Q4 2021 Kornit Digital Ltd Earnings Call

[music].

Greetings and welcome to corny Digital's fourth quarter and full year 2021 earnings call. As a reminder, this conference call is being recorded I would now electric to turn the conference over to Andrew Backman.

Global head of Investor Relations for <unk>.

<unk> digital Mr. Blackman, you may begin at this time.

Thank you operator, and good day, everyone and welcome to coordinate Digital's fourth quarter and full year 2021 earnings conference call with me today are running Samuelle Corny Digital's Chief Executive Officer.

Ron Rosa Carney Chief Financial Officer.

<unk> executive Vice President of corporate development.

Before we begin I would like to remind you that forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, and other U S Securities laws will be made on this call.

These forward looking statements include but are not limited to statements related to the company's objectives plans strategies statements of preliminary or projected results of operations or our financial condition.

And all statements that address activities events or developments that the company intends expects projects believes or anticipates will occur in the future.

Forward looking statements are subject to known and unknown risks and uncertainties and.

And are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by the forward looking statements.

I encourage you to review the company's filings with the Security Exchange Commission, including the company's annual report on form 20-F filed on March 25, 2021, which identifies specific risk factors that could cause actual results or events to differ materially.

Any forward looking statements are made as of this call hereof and the company undertakes no obligation to publicly update or revise any forward looking statements except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measures on this call. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the.

The company's earnings press release published today, which is posted on the company's Investor Relations website.

I would like to now turn the call over to Ryan London.

Thank you Andy and thank you all for joining us to summarize an excellent year.

We view, our strong business momentum as we enter what will be one of the busiest and most exciting years in the eastern area of call. It.

2021 will be remembered.

As people tell either in Kony pass to become a $1 billion company in 2026 all before.

Annual performance reflects outstanding execution on the huge market opportunity, we are after and the strength of our unique business model as we continue to exceed our growth and profitability goals.

Of course the board.

We delivered remarkable year over year total revenue growth of over 65%.

And shipped a large number of mass production systems that will continue to fuel the growth of our recurring revenue stream for years to come.

System sales grew over 100% this year.

And now we carrying consumable and services revenues grew over 30%, reflecting record growth of our customers.

We also delivered an extraordinary operating margin will continue investing in the business.

In 2021, we unveiled a 4.0 strategy and laid the foundation for the future growth of coordinate X.

We strengthened our team with talents in key leadership positions skilled R&D and go to market function at cost regions scale operations and infrastructure.

Launched ground breaking technologies and real state of the art customer experience centers.

And initiated innovating lead generation marketing platforms.

We also leverage our strong balance sheet to enhance our organic efforts to digitize the production flow, we smart inorganic technological innovation such as <unk> eight.

For the fourth quarter, we again exceeded the high end of our topline guidance.

The liver.

Total revenue of $87 5 million net of $7 9 million in warrants related to our global strategic accounts.

Our record recurring consumables and services revenues were driven by an exceptional peak season.

<unk> margin expanded versus last year and operating margin was in line with our guidance.

We ended the quarter with a very strong backlog of orders and an extremely robust pipeline across all regions, giving us tremendous tailwind into 2022.

Our business in EMEA is growing strongly with remarkable strategic projects with major tier one brands and service providers engaging in capacity buildup that we have seen mainly in the Americas to date, including an order for a double.

Digit number of Atlas Max systems, and multiple integrated projects leveraging our coordinate X platform, we see encouraging signs of recovery in Asia markets.

Had our strongest quarter ever in the region with promising activities in China, Korea, Australia, and Japan that fuels, our expectation for a record year in 2022.

In the Americas, we had one of our best quarters for net new accounts, but just seeing mass production systems and we expect many of these to rapidly grow their fleets in the quarter to come gross activities with our global strategic accounts, particularly.

Larry this quarter in the Americas continued to be tremendous and we expect this impressive volumes of activities to continue in 2022 and beyond.

As our relationship continues to be stronger than ever.

We started 2022 with outstanding momentum the Mega trends that have been fueling our business our intensifying in magnitude.

<unk> formation to digital on demand sustainable production continue to accelerate the digital fashion and apparel segment continues to outpace growth of the overall e-commerce sector brands of all sizes license, so merchandisers designers and in the.

Digital creators are all seeking to monetize the enormous traffic their creative offering.

Capturing on the digital platform and are in desperate need for sustainable on demand production traditional textile supply chains are completely broken and unreliable at this point and alternative digital manufacturing supply chains based on proximity.

Duction and fast turn around.

Becoming the new norm.

Additionally, the fashion industry is unfortunately is possible for severe ecological damage.

As a result of excessive production approximately 30% of manufactured governments consider OLED production. Furthermore, the session industry produces nearly 20% of the global water waste.

It is the only company that offers high quality on demand mass production digital solutions that can deliver to this massive need and is also the only company that seamlessly connects the virtual and physical walls of the textile industry.

More of their core netease driving a massive positive ecological impact in the fashion and textile industry.

22 will be exciting as we gear up for very strong growth.

And the remarkable amount of ground breaking new products introductions, starting already in the first quarter.

Backlog of orders for the remarkable Max technology from our customers and prospects is very strong start in Q1, we expect approximately 75% of our installed Atlas fleets to upgrade to the Max and approximately 50% of the fleet to the App.

Steve Laut automation throughout 2022 and into 2023.

Atlas Poly will be a game changer to the multibillion dollar sports market. We expect this solution, especially when integrated with coordinate aches to unleash the massive untapped demand in this market for short runs production personalization and disruptive.

Direct two funds and direct to recreational players business models. Our quest software based solution is highly anticipated by customers scaling globally and seeking consistent quality and.

And we will also lounge exciting upgrades to our cloud based production analytics Cognex platform.

Earlier this year, we shared that doing age to 2022, we will unveil a groundbreaking high productivity next generation BTG platform.

We believe this will be a revolution in how text as a producer and will change forever, the economical and sustainability balance of short run mass production shifting volumes to cool need that they have been traditionally untapped for digital production.

We expect better testing in the end of this year with initial shipments in mid 'twenty three.

On the Dps side of the production floor offering the Presto Max will be made available during Q2 2022 with never before seen applications and quality standards that meet the needs of the board of fashion industry.

Pipeline for these products has been building strongly since we unveiled it and we are very excited with our continued traction into the DPF market. We expect H $1 22, mpls to meaningfully contribute to our growth in the second half of 2002.

'twenty, two and well into 2023 and beyond there is started with another exciting announcement on our execution path to digitize the production flow with the announced acquisition of the Soma.

This acquisition will further empower kunitz customers to operate and to end production process with greater automation and quality.

We plan to take <unk> to an entirely new level in 2022.

We see massive massive opportunities for the end to end on demand workflow that clinique <unk> enabled.

In both B to C b to B environments, a course booming verticals, including sports music Entertainment influences gaming and broader key eight communities.

We are laser focused on execution areas of this extremely strategic pillar.

Scaling our global fulfillment network, which is progressing extremely well investing in tech layers of the platform such as automation AI and data driven decisioning.

And reaching our front end offering such as content management visualization and smart connectivity.

And striking additional strategic alliances with Mega platform and marketplaces.

Stay tuned for exciting developments with coordinate X in the quarters ahead.

In 2021, Kony delivered a strong message into the core of the fashion industry with the launch of the cornea fashion week platform.

This powerful platform is about unleashing creativity, driving all demand sustainable production and promoting diversity.

We will continue to expand the successful activities and are gearing up for co need fashion week Tel Aviv in April in London doing may.

At this amazing events, we will host tens of designer's brands influences and producers.

At this event, we will plan to unveil our new production solution showcased coordinate aches and demonstrate our vision for connecting the virtual and physical walls in the fast approaching areas of web 3.0, and the met office.

In summary, our fundamentals are excellent the market opportunity. We are after is endless.

Our competitive position is unmatched co need has never been in a stronger position and we are extremely confident in our ability to meet our $1 billion revenue goals by 2026, if not before I am proud of our amazing team.

Thank you for your commitment and I'm looking forward to the exciting times ahead of us.

With that let me turn the call over to alone for a closer look at the numbers and the guidance alone.

Thanks, Ronen and good day to everyone.

As Ron and shared we ended an outstanding 2021, and entered 2022 with a strong backlog and robust pipeline, which gives us excellent visibility into 2022 and beyond.

We had record revenue in the fourth quarter of $87 5 million net of $7 9 million noncash warrant impact related to a global strategic account.

The top range of our guidance of 89 million to $93 million, which as a reminder assumes zero impact of the warrants.

For the full year revenues were $322 million net of $25 4 million noncash warrant an increase of 66, 6% year over year.

This was a very strong quarter for systems for both Atlas and Atlas Max <unk>.

Systems as a percentage of total revenue was one of the highest level, we have ever experienced for fourth quarter. We view. This as an extremely strong indicator of capacity needs. Our customers are planning in 2022 and beyond and the associated ramp up.

Or future recurring revenues from these systems.

Not only were systems sales strong in the quarter, but we also delivered record revenue from consumables and services.

In what was an exceptional peak season for our customers.

Services revenue came in at $11 6 million for the fourth quarter net of noncash warrant impact of approximately 441000 and were 13% of total revenue.

This compares to $10 9 million in the year ago quarter, which included very strong upward revenue.

For the full year 2021 services revenue was $39 4 million net of the noncash warranty impact of approximately $1 5 million and were 12% of revenue.

And approximately 39% year over year.

As we enter 2022, we are gearing up for a very busy upgrade cycle. In addition to a number of innovative ntis and have very strong backlog heading into the first and second quarter.

Top 10 customers accounted for approximately 56% of total revenue this quarter as we have said before we expect our top 10 customers to be in the range of 60% to 65% of total revenue, but the composition of those top 10 will change.

Given the progress we are making with new strategic and other customers.

Overall, we saw very healthy mix of net new customers this quarter, especially in the Americas and we are expecting some of these to rapidly grow with clinique in the quarters and years to come.

Geographically it was a record quarter and a record year for both EMEA and APAC and a record year for the Americas.

In EMEA, we are seeing deals that are larger in size such as our expansion with print service provider and E. Commerce customers HST 71 market leader in Poland will purchased 10, plus Atlas MX systems, and Snuggles, a UK based streamed.

On demand provider, who added a number of <unk> systems to their core need fleet.

We also saw print full move aggressively into the UK with new production site and plans to expand capacity during 2022.

In APAC, we are seeing a very strong start to 2022 and a positive change in the market with nice growth in both high end <unk> and Dts.

In the Americas, we saw excellent momentum with Atlas marks which represented over 50% of total systems orders in the region.

We had great traction with new accounts, which accounted for half of the systems order and excellent progress and strength with existing strategic accounts as evidenced by the significant <unk> impact in the quarter.

The team also secured our first outlet smack sales in Latin America with three new clients and saw continued momentum with presto throughout the Americas regions with multiple new clients.

Moving to profitability.

We saw year over year progress in the fourth quarter with solid gross margins driven by a mix of strong mass production system sales a high volume of consumable as well as the impact of the improved profitability in service.

non-GAAP gross margins net of the impact of the warrants came in at 49, 6%.

We expect gross margins to improve longer term given the ongoing shift to higher mix of mass production systems profitability leverage in growing our recurring consumable business continued operational efficiencies and margin improvement in our services business.

We also expect continued acceleration of corn at X and other software driven initiatives to positively impact margins over time.

Looking at the supply chain.

Our good visibility into the business and strategic planning combined with our experienced and proactive operations team gives us the confidence that we can deliver on our commitments for the balance of the year and into 2023.

From a cost perspective, we do see macro pressures and have experienced cost increases in certain areas.

We have been able to mitigate some of this impact through cost reduction project and securing raw materials and production slots well in advance.

We have had to share some of these cost increases.

Through price increases in 2021 and plan an additional increase in the second quarter of this year.

Turning to Opex.

For the fourth quarter, Opex was $38 4 million up almost 17% from the third quarter and 50% year over year.

Due to continued investment in scaling up our operations.

As Ron mentioned, we will continue to invest in the business in 2022, as we see vast opportunities for growth that will lead to long term acceleration in revenues.

Research and development expenses were $12 1 million for the fourth quarter or 13, 8% of revenue.

As compared to $8 7 million or 12, 1% of revenue in the fourth quarter of 2020.

R&D was up due to the continued investment in production floor innovations and new products, such as our new high throughput BTG system, which we will announce later this year in.

In addition to investments in Vox Elate kinetics, and other advanced software applications.

Sales and marketing expenses were $16 6 million or 18, 9% of revenue as compared with $10 2 million or 14, 2% of revenue in the fourth quarter of 2020.

The increase was due to continued expansion of our go to market capabilities gearing up lead generation and customer facing activities in advance to the exciting NPI that we are bringing to the market in 2022 and establishment of major marketing platforms.

<unk>, our very successful coordinate fashion week, Los Angeles last November .

General and administrative expenses in the fourth quarter were $9 7 million or 11% of revenue as compared to $6 7 million or nine 2% of revenue in the fourth quarter last year.

The increase was due to continued staffing and other investments to support the overall business infrastructure, including investments in it and data management as we move to our new ERP system.

Looking forward, we would expect G&A for full year of 2022 to be in the high single digits.

non-GAAP operating profit was $5 1 million or five 8% of revenue for the quarter net of $7 9 million or seven 8% warranty impact.

In line with our guidance for the quarter, which assumes zero impact of the warrants.

Versus 16, 3% in the year ago quarter.

For the full year non-GAAP operating profit was $30 3 million or nine 4% of revenue.

Net of $25 4 million or six 6% warrants impact versus two 7% for the full year 2020.

We ended the quarter with 882 employees a year over year increase of 210 employees and an increase of 33 employees from last quarter.

The increase was again, mainly in R&D and sales and marketing.

non-GAAP net income for the fourth quarter was $6 4 million or <unk> 13 per share on a fully diluted basis as compared to $11 5 million or <unk> 24 per share in the fourth quarter of 2020.

Full year non-GAAP net income was $36 1 million or <unk> 74 per share on a fully diluted basis as compared to GAAP net loss of $9 million or 21 cents per basic share in 2020.

In the fourth quarter GAAP tax income was $1 3 million, mostly due to the successful closure of tax assessment with the Israeli tax authority.

Fourth quarter GAAP net income was $1 million or <unk> <unk> per share on a fully diluted basis as compared to $5 9 million or 12 cents per share for the fourth quarter last year.

Full year GAAP net income was $15 5 million or 32 cents per share on a fully diluted basis as compared to GAAP net loss of $4 8 million or 11 cents per basic share in 2020.

EBITA for the fourth quarter was $6 7 million as compared to $12 7 million in the year ago quarter, and adjusted EBITDA was $14 6 million as compared to $14 5 million in the year ago quarter.

Full year, EBITA was $36 million compared to EBITDA of $9 1 million in 2020.

Full year, adjusted EBITA was $61 4 million compared to adjusted EBITDA of $14 5 million in 2020.

Net cash provided by operating activities came in at $9 3 million for the fourth quarter and a record $52 5 million for the full year 2021 versus $32 4 million for 2020.

We ended the quarter with a very strong backlog, including $5 4 million of deferred revenue and customer advances.

Our cash balance, including bank deposits and marketable securities at quarter end was $798 million, an increase of $341 million versus last quarter, mainly due to the successful equity offering in November .

I will note that this was the first time and coordinate his story that we ended the quarter with over $1 billion in assets.

Turning to guidance.

We expect a strong start to the year with first quarter revenues to be in the range of 87 million to $91 million, representing approximately 35% year over year growth at the midpoint.

While we are not guiding for the full year, we expect the regular seasonality in our business with the second third and fourth quarters of 2022 being stronger than Q1 and revenues in the second half of 'twenty two exceeding total revenues for the first half of 'twenty two.

We expect to generate non-GAAP operating margins in the range of 7% to 9% in the first quarter and EBITDA margins of 9% to 11%.

We believe disclosing EBIDTA margins is important given the increased depreciation expense associated with our new facilities and other planned investments.

While we are not guiding for the full year, we expect higher operating margins in the second third and fourth quarter of 2022 versus Q1 of 'twenty two with operating margins in the second half quarters to be in the mid teens.

I want to reiterate that all guidance assumes zero impact from fair value of issued warrants in the quarter with our global strategic account.

In summary, we are very proud of our full year performance and our strong fourth quarter. We so many terrific accomplishments made by the entire <unk> team.

Entering 2022, we.

We have never been in a better position as a company and we will continue to build and expand on our strong foundation with new product introductions targeted investments in the business strategic acquisitions and partnerships within the three key pillars of our strategy.

With that let me turn it back to Ronan.

Yeah.

Thank you alone and I believe now we are ready to take questions. Operator. Please open the call for Q&A session. Thank you certainly will now be conducting a question and answer session. If you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions. Our first question today is coming from Rob Hauff from Goldman Sachs. Your line is now live.

Yes. Good morning, Thanks for the question.

I guess I wanted to kick off given where in reopening Ronan and you have so much insight into the fashion industry I Wonder if you could talk a little bit about how you see reopening affecting demand.

For the kind of digital fashion that you guys are.

Are behind us.

And your products and then I have a follow up.

Yes, Thank you Rob.

No.

We see major trends in the market both for them.

Brand.

Designers creators.

Many many others.

Companies that would like to go digital and would like to connect into from the digital tool to the physical.

Conatus, playing a major role in connecting the digital to the physical we see a major demand is growing into the e-commerce into the different platform of Oh.

The marketplaces.

And the good.

What we've seen in Q4, we see a peak season for our customers. It was one of the strongest.

This is an ever customer grew about 30% and we saw demand around the globe. This is coming mainly from the digital world that would like to coordinate into the physical world coordinate is a unique position in our customers' unique position to enable this connectivity from the virtual physical and this is where we see it.

The growth is coming also moving forward into 2022.

Do you I guess, what I was getting at it do you think demand could accelerate given reopening people havent really been too much into fashion and walk down but now as we continue to reopen it seems like fashion would be more of interest to people or do you think that that demand is already kind of there.

No I think it's just the beginning we actually what we are enabling us to unleashing the creativity for any creators till now.

The supply chain was the limitation.

Being able to create so bren.

We are producing well designed products that produce the gate over overseas.

And shipping it and taking 18 months when the product is coming through to the shelf.

In today's world in the digital World.

<unk> is enabling us actually initiate those any of these diners to take their design.

Hosted wherever the warranty that was posted in shopify, Instagram and enable them to sell it on the core NIM ex platform and connected to the GSM network of our fulfill all of our customers are choosing coordinate technologies.

If I can add we see.

We see.

Much much bigger exposure to the fashion World and this is.

Part of our plan to open two these words with.

The fashion event that we are running and we plan to continue with this because we see this section you see the interest in it.

From.

Not only the traditional customers but.

The ones, we're running efficient world and this is it gives us a lot of confidence that in the right direction.

Okay, and then I had a just a follow up on a question with all the price increases I know you've been putting some through I wondered how customers reacting to the price increases and then what youre thinking in terms of increases as we move through this year.

Thanks.

Yes so.

First of all price increases. The last result, this is not something that we would like to do.

Actually both in putting a lot of focus on cost reduction.

As much as we can but there are areas that we have no choice to give you. An example logistics logistic cost.

Cost is going up dramatically and we have to share it with our customers. So we're not taking the entire quarter.

Going into our customers, we are sharing some of the pain.

Communicating very very clearly ahead of time at least three months ahead of time with our customers enabling to order ahead of time, if they would like to order new systems and new or additional Inc.

And we share the minimum possible with our customers we already done it last year.

And we are planning to do it this year overall customer mix.

Then.

The market dynamics and.

Excepting it in a positive way.

Okay, great. Thanks Robyn.

Carolyn.

Thank you.

Thank you. Our next question today is coming from Patrick Ho from Stifel. Your line is now live.

Alright, Thank you very much and congrats on a nice year.

Ronen, maybe first off in terms of the supply chain. It sounds like you guys managed through that very well can you give any color on maybe some of the challenges and the headwinds that you experienced during the quarter and how you look at the current environment from that angle.

So I think that we.

We are facing the same issues if any other companies facing first of all the logistics so logistics.

First of all the cost is going up is not predictable many shipments as we were supposed to get being delayed.

Which carries compliments and material for different.

The products that we are trying to build to sell.

But overall as we have a great.

Ability for our business.

<unk> managed to share the visibility in place order ahead of time with our suppliers with our contract manufacturers we secured.

Space.

With a contract manufacturer to produce ahead of time, we leverage out.

<unk> balance sheet.

Two placeholder ahead of time, and then inventory in areas that we felt that we have to secure.

And you can see it on our balance sheet as well.

We feel right now secured for 2022 and even entering into 2023 on top of that I believe that we have the best operation operational team in the world working around the clock every morning, we have new surprises or things that are.

Being delayed.

Our suppliers and our team is fully committed to find solution until now we managed to deliver.

Fully to the SLA, we are committed to our customers.

Great that's helpful and as my follow up question are your recent acquisition up to Soma.

Or are you going to manage their product base with yours is it something that you could still sell on a standalone basis to customers or is it going to be kind of integrated with your.

Your current system portfolio as kind of like an add on or what kind of a complementary solution.

Yeah.

So as you know the acquisition.

We will complete it in the beginning.

This is the aim so we just started right now.

Entering into the PMI.

So there will be a transition period.

Soma has a product they are selling not all of them to the textile market gradually we will change the focus of the soma with that technology into the textile market.

There will be products that we were going to integrate fully to our solution that will be fully connected in line to a solution that will be smart technologies that we're taking there.

For Soma.

We'll be more sustainable better total cost of ownership and much better productivity. So we are excited about this acquisition.

This very strong capable engineering and technology team there we are.

Eventually going to integrate them into coordinated but we're taking it one step at a time, we have a very clear targets for end of this year.

<unk> bring to the market the new solution based on the integration of core Nathan for Soma those would be smart solutions that will connect in line to our solutions some of them will be near line solutions.

I just want to highlight what they run in started with.

We signed the agreement we haven't closed the deal yet.

We are in discussions and working on the plan to be as ready as possible for our.

PMI post closing and.

And then we'll take it from there to execution.

Okay.

Thank you very much.

Thank you and thank you. Thank you.

Thank you. Our next question today is coming from Jim Suva from Citigroup. Your line is now live.

Thank you can you, let us know kind of a little bit about what's normal or expected for the cadence of kind of your automation of these integration of acquisitions Youre doing like is there like a alpha phase and a beta phase and then a couple of quarters that starts to roll out more broadly.

Is that the way to think about it or are we already at some of those phases now and what time line should we be thinking about thank you.

Thank you for the question. So as you know last year, we shared our strategy.

Four zero strategy, which is based on three pillars. The base filler is really about the operation side.

Production flow.

With the aim to automate.

Digitize the entire production flow.

Until now we were focusing very much on the printing engine, but their other power from the ERP picking of the government.

Ooh printing to.

Trying to holding two shipping all of this the aim is to automate and digitize by then we see it as a dark room.

No operator, and then we are taking it one step at a time for example, this year, we announced that we are coming with automation.

Onto the Atlas.

Into the Atlas family at the Smarts, and the Atlanta, which will enable us.

And much faster automated much faster loading and unloading on the Atlas matched with much better predictor.

Predictability and consistency.

We'll see later this year, we're going to unveil our next generation platform for the <unk> already mentioned in previous call, we are going to unveil it.

Here in Israel and in an event in the beginning of April .

This system is taking the automation to a totally different level, both from the loading and unloading but also from the dry perspective in the overall smart capabilities of the entire solution. So we're looking at the entire solution on the floor and the aim is.

Fully to automate.

Great and then my follow up question is I believe you recently announced a expansion a new center in Israel, If my Memory's correct that could be off on that.

Is that a new announcement it was that.

Due to you had constraints at your other facility or is this more.

Due to lead times and shipment costs and delivery times to your customers or how should we think about that.

No. This was a project that we're already working for the last three years of course, we announced about it because it was included the massive capex investment.

It's now ready.

It's very very successful project.

Actually we.

<unk> decided to go forward when.

When we looked at our long term strategy of becoming.

$1 billion in 2026.

And even going beyond that but we understood that we need more capacity.

<unk>, Inc.

Inc, and the current.

Glen.

I would not be sufficient for 2026.

And the situation right now.

We actually moved already to the new England, we started to manufacture the quality is fantastic we are going to see some benefit not only in terms of quality and automation.

But also in <unk>.

Sustainability.

And longer term, we will see improvements in the cost of.

Producing gold Inc.

Thank you so much for the details it's greatly appreciate it.

Alright. Thanks for your question is coming from Brian Drab from William Blair. Your line is now live.

Hi, Thanks for taking my questions and sorry, if I could just start.

With the upgrades and can you.

Give us a sense for what percentage of those upgrades do you think you can complete in 2022.

As a percentage of the total that you expected to do ultimately.

And are the are the margins can you make any comment on how the margins would be on those upgrades relative to your corporate average.

Yes, good question and I will try to give you some color would not be able to provide the exact numbers. So we have.

We made new upgrade doing starting to.

1022, one of them is the output from the Atlas can be at the Max.

As we mentioned, we expect about 75% of our installed base to grow food. This update some of them into 2022 and some of them in 2023, we expect to end the average by the end of 2023.

The second upgrade is about automation automation are first of all we are aiming for those customers are buying now.

Mark it will be able to add automation.

Shipping end of Q2 and later on also customers that have outlets will be able to add automation on top of the Atlas. This will impact positively mainly H two of the ear and following a post 2023 the third.

Upgrade is about the.

First for Max.

So customers are choosing the presto will be able to upgrade to the best of Mark's doing H two of this year, which.

Then a huge benefit for the past four months, we expect all our installed base to upgrade to the <unk> for the.

Nation, we expect 50% of our installed base and for the Atlas Max 75%.

In terms of timeframe, we didn't share exactly our menu, we expect in 2022 'twenty.

2023, but it's going to be a long ago.

Brown as the.

Automation upgrade coming you said at the end of the second quarter.

Originally you were planning to have that in the first quarter is there.

Anything to comment on there.

Youre right in terms of that the snacks, we started already the upgrade for from Atlas to Atlas snacks.

The automation, we decided to delay a bit into Q2 end of Q2.

Some of it because we wanted to focus first of all on the Atlas Max before we're going to the installed base of the Atlas we have.

A bit to wait for the maturity of that looks likes to.

To implement the solution.

And we are starting now beta testing of the solution will be ready to go to the market by end of Q.

Okay. Thanks, and then can you say anything about how the margins are going to be on these upgrades relative to the average.

The margins are very similar to the average margins that we have on other products.

Okay, and then just try to ask one more can you give us any sense for.

I know youre going to show.

So it's a machine with more details on the <unk> side. The high volume machine later this year, but can you give us any sense for what sort of unit volumes become economical.

Potentially on.

This machine compared with today.

Great question, and I will be able to share much more information and accurate, but the aim of this.

Technology and the <unk> is really going after the mass market.

So while the Atlas.

The entire portfolio that we have on the DDG is mainly going to the on demand.

For the customization and one off.

And very very short run.

This solution system is aiming for much longer run aiming to go after the screen with the placement and after the traditional market.

I used to run on gainful for brands and fashion industry.

Okay. Thanks, very much I'll pass it on.

Well just to add on that is totally additional market is really incremental market was up.

Till now.

We didn't play there for us is a huge potential moving forward again this product we're going to unveil in.

In April is going to be ready for the market mid of 2023.

Got it thank you very much.

Thank you. Our next question today is coming from Tobey Rozener from Barclays. Your line is now live.

Yeah.

Hi, Thanks for taking my question.

Wanted to talk about coding.

And it will be.

You mentioned, the new opportunities and move them.

I was wondering if you can comment on the different.

The ramp up coming from there.

Kind of the.

The number of machines.

Mhm to invest more.

And then on the back end software.

How should we have to grow.

Quarters.

Can you repeat the question I Couldnt hear you.

No.

Savi can you repeat please the question.

She is my my headset is it better now.

Yes.

Okay, so sorry for that.

Yes, I wanted to ask about Corning.

You mentioned the opportunity and obviously you have to go long term guidance.

I wanted to think about the next stages of the ramp up from here easy to increase kind of the.

The number of machines that are connected to the system.

Is it to kind of invest in software or how should we think of the roadmap from here for that.

Next coming quarter.

Yes so.

Thanks for the question <unk>.

A massive massive opportunity for cognex and for the industry.

And we are working right now we're very much focused on the pillow under kinetics, one is global fulfillment network.

Working with our customers define who is going to be a pause filler for coordinate X.

In all territories around the world. So not everyone will be part of this network you will have to meet.

Defiance is areas in terms of quality capacities SLA pricing and other stuff.

So we are working very very closely with.

Defined.

For failure to meet.

All of this pillar the other pillar is really the platform itself.

The <unk> X platform, which we always adding more capability now, we're coming with new UI and UX March moving pool.

There is a lot of capability in terms of.

<unk> designs and.

And the ease of use of the system. So this is another focus area for the team.

The third focus area is really about the demand generation.

And there we're looking at some really really big.

Big deal.

Hope that we would be able to announce very very soon in some very very big deal connecting mega platform into coordinate.

The X.

Very similar to the Canada deal.

But with even much bigger platform driving the entire volume kinetics. So we see many segments interesting segment that they connect to kinetics.

If it's in the fashion industry, if it's in the gaming industry.

It's in the corporate World.

We're working on a few very interesting project in team sports team.

And.

So the potential there is massive.

The entire world is moving into the digital space and who need us the platform to connect the digital into the virtual into our customer base that's using.

The Konami system and enabling the on demand manufacturing anywhere around the world in a sustainable way.

Great. Thanks for that and last one for me if I may.

You guys mentioned.

Significant net cash position that you have on the books.

Historically, you mentioned some of the proceeds from the niche werent going into acquisitions and I guess I was wondering how we should think of acquisition going forward should we think of.

Kind of.

The smaller ones.

You have made.

Sensory technology or perhaps down the road you'll be thinking of.

A large one.

On the software side.

So we are looking at.

On the bulk of the.

Production floor are digitizing the production floor.

On the kinetics.

A lot of solution around it that can complement very the kinetic solution on base managing baytown.

So it's really interesting.

Other plays more into the digital world.

We will looking into areas of playing more on the <unk>.

High value stream.

Stream.

And capturing demand.

Are there in terms of the size of the deals.

There's a big range, where we're looking for some small companies, but we are looking also for some more sizable M&A potential in front of us.

Great. Thanks for that I appreciate it.

Thank you. Thank you.

Thank you. Our next question today is coming from Greg Palm from Craig Hallum. Your line is now live.

Yeah, Congrats on the results here.

The questions I guess, just as a follow up to Q4.

EMEA really stood out and you gave us a little bit of color, but maybe we can dig into that a little bit more.

I'm, assuming that was sort of the big part of the upside relative to maybe your own expectations.

The upside versus the expectation James both from our EMEA was from Asia is you had.

Great quarter as well in Asia is entering into 2022 really with massive momentum a nice thing to see in Asia is also the day, we start to see business also in the DTF not only the BTG.

But also from our global strategic accounts.

Well you should assume that some of the kind of surprise on the apps.

On the numbers not only coming from systems are coming from the recurring it was a peak season to be recurring ahead of what we expected our customers.

Printed more than we expected and generated more revenue out of the ink, which is great. Because also is in better gross margin.

Okay.

To the different revenue.

So when Ed mentioned that are very strong peak season.

Very nice consumable revenues, but in addition to that we had very strong system sales in Q4.

The regular seasonality and more to the consumables in Q4.

And this quarter, we enjoyed both consumables and strong system sales.

Okay. That's helpful.

I guess as we look back on the last year.

Clearly a huge year for systems growth and you mentioned that even Q4 was a lot better than normal seasonality. So I'm curious as you're talking to customers is the reason that they're accelerating their own investments changing at all I don't know if that's just more replacement of screen, maybe it's got to do with supply chains I don't know maybe a bigger focus on.

The inability what are you seeing out there.

Yeah.

Maybe there is a different play between the DJ two Bcf at the BTG. The main demand is coming from oxy form the digital world most of our customers into the B to B to C. O two b to B to C.

Business connecting to all kinds of E.

E Commerce.

In marketplaces.

The demand is coming from there.

Mentioned into the future with the new system that we are bringing in the <unk> will start playing more in the traditional market, replacing screen printing in more longer run in the Dts is a different place. This year first of all is.

Hey.

Sustainability as you know this year the traditional way of producing one fabric is is massive polluting.

Consumer a lot of water there is a lot of regulatory regulation right now in different countries that we cannot use it anymore.

The switch to pigment.

And we have by far the best Big Man fully sustainable. So this is major driver into our technology and another driver that we would start to see we start to see fashion.

And not only printing on government printing on rolls of fabric.

For two kids fashion.

We're all fast people home moving online as well.

And customization is coming towards the fashion world and consumer can order a different design and.

This market is moving also to on demand.

Duction versus producing into.

Inventory and trying to push it to the to the market. So those are the two men.

They're either on their own and.

And we are enjoying in Mexico.

And thing Q1, with really strong backlog of order into the Dcs.

And we are adding more capacity and gearing up in terms of head count on the <unk> on the ground to go after this market.

From a customer from customer perspective.

We see.

The larger customers continue to expand either in new sites only new territory.

We see very clearly and we see many new customers joining.

To display.

We have very nice ratio also new customers.

Rich can give you an indication.

Where the volume growth.

Yep understood all sounds like a lot to look forward to in 2022 I'll leave it there. Thanks.

I would just add one more point is that the platform of the coordinated fashion week is really driving the awareness that full that was missing in the market for designers that you really can unleash their creativity. They can design anything they want and getting the same day, they don't need to wait six months or.

18 months to get the product, we don't need to order hundreds of meters. They can order it can designer dress and clean one dress and produce it and ship. It. The same day. This is a revolutionary concept.

The platform of coordinated fashion week that we've done in the Le and this year, we're going to do it in London and in Israel again is really <unk>.

Driving this message to the entire market and we feel the change within the trend.

Due to this.

Marketing activities.

Yeah.

Thank you. Your next question is coming from Jim Ricchiuti with Needham <unk> Company. Your line is now live.

You talked about the strength in Europe .

I'm not sure if I heard you correctly, but I thought I heard something about a major tier one brands in Europe and I Wonder if you could elaborate on that is this a new customer existing customer.

Can you talk to that.

Yeah.

So we didn't mention the name so I cannot mention the name, but we are dealing with some major major brands in Europe .

We've mentioned in the past like the <unk> and <unk>.

Who of the wall, but I can tell you those are.

Tier one brands that we are dealing with.

In Europe , right now and potentially can lead to massive growth both on kinetics and the <unk>.

Systems, Inc.

What we mentioned a few customers.

Filler that the purchase multiple units one of the more more than a double digit number of units is HFC.

71.

Based in Poland.

And they're growing very very fast already have a few of our system and now we're scaling.

First the business, but also sligo in the in the U K, we can see painful expanding both in the U S and Europe across Europe , and UK and in Barcelona in Poland in many other places.

This is another example of a massive expansion of one of our customer.

And then a question for you a lot just you gave a little color on G&A.

Wondering on the R&D side is there going to be anything unusual in terms of the cadence of the R&D spend over the course of 'twenty two just given the work youre doing towards developing the new G. T G system.

So.

Sure.

Nothing unusual in terms of the excess expenses a lot of unusual unusual things in terms of innovation.

So we are continuing to invest in R&D heavily.

And this is for the great NPI is coming this year and investments in quality and other and your application.

And but as you can see we grow the R&D expenses in a responsible way and it continues to grow.

From quarter to quarter, but.

In a controlled way and there is no something special.

Will happen in the future.

Got it thanks a lot.

Thanks, a lot.

Thank you. Our next question is coming from Jared many months from <unk> capital. Your line is now live.

Hey, good morning, guys.

So first question for me.

So I think one of the one of the key benefits of the technology.

Obviously.

Which has been the heat transfer vinyl et cetera.

And run out and I think you mentioned.

I think the number was 75% of your your your Atlas installed base or expecting to suffer in outlets.

It's Max.

So I'm just wondering I mean, if I think about if I own a 100 Atlas system.

And 10% of our jobs require.

And then why would I go on upgrades.

75% of per cent of my systems.

So I guess the question there are.

A lot of these customers that are upgrading or are they doing it or kind of SDI and some of the additional capabilities or is it more about productivity and the kind of it system changes.

Yes. Thanks for the question. So of course, it's not only because of that so there's a massive benefit to the Max technology.

First of all is the quality.

The great qualities in a differently with.

When I'm, saying quality is not only the weight loss, but its also the durability of the print the ability to print on much wider.

India range.

So many many different types of media that you couldnt bring before.

Using the uplift that you can do it without the smart.

So on the grain quality is a massive massive jump and it's meeting all the highest quality sensitive brand.

Quality air quality standards.

The second is productivity actually by implementing core knit basic netting the Max technology.

Increasing the productivity of the Atlas by more than 20%.

So just by calculating the 20% productivity is that youre, adding.

This makes a lot of sense to upgrade and it was quite a lot.

For our customers to do that and of course, the third point is new application, which is leveraging back.

Youre, absolutely right not everyone was going to add <unk>.

But those that will leverage that they will be able to sell much higher premium products get much better margins on the on the on the products that sell into the market. Then we will see the adoption rates.

Increasing also in the SDI and moving forward.

Okay, Great that's really helpful and then.

I guess the only other question for me just on <unk>.

It sounds like this is already.

Progressing pretty well and I know you've mentioned before you guys have a pretty sizable backlog of customers that are.

You know trying to trying to appliances offering and try to get in on it.

So I'm just wondering is there any color you can kind of provide us on.

You got.

It might contribute in 2022, either from a topline perspective, or how close the business might be to that.

Kind of longer term gross margin target.

Yes. So in terms of guidance, we are still not providing guidance for the excess of business Standalone business. I can tell you that is already generating a few millions of dollars doing 2021, and our Q4 was a record quarter for <unk>.

He is very very nice growth coming into this platform, we have ambitious plan to grow the kinetics during 2022.

And of course, the margins that youre going to see on this platform moving forward is higher than the margins that we even see on the on the system and ink side. So it should contribute very positively on the marketing side.

Okay got it that's helpful. Thanks Ryan.

Okay.

Thank you. Our final question today is coming from Chris Moore from CJS Securities. Your line is now live.

Alright, Thanks, guys. It takes to make a quick so just trying to better understand kind of the evolution of the top 10 customer mix specifically.

How many global consumer brands are in there now and.

Are you expecting that much differently 12 to 18 months from now.

So at this stage, we're not providing color as how many brands are within the top 10, okay.

Suspicious.

Customer you probably know one of them is of course, a global strategic account and is the biggest one.

And we have Oh most of the top.

Customer fulfilled.

This list.

We expect to see.

Massive change or major change moving forward in the next two to three years.

You will start seeing new names coming into the top 10, none of them brand.

And some of them other marketplaces going to enter into this space as well.

So while the top 10 will continue to be at around 60% of this is our assumption moving forward. The names will change dramatically and you will see brand.

Our major tier one brands part of business.

Got it all right I'll leave it there I appreciate it guys.

Thank you very much. Thank you Mr. Samuel we have no further questions I'll turn the floor back over to you for closing remarks.

So I would like to thank everyone for joining the call today.

We're very very proud about what we achieved in 2021, and we're really looking forward for 2022, which going to be an exciting and very very busy year and I'm really looking forward to share with you more in the next earning call.

It's also an opportunity to invite you again all of you.

The analyst community and investors to come to the fashion week here in Tel Aviv in airfoil beginning of April .

But also there is another opportunity to come to the fashion week coordinated fashion week London.

Week of May we will be happy to host all of you to.

To share with you our plans and to show you the new technology, which we are going to unveil here in Israel and effort. So we are excited about this year and we'd like to thank all of you for your trust last thing I would like again to thank our employees.

For doing an amazing job for <unk>.

Caring about our customers being so passionate about it working day and night and really.

Making it happen.

So thank you for employees and by that.

I wish all of you a great day, and a passing the call to Andy.

Great. Thank you Ron and thank you Ilana number here and thank you all for joining US today as always if you should have any follow up questions. Please do not hesitate to reach out to me directly.

With that have a great day and Kevin could you. Please close the call. Thank you.

That does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.

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