Greetings and welcome to the Kornit Digital Limited First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to our host Kelsey Turcotte. Thank you. You may begin.

Thank you operator, good afternoon everyone and welcome to Kornit Digital's First Quarter 2020 Earnings Conference Call. Before we will 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 based on assumptions that are subject to known and unknown risks and uncertainties and could turn out to be incorrect, which could cause results to differ materially from those expected or implied by the forward-looking statements. 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 23, 2020, 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 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, Kelsey. Good evening and thank you for joining us on this afternoon earning call. I want to start by extending our thoughts and prayers to everyone who has been impacted by COVID-19, and wish all affected a safe and healthy recovery. After weeks of uncertainty we are enthusiastic to see many countries progressing on the exit plans and business activities picking up. At the start of the pandemic, we acted decisively to ensure the safety and health of our staff while maintaining business continuity. Our manufacturing sites and R&D labs continue to operate in staggered shifts. Our service teams continue to work closely with our customers and our global stuff shifted to work from home where needed. On the community front, we actively partnered with manufacturers and large brands for production of protective personal equipment, with the use of our inks and our systems. Overall, I'm very proud of how well our team handled this incredibly stressful period. At this point, all our manufacturing and R&D sites are fully staffed again and our experience center are open, operating in line with safety guidelines of the local authorities. While Q1 results of total revenue of $26.8 million, including 564,000 of warrants related to global strategic account we present the immediate and short-term impact of the pandemic on our business. We are already witnessing a very strong recovery path back to growth. I want to share with you our view of the industry. What we have seen over the past weeks, our readiness to execute and how we expect the balance of the year to look. This crisis is fundamentally changing behaviors and how the textile industry is looking at both demand and supply. And we believe this is an inflection point in the continued adoptions of digital textile production.…

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 a non-GAAP pro forma results. Our first quarter non-GAAP pro forma results reflect adjustment for the following items: stock-based compensation expenses, which totaled $2.1 million; total amortization expenses relating to the acquisition of intangible assets in the amount of $160,000; and non-cash deferred tax benefit in the amount of minus $764,000. Adjustment related to the COVID-19 pandemic are non-cash inventory adjustment of $207,000, warehousing expenses of $37,000 and marketing expenses of $11,000. As the Company has significant operating lease liabilities in foreign currencies, the Company incur foreign exchange gains or losses from the reevaluation of these liabilities. These gains and losses may vary from period to period and do not reflect the true financial performance of the Company. This quarter, foreign exchange gains associated with ASC 842 were 610,000. A full reconciliation of our results on GAAP and non-GAAP basis is available in the earnings press release issued earlier today, and on the investor section of our website. First quarter revenue, net of 564,000 non-cash warrants impact was $26.2 million, a decrease of 32.1% compared to $38.6 million in the prior year and 46.1% sequentially. First quarter business decreased 31.6% and 46.2% over the prior year period and the prior quarter respectively. Top line results were impacted by delayed orders, as a result of the COVID-19 pandemic. Services revenues for the first quarter were $3.8 million and net of 126,000 warrants impact, accounting for 14.6% of total revenues, a decrease of 39.7% from the prior year period. The amount attributed to the non-cash impact of warrants in the first quarter was 564,000 or 2.1% of revenues compared to 560,000 or 1.4%…

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

Thank you. Ladies and gentlemen, at this time we'll conduct our question-and-answer session. [Operator Instructions] Our first question comes from Patrick Ho with Stifel. Please state your question.

Thank you very much and glad to hear that you guys are doing well. Ronen, maybe first to start-off on the impact of COVID-19 on the March quarter, and what you may be see on a going forward basis? It's a good sign that you're saying that orders are starting to pick-up now in the June quarter, which will be delivered through the rest of the year. Are there any constraints on your end still on the supply chain or even on the manufacturing front that may limit you both in the June quarter -- over the next couple of quarters?

Thanks for the questions. We don't see any constraints on manufacturing side, all our manufacturing sites are fully operational, ready to deliver. We have enough inventory to supply for the Q2 and we are ready do supply, to produce for the peak season and for H2. We don't see any limitation.

Great, that's helpful. And as my follow-up question on some of the long-term trends that you talked about in your prepared remarks, on how they are accelerating. Can you discuss especially, with some of your new products and the traction with new customers? You obviously have gotten good traction with existing customers on some of your products like the Polypro and the Presto with existing customers. Can you discuss, I guess the traction you're making with new customers, especially as it relates to the pandemic? Do you feel some of those evaluation works have been pushed out somewhat? Or are you already starting to see a pick-up once again?

So we see a mix between strategic account, existing customers and new customers. And as you know, we are focusing on three main segments, their own demand, the customized design segments, the brands and retailers and a promotional, we are engaged with new brands and retailers, helping them to change the supply chain, helping them to move into on-demand manufacturing. And I hope that later this year we will be able to publish some -- few names in this area on the -- on-demand side. In the customized design, we see many customers that used to build the screen market moving into the online business, into the on-demand manufacturing. And we see it, both in the all-to-all in the direct-to-fabric and in the DTG market. We see a very strong adoption for our latest technology, the Atlas is by far the best product in the market. As of today, we have a huge demand for the Atlas both on strategic accounts and new accounts as well. The Presto is, I would say, the biggest surprise for the Kornit. We as by far the best pigment inks technology on the Presto, and we see a very good adoption for this technology for the overall solution, with a great adoption across the world and specifically North America, EMEA and Latin America. As well as I mentioned the Vulcan, we launched early this year, we see a very good adoption on that, we see customers buying the secondary machine and even more than that. So overall, the portfolio is very, very strong. At this period of time, we also -- during the pandemic, we took the leverage and continue to invest in R&D in the development to strengthening our -- continued to strengthening our leadership position and we believe that we opened a bigger moat [ph] compared to the competition. And we are ready to capture the opportunity moving forward.

Great. Thank you very much.

Our next question comes from Brian Drab with William Blair. Please state your question.

Hi, thanks for taking my questions. Just hearing your outlook makes me actually feel a little better about the whole pandemic, to be honest. This is a market that I thought was going to take a little longer to bounce back. This is great news today. And I just wanted to start by asking this activity that you're seeing and expecting for the second half of the year, is that driven more by customers resuming previously planned activity? Or are you seeing new customers with new programs, maybe stimulated by the pandemic or response to the pandemic like change in behaviors?

Great questions. That's -- there is actually mix. As we mentioned in Q1, we were very optimistic when we entered to Q1, because we knew about a few big projects that we started to work with our strategic customers and then the pandemic arrived, and then many of them decided to delay those projects. And now we are very happy to share that, they re-engage and actually some of them placed already the orders. So we will see some of the orders getting inside into Q2 and some of them into H2. Those from the strategic account -- from our biggest strategic account. So those are significant order, as I mentioned, both for Q2 and for H2. On top of that, we have a key account, and new accounts that we already got orders in Q2 and some accounts that we know that they are gearing up for the peak season. Our peak season is starting in October and many of them are preparing themselves in June, July orders. So we are preparing for that as well. We can see customers that they are reopening their site. We can see the print volume going up, some of -- many of our customers that are playing in the e-commerce market already for weeks in peak season, they are saying, that the peak season that they used to see in -- during December, they already filling it for few weeks and is a great indication moving forward also on the supply side.

All right. So Ronen, in that answer, I think you did say that you are seeing some new accounts and did you even say that you're developing some new key accounts? Did I mishear that?

Yes. Yes, some new key accounts, are relatively small and now really ramping up very quickly with multiple system, echos the DTF and the DTG.

Okay. Is the lack of professional and sports in general weighing on this industry quite a bit? Or do you think that's not a major issue?

It is an issue in a short-term on the customers that are playing in the promotional space. So we can see traditional screen printers and mainly small customers, they are suffering the most. But as I mentioned, many of them are changing the business model into e-commerce. Most of our business is with -- the customized design, in the online. And they are actually accelerating the business those days, and the brands and the retails understand that they need to change the business model, understand that they need to move to proximity production. They're asking us to engage them with our customers and so we will see a major growth coming from the retails and the brands as well.

Okay. And then one last quick one, your global strategic customer you mentioned ambitious growth plan, that included North America, Europe, Asia. Is that -- is it, did anything change there? Are you -- did you mean that, indicate that maybe that plan is more ambitious now? Or has accelerated or/are you just restating that you have a great relationship and that they have that plan?

So, as you know, we cannot be very specific about the business with our global strategic account. If we mention it in my script about ambitious growth plan is probably -- is a plan that are going to be executed in the coming quarters and it's a significant growth plan.

Okay. I'll leave it there. Okay, thank you.

Our next question comes from Peter Zdebski with Barclays. Please state your question.

Hi this is Peter on for Tavy Rosner. Thank you for taking the question, I hope you all are well. Could you help us understand almost -- the almost 50% sequential decline in Q1 when most of the quarter was intact outside of China compared with a strong rebound in Q2, where we had more widespread shutdowns. Was a large portion of shipment set for later in the first quarter that got postponed. And if so, should we understand that the majority of those will be pushed out and realized in Q2?

So the nature of the business in Kornit is back-end loaded in the quarter. It's not unique to Q1 2020. We see almost every quarter. And the main impact was actually delayed in orders in the second half for most of March. As far as we know, we haven't lost any deal to competition. We expect most of those deals to return throughout 2020.

Great. Thanks. And then could you give us some color on how you see the COVID-19 pause impacting the service and consumables business growth? And how quickly that might rebound or how do you see that rebounding in 2H onwards?

So in the short-term, there were some impact because there were some site that were closed across the globe. But longer terms now, we see that they're reopen. We see that they are ramping up both on the supplies and working around the clock, some of them, of course, ordering new system. So we expect that the service business will be breakeven by Q4 2020. By end of this year, we will move to breakeven and it will continue to be positive moving forward.

That's helpful. Thank you.

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

Hi, thank you. Just a point of clarification for me. When you referred to a global strategic account and a global strategic customer, are we talking about one in the same customer or two customers?

The same customer.

Fine, thank you for that. Just with respect to some of the push-downs that you saw, I'm wondering, how much of it was the fact that facilities, customers were reluctant to have you guys install equipment and facilities as opposed to concerns about the overall level of demand you might see?

Can you repeat the question, that the line was not clear.

I'm sorry. I guess when you called out the fact that this were [indiscernible] quarters. Was it a case of those customers being sensitive to the fact that, in the minutes of the pandemic, they didn't necessarily want you install at that time because pandemic or the concerns about -- and in the near -- now has changed somewhat?

So it's again, something a mix. I would say that in beginning of March what we have seen, we have seen a total shock in the industry, okay? People just decided to pause for a second to see where the -- what's going on in the world, what's going on in the industry. And the last thing that they wanted to do now is to invest. So they didn't know what will be the result of this pandemic. A few weeks later, beginning of April, they understood that actually the pandemics is accelerating the e-commerce and accelerating all the trends that we were talking about. And they found themselves opening the sites -- reopening the sites and working around the clock 24x7, and starting to ask us, can you ship us more system, in order to meet the demand that they're facing. So it's a combination of shock, it's combination of that they were forced to close sites. But immediately few weeks later, they started to reopen and produce around the clock.

And Ronen, you mentioned that if I heard you correctly, that Presto is -- has emerged as perhaps the biggest surprise. From a standpoint of surprise, can you give us a sense as to either help customers, now have this equipment or how many machines thus far this year have gone [ph] down?

We cannot share how many machines, I can tell you that it's surprising the targets that we put in front of us. What we can see, we can see some big projects moving into on-demand manufacturing, leveraging our Presto solution, as the micro factory for on-demand manufacturing. And we see those projects around the world and some massive projects. And those massive projects, I'm not talking about one systems, I'm talking about multiple systems in each site.

But it sounds like these would include machines that are going to multiple customers?

Yes, it's multiple customers but some of those customer with huge potential of multiple machines.

Thank you.

Our next question comes from Jim Suva with Citigroup. Please state your question.

Thank you very much for the details thus far, it's been very helpful. I have a couple of follow-ups. On your slide entitled, well positioned. The last bullet, you talk about, we believe the market is now moving more decidedly in our direction and we are ready to execute. Can you help us understand about why that type of a statement you have a confidence forward or indications? It seemed like the market was kind of going digital-printing steadily, but now you kind of throw an additional color of more decisively in your direction and things like that. So, just kind of curious about anything behind that, that we should think about. And then I have a few follow-ups.

Yes. Thanks for the questions. So you know that for few years we were talking about changing the supply chain, moving into proximity production, e-commerce was booming. We were talking about this on-demand manufacturing with few of our customers are doing it. We were talking about the trends of sustainability. All those were megatrends that we were talking about. But what we've seen in the last few weeks due to the pandemic that it's become, we saw an inflection point to the textile industry. The textile industry understood, and you see what's happened in the retail market, retail market is really fully shut down, they understood that they have to change the way they are doing business. They cannot have any more massive inventory and write-offs, and they have to move into more sustainable way, into more agile way of production, and this require to move into digital. And we see that the brands and retails moving to proximity production, and they are engaging with the customers, and we also getting some substantial orders with new customers which prove that, we are in a different age of this industry.

Great. Then my follow-up question is, on your prepared comments, I may have heard it wrong, but, did you mentioned you had some write-offs, and was that for this period or last or a year ago? And was that inventory or accounts receivable or any details on that?

We mentioned that we had some write-offs, when we discussed. Our gross margin, it was related to inventory and it was in Q1.

Okay. And does that inventory, that might end-of-life inventory? Or it seems like with the economy coming back, you could -- there is a market for it or was it like specially configured or designed or how should we think about -- is it totally gone or is there a chance that you could actually resell it or the concern of more risk of more write-downs?

Due to less revenues this quarter and less demand this is actually an accounting treatment. We expect due to shelf life, that this inventory will not come back, obviously. If demand is going to come back faster than expected, then this inventory will come back to life.

Okay. Then my last question; professional sports, when we think about all the fan gear, hats, T-shirts, all these things. Is that something you're closely monitoring and you are -- we need to be mindful of that coming back in the second half of the year?

So we are working very closely with few big brands. Of course, we announced about the partnership with Adidas. Some of our customers are really focusing on this segments, and we are developing some new solution in our labs, that will be focus -- that are focusing on capturing the opportunity in the professional sport market. We will be -- we believe that in H2, we will see this market coming back and we will be ready to capture it.

Thank you so much for your details and clarifications. It's greatly appreciated.

Thank you.

Our next question comes from Chris Moore with CJS Securities. Please state your question.

Hey good evening guys. Yes, really, really helpful call. Just wanted to talk a little bit, you talked some on it Ronen, on the Vulcan. I'm just trying to understand kind of this, the acceleration towards the inflection point obviously Atlas, Presto, Polypro key systems. Does the thinking in terms of the Vulcan, does that ramp up further as well, kind of given that this --the whole movement that we're talking about?

Yes, actually the Vulcan, the value proposition of the Vulcan is suited mainly for customers, that focusing on the mid-run length to long-run length, okay? Versus the Atlas that is -- more focuses to short runs, for customized, for one-offs. So there is a different value proposition to those products. The Vulcan is more focused, if you're looking at the vertical market, is more into the retail, into the brands, while the Atlas is more into the customized design segment. So now that we are starting to enter in a bigger way to the retail market and to the brands market, we see a better adoption of the Vulcan in those markets.

Got it, helpful. Thanks, guys.

Thank you. Our next question comes from Greg Palm with Craig Hallum. Please state your question.

Yes, thanks. I appreciate all the color and glad to hear you guys are doing well. Starting-off, I think it was, I don't know, because you Ronen or Guy who had mentioned, peak season like volume that some of your customers here recently, which presumably should bode well for consumable sales. Could you talk about growth rates for that segment, maybe not specifically, but just directionally given everything on and what are your expectations for the year then?

So we are not breaking down the growth rate on the supplies versus the hardware at this stage. But as I mentioned, those customers that are -- in the customized design, in the online, they are already in peak season for few weeks. And we see big consumption of inks coming from this vertical. We also see a very, very nice growth on the DTF side. On the Presto, we see very, very high consumption there as well. So we expect to see the impact on the supplies in H2. And on top of the growth that we see also in the system side.

Got it. So no way to talk specifically at least directionally on maybe growth rates in Q1 or the first half? I just want to make sure the comments about...

Overall -- yes, overall, we gave some indication. Again, we don't want to give detailed guidance. The indication is that the Q2 will be at least 30%, you will see at least 30% growth versus Q1 -- sequential growth in Q2. In H2, we will -- you will see strong single-digit growth H2 versus H2, so H2 2020 versus H2 2019. And we expect gross margin to be in the same range of last year in H2 and operating profit -- a positive operating profit for the year.

Great. Yes, that's really helpful. And then Guy, just following up on gross margins here in Q1, are you able to maybe quantify the impact from the inventory write-off? And then the negative mix, was that specifically among products? I would have thought there would have been positive mix overall due to higher proportion of consumables relative to product and service but maybe I missed some.

Yes. So in terms of scales, we actually mentioned three points. The first one was the decline in revenue which was predominantly the number one reason. The second one was mix, and when we say mix, it's system mix. We're not addressing mix between ink and consumable and systems. But this quarter we saw less favorable mix in the systems. And the third one was inventory write-offs.

Great. Okay, makes sense. And then I'm just kind of curious how you're thinking about changes in your go-to-market strategy, with everything going on, I mean trade shows, live events have obviously been an important part of that previously. And nobody knows how long we're -- will be in this pandemic. But are you thinking at all about sort of changes in that with less travel, less trade show going on in the near-term?

Yes, absolutely, and we prepared for that and we are already running it for the last few weeks. We are doing many, many virtual demonstration, live visual demonstration from all our demo centers around the world. With customer sitting on their own site and seeing live demonstration, they're sending out the material in advance, we are selling them the material printed after the demonstration. So they have the full experience. We are planning to bring the experience close to the customers, doing some open houses across North America, Europe and Asia, close to customers instead of doing big trade shows. So those are the type of things that we are doing. We are doing many webinars, to more we have a very important webinar, you're all invited to join the webinar for tomorrow. So there is a lot of marketing activities, but we're moving much more to virtual and it's -- I would say it's very successful till now.

Yes, makes sense. And last one, just for a quick clarification, following up on a previous question regarding your global strategic account. So just to clarify, do you currently support them in all regions, North America, Europe and Asia?

I was talking about it's ambitious growth plan, and I mentioned those three regions I cannot share more information about the current status, if they're playing in all those three regions or it's a new site in those three agents [ph].

Okay, perfect. All right. Best of luck going forward. Thanks for all the color.

Thank you very much.

Our next question comes from Brian Drab with William Blair. Please state your question.

Hi, I wouldn't bother you with one more at this late hour unless I thought it was important. But on the direct-to-fabric market, it sounds like you're reaching an inflection point now with the new Presto. And this is a market that, from the --going back to the IPO slides, it's always been talked about as multiples in size of the direct to garment, maybe like five -- five times [ph] or more of the size. Are you -- first question is, are you now at the point where you can, where you feel like you fully access that market with the products that you have? And second question is, are you introducing more roll-to-roll products this year in the near-term?

Can you just repeat the first question, because you were cutting -- cutting out.

Sorry. I was saying that, first question is, with that the product -- can you hear me now?

Yes.

Yes.

Can you more fully access this very large roll-to-roll market now with the products that you have in place. Or -- then second question is, are you introducing more roll-to-roll in the next version of the Presto is that coming soon?

Yes. The value proposition actually, we are not addressing the mainstream market of the roll-to-roll. The value proposition is really about on-demand manufacturing of very short runs. And due to the market is moving now into proximity production, on-demand manufacturing of really short runs because of the e-commerce. Then -- because of that we see the momentum and we have a very strong momentum as I mentioned. As of -- for the -- regarding development, yes, we are developing new products that will come to the market sometimes, hopefully soon.

Okay, all right. Thanks very much.

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

Just two quick questions. It sounds like on the M&A side you appeared to be still having -- still have an active pipeline and potentially or could be moving forward over the near-term, is that a fair way to think about it?

Correct. Yes, we are very advance in evaluation. And we identified few good candidates. The focus is on the workflow as we mentioned in the past, and really hope that we will be able to announce something soon to the market about M&A activities.

Okay. And Ron, the second question is, and it may not be a fair question, just in light of the global economic environment. But you've laid out remedy [ph], exiting 2023, that kind of run rate of revenues. How should we think about that? Do things get pushed to the right [ph]?

It's a very, very good question, and I would be very, very open with you. We are super committed to the $500 million. Actually, we believe that commit [ph] will be much bigger than $500 million. And obviously due to the pandemic, there might be a slight delay. We might find ourselves sometimes in 2024 instead of 2023, meeting the 500 goal. It's too early to commit on that, when exactly we are going to be there. We are still aiming to bring it as early as possible, but I don't want now to say, what it will happen in Q4 2023. Due to the pandemic situation, I guess that in one quarter from now, we would be able to share more details when are we expecting to reach the $500 million. But if there will be delay, it will be a small delay.

I understand.

Thank you. There are no further questions. I'll now turn it back to management for closing remarks.

So, thank you for joining today's call and appreciate your continued interest in Kornit. I want to thank all our employees for their hard work and dedication through this unprecedented time and I look forward to speaking with all of you throughout the quarter. Thank you very much and good evening all.

This concludes today's conference. All parties may disconnect. Have a good day.