the screen, the screen market 99% of the impression are still being printed on the screen market on the analog and this is what we need to go after. This is what we need to focus on. How can we convert those impression into digital? Within the digital market and DTG, we are by far the market leader and with the latest technology, we will continue to lead this market.

Okay, great. Thanks guys.

Thanks.

And we will take a follow-up question from Jim Ricchiuti with Needham & Company. Please go ahead,

Yes. I was just wondering – thank you. I was just wondering if you can provide any early color on Atlas utilization or the consumable usage. I'm curious what you're seeing from the early customers that have been using the equipment.

Well, it's a bit early to talk about it, but a good indication is the announcement about DTG to go, but we are better sized. We tested the system and later on decided to add another 10 units. We can see few more customers that bought the first unit and really less than one-month later, two months later I decided to buy the second units. We just posted a video on Linkedin, you can see a testimonial of the customer from UK, T-Shirt & Sons is talking about the latest Atlas that he acquired both the first one, he was part of the beta and recently, they bought the second one. I think the best to hear it from the customer just go Linkedin and look for it.

Okay. Thanks a lot. Congrats on the quarter.

Thank you.

And we will take another follow-up question from Brian Drab with William Blair. Please go ahead, sir.

Hi. Just wondering if you could just comment a little bit further on opportunity with some of the larger brands. And do you have a sense for whether the Poly Pro or the Atlas might be your first foot in the door with one of the big brands?

Yes. So thanks for that Brian. So we have few brands, I would say the leading brands of the world that's currently are testing both the Poly Pro and the Atlas. We have great focus with few of them. One of them was already in a pilot, live pilot in the market, the others are still in a different stage of testing and evaluation of the system. We are getting great feedback. We are working with them very, very closely and it looks very promising.

Thanks. And then Guy, this is just to clarify for everyone, when you report percentage of revenue and we think we know – if someone thinks they know which number applies to Amazon in terms of percentage of revenue in your slides. Would that number be reported net of warrants, meaning that the warrant impact would be taken out of the numerator and denominator in that calculation?

Yes.

The answer to that is yes, right. I just wanted to share with you.

The answer is yes.

Okay. Because that's material if the number was 7% of revenue, you're going to get a single-digit level of revenue, but warrants or you add back a 1 million to that. So it's a significant…

Exactly. If you would like to know what was the real number of business with Amazon this quarter, you actually have to take the global customer and from customer concentration. You have a percentage. Do the percentage from revenue net of impact and then add a 1 million.

Okay. Thanks for clarifying that.

Thanks Brian.

And it appears there are no further questions in queue at this time. Mr. Samuel, I would like to turn the conference back to you for any additional or closing remarks.

Well, thank you for joining today's call and we appreciate your continued interest in Kornit. We are pleased with our continued success as we look to drive long-term shareholders value. I want to thank all of our employees for their hard work and dedication to this exciting time for Kornit. I look forward for speaking with all of you on our second quarter call. Thank you very much.

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