Q4 2022 Kornit Digital Ltd Earnings Call

Yes.

Greetings and welcome to coordinate Digital's fourth quarter and full year 2022 earnings conference call.

A reminder, this call is being recorded.

Wed now like to turn the conference over to your host Andrew Backman Global head of Investor Relations for coordinate digital Mr. Backman you may begin.

Thank you operator, good day, everyone and welcome to Corny Digital's fourth quarter and full year 2022 earnings conference call joining.

Joining me today are chief Executive Officer, running Saturday well.

Laurie Hangover corny, its chief financial Officer, and I'm here in Chicago, Mendell EVP of corporate development.

For today's call Ronan will provide comments on our fourth quarter recap the full year 2022 highlights and discuss key focus areas for 2023, Laurie will then review fourth quarter and full year numbers and provide our first quarter outlook before we open it up for Q&A.

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.

Other U S securities laws will be made on this call.

These forward looking statements include but are not limited to statements relating to the Companys plans strategies projected results of operations or financial condition and all statements that address developments that the company expects will occur in the future.

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

Our results to differ materially from those implied by 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 in March 2022, which identify specific risk factors that could cause actual results to differ materially.

Any forward looking statements are made currently and the company undertakes no obligation to publicly update any forward looking statement, except as required by law.

Additionally, the company will be making reference to certain non-GAAP financial measurements on this call.

A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings press release published today, which is also posted on the company's Investor Relations website at.

At this time I would like to turn the call over to Ron It Ronen.

Thank you Andy and good day, everyone. Thank you for joining us.

Before we begin I wanted to extend from all of US here at cool neat our thoughts and prayers to those who have been impacted by the recent devastation caused by the Earth quakes.

Turning to our results as reported this morning fourth quarter revenues were 63.3 million net of approximately $4 3 million of noncash wins impact related to our global strategic accounts and in line with the revenue guidance range provided in November which as a reminder.

<unk> zero impact from the fair value of the issues warrants for the fourth quarter consumable and services revenues were again up sequentially year over year and on a full year basis as compared to 2021.

We saw a mixed peak season across regions and customers. We psammophyte allowed the strategic accounts, mainly in Americas experiencing a very good peak season out there, especially in Europe were generally flat to slightly up or down in terms of impressions.

And consumables as expected systems revenues were down meaningfully in the quarter given the ongoing macroeconomic backdrop.

Some customers and prospects continue to take a wait and see airports or making meaningful investments, including adding production capacity to their existing fleets as such we continue to expect system sales to remain challenging in 2023 and expect to see growth for <unk>.

Consumables and services.

Like the broader global technology environment, 2022 was a tough year for all of us with.

We started 22 with a strong momentum and growth fueled by the introduction of groundbreaking new products that set the stage for sustainable long term top line growth.

We closed the acquisition of the Soma opened our new England and cemented the position of our Max technology is the new industry standard for quality with several strategic customers looking to upgrade to Atlas Max given its retail quality and superior T. C L.

Despite the macro backdrop, we experienced good demand and encouraging results for our DPF solution, especially in Latin America and in important European fashion production in countries, such as Italy, Portugal and Turkey.

Results in Japan are trending well and new meaningful opportunities are beginning to develop in India as well as in China, where the economy is slowly reopening.

Our long term partnership with our largest global strategic customers remains very strong relative to the market. They continued to grow nicely contributing to the increase in our consumables and services revenues this quarter.

Looking at 2023, we expect this customer to add new sites operational with added capacity driven by the systems, we sold in 2022.

While global uncertainties and what they call the big waves of the overall market environment outside of our control. We are focused on what we can control. We view 2023 is an important info puneet a year of transition and execution.

And the ease we will focus on three key areas vital to our long term profitable growth.

First returning to profitability.

Over the past several quarters, we implemented decisive actions to reduce operating expenses improved margins and adjust our operations to the current market conditions. These actions combined with improvements in system utilization in some.

Finally installed base.

Plus the rebuilding and scaling our system sales should help us turn the corner during the second half of this year and approach breakeven and later one move to profitability.

We are laser focused on successfully launching our polo for which we expect to gain meaningful traction with retail brands and for fillers and to help transform the retail industry supply chain better to rise for the polo are set to begin over the next several months.

The formal unveiling in June at EMA Global trade show in Milan, Italy. In addition to showcasing our polo at EMA, we will demonstrate how cool neat is leading the retail transformation without a strong portfolio of DDG D E F and Clinique X solutions.

We will show global brands and retailers, how they can fundamentally change their business models with the highest quality flexible on demand sustainable digital production capabilities, all while unleashing unmatched creativity and being aligned with the new rules of supplies and.

Demand, we hope many of you will join us for what will be an amazing conference. So stay tuned for more details.

Instead, we are focused on scaling puneet acts by pursuing demand generators and further building our global fulfillment network of on demand digital fulfills.

We have added several key customers and partners. Most recently with a number of global brands and marketplaces over the past two years, we have learned a great deal and repay overtime efforts to improve the customer experience for demand generators and further develop and.

Scale. The GSM, we continue to believe <unk> X will be a meaningful contributor to coordinate in the years to come Okay. A couple of final comments before I turn it over to Laurie.

First our long term growth drivers remain firmly intact. The penetration of digital production remains low and we fully expect demand for DDG systems to resume growth as capacity utilization and market conditions improve.

We also see meaningful new market opportunities with Apollo Atlas smacks poorly D T F and scaling coordinate X, we see meaningful system upgrades and replacement opportunities across our customer base.

Further we expect a higher mix of revenues from consumables to drive additional operating leverage on our adjusted post tax share overtime, while current market dynamics have impacted the timing of reaching our 2026 financial objectives. We firmly believe we can achieve.

Our long term financial goals in there is to come as we continue to lead the retail and supply chain transformation in the industry. It is clear to me that our vision to transform the fashion industry is happening, while we expect customized design, which represent the vast majority.

<unk> of our current business to resume growth and continue to be a meaningful part of our business, we see very meaningful growth opportunities in several new markets that we expect to really drive and accelerate long term growth.

For example, we see mid sized retailers all over the world shifting their business models and transforming their supply chains with vertical on demand digital production or by using co neat X as they test and change product Skus daily in order to chase trends.

In addition, we see massive opportunities within Celgene create all economies influences and their communities large digital social and content generating platform, all of whom can benefit from <unk> and monetizing their individual brands and platforms.

Using co needs on demand digital solutions to support their production needs.

Finally, as we have seen over the last several years supply chains in the broader apparel industry, including for the large traditional brands are broken and not reliant on antiquated production cycles. We believe <unk> is best position to lead the retail transformation.

<unk> to a more efficient profitable and sustainable business model for years to come as I've said before we are a zillion company with a strong balance sheet and we remain fully committed to long term profitable growth with that let me turn the call over to Laurie for her.

Closer look at the fourth quarter and full year 2022 numbers and guidance Laurie.

Thank you Ron and good day to everyone fourth quarter revenues were $63 3 million net of $4 3 million noncash warrant impact related to a global strategic account.

For the full year 2022 revenues were $2 71, 5 million net of 22.5 million attributed to the noncash warrant impact.

Paired with 322 million net of $25 4 million attributed to the noncash warrant impact in 2021.

As Ron described earlier consumables and services revenues were each up year over year and on a full year basis as compared with 2021, while systems revenues were down meaningfully in the quarter as we expected and for the full year 2022.

In the Americas, we had a solid quarter of consumables and services revenue growth with some customers experienced a strong peak season, while others continue to work through excess capacity.

Although overall system sales remain challenging we continue to gain traction for our D. T F solutions in Latin America with yet another encouraging quarter of growth in EMEA <unk> consumables and services revenues were generally flat compared with the same period last year while system sales.

<unk> continued to be impacted by capacity utilization and higher financing costs.

We are seeing encouraging results in important European countries, like Italy, Portugal, Iberia, and Turkey with additional opportunities opening up in the U a E in northwest Africa.

The APAC region delivered stable performance, despite the tough macro backdrop, driven by China's zero Covid policy.

Both consumables and services revenues were flat to slightly up and system sales were lower year over here, we do see encouraging penetration of the Max technology in APAC with installations in Japan, and Australia, and as Ron said meaningful opportunities developed.

Thing in India and in China.

Moving to margins non-GAAP gross margin net of a 4.1 margin point warrants impact was 36, 4% compared with 49, 6% in the same period last year.

The lower year over year gross margin was driven primarily by reduced sales volumes compared with the same period last year as well as approximately 6 million of inventory write offs associated with older generation systems and spare parts as customers continue to move to a new way.

Generation systems.

We continue to examine our bill of materials selectively raise prices and seek opportunities to generate efficiencies within our services offerings.

We therefore expect gross margin to improve over time, particularly our system sales volumes rebuild and recover to a run rate that generates operating leverage on a reduced cost structure.

Turning to expenses.

Total fourth quarter non-GAAP operating expenses were $32 9 million down approximately 14% from $38 4 million in the same period last year.

The change was due to cost structure improvements across the board, including prioritizing R&D and sales and marketing initiatives and reallocating resources from non customer facing activities to development and two customer engagement functions, thus enabling accelerated.

Asian of our long term growth engines.

We also completed workforce reductions over the past two quarters, which will reduce overall head count by approximately 10%.

We ended the fourth quarter with 934 employees.

non-GAAP operating loss was $9 9 million net of 4.3 million noncash warrants impact, which was in line with our guidance for the quarter.

For the full year 2022, non-GAAP operating loss was 41.8 million net of 22.5 million attributed to the noncash impact of warrants compared with non-GAAP operating profit of $30 3 million net of $25 4 million.

Attributed to the noncash impact of warrants for the full year 2021.

Fourth quarter adjusted EBITDA loss was $6 1 million compared with adjusted EBITDA of $6 8 million in the prior year period.

For the full year 2022, adjusted EBITDA loss was $30 8 million compared with adjusted EBITDA of $36 million for the full year 2021.

Please refer to our updated adjusted EBITDA disclosure in the earnings press release as well as the details provided in the GAAP to non-GAAP reconciliation table for details.

Next I would like to address two special tax items impacting the reported fourth quarter and full year 2022 results.

First approximately 11 and a half million dollars or 23 cents per basic share was paid to the Israeli tax authority specifically the company took advantage of a window of opportunity to pay taxes for trapped profits from prior years at a steeply discounted rate.

Which provided us with material tax savings compared with the higher rates, we would have paid in the future, including taxes associated with our previously announced share buyback program.

Second we took a valuation allowance against our deferred tax assets given cumulative losses incurred over the past three years of which approximately 10 million impacted the P&L or 20 cents per basic share.

From a P&L perspective, the Israeli tax authority payment was a one time cash expense, while the deferred tax revaluation was noncash.

Please refer to the GAAP to non-GAAP reconciliations in our press release for further details.

Our cash balance, including bank deposits and marketable securities at quarter end was approximately 646 million.

Cash used in operations during the fourth quarter was approximately $39 6 million driven primarily by the operating loss the Israeli tax authority payment I, just discussed and changes in working capital.

As expected inventories remained high and our less than typical payables balance reflects lower material purchases and payments in advance of cutting over to the new ERP system, which we successfully transitioned two in January 2023.

As described in our recent 6K filed in December we are pleased to report that the Israeli Court has approved our request to authorize a share repurchase program of up to $75 million. We continue to believe opportunistically purchasing shares is in the best interest of the company.

And our shareholders and that the share repurchase program will not impact our ability to execute on our growth initiatives given our strong balance sheet.

Before discussing first quarter guidance I'd like to highlight key changes to the guidance that we will provide to the investment community going forward.

As has been our historical practice the guidance provided assumed no impact of the fair value of issued warrants related to our global strategic account. However, we received valuable feedback from the investment community to make our financial reporting easier to understand.

To be better aligned with our reported financials. We have therefore decided to provide guidance net of the warrants impact on revenues and profitability going forward, starting with the first quarter of 2023.

We are also providing a guidance range for adjusted EBIT and margin expectations going forward instead of a range for non-GAAP operating margin.

In this regard depreciation expense has materially increased after the completion of our new ink manufacturing plant as such we believe adjusted EBITDA margin is a more useful financial metric instead of non-GAAP operating margin to measure the performance of our business.

We have included a reconciliation table of our GAAP net income to adjusted EBITDA in our earnings press release for the last three years.

So turning to first quarter guidance. We currently expect revenues for the first quarter 2023 to be between 47 million and 52 million and adjusted EBITDA margins to be in the negative 27% to negative 35% range again the guidance for <unk>.

Revenue and adjusted EBITDA margin includes the impact of the noncash expense associated with the fair value of the company's warrants to our largest global strategic account.

I'd like to remind everyone that the first quarter guidance reflects the typical seasonality, we see in our business with the first quarter typically being the lowest quarter for higher margin consumable sales and also factors in a difficult year over year comparison for system sales volumes.

As a result generating operating leverage on the revenue range provided in our first quarter guidance is difficult as our operations were built to be profitable at a higher revenue run rate.

I will note given the decisive actions we have taken over the past several quarters to adjust our operations, we see breakeven on an adjusted EBITDA and operating margin basis at a quarterly revenue run rate of approximately $70 million with gross margins in the mid <unk>.

30% range, obviously, depending upon mix and opex in the mid Thirty's.

As Ronen mentioned, we expect to turn the corner during the second half of this year and approach breakeven and later on moved to profitability again on both and adjusted EBITDA and operating margin basis.

Looking out we continue to believe substantial long term growth drivers remain fully intact and that we can achieve our long term financial objectives as overall markets improve capacity utilization increases and as we penetrate several new markets and with that let me turn it back to Ronan.

Yeah.

Thank you Laurie and we.

We are ready now to open the call for the Q&A session.

We're not going to open up for Q&A. Please.

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Okay.

Ladies and gentlemen, we apologize for the technical difficulties, we will begin our Q&A session again, if you'd like to ask a question. Please press star one at this time.

Do have a question coming from the line of Jim Suva with Citigroup. Please proceed.

Thank you so much just a quick housekeeping item before I proceed with a more interesting question. The change in our guidance to include the warrants am I correct. That's more just of a housekeeping in getting sell side analyst in consensus numbers all on the same definitional term and.

There's actually been no relationship change your contractual change between you and your larger strategic customer.

Hi, you're absolutely correct we.

We have been engaged in very frequent dialogue with our current our investors as well as the research analysts and we received very valuable feedback that we need to make our financial reporting easier to understand and less confusing as well as align with our reported financials and that's the reason that we've taken there.

Yeah.

Great that was my understanding also thank you and I think everybody will appreciate that they made more meaningful question.

We all know interest rates have materially increased during the past year or so with that with corneal selling their large printers.

For the purchase decisions are they now starting to come back to a more normalized level of discussions or are your customers kind of still pausing and struggling for financial arrangements and if theyre struggling for financial arrangements does coordinate kind of change the way that it helps it.

Customers with getting across the finish line for that or how should we think about the impact from.

The closing phase of selling products and corny, you're able to get it across the finish line for a sales contract. Thank you.

Yeah. Thank you for the question. So we still see impact of the macroeconomics on decision, making by our customers. Many of them are still sitting on the fence.

And waiting to see the direction of the market.

The good size in Q4, what we have seen we.

We see we saw growth on the on the supplies on the impressions versus last year to remind you Q4 2021 was very strong peak.

Thanks, Susan.

To show our growth we see on the supply is very very healthy we see the utilization of the overall system is getting better we still see some overcapacity, but.

Customers are closing it in days better utilization, but some of the decision of buying new equipment.

Being delayed now we are still selling we have segments that we actually accelerating a DTA for example, direct to fabric is a growing segment. We had a very strong Q4, and we had a very strong Q1 for the DTF.

We are starting to penetrate with the BTG to new markets like the retail market. The brands, we're starting to see very nice success and.

Q4 was a nice big season for some of the retailers. We can see are interesting stories with retailers that buying handful of system Atlas maxes.

And utilizing two utilizing them to the Max and different from the previous business that it was mainly custom design business of one off their.

We're leveraging this equipment for mid run length, some of them treating up to 3000.

Linear copies or impressions per job, which is a great testimonial of going after the retail market and the brands.

Financial solution Laurie and her team are working very very close with partners to find financial solution to support key customers moving forward. We are selective as of today, we are supporting our customers, but the customers that we believe in them longer term, we already supporting them.

On the payment terms and as I mentioned some of it will come with financial solution around it may be low we can add a bit more on that point, yes, just to remind you as I stated last time one of my key initiatives for this year is to evaluate various programs and to ultimately formalize and all.

Furniture financing solution with third parties, with whom we have relationships and who understand our business and help coordinate solutions help our customers I really believe this kind of a program could provide the company with a significant competitive advantage in the marketplace.

Thank you and congratulations to your team for getting through and navigating a challenging 2022, and we're all looking forward to 2023. Thank you.

Thank you very much I appreciate it for non next question. Please.

Thank you. Our next question comes from Katherine Rosner with Barclays.

Hi, good afternoon, thanks for taking my questions.

I wanted to ask a little bit about the outcome.

I was wondering if you can comment on the demand you are seeing through the different end markets. So I'm thinking.

The global strategy customers the E Commerce channel.

The brands.

Are you seeing kind of the same wait and see reaction from every one or is it just particular segment.

And I guess as a follow up to that.

Is there any indication you can give with regards to potential top line growth in 'twenty three or is it too soon to talk about.

Oh cool easier.

Yeah.

Thank you Tom So 2023 as you can see we are starting.

In Q1 always on the pharma seasonality perspective on the low side. So we expect Q2 to be stronger than Q1, and eight two to be stronger than H, one and as I mentioned, we are we are aiming to move back to break even doing H, two and then for two profitability and <unk>.

And the driver for that first of all we'll come form from systems sales.

In the mid of the year in June we have a big event at Mt.

We are going to introduce and reveal their Paulo and start selling it but we're going to also introduce many other new technology, both on the BTG and the DTF and coordinate X.

The industrial is a long shows more than a week and it's a cell so show and we know many customers that we are speaking with them today are waiting for the show.

Take a final decision on our part.

Purchasing of new equipment. So we expect it to contribute already for Q2, but definitely for <unk> and beyond that.

On the systems side, we see mixed we see customers that really sitting on the fence and.

Some of them from the custom design.

And.

Segment, but.

But we see some that are seeing the opportunity we need to understand that the market the textile market and fashion market is going through a major transformation right now.

<unk> chain is fully broken inventory is the biggest issues of brands and retailers.

Retailer required today to have many S. Skus on a daily basis to attract the Gen Z.

And for that they have to move into on demand production and in a sustainable way onshore or nearshore and the only solution that they can.

That can help them to do that is leveraging coordinate digital solution. Both on the systems side and <unk> side. So we believe the long term when we're looking at 2023 and beyond.

Beyond that we are in an inflection point that the market will accelerated move to on demand production.

As for the supplies Q1 is the slowest supply sick water, we will see an increase in Q2 and definitely a strong increase in H, two and ending Q4 services, we expect a nice schools across the year, we see some major key customers adopting the Max technology.

And going into upgrading their fleet of atlas's to Atlas Mattson, we see of course the year like we saw it also in the in Q4.

So just on the on this.

Salaries interesting part on the on the segment side and I mentioned also before 90% of our business as of today is coming from custom designed custom.

Customers like you know the Amazon and the principal of the World.

And they will continue to grow and we expect these segments to continue to work, but in overall impression. This is relatively a small segment.

Match biggest segments, which is more than tenfold. This segments is the screen market and the screen replacement and mainly growing Walker with the retails and the brands now with the Max technology, which is the new standout is much better than this given our quality with all the market trends.

They spoke about four years and now is really happening and our brands are moving into many skus and retail needs to move to on demand production onshore now is the time for coordinate really to grow big time onto the replacement market and we would start to see it.

In 2023, and mainly in the age too, but definitely into 'twenty four and beyond that.

Thanks Julien.

Great.

Next question please.

Our next question comes from Brian Drab with William Blair.

Alright, Thanks for taking my question first of all I just wanted to clarify something I think on the last call. You had said that you expected your large strategic customer to.

Begin purchasing equipment again in the second quarter of 'twenty three.

I don't know if I misinterpreted, but it sounded like you made a comment.

Along the lines of they've added.

It has to be in 2022.

That they would need to.

That they would need for 2020 three I don't know if I misinterpreted that.

No no you're absolutely right and I mentioned on previous calls, we expect Oh strategic customers, a global strategic customer too.

More capacity in 2023, and let me clarify 2022 was a very strong year for our four strategic global customer from our perspective, we saw an increase of volume in terms of number of systems opening new sites and definitely in terms of impression.

Nice peak season, and they are getting very strong into 2023.

We expect into 2023 that will open new sites, whether they were going to leverage systems that we sold them in 2022 to deliver them into those sites in 2023, So that will open new sites will add more capacity and we expect to see.

Our increased volume in 'twenty 'twenty suite.

We are not expecting at this stage to sell additional systems.

To this strategic customer in 2023, we see massive opportunity of growth with this global strategic customers not only by selling new system in 2024.

The relative new systems that we are going to release in 2023 like that Paulo, we see a major opportunity of upgrades there.

Existing Atlas the portfolio into the Atlas marks.

Jim.

Trade ins that all technology without as much technology and potentially with the following the future and get into new businesses with this this as well so there's a lot of.

It's very very closely as I mentioned in the calls before.

We have to expand the relationship and working on three plans.

And we expect to see major growth coming in the years to come.

Okay. Thanks, Thanks for clarifying that.

And then Oh.

I'll just ask one more for now.

Do you still see the potential for this business to generate greater than 50% gross margin or something changed structurally in and what what needs to happen, maybe besides volume leverage to get to 50% plus.

So longer term, we still believe firmly believing in the model we have a very strong business model with the supplies, we need to uplift the volume on the system. We definitely believe that we can be at the 50% that have been causing it.

We believe longer term that we will be in operating profit of more than 20%.

As Lauralee mentioned for us to be in the breakeven, we adjusted our cost structure and right now we can be at a breakeven to around $70 million of revenue and in the round.

The mid Forty's gross margin with the current topics that we have to be at a breakeven. So we are aiming to be at a breakeven in the second half of the ear and hopefully move to profitability.

Later, this year and beyond that.

So longer term, yes, we are firmly believes that coordinate can be multibillion dollar companies with a.

Strong gross margin of above 50% and operating margin of above 20%.

And then one last quick one just to be clear when you say breakeven you're talking about an EBITDA basis.

And both both EBITDA and operating margins.

EBITDA, Okay. Thank you very much.

Thanks, Brian next question please.

Thank you. Our next question comes from Erik Woodring with Morgan Stanley .

Hey, good morning, guys I'm excited to be on the call. Thank you for taking my questions maybe running in first one from you.

Or for you I should say you know I I I very much hear you on the opportunities that you highlighted for the future in terms of better penetrating kind of midsize retailers the creator economy, social platforms transforming supply chains that all makes sense to me I guess my question is how are you.

Having.

Are you having customer conversations with these kind of customers today and theyre expressing kind of interest in your types of digital systems or <unk> or software enablement or are you kind of more more more so saying these are markets that makes sense and we will approach them I just kind of want to understand if those cuts.

If those conversations already happening and you're hearing about demand.

Or if youre just saying these are ripe for opportunity and we're going to go after them in the future and then I have a follow up thanks.

Thank you for the question. So it is not only.

Discussion happening actually major part of the new systems that we're selling today is into those E tailers brands and digital platforms.

And we see an increase volume of supplies of incoming from those.

Brands and retailers. This is a massive opportunity most of our team engaged with those discussion and selling today, we are selling many system to those type of customers that we were talking two years ago. When it was a dream that we were aiming and it's happening now and it's happening now.

For two reasons, one is from the macro of the textile industry.

Supply chain and what we have discussed inventory of being able to too big.

<unk> native and to invent yourself every day.

Without I mean in theory, and making it sustainable. So this is one thing.

Which is happening now and the other thing.

Finally, and coordinate finally.

As the quality and the productivity and the total cost of ownership that can address this market and really transform it once and for all to more sustainable on demand production.

Great that is it that is very helpful. Thank you running.

And then and then maybe Lori one for you is you know seasonality does at least look a bit different than normal right now it looks a little different in <unk>. It looks a little bit different in one queue. Just in terms of forecasting kind of your second largest seasonal decline after the March 2020 quarter, which we know was impacted by cold.

And so I guess my question is.

Is there any visibility into when you believe revenue growth can return to more seasonal trends or even above seasonal trends and if so why why would that be the case. Thank you.

In terms of seasonality. So currently in 2023, we are not expecting changing the seasonality Q1 will be the lowest one.

And Q4 will be the strongest one in terms of supplies Q3 will be the strongest one in terms of the systems and you will see Q2 higher than Q1.

So we don't expect longer term.

Getting into the retail markets moving more into the brands will start to see a big difference Ah seasonality across the year.

Of our business today as I mentioned before was for the custom designed for those customers that selling mainly in the peak in the in the holiday season, one of our working with the retailers and the brands are they are they need to sell of course of the year and I'm listening to that to the shops into retail so we expected to see.

Another thing tens of supplies.

Supplies will moderate.

Moderate in the coming years.

Super Thanks, so much.

Thank you our next question please.

Our next question comes from Jim Ricchiuti with Needham <unk> co.

Alright, thank you.

Question I have is relates to the systems business in 'twenty three.

You provided a framework in terms of.

How you get back to a breakeven whether that's later in the year, but what my question relates to is.

If we think about the systems business. This year do you expect more meaningful inroads with new customers or a possible recovery later in the year from existing or some combination and to what extent does Apollo play into this.

Maybe in broad strokes the launches mid year, but what are your expectations as it relates to Apollo for 'twenty.

Yeah, so its mixed and it's mixed between regions and between different segments.

As you know I'll give you. An example on the Dts side direct to fabric is this relatively new segment for US most of the deals that we're doing in the DPF.

Net new customers, if it's in our Brazil, Argentina, Poland, Japan et cetera, Turkey, we see good business there.

Yeah.

Excellent business as well on the Dth side.

So this is all net new customers.

We're talking about the retails are and the screen replacement. There is mainly net new customer as well finally, we are getting to those retailers many of them buying systems. Many of them walking whats called ex so this is a new type of customers.

On the custom design side.

Side. This is the mix we expect in 2023, some of our biggest customers to start getting into the cycle of buying additional systems. We.

We see it in the utilization.

The current fleet that they have a we see it that they need to trade in some of the old legacy system to new system, and we definitely see it in the update from Atlas to Atlas Maxes. So this is regarding the type of customer the type of segments.

And again between region in Asia Pacific most of the customers that we're selling are relatively new and in the Latin America as well in North America, and Europe is kind of a mix.

As for their follow at all or is the biggest lounge that we have done for the last four years is bringing tons of innovation. This is what the market was looking for a full hundreds governments the hours the highest quality of the Max technology quality with one operator.

Full of Autonation quality controls and many many more elements into it.

Smart queuing and much more we are going to reveal it in Israel and stopped installation of beta sites before it's more in the next few months, we are starting the installation of the better.

As I mentioned I think on the <unk>.

Previous call, we aim for 2020 free to install less than 10 units.

And it's mainly around the beta sites and around our demo center centers in the U S and in Europe .

And are we expecting to where the second order from our beta sites already this year.

And a real acceleration of growth will come in 2024 from the revenue perspective, I can tell you we already have a list of customers waiting for the Apollo we expect it to be a very very strong demand generator generator for there Paul.

And we believe that after eight months, we will be able to close already 24 in terms of the capacity for that Paulo.

Got it and a question for you.

Laurie.

Some of this is going to be disclosed in the 20-F, but I am wondering if you can provide us if you could share with us any color.

Around the breakdown.

Of systems and consumables and service.

Is that any of that detail available or do we get away through the 20-F.

Yeah.

Yes, it can certainly help you out here.

Let's say you're looking for about a year.

Well it would be great. If we added for the quarter as well, but I'll leave that to you.

Hey, Jeff you will see it and as we said in the 20-F.

We haven't in products and services throughout the quarter.

We don't break it out yet so you go away.

That segregation between.

We service.

So Jamie you can see today between the.

System, which include our machines.

And and ink to the services. So you can see a major growth on the services side, which include the upgrades of the <unk>.

Yeah, I believe kits for the Max.

Don't see the breakdown on a quarterly basis right now in the 20-F, you will see the breakdown between the.

The ink to the system and what I can say that our we see larger portion of ink versus system.

Versus previous year, so we see it we see a growth on the insight.

Versus 2021, and remind you that 2021 was a very strong year.

On the ink, but we see major decline.

One on the system side. So overall the mix is totally different from 2020.

One.

Got it we'll look for that thank you.

Thanks, Jim.

Next question please.

Our next question comes from Chris Moore with CJS Securities.

Hey, Good day guys.

Talk a little bit about how 'bout corny decks I know it has changed or evolved quite a bit over the past two years and I guess, there's two questions. There is one kind of you know what do you know now that you didn't know then in too just from a marketing standpoint, you know you talked about mid sized retailers et cetera as being.

Kind of a prime market, how will the marketing approach differ from what you're doing right now.

On the you know on.

On the system side.

Yes, so we have learned a lot in the last two years from the acquisition of custom gateway.

And we adjusted our business model, we developed a solution, we have much more clarity and better traction than before.

We have very high confidence about coordinate X is material contributor in both in terms of revenue and in terms of driving impressions and volume to our systems and to the GFS the global fulfillment network.

It happened in the market that many digital platform as of today.

I would like to monetize and prototype therefore.

Platforms.

And create a community is happening greater economies happening many of them are walking through those platform and those platform are looking for BEC black box, but they can.

Send all the jobs and be fulfilled locally closer to the consumer in a sustainable way.

Without dealing with production.

This is coordinate X. So in a nutshell, if you think about that.

Mordo coordinate X is the platform is the app that connects between volume of impressions coming from grants for marketplaces from digital platform into in network offer fillers that using coordinate machine and dry.

Giving volume to those machines are driving volume to those machine will drive more machine more ink and more machine.

As I mentioned, we see a very nice traction with some very very nice platform and some brands.

And 2023 is a transition year also for corn at X and we hope that by the end of 2023 would be able to start reporting more meaningful information and data.

<unk> financial data and analytics.

And just kind of a best guess in terms of when corny X.

It does get to that meaningful revenue level that's likely.

25 versus fiscal 'twenty, four from where you sit today.

Yeah.

Yes.

Look it depends how you look at it from a revenue perspective, it's already generated few millions of dollars, okay, and we expect to see growth in 2023 versus 2022, but even more important what we are measuring is how many impressions are being.

Being routed through coordinate aches to our customers that using a cool need and because of that they're buying more systems Inc.

This is very very material and we start to see the volume picking up and we are very very focusing on those retailers and brands are some of them do not want to go vertical into by system, but they are looking for solution to produce for them all over the world leveraging kinetics.

Got it helpful I will leave it there thanks Ron.

Thank you thanks, Chris.

Mr. Backman. Our last question comes from the line of Greg Palm from Craig Hallum. Please go ahead.

Yeah, Hey, everyone. Thanks for taking the questions here I just wanted to follow up on the commentary on your global strategic I, just want to make sure I understood that correctly. So they will not be purchasing any new systems in 2023 years.

What I heard but they're still opening up new sites and so they are are they using systems from other existing sites to fill the new sites is that essentially what's going on.

So first of all the first centers is correct, we are not expecting them to buy additional systems. In 2023. This is the current assumptions that we are taking into.

Our model and how do we see 2023, we are still working with them on many other opportunities as I mentioned before as for the new sites as you remember last year, we discussed about delayed sites. They both system last year for those sites.

And some of those sites will be the judge.

Often this year. So we will see the machines are the board last year being utilized on those new sites only this year.

Okay.

So form form out from their perspective, they will see a major increase in potential volume.

Okay. So so some of the printers that you sold them in 2022 were for these new sites that they're opening this year.

Correct.

Understood.

And I'm just following up on on the Apollo last last quarter I think you said it.

And selling and installing dozens of systems I think you said less than 10, I don't know if I misunderstood you do last quarter, but can you just can confirm that and then just in terms of revenue recognition are you expecting to recognize any of those systems. This.

This year for the beta sites or wall Rev. Rec me in 2024.

But let's make of him in 2023, our aim is to make that all of the most successful products and believe that we are very much focused and we are going to deliver less than 10 units mainly for better sites for the demo centers and we are expecting second order already from those beta sites in 2023, we're going to be very focused.

And making a successful <unk>.

As full recognize those system at this stage, we are not adding it to the plan. We are taking the conservative approach that we will recognize some of those unit only beginning of 2020 full. So this is a conservative airports on top of that into at the beginning of 2024 days at a full acceleration plan.

Of Oh, selling many more apollo's beginning of the year.

Okay, Perfect and then I guess just last one if I can just maybe one more clarification.

Your commentary implies you know.

Approaching breakeven in the second half and so I think that sort of implies revenue in the $70 million ran just if that makes sense and I just wanted to be clear that is including the impact of the noncash expense associated with the warrant accounting is that correct yes.

Yeah.

Alright, so now we're talking only net and the $70 million of isn't it.

And yes, we expect as I mentioned to reach the breakeven in a stool. So based on what we gave around the $70 million.

And around the mid 40 gross margin of course is different from Q3 to Q4 Q4 was a very strong quarter from a supply perspective, so hopefully we will move into profitability.

Perfect. Okay. Thank you so much for the color.

Got it thanks, Greg Thank you.

Mr. Backman, we have no more questions at this time I would like to turn the floor back over to Mr. Backman for closing comments.

Great. Thank you around and thank you to everyone for joining us today as always if you should have any additional follow up questions. Please feel free to reach out to me directly have a great day. Thank you so much for not just close the call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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