Q2 2020 Kornit Digital Ltd Earnings Call

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Greetings and welcome to corner digital second quarter 2020 earnings Conference call.

This time, all participants are named listen only mode.

Question answer session will follow the formal presentation, if anyone should require operator system. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your hosts Kelsey Turcotte, a big Blue shirt group. Please go ahead.

Thank you operator, good afternoon, everyone and welcome to Great Digital second quarter 2020, <unk> earnings Conference call before we begin I would like to remind you that forward looking statements within the meaning of the private Securities Litigation Reform Act 1995, and other U.S. securities laws will be made on.

This call before at Lucky statements include but are not not limited to.

Statements relating to the company's objectives plans strategies.

They meant a preliminary our projected results of operations or financial condition, and all statements that address activities events or developments. The company intends expects projects believe it or anticipate well or may occur in the future forward looking statements are subject to known and unknown risk.

And uncertainty and our based potentially on inaccurate assumptions they could cause results to differ materially from those expected or implied by the forward looking statements [laughter]. They comprise actual results could differ materially from those anticipated for many reasons and I encourage you to review the company's filings with the security.

And exchange Commission, including the company's quarterly report on form 6K filed May 19, 2020, which identifies specific risk factors that may cause actual results or events to differ materially.

Any forward looking statements are made of this call here for the company undertakes no obligation to publicly update or revise any forward looking statements whether as a result of do information future events or otherwise except as required by law. Additionally, the company will be making reference to certain non-GAAP.

Financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Companys earnings release published today, which is posted on the company's Investor Relations site.

Before I turn the call over it you're running Samuel current <unk>, Chief Executive Officer, and Guy avid John Forney, Chief Financial Officer, I would like to invite you to a virtual fireside chat next Tuesday August 18th.

10, 30, I am eastern time further discuss corny acquisition of custom gateway and the related market opportunity. This is an RSVP only event for further information. Please go to the Investor section of Cleats Web site at this time I would now like to turn call over to run it on it.

Thank you could see good evening and thank you for joining us on this afternoon and equal.

I Hope you and your families are old safe and healthy.

Before Guy and I shared with you in more details the results of the quarter.

I'd like to highlight the exciting announcement, we made earlier today with the acquisition of custom gateway and leading global provider of cloud software walk full solution, enabling only men fulfillment.

This both these you can acquisition accelerate organic development and Benson our value proposition for Britain's retailers and for free live in DC fascinating area or did you got the formation.

Industry is an inflection point the online channel is booming equals b to C and b to b environments and traditional retail channel outcome foaming, how they operate in older do we made available to consumers.

Why did the same time solving that massive inventory inefficiencies.

Disruptive moments like these driven by changing consumer habits create the best looks strong for they accelerated adoption of age as digital and sustainable on demand picks up production.

The combination of custom gateways softwood Wolf real portfolio, we school meet the existing and future technologies will bring to the market a unique end to end solution for on demand production.

To get there we will have evolution NYSE, how global brands and for Filos transforming the supply chain into sustainable on demand production to meet consumer needs.

We have popped lose custom gateway for several years now and have seen the synergy between the two organisation first hand in shift strategic accounts like when full they did you to go and Phenoptics custom gateway is over 300 customers globally, including.

Leading brands and retailers like UK largest fashion retailer mixed.

This is an extremely important mix that for us in terms, forming the textile industry and we are pleased to welcome the custom gateway deemed to call me.

Turning to our second quarter results I'm very proud of how well the team executed we delivered total revenue of 37.4 million met or 842000 enrollments related to global strategic account, which represents sequential growth.

Well for bauxite Mutli, 44% in Q2 compared to Q1 Twentytwenty.

These strong results reflect the positive momentum we started seeing in late April as production sites open and our customers started to responding to the surging demand coming mostly from online channels.

We believe that will need is the meads office shop V shaped recovery.

Our visibility into the second half of that you is as strong as ever and we remain very confident in the business outlook not only for the second half will twentytwenty, but into 2021 as well.

For the second half will Twentytwenty, we now expect to deliver evil video revenue growth in below team.

And the positive operating profit for the full year. This is an increase to the high single digit eagle that either revenue goals, we forecasted or no first quarter call and reflects the significant and building momentum we have in the business.

Despite the continue impact of Corvidae on regular daily routines in certain territories, our global operation our fully operating in line with the safety guidelines of their 11th local authorities.

The other restrictions have been eased in many places, allowing our sales and service personnel to support customers onsite when needed and all our manufacturing and R&D sites in Israel, our fully stuff.

Regionally.

We had exceptionally strong performance in North America across both new and existing customers. We're also seeing continued growth in central and Latin America and believe this region will become increasingly strategic in the coming years as brands and retailers look to new showing an.

Onshoring isn't necessarily evolution in their existing supply chain, while there continue to be a lingering impact from quoted in Europe and Asia, the Mega trend propelling our industry as similar to those serving as a tailwind in the U.S. and we expect increased demand from this.

Regions as we move through the year.

To that and we are accelerating investment in both regions as we build a larger direct touch presence in the UK, Germany, and Japan in conjunction with local partnership.

This infrastructure will allow us to accelerate growth and support of our global strategic account as they expand to new territories.

Former system perspective, it was another excellent quarter for the Atlas, which is proving to be a huge success across both new and existing customers.

Our customers are making significant investments in the Atlas to create new capacity for on demand fulfillment in many cases deploying multiple systems.

At the same time demand for Wolfcamp, plus is strong with new customers engage in active conversation with us and follow on orders placed in the quarter.

This follow on orders are particularly impressive given the Wolfcamp plus we'll just introduced to the market in the first quarter of Twentytwenty.

And finally, the polypore as we shared earlier this year.

We expect to release significant technological enhancements to the polypore doing the first half of mixed here and we're very encouraged by the building pipeline of customer excited about its unique capabilities on the direct to fabric side. The personal continue to perform beyond our expectation.

With new and existing customers and we believe we have the best technology in the market to capture a huge opportunity for sustainable on demand manufacturing in the fashion and home decor markets on the operational in service side, our teams globally, our focus on customer excellence.

Delivering on the numerous large scale implementation, we have in place with customer like TSC painful spoon flower BTG to go spread Jacob and many others, which will not only generate revenue for the second half, but will also drive growth inc. and supply.

Guys in 2021 and beyond.

Some of those projects, we identify with regional in strategic account in our first quarter call if proven to be significantly larger than we had anticipated as.

As our customer experiencing a steep growth in orders for on demand proximity short run production.

Our partnership with our global strategic account continued to be very strong and we are successfully walking with them on their ambitious growth plan, while expanding globally.

We're also seeing good progress with leading global brands.

On the way to transforming the supply chain into on demand production for both B to C and b to B business models.

This exciting times for coordinate and for the entire textile industry. The market is shifting in our direction strongly and we are ready to execute on their massive opportunity ahead of us.

Before I turn the call over to Guy I would like to personally invite you to eventual fireside chat. We're also seeing for Investor community on August 18 at 10, 30 am eastern time to discuss the vision beyond the acquisition of custom great way in more detail as well as.

More details on our execution plan.

Now I will turn the call over to Guy for a closer look to the numbers Guy.

Thanks, Ron and good evening everyone.

Before beginning the financial overview I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP pro forma results.

Our second quarter non-GAAP pro forma results reflect the adjustment for the following items.

Stock based compensation expenses, which totaled $2.5 million.

Total amortization expenses relating to the acquisitions of intangible assets in the amount of $141000.

And noncash deferred tax benefit in the amount of $71000.

Adjustment related to cover 19 pandemic this quarter are noncash inventory adjustment of $222000.

And warehousing expenses of $100000.

As the company has significant operating lease liability in foreign currencies, we incur foreign exchange gains or losses on the reevaluation of these liabilities.

These gains and losses may vary from period to period and do not reflect the true financial performance of the company.

This quarter foreign exchange gains associated with AMC aid for too.

Were $528000.

A full reconciliation of our result on a GAAP to non-GAAP basis is available in the earning press release issued earlier today and on the Investor section of our website.

Second quarter revenue net of 842000 noncash warrants impact was 37.4 million a decrease of 17.4% compared to the prior year period, and an increase of 42.8% sequentially.

From a year over year perspective, we saw very healthy demand for our systems on the part of customers serving online market in the U.S.

Offset in part by headwind in the fashion and apparel market due to cover 19 pandemic.

Services revenues for the second quarter was 5.6 million net of 120000 warrants impact.

Accounting for 14.9% of total revenues, a decrease of 14.8% compared to the prior year period, and an increase of 45.8% sequentially.

The amount attributed to the noncash impact of warrants in the second quarter was 842000 or 2.2% of revenues.

Compared to 974000 or 2.1% of revenues in the second quarter of 2019, and 564000 or 2.1% of revenues sequentially.

As Ron mentioned, it was particularly strong quarter in the Americas was 66.5% of total revenues coming from that region.

24% from Europe, the Middle Eastern Africa, and 9.5% from the Asia Pacific region.

In the second quarter, we had one customer contributed more than 10% of total revenues, while the global strategic customer contributed 8.8% of total revenues.

Our top 10 customers accounted for 59.3% of our total revenues compared to 44.5% in the prior year period.

Moving to profitability.

Non-GAAP gross margin in the quarter net of warrants impact was 44.1% compared to 47.7% in the prior year period and 33% sequentially.

Non-GAAP gross margin in the first half of 2020 reflects covered 19 related impact on revenues.

Given our expectation that revenue growth reaccelerate in the second half of this year relative to the first half we expect non-GAAP gross margin to revert to pre covered levels of 50% in the second half of the year, excluding the impact of warrants.

On a GAAP basis gross margin in the quarter was 42.2% compared to 44.3% in the prior year period and 30.6% sequentially.

Moving to our Opex item.

I'll discuss these items on a non-GAAP basis, which excludes non operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation included in our today's press release.

As Ron discussed in his prepared remarks, we expect that we are in the early stages of a V shaped recovery driven by our customer need to transition from analog printing to digital.

The systematic changes in the textile industry, which we have anticipated for sometime now.

Has been further accelerate by covered and represent a significant market opportunity for coordinate.

Accordingly, each of the following line items, Rick reflect the head count investment to build the infrastructure necessary to support the growth opportunities ahead of us.

We ended the quarter with 574 employees a year over year increase of nine employees and a sequential increase of only nine.

Looking forward custom gateway and other work flow activities will bring approximately 60 additional employees this year and we welcome them to coordinate.

Adjusted Research and development was 17.8% of sales or 6.7 million compared to 11% of sales or 5 million in the prior year period.

Additional R&D cost is attributed to head count additions.

Sales and marketing expenses in the quarter were 7.4 million or 19.9% of sales compared to 8.7 million or 19.2% in the prior year period.

The decline in sales and marketing expenses. This quarter is mainly attributed to the absence of trade shows and reduced travel expenses.

General and administrative expenses in the second quarter were 4.9 million or 13.2% of sales compared to 3.8 million or 8.3% in the second quarter of 2019.

As evidenced by today's acquisition of custom Gateway, we continue to be active in evaluating M&A opportunities and some of the hiring and expenses increasing gionee has been done to bolster our business development and integration capabilities to support these initiatives.

Non-GAAP net loss for the second quarter was 1.3 million or three cents per share net of two cents worth impact.

GAAP net loss was 4.6 million or 11 cents per share on a basic basis compared with net income of 1.9 million or five cents income per share for the prior year period.

Our non-GAAP financial income this quarter was 1.1 million as a result of accrued interest on our cash investment.

GAAP financial income this quarter was 0.6 million.

Turning to adjusted EBITDA.

For the second quarter 2020, adjusted EBITDA was negative 0.9 million compared to positive adjusted EBITDA of 6.5 million for the prior year period.

Net cash used in operating activities was 9.2 million this quarter, mainly due to a 6.8.