Kornit Digital Ltd. (KRNT) Earnings Call Transcript

Hi, and thanks for joining us. This is the session with Kornit. It's Wayne Baker, Citi Tech Sales and Head of U.S. Specialist Sales. I'll be standing in for Jim Suva this morning. I'm very pleased to have with me, Ronen Samuel, CEO of Kornit. A few housekeeping tips from Citi, and then I'll hand over to Ronen. There are disclosures associated with this feature review. All clients are subject -- all clients subject to MiFID II are reminded they need to have research agreements in place, contact your Citi salesperson if you have questions. There may be forward-looking statements. If you need more information, please refer to the Kornit website. And with that, I'll hand over to Ronen. He'll give a quick introduction, and then we'll hand off to Q&A. Ronen, please go ahead.

Thanks, Wayne. Good morning, and it's great to be live with all of you. With me today, we have Guy Avidan, our CFO; and Amir Shaked is our Corporate Development EVP. So they will be able to join me for any specific Q&A that you have for them. I'm delighted to be here. I'm here after 3 weeks of traveling both in the U.S. and Europe, visiting many of our customers, seeing the huge growth that's coming from the marketplaces, which I'm sure we were going to discuss it.

So why don't we start with jumping into Q&A? [Operator Instructions]

Yes, that's right. Thanks for mentioning that. So wayne.baker@citi.com. Please send me something if you want to ask a question, I'll weave it into the conversation. But I have several to keep us going. So well, we'll just kick it off. So big picture, can you talk a bit about the demand trends in the near term, the 6- to 12-month kind of time frame, how these have changed as we enter 2020 and also as the pandemic spread globally?

Okay. So looking back at 2020 was a crazy year with the pandemic. We started the year very, very strong, and then it surprised everyone. And now we see a very, very strong tailwind. So what's going on? So you all seen that the market is really moving into on demand fueling by the e-commerce. Actually, in the last 3 months, what we see in the e-commerce that is growing in the same pace of the last 10 years. Within the e-commerce, apparel is the second largest segment, is the fastest segment that's growing. So the consumer is going online to the e-commerce and ordering products. Many of those products are really fueling the growth of our customers. From end of April, we started to get a huge demand from our customers. They are in peak season. Many of them that I visited in the last 3 weeks are telling me that they never seen just a long peak season, and they are all preparing for the real peak season, which is in November, December, talking about next year that they are going to double their capacity. So the entire market is moving into the e-commerce. We can see the retail, what we have discussed on a retail meltdown now, it's really is happening everywhere. The social media is really booming and changing the way that they're influencing the consumer what to purchase. The consumer would like to express themselves. More and more people are moving to work from home through Zoom and would like to wear casual stuff and to express themselves. And on top of all of that, sustainability is becoming even more important in this world. The consumer would like to choose products that produce sustainable brands. All of them are talking about moving and committing to move to sustainable production. The way product will -- the textile was produced before with the conventional way is very -- polluting the environment, and digital is the only sustainable way to produce textile, both for fashion and home decor.

That's a helpful summary. So how do you think looking forward? So that's some of the perhaps shorter-term impacts that you've seen this year. How sustainable do you think that is on a 2- to 3-year kind of mid- to long-term view in terms of how that changes your growth outlook for your end markets, for example?

So I'll give you just a small anecdote, which is funny. I'm looking at my father, he's 83 years old. He never went online. Through the pandemic and when there was a closure, he had to go online and buy grocery. And now he's sitting every day and telling me he's buying from Amazon all kind of things. So the world won't change. People find the online more convenient. They can order when they want and get it immediately, even return it if they don't like the product. So the move into e-commerce is just going to accelerate. The focus is that in 2024, 50% of the item in the apparel market will be purchased online. So it's just going to accelerate and continue to grow. The brands, all of them are talking about moving online. Every brands, they have their own e-commerce, but they're talking about moving into on-demand manufacturing. So what happened during the pandemic that many of the brands were stuck with tons of inventory that they couldn't sell. We saw many bankruptcies. So they had to change their business model. We can see production is moving from offshore to onshore to nearshore. But all the idea is to produce closer to the consumer, to produce only what the consumer need and to meet the demand that is changing on a daily basis by the consumer. This is the -- the only way to do it is full on demand. So what we see, we see this trend just accelerating. And we see it also in our business. So we gave a clear guidance for Q3. We gave direction for H2. We also mentioned that we have a very strong visibility to 2021 with orders. And with big projects, we see growth both from the big strategic account, the big customers that we have. We see many medium customers are becoming really big. We see growth coming also from the brands. Specifically, we see from different segments like the segment of promotion that was very traditional and screen, and it's moving online, fully online. There is no other way to do it today. But also, we see huge growth coming from the DTF business, which we launched about a year ago, and it's becoming -- starting to become very substantial business for Kornit, and we see continued growth in this segment as well.

So talking a bit about some of the challenges that you and also other technology and manufacturing firms have faced this year related to tariffs and supply chain and operational challenges around COVID, can you talk a bit about how that's impacted your business practices, and how you've overcome them? And how that's enabled you to be still an efficient operation?

So actually, we didn't have much effect. We had -- when China closed around January, there were a few components that we had to move production from China and produce them in Israel, but we manufacture everything in Israel, both the ink and the systems. Our contract manufacturers on the system were open all the time. The biggest contract manufacturer of the world, Flextronics and Sanmina, and we have our own implant, and now we are moving to a new implant with capacity for the next 10 years. So we didn't have any really direct impact coming from the COVID on a negative side. What we can see, the only impact it was in Q1, in March time frame when the closure came to the Europe and the U.S., many customers didn't know what to expect. And many of them just say, we stopped. Stopped order. Our sites are closed. We cannot produce. They stopped printing and closed the site. And this is why we came with immediately announcement to the market that we are going to miss Q1, and we didn't know how Q2 will look like. But as we mentioned in end of April, we already saw totally new trends, and we now understand that actually, COVID-19 changed the entire industry, from one hand to another, and accelerate all the megatrends that we were talking big time, and it's a very, very strong tailwind for Kornit moving forward.

So just moving on to the broad industry, and I think you touched on this in some of the answers just before. But can you talk about the broad stage of digital textile printing, your position in that market? How you see the competitive environment and the future trajectory?

I think that our competitive situation, our position is as strong as ever. During the COVID-19, actually, we invested more in R&D than ever before. We have amazing pipeline of new products or new innovation, both on the inside, on the system side, on automation, on workflow. We introduced new workflow. We did the acquisition of Custom Gateway, which I'm sure we will discuss about it later on. So we just opened a much bigger moat versus the competition. It's not that we had a very strong competition before that on the DTG, but we managed to even open a bigger moat versus the competition moving forward. We penetrate many new customers, brands. Our biggest -- our big customer growing very fast with us. So any new competitors that will try to enter to the market, they will have very tough time. Our solution and our technology is getting better and better every day. And also, the DTG and now also on the DTF, I can tell you, I was in Italy last week, visiting the key customers that are serving the fashion industry in the Como area, in the center of where the COVID started in Italy, and they are evaluating our solution on the DTF. And they are really pleased with what they have seen. We have, by far, the best pigmenting also in the DTF. We believe our solution will transform also the DTF market into digital, leveraging pigmenting, becoming sustainable production. So our position is super, super strong as of today, both from technology, from our installed base that we have the biggest customer of the world leveraging our technology. And we also managed to build a very strong company, go-to-market and team to support our customers. So we move direct in North Americas, have become very successful. We are moving now direct, both in specific areas in Europe, Germany, U.K. and also moving directly in Japan, in Asia. So overall, really, the business is accelerating, and our position is very strong.

Moving on to your printer lineup. Can you give an overview of your current lineup and then discuss the success of penetration into various target segments? And do you see, related to that, any overlap or cannibalization by new printers?

Yes. Good question. So look, we introduced -- a year ago, we introduced 3 main products. We introduced the Atlas beginning of 2019. With -- in the middle of '19, we introduced both the Poly Pro and the Presto. The Atlas is by far the most successful, I would say, product. We are selling it in big number. We just mentioned it in the last earning call, just in Q3, we are going to sell and produce more systems for the entire -- in Q3 alone, more system compared to 2019 as a whole. And it's just accelerating. The amount of demand for the Atlas is unbelievable, both from a new customer and in our traditional strategic account across the world. So we are very, very happy with that. With the Presto, as I mentioned, the Presto for the DTF, this is total -- is opening for us totally new market. And we see it's growing both in North America, in Latin America and in EMEA. We see traditional customers that are using analog technology really entering to digital. We see customers that used to leverage digital technology, but with ink of -- reactive ink and acid ink deciding to move to pigmenting, which is sustainable. You don't need to do pretreatment or posttreatment. And we have by far the best technology that doesn't require pretreatment. We are the only one that we don't need it also on the DTF side, and our pigment ink in terms of hand feel and look and durability is, by far, the best. So we see really strong growth coming from there. We were talking about some gaps that we had in the introduction of the Poly Pro, mainly being able to print on glass material, and we already mentioned that we solved this solution. We are in beta testing now of this solution. We're getting very, very strong positive feedback on the solution. We are going to introduce it early next year. So those are the main things that we introduced. Of course, we introduced the Konnect system, the workflow that enable our customers to see what they are printing, to have all the statistics, enabling us to see what the customers are doing, enable customer to place orders for supplies, for spare parts and also opening coal in the future. So this is a new platform. The acquisition of Custom Gateway now brought with it new products that we are starting to sell directly to our installed base and connecting to the brands. So the last 1.5 years was a lot of product introduction. Looking forward, I'm super pleased to see the development that's going on with here in R&D. I already mentioned that early next year, we are going to introduce new products. We are going -- planning to do a big event in Israel in April. We will invite all of you to come to see the new technology to the market. The new technology is about both new systems, both in the DTG and the DTF, new type of ink, getting to new application to new segments. There will be a lot of focus on automation and workflow. So there is something to expect, but the growth that we already see for next year is based on what we have today, and the new products will take us much longer than that.

So that's a good segue into my next question, which is on trade shows, and you mentioned the April event in Israel. So trade shows, I think, have been a pretty big revenue driver. Can you talk about Kornit's latest sales efforts as well as pipeline growth as well as new customer adds and how your sales motion is perhaps varied in this particularly unusual COVID environment?

Yes. So I would say we've never been in such a strong situation in terms of pipeline, visibility and funnel as we are today, okay? So this is bottom line. I cannot give more numbers for that. And of course, what we already guided, and I cannot mention anything about the guidance and about our focus for H2, and -- but we feel very, very strong into in 2021. So we have a strong visibility to 2021 with orders and pipeline. In terms of the way to go to market, there's a big change. The COVID-19 really changed the industry, not only the textile industry but also the way companies in B2B are presenting their products. We are not the only one exhibition. There's no exhibition. There are -- in China, there are a few exhibitions that running, but all the big exhibitions are closed. And my estimation that it will be at least close until mid of next year, if not beyond that. And beyond that, it also will have different -- it will be different flavor, those exhibition. Because what we found out now is that there's other way to do things more efficient with faster -- with better ROI with a great engagement with customers. So last week, I've been in Europe. We had 2 days of events, live events that customer came to our demo center or experience center in Düsseldorf for demonstration. So are doing small events within our demo center, if it's in Europe, if it's in U.S., if it's in Asia or in Israel, it's one way we are doing on a daily basis many virtual live demonstrations. So customer can send the material in advance, connecting live and see the machine printing, getting all the information, then we are shipping them the materials that they can see. So it's working fantastically. We are doing many open houses within customer base. So yesterday, there was, for example, an event in U.K. within one of our customers that we invited other customer to witness. So there's many, many other ways to do marketing. There's a lot of online activities, of course. I can tell you, it's -- well, last 3 weeks, I was traveling, meeting customer face-to-face, and there's nothing like meeting customer face-to-face. But in the last 6 months, the Zoom gave us the opportunity to meet customers online and meeting many customer online, which is impossible to do it when you're traveling. When you're traveling, you can meet maybe 2 customer a day, maximum, if they're in the same area. But with Zoom, you can meet 10 customer or more in a day, different interaction. The Zoom has lots of qualities. Of course, there's nothing like meeting customer face-to-face.

Yes. We've heard similar things across the tech ecosystem. So just moving on to individual clothing brands. So that's increasingly important to Kornit. Can you talk about how these large brands are adapting, whether your technology and perhaps touch on your growing relationship, in particular, with Adidas and what they're trying to accomplish by using Kornit?

Yes, it's a good question. So the thing that I can, of course -- cannot disclose at this stage, but in general, what we see today is that all the brands are moving on, right? They all understand that brick and mortars is one way, but it's not the main way. The main way for them is online, and they're moving online. All of them has e-commerce. But the way that presenting the products in e-commerce is actually using the shelf and selling in e-commerce, and this is not the right way. They have to change the entire supply chain. They are moving production from offshore in China to nearshore and onshore in order to be closer to the consumer, to react faster, to enable the consumer to choose larger variety of products, to make sure that the products are available and to be able to ship the products within 24, 48 hours to the consumer when they're going online. So this is a major, major change with the brands. And we see it. I can tell you on an hourly basis, not daily basis on discussions, hourly. Before the COVID, and I mentioned it for -- from the first minute I joined Kornit, I mentioned that the brand is a target for us because we had this vision that the brand will have to move to on-demand manufacturers -- manufacturing. And many brands were receptive, like to talk with us, understood the vision, wanted to experience with that. Now there is a totally different dynamic. It's not anymore we are coming to them. They're coming to us. They're coming to our customer. They're really begging, please produce, are going to our customer, we need to produce on demand. We need you to help us to do fast replenishment on the shelf. Help us to do on the manufacturing. They don't know how to do that. They just don't know. They used to do so one way of supply chain, moving to a totally different way of supply chain. This is where we Kornit we believe we can help them. And it's not by giving them a solution of printing machine. Printing machine is one way. In the end, you need to print the garment or to produce the garment in digital way. But the entire workflow is so important for them. They know how to do the e-commerce, but you need to connect to the e-commerce. You need to direct the jobs that they are getting. They're getting thousands of jobs in every hour, and they need to flow them to the right places to be able to produce them and to ship them to the consumer, and they would like to have the full control on that. And this is exactly the reason why we acquired Custom Gateway to enable the brands to move into on-demand manufacturing in a sustainable way and to help a customer, the fulfiller, to really go into mass production of many, many, many jobs per day. As for the engagement in brands, look, there are 2 type of brands. There are the brands -- most of the brands, I would say, more than 90% of the brands are not producing by themselves. They have fulfillers. And now they're moving to new fulfillers onshore, near shore, more digital fulfiller, more flexible, agile fulfiller, and most of the brand will not buy machine directly from us. What we, for us, important is to capture their impression. As long as we capture their impression and directing them to our customers -- our fulfiller, the fulfiller will buy more machine, and this is exactly what's happening now. There are some brands that buying machine by themselves. They would like to do a direct-to-consumer business and to fulfill it by themselves. A good example is Adidas. But actually, the intention of Adidas wasn't direct-to-consumer. It was to do a fast replenishment on store and different other business models. But now they are moving also direct-to-consumer, like many other brands. And there's more brands like the one that we introduced 2 weeks ago, small brands in all over the world that are doing -- that buying by themselves the machine and doing the end-to-end production directly from their own facilities.