Kornit Digital Ltd. (KRNT) Earnings Call Transcript & Summary

All right. I think we are ready to start, right? We have something like 85 participants on the call. So good morning, everyone. We are very, very excited to do this fire chat -- fireside chat with all of you. We have an exciting day and exciting news to share with all of you. I'm here in Englewood in New Jersey. I arrived yesterday to be here with the team. We have exciting week in front of us, meeting many customers that come in here. We are going to visit a few of them, partners. Behind me, you can see our demo centers. We have a few customers that are here already. And next week, I'm planning to be in Europe. So finally, after 6 months that I couldn't travel, finally, I'm traveling, visiting a customer and looking closely at the great business momentum that we have in front of us. Today, it's going to be a busy day. With the next 1.5 hours, we're going to share with you a lot of news. We will start with the story behind the acquisition. I'm going to introduce the CEO of Custom Gateway, and he's going to share with you some information on Custom Gateway, the solutions as well. Then I'm going to give you some business highlights. Super interesting parts and some news on the business side. Going to do some business -- personal introduction of 2 new executives in our team, Chuck Meyo, our President of North America, will lead a very interesting discussion with 3 customers. We are going to host today 3 very important customers on this call, and you will have an opportunity to ask them questions. We're going to host PSC, Stakes and Life is Good. Life is Good is the brand. First time, we're exposing them. One of those brands that decided to move to digital. Again, very, very exciting news that you're going to hear later on. So with that, we can jump into the news of the day, of the week. So Kornit really did the acquisition, the first very important strategic acquisition of Custom Gateway. And the whole idea behind this acquisition is to connect the virtual front end into the physical back end and to enable brands to do on-demand, sustainable manufacturing. So this really solution, which connects to the back end of Kornit with this content of Custom Gateway will enable brands, retail to move into on-demand manufacturing, which we're talking for many, many years. Now what was leading to this important acquisition? We were talking for years already of those market trends, about the self-expression, about sustainability, about the e-com. But when we are looking what's happened in the last 3 months, there was kind of a perfect storm, a perfect storm in those 3 main trends. And I'm going to touch on this perfect storm and how does it change the business for the textile industry and specifically for Kornit. We are facing a very, very strong tailwind for an industry, and we will talk about this inflection point that we see in the market. So first about self-expression. We were talking about the self-expression, the generation that would like to express themselves, social media, immediate gratification, all those things you're all familiar with. But what happened in the last 3 months that it's all been accelerated, accelerated dramatically. People are using Zoom like this and would like to express themselves, to wear t-shirts, to be more casual. Social media is really booming to a different level and people choosing the preference based on social media, and everything that the consumer is not willing to wait. They would like a huge variety of products, and they would like to get it immediately. And all the marketplaces are looking at the Amazon, the race about time to market, delivering within 24 hours and even less than that. So this is the major, major change that being accelerated in the last 3 to 5 months due to the pandemic. Another thing that we were talking all the time is about sustainability, and we all know that the textile market is the second most polluted industry in the world. Now with the coronavirus, people are much more sensitive to pollution and things that are helping the globe. Also on waterways, people are much more sensitive to that. But even more important than that, what happened in the -- during the pandemic that the retail was shut down and the brands were stuck with tons of -- millions of tons of waste of materials that they couldn't sell. And they need to throw it away, and they generate huge amount of waste. And they have to change the way they're doing the supply chain and moving from really focusing what will be the demand to producing to demand. So this is a big, big change that will improve the overall sustainability of the industry and the world. But the biggest impact and the most important inflection point that happened in the last, I would say, 3 months is really about the e-commerce. What we have seen there is that the penetration in the U.S. of the consumer into e-commerce in the last 3 months is equal to the penetration in the last 10 years. So it's really an inflection point which accelerate the move into online, into e-commerce due to the closure of the retail. But many people, like my father, he's 83 years old, moved to -- started to buy in the e-commerce, and they will not move back. My father now is ordering in Amazon and other sites, and many people saw that the experience of moving online is very convenient, and this trend is going to continue and accelerate. And what we have seen is that many brands, and you can see it in the news every day, the overall business actually declined during the pandemic in the last 3 to 5 months, declined dramatically. A few brands in retail really went bankrupt. However, we can look at the same brands and some other brands, if we look at the e-commerce and online activities really grew dramatically. And they're all talking about moving online. You can see here the business of Adidas and Nike and H&M and, of course, Amazon, the e-commerce business is really, really booming. And we are getting in the news every day news about those brands moving -- closing the retails, closing brick and mortars and moving more and more online. Interesting to see, for example, Nike, the new CEO of Nike's coming from PayPal, from eBay, really looking for someone that understand how to move online. We can see the activities between Vogue magazine to Amazon, Amazon starting to sell high-value fashion products as well. And of course, all the move into online by other brands like [indiscernible] H&M and Adidas. So how does it really affect us? We were talking about the potential market of 15 billion decorated garments that's being decorated on an annual basis. Those are the main segments, 3 main segments. The online marketplaces, those are -- the segment of the Amazon, of the Queenspool or the Spoonflower. This is really exploding. What we see in the last few months that those customers really ordering -- the amount of job that they're getting on a daily basis is dramatically increased, and they're ordering new equipment, opening new sites, expanding globally. So this is a growing market for us. Promotional item, promotional market as a segment was traditionally more analog. This is products that are being sold in sports events, in concepts, in company events. Most of those events in the last few months will not exist anymore. Now it's starting to come back, sports, but it's all moving online. If you want to go to a sports activity, you won't be able to buy a shirt in a stadium, you will need to order it online. If you're going to run a marathon, you will need to -- instead of collecting your shirt 2 days before the marathon, it will be sent to your home, and you will be able to customize it. If you're going to a concert, there won't be places to buy the shirts of the concert. You will buy it online. You will have a much larger variety. So this segment is also moving online. The biggest segment is the brand, 11.5 billion impression out of the 15 billion impression is the brand, and we see a huge change within the brand. And this is why we were talking with you for many, many months of focusing more on the brand and how can we provide them, how can we help them to change their business model, change the supply chain and move into on-demand manufacturing. So the brands really want to move to on-demand manufacturing. They don't want to have any more waste. They understand that the consumer wants much bigger variety of products, and the consumer doesn't want to wait for the product. So the first, if we look back and we look before the pandemic, what's happening in the fashion industry, the brands -- many of the brands move into fast fashion. The whole idea of the fast fashion is to provide a large variety of products so when the consumer is coming to a brick and mortar, to the retail shop, they can see new products and they can choose it. Product life cycle becoming shorter, much more short run available. This also created quite a lot of waste in the market. And in order to overcome the waste and the long lead time of producing, brands move into proximity production. We saw proximity production both in the B2B on nearshore and on onshore for B2C. So if they want replenishment, it's more B2B. If it wants direct-to-consumer, it's B2C. And we can see the move out of China into a closer location or onshore happening with most of the brands. However, it's not good enough. The brands wanted, of course, to move online directly to the consumer. And every brand today, they have their own e-commerce. But actually, when you look at the e-commerce, they're using the e-commerce as another vehicle of sell in parallel to the brick and mortars. And they are selling in the e-commerce the same products that they have on the shelf in the brick and mortar. And this is not the idea. The whole idea is to change the supply chain, to connect the front end that is fully digital, is online to a back end that can supply on-demand manufacturing. And this is the solution that Kornit is bringing today to the market together with Custom Gateway, enabling the consumer to go online and to order what they want and enabling the brands to produce after they got their orders and not to produce to [ focus ] and being stuck with huge waste. So the way that the workflow works in, really, if we need to illustrate it, the consumer place an order online on the e-commerce. The e-commerce is actually directed the jobs into a fulfiller that is next to the consumer. It can be printed off one of the Kornit machine. It can be printed on the DTG or the DTF. And from there, the fulfiller is sending the product to the consumer. So if the consumer is in China, the product is being produced in China, being sent to the customer from China, but everything is being managed by the brands. The consumer is connecting with the brand and everything under one umbrella of quality control of Kornit, Kornit system together with Custom Gateway. So if you produce it in China, you will get the same quality as if you produce it here in the U.S. On top of that, what we are bringing to the market together with Custom Gateway is enabling a solution that will improve the productivity and efficiency of our fulfillers. We will enable the fulfillers to get thousands of job per day and managing them on the production flow from the connecting to the ERP of the fulfiller to really the production of the garments and the products and to the shipment of the products. So together with Custom Gateway, actually, we are bringing to the market 2 main products. One is the product that focus for the brand's on-demand manufacturing to enable the brands to connect to the consumer and to do it efficiency -- to do efficient and changing their supply chain. And another thing is enabling our fulfiller to scale the business and to be more efficient on the production flow. I would like to take this opportunity now and to introduce you to Andrew Talbot, who is the CEO and Founder of Custom Gateway, now joining Kornit. He is going to lead our workflow team within Kornit, and he is going to share with you in a few minutes a bit about Custom Gateway and a bit in high level about the solution, and then we will continue the discussion about the business momentum. So Andrew, the floor is yours.

Thank you, Ronen. Delighted to meet everybody and have the opportunity to share a little bit about Custom Gateway with you. So in on-demand terms, we're quite old. We've been going since 2012, which kind of means we've been around since on-demand really started to take momentum. But it also means our software is young enough. It's only ever been cloud-based to be relevant. So we built our software from the beginning only for the on-demand marketplace. We've been supplying people with Kornit machines since 2014. So we've been collaborating together for some time. And what's been great is over the years, we've discovered that the people who are prepared to invest in garment machines are the insightful ones, and they've made our best customers. So we have many mutual customers now that have basically succeeded with both of our companies. So we have a great starting point for our collaboration. The other interesting point that Ronen mentioned it earlier is Kornit has traditionally been in the fulfillment space, and we've traditionally been pushing with the retailers and the brands. So you can see we can name the U.K.'s largest fashion retailer, Next, as one of our big success stories. We've worked with many brands in the football industry, and we've also enabled companies like Fanatics in the made-to-order section. So we've moved on together with lots of different customers. And what's been exciting on this journey is we found that we have a real shared vision with Kornit. You can see our strat line is Enabling on Demand, and we love the Bonding Matters strat line as well because it really is about partnerships, not just our partnerships but partnerships with our customers and perhaps, most importantly, the partnerships with the supply chain. So if we can move to the next slide, Ronen, please. So it is about connecting the brands and the retailers. And in July, we had 1,900 active connections between brands and retailers. So you can see that means retailers have many active connections. That's one of the great things they're finding out about the on-demand space: it increases their choice and also reduces their cost. And what we found with the customers we work with, that they're very happy to use our business model, which is a success-based charging for speed. So the one thing that Custom Gateway really does for a brand and retailer, it reduces their development life cycle. So we have technology now that enables brands and retailers to get live within months. So instead of a long drawn-out IT cycle, our workflow helps people get live in months. And you can see on the bottom of this slide, we mentioned people like eBay, et cetera, and other marketplaces. And with marketplaces now accounting for 50% of the world's e-commerce trade, it's become essential to offer solutions for that, too. And most of the brands and retailers we're working with now also have a marketplace strategy. So what we found is big brands are using us, Custom Gateway, as their on-demand warehouse and then using our workflow to route it to Kornit or other people in the on-demand space. So if we move on, how does this all work? So the great thing is because we've been collaborating for years now, we've been able to rebrand the product from day 1. We've been working on this for a few months. So we have modules of sales, catalog production in the shop floor. And we've got 2,300 live integrations with carrier systems, accounting systems, ERP systems, warehouse systems. So the word Konnect is very suitable here. And obviously, using Konnect, we can now push into the big data world and push more information in there. So the one thing we found is workflow holds back the on-demand world because it needs to develop people. So the partnership between ourselves and Kornit basically unlocks that tide, which, as Ronen has explained, is gathered momentum in the COVID world. So finally, and I'm sorry for the whistlestop speed, but I've got so much to say and a little time to say things today. We've got a common vision, ourselves and Kornit. We will enable on-demand and help the world flow faster. We've got many mutual customers already, some direct, some indirect, but the supply chain is all about linking together. And we've been working together for that time. So our partnership is already strong, and we partner with other people. And I guess, best of all and most important, we found an amazing cultural match. We're both in a hurry to help this revolution happen. So thank you for the opportunity to present to everybody, Ronen.

Thank you very much, Andrew. Really exciting. I'm sure this partnership is going to be super successful. So next, I'm going to share with you a bit about the business momentum, and we are talking about inflection points. We are really in an inflection point. You all remember a few months back, March, the world changed. Pandemic was in the middle of spreading all over. Many customers decided to stop to see where is the world going. Many sites were closed, and we didn't know exactly where the business is going. Immediately, months later, the beginning of April, our customers started calling us, saying we have a huge demand. Something is changing. Orders started to come in, and we started to see something totally different. And this is the inflection point. So what's going on in the business? I'm going to summarize it with a few points. First of all, today, we're already in the mid of Q3, we have a very, very strong pipeline and a very strong backlog of orders not only for H2, which we gave a guidance, clear guidance for Q3 and for H2 that we are going to have a double-digit -- low double-digit growth versus last year. And we said that we are going to be profitable for the entire year. But we have a very strong visibility to mid of 2021, and we feel very confident with continued growth into 2021. This is coming with major orders that we received from big projects that we were talking about -- actually, we got much bigger order than we expected due to this inflection point. And we have -- for the first time, we have such a strong visibility for a year ahead. The second point is about strategic account projects. As I mentioned, we see a big strategic account coming, some of them new strategic accounts, some of them existing strategic accounts. And when we are looking at those strategic accounts and we're asking ourselves, how much the increase in capacity, on average, in the next 6 months, our strategic accounts as a whole going to double the capacity available using Kornit systems. So we are expecting to get many orders, some of them are already in the orders, some of them were already delivered for big, big projects, overall, with the strategic account, going to double the capacity available in the market. We also see geographical expansion of strategic account. We see expansion here in the U.S., closer to the main cities. We see expansion outside for those strategic accounts, both in EMEA and both in Asia. And this is a trend, each one of them opening more, more sites in order to the big opportunity in the market. With our strategic -- with our global strategic accounts, and you know who is the global strategic account, they have a very ambitious plan, and they are growing very fast. We have a great relationship with them. I already mentioned that they are expanding both in North America, outside of North America, in Europe and Asia, and we see a huge growth coming out of them. We have a great relationship, and it will take us to the future. When we're looking at the brands and trying to explain what are the expansion, and later on, you will hear from one of the brands here in the U.S.A., Life is Good, about their adoption of the Kornit solution and changing their supply chain. But when we are looking at the top 10 brands of the world, out of those top 10 brands, 5 of them we're already in major projects, very important project with 5 out of the top brands on implementing, on moving the supply chain and implementing on-demand manufacturing, leveraging Kornit technology. We see very, very strong demand to the Atlas. You remember, last year, I mentioned with [ finite ], we introduced Atlas in January 2019. By the end of the year, we sold 80 systems of the Atlas. This year, and I'm talking only Q3, now in Q3, we are going to produce more than 80 units only in Q3 for the Atlas. We have a very, very strong, and this is only Q3 -- of course, we have major growth into Q4 and beyond and what we already produced this year. So the Atlas is really a growing engine, and we are getting very good feedback for our customers, new customers, strategic account and territory account. Vulcan Plus, we introduced it early this year. We're already in multiple implementation with some key accounts. One of those key accounts will be here on the call, leveraging on the Vulcan Plus, and you will be able to hear first-hand from him. We're getting great feedback. This is the highest-end solution on the DTG. The Presto on the DTF is really growing very, very nice. Globally, we see big demand in North America. Latin America is growing very fast in Presto and also EMEA. So we are very happy with the demand. We are very happy with the feedback. We feel that we have a moat around this technology and the best pigment in the marketplace. And we are entering to market both on the fashion and home decor. On the Polypore, I mentioned that we released the product mid of last year. We had a great feedback from our customer, but we had also some challenges. I mentioned that we overcome the challenges. We are in the middle of beta right now, both regarding the fiber of the material and also regarding the dye migration. I just want to show you an example what does it mean on dye migration. So you know that we overcome the dye migration already on the high energy dye. High energy dye is polyester that was dyed in high temperature. But polyester that was dyed in low temperature, we still encourage some -- we see some dye migration. Let me show you what does it mean. You see here the white, it's not really white, it's more pinkish. We managed to develop a new technology, which enables a customer to print on low energy dye. And this is the same shirt, and you can see the white of the shirt. And this is a new technology that will enable a customer to print a much wider polyester material also on brushed polyester and will really expand the market opportunity for our customers and for Kornit. Another news is that we mentioned that we are moving direct in U.K., Germany, Japan. I got many question, what is behind it. So the main rationale, our strategic account are entering to those countries, U.K., Germany, Japan, we see huge potential in those countries. Learning from the move to a direct motion in North America, which was happen -- which we did it about 1.5 years ago, we are very successful here in North America. Our total customer experience is much better. Our engagement with our customers is much better. The acceleration, the growth is much better. We are really at a full control, together working very closely with the customer. We would like to achieve the same performance both in U.K., Germany and Japan, while selling more advanced solutions like the Atlas and the Vulcan Plus and many more new solutions that are coming in the future. So I'm going to touch a bit about the new solution, R&D projects. When looking back during the pandemic, we actually increased investment in R&D because we knew that there is an opportunity here. And we managed to come out of the pandemic with a much stronger portfolio, and we introduced the Vulcan Plus, we introduced new ink and more solution. But what is coming next, looking into early next year, really new product that going to enable our customers to get into new application. The direction that we are working is bringing products that are more productive on one hand with better utilization, with better ease of use, with much more automation into the solution. On other hand, we are looking to expanding the application. And we are talking about application both on DTG and DTF and, of course, to improve the total customer experience, total customer cost of ownership. So those are the areas, and I'm very happy to share that next year -- early next year, we are going to be in beta testing with new systems in the market. Service scalability. So scalability of the service is very important. We are reaching a tipping point where service is going to become profitable. In Q4 this year, we believe that the service will be profitable from there on, it's going to increase the profitability because we are getting to a scalability level. We're putting a lot of effort here on customer success implementation. And we -- again, we're starting to get great feedback, TCE, total customer experience, from our customers. Last point is about the $500 million goal. We are more than ever confident about delivering the $500 million run rate goal into the year of 2023, while improving along around gross margin and improving along around the operating profit of the company. So those are great news and great momentum. We really feel that the market is in a different place. Kornit is in a different place. And we are managing to even open a bigger moat versus the competition and really capturing more and more of the market and enter into new market segments. Now I would like to move ahead and to introduce you 2 new members of our team. First of all, I'm very excited to introduce Benzion Sender is our new EVP of R&D, replacing Haggai Abbo, working very, very closely with our CTO, Kobi. And I'm very pleased to have Benzion joining us with a lot of experience from different companies in Israel. The other member of my team that I would like to introduce you is Chuck Meyo, our President of Americas. Chuck will introduce himself in a few minutes. And also, he's going to lead the discussion with the 3 customers in just a few minutes. So Chuck, I will pass the ball into you.

Good morning. By way of introduction, my name is Chuck Meyo, and I'm the new President of the Americas. We're located right here in New Jersey, right outside of New York City right by the George Washington Bridge. Overall, I've been with Kornit about 5 months. For those of you that are doing the mental math, you'll realize that I really started about 10 days before they closed the borders here in the United States. So I've had a very interesting onboarding and very interesting first 5 months with the company. I wouldn't say that it's the most ideal to onboard this way. But really, it's been very, very interesting to us because it really -- I joined at the time of the outbreak, but it's really more or less a tale of really 2 stories. The first, rather negative in the fact that we kind of had to live and manage through a global pandemic, something that was very different probably for all of us in terms of working and managing in an environment like that. We -- here in New Jersey and in New York, we're probably one of the hardest hit globally. We quarantined for quite a long time, about 107 days. For the most part, our area here was kind of overwhelmed, recovering now. But the flip side of the coin there and very much to what Ronen was just talking about in terms of an inflection point and also catalyst is COVID-19 really, really changed our marketplace. I mean we had some significant, significant business performance in Q2 where you never really would have expected it. So in April, in May and June, we had a significant uptick in volume in terms of system sales, in terms of consumable sales and in terms of upgrades that we did for our customers. And I think this was something highly unprecedented, unpredictable, but at the same time, really changed our marketplace, right? And if you think a little bit about what happened, our customers, a lot of our strategic customers that Ronen was talking about that actually embraced an online business model, they flourished. Whether it was online sales or it was fulfillment, they all experienced really hyper-growth, right? Outstanding for them. A lot of our major customers leaned in with significant investments. So investments normally going into peak period, people would be buying 1 to 3 systems. And we had customers leaning in with tens of systems. It's going to put a lot of pressure on us in terms of actually deploying, but really an outstanding time. I think all my years, all my years in industry, I have never ever witnessed something like that or saw the uptick in the business performance. Really, really outstanding. And I think one of the key things I want to kind of get across is that we talk to our customers, mostly our strategic customers, and they think they're in peak period, right? So in April and May, they were running 2 and 3 shifts. I mean highly, highly unpredictable for them, but they were very responsive, and I think that they got a great return on that. On Friday, we had our QBR, quarterly business review, with Fanatics. And to quote them, they said that they're -- in May, they were pulling out their peak season playbook. So they're ramping for it. They saw just unprecedented demand. They were seeing it. And I think one of the great points of this is that they're not only seeing it through the peak season, but they're anticipating it into Q1 of 2021, which shows that they're not only growing their business, but they're growing their business base and their current customers, in addition taking on new demand that they're seeing from customers that are in the brands and also in the retail. So this is a great sign for our business, a fantastic sign for [ KDAM ] and I think really proved in a lot of these emerging business models that we've been talking a lot about, that Andrew talked about and Ronen talked about. I think you're going to hear some of that this morning because, as Ronen said, if you go to the next slide, we're very pleased to announce that we have some of our customers on the line today. I think as you listen to their story, you're going to see that they all have very different customer models. And -- but they're probably going to talk about very similar things that we talked about in the run-up to the discussion with the customers. So first of all, we have Jed Seifert online. He is with Stakes Manufacturing. He's one of the co-founders there. And Jed, we'll probably start with you. The other person we have -- or the 2 people we have, we have Tom Hassell. He's the Vice President of the business online. They're a Boston brand, a very different business model than what you see at Stakes. But I think, again, to the whole point of where the brands are going, I think you'll enjoy the discussion that we'll have with him. And then we also have Billy Koorse and Scott Valancy on the line, and they're from Tee Shirt Central, or TSC, in their Miami-located business. So maybe we can start out with you, Jed, and maybe just a little bit in terms of context, just kind of talk a little bit about Stakes, a little bit about the marketplaces that you guys operate in and then maybe some of the business models. And then maybe if you can morph that in, is it -- kind of in this new and more dynamic marketplace, what are you guys seeing? What's going on in your market? And then what have you been doing in the last several months to really capitalize on?

Absolutely. Thanks for having me. So Stakes Manufacturing is a technology-focused, full-service print on-demand company that specializes in delivering premium retail quality POD apparel through our white label solution. What that means essentially is we integrate into the back end of brands and platform websites so that they can sell product without carrying inventory. If you go to nfl.com and you order a shirt, the order automatically comes to us. We print it out, we white label it, and we ship it out to the end consumer. The end consumer doesn't even know we exist. We are a Kornit shop. We have 26 Kornits, roughly about 170 employees, and we're growing like a rocket ship right now. You won't find us in any of your app stores or general published areas for the general public, like you see most POD companies. And that's because we're solely focused on large B2B aggregators, so whether you're a record label representing 150 bands or you're a website representing thousands of artists or you're a platform representing thousands of stores. We have a strong focus in sports, entertainment retail and brands, but the unifying theme with them is it's all people with valuable IP that require high-quality prints. And color accuracy is very important as well, which is also why we've aligned ourselves at Kornit to use their top-of-the-line equipment. Some of our partners include Fanatics, all of the major sports leagues, WWE, Stack Sports, Universal Music Group, Sony Music, Redbubble, Threadless, Rolling Stone, Printify, [ Guten ], Stand Up To Cancer, I could go on and on and many more. COVID has had a tremendous impact on our business as well as the market. I would not say that it has changed the market. I would say COVID has been an accelerator. The retail -- physical retail was already crashing and burning to a slow death. COVID was just gasoline thrown on top of the fire. And consumer habits have already been changing and moving towards buying more and more online. We've already seen through the various slides, as you guys showed before and everybody has been hearing about, all the bankruptcies of physical retailers. But COVID has only just made that faster. I don't think it's what created it, it actually happened. And I think it's permanent, too. While you're going to see live events and travel will return, I don't think physical retail is ever going to return, which creates a ton of opportunity for everybody in the e-commerce space, in particular, print on demand. We've seen that COVID has exposed a lot of challenges in the supply chain with long lead times, large bulk production. And in addition to COVID, there's also been changes in trade laws and tariffs that have made people kind of reconsider their kind of overseas production strategies. So that and the fact that everybody's strapped for cash with COVID going on, too. So people are becoming a lot more risk-averse. So buying behaviors are changing. And really, people are changing their business model. Brands, in general, are moving towards D2C, so online focused with smaller orders, lower inventory risk and the ability to offer a lot more styles, colors, designs and sizes without any real financial commitment. And print on demand and digital printing has addressed all those issues as well as problems with overproduction and the sustainability that you guys have mentioned in some of your slides as well. We're not the only POD business that's booming right now. I mean we started COVID up 200% on the year. Then the economy dropped out about mid-March. We saw our business get -- lose 1/3 of our business overnight. And 3 weeks later though, it came back like gangbusters and just hasn't turned around. We are currently -- as you mentioned, we are in peak. We are up somewhere between 300% to 400% where we were last year. We're up over 200% from what we were doing from Black Friday to Christmas last year right now in August. And it's not just us, everybody is booming. It's the entire industry. And all the kind of like-minded companies are really growing, and COVID is really just kind of accelerated that growth. And I think we're only on the tip of the iceberg because we're still such a minute fraction of the total market that's available. And I think the overall theme that COVID has also really shown everybody clearly is that there is far more demand in this industry currently than there is supply, which is obviously great for folks like us and Kornit as well.

Jed, congratulations. That's a great story. That's good news for our industry. Appreciate the feedback. And again, thanks for being on this morning. Maybe we can shift to Tom. And from the brand's perspective, maybe you can give us a little idea of kind of what you guys have lifted the last several months and then kind of what you're thinking about your marketplace. And then maybe a little bit of feedback on how you want to capitalize on it.

Sure. Thanks for having me this morning. It's a pleasure to be here and to speak on behalf of Kornit. Just a little bit of background about Life is Good. We're a 26-year old lifestyle brand whose primary product are T-shirts. Our mission is to spread the power of optimism, and we use our message to do that. And T-shirts are the primary canvas on which we print our artwork. So our business has gone through a dramatic shift in the last 2 years. Prior to last year, 100% of our T-shirts were screen printed, and most of those shirts were screen printed overseas. We started testing in 2018 to see what the impact on business would be to offer a piece of art not just on one T-shirt one color, but across multiple colors, multiple sleeve lengths, both genders, different necklines. And we found that the business was almost 100% incremental when we expanded the offering to the consumers. And thus, we started talking to companies like Kornit about print on demand so that we could dramatically expand the offering to our customers without expanding our inventory. We thankfully invested in 2 Kornit machines last year, and they went live on April 15. And what started out as a trickle of business turned quickly into a torrent. And we were already well on our way towards making an additional investment with Kornit when the pandemic hit. And our business at that point was about 50% direct-to-consumer through lifeisgood.com and 50% wholesale. So we, like many people, went through a very scary moment where wholesale essentially dried up, and we realized that we needed to drive significantly more revenue through e-commerce. We also realized that it was an opportunity for us because in a time of adversity, people need optimism more than ever. And our message was really resonating with consumers even in the first days of the pandemic. So we decided to really lean into producing new artwork that spoke directly to what was going on in people's lives. And we've created over 750 pieces of art that relate directly to the pandemic, offering words of wisdom in a lighthearted way, how people can stay safe and just adding a bit of levity to the tough times that we're all going through. We've seen our customers respond like I've never seen in my 27-year career. The products began selling the second day at the website. We were designing on Monday to sell on Wednesday and developing an e-mail on Tuesday to support the launch of the new graphics and then having a meeting at 10 p.m. on Wednesday night to talk about which messages were resonating, which art styles are resonating. And the graphics team was then literally working through the night to build the next set of graphics, which then we could get up on the website by Friday. All of this was possible because of our investment in Kornit. I'm glad to say that we have 2 more machines coming online next Tuesday. And we see this business continuing to grow from this point forward. I agree with Jed's comments that this is not just a point in time where the business is going to spike. I do see this trend continuing. And the 10 years of growth that we've seen, as Ronen outlined in his opening statements, we think is here to stay and is, in fact, going to accelerate. So as far as where things are going in the future, I do believe that self-expression is going to be so important to our customers. We did just week before last launched the capability for our customers to create their own T-shirts using our art and picking the T-shirt of their choice, the color of their choice, the neckline of their choice. And this multiplied the customer options on our website by a factor of 15 overnight. And we're just getting started with this technology. Every one of those orders is flowing through our Kornit systems. And so we see robust growth ahead.

Tom, thank you very much. I would just have to say that the messaging that you're bringing to the discussion really is very common in what we're hearing from the brands as a whole. I think the first thing is just congratulations on quickly pivoting to online. I'm sure that contributed to sustaining you guys through a tough time and really just your ability to be continually agile in what these kinds of systems do. So thanks for your feedback. Appreciate that. And again, thanks for taking time this morning to talk with us.

You bet.

Lastly, I'd like to talk with Scott Valancy and also Billy Koorse. They're with Tee Shirt Central. They're located in Miami, Florida. And maybe you guys can give us a little bit of feedback about the marketplaces you guys participate in, maybe a little bit about the business model and then kind of this new market dynamic as well.

Can you guys hear me?

Yes.

Okay. Great. Well, congratulations, Ronen. We're -- we've been a Kornit customer since 2009, and we've had some -- an amazing journey with you guys. Scott and I started a company called Art Gun, and we sold it to Delta Apparel, which became DTG2Go. We were there for 7 years running that company, and then we decided to go on our own. And we sat in the sidelines for a while because of our work contract, and we just -- about 1.5 years ago, went back into the digital business. We're also a very large screen printing and marketing company. And we bought 6 Kornit machines about 1.5 years ago, and it was about 5% of our total volume. After the pandemic, our business, like everyone else's in the screen print industry [indiscernible] digital went through the roof. We had a plan, we were buying more and more Kornits as we're going along, but we are going to wind up with, by September, 36 Atlas machines. And we have 2 facilities, one in Miami and another in Mexico. We've got nearly 300,000 square feet of manufacturing and distribution. And we'll have over 900 employees before the end of the year. But our digital business has been crazy. We -- as Jed and Tom both mentioned, we've never seen this type of growth ever before. And with the investment that we just made, buying all the Atlas machines, we're getting ready for it, and we're going to -- we're extremely happy to be part of the Kornit family. And we're excited about the journey that we're on. But I'm going to let Scott Valancy take you through the growth. This was originally Scott's brain child many, many years ago. So Scott, why don't you take people through that?

Yes. Thanks, Billy. Ronen, again, thanks for having TSC Miami and us, and I couldn't thank you enough for the relationship. As Billy mentioned, we've been around for a minute with Kornit and have seen tremendous evolution. I remember when we first started with Kornit, TSC's background has always been very, very large distribution tiers, mostly brick-and-mortar at the time, years ago -- 16 years ago when the company was founded. And we have distribution areas and vendor numbers in every store pretty much from Target through T.J. Maxx to Macy's and everyone in between and doing a nice fulfillment and distribution. It was back in '09 that we felt the technology was first started to become what we felt the retail potential solution to resolve small run sizes and other things. And throughout the years, I think Kornit has done an amazing job. It's one of the reasons that we stayed with the company. We've seen great evolution with the fixation in ink systems as well as the delivery of the product and the efficiencies. I can tell you that our focus is still managing those distribution points. All of our customers have large e-com sites that have now shifted a lot of their needs to the e-com site. So we were there ready for them to do that with Kornit's help, of course, and to Billy's point, is some of the reasons that we stepped up on a lot of our expansion. We also feel that over the last couple of years, working with Kornit as a strategic supplier in understanding our road map to retailers and brands, we now have screen-printed product side-by-side with digital on-demand product. And we have no pushback and only positive feedback. So it's helped our organization produce smaller runs. We call them test orders that we produce, 150, 200 piece runs, to see if they're going to be selling in a mass level where we do screen printing. That has now -- digital has taken over that part of our company as well as other areas of expansion. So really interesting. I can't talk highly enough about not only the support from a technical aspect, but also from the sales channel and understanding our needs as a company and working with us strategically to make the things that we need to happen.

Thank you, you guys. Thank you for your input. I think probably the first thing to say is we appreciate your continued trust. We are here for you guys when you need us. I certainly appreciate all the years of supporting Kornit. I think I just want to thank at least the customers that were able to dial in this morning. I know that you carved a piece of your morning out. So thank you very much for participating. I appreciate the market input. And Ronen, I'm going to hand it back to you for Q&A.

Yes. Thank you, Chuck, and really thanks a lot to Jed, Tom, Billy and Scott. There's nothing like hearing the stories from you. We can tell about the evolution, revolution, inflection point. But hearing it from you, it's just an amazing testimony of what's going on in the market and how unprecedented times we are all in. I would like to open now the call to questions. The customers are still here. We can ask -- you can ask them questions. You can ask myself, Chuck, Andrew, Guy, of course, on the call, if you have any financial questions and Amir as well. So any questions, welcome to us. So the call is now open. Just unmute yourself, and please go ahead with your questions.

Ronen, can I try to give in the first question? It's Brian Drab.

Of course.

Yes, this is really incredibly full of information this morning, so I appreciate that. And the time that the customers gave as well, so insightful. I have a bunch of questions, but I wanted to ask Andrew, I think you said 1,900 connections that he has developed with his software. And what does that mean 1,900 connections exactly? Is that 1,900 customers? And then secondly, I also wanted to ask Andrew, does the software enable customization for a brand? Is that kind of the behind the scenes that the brands haven't been that good at allowing all those options for the customers?

Should I take that, Ronen?

Yes, please, Andrew.

So 1,900 connections means the connection between a retailer and a fulfillment store. So they're all many to many or many to 1. So it doesn't mean 1,900 customers. I think you say there was about 400 live retailers on the system at the moment. So you could average that out and say 1,900 would mean -- my math is about 5 connections each. Obviously, some with more, some with less. So there are multiples on that. And yes, very much about customization. That's a real driver. Print on demand is what's been driving volume, but customization is certainly getting people's creativity. And we've been working on tools like profanity filters to make sure people can't destroy brands. And I was very interested to hear about Life is Good now kind of offering different colors and different designs and different styles. That's a trend we're enabling a lot, too. So I hope that answers your question.

Ronen, this is Patrick Ho. Maybe directly for you and how Custom Gateway integrates with your Konnect system because you've talked about Konnect in the past and some of the key aspects of that solution. Maybe from your perspective, how does Custom Gateway add further to what you're providing with Konnect? And I've seen the value proposition today with the fulfillers and everything. But how does it work on your end in terms of bringing that workflow solution to your customers?

Okay. So let's talk a bit about Konnect. What Konnect enable -- this is a cloud-based software that actually enable the customers to see what's going on, on the fleet of Kornit systems. So they have whole -- they can see it live if the machine is in production. They can see the history, what was printed. They can order -- open service call, order spare parts, but most importantly, really see the efficiency of -- and the productivity of the solution. So the Konnect is umbrella of products, and we continue to develop it. And then the main purpose of Konnect is to improve the efficiency running Kornit systems. Now what Custom Gateway will bring with the solution is actually managing the entire production flow. So when the orders are coming in, it comes in through the Custom Gateway. It connects to the ERP. And from the ERP and through Custom Gateway, you're actually managing the entire production space, yes? From collecting the right garment to printing it on the right systems, reaping the file, also controlling all the quality control on the sites including the dryer and then the shipment of the product. Both systems will talk to each other, will connect to each other. And the customer will have the full visibility on the entire production flow, not only on the Kornit but from the getting the file, reaping it and through the shipping of the products out. I hope I answered you. If you need a bit more technical, we have here more people that can give you.

It's Jim Suva here. Can you hear me?

Yes, Jim.

A quick question probably for your customers more. They all talked about expansion and adding more Kornit printers, which is great. Are they taking out old Kornit printers? Or are they expanding their like physical footprint that they already had or just reconfiguring their plants? And I was just curious about how long this typically Kornit printers last when it's under their roof?

I guess it's more relevant to Stakes and TSC. So Jed and Scott or Billy, any one of you would like to take a -- share your experience?

Sure. So I think it's a combination of both. We've been a Kornit customer for -- since 2012. So we had some old equipment that we were decommissioning to move to the new 6-color HD ink sets, which definitely give a higher level of quality and color accuracy. So we've decommissioned a lot of that. But the great thing about the new Kornit equipment, it actually takes up less of a footprint than the old Kornit equipment. So now that you've got so many faster horses, we could quadruple our capacity while still maintaining the same amount of square footage that we're utilizing.

Thank you, Jed.

This is Scott. I can also say the same. I think that the -- we typically at TSC, we tried not to decommission machinery. We try to use it as long as we can. And we've gotten -- I mean we've had some machines that are running for 8, 9 years. So we've gotten some real good life out of them, and that's running 24/7. So as long as they're maintained properly and preventive maintenance plans are in place, I think you get some really good use out of it. Clearly, there's a great ROI for new equipment that as you build your capacity with things like the Atlas that has come out that clearly has bigger outputs. But machinery lasts really well. It's one of the reasons we have been with Kornit so long. It's truly an industrial solution for us.

This is Evelyn. I have a question.

Yes, please, Evelyn.

So this is for Andrew. I was just wondering how -- what percent of your customers don't have a Kornit machine? Like I'm trying to just get a sense of what the cross-sell opportunity would be selling to that -- into your customer base at Custom Gateway?

Yes. So I guess this question, we will ask Amir who was involved in all the due diligence to give an answer on that.

Yes. I think we don't -- Evelyn, we don't refer to specific number of machines. Andrew mentioned, he said over 300 active customers. Right now, there's a few tens that have -- are using Kornit. So obviously, there's an upsell opportunity. Custom Gateway does both textiles and nontextiles. So not all of it is up for textile, but there is a cross-sell opportunity.

Thank you, Amir. Next question.

I'd like to ask one more. It's Brian Drab. What is the financial model for Custom Gateway? I'm just thinking -- I know you didn't say what the revenue is, but if I just guess what the revenue was, let's just throw a round number, $5 million annual revenue, maybe there is $10,000 subscription cost per customer or something along these lines. What -- maybe that's not right at all. I'd just like to poke you with the number, and then you can tell me how wrong I am. And then what is the financial model going forward? Is this more of a give the software to the customer so you can sell the systems and the ink? Or how do you -- how are you going to run that?

Excellent question. Again, I will defer this question to Amir.

Yes. It's a great question, Brian. And so Custom Gateway today, the way the business model, the way it works today, there's -- obviously, there's a setup fee and some professional services to get customers onboarded. There is a SaaS model, subscription fee. So modules are -- customers are paying license fees for specific modules. And there's also what Andrew referred to before, there's a transaction fee. Hence, as the customers are more successful and the volumes increase, it's kind of a partnership model. Going into the day after as we roll out the joint solution to the market, we intend to maintain the same business model. I think, with time, we'll have better understanding of what's the best fit for those integrated solutions environment. As to the subscription numbers, Brian, there's a really big variance. Custom Gateway, the beauty of the platform is that it can cater very large enterprise environment, but there's also a nice SMB installed base that's using the platform. The variance is very big. Some of the larger brands and retailers on the Custom Gateway platform could be generating 6 figures and above, but there's also an SMB installed base that would be paying $10,000 and the numbers you'd throw.

Thank you, Amir.

Just to dovetail on that. Are any of the 3 customers on the call today Custom Gateway customers? And maybe if not, what are you currently using? And then lastly, is Custom Gateway something of interest for your -- for businesses going forward?

Okay. Anyone, Scott, Billy, Jed, Tom?

This is Scott. We're currently -- from TSC, we're currently not a current customer. We built our own proprietary system to manage our back-end and front-end operations. But certainly, as Kornit evolves, we do as well. And if there's some duplication there or some things that we have not built out yet, we would definitely look at a possibility of the software that how it can help us out as we move forward if that's available.

This is Jed at Stakes Manufacturing. We, too, built our own proprietary systems. I can tell you that, that is a very tedious, long process. So if with this acquisition, Kornit's going to enable other manufacturers to speed up quickly without having to go through all the pains of developing their own software, so we're excited to see what it looks like, excited to see how it compares to what we're currently doing. And hopefully, we can continue to streamline our own processes and leverage the software for that.

Thank you.

And this is Tom. I'll just tack on to that by saying we extended SAP to manage the production. And I will say that it's been a lot more work than we anticipated. We're able to launch no problem last April, but we have been continuing to refine and develop that application that we built for another 16 months and anticipate the need to continue to develop for at least the next year to continue to refine our operations. So I am interested in looking at the product because that could be a way to solve a pain point for us.

More questions?

I'm sorry, I'd have to ask one more, given the access to the customers today can I just ask Jed and the other customers, have you -- I get this question from investors all the time. How important is it to you to use the pigment and consumables from Kornit? And have you ever considered trying to use cloned ink and how big an issue does that cause if someone goes down that path?

So we're very much so an R&D company. We've explored pretty much every system out on the market. We've explored ink sets. We do a lot of stuff in our in-house as well. And we -- there's really no point in going any direction besides using Kornit's ink at this point because it's just light years ahead of where everybody else is. So we're very satisfied with the quality, the color accuracy, color gamut that we get from the current ink set, and we have not found that anywhere else.

This is Scott from TSC. Totally on the same page. We -- there are other options out there, but we have never strayed away from Kornit and find that their color consistency and washability, which is critical to retail product we're shipping, is there, and it keeps improving. We also have a supply chain setup that is easy for our group to manage. So it's just for ease of use and really the quality of the product we stayed with Kornit and don't plan on moving away from that.

This is Cary Sherburne from WhatTheyThink. I wonder if any of the customers are using the softener solution and what they think about that.

So all those 3 customers are on the DTG, not on the DTF. So unfortunately, they will not be able to answer the question. But softener is a new product that we rolled out to the market, into the DTF. We -- it's a released product. We are getting great feedback from customers using it, enable them to get into the really the fashion -- mainstream fashion. We see amazing products that our customers are printing and producing on the DTF. We see the DTF moving more and more also into the online space, which is really exciting to see the development on this side.

And no plans to be able to somehow bring that softener to DTG?

On the DTG, at this point, we are not planning to bring the softener. We don't see the need on the DTG for the softener. It's interesting point to look into, but it's totally different application. Remember the DTF, we are not printing white ink. It's color. And on the DTG, you have -- usually, you have white and then the color. It's totally different process, which on DTG, the effect of the softener will not be similar to the effect on the DTF. More questions? If not, I would like to thank all of you, first of all, to thank our customers for their time and being with us. Thanks for Chuck and Andrew and the people on the call, and thank you for your trust in us and being great partners. Looking forward to meet many of you face-to-face, hopefully. We are planning to have next year in April a big event like we were planning this year in Israel. We are going to host our investors and analysts in Israel. Hopefully, the pandemic will be behind us, there will be vaccines already, and we can run this event. Of course, we will share more information about that. So thanks a lot for all of you for being here, and looking forward to meet many of you face-to-face. Thank you very much.