Q1 2022 Kornit Digital Ltd Earnings Call
[music].
Greetings and welcome to Clinique Digital's first quarter 2022 earnings call.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to our host Andrew Backman Global head of Investor Relations for digital.
Mr. Backman you may begin.
Thank you operator, and good day, everyone and welcome to coordinate Digital's first quarter 2022 earnings Conference call with me today are running Sandro Corny Digital's, Chief Executive Officer, Alon, Rosener Carnitas, Chief Financial Officer, and <unk>, <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 security laws will be made on this call.
These forward looking statements include but are not limited to statements relating 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 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 Securities and Exchange Commission, including the company's annual report on form 20-F filed on March 31 2022.
Identify 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.
Additionally, the company will be making reference to certain non-GAAP financial measures on this call the.
A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings release, which was published today and is also posted on our website in the Investor Relations section.
At this time I would like to now turn the call over to Ronen Ronen.
Yeah.
Thank you Andy and good day everyone.
Thank you for joining us on today's call.
I am pleased to share that we delivered a good start to the year with revenues coming just above the high end of our guidance and operating margins in line with our expectations.
For the first quarter total revenues grew by 26% year over year to $83 3 million net of 8 million in warrants related to our global strategic account.
System revenue growth was very strong and overall system contribution to the revenue mix was very high.
We saw diversification across the business within our top 10 customers with very strong performance of our global strategic account that continues to execute on its aggressive expansion initiatives throughout 2022 and 2023.
We saw a record quarter in Asia Pacific and a strong quarter in both EMEA and the Americas.
We continue to make progress with major brands, including one of the largest retailers in the world. We acquired several Atlas Smack systems this quarter.
This major retailer is focused on the ability to scale and also make massive quantities of production. In addition to leveraging the incredible benefits of <unk> <unk> and our global fulfillment network.
On the product side, we see a strong pipeline and adoption of the Atlas Max with existing and new customers.
We are moving along through the initial stages of the Atlas to Atlas Max upgrades, which will continue to gain pace throughout the year and into 2023.
We also received tremendous customer feedback on the automation upgrades.
Which will be selectively available in the second part of this year with commercial availability in 2023.
We had an exceptional quarter for the Presto, especially in Europe , and Asia Pacific and see a lot of excitement and momentum around the Presto, Max which now represents the majority of the Dts pipeline.
Also see an increasing backlog for Bristow Max upgrades as customer tell us that enhancing the coating capabilities for that colors fabrics is a massive benefit.
On <unk>, we continue to engage in several very interesting initiatives with some of the largest digital platforms marketplaces and brands in the world. We are particularly enthusiastic about the upcoming launch of our strategic partnership with weeks.
One of the leading SaaS an e-commerce platform in the world with over 220 million users globally.
<unk> is the leading platform for creators and enterprises of all sizes that are looking to build a digital presence.
With <unk> X the wix platform will enable its massive community to seamlessly.
Add on demand fulfillment services opening to them exciting comex and merchandising opportunities.
We expect to go live later this quarter and are excited about our joint roadmap pads.
In addition to this massive opportunity in our pipeline of new partners.
Some of our existing <unk> customers and partners continue to scale volumes and the total Jean <unk> running on the platform.
And we are very satisfied with our progress.
As mentioned on our last call.
2022 will be an exciting year of groundbreaking new product introductions.
In early April we hosted the extremely successful co need fashion week Tel Aviv, where we officially unveiled the Atlas Max poorly and demonstrated our revolutionary game changer coordinate Apollo.
The Apollo is the most comprehensive digital single step system targeting screen print mass production markets.
And the best solutions for New show mid runs mass production with best in class Max quality with the lowest TCE and the highest output per operator.
Our portal use this mark queuing from our recently completed the Soma acquisition.
We expect early customer engagement for our polo in the second half of this year and commercial availability mid of 2023.
We see strong movement in growth in the market from brands and retailers shifting traditionally mass produced offshore jobs to nearshore and onshore short run production supporting the lean inventory faster replenishment and in season the activity needs.
Our strong portfolio of mass production Max solutions.
And soon to come <unk> Apollo all powered by our unique who need X platform plays core need in a remarkable position to cater to these evolving market opportunities and trends.
While we see this tremendous and growing tailwind fueling our business our customer and us.
Not fully immune to the overall macro headwinds and certain post pandemic dynamics.
We started this year with a strong backlog and robust pipeline, but as we move deeper into the first quarter, we began to see the macroeconomic volatility weight on the pace of consumer purchases.
On capital allocation decision of certain customers.
As such some of these purchases and expansion plans I will now shifting out into later quarters.
We remain excited with our growth plan for the full year and continue to expect the second half of this year to be much stronger than the first half in terms of both revenue and profitability.
Considering the near term volatility of the top line and the continued investment in major marketing events and the sales activity. This quarter, we expect operating profitability in the second quarter to be lower than the first quarter as the loan will discuss each shortly we are extremely.
Energize heading into co need fashion week, London, which will take place next week.
We expect over 600 brands.
Diners retailers' influences investors and press to attend where we will demonstrate how virtual and physical fashion walls intersect.
This coming event as well as the first by event in Berlin at the end of May will be a catalyst to develop our funnel and pipeline for the coming quarters.
In summary, we remain focused on our mission to build the operating system for on demand fashion and the massive opportunities ahead.
And as I mentioned, while we are not fully immune to overall macroeconomic headwinds and near term volatility. We continue to expect to deliver ahead of plan. The 125 million run rate business. We originally targeted for the fourth quarter.
2023, and remain confident in our journey to become a billion dollar business in 2026.
We are working extremely hard to mitigate the external macro factors and I remain extremely confident in our team and the value we deliver to our customers.
Thank you again, and we hope to see you next week in London with that let me turn the call over to a loan for a closer look at the numbers and the guidance.
One.
Thanks, Ronen and good day to everyone.
We are pleased to report first quarter revenues of $83 3 million net of $8 million noncash warrant impact related to a global strategic account, which is just above the top end of our guidance range of 87 million to $91 million as a reminder.
Our guidance assumes zero impact from warrants.
As Ron and shared we saw good diversification across the business in the first quarter systems revenues were very strong primarily due to very strong sales for both Atlas and Presto.
Services revenues increased 32% year over year to $10 8 million and were 13% of total revenues net of noncash warrant impact of approximately 350000.
Top 10 customers accounted for approximately 53% of total revenues this quarter.
Looking at the regions.
Asia Pacific had another record quarter with good mix of both Atlas marks and Presto systems, including several press dose in Japan, any first pressed a mock system in India.
We continue to see very good interest in the region for both <unk> and Dts systems. In addition to coordinate.
With opportunities unfolding in Korea, China, Japan, Australia and India.
EMEA delivered one of its best quarters ever including upgrades from Atlas marks.
Building upon the strong go to market foundation executed over the past several years, we saw continued interest and momentum across the entire region for both Atlas Max Presto marks and kinetics.
In the Americas, New customers included a major swim and sports apparel company, who will be utilizing our Atlas poly.
A licensee for major professional sports leagues, and direct mailing solutions provider both utilizing Atlas.
We continue to see strong momentum in Central America, and Mexico, as a result of new shoring, including additional wins for Atlas marks and a robust pipeline for Presto systems.
Moving to margins.
non-GAAP gross margin net of the impact of the warrants was 41, 5% compared to 47, 1% in the same period last year.
This was due to several factors, including a higher mix of systems as a percentage of total revenues.
Including sales to our largest strategic account, who has experienced significant growth in and beyond the U S and higher Dts sales in both Europe and Asia Pacific.
In addition, we had lower consumables revenues as a percentage of total revenues.
During the first quarter, we move to mass production in our new ink manufacturing facility.
We believe as consumable sales pick up throughout the year, we will gain operational efficiencies on the fixed cost in the business.
Looking forward, we expect gross margins in the second half of this year to revert back to similar levels. We saw in the second half of 2021, primarily driven by new product introductions and increasing percentage of revenues from our recurring revenues consumable business.
Operational efficiencies and longer term the acceleration of <unk> and other software driven initiatives.
Looking at macroeconomic issues and supply chain.
We like our customers are not fully immune to overall macro pressures, including impacts from inflation and higher interest rates in.
In this environment, we are working hard every day to proactively address and mitigate this impact on the business where possible.
These include focused cost reduction project continued supply chain initiatives, including dual sourcing strategies and long term commitments design adaptation as well as selective price increases.
Given our proactive supply chain initiatives.
We remain confident in our ability to deliver on all our 2022 customer commitments and utilizing our strong balance sheet continue with our efforts to secure our 2023 supply chain requirements.
Turning to expenses.
Total first quarter operating expenses were $35 2 million a decrease of 8% from the fourth quarter and an increase of 43% year over year.
As I stated last quarter, we continue to invest in R&D to support our array of industry, leading NPS as well as in sales and marketing as we see meaningful opportunities to generate long term acceleration in revenue growth.
Our research and development expenses were $12 8 million in the first quarter or 15, 4% of revenue as compared to $8 9 million or 13, 5% of revenue in the first quarter of 2021, primarily due to continued investments in new.
<unk> introductions and kinetics.
Sales and marketing expenses were $14 6 million or 17, 6% of revenue as compared with $9 9 million or 14, 9% of revenue in the same period last year.
Due to continued expense expansion of our go to market strategy and capabilities in all regions, including the transition to direct sales model in some regions, including EMEA.
We continue to invest in brand awareness initiatives, including core need fashion week, Tel Aviv, and fashion week, London as well as other customer focused events, which will impact sales and marketing expenses in the second quarter.
General and administrative expenses in the first quarter were $7 8 million or nine 4% of revenue as compared to $5 8 million or eight 8% of revenue in the first quarter of 2021.
The increase was due to staffing and other investments to support the overall business infrastructure.
non-GAAP operating loss was <unk> 7 million net of $8 million of noncash warrant impact excluding the impact of the noncash warrants operating margins were in line with our guidance of 7% to 9% for the quarter, which again as <unk> zero.
Impact of the warrants.
We ended the first quarter with 913 employees a year over year increase of 213, and an increase of 31 employees from previous quarter, primarily in R&D and sales and marketing.
non-GAAP net income for the first quarter was <unk> 2 million or zero cents per share on a fully diluted basis as compared to $7 7 million or 16 cents per share in the first quarter of last year.
First quarter GAAP net loss was $5 2 million or loss of <unk> 10 per share as compared to GAAP net income of $5 1 million or profit of <unk> 11 per share for the first quarter of 2021.
Adjusted EBITDA for the first quarter was $9 5 million as compared to $10 8 million in the first quarter of 2021.
Our cash balance, including bank deposits and marketable securities at quarter end was 734 million a decrease of approximately $64 million versus last quarter, primarily due to cash used in operations of $47 1 million and capital.
Spend detours of $7 5 million in the first quarter.
We came off a strong peak season in the fourth quarter and ramped order during the second half of the first quarter.
The timing of sales later in the first quarter, two our largest strategic account grew receivables materially quarter over quarter, producing a drag on cash flow.
I want to emphasize that we see no collection issues in our receivables and we anticipate cash collections to improve over the next several quarters.
We also used our balance sheet to secure our supply chain, including building up key categories of inventory due to long lead times and shortages.
This includes components for Atlas <unk> and automation upgrades, which we expect to begin materializing in 2022 and into 2023.
We also made advance payments for key go to market programs.
Turning to guidance.
As Ron had mentioned given the macroeconomic impact on consumables and capital allocation decisions of certain customers and overall near term volatility. We currently expect second quarter revenues to be between 85 million to $95 million.
We expect revenues in the third and fourth quarters to be stronger than the second quarter.
In addition.
Considering the near term volatility on the top line and the continued investments in the business, including investments in multiple NPI and significant events like fashion week, Tel Aviv, and London and industry events, including <unk>, we expect operating profitability in the second quarter.
<unk> to be lower than the first quarter.
Specifically, we expect operating margin in the second quarter to be between minus 2% to 2% and EBITA margins of zero to 4%.
Further we expect higher operating margins in the second half of the year with operating margins in the third and fourth quarters to be in the low to 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.
With that let me turn it back to Ronan.
Thank you alone.
Operator, we're now ready for the Q&A session.
Thank you at this time, we will be conducting a question and answer session.
If you would like to ask a question Keith Please star one on your telephone keypad.
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You May press Star two if you would like to remove yourself from the question queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
The first question comes from Jim Suva from Citigroup. Please go ahead with your question Jim.
Thank you very much I have a few questions. When you mentioned the slowdown is the slowdown primarily related to your global strategic customer or is it not that and it's actually.
Absolutely not that and it's more the other accounts and customers that you're dealing with and I have a follow up.
Thank you Jim.
Actually it's a mixed view.
The slowdown that we see is coming mainly from the E com.
Segment.
Have many customers that.
Building the business based on the E com.
And we see defense.
Our view from different customers.
Referring to our global strategic accounts actually in this case, we see a tremendous growth.
<unk> cost in Q1, a tremendous growth in Q2, and we have very high expectation of continued growth not only in 2022, but also in 2023.
On the other hand, we see some other customers that they saw during Q1 and now during Q2.
Slower growth on the e-commerce, which impacts their business and by that delay decision of the acquisition of new system and we saw a slowdown in specific customer also on the supply during Q1.
Now also during Q2.
On the other hand, we see a very strong tailwind in other segments that we have.
Savi for example in the retail market successful at that.
Serving the retail space, we see a major growth we see momentum moving.
Joe from offshore from China from Bangladesh to onshore and nearshore in those customer enjoying it and growing really fast.
We see also other small customers strategic customers that working with both retail and E. Commerce that continues to grow Dts specifically.
And the Presto mass specifically is growing very fast it was a very strong quarter for Q1, and we continue to see momentum into Q2 with the.
Presto months.
Interesting to see the momentum that's coming from Asia Asia is the second quarter, a record quarter for Asia, but also in EMEA, while others businesses see a slowdown in EMEA, we actually see a major growth coming from EMEA.
And we expect a very strong Q2 also from EMEA due to some of our major activities that we're doing there with the fashion week in London et cetera.
Atlas Max we.
We see adoption, we see great feedback from customers and we are also starting to see a very nice growth coming from core networks and with the announcement today on the weeks.
Partnership and few other partnerships that we are developing we expect continued growth into <unk> and material revenue coming into 2023. So again to summarize is the mixed deal.
But definitely we saw and we see now in Q2 fuel customers that serving in the E. Comm the deciding to delay purchases of new system in Q2 to a later stage some of them will buy <unk> and some of them will delight even to 2023.
Yes.
Okay. Thank you and then my for.
For my follow up is you talked about an improvement in the second half of this year.
What gives you the confidence or the conviction.
As opposed to what you're kind of giving for Q2 right now is about three months ago.
Like this.
One shift.
Likely to happen and so I'm curious about your second half conviction. Thank you so much.
Yes, so actually we see Q2 kind of a bump on the road.
We believe in the 500 billion dollar run rate earlier than expected in Q4 2023, we believe in the long term vision of the $1 billion.
In 2026 or before all the fundamentals of the business are growing and accelerating we see the offshore moving onshore west.
We see the consumer trends to have unique.
Close.
We see overall E. Commerce is growing is just slowing down versus last year, where it was growing very very fast as.
So all the major trends that we were talking indefinitely the sustainability.
In short run strengthening chosen production is a major driver to our growth.
You were asking why we believe in H two that it will be stronger it will be much stronger than H, one it would be much more profitable as a loan mentioned in that H one.
First of all we have a line of sight to major orders some of them is from our global strategic accounts or you will continue seeing from the global strategic account.
Revenue coming not only in Q2, but in Q3 and Q4 in <unk> also in 2023.
We have major product introductions during Q2, which is the Atlas poorly and the Presto masks that we already booked orders in the implementation will be doing H. Two so we had a very high visibility on orders and remembers up eight two always is much stronger in terms of ink consumption.
<unk> Q4 is always big season.
So you will see a much stronger <unk> versus <unk>.
Thank you so much.
Thank you. Thanks, Joe next question please.
The next question comes from Kevin <unk> from Barclays. Please proceed with your question.
Hi, Thanks for taking my questions.
I wanted to first.
Talk about the progress was brands you mentioned in your opening remarks.
Seeing significant progress.
How does it compare the restaurant of interest compared to last quarter and I'm, just curious to get a sense of the conversation you're having with brands.
Are they still talking about why adopting.
Core needle there moving into rather win to adapt accordingly.
Yes. Thank you very good question.
So.
We see accelerated in.
Engagement and growth on the brand side.
We specifically see a very strong growth in EMEA with some of the biggest brands of the world. The Brexit I mentioned in my opening remarks.
He is one of the top fashion and one of the top five fashion brands of the world.
And they decided first of all to grow vertically.
<unk>.
Very few Atlas masses, and Theyre running them.
And picking up production and they are also will start walking through kinetics, we see different behavior from different brands some of them adopting <unk> as the main vehicles some of them would like to be fully vertical and some of them have been kind of the hybrid <unk>.
Good.
We are working with I can tell you 10.
Major major brands and hundreds of mid size brands across the world.
Many of them.
Will be next week in London fashion week.
And our fully fully engaged with the vision to transform the business.
Directly to consumer on demand and sustainable so the main driver for the brand first of all nobody wants to deal with the supply chain prices that they were dealing in the last two years.
In terms of the waste that is being generated in terms of being able to forecast what they need to deliver and when theyre going to bet on the interest cost for them all was to move production locally onto new show that we'd like to control the supply chain and they would like to do it in a sustainable way without waste.
Any sustainable production and this is why they would like to use digital and specifically chronic so.
So those are the major major trends and of course, the entire behavior of the consumer is totally different from what it was in the past consumer today and people today, we'd like to be unique would liked with different.
Close.
And by that.
The brand needs to react to be proactive and to allow the consumer to choose.
Much wider skus, even up to customization and personalization and we see it across the board. So those are the main driver for the brands to adopt digital and specifically comet one more thing that I would say widely adopting specifically co Nathan why core need is the one that talking with the.
Brands.
This quality.
We are the only one that has the highest quality the brand quality both in terms of their experience in terms of durability.
The brand's needs in the past it was almost there.
It was difficult to get the scale was better quality with the mass technology for the first time coordinate surprise the screen quality and we are by far better both in terms of appearance durability application range and now is being very very attract.
With all of the tailwind of the different market trends.
To adopt digital.
Alright, thanks for that.
Wanted to talk about accordingly.
So you mentioned the partnership with <unk> and I'm assuming that.
This will be helpful on the on the front end of the business.
I am just looking thinking down the road what are the next stages.
Hum.
And the ramp up.
Yes, so on kinetics, we see really.
Nice progress.
<unk> both from the demand generation companies like rates and thus may be in other areas that we are focusing.
But also all the <unk> global fulfillment network that fulfilling eight everywhere around the world and in consistent quality. So we see progress on those two phone and of course, we have all the time, improving the platform and the capability and the ease of use of the platform.
In the last few months, where we have many many discussion management discussion about areas of focus.
We are focusing right now with.
For the X.
Main focus was on the assertion the fashion industry the fashion brands.
But we're also focusing on major platform platform like <unk>, which we are.
Also.
Now starting to work with a major gifting platform one of the leading gifting platform the world starting to use us or.
Canada is a great example of.
Platform that already running full coordinate.
So we're starting to see major adoption, we are talking with I can tell you with all with many many of.
Last form around the world think about music platform.
And TV platform and mobile platform and so on all of them are potential to use kinetics to make to do to monetize the platform to create merchandise mainly around the fashion industry, leveraging kinetics and we see major progress.
As I mentioned.
In H two this year, we start to see we will start to see.
Meaningful revenue coming from community and we expect core net ex really too.
Accelerated growth in 2023.
Yeah.
And just a last one if I may offer that competition.
Im starting seeing more press release from.
The screen the manufacturers of screen printing equipment going into digital BTG solution is that something that youre seeing as well are you concerned at all.
The answer is that I'm not concerned actually I believe that we build a very very strong new moat around our technology around our products in the last two years actually will develop products and we created much bigger gap versus any of our.
Competitors, we've always had competition and we always will have competition. This is a very interesting.
Market space, but.
But I don't see any one else there with first of all the quality that we have by far nothing to compare to the print quality that we have with the Max the durability that we have.
The ease of use the automation.
The productivity now that we are bringing also with their colo.
The mix of the platform that we have both <unk> and Dts with the leading vessel technology on top of that the coordinates X platform that really connecting demand to fulfill their.
We are creating something different for many of our competitors. We are creating a platform we are creating an operating system and to an operating system.
And none of our competitors really looking at it this saw lipsticks.
We are already dealing with most of the major players in the market at our base for <unk> brands.
Marketplaces.
Fully committed to us.
And I believe this is just the start the technology that now we are launching this quarter with the Atlas Poly will the Presto marks.
With unveiling there all of which will be ready next year, which is a game changer not only in the current segments that we are addressing but really going after the replacement of the screen market.
This is a game changer. This will accelerate the growth of puneet and are more confident than ever in our technology and ability to reach the $1 billion in 2026.
Great. Thank you very much and we'll see you in London.
Hey, great to backstop the quarter. Your next question. Please.
Thank you. The next question comes from Rod Hall from Goldman Sachs. Please proceed with your question Rod.
Yes. Thank you morning, guys. So I wanted to see our evening for you I suppose.
I wanted to dig into the demand situation, a little bit more with you Ron and it sounded like.
There were large e-commerce customers that pushed out purchases do you think.
So you think that they are seeing lower demand for products themselves. Their revenues are being impacted by macro and then theyre pushing these out and I guess the reason I wanted to dig into this because we thought that as people travel more as they get out more.
This year the demand for T shirts, and fashion more broadly would probably go up not down. So just wanted to dig a little bit more into what you think is going on with that dynamic and.
What those customers Youre seeing on the ground and then I have a follow up.
It's an interesting dynamic and im not sure that has the full asset.
And in terms of the demand consumer demand, we see different behavior in different segments as I mentioned in the retail environment, we see customers serving the retail that actually see a massive pool. So I wouldn't say that the consumer demand is declining on T shirts and Moody's.
Across the board.
And as I mentioned also with our strategic global customers they see tremendous scope.
Okay across the board not only in the U S. But also in Europe .
We have some.
Customers.
Without getting into names that are mainly driven and driving the business on b to C.
We see a slowdown some of them.
All engaging.
Capacity during the last two years.
The purchased.
Additional systems and capacity.
They just don't see the same level of production that they used to see.
Some of them seem as a plateau some of them seeing a decline in their business.
They were planning few of them were planning to place order in Q2 to be ready for the peak season of Q4 at this stage have decided to delay this decision due to the tariff situations that they see and of course, if it's a bump on the road they will continue to pursue.
He's doing a store if not it will come in 2023 from those customers specifically.
Again E Commerce is not going to disappear is greatest commerce is growing is growing now it will continue to grow this is the <unk>.
Our direction.
It's just a bit of a slowdown that the feeling right now and I'm sure that we'll see it coming back.
Okay, that's great and then.
I wanted to.
Wanted to ask you if you could talk a little bit more about the.
The margin mix in the quarter I get that Amazon or I should say the strategic customer was stronger than we thought it would be so that was very strong. So I get that mix effect, but then I wonder what happened to ink and consumables did you see lower ink and consumables.
Demand in than you thought and can you quantify what happened with ink and consumables at all for us.
Yes sure.
Firstly just to continue to answer from a previous question.
Which also relates to the margin.
We don't see any dramatic change in the mega trends and fundamentals in the market.
We clearly see growth.
And.
We have very solid business model to support this growth and we are strong in our.
To deal with.
Some volatility and uncertainty and yes, we see some uncertainty in the market mostly related to.
So the macro.
This is the global economy, and then both equally into into our margins I think that the results in Q1 either.
Margin is related to mix to volume and the timing of the deal and the mix in Q1 was there a lot towards system, which is.
Very good for us because it decreases our installed base and we.
We saw a very strong system sales both for <unk> and Dts, we had very strong quarter for this year.
And then.
In terms of volume the consumable were lower in terms of percentage, we saw growth in consumables. It was lower than we expected.
And they're entered the volume factored into the game and we have the capacity in our new manufacturing and when we are manufacturing less.
The heat of the fixed cost and Thats why we say that as we go throughout the year, where consumables portion will be higher.
Then we will go back to the levels of margin that we saw in the second half of 2021.
So our business Okay. When you look at a store will be.
Similar to <unk> 'twenty, 'twenty, one which means it's around the 50% plus on the gross margin.
We are fully confident that we will continue to see expansion into 2023 on the gross margin on the way to reach the 50, 455% gross margin as we promised.
To our investors.
Great. Okay. Thank you very much.
Alright, Thanks alive, probably next question please.
Yes. The next question comes from Jeremy <unk> from <unk> capital markets. Please go ahead.
Hey, good morning, guys. Congrats on the good quarter and Great news on work.
That's really reassuring for the very next day.
First question can be here.
Yeah, absolutely. So first question for me just on the excess capacity that you guys had mentioned.
Remember back in I think it was Q3 'twenty. One you guys mentioned that you had placed the entirety of your orders for 2022 with your contract manufacturers.
And I'm wondering if you if you thought this kind of excess capacity that could be a problem.
Background, when you made that order or if there has been kind of an incremental shifts since then.
In fact of that order and I believe this has kind of weighed on your near term guidance.
Yes.
We don't.
See any dramatic change in our plans going forward there is a timing issue now and.
Yes.
We have higher raw materials.
Inventory at the end of Q1 all of the increase in inventory was raw material, we're not stuck with.
Stock of systems that.
While waiting for sale.
We are building, our raw materials to be ready with the NPI with the upgrades and <unk>.
And then we are ready for growth in second half of this year, we don't see any risk at this point for excess inventory.
Okay got it that's great. Thanks, a lot and then.
I'm just curious.
Near term volatility that you guys are seeing I am wondering is there any.
The decrease for <unk>.
M&A or do you think maybe you or even a little bit more eager now that valuations have come down in the private market.
So we are we are engaged and looking very closely on to all kinds of opportunities. Many on the software side on the M&A.
The market now is more interesting and of course, we are looking deeply into that.
Our strategic direction is very very clear, we are not changing anything from the direction that we're taking as a company we believe in the future.
We believe in becoming the operating system for the fashion industry and areas that we need to invest in M&A. We will continue to invest there is no change in our plan.
Okay got it okay, that's great and then just one.
Thank you.
One for me.
I'm just curious could you sequentially it looks like service gross margins Macquarie.
So I'm just wondering what happened there I assume maybe it's related to.
Let's start with smart grids, but just curious what happened there.
For the next couple of quarters.
Yes.
Okay.
Sequentially.
Quarter over quarter.
Yes.
In in service business, there are different components and it very much.
Related to which projects we do a deal.
At each quarter overall, we are.
Investing and.
Building, our service organization and.
It very much depends on specific projects overall, we continue to see.
Continuous growth and improvement in service profitability and this is the way we planned going forward.
Thanks, guys, Hey, Emlen.
Our major growth on the on the service both revenue and margin you will start to see more adoption of the upgrades kits in Q2 and definitely in a store, which will influence the service.
P&L, both on the topline and bottom line on gross margin.
So you will see a major improvement.
Got it thanks, Brian .
Alright, Thanks Terry.
Please.
Okay. The next question comes from Brian Drab from William Blair. Please go ahead Brian .
Hi, Thanks for taking my questions.
I just wanted to.
Clarify one thing I know you said youre seeing some customers in the second quarter delaying decisions are you.
It sounded like round and that Youre, saying youre not sure what some of those customers are going to do in the second half of the year.
There is some of those customers that are saying.
We're delaying second quarter, we'll see you in the third quarter or with all the economic uncertainty.
Is it really an unknown and then getting back to that where does the confidence come.
For the second half of the year I guess is it more related to some of these customers knowing that they are coming back or is it more related to just the overall momentum from all the new product introductions.
Seasonality et cetera.
Yes.
Brian Thank you its a mix.
Look it's a few customers.
We're planning to process in Q2 and decided to delay that.
Purchases is not.
The amount of customer we see overall in the supply.
Im kind of slowing down in Q1, and some slowing down also in Q2 actually in the last week, we start to see a different trend than supplies. Hopefully this trend will continue.
A positive trend.
<unk>.
Those customers have decided that we were planning that they will buy in Q2.
And decided to delay a few of them and we have a date with them for a store, but a few of them didn't decide if they will buy it all this year or it will be delayed to next year. The confidence that <unk> is not based on those customers the confidence of comparable age too is based first of all you know we have recurring revenue almost 50.
<unk> of our revenue is recurring.
And if a store is higher than each one by this is the basic of.
Our tendency.
<unk> of the business.
On top of that we have a few strategic customers, including our global strategic customers that we have we have already the orders and commitments.
And we are producing the systems.
So we don't see any risk on board, we see a growing pipeline on the new product introduction, mainly on the <unk> Max.
We are now producing them and many of them will be shipped only in Q3 and Q4. The same thing on the Atlas Poly, which we are going to.
Or is it only by the end of this quarter Q2, and the main impact will be into a store revenue.
Also we start to see revenue coming from.
Puneet, it's mainly into Q into a store so all in all our confidence level into a store that is going to be much stronger both in top line.
<unk> operating profit and also gross margin will be look totally different and very similar to the gross margin. We saw 82 last year is very high.
Okay.
Got it okay.
And then theres been.
Some discussion around it in the past.
Had a certain customers attend your analyst days.
Some strong relationships that you've had in the past.
I'm curious can you update us on.
And any any specifics around.
The strength of your relationship with fanatics.
Delta apparel.
Yes, it's a good question I was anticipating it.
So.
First of all we have a great relationship both with fanatics and Delta apparel specific duties to go.
I cannot get into the specific of their business.
And you and I am sure that you are posting them. They will give you all the answers.
General Fanatic decided to change their business model.
It is a brand and they decided actually instead of being vertical.
And produced by himself to outsource the production and the outsourcing it.
Both too distributional role, but also to other customers.
And.
I think this is the direction that we.
Whoa Foreseeing. This is exactly why we have kinetics to enable those brands like fanatics and like many others to fulfill through a network of wholesalers, but using coordinate technology.
As for.
Delta apparel Delta apparel is one of our largest customers.
They have a fleet of coordinate.
In the last two quarters, we aware that they decided also to acquire a few systems from one of our competitors.
Mainly the <unk>.
Look at it as more fat replacement for screen not for short runs for one off.
Multiple direct to consumer more for the long run.
We know that they are testing it.
We know a bit more on that but I will note.
Get into it.
We again, we believe that our solution and definitely what we are bringing to market with the Apollo.
It will be the best solution and I'm sure that we will work closely with.
Delta apparel and fanatics.
Others too.
To make sure that.
Consistent they continue working with us in strong partnership.
We like them as our customers and will continue to support them for many years to come.
Okay. Thanks, Thanks very much.
Thanks, Brian next question.
Thank you. The next question comes from Jim Ricchiuti from Needham <unk> Co. Please go ahead Jim.
Thank you I wanted to go back to this.
This global brand that purchase.
Atlas machines is this.
How are they using.
These atlas machines are they using it for an e-commerce application or are they using it as kind of a hub to supply some of their their retail stores are not entirely clear on that.
Unfortunately, they cant get into too many details because Venezuela.
Who is the.
Who is the customer with the brands and they would like to be.
To keep it.
Confidential at this stage is actually building a unique business model combining both.
But in the end I would like to address also directly to customers.
The hub that they are building.
I would say more than that.
To what extent can you say.
If some of the.
The.
ESG type benefits of your technology played at all into their decision.
Yes.
I would say to think that the leading debit senior festivals quality. They would like to have the best quality on printing on government that we're testing.
Our solution.
Helping special governments.
For those solutions, we have the best quality in the market. So quality is number one.
F&B sustainability is a key issue in supply chain, making it closer onshore production is also very important for them.
And I wanted to also follow up question, just with respect to the upgrade of the Atlas.
Our fleet the installed base.
Light up some.
The change.
Changing dynamics that youre seeing in the market I think in the past you've talked about as much as three quarters of the existing Atlas fleet potentially.
Upgrading to match has that.
Correct me if that's.
That's right.
Correct or not.
Or are you seeing any change in light of the market environment and just with respect to the market environment am I correct in assuming this is mainly in the U S. It sounds like Youre seeing good momentum in APAC and good momentum still in EMEA and ill jump back in the queue. Thank you.
So in terms of the momentum.
Q1 was very strong as well in America.
And we actually see in America into Q2.
Defend again mix. So we see actually a very very nice growth in Latin America, coming from Brazil, and Mexico, So more of the.
New show production is growing we see a few customers that that product we're producing for retail.
In America is growing but we see also some slowdown in the Q2 former customers mainly in the E com side.
Indeed is more right now in the Americas.
Again, I believe it's a very short term bump.
On the road as for the upgrades of the Atlas Atlas Max.
We are on a journey right now.
Four we are not changing.
Forecast of 75% of the installed base upgrading their Atlas to Atlas. We are on the journey to create a new standard of quality, we believe that the Max will be a new set of quality for the industry.
We're working very closely with the major brands, who decide that this is a standout.
<unk> will be based on the standard of Atlas marks on the Max technology.
And therefore, we are putting a lot of emphasis on that and you will start to see more adoption of the aggregate Keith.
During Q2 and mainly in a store.
And while we are ramping up.
Service and support organization to implement it with our customers.
Thank you.
Okay.
Thanks, Tim next question.
The next question comes from Chris Moore from CJS Securities. Please go ahead.
Thank you and good morning, it's actually Dan in for Chris.
You've talked quite a bit about near shoring on this call can you give some specific examples of it happening yet where do you see it accelerating and how big of an impact do you see it having long term on the business. Thank you.
Yes, we see it.
A lot both in EMEA.
We see it definitely in the U S inside.
But also in Mexico very strongly so we had few customer in Mexico, that's growing very very fast and doing new show for North America, but we have few customers inside and automakers are starting to get bulk Joe that never been used to get those in.
In the past moving actually directly from brands that used to produce in China and in the far east and producing now onshore or nearshore.
It is very obvious is very clear the trends.
We see both on the digital side, but when we're talking to our customers I see also on the conventional side.
So a lot of the large orders are moving onshore both in EMEA and in Americas.
That's great and one more for us given the slate of new product introductions.
Max Poly Paulo, I hope others can you talk about the impact on carnitas, ASP and gross margin profile over time. Thanks again.
Yes, so on ASP actually overall SD of system in Q1 went up.
Our focus is to sell more high end products.
And you will continue to see the ASB.
Improving.
Along the year, because we will sell more the Atlas Paul is in more of the Presto marks and even the Atlas mass of course is the ASC. That's as much is higher than the ASP of the Atlas.
As well Unfortunately, we had to do some price increase which also impacts the ASB.
So you will see it in terms of the gross margin I think what you've seen in Q1 is I would call. It a one off.
And this came mainly from a very low mix between supplies.
<unk>.
Good to see.
Systems we.
We had a very low relative low revenue on supplies in Q1 some of it.
Already because customer we're acquiring supplies in Q4, there were focused in Q4 to be stronger and they had supplies being using it also for Q1 for ordering less supplies in Q1, we start to see as I mentioned and you have different trends right now we start to see an improvement.
And starting to get larger order for supplies.
So hopefully lets wait few more weeks to see that these trends.
So this is the major impact on gross margin gross margin for Q2 will be much better than Q1, and <unk> will be very similar to last year. So.
Around 50% of 50% plus in terms of gross margin and you should expect in 2023.
The expansion on gross margin as well.
And just to add longer term, we keep our targets in the long term model to have.
Gross margin between 50% to 54%.
Very helpful. Thank you again.
Thank you.
And our final question comes from Greg Palm from Craig Hallum Capital. Please go ahead.
Yeah. Thanks for fitting me in here I guess on gross margins specific to systems it sounds like.
Shipments were better than expected I know there were some mix issues between presto in Atlas, but just trying to get a sense on how system margins were relative to expectations for prior quarters.
Yes, so system margins was occur.
According to our expectations actually it was a bit better than we planned.
We planned for a mix <unk>.
<unk> and DTF.
We said it also in previous quarters that we invest a lot in Dcs. So we had good quarter four bps.
We planned for it and overall.
Systems' margins was.
Even slightly better than what we planned.
Okay. Good.
Then on the receivables comment for my follow up I think youre blame that on late quarter sales I think you said specifically to global strategic was that a pull forward of activity into Q1 from Q2 or was it I don't know maybe a pushout of shipments for maybe mid quarter to late quarter. It wasn't exactly.
We have clear what what happened there.
So it was a.
The timing issue of making decisions then getting.
The paperwork.
Did the start of the year in the quarter was a relatively weak after a very busy peak season. So people took some time off.
Relax and then we saw.
Quarter building up at the second half of the quarter. When we got the <unk> of the planned business for the quarter and then we ship them relatively close to the end of the quarter and just in a matter of timing.
Most of the day, our adjusted <unk> will be collected mostly in the second quarter.
Yeah makes sense okay. Thanks.
Thanks, Rick.
Thank you Mr. Sam you we have no further questions I will turn call over to you for closing remarks.
Yes. Thank you operator, and thank you all for joining us on today's call as mentioned earlier, we remain laser focused on execution.
Across the board.
To capture the massive opportunity we see in front of us I would like to thank all of you.
I would like to thank coordinates team for the amazing work and hard work and passion and.
And to all the stakeholders for continued support and confidence in us.
I am looking forward to see many of you next week in London, we'd like to thank you and have a great day. Thank you very much Greg and thank you Ron and thank you Milan 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 and we hope to see in London.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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