Good morning, ladies and gentlemen, and welcome to the Kornit Digital Second Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, August 7, 2024. I would now like to turn the conference over to Mr. Jared Maymon, Global Head of Investor Relations. Please go ahead.

Thank you, operator. Good day everyone, and welcome to Kornit Digital's second quarter 2024 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel; and Lauri Hanover, Kornit's Chief Financial Officer. For today's call, Ronen will provide comments on the second quarter of 2024. Lauri will then review the second quarter numbers and provide our third quarter outlook before we open it up for Q&A. Before we begin, I’d like to remind you that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other US securities laws will be made on this call. These forward-looking statements include, but are not limited to statements relating to the company's plans, strategies, projected results of operations or financial condition and all statements that address developments that the company expects will occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by the forward-looking statements. I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's Annual Report on Form 20-F filed with the SEC on March 28, 2024, which identifies specific risk factors that could cause actual results to differ materially. Any forward-looking statements are made currently and the company undertakes no obligation to publicly update any forward-looking statements, except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings release published today, which is also posted on the company's Investor Relations website. At this time, I’d now like to turn the call over to Ronen. Ronen?

Thanks, Jared. Good morning, everyone, and welcome to our second quarter 2024 earnings conference call. Today, we reported revenue of $48.6 million and an adjusted EBITDA margin of negative 3%, which is within the guidance range we provided in May. I am pleased to announce that we generated positive cash from operations in the second quarter, marking our third consecutive quarter of positive cash flow. The year-over-year boost to our EBITDA and cash flow reflects improved efficiencies from the cost-saving measures we implemented over the last several quarters. During the second quarter, we again saw growth in impressions and consumable, supporting our view that our customers continue to utilize available capacity. This growth is driving our ability to improve our results and stabilize our business in the second half of this year. Despite the macroeconomic environment remaining unstable and delaying investments in capital equipment, we are witnessing a pivotal shift to on-demand production in the fashion industry, speed, on-time delivery and an increase in the variety of SKUs are becoming crucial. At Kornit, we are not just adapting. We are leading. Our innovative solutions are designed to help our customers succeed in these dynamic times. Two of these groundbreaking solutions are the AIC model and our recently released Apollo system. The Apollo continues to be well-received in the market, driving significant improvements in productivity and total cost of ownership. It is regarded as the best solution for replacing screen printing in mid-sized runs. In Q2, we received several additional orders for Apollo's with four specifically ordered through our AIC model. The pipeline for 2024 is robust with both AIC and CapEx deals, and we are actively working on our pipeline for 2025 with new and existing customers. We believe the AIC model is a game changer for our customers and…

Thank you, Ronen and good day to everyone. Second quarter revenues were $48.6 million within the guidance range of $47 million to $52 million we provided in May. This quarter consumables contributed to year-over-year growth, while systems and services sales declined as expected. Moving to margins. Second quarter non-GAAP gross margin was 48.6% compared with 36.1% in the same period last year. The year-over-year improvement is once again primarily attributable to a better mix between comparatively higher margin consumables and systems as well as reduced fixed costs due to our restructuring efforts. It is important to note that the second quarter margin also benefited from the conclusion of the first tranche of our warrant agreement which covered purchases of $250 million in existing products and services by our largest global strategic account. As such, this quarter did not include an impact from expenses related to those warrants. Per this existing agreement any purchases of products and services categorized as new business up to $150 million would be eligible for warrants. Looking at operating expenses. Total second quarter non-GAAP operating expenses were $28 million, a decrease of $6.1 million or 17.9% from $34.1 million in the same period last year. The reduction in expenses reflects our cost savings and restructuring initiatives including a meaningful workforce reduction, consolidation of facilities and a phasing out of our legacy platforms. Also remember that the second quarter last year included significant marketing expenses associated with our participation at the ITMA trade show, which did not repeat this quarter. Lastly this quarter's operating expense includes an allowance for doubtful debts of approximately $1.5 million related to a North American customer that filed voluntary petitions under Chapter 11 of the US Bankruptcy Code. Despite this event we continue to target full year 2024 non-GAAP operating expenses to…

Thank you, Lauri. Operator, now we are ready to take questions from the audience.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Mr. Greg Palm from Craig-Hallum Capital Group. Please go ahead.

Great. Thank you. Hey, everyone. Thanks for taking the questions here. Maybe starting with AIC model, if you could maybe just give us a little bit more of an update on progress you're seeing with Apollo, but more importantly, what gives you confidence that moving this to Atlas is the right decision? And does this mean you're now maybe broadening out this program with certain potential customers type of customer that you maybe weren't expecting to do this initially with?

Thank you, Greg. The AC model is a game changer for this industry. To remind everyone, we were targeting with this program to penetrate new markets and bring incremental volume into Kornit. And the initial feedback that we are receiving from customers are very encouraging. As of today, we -- as Lauri mentioned, we have signed on multiple Apollos, we are planning to deliver about 15 systems this year out of this 15 systems, 10 Apollos will be on the all-inclusive click. What we hear from our customers is that they see massive benefit for this program. First of all, it removes the barrier for entry. They don't need to invest the large amount for capital investment in the beginning. They can allocate this investment to other stuff, aligning their expenses with revenues and provide predictable unit economics. Also, there is a massive benefit for Kornit. It clears the view for revenues, profitability and cash flow. We expect that each unit that will be on AIC actually will produce more impression and more ink and more revenue. We assume that it will produce about 30% more in terms of impressions versus the CapEx program. Think about it, the tenfold that we are going to install this year, each one of them is going to generate on an annual basis, a $1 million of revenue. This needs to be taken into account into the P&L starting in Q4 and will be very meaningful for next year. So the feedback that we are receiving is very, very positive, and therefore, we have decided to open it also for the Atlas MAX. The reason why we have decided to open it for the Atlas MAX is because we are meeting many customers that cannot commit to a minimum volume that addressed with the Apollo. Apollo is going after a massive volume and the minimum commitment in some customer is too high. Those customers that they don't have high enough minimum commitment, the Atlas MAX is the right solution. So right now, we have a portfolio of solutions to address different volumes and different type of customers. And again, to remind everyone, we are approaching incremental volume and mainly going after the screen replacement market, which will accelerate the growth of impression and consumable and revenue for Kornit moving forward.

Got it. That's helpful. Appreciate all that. And then just on the warrant situation, just to be clear, you did generate revenue from your global strategic in the quarter, if you could confirm that. But going forward, are you saying you'll only receive or you only have a warrant impact if the purchases are on the new systems. Is that right? Did I understand that right?

Yes. So first of all regarding our global strategic customers, they are growing very, very nicely. We see the growth in impression. We see the growth in of course supplies – consumption of supply. To remind everyone they increased their fleet in 2023 and now we see the results of these growing fleets and impressions. And as I mentioned in the previous call, they also were looking for the MAX upgrade. And hopefully we'll get it sooner than later. In terms of the warrant, the warrant agreement with our strategic customer – our global strategic customer completed the first tranche. And the first tranche was about existing products and it was up to $250 million. And the second tranche is about new products and it's up to $150 million. So if the global strategic account will go and buy new products i.e. Apollos or Prestos, then they will be able to utilize the second tranche. But they continue to grow with the current product as well.

Okay. But to be clear, it sounds like the relationship is still really solid and obviously growing based on what you said for Q2?

Absolutely. Absolutely.

Okay. I’ll leave it there.

Thank you, Mr. Greg. Your next question comes from the line of Mr. James from Needham. Please go ahead.

Hi. This is Chris Grenga on for Jim. You spoke about the Direct-to-Fabric. I'm just curious if you could elaborate a bit more about what you're seeing there and whether you expect upon systems recovering to see any difference in the pace or cadence of recovery between Direct-to-Garment Direct-to-Fabric? If there's any difference there?

Yes. Certainly, there is a massive difference between the Direct-to-Garment to Direct-to-Fabric. Totally different markets and different type of customers. Overall, what we see in the market is that the overall fashion market is moving to on-demand and fashion is choosing on-demand. And this will be also the theme of the event – the investor event that we are going to have. What we hear from brands, retailers, demand generators is that on-time delivery and speed to market is crucial. Variety of SKUs today is crucial. The lifespan of every product is getting shorter and shorter and consumer would like to have more SKUs. So all of it is driving shorter runs. And we also can see production moving from offshore to nearshore and to onshore. This of course reflects both in our DTG Direct-to-Garment business and also in the Direct-to-Fabric business. So on the Direct-to-Fabric, the excitement that we see is actually going after new value applications, which are unique and we can bring huge value to the industry. One of them that we mentioned is footwear. This footwear industry is massive and it's growing and it's very manual and quite analog in the way that it is being produced. We have the potential to disrupt this market. We are working with a few major producers, both in terms of brands and fulfiller or in this market, and there's a lot of excitement. We are in a process to finalize our solution to prove that this meeting, the standard of the industry, and we are planning to launch it and to scale it in the coming quarters. There are other exciting verticals that we are going after. One of them is a technical vertical, another one is home decor. And we are going to deep dive into them doing our investor event in September. Of course, we continue to see the growth also in the fashion. And there, we are focusing specific territories like India, like China, like Peru, Portugal. Those are the producing countries, and we are focusing there. We can start seeing customers really utilizing our system for longer runs, replacing the reactive process and being able to deliver products in a much more sustainable way on time in much faster speed to the market in much larger SKUs, both in terms of fabrics and designs and going into a relative shorter run versus the analog that needs to print only longer runs.

Great. Thank you, very much. And you had reiterated your expectation for revenues in the second half to be up 20%, 25%. So my estimate the midpoint shows that at least if I'm doing this right, Q4 will be a return to growth year-over-year. You had mentioned your expectation for consumables to continue to increase sequentially for the back half of the year. Just wondering, if you could elaborate on the expectation for return to growth in Q4. Is that consumables driven? Is that -- does that also include the impact of all-in click? Just wondering if you could elaborate on what you see there. Thank you.

Yes. So what we have mentioned -- we gave guidance of course for Q3 and we gave indication for the H2. In terms of indication for H2, we mentioned very clearly that we see right now a growth in revenue of about 20% to 25% versus H1. We also said very clearly that we are planning for the full year to be EBITDA positive and to continue to deliver cash flow positive for the coming quarters. So this is in terms of the financials. In terms of the growth that we're expecting, a major part of it will come from the growth of the ink. As usual, the seasonality of our business that H2 is much stronger than H1 and Q4 is much stronger in terms of ink than any other quarter. So you will continue to see the impact of the growth of the supplies both in Q3 and Q4. You should expect to see improvement in gross margin both in Q3 and in Q4. And on top of that, we have a good line of sight for systems that we are going to deliver in Q3 and some of them in Q4. We have an important event in front of us in September which is the Printing United which we are planning to collect as well orders for Q4 -- for the end of Q3 and Q4. And the impact of the All-Inclusive Click of those units that we are installing right now and planning to install during Q3 and Q4, you will start seeing the impact of it in Q4, but the meaningful impact of those units will come in 2025.

Great. Thank you very much. I'll leave it there.

Thank you, Mr. James. Your next question comes from the line of Mr. Brian Drab of William Blair. Please go ahead.

Hi, thanks for taking my questions. I just wanted to put maybe just a slightly finer point on that last discussion and last question around the sales guidance. So, my understanding -- and you've given us enough numbers here to do some math. But if the second half sales are up 20% to 25% from the first half then we'd have that in dollars that's a range of $111 million to a little over $115 for the second half. And you gave us guidance for the third quarter. So, we're looking at a fourth quarter that ranges from $59 million to $68 million. And I just want to make sure that math is right and you're looking at significant step-up in sales from the fourth quarter to third quarter I guess Ronen for the reasons that you just spoke about. Am I doing that math in line with how you're doing it?

Yes, the math is correct. And again I would like to repeat that most of the growth will come from the ink side and less from the system side. Although we will install systems as I mentioned quite a few of them will be on the all-inclusive which we cannot recognize the system when we're installing it. We're of course recognizing over time on the impression on the click being generated.

Okay. Thanks. And then as you go into 2025 you'll of course have this building revenue base from the AIC units that you're putting into the market now and more and then you'll have further orders. I'm just wondering can you make any comment on how you're feeling about as we move into 2025 and that typical seasonal downtick that we see in the first quarter. Or do you feel like you might -- this year, it might be a different dynamic because you have that momentum?

So, it's too early to discuss about 2025. Of course we are going to share our longer term view at the event. In a month from now, we are going to share with all of you how do we see our longer term view in high level and we are going to get into the detail of the all-inclusive and how do we see it growing in the coming years. Of course the intention is to move more into recurring into a SaaS-based model and you will start seeing the impact beginning of 2025. But let's leave it to our investor event, which is going to be an important one, which we are going to share the direction of the business moving forward.

Okay. And then can you just comment on because I think this is so important how are you seeing the business develop across -- for the Apollo and with the AIC across historically companies that only do screen printing and only use analog screen printers historically? And are you getting their attention more? And can you maybe give us an example or a couple of examples of where that's working?

Yes. So first of all, the answer is absolutely. We already closed with few traditional screen printers, some of them with no digital experience. And we have a very strong pipeline moving forward with screen printers, which are first being introduced to digital. They heard about it, but they don't -- they didn't think that the quality is there the productivity and of course the initial cost of the investment. Now that our technology, the Apollo, the MAX technology, meeting the needs of quality, first of all of the market actually surprising in terms of quality versus the analog. The screen in many, many fabrics and many design like photographic design, we're doing a much, much better job than screen. And on top of that, the productivity is reaching to totally different limit. And the run lengths are getting shorter. And with this machine, you need only one operator. It's starting to make a lot of sense to those screen printers. And we see a really good reaction and interest. And almost every door that we are opening is a door that we have a potential to close. Many of them will come to the event, the investor event. We will have a panel also with customers. So some of them really moving volume from the analog, to digital, to Apollo. So Apollo is a game changer both in terms of manpower -- it's only one operator to run the system -- both in terms of TCO and productivity and quality. And now combining with the AIC model, we really reduced the last barrier. And the intention as you know, we mentioned on previous calls that this year, we are going to deliver 15 systems. Next year, we are planning to double the number of systems of the Apollo into the market. We're already collecting orders for 2025, and it looks very, very good. So the issue that I see right now is not the demand. We need to ramp up. We need to make sure that the product deliver, what is promised to deliver. At this stage, it looks fantastic.

And I just want to also just close with my questions by just saying, congrats on -- and you're sensitive to using the name of the global strategic, but it's mentioned 100 times in these warrant agreements. But -- like some people may have lost track of this, but congrats on hitting $400 million in cumulative sales to Amazon. As Greg, I think alluded to it -- I get questions often on -- regarding how your business, with the global strategic customer is. And that's a real milestone. So congrats on hitting $400 million.

Thanks very much.

Thank you very much -- your next question comes from the line of Mr. Erik Woodring from Morgan Stanley. Please go ahead. Q – Erik Woodring: Thank you very much for taking my question. I just have two, maybe to touch on a number of the questions that are focused on 4Q here, again, just to be even more specific. I think Ronen, what you're guiding to is perhaps roughly 14% year-over-year growth at the midpoint in the December quarter and an adjusted EBITDA margin of low double digits. Obviously, a significant improvement from recent performance especially in the context of effectively since ITMA guiding below consensus. As we sit here today, I guess, why should all of us on the call, whether we're covering analysts or those that are following the company look at that guidance and say, we believe and we have confidence in that guidance? What can we take away from your comments that help us gain guidance in that commentary, and that 90 days from now, we won't be talking about further macro issues and an additional guide down? And then I have a follow-up. Thanks.

No, it's an excellent and direct question. The way I will put it is as follows. Look, we went through a very tough two and half years, a big change in our market that we were addressing. We were addressing mainly the customized design. This was most of the business of Kornit, Kornit business today on top of the customized design. But finally, the utilization getting to a different level, we are addressing totally new markets if it's the fashion, if it's the screen replacement, if it's the sports, home decor, et cetera. But you know what? Let's talk a bit about this year, the past versus talking about the future. And maybe it will be confident. So what did we say in the beginning of the year? In the beginning of this year, we said that we are going to deliver 15 Apollo's this year. We are spending now and we have full confidence that we are going to deliver it. It's a breakthrough product, and we are already focusing on collecting orders for 2025. This is the most disruptive product that's ever been in this market. What else we said? We started talking about AIC model in the beginning of the year. I remember, there was a lot of confusion. And we said in the beginning that maybe 7 out of the 15 system of Apollo will be on all-inclusive. Now, we can say that probably 10 or more of the Apollo's that we are delivering this year will be on all-inclusive. And it's so successful and we entered into new markets, an incremental volume that we are opening to the Atlas. We said very clearly in the beginning of the year that, we continue to cut costs and our OpEx is going to be in the range…

Thank you. That was an honest answer. And again, my feedback is you're right. A lot of what you said you would deliver you are delivering on. And so I just want to make sure that the expectations have not been set too high to -- so maybe mask all of the progress that you have made this year. That was the point of my question. Maybe just on a follow-up. Just in terms of the buyback I realize you'll save most of the details for -- on capital allocation for the Investor Day on the 10th of September, which I think we're all looking forward to. Can you maybe just help us understand maybe mechanically just the timeline that it will now take to go back to the Israeli courts get some form of approval, I'm not asking necessarily for how much you would increase your authorization by or how your capital allocation plans will change but simply the process of getting that authorization if there's a timeline that we can think about at least initially so we can all maybe make estimates that maybe we'll get updated on September 10. And that's it for me. Thanks.

Okay. Hi, Erik. Let me take that question. So, first of all, our existing repurchase authorization expired during the second quarter as I mentioned. And with the new regulations, there is no longer a need for court approval. All other elements of the regulation remain. We still have a notification a 30-day notification period, et cetera, et cetera. So we are now navigating this process. And as you noted we will be looking forward to share with you a more comprehensive capital application strategy in September.

Okay. Fair enough. Thanks so much and good luck guys.

Thank you.

Thank you, Mr. Erik. Your next question comes from the line of Mr. Chris Moore from CJS Securities. Please go ahead.

Hey, guys. Thanks for taking a couple of questions. So maybe get back to AIC for a moment. So, $1 million in annual revenue on the Apollo. Any -- can you kind of give a reasonable gross margin range for that $1 million minimum?

So, the intention, first of all, to share more information on the all-inclusive in our event in September. What you can assume is that we build the model in such a way that our gross margin will be at least as good as the CapEx model if not better. So you will see the results of it during the meeting during the investor event.

Got it. That's helpful. And in terms of the AIC with the ATLAS MAX is there a revenue a minimum revenue number associated with that?

Yes, of course, and we will share it at the event. As we are starting the pilot right now I prefer to keep it confidential at this stage. We will share it at the event in September.

Got it. And in terms of the kind of the customer profile you walked through that with the Apollo AIC. Is the typical customer that you're approaching on the MAX AIC, is that much different from the Apollo? Is that more -- even more as interest rates come down is that going to be less of an issue since the cost is not what the Apollo is? Just trying to understand who you're talking to there?

Yes, it's different. Of course with Apollo we are addressing -- focusing on big screen printers and big retailers that they have massive volumes that they need to move from analog to digital, because they're getting shorter and shorter runs and they need to deliver them in speed to the market. We are talking about hundreds of potential customers for the Apollo. With the ATLAS MAX, we are targeting smaller screen printers that they might have two or three cover sales only, and they would like to move some of the volume or the entire volume into digital again to meet time to market, speed, quality and better ROI and with much less manpower. There we are talking about thousands of potential customers. So this is the differentiators. And we will again provide much more details on the event in a month from now.

Got it. And I'm guessing this last one falls in that category as well. But just -- obviously the model is changing to more and more recurring revenue, which is a great thing obviously with the AIC. Is there a target range in terms of recurring revenue or percentage of overall revenue a couple of years out?

We will share more details on the event. I cannot share it right now. Of course, we have targets internally and we have model internally, and we will share a high level of the model with all of you.

Fair enough. All right. I appreciate it guys.

Thank you very much.

Thank you very much, Mr. Chris Moore. There are no further questions at this time. I'd now like to turn over the call back to Mr. Ronen Samuel, Chief Executive Officer for final closing comments.

Yeah. So first of all thank you all for joining today's call. Before we disconnect, I would like to remind everyone again and to give the attention to the announcement we just released this morning and on this earnings call relating to the investor event in September 10th in Vegas. We have a great day planned there with a lot of details. We're going to discuss the market situation, how do we see the market moving forward, our go-to-market strategy, capital allocation, AIC and much, much more. We really hope to see you there. It will be beneficial. There will be many of our customers. There will be panel with key customers with the main generators. We're going to talk about future technologies. So please if you can join us by person please join. If not be on the call. It will be an important day. Looking forward to see you all. Thank you for your questions.

Thank you, Mr. Ronen Samuel. Ladies and gentlemen, this concludes our conference call for today. We thank you for participating and ask that you please disconnect your lines. I hope you all have a great day ahead.