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

Hello, everyone, and thank you so much for joining us here today. I'm Jim Suva, the IT Hardware Analyst here at Citigroup Investment Research. This week, we have over 200 technology companies who will be presenting. A few housekeeping items before we get into our fireside chat with Kornit, stock ticker, KRNT. First, there are no media and no press allowed on this. If you are a media or press, please disconnect immediately. Also, if you are an investor who's subject to MiFID II, please ensure you have the research agreement in place or contact your city representative. There are disclosures associated with this. They're available upon the Citigroup website as well has been disseminated and upon check-in. We do note that also Kornit has an Investor Relations site, and we reference you to please look at that for the safe harbor risks and forward-looking statements associated with it. You are able to ask a question on this. And in order to do so, please click the little button that says after question. That will be e-mailed to me during the event, and I will take those questions and aggregate them because some of the questions will be quite similar in nature. However, I'll not mention who it's from. And so, you'll remain without your name or entity, and I'll ask the question on your behalf. This ensures that there's good sound quality and audio and video quality during this. I'd like to introduce today, from Kornit, we have Ronen, the Chief Executive Officer; Alon, the Chief Financial Officer; Amir, who's Head of Corporate Development; and Andy or Andrew Backman, he's Head of Investor Relations. They'll be joining us here today. Gentlemen, thank you so much for joining us here today to spend this time talking about Kornit, again stock ticker KRNT.

But to kick things off, I noticed that just this morning, literally a few minutes ago, you had a press release that issued an ESG report. Given your digital footprint and sustainability and things like that and in the fashion industry where we think about water and chemicals and waste and things, can you maybe remind us and talk a little bit about the sustainability efforts that Kornit has done?

Yes. First of all, thank you, Jim, and good morning, everyone. Pleasure to be here again. Yes, we are very excited. It's the first report of being issued by Kornit -- impact report, and we -- it's super, super important report because what's Kornit is representing is really changing the industry from the dirty way of doing production to much more sustainable green way of production of printing and changing this industry -- the fashion industry and textile industry to be much more sustainable. So it's very important report. And the report is based on the order capacities being generating this industry. Actually, when you look at the industry, the fashion industry, about 30% of what is being produced is over production and most of them being shown away. And imagine that using our technology, you could have a limited over production because what our technology is enabling is to do on-demand production. So the way we base the impact report, we ask ourselves, where are we going to be Kornit and our customer in 2026? How many impression? How many apparel they are going to bring using our technology? And ask ourselves, again, if we were not there, how many apparel would the analog would treat? And the difference is the waste. And with this waste, we calculate how much we are going to save in terms of water and in terms of greenhouse gas, mission and, of course, the waste. So as you all know that this industry, the second most polluted industry in the world, both in terms of chemical but also in terms of water pollution. Kornit in 2026 going to generate 2.5 billion apparel, our customers going to print with our technology 2.5 billion apparel. And actually, by doing it with our technology, we are all going to save something like 4.33 trillion liter of water. Now what does it mean 4.3 trillion liters of water? It's like the entire drinking capacity of the United States or population of United States for 11 years. So this is what we are going to sell by 2026. On top of that, 17.2 billion kilograms of greenhouse gas emission reduction. And of course, other production of about 1.1 billion apparel items that Kornit need to produce because you are going to produce on-demand. So it's a massive impact on the industry. Of course, with this report, we are covering many details, LCA of the products of the Atlas and LCA of the Presto. We are touching areas on the employee ESG issues, how do we consume electricity here in Kornit and many, many other aspects. So it's very interesting report. It's the first time we put very clear goal to the organization where we are aiming and how -- what are the standards we are taking to improve in different aspects. So I welcome everyone of you to read this report.

Yes. And I did find it interesting that some of your competitors have to laundry or wash the entire shirt. And when you think about the amount of gallons of water and waste associated with that, it's quite material. And you don't have to do that, you just print right on the area or prep just that area.

Absolutely. So yes, if you're taking reactive ink or acid ink, you really needs not only to watch it, you actually need to pretreat the material, then to print on it, then to stint it a steamer that using also a lot of water, then to wash the material -- tons of gallons without technologies, the pigment ink. We take any garment, we print direct unit without pretreatment, without post treatment, fully sustainable, fully green. It's a revolutionary technology. On top of that, we are enabling all demand production. No needs anymore to forecast, not need anymore to produce millions of copy of the same garment. So it is a huge, huge change to the industry.

Switching over to our business fundamentals, Kornit has recovered very well post the pandemic. Can you talk about some of the underlining drivers of the growth? Is it megatrends? Is it everybody like in your room has a different personal t-shirt on and they want to talk about their character or their initiative that they're supporting or make a statement. Can you talk about some of that and demand trends that you're seeing?

Yes, Jim, the world of today is totally different world from what we've known 2 years ago. Although before that, even the world moved to digital, what happened in the last 2 years, there was a major driver to digital. Now the world is about people. And the people of today are different people who were used in past. People today would like to express themselves. Everyone wants to wear what they like. They would like to be different. Nobody wants to go to a team or to any place or to party wearing the same things. People are being influenced and the decision of what to buy is not anymore by going to retail and looking what they have on the shelf. It's actually, first of all, they're going to Facebook or to Instagram and seeing what their idols are wearing and clicking on it and ordering it. So the entire equation of supplies and demand change into demand and supplies. And this is a major, major change. Now on top of that, while the retail is melting down, and we all see it going in Fifth Avenue, you'll see what's going on there. People are buying online. And when you're going online, you have now the opportunity to buy anything you like because it's virtual. So why to limit? You don't have -- you don't need to be any more constrained by the shelf size is digital. You can show any type of color, any type of shape, any type of design. But you don't need to produce it. Everything is virtual. You produce it only when you get the order. And this is exactly what Kornit is driving. It's on-demand production into order and by that, you're doing it sustainable because there is no waste. You don't need to keep inventory. You don't need to put cash on your warehouse of inventory and then to sort the way. So those are major, major changes in the industry. This industry didn't change for ages. And now it's about time to change and with all the regulation and all the questions that this industry is going through and the digital wave, Kornit is the best position to enable the on-demand sustainable production, near show production or onshore production next to the consumer.

And Ronen, can you talk a little bit about your current portfolio of what you actually have in your print line up and maybe some of the penetration or where certain of them do better than others?

Yes. So Kornit technology is based on our comparative technology, which is a pigment team with no pretreatment, or post treatment. Actually, we managed to bring this technology to maturity that it address all the different market segments, and specifically in the fashion world -- in the high-quality fashion world. So we're addressing high-quality, high-productivity industrial solution, both in the DTG, direct-to-garment, printing on t-shirts, on hoodies, on hats, but also in the direct-to-fabric going after the fashion world, for example, printing dresses, but also for the home decor, which is another huge dynamic that's happening. People like today to decorate their home with their own designs. And they are again a major drive into digital. Our technology that we bought recently was the Atlas. We just announced the Atlas MAX, which we are taking -- it not only increase the productivity and the quality and the doability and the sustainability, we're enabling new application. Like now, for the first time, you can do embroidery, but not in the whole way of printing embroidery with our technology and replacing the oven much faster and much cheaper, replacing the heat transfer with the printing technology, our own technology. So many, many new segments we are going after [indiscernible] as well in the DTS [indiscernible] market early next year. The Presto met [indiscernible] addressed in this market. On top of that, we are bringing solution life automation that now you can automate most of the work that operator was doing before. So you can be much more productive, much more consistent. Labor today is a major issues and by making it easier, you're also addressing the sustainability aspect of empowering fair labor using our technology. So it's very, very important as well. On top of that, quality control along [indiscernible].

And thinking of few [indiscernible] recently of XDi, which I think is the 3D or the puffy print or embroidery type feeling. It sounds like that, that's an upgrade. Can you talk about what you're doing there where consumers -- enterprises, then say, "Hey, I want this." Do you take it down for a day or 2 and install this? And what type of uptake you're seeing? Can you just talk about that technology a little bit?

Yes. So there are 2 major upgrades that we are bringing to the market for our installed base. One is to enable an installed base that bought the Atlas to upgrade the system to the Atlas MAX. So Atlas MAX, we are now selling it out of the production line. But if you bought already and we have large installed base of Atlases, you can now buy from us the kit, and we will start installing it from Q1 to upgrade your system to the latest and greatest Atlas Max, bringing the quality to different levels, bringing the XDi technology, the productivity and other stuff. And so this is one key. Strategy is automation. Automation is not only for the Atlas Max. It's also for the installed base of the Atlases they will be able to upgrade. We expect a massive adoption of our installed base and new customers are buying new systems with the MAX upgrade and automation. Now it's a substantial revenue that we are going to see next year starting for Q1. This revenue is going to the service organization. This is part of the service business. We expect many of our customers -- actually, we go to many orders already with technical folders of implementation already in Q1, both for upgrade the system to the Atlas MAX, but also for the automation. We expect all our strategic accounts to update to that. The price that we are positioning those upgrades, each one of those upgrades are equal to 25% of the cost of the price of a new system. So substantial revenue that we will get both from Atlas MAX, but also the upgrade on the automation.

Can you talk a little bit about individual clothing brands? It seems like that's starting to take up a little bit more monolithic brands. Just kind of what's going on there as far as strategic relationships? And what are they trying to accomplish? And what are the solutions you're doing with that?

Yes. So if you're talking today to any brand, I mean, I can tell you, we are talking to hundreds different types of brands from all levels, from the top brands of the world to medium-size, to small size, all is having the same issue. Supply chain is totally broken. They cannot trust any more production in China and Bangladesh. The cost of shipment is very costly, and they want to control it. On top of that, all the market trends that we explained before, they understand that they need to provide a much bigger variety. They need to react to market trends much faster. So they need the flexibility and would like to move production as close to the consumer as possible. So if they're selling in the U.S., they would like to move production to the U.S. to react fast and be able to ship all that within 24 hours. We see both with brands -- fashion brands. We see it also with retails -- very big retails. And we see it, of course, these marketplaces. So the other issues that they are facing, all of them, other than this sustainability and regulation, that they need to produce in sustainable way and not to slow way 30% of the production. It's really inventory control. And from time to time, we hear on those fashion brands that needs to obsolete a huge amount of their inventory. And of course, the impact on the P&L is massive. And they don't want to carry inventory. And to do that, they are all -- I can tell you, Jim, there's no one brand that are not now engaging with us on changing the supply chain into on-demand, asking where can we help them to move to onshore production closer to the consumer to be able to shift and to produce after receiving the order in a sustainable way.

Can we shift from talking about the hardware to more of the ecosystem? How everything is connected? And talk about investors about what now is included in the ecosystem? Because many times they think about you is doing the large printing and the ink associated with, but talk about the ecosystem and help people understand what's all included in the ecosystem?

Yes. So it's a big, big ecosystem. And the way we are looking at it -- we are looking at it as an operational -- operation system -- yes, operating system. And we have defined that we would like to be the operating system of the fashion industry, of the textile industry by not only providing the technology that you can print and produce garment and fashion and for home decor, but also enabling their own demand. And to enable the on demand, you actually need to connect to the e-commerce of the fashion brand, of the marketplaces, of the retails and to enable them to actually democratize fashion to put any type of fashion and type of design on the website, on the e-commerce, and to drive the order that they receive to a network of fulfiller that's using our technology anywhere around the world. So if the order -- like, I sit now in Israel, and I would like to have this shirt saying, let's save the world from the fashion industry that we would like to have it. You don't need to print it in the U.S. or in China and ship it all the way to Israel. You can bring it in Israel, and I can receive it within 24 hours. So this is what we are building. We have great traction. Actually, we have more than 80 projects now to implement. We are working with one or few of the biggest brands of the world, if it's Disney World that's using our technology, if it's Kansas that we signed a big agreement and many, many other fashion brands like SOC in the U.K. We are talking with many, many sports fashion as well. So we see huge traction. Of course, for our customers, it's a huge benefit, those that are using our technology, because actually we connect them to volume to jobs that they then can treat and get revenue out of it. So it's a win, win, win situation to all parties. And we are best suited to control this operating system because we can see the entire production line. We are controlling our system. We see what's being printed there. We know how to control the quality. We can give -- we can make sure that the SLA meet the standard of the fashion brand, if it's printed in Israel or printed in New York or in China. So this is kind of the ecosystem that we are building. Think about the Uber operating system, connecting passengers to Texas. What we are doing, connecting impressions of the brands and retail to our fulfillers that using our system. But we're also selling the taxes, which are the system. And we're also selling the gasoline, which is the ink. And as much as we are bringing more jobs to our fulfiller, they will buy more ink and more systems. So it's actually ecosystem that fuel itself and going.

Can we talk a little bit about M&A or mergers and acquisitions? I believe you just recently acquired a company, I think it was called Voxel or Voxel8. Can you talk a little bit about that? And maybe, backward looking the past year or 2, the acquisitions you've made and what they add to the portfolio and ecosystem?

Yes. I will talk about the past acquisition, and I'll ask Amir to talk about the future acquisition as well, all directions that we are taking. So in the past, we did 2 major strategic positions. One was the Custom Gateway. The Custom Gateway is the platform for these committees, the ecosystem that we just talked about. And it's fantastic. I can tell you, this platform already generating revenue, it's growing. There's a lot of traction. Of course, there is a lot of investments that we are putting into continue developing this platform to the next level. But we are very confident that this will become the operating systems of the textile and fashion industry. The Voxel8 acquisition is the technology acquisition, very strategic acquisition. Why did we do it? Think about it? Our technology, which of the DTG and DTF, is using print heads very, very accurate. And with this print heads, you have limitation on the size of particle. You can shoot those -- suit these printers. So it's very good for printing with pigmenting, but it's very limited. If you want to print, for example, reflective ink like when you're running with the running shirts, you have always reflective ink. It's impossible to shoot the noses of printers. The same thing, metalizing, the same thing, other stuff. So we were looking for technologies that enable us to take different particle and shoot them on to textile. We were doing a deep diligence for a few months already with Voxel8. We found the technology beyond any expectation. They were proprietary technology, not only that we will be able to group all this reflective ink and metalizing and combining it with our solution. But it's really -- what they have developed is a flexibility on the flight to change the softness and the structure of the ink. if it's going to be hard or sourced on doing the line. On top of that, they were focusing very much on the footwear in the state that we were not there, but it's a huge market with huge potential. We are continuing to investigating this market and potentially we can leverage this technology to another huge standard we will take forward. So I'm confident that we will be able to leverage the technology and bring it to the market within 18 months as part of our solutions. Amir will touch on a bit about the direction on M&A moving forward.

Yes. Thanks, Ronen, and thanks Jim for the question. In terms of M&A, first of all, the way we generally look at M&A, we have a very strong organic growth in the business. We're being very prudent on how we look at our M&A activities. For us, it's about accelerating, it's about strengthening. And making sure that these businesses fit with our culture, with the way we operate, and that we feel comfortable that we can integrate them successfully. I want to take you back to the 4.0 strategy, and I think that will clarify also how we're looking at M&A in general. So when we talk about the 4.0 strategy, which is digitizing -- continuously digitizing the production floor. If you think about the Voxel acquisition, for example, that present us within continued digitizing textile production and decoration processes on the production floor. And on top of that, 4.0 strategy calls about laying out the Kornit X platform, which Ronen discussed extensively. And obviously, Custom Gateway acquisition was the foundation for that virtual layer of Kornit X. When we look forward, obviously we continue to be focused on strengthening our capabilities in both of these pillars of the strategy. Specific areas we're very focused on is deepening more and more our capabilities around the software workflow space. So the Custom Gateway platform is the best platform out there in terms of breadth. In some areas, we want to deepen know-how, deepen functionality, deepen the specific needs for certain segments. So we're very focused on add-on tech acquisitions to broaden the software workflow platform. The second area we're very focused on, and we've been discussing this is on expanding the solution breadth. We used to refer to this as ancillaries in the past. These can be hardware or software elements that are -- complete the printing process as you produce textile on the production floor, and you should expect us to see more active on the M&A side in that area.

Maybe over to Alon as Chief Financial Officer, can you talk about your capital structure and plans to deploy capital? I mean, as a growing company, there's so many needs for capital, whether it be sales force expansion, whether it be additional software or services or geographic areas or acquisitions. Can you talk about capital allocation?

Yes, sure. So as you hear in the last half an hour, I mean, we are enjoying great momentum in the business, and we continue to invest heavily in growing the organization, strengthening the organization, acquiring additional capabilities. And we invest in 3 areas. The first area is our direct in-house or internal resources in terms of OpEx, and we invest in our go-to-market and R&D capabilities. So this is a very high focus for us. The second area of investment is part of the need to scale up our infrastructure, and we invest in CapEx. We are upgrading some of our systems to allow us to move faster and be ready for the future. We are in the final stages of establishing or building our new ink -- plant ink factory, which will allow us to supply consumables for many, many years to come. So these 2 areas are organic investments. And we are also looking and you heard from Amir, I mean, we have a great pipeline of inorganic opportunities, which will help us to accelerate the growth and accelerate our performance and execution.

I got a e-mail asking about, you've been able to upside expectations and deliver more than what you initially thought. You had -- many companies are facing supply chain or logistical challenges, whether it be shipping components or procuring semiconductors. Can you talk about how you've been able to not only mitigate, but upside your sales based upon the demand and procure the needed items for your products?

Yes. So first of all, I must say, we see the same constraints of other sees here. So we see the rise in cost of logistics. We see the rise in overall cost. We see also the pressure on the suppliers. What I would say that we are maybe different for many other companies, but we had a much stronger visibility when we enter in to pandemic. And we knew that we are going to have a very strong year, which we forecast a very aggressive goals with our suppliers. And entering into 2021, we also knew that it's going to be a very, very strong year, and we placed an order for all our [indiscernible]. We're adding now a situation that we already place all the order for 2022. So when I'm saying all the orders, we already take into account some aggressive growth -- internal growth, of course I cannot share, of what we expect to be the growth and how 2022 will look like. So we feel that we have covers in terms of guessing that we believe that we are going to deliver not only 2021, but 2022. Of course, on the inside, we have our owning plan that we fully control and we don't see any issue on that. I must say that on a daily basis, our operational teams working very hard. They have all the time, all kinds of issues. These components is missing and the other one, and this supplier was promising to ship it next week and now delayed another 2 months. We are working very extensively to find alternative suppliers. I can tell you bottom line, we have confidence to deliver to our targets -- our internal targets, which, of course, is a bit more aggressive. We want that to market today.

And I got another question asking for the general investor. Can you explain a little bit about some of the intellectual property or patents that you have that may be unique? And I know, when I visited your company in person, I noticed that the way that you print directly to the garment and don't have to wash it, that's seems pretty unique. Can you talk about your intellectual property and patents that people should be mindful of that just simply other companies can't copy?

Yes. First of all, I will start by saying that we have a major focus on innovation and IP, not only on R&D and CTO, but we have a dedicated group of dealing with all the IP and protection and all the patents. And we are generating many patents recently. You can look into it, there are many, many patterns that we are generating right now on different type of technologies. Our base technology, which provide us a huge gap compared to any digital competitor and then mold around our technology and our business is based on the capability to take any garments to fit direct unit without pretreatment. All the other digital solutions require pre treatment, at least some of them wants the post treatment. And we don't need to do the pretreatment. By that, this is a very robust patent. This patent has another, if I remember correctly, 7 to 10 years of use. Of course, we are working on the next patents to protect it. There's other patterns that are like you're running in 2 pallets in parallel, which again, making the life of any competitor enter into this market more difficult. We have very strong pattern on the automation. We have a very strong pattern of being able to print on polyester, on dye polyester. So we feel that we are doing a very good job on protecting our technology and our advantages and our innovation, and we'll continue to invest in that.

Got you. Well, we've got a couple of minutes here, and I wanted to give you an opportunity to explain why you're so excited about being CEO, and also maybe a CFO, of what -- the couple of things that investors asked you a lot that you think they're underappreciating and why they should own Kornit stock.

I think that -- from my perspective, 3 people -- 3 things that I would like to mention. One is about an industry. I don't think that you will find today such industry that -- such a huge industry, which didn't transform yet from analog to digital. This is one of the last [ dinosol ] industries that is fully analog, not sustainable, using wrong way of production in wrong places, really making unfiled labels and other stuff that we have to change it. And we have an opportunity here for this tough end market and doing a big job. So this is one thing that not many investors really understand the magnitude of that. With all this back win that we have with digital wave of e-commerce or social media, people that would like to express themselves or designers and new brands are emerging on a daily basis. So this is a really, really huge opportunity to distort the market. The other point is really to understand the uniqueness of our P&L. You don't see great companies are growing constantly for the last 7 years, 30% year-over-year, 25%, 30% [indiscernible]. You see much more than that, generating around 50% gross margin and coming and saying, we will do better than that, you will see an expansion. 50% of our revenue -- our recurring revenue is a SaaS model of ink. Not everybody understands. 50% every quarter is already recurring revenue, generating cash profitable with such a strong balance sheet that enabled us to protect our technology, to protect our market, to invest in new technology and new businesses. So this is the second point. And a third one, I think that we are unique in our culture and our people. Every CEO will say that, and he will not say that he will have a problem with his team. But I really believe in that. We are unique. If you will see what happened last week in New York fashion, the way we invested in having a show in the new fashion week, the way we are taking it now to the market in LA, Kornit LA Fashion and sending a clear message. We have to change this industry, on-demand, sustainable. We have to do inclusive. Everybody can work on the runway, no matter gender, color, size. Those are unique culture values that Kornit is bringing with our own unique people. So those are the 3. Any inputs for many of you.

So from my side, not very different. I mean, Ronen as the CEO is so excited by the business model. I mean, for me, it's the best dream. So being part of fast growing, profitable company with huge, huge opportunity ahead, so it's really amazing and very exciting. The second point goes with sustainability. I think that beyond to all the business results and our performance, I think that we are doing something good for the world in addition, which for me as a person, matters a lot. And the third one is both again to the organization and the culture, I think that it's a unique organization. There is a very, very strong winning spirits. Can do attitudes. We are very much focused on execution and results. And it's demanding, but it's also fun.

Well, I want to thank the team at Kornit. And congratulations on really coming out of the pandemic, a much stronger company and really being able to meet the demand and upside the expectations. And also, you continue to innovate the way that fashion and people are building and printing on clothing and a look. So it's quite exciting. And I look forward to hopefully seeing you in person in the future. This now concludes our fireside chat with Kornit, stock ticker, KRNT. Thank you.

Thank you. Thank you very much.

Thanks a lot.

Thanks, everybody.