Kornit Digital Ltd. (NASDAQ:KRNT) Q3 2023 Earnings Call Transcript November 8, 2023
Kornit Digital Ltd. beats earnings expectations. Reported EPS is $-0.07, expectations were $-0.09.
Operator: Greetings and welcome to the Kornit Digital’s Third Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Jared Maymon, Global Head of Investor Relations for Kornit Digital. Mr. Maymon, you may begin, sir. Please go ahead.
Jared Maymon: Thank you, operator. Good day everyone, and welcome to Kornit Digital’s third quarter 2023 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel; Lauri Hanover, Kornit’s Chief Financial Officer, and Amir Shaked-Mandel, EVP of Corporate Development. For today’s call, Ronen will provide comments on the third quarter of 2023. Lauri will then review the third quarter numbers and provide our fourth quarter outlook before we open it up for Q&A. 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 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 30, 2023, 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 financial 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 would now like to turn the call over to Ronen. Ronen?
Ronen Samuel: Thanks Jared, and thanks everyone for joining us on today’s call. Before we go into our third quarter results, I would like to take a moment to address the situation in Israel. I’m sure most of you are aware of the horrific events that have taken place in Israel over the past several weeks. I want to extend my deepest gratitude for the supportive messages we have received from many of you on this call, letting us know that Kornit is in your thoughts. Your support is greatly appreciated. I also want to stress to everyone that we are committed to the safety, security and well being of our teams in Israel. Additionally, three weeks ago, we sent a letter to our customers emphasizing our commitment to continuity and telling them to expect no disruption in their daily interaction with Kornit.
As of today, I’m pleased to report that the situation in Israel has not materially impacted our business. We have also strategically bolstered our regional inventories to meet customer demands, not just for the upcoming peak season, but also for the first quarter of 2024. As this complex situation continues to evolve, we pledge to remain proactive and implement contingencies as needed. Now, let me talk about our third quarter results. Today, we reported revenues of $59.2 million, which is within the guidance range we provided in August. As a reminder, this includes the impacts of the fair value of issues warrants despite a challenging macroeconomics environment, we continue to see consumable sales growth. Impressions also increased year-over-year, marking our third consecutive quarter of year-over-year impression growth.
We anticipate continued growth in both impressions and consumable sales in the fourth quarter of 2023 and 2024. However, the macroeconomic situation we saw in the first half of 2023 as continue in the second half, constraining system sales in the third quarter as was expected. Despite these headwinds, system sales improved sequentially, as we continue to convert orders from ITMA. We also continue to focus on diversifying our customer base, selling our solution to new customers in key growth regions including LATAM and Asia-Pacific, and accelerating our growth into market segments like screen replacement and retail. We are encouraged to see new key customers leverage our technology in emerging application, which we believe can generate meaningful growth for our systems and inks.
Traditionally, these key customers have used analog technology, but recognize the quality, capabilities and sustainabilities of our digital solutions. Additionally, we continue to see growth in our direct-to-fabric technology as evidenced by Q3 being one of the strongest quarters for Presto system sales. We also saw additional upgrades to MAX in Q3. As customers continue to see the value of our MAX technology which includes enhanced quality, durability and productivity. Following the upcoming peak season in Q4, we anticipate upgrade momentum to resume in 2024. We are seeing strong interest for the Atlas MAX Poly in the sports and athleisure market. In October, we attended PRINTING United in Atlanta where we built additional momentum for this solution.
Our customers are most excited about the system quality and vibrancy when printing on synthetic, natural and blended fabrics. Moving on to the Apollo, Q3 was the first quarter where initial better systems were installed and operational. The feedback we have received from our customers is highly encouraging and we have seen strong indications on systems’ uptime, yield, quality and unit economics. As of today, we have three systems installed in North America and we expect these systems to be fully operational for the coming peak season. We continue to target general availability for the Apollo in the first quarter of 2024 and we are building a good pipeline of existing and new customers. In summary, this quarter we saw a continuation of macroeconomics headwinds.
However, we were able to further diversify our customer base, expand into key textile production regions, and pursue growth opportunities in new applications. Looking ahead, we will continue to take proactive measures to resume sales growth while also focusing on enhancing operating efficiencies across our entire company. Our plan is still to approach breakeven on an adjusted EBITDA basis during the fourth quarter and grow profitably in 2024. Now let me turn the call over to Lauri for closer look to our third quarter financials and fourth quarter guidance. Lauri?
Lauri Hanover: Thank you, Ronen and good day to everyone. As Ronen mentioned, third quarter revenues were $59.2 million within the guidance range that we provided in August. We saw revenue growth in consumables during the quarter both year-over-year and sequentially. Services sales declined slightly year-over-year due to significant upgrade activity from a key customer in the comparable quarter of 2022. As anticipated, system sales were once again lower on a year-over-year basis, but were much improved sequentially as we continued to convert orders from ITMA. Excluding purchases in EMEA from our global strategic account, system sales were up year-over-year. In the Americas, year-over-year growth was driven by strong system sales in Latin America following ITMA.
In EMEA, consumables revenue grew nicely as utilization rose and upgrades to MAX continued. Turning to APAC, sales were flat compared with the same period last year. As Ronen described earlier, we continue to develop a meaningful pipeline of long-term opportunities in this region. Moving to margins, non-GAAP gross margin was 37.4% compared with 35.5% in the same period last year. The year-over-year improvement is due primarily to comparatively higher margin consumables representing a greater portion of total revenues. We continue to expect gross margin improvement for the balance of this year as consumables typically comprise the highest percentage of sales in the fourth quarter. Looking at expenses, total third quarter non-GAAP operating expenses were $31.1 million, a decrease of 15% from $36.7 million in the same period last year and down 9% from $34.1 million last quarter.
This year-over-year improvement in expenses reflects the benefit of our active cost savings efforts, which includes our previously completed workforce reductions. The sequential improvement primarily reflects lower expenses attributable to our participation at the ITMA Trade Show, which, as a reminder was a Q2 event. All of this resulted in an adjusted EBITDA loss for the third quarter of 2023 of $5.6 million, a significant improvement compared with the adjusted EBITDA loss of $10.5 million in the same period last year and the adjusted EBITDA loss of $10.7 million just last quarter. Adjusted EBITDA margin for the third quarter of 2023 was negative 9.5%, again within the guidance range we provided in August, and reflects a substantial improvement both year-over-year and sequentially.
Our cash balance, including bank deposits and marketable securities at quarter-end was approximately $569 million. Cash used in operations during the third quarter was $7.7 million, driven primarily by the operating loss and changes in working capital. Accounts receivable increased due in part to a higher balance of extended payment terms related mainly to converted deals from ITMA. Other prospective customers are being directed to financing partners, including two new partners recently onboarded for extended payment plans. Inventories declined sequentially. We continue to remain focused on improving working capital to drive cash conversion. Since the beginning of the year, we have repurchased approximately 1.6 million shares under our share repurchase program for an aggregate amount of $36.8 million, representing an average price paid per share of $22 97.
The unused balance of our previously announced share repurchase program is approximately $38 million. We plan to be more aggressive in our repurchasing efforts given our current enterprise value. Turning to fourth quarter guidance as we discussed last quarter, we continue to plan to approach breakeven on an adjusted EBITDA basis in the fourth quarter. We currently expect revenues for the fourth quarter of 2023 to be between $55 million and $60 million and adjusted EBITDA margin to be in the negative 6% to 0% range. As a reminder, the guidance for revenue and adjusted EBITDA margin includes the impact of the non-cash expense associated with the fair value of the company’s warrants to our largest global strategic account. As Ronen noted earlier, while the pipeline we have built for our solutions coming out of ITMA and PRINTING United is encouraging, we continue to see macro headwinds weighing on our sales cycle.
As we move into 2024, we anticipate that our customers will likely face similar pressures to those experienced during 2023. These headwinds include constrained CapEx budgets, high interest rates, and difficulty in securing financing. Similarly, we see rising risks to discretionary consumer spending stemming from tightening credit, rising rates, higher energy prices and other such factors. The spending behavior of the end consumer, therefore, could impact the investments our customers are willing to make. To-date, in 2023, we have worked closely with our key customers to mitigate some of their challenges while also focusing on improving our own operating model. We have reduced costs and reallocated resources towards long-term opportunities with the goal of generating improved returns on invested capital.
In 2024, we will continue to proactively work with our customers, invest in our product roadmap as planned, and improve our operating model. We are therefore planning to deliver profitable growth for the full year 2024 on an adjusted EBITDA basis. To clarify, our 2024 plan considers the typical seasonality inherent in our business model, which implies that revenue and adjusted EBITDA margin will be stronger in the second half of 2024 as compared to the first half of 2024. That concludes our prepared remarks. And with that, I will now turn it back over to Ronen to open up the call for Q&A. Ronen?
Ronen Samuel: Thank you, Lauri, and for that operator, we are ready to open the call for Q&A.
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