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

Welcome to the Kornit Investor Event. Before we start, I would like to remind everyone that today's presentation contains certain forward-looking statements. These statements are subject to risks and uncertainties, and actual results might differ materially. These risks are discussed in our most recent Form 20-F and in our other SEC filings. Our forward-looking statements speak only as of today, and Kornit maintains no obligation to update these forward-looking statements. The materials presented today will be posted to our website shortly following the conclusion of today's event. With that, I would like to hand over to the company CEO, Ronen Samuel.

Hello, everyone, and shalom from Israel. There is no better way to start this investor event than saying shalom. Shalom in Hebrew means hello, welcome and peace. We are all praying for long and lasting peace. With me today, Alon. And our management team is on the webcast as well. And we are all excited to share with you the next frontier of Kornit, Kornit 4.0. Today, we will share with you the following: We will talk about our organizational mission. We will talk about our new and exciting products, solutions and innovation. We will share the market opportunities in front us and we will share our 5 years financial goals, but before we start, let's watch a short video clip. [Presentation]

Amazing start for the year. We are very proud of the team and the execution of all of them. Thank you for the team. The key takeaways from Q1, which I would like to share with you, are amazing. One of them is a record quarter of 152% growth year-over-year. Actually when we're looking at 2019, it's 72% versus 2019. That was very, very strong year for Kornit. Record industrial shipment of system both on Presto and on Atlas; record consumable year-over-year growth. We can see recurring revenue is growing very fast. Record service year-over-year growth and profitability, very strong profitability we are starting to see on the service business; and a record backlog of order for the rest of the year. You all remember, 2.5 years ago, we shared with all of you a goal to become a $500 million business run rate by end of 2023. Today, we are more confident than ever that we are going to deliver it ahead of time. As we're now looking forward, one thing you know about Kornit, we deliver and think big. Today, we are announcing our new management goal to be a $1 billion revenue business in 2026. We will share in the next few slides the fundamentals that will drive the business growth in the next 5 years. The megatrends that we were discussing for many years become a fact. This is a reality. Consumer behavior is forever changed, and social media has unleashed a potential for self-expression and become the main driver for the fashion industry growth. Consumer expect to receive products as fast as going to a shop and buying the product. The e-commerce genie cannot be rebottled. It's a game changer for the fashion industry and for the textile industry. 1/3 of the U.S. sales are done through e-commerce as of today and are expected to double in 4 years from now. E-commerce fashion will become a 1 trillion global market by 2025, but the supply chain and the production is no fit for the new world we have just discussed. Think about it, massive [ offshore ] of factories producing textile getting order against 18 months of forecast. Should I call it forecast or "hopecast?" Shipped 12,000 miles to a warehouse, where only 70% might eventually be sold, those 30% that are unsold items creating a huge waste of 21 million tons of textile; and a waste of 28 trillion liters of water, which equals to the amount of the total population of the U.S. drinking water for 72 years. What if we could do things differently? Things can be different. The answer is on-demand sustainable proximity production. Between today's consumer needs and yesterday's supply chain, there is a huge gap and only one clear solution, production to order versus production to "hopecast." Or shall I say forecast? This will deliver 0 waste, immediate verification through near-shore production and limitless of -- self-expression for creators. While no one could predict the speed and scale of changes, it's precisely what Kornit has been building for years, a world where supplies is being fulfilled by agile on-demand production. Almost 1/3 of fashion production is expected to move nearshore in the U.S. by 2025. And the same trends will be all over the world, which will enable brands and retails endless virtual variety by digital on-demand production that's breaking analog designing constraints, flexible inventory management by fast store replenishment and in-season reactivity to react fast to consumer behavior changes. To answer market needs, Kornit will lead the transformation, and therefore, our mission is to become the operating system for on-demand sustainable fashion. This is our mission. We always understood that to revolutionize fashion and fashion on-demand production, it will require end-to-end digital transformation. Our strategy is to focus on 2 main pillars: One pillar is digitizing production, converting analog processes to digital; the other pillar is establishing the virtual layer of on-demand production workflow. We call it KornitX. Let's start with exploring the first pillar of this strategy. From replacing analog process like screen to replacing processes of dye-based printing to DTF, today, we are going to talk about replacing other processes like heat transfer, vinyl transfer, embroidery, everything we can do today digital, but we're also focusing an entire production also how can we digitize cutting, sewing and the entire production flow. This is where we focus on digitizing the production. Since 2002, Kornit has established itself as an innovative pioneer of wet-on-wet printing, developing and scaling a portfolio of systems and solution that has set the bar for on-demand printing. In 2005, we actually developed the capability to print on dark garment with white ink, and we focused on Kornit 1.0. This was focused on custom designs on t-shirt. In 2012, we released our first single step of pigment DTF. We were focusing on textile decoration. This was Kornit 2.0. In 2018, we released the HD technology and the capability to print on dark poly. We were focusing on the retail market, retail quality with Kornit 3.0. Today, we are evolving and announcing Kornit 4.0. Actually, we're leveraging and combining the MAX technology with the KornitX technology, becoming the operating system for on-demand sustainable fashion. The innovation that fuel our growth are aligned perfectly with consumer and market megatrends of the e-commerce. Today, I would like to start to take you through the technology side. A few weeks ago, we announced about the MAX technology, what an impressive solutions that we are bringing to the market. The MAX technology will enable highest quality, much better than any quality you've seen till today with the highest durability that the industry needs. It will take to -- productivity to the next level both in terms of speed, in terms of automation. Also we are focusing on new application. How can we convert analog -- other analog application into digital solutions? And of course, sustainability. We always strive to improve the sustainability and to help the globe to be greener. And MAX technology take the sustainability to the next level. So a few weeks ago, we announced the ATLAS MAX. And the ATLAS MAX is actually the first system that is CO2 neutral from Kornit. It's already commercially available. And you should expect to see revenue contribution in Q3 coming from this platform, but before we continue to talk about the innovation of the application, the capability, let's watch a short video clip. [Presentation]

What an amazing product is the ATLAS MAX. Now let's talk a bit more about the capabilities and specifically on the XDi technologies that -- embedded in the MAX technology and within the ATLAS MAX. You're all familiar with our wet-on-wet technology, which is unique by definition compared to other processes of pigment, but now we are taking it to a different layer. We actually can build layer on layer of ink, creating a 3D image. And by creating a 3D image that is fully durable, yes, and with such a layer of white, we can create many new applications that were never being possible before with digital. Let me take you through it. Application like embroidery. Yes, we are going to replace embroidery with digital. Application like heat transfer and vinyl, yes, we are going to replace it with digital. An application like high density, of course, we are going to replace this with digital. Let me show you an example. You can see my t-shirt here. What you can see here is almost impossible to do it with any other technology. You can see here on the left side embroidery. You can see here heat transfer and a regular print, everything in one shot [Audio Gap] today with screen printing. You know what, let me give you an example. What you see here is an example of embroidery that almost impossible to do it with screen because of the amount of colors that you need. You need so many different yarns to run this type of t-shirt. And the way it's being combined, the complexity of it, is almost impossible to do it with screen. Now in 2 minutes, in less than 2 minutes, you can print it on digital in much cheaper cost compared to analog. This is one example. Look how beautiful it is. You actually can feel the embroidery. This is about 300 to 400 micron above the fabric. Let me show you another beautiful example, another type of embroidery. Look at the sharpness of the image, yes? Look how complex it is. To do it in embroidery, is super, super difficult. Another one, which is an interesting application that you never thought about it before, actually do crochet, crochet printing on a t-shirt. It feels like crochet. It looks like crochet. It's about 600 to 700 micron above the fabric, unbelievable applications that you can do with this technology. Another thing is denim, printing on denim, printing on the seam. Look how beautiful it looks, printing on the seam of denim. So this is a huge market. And we believe, with this technology, we are going to replace and increase the TAM and the potential we have for Kornit moving forward. Another application, which is also a big market, is the heat transfer and vinyl transfer. And the market is about 2.2 billion impressions. We actually can print it 20x faster and 3x cheaper than the way you do it today with screen or with vinyl. And for the first time, without technology, you can do it not only on polyester. You can do it also on cotton. You can do name and numbers not only on polyester, name and number on cotton in any color you like, in any shape. You do -- you are not constrained to normal shape. Let me show you here a simple vinyl type of printing. And look down the details of the image, the quality, the sharpness of the image. This is something like 500 micron above the fabric. What an amazing capability with this technology. Another application with these XDi technologies that we can do is the raised printing, which is high-density printing, which the market is about 0.3 billion impression. This is a relatively small market but unique. It's small because it's very difficult to do it today with screen. And we are bringing capability to open this market and to open new applications that were not exist before. And we can do it 20x faster than the process today and 3x cheaper. Let me show you an example. Actually this example is almost impossible to do it in screen. It's so complex that it will take many, many hours to be able to print it in such a quality. So this is about the XDi technology, but now I would like to talk about another market. And surprise, we are going to bring MAX technology to the poly market. You'll remember the Avalanche that we released 1.5 years ago, the Avalanche poly that was focusing on the polyester market. It was a revolutionary product, but we have learned a lot doing this process, what we can do good and where we can improve. And there were areas that we should -- we worked on to improve. And we are coming now with a solution which is based on the ATLAS MAX, and we combine the ATLAS MAX technology with the poly technology into one system. This system will be available end of 2021, with revenue already generating in Q1 2022. This market is huge. About 16% of all t-shirts is coming from -- is printed on polyester. And now people are starting to get used to athleisure. You can see people walking with polyester, going to a supermarket or even to the office. It's a big, big market. Let me show you 2 example coming from this technology, from the ATLAS MAX poly; one of them, look at this, for the sports market, name and number with the right colors that can fit your team. Beautiful one. Another one, let me show you we are bringing also fluorescent ink to this market, to this system to the ATLAS MAX poly. It will come also with [indiscernible]. Look at the color. Look at the sharpness, beautiful image that we can do on polyester without any dye migration, without any limitation. So this is a great news. It's going to contribute a lot, starting from next year. We have a huge demand. The -- really the request for this solution is immense. And we are going to change the market and replace the way it's being printed today on analog, using digital technology, using Kornit. And Kornit is the only one that has the solution to print digitally on dye -- on polyester, on colored polyester. Next -- sorry. Go back one slide. Another breakthrough technology that I have to share with you is about automation. And one of the main constraints today about productivity is the operator itself, the way it needs to load and to unload the garment. I don't see it running. Let me take it back again, and hopefully, now it will run. Yes, now it will run, so you can start to see the video clips. On the top is the way to load. And you can see how easy to load today with this system, with the semi-automation system. On the bottom right, you can see that actually the pallet is changing to the size of the garment. If you are using a small garment, the pallet will go small. If you're using a large garment, the pallet will enlarge to the right size, everything automatically. Now today, as I mentioned, the -- one of the main constraints in terms of productivity and consistency is the way you load it. By using these systems, you're actually going to increase the productivity by 20% at least. The loading time today is about on average 35 seconds. This will reduce the loading time to 15 seconds, even less than that. And you will be able to increase the productivity by 20%. Also it's really easy. Everybody can do it now. You are not going to be tired. And it force you to have a consistent productive -- consistent production, which will reduce any waste that you have during the production. So it's a -- fantastic. It's a patent technology that we are the first at bringing to the market. It will be available Q1 2022 for the entire ATLAS portfolio, for our installed base; and for the ATLAS MAX, from Q1 2022. To sum up about the digital DTG market opportunity. The market is huge. Today, the market is about 21 billion impressions. This 21 billion impression is about 20 billion items that's being decorated. Today, our customer are printing something like 200 million impressions, which means that we are less than 1% of the market. Looking at 2026, the market is going to be 31 billion. And as you remember, I mentioned $1 billion in 2026. To be $1 billion in 2026, we need to print 1 billion impression, which relate to 3% of the market -- or less than 3% of the market. We are not talking about capturing 20%, 15% of the market. To be $1 billion in 2026, we need to capture only in the DTG 3% of the market. Let's move on. Let's move on to the DTF, to fashion on demand. We see huge goals coming from the DTF with our innovative pigment-based Presto platform. One of the biggest area of growth in Q1 was DTF. We see many customers, new customer ordering the DTF, if it's for fashion or for their home decor, leveraging the pigment ink, replacing the reactive and acid-ing that's really polluting the industry and the world. In Q1, one of the highlights as well was the Kornit Tel Aviv fashion week, which we are so proud about it. And it was so perfectly demonstrating the value that Kornit process can bring to this market. I would like to give you a taste of the amazing experience we had, please. [Presentation]

What an amazing event. Before we continue, I would like to show you something that -- you saw it in the video. Look at this fabric that was printed leveraging our technology, the Presto technology, an amazing fabric. Look at that. Look at the color. Look at the -- pity you cannot feel the hand-feel, so smooth. Well, what I can tell you is that fashion week had demonstrated the capability to produce an entire collection in less than 2 weeks and a dress in less than 1 day, from an idea to a ready-to-wear collection. I can tell you. I was standing next to the designer. They were blown away by the technology. They always used to create new fabrics, new design, but it used to take them months. I'm talking about 12 months to receive the material back, but they also had to order hundreds of meters. And then they are standing next to the machine designing a product; see it being printed live, making one dress, cut and sew. And it's ready-to-wear. This is a revolution. A great example is the collaboration also between ASOS and Fashion-Enter U.K. creating a micro factory to enable ASOS to produce on demand, into order in a full sustainable way. They are leading the market in that and we are partnering with them. We are very proud of that. We are planning to establish Kornit brand as a leading brand in the fashion world; and about to take Kornit fashion week globally, in mega cities. You should expect this year to see us both in New York and in L.A. Now I have another surprise to you. We're actually taking the MAX technology and bring it to the Presto. We are going to bring Presto-based MAX technology early next year, early 2022. And we'll see revenue already contribution in Q1 2022. We're also going to give capability for the installed base that they -- are using Presto to upgrade to the MAX technology as well. There will be an amazing application that you cannot imagine coming from the Presto. I don't want to unveil it right now. We will share with you the new applications that -- coming from the Presto in the coming -- weeks and months to come. We are in the beginning of the revolution of this market. Now think about it. You'll remember what I was saying about 31 billion items, impression of the DTG. When we convert the 39 billion square meters into impression, we are talking about 4 trillion impression. This is more than 150x the size of the DTG market, and this is where we are going after. We believe we can revolutionize this industry, move it more on demand, more sustainable. Now I want to touch on the second pillar of our strategy, establishing KornitX. KornitX is the engine and the brain behind the operation system -- behind the operating system managing every aspect of the end-to-end process, from empowering the front-end steps like design, order management and virtual catalog, to smart routing of orders and a network of fulfiller, enabling a true proximity production and brand integrity. We will also soon release the [ QUEST ] -- is a system which will enable consistent quality across system and across different sites. Another part of this system is to manage the end-to-end production flow from the ERP to inventory, to print, to cut and sew and pack and ship. Everything on the production space, we are going to manage through KornitX. So KornitX is about to become the standard for on-demand production. In the last few months, we've managed to connect many of our installed base, our fulfillers using the KornitX; brands, retails, marketplaces, licensors, big licensors using KornitX. And today, I'm happy to share with you latest news of partnering with one of the fastest-growing software companies in the history, Canva. Canva will print and -- using our technology to connect their solution on a global level. Print is one of their key growth engine to help to increase the monetization of their platform. And they are going to leverage KornitX as the one that's going to manage the entire print for Canva company. It's a really exciting news. When we are looking at this business, KornitX, we are putting a very clear goal in front of us. This business is going to be bigger than $100 million business in 2026, coming mainly from transaction through this system. Now is a time to speak a bit more about the financials and to share with you a bit more KPIs. And for that, I would like to ask Alon, sitting next to me, to share with you some more information. And then we'll come back and we'll summarize before the Q&A. Alon?

Wow. Thank you, Ronen. I'm so excited to be here today to be part of a great team and great company. Now let's connect the great technology, innovation and market opportunity to our financial model. Let's start with our current model. Kornit today has very strong financial model with robust and growing recurring revenues. Kornit enjoys an impressive, profitable revenue growth, increasing profitability, and generation of cash flow from operations. We have a very strong backlog and great momentum in the business, and we have strong and disciplined balance sheet. Setting aside the anomaly of H1 of 2020, Kornit has shown an impressive CAGR of 24% in the last few years. As you can see, we had great recovery in business since H2 of 2020 with over 35% growth in H2 of 2020 compared to H2 of 2019 and more than double from H1 of 2020. We had an outstanding start for the year with great results for Q1 of 2021, very strong revenues of $66 million, net of $3.1 million of [ warrants ] impact and increase of 152% compared to Q1 of 2020; and an operating margin of approximately 10%. Both the top line and profitability exceeded our guidance for the quarter. Last week, on our earnings call, we gave strong guidance for Q2 of $76 million to $80 million revenues and 11.5% to 13.5% operating margin, all assuming 0 impacts of warrants. So our focus for H1 revenues, meaning Q1 actual plus the midpoint of our guidance assuming 0 impact of warrants, is $144 million, which is by far higher than H1 of 2020 and higher by over 70% from H1 of 2019 which was a great year for Kornit. As for 2021, we don't give guidance for the full year, but we forecast that H2 will be higher than H1. We expect to see sequential growth of revenues from Q1 to Q2 and from Q2 to Q3. We also expect to see high profitability in Q4 due to favorable mix of consumable business. And as you all remember, 2.5 years ago, we set a long-term goal to achieve $500 million run rate revenues by the end of 2023. Now let's look at our new mid- and long-term financial goals. As for the mid-term goal, we are very confident in our ability to meet our $500 million run rate goal, and we believe that we can achieve it ahead of plan. Our long-term model consists of 3 main financial parameters: revenues of $1 billion, gross margin of 50% to 54% and operating margin of more than 20%. Looks like very ambitious targets. Well, it is, but we strongly believe that we have a solid execution plan to meet these goals. In the next few minutes, I will share with you the main building blocks of our financial model. Let's start with revenues. We expect revenue CAGR of approximately 30% from 2020 to 2026. As you saw earlier, 2020 started very slow, so the growth rate in 2021 is going to be higher than 50%. Our revenue model assume organic growth. We take into account possible technology acquisitions, but we don't assume significant business from it in our model. Our revenue model consists on end-to-end solutions to our customers, which include systems, consumables, value-added services and KornitX solutions. All revenue streams are expected to grow significantly in absolute dollars in the coming few years, while growth rates will change. Currently, our system revenue grow very fast, which is fantastic. And as we grow our installed base over the years, we expect consumable and software solutions to grow faster. As you can see, our current model consists of about 50% systems sales and 50% of other revenues, which most are recurring revenues. In 2026, we expect our recurring revenues to reach approximately 60%. Interesting point about consumables. The 40% or $400 million of revenues from consumables are expected to serve approximately 1 billion impressions for DTG and DTF. As Ronen discussed before, our TAM for DTG only is expected to be 31 billion impressions in 2026. That means that, even if all consumables are going to DTG, we will serve about 3% of our TAM. And as we know, the potential of DTF for us is huge, and the DTF TAM is by far bigger than DTG. Services revenues, which include also the KornitX business, are expected to be significant part of our business in 2026. We invest a lot in KornitX, and we already see the huge value it brings to our customers and the potential for us. We expect KornitX to generate approximately $100 million of revenues in 2026 at a very high profitability. Now let's move to profitability. Gross margin or gross profit is one of the key parameters in our financial model which shows the value of our technology and fuel our investments for the future. The main and most important driver to profitability is our technology and innovation. It is relevant to our systems, consumables, software and our added value services. As Ronen discussed, we have aggressive plans to continue and lead the digital transformation in textile by superior technology. The second driver is the strength of our recurring revenues. The example we see here of our new products clearly shows the strength of these 2. Again, technology plus recurring revenues. For example, our Atlas system generates recurring revenues of about 2x of the ASP on top of the ASP in 5 years. The advanced DTG and DTF systems generate much higher revenues in 5 years. It includes higher ASP, higher quantity of consumables and higher ASP of the special consumables. Additional drivers to increase profitability are obviously the Kornit X business at high profitability of more than 70% and continuous improvement our service profitability. While increasing the top line and gross margin, we continue to invest in growth to allow us to maintain our leadership position in the future. Our investments will be in R&D, sales and marketing and scaling up our infrastructure. And we expect to see operational leverage and continuous improvement in operational profitability. Our long-term goal for operating margin is over 20%. In summary, $1 billion revenues in 2026, high growth in all revenue streams, very strong mix of recurring and nonrecurring revenues, superior technology, which brings great value to our customers, continued improvement in gross margin, driven by high-end technology, high growth of consumables and Kornit X business, significant investment in growth, mainly in R&D and go-to-market and increasing operating profitability. Thank you. And looking forward to continue this exciting journey.

Wow, Alon, really exciting, and I love your t-shirt.

Me either.

Yes, beautiful one. So to sum up for today, I have a few messages to share with you. First of all, our mission is to become the operating system for the on-demand sustainable fashion, and in 2026 to become a business of $1 billion. This is a very clear mission that we have in front of us and a very clear strategy that we are going after. Secondly, as you all know [ how it is on ability ] community to all of us, our founding values is our commitment to sustainability and community. We will not rest until we turn this industry's harmful ways to a green and sustainable. We are planning to issue our first impact report in H2 this year. Think about it. Again, this 1 billion items, 1 billion impression. If all this 1 billion impression manufactured on demand, think about how much it will save to the earth. It will save approximately 420,000 tonnes of waste and 560 billion liters of water. This is where we are driving this industry, and this is just by turning 1 billion item to on-demand manufacturing without waste. Our vision is very clear. We are here to create a better world where everybody can bond, design, express their identities, everything with digital one impression at the time. Now is the time for Q&A.

Thank you.

Wait, with us today, Monica, and we have our entire management team on the line waiting for your questions. And of course, we have Alon here and myself, and I will direct the question to the relevant manager to answer. So today, we are going to start with our analyst community. And after that, we are going to give you a chance to ask questions. So please write your questions and we will take your questions and we'll try to answer all of your questions. We have about half an hour or 40 minutes to get your questions. So Monica, to you?

Thank you. We will start with our covering analysts. We'll go with Rod Hall from Goldman, please.

Yes. First, let me say we've been observing all the events in Israel. We hope everyone is safe there.

Thank you.

Thank you very much.

Thank you.

So let me ask -- I've got 3 questions. The first one is, just wanted to clarify the $1 billion in 2026. Is that an end of year run rate for revenue? Or is that total revenue in that year?

No. This is our goal for the year of 2026.

Okay. Got it. And then I wanted to dig into Kornit X a little bit more and just trying to understand how the revenue model there works. Is it on a per impression basis? Or is it -- is it charged some other way? How do we think about how that revenue develops? How would we model that?

Yes. So it's mainly based on transaction, but I would ask Guy, who -- ex-CFO, who is managing this business line to give you a bit more information about that, but we are still keeping it -- we are not sharing everything. So Guy, please open your microphone.

Yes. Can you hear me now?

Yes, we can hear you.

So we actually showed it before. So as Ronen said, the #1 driver for our revenue and our growth is transaction. And -- but we're also going to see revenues from SaaS models, subscription and value-added services.

Okay. Okay. So you're not going to disclose yet KPIs for Kornit X that maybe over time so we can start to think about how that revenue develops or...

Not yet. But as I'll repeat what Alon said before, we expect much higher CAGR for the Kornit X than the average CAGR.

Okay. Okay. And then let me come back to maybe the most interesting question, which is how do you see this, Ronen, this market developing? I -- so you're pushing -- it's very exciting to us to see digital manufacturing rolling out. We've thought about it on 3D printing systems for a while, but this is the first real example that's being monetized. And I'm curious, do you think that -- do you think this develops -- we have these FedEx and used to be Kinko's printing offices, all around, distributed all around the U.S. and most countries have this kind of a thing set up. Do you think we could eventually see these kinds of machines out close to consumers? Do you think there's even eventually a market where consumers could have a product themselves? How does this all develop over time in your mind?

We definitely see today our customers, our fulfillers are opening additional sites to be closer to the consumer all over the world. We can see big customers in the U.S. spreading all over the U.S., opening sites in Europe, also in Asia to be able to fulfill closer to the consumer because for the consumer, what is important is quality and time to market. Immediate clarification is very important. Now think about it, to ship a t-shirt produced in the U.S. to China, or produced in China to the U.S. will cost you more the shipment cost than the t-shirt, doesn't make any sense. You have to produce it locally next to the consumer, and this is where the market is moving.

Right. Yes, the ESG elements of this are unbelievable, honestly. I can't even believe 30% of this stuff isn't ever bought that gets produced. Anyway, okay. I appreciate it.

Thank you very much.

Thank you.

And our next question will come from Jim Suva from Citi.

Thanks for the insights and the videos and the demonstrations are especially important and very useful to have during such a time when we can't meet in person. So thank you.

Thank you, Jim.

I have a question on the goal of the $1 billion, it seems like your gross margins are going to be boosted. Is that mostly because of the consumables become a bigger portion? Is that how we should think about that again, the hardware kind of being the margins of what they are, but more the consumables become a bigger portion of the pie. Then I have a follow-up.

Okay. So yes, I mean, you are right. We are currently selling a lot of systems, and we grow our installed base. Now as we move on with time, we will have more and more systems in the field printing and the consumables are going to grow faster and drive the increase in gross margin. Yes.

If I may add a few more points on that. So of course, we are selling more high-end solutions. So you saw the selling the Atlas and the Atlas MAX and the Presto, and there will be more high-end solutions that will come to the market. Also, look at the service. The profitability of the service is a night and day compared to a year ago, and it will be a night and day compared to a year from now. And of course, the Kornit X is a software business. You should assume that it's a very, very high gross margin. So all of those together with what Alon was mentioning about supplies, will bring the gross margin above the 50%.

Then my last follow-up is on geographic focus. Do you move to certain geographies kind of on your own initiative? Or is it more your top few customers lead and take you to those geographic regions? Or what are the geographic focus and strategy that we should think of?

So today, we can see that the Americas and specifically in North America is about 60% of our business. EMEA is about 30% and Asia is about 10% of our business. North America will continue to be our biggest portion business, but we expect both EMEA and Asia to grow and to grow faster. If we look 10 years from now, 5 years from now, China is a mainstream market. And there is so much production there. We have now to build the base to be able to build a big business in China and in Asia. But we see a huge growth coming also in EMEA. Luckily, North America is really firing on all cylinders and running very fast. Also, it's amazing to see the business coming from Latin America, places like Mexico, like Brazil becoming a growth engine for our business.

And our next question will come from Patrick Ho from Stifel.

And likewise, hope everything is well during this challenging period. From your perspective, it was great to see all the new product introductions and the offerings you presented today? Looking at it from an operational standpoint, how does Kornit manage these various introductions in terms of the supply chain, parts procurement? Is the company able to leverage its existing infrastructure? Or how much more do you have to build that out to support a lot of these new product introductions as well as on the workflow solutions side?

I will start, and maybe I will ask also Ilan, our VP of Operations, to add a few comments from his side. But we are scaling, in the last few years, our operations system, and I'm very proud of our dedicated team on operations side. We scale our business both on the contract manufacturers on the system side. So today, we have 3 contract manufacturers building our systems. Two years ago, we had only 1, and we are planning to add even more. On the ink side, we just moved to a new facility, a new building, a new ink factory that can produce for the next 20 years, the capacity that needed for Kornit. So we are scaling in every element. Supply chain is an issue today worldwide. Luckily, we had a very good forecast for the year. We came to this year with a very strong backlog. We knew what we needed. We order well in advance, and we don't see any risk to meet the demand that our customer needs for this year, and we're already building for next year and even the year after. There is pressure on cost from all kinds of vendors. Of course, we are working very closely with them to make sure that we maintain the cost where we want it to be, but we're all aware of what's going on around the world with shipment costs and other stuff. Ilan, do you want to add any comments from your side?

Yes. Thank you, Ronen. So coming back to what you said, we are basically working with 3 very large contracted manufacturers. We don't see any capacity issues or ability to grow up in terms of capabilities of those 3. We are putting a lot of focus to trim down or shorten the time of the new product introduction moving from R&D phase into MS production. And this is the big challenge that we have, and we're going to make it this year.

Thank you, Ilan. Thank you very much.

Great. And just as a quick follow-up, the Kornit X, a very differentiated solution is something that is probably very beneficial for your customers. I've seen in other industries where the customers kind of want to remain in control of that managing and the routing and all of those aspects. How do you convince your customers that this is something that you can do better for them and bring more value added?

So what's the value proposition that we are bringing is ability to provide, first of all, for the brands, the retailers, the e-commerce of the world, the [ licensors ], the ability to do proximity production wherever the consumer is there. So this is the value proposition on top of that consistent quality. So if you produce it in China or you produce it in the U.S., you're getting the same quality, which is very, very important for the brand. Now some of -- few of our customers already have their own technology, own workflow. With many of them, we are working hand-in-hand because in the end, we are not providing services of printing. They are the one that providing services of production and printing, and we are routing jobs to them. So they are enjoying from those jobs that we're accelerating their business. So in the end, our aim is to accelerate, to fuel their business with more jobs, more impressions that coming from the licensor, from the brands, so they can produce more, they can consume more ink and can buy more systems, And so it's a win-win situation.

And our next question will come from Brian Drab from William Blair.

So I just wanted to start by just clarifying the TAM. You're talking recently about in recent presentations, 18 billion impressions. Can you just make sure that I understand exactly what was the TAM before in terms of impressions? And then are these 5.2, 2.2, 0.3 is all incremental to that? Or were they within that and now you can attain those?

Yes, excellent question. The TAM, as we were relating before, was 2017 and was not included embroidery. So what you see today is the TAM for today with embroidery. The heat transfer and the vinyl was there before, but it was a relatively small portion.

Got it. Okay. So what is the total number of impression? I just wanted you to go back to that.

Total number of impression, as of today, is 21 billion potential impression.

Okay. And in 2026, that goes to...

31.

31.

31. Okay. Can you share -- will you share anything in terms of the pricing for any of these machines, the MAX, the Poly MAX, how much it will cost to upgrade to the MAX or how much the automation solution will be priced at?

It's too early to share it. Of course, you should assume that the Atlas MAX will cost more than the Atlas. The benefit of the automation is huge. You can increase by 20% the productivity of the system. So there is a huge value to that. And of course, the Atlas Poly brings an immense value proposition. There is no other digital solutions that can print on dyed polyester, and we are really going to make the life of any printer or any producer much easier using our technology. So there is a huge value. And this is why we believe there's a good gross margin and good business for our customers using this technology.

Okay. Great. And then if I could just ask, you use 2020 as a base in the slide where you show the growth to 2026. And if you -- it looks a little different if you use 2021, right, because we're doing a lot better in 2021. And I would assume -- it looks like system sales are going to be up a lot from 2020 to 2021. Is your assumption that system sales from today through 2026 grow at below 25% rate? Or do you think that -- because it seems to be what's implied because if you're going to grow, I think in the slide, it kind of shows like a 25% growth rate for systems, but -- and there's obviously much stronger than 25% growth in 2021. So any comment on that?

Alon.

Yes. So we started the baseline year is 2020 because this is the year where we have official results. We did say that we gave the forecast for H1 of 2021, and we don't give the full guidance for the year, but we gave some indications where we go. Now when we look at the growth rate between 2020 to 2021, it's going to be much higher than the 30% that we assume for the 6 years. We said over 50%. And then over the years, the growth rates of the consumables, the Kornit X will be higher than the systems growth going forward.

And our next question will be from Christopher Moore from CJS Securities. Chris?

Yes. On the -- trying to get a better sense on the DTF trajectory. Maybe just what a reasonable split your system sales would be between DTG and DTF? And I'll say, 2 years from now and 5 years from now, I'm just trying to understand kind of how you're looking at it.

Do you want to start with it?

Yes. So we don't break exactly the ratios of DTG and DTF systems at this point. But what we do see is very fast growth of DTF. And DTF, in terms of percentage in 2026, is going to be higher than it is today. Ronen, do you want to go ahead?

Yes. So as you mentioned, the growth that we see in the DTF is faster than the DTG, but because we have such a large installed base on the DTG, and the DTG is also growing very, very fast. So DTG will be, also in 2026, the majority of our business. DTF will be much bigger than today, but will still be relative smaller part compared to the DTG that will be the majority of our business.

Got it. And maybe just one on Kornit X. Are there specific milestones targeted for 2021? And secondly, how much investment in KornitX say, between now and the end of 2022?

Yes. I will start with that -- with the target and also [indiscernible] . So of course, we have a very detailed target. Where we came up now with the $100 million by 2026 is based on a very detailed business plan that we are taking not by year by year, by quarter by quarter. The amount of investment, the new customers that we are going to bring here, what we have today, what are the new solutions we are going to bring for the committee. So it's based on very detailed plans. And we have a very clear KPI, both on revenue or number of impression or number of customers using it on many other things internally. At this stage, we are just sharing the $100 million asset target. We cannot share more, but you will see more investment coming to R&D around the workflow and KornitX and you will see additional acquisition, technology acquisition specifically focusing on the workflow and KornitX.

And our next question will be from Greg Palm from Craig Hallum.

Yes. Great. Just to start off, kind of a follow-up on the last question, but maybe I'll ask it in a little bit different way. In terms of the mix of your customer base, and I guess we'll start it on DTG. Curious how that kind of evolves over the next 3, 4, 5 years? What's baked in for growth in terms of that core customer base, the marketplaces versus the growth of brands and obviously, the associated supply chains related to those?

So let's be very clear. We are going after the impression. Wherever the impression are, we are going after. Today, we see a huge growth with our strategic customers. Starting with our global strategic customer, but many customers like TSC, like 2GO, like DTG2Go, Fanatics and many, many more stakes and many more. The growth will continue to be with those strategic customers. We are working very closely with them on their business plan already for 2021, and we can see they continue to grow and expand. But because we are entering too many new market segments, like the Poly, like the DTF, now with embroidery, with the sport, we are getting net new customers that today they are small, we are starting with 1, 2 systems. In a few months, they're accelerating and growing very fast because the solution and the ROI is super efficient. So the growth is coming from those areas. The growth is coming also geography. Today, as I mentioned, huge growth is in North America, but we start to see EMEA specifically in area of Eastern Europe, Poland, with Spain. Of course, Germany as we move to direct, U.K. that we move to direct, we see a huge growth going there. And we really hope and we start to feel it that the growth is also coming in Asia, and I mentioned China. But we see today the growth in Japan. We see today the growth in Australia and in Korea. So also geography, we are seeing the growth. And of course, it's all about, as I mentioned, the impression, which will come not only to fuel our system and ink, but also generating impression and transaction on KornitX, the growth on our service business, value-added service business that become more substantial moving forward. So the business plan is built on layer by layer on very, very detailed plans to bring it to the $1 billion by 2026.

Okay. Makes sense. And just to clarify, you're not willing to disclose the expected mix of DTG versus DTF, but it sounds like you are expecting that DTF grows faster than DTG over the next 5 years?

Yes. Because DTF is starting for much lower installed base. So in fact or in terms of percentage, it will grow faster. As I mentioned, it will still be a relative smaller part of our business, but a material part and a very substantial on the growth moving forward. If you look beyond the 5 years, really to bring Kornit to a $10 billion in terms of revenue, and Kornit can be there, is really to transform this 4 trillion and just taking a few percentage of this 4 trillion in the DTF and move them to digital. Eventually, it will happen.

Okay. Good. And then if I can just sneak one more in on automation. What has baked in as maybe an expected take rate on that? I assume that's going to be an added option. And is this something that you can also add to the existing installed base at some point, not just on Atlas? And then I guess, long term, what else are you thinking about as sort of enablers that can help boost productivity?

Yes. So I also will like to ask Omer to say a few words on that, but automation is critical. We are talking with all our customers. They're all talking about, "hey, how can we automate the entire process." And this is what we are doing. It's not only on the machine, but the automation of the entire production flow. We expect that most of our customers, when they will buy new system, will buy it with the automation system. Also the installed base, and we are talking with our biggest customers, they are going to upgrade the system with automation. So we will see next year and the year after substantial revenue coming from the option selling to the installed base on each one of those elements. In terms of how can we improve the productivity even further, you can assume we will come with even faster systems. We will come with even faster automation. Yes. Today, what you've seen is about the loading. There is a full automation in the future, which I cannot share more information about that. But it's much more than that. It's again the entire operation. It's not only on the system. How do you automate all the other aspects up to the packing and shipment of the items to the consumer? Omer, would you like to say anything about automation or any part of it? Omer? I think we have a problem with his connection. So hopefully, I answered your question.

Yes. Okay. That's great.

Thank you.

Any more questions?

Yes. We have a follow-up question from Brian Drab at William Blair.

Yes, Brian.

And the host has been asking me to turn on my video. So I turn my video on. And can you just clarify, did you say greater than 70% gross margin for KornitX?

Yes, we did. We expect high profitability for this part of our business. And yes, we said it.

And that's in the near term? Or is that something that you need to scale to? Is that immediately that profitable?

It's not immediate. This is our goal for 2026, and we will get there.

Okay. Got it. And then I just want to ask this question just to give you a chance to answer a question that's on the minds of a lot of the investors that I'm speaking to. Given the horrible situation that is occurring in Israel right now, can you talk about your manufacturing partners? And is there any risk that people won't be able to get to those factories? I know you partner with Sanmina and Flextronics and you run your own ink manufacturing site. But what are contingency plans and capabilities outside of Israel for manufacturing?

So thanks for the question. So first of all, our workplaces in Israel are open. So our employees are in the office today and working and they are in the ink plant in [indiscernible]. Our contract manufacturers are all around Israel. They are the biggest contract manufacturers of the world. They are Flex, Sanmina, and they have not only in Israel facility, if it's in the north of Israel, if it's not far from where we are in Rosh-Ha'Ayin, not far away from that. But of course, Sanmina is a global company. So potentially, we can -- we can produce also around the world and also with Flex around the world. But we don't see a risk not to be able to produce in Israel. The situation is tense. You can all hear the news. I think we all have been there before in Israel. We are a bit more relaxed because we grew into it. We believe that this round of escalation will open a new door for peace between the sites, and we all pray for that. And hopefully, in the next 2, 3 days, everything will calm down and we'll continue our life as peaceful as before.

All right. Well, good luck with everything.

Thank you.

Thank you.

And now we have a few questions from the audience. We will start with the first question is, does the $1 billion target, DTF -- include just DTF? Or is the $1 billion impression of DTG? Can you clarify that?

No. So I guess you are asking about the consumable parts in our model. So we forecast or we model about 40% of our revenues in 2026, meaning 400 million, which will serve about 1 billion impressions to come both from DTG and DTF. The majority will come still from DTG, but we will have, for sure, business also coming from DTF.

Okay. And can you talk a little bit about how the new ink plant construction is progressing?

Yes. Progressing very well. Actually, our team moved already to the new ink plant. And we are planning to start shipping new supplies coming from the new ink plant by end of this year. So we are very excited. And of course, once the first bottle of ink will go out of the new implants, we will share it with you.

Okay. And our last question from the audience is, is the DTF opportunity a replacement market or enablement?

Very good question. I see it, and we see it mainly as enablement market. When we are talking about on-demand manufacturing, this is an enablement. This is not a replacement. The market is moving into near-shore production to do on-demand manufacturing in a sustainable way. You cannot do it today with the current technology. You cannot do it sustainable. You cannot do it next to the consumer, and you cannot do it on demand or in one or for short term. You have to do it in very long runs. You have to plan for it months in advance, and it will destroy the earth. So it's an enablement, and this is where the world is moving.

Great. [Operator Instructions] Ronen, sorry. We do have a couple of update questions that just came in. So one is about your acquisition strategy. Any gaps in the portfolio around automation or software to enable next steps in that journey?

Yes. So of course, software and workflow in KornitX is our focus. I actually would like to direct these questions to Amir. Amir, are you with us?

Yes. I'm here. Thanks, Ronen. So the answer is yes to the question. We've been discussing this. The key area of focus for us on the M&A side, in some areas, we want to deepen our technology capabilities, and we have a very interesting pipeline of technology acquisitions on the KornitX side.

Great. And then our last question. The vinyl and heat transfer capabilities mean that the first time your system is cheaper than existing processes. So what implications does that have for the adoption trends compared to previous new products?

We expect it to accelerate. This adoption will be fast because it's not only 20x faster, it's also cheaper and provide you new flexibility of any color on any shape. So we expect a very fast adoption for the HDI technology, the MAX technology and all the products coming after that.

Okay. And it looks like we have one more question from one of analysts, Brian Drab from William Blair.

Yes, Brian. We can see you but we cannot hear you.

All right. It says I have to wait. The way it's working is you have to wait until the hostess -- so this year, you're -- I'm forecasting, and I think the consensus forecast is for operating margin to move to above 15%. And the goal for 5 years from now is greater than 20%. Greater than 20% could mean a lot of things, right? So I'm just wondering, is there a possibility that greater than 20% ultimately means mid-20s? Or do you have aspirational goals to get even above that to 25% plus? And some of the components I'm looking at, right, are, first of all, you've had your foot down on the accelerator on spending and selling and marketing and service. Five years from now, you'll have more of that infrastructure. You have this KornitX that 70%-plus gross margin just on its own could add -- or should add about 200 basis points to your margin profile. So I'm just pushing back a little bit, saying 20% seems pretty easy 5 years from now, if you do what you're -- if you do achieve the very ambitious goals on the revenue line.

Brian, it's the first time someone called me conservative, but I will leave the question.

Yes. So I would not say it's easy. There is a lot of work and hard work being done to achieve our targets. But we certainly see several drivers to increase our profitability. We discussed some today. Gross margin is expected to grow. But we also invest. And we must invest in order to have the right infrastructure, the right products on time to capture as much as possible from the market. And bottom line, we are not trying to maximize our profits in the short term. We believe that the investments that we will do now on the account, in a way, on the account of maximizing profits in the short term will be much, much more profitable to Kornit in the future. So this is, in general, our strategy. Currently, we feel comfortable with over 20% operating margin for 2026.

I would say one thing that I mentioned before. The $1 billion -- $1 billion in 2026 is the beginning for Kornit, and we need to prove it. Yes. Like we proved that we are going after the $500 million. If we'll be there at $1 billion in 2026, which means we are going mainstream, we are penetrating this $4 trillion market on the DTF. We are penetrating much bigger portion in the DTG, which means we can scale the business to the next frontier of the $2 billion, $10 billion company. We have to do it in step-by-step. While expanding our reach in the market, we need to invest in R&D and go-to-market while growing constantly.

Okay. The very last question is about DTF. If you could just talk about some of the applications there? Is it mostly home decor or are there others? And how do you compare versus your larger peers?

Yes. So I would say a few things. First of all, we are targeting with the DTF both the fashion industry and the home decor industry. What we've brought to the market and what we are planning to bring also with the Presto MAX is technology that does not exist in the market. Not only we are using pigmenting, but our solution doesn't require any pretreatment and any posttreatment, fully sustainable, fully green. You can take any fabric, if it's cotton, if it's polyester, printing directly onto it, cut and sew. We are focusing also on the micro factory and workflow around this system. What unique in our solution, not only this process of no pretreatment and posttreatment. The hand-feel that you are getting from the fabric is amazing. Those designers that you saw on the Kornit Fashion Week were amazed by the hand-feel. The quality and the durability that you can wash it again and again and the vibrant of the ink, you cannot compare it to anyone in the industry. This is the beginning. And as I mentioned, wait few months, you will hear what the Presto MAX is going to bring with it. Totally new application. Some of them were not exist before. You cannot do it before with digital and digital is going to replace path by path from the analogs. Any more questions?

Great. Then our very last question is, when do we plan to host an in-person event to showcase some of our technology?

Good. So we are looking forward to meet all of you both here in Israel and our facilities around the world. Actually, in July, we are going to do VIPs and for both for our investors, analysts, but mainly focusing for our customers. We're going to do it both in Americas, in North America, in New Jersey. We are going to do it in Europe. But as I mentioned, there's going to be some exciting events this year coming on the fashion side, which we are going to demonstrate the entire solutions and the result of the solution. You are going to see a big show in New York, which will be face-to-face. You, as investor and analysts, you will come there. There will be big news coming on those events and a big event later this year in L.A. with many designers, which we are going to also introduce new technology in those events and showcase what digital on-demand sustainable can do to this market, both in DTF and in DTG.

Great. Well, that concludes our Q&A session. Thank you so much, Ronen.

So by that, thank you very much to all of you. Thank you, Alon. Thank you for the management team. Thank you for our dear employees for your dedication and commitment and care. And the last question was perfectly in timing because what we would love to do is to meet you face-to-face. And we are going to do it soon, hopefully, sooner than later, both around the world, but we would like to welcome all of you to Israel, to Israel, to a peaceful Israel, hopefully, soon and that it will last for many, many years to come. Thank you very much for your time. Thank you for your questions, and looking forward to meet you soon. Thank you.