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

Great. I think we are live. Hi guys. Thanks for taking the time.

Thank you.

Thanks for joining us today. So I'm Tavy Rosner for Israel Equity Research, and we're delighted to have Kornit Digital. It's a short session, 25 minutes, so that goes very fast. So I thought perhaps I give you 2 minutes to introduce yourself in very briefly what does Kornit do, and then we'll kind of move on to Q&A. Just to remind investors, they can e-mail me questions or send me an IB on Bloomberg at Tavy Rosner, and then we can pass on. Okay, do you want to...

Thank you, Tavy. Good morning, everyone. We are here in Israel in the afternoon. Pleasure to be here. My name is Ronen Samuel. I'm the CEO of Kornit. I joined Kornit about 2.5 years ago. I'm pleased to share with you here, next to me, Alon Rozner, the new CFO of Kornit. We announced 2 weeks ago about the change of CFO. Guy is here as well and Guy is moving to a new and exciting position within Kornit of leading in new business units, which I'm sure we are going to touch on it as part of the Q&A. So pleasure to be here. Kornit -- what is Kornit all about? Kornit is actually enabling the transformation of the textile industry from the analog industry into the new age of the digital industry. We are developing, producing and selling solutions which enable to produce and print on textile with a digital system. We are selling system, ink, services, software and workflow. Today, Kornit is about 650 employees. In the last few years, we were growing constantly around 25% CAGR. We have about 1,200 customers. Within them, the biggest customer -- the biggest companies of the world Amazon, Adidas, Fanatics and many others. And we are dealing with 2 main market segments within the big textile market. We are dealing with DTG, direct to garment, printing directly on garment. It could be t-shirt, it could be jeans, it could be sweat shirts, but also in direct to fabric, printing on rolls of the fabrics and then converting them into a product and the product could be for the fashion market. For example, the dress that you see behind me, but it could be also a product that convert into the home decor market like a sofa, a chair or a curtain. So I will stop here and let's continue with the Q&A.

Thanks for the intro. So I mean, first one for me, looking at the trend. So 2020 was definitely unprecedented. Looking back, you started very strong. Then there was some slowdown at the very early stage of the pandemic, and then you initiated a massive reshape recovery that we're still entering today, driven by e-commerce, and the on-demand production. So I guess, can you talk a little bit about these trends? And I guess, looking beyond the pandemic, how do you see those kind of tailwinds continuing?

Yes. So you have described it very well. We started the year very strong 2020 after a very strong 2019 with big orders for the year. And then in March time, the world has changed. A customer told us we don't know what will happen. We stopped order. They were forced to close the sites all over the world. And we, of course, came out with the announcement that we're going to miss Q1. But immediately after that, about less than a month after that, our customers starting to call us that are telling us we have huge amount of jobs that we are getting because the retail market is being closed, and everyone is going to the e-commerce and starting to order. And our customers start to tell us, come, helping us -- help us to open the sites. And actually, we need more system for you, more ink from you, more services, and we would like to accelerate the projects that we would tell -- we were talking about. So we saw a huge inflection in the industry that's coming from the e-commerce mainly and the changing in the business model. We saw the brands are moving into the on-demand manufacturing, leveraging our customer base. Brands are changing also the way they are producing into inventory, mainly in the -- on the retail market as -- on the replenishment. So instead of having huge stocks, they are now ordering on demand to fill their replenishment on store. We saw a big demand from e-commerce sites, Etsy, Shopify, different e-commerce are connecting directly to our customers. Business are coming from licensors. Today, everybody can become -- can be a licensor and go live and become a brand on Shopify. So this created a huge demand into on-demand manufacturing. And our customers started to ask us for more systems and more equipment, and we just delivered the results for Q3 that we are very strong. We delivered the guidance for Q4. We never been in position as of today that we have such a strong visibility for the next year. Actually, we have a visibility for the entire year in terms of orders because the market is so hot. And what we see today that the brands, the licensors, the main vehicle for them to sales is online. The focus is that 66% of the apparel will be sold online in 2024 versus 40% today. And this increase in online, the front end is digital, has to connect to a different supply chain that will be much more agile and produce for on-demand, and therefore, they need to leverage our solution. We saw growth both in the DTG and DTF. Actually, we released a new product, the Presto, about 1.5 years ago. And with this 1.5 year ago, within today, we can announce that we are the market leader also in the DTF, in the pigment market, in the direct-to-fabric in the DTF. So this is a huge achievement due to our unique technologies that enable us to print on any fabric without pre-retreatment, without post-treatment in fully sustainable way, which this is what the market needs. You asked me what will be the trend moving forward? So I can tell you that what we see just an acceleration of these trends. The market understand that they have to change the supply chain, both from sustainability issues, but also they cannot lose any more money but by -- we aren't forecasting the demand. It's just impossible to forecast today the demand because the consumer would like to have many choices. And while you're using website, e-commerce to sell, you can have endless choices to choose from, and it's very difficult to forecast how much to produce. So the trend now is to move in the production after getting the orders. So you go to the e-commerce, you order a product and then the products being produced like it's happening today with Amazon. If you go to Amazon and you order from Amazon, one of our customers, of course, they don't have the product from the shelf. You can design your product, you can choose any design, any shape of the product, and it will be fulfilled immediately and be sent to you within 24 hours. So the trend is only increasing now.

That's helpful. So I guess, as an obvious follow-up, you talk about the strong trends and the tailwinds. And if we look at your long-term guidance of $500 million run rate, is it too conservative because we're getting so much -- so many positive signals from you, but that goal is still there. So are you just going to hit it sooner? Or you just prefer to air on the cautious side?

So it's an excellent question. I'm very happy that now people look at the $500 million as conservative approach. A few years ago, they were looking like -- I was -- we were drinking something, so I'm happy. So I'm not in a position to give a new guidance for next year and for 2023. I'm in position to say that the goal of $500 million in the run rate business in 2023, we feel more comfortable and more secure than ever before. This is only from organic growth. Of course, if we will have any additional inorganic activities, we will accelerate the goals. And I believe that in the next 1 or 2 quarters, we will be able to provide more detail about if we can exceed and bringing this goal earlier than 2023.

Okay. Moving on to the competitive landscape. So obviously, the addressable market is increasing, and that raised the question. If new players are coming in or if existing players are kind of expanding into your territory, can you just go over -- kind of what sets Kornit apart on the 2 main segments that you operate in? And if you can talk about your competition, that would be great.

Yes. This is a very interesting market to look into. It's very unique situation where Kornit is today. In the DTG market, we actually hardly have competition. We have competition, but not material one. And the reason for that is the unique technologies that we managed to develop over the year. We are the only company, the only technology that really can print direct-on-garment without pretreatment, without posttreatment. All other solutions require many steps of pretreatment, of ironing, of drying and many other steps, which means it's not efficient for high-volume for really industrial use. And this is why we have very strong position with all the big manufacturers, if it's marketplaces, if it's big fulfillers, screen printers and so on. So we found ourselves in the industrial space almost by ourselves. In the commercial space -- and there are competition. We are not playing much in the commercial space. This is more from small shops that needs to print 100 t-shirts, 200 t-shirts a day for birthday parties and so on. We are not playing there. You can find many Japanese companies like Brother, like Epson, like Ricoh are playing in this space. They are not playing in the industrial space, and industrial space we are really, really stronger there. In terms of the DTF, I mentioned in the beginning, DTF is a new market segment with huge potential and we came up with, again, a new technology. We are the only one that can take any fabric. It could be polyester, it could be cotton, it could be blended and print on it directly without pretreatment, without posttreatment in the best durability and sustainability and the hand fill and the quality is the best-in-class. And today, 1.5 years after releasing this product, we can announce that we are the market leader and there is competition there. There's companies like EFI, MS, Durst, many serious companies, and we are today market leader by far in the pigment market. The market needs pigment because it's the only sustainable way to print on fabric, and we are leading it. So it's all about the technology. Actually, the pandemic, while many of our competitors, we didn't hear much of them. Kornit actually decided to accelerate, accelerate the investment, accelerate the people in the go-to-market, supporting closer to our customers. And we came out of the pandemic, actually increasing the moat around our technology, around our position in the market, and we feel that we are really accelerating our growth moving forward in both markets.

Thanks for that. I wanted to talk a little bit about the new business unit and the custom gateway. So when you acquired the company, you talked about the strategic aspects of the acquisition for allowing you to bring value to the value chain. And then 2 weeks ago, you announced a new business unit to be headed by Guy. So I just wanted to hear your thought about the value proposition and how that unit fits into the growth strategy?

Yes. So actually, this strategy started, I would say, about 3 years ago when we decided that we need to go and help the brands to change their supply chains to on-demand. We understood that they need to change the supply chain, and we saw that they are starting to sell more and more through the e-commerce and they need to connect to the consumer. And by then, we came with a clear vision that this is what we are going to do. We are going to bond the brands and the consumer together through our technology. And within the last 2 years, we were looking for the right technology to enable us to do this connection. And about 4 months ago, we announced about the acquisition of Custom Gateway, which we found is the best platform to enable us to do this connection and transformation in the market. Now let me explain in a nutshell what is this transformation. The -- today, when you're going to buy an apparel, most likely you're going online, your kids are going online and buying apparel online. When they're going online for a nike.com shop, in many cases, they will choose the shirts they want and the color they want. They will go to the basket. They will say I want to buy it, and then they will get the message we are running out of inventory. Why? Because what Nike is doing and what most of the sites -- websites are doing are selling what they have in inventory, what they have in the retail shop. So the front end is digital, but the back end didn't change much. They're trying to sell through the e-commerce in the same way that they were selling in the retail shop. It's like taking the telecommunication and using the old phone that we were dialing when we were kids, yes? And what Nokia brought is the mobile phone that you can work everywhere but it's the same phone. You just can talk, you couldn't do anything. And the real transformation happened when you changed what you can do with the phone, you can SMS, you can WhatsApp, you can do e-mail, and this is the smartphone. And the industry needs to move into a smart way of production. And the smart way of production is to enable the Nike of the world and all the rest to provide the consumer a variety or endless variety of products because everything is digital. So they don't need to keep it in inventory. They don't need to produce it. And only when the consumer will order it, then it will go and being produced and being sent to the consumer within 24 hours. Now the advantage of Kornit that we have 1,200 customers all around the globe that can do the fulfillment. So we need to route the jobs to the right customer that sits next to the consumers that order the product. So if the consumer sits in China, in Beijing, and is ordering from Nike.com a specific t-shirt that he likes, with Michael Jordan, in a red shirt, with long sleeve, with v-neck, he can get it within 24 hours because it will be produced next to him. And what Kornit is going to do, Kornit is going to manage this network and to do the routing and to make sure that the quality that is going to be produced in China or in Israel or in the U.S. is the same quality and with brand integrity, which is very important to the brand. The focus area for us is brands, is marketplaces, enabling marketplaces like Shopify, like Etsy and other to connect to our customer is license flows. Today, every musician, every gamer is becoming a brand, is all going to Shopify, open a shop but the problem is when we he get an order, how does he sell it, how does he produce it? He needs to have it in inventory as of today. And it's a huge risk. Tomorrow, he doesn't need to have it in inventory, just put the files, the images on the shop, people ordering, the order is being routed to one of the customer of Kornit that is the closer to the consumer and being produced on-demand and this is the solution that Kornit is working on it. The nice thing that this solution is working today, so custom gateway. We have already many customers that are fulfilling through it. One of them is Disney that are fulfilling through custom gateways, through this technology. And now Guy is going to lead this business unit that is going to focus on transaction, on impression that convert into the transaction is a SaaS fee. In the end, think about it like this, you all know Uber. Uber model connecting people to taxies. Here, we are connecting brands or impressions to system, to our fulfillers, but the nice model that we are also selling the taxies, and we're also selling the fuel for the taxies. So it's a look that's filling itself. And as much as we will connect more impression to our customers, they will buy more ink from us and more system. And of course, we will charge also for the impression, for the transaction fee on the impressions.

Thank you. That's very interesting. And -- I mean, we're nearing the end, but the question I wanted to ask is about capital allocation. So you have a nice net cash balance, and you often talk about M&A. And -- so I'm curious what's your view about M&A, what do you think is missing? What do you think could be complementary, anything you can add?

Yes. So indeed, we have healthy balance sheet and as starting to be substantial company, we need a healthy company because the market is now full of opportunities. And this is the time for us to expand. We would like to get into new market segments that we are looking into in the textile market, mainly in the software area and the workflow area. Still, there are areas that we would like to bring additional value, moving more into -- in the high-value chain of the solutions to enable consumers to do more and also for the brands. So one area is in the workflow. One area is in -- expanding on our technology solutions, looking into acquisition of potential competitors. And also in the go-to market, we are moving more and more direct. So there's areas of acquisition of potential channel partners or go-to-market.

Okay. That's helpful. We have about 2 minutes. So I guess, before we conclude anything that we forgot to touch on or any key message that you want to convey to investors.

The key message is that we really -- the industry is in an inflection point. We saw it in the music industry when it moved to digital. We saw it in the telecommunication industry. We saw it in film industry. Finally, it's arrived to the textile industry. Kornit, we believe, is the best position to drive this. We are planning to take much bigger play within these ecosystems. We're already engaged with many brands, big companies, fulfillers, marketplaces, like one of them is Amazon, but many more of them. And we believe that the $500 million is within our hand to reach it, but this will be only the starting point of the growth of Kornit moving forward.

Great. Thank you so much. Thanks for taking the time.

Thank you very much.

Thank you. Good luck with everything.

Thank you very much. Bye-bye.

Bye.