Good day, everyone and welcome to Kornit Digital Limited Fourth Quarter 2016 Earnings Conference Call. As a reminder, today's conference is being recorded. After prepared remarks, we will provide instructions to conduct a question-and-answer session. At this time, I'd like to turn the conference over to [Tom Cook] [ph]. Please go ahead, sir.

Thank you, Matt. Good afternoon, everyone and welcome to Kornit Digital's fourth quarter 2016 earnings conference call. Before we begin, I would like to remind you that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. Securities laws will be made on this call. These forward-looking statements include, but are not limited to, statements relating to the Company's objectives, plans, strategies, statements of preliminary or projected results of operations, or of financial condition; and all statements that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may 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. The Company's actual results could differ materially from those anticipated for many reasons and 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 March 17, 2016 which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of the date hereof and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, the Company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Company's earnings press release published today which is posted on the Company's Investor Relations site. With that said, on the call today we have Gabi Seligsohn, Kornit's Chief Executive Officer; and Guy Avidan, Kornit's Chief Financial Officer. At this time, I would like to turn the call over to Gabi. Please go ahead.

Thank you, Tom and hello, everyone and welcome to our fourth quarter of 2016 and full year earnings conference call. During today's call, I will review aspects of our performance, then provide an update on market conditions and our view on the year we are entering, 2017. Guy will then walk you through the full financial details for the fourth quarter and for the year, as well as state our guidance for the first quarter of 2017. Q4 2016 was another record quarter for Kornit, reaching the high-end of our revenue guidance and achieving record level operating margins. 2016 as a whole represents 28% year-over-year growth and a fifth consecutive year of significant growth with a CAGR of 30% for that period. Non-GAAP revenues during the quarter came in at $34 million and non-GAAP operating margins came in at 15%, while non-GAAP gross margins came close to 50%. We achieved this performance on widespread product growth with deliveries to multiple new and existing customers underscoring our momentum in the printed textile markets. Having recently completed our first follow on offering which was significantly over-subscribed, we are honored by the tremendous support we received from the investment community and thankful for the vote of confidence that our existing investors and new stakeholders put in our team. 2016 was a year of great achievements for Kornit. We executed on our plan to invest heavily in our future growth, increasing our OpEx by about 40% while remaining very profitable. Looking forward to the opportunities we see ahead of us, we envision strong secular growth in our markets continuing and remain committed to taking full advantage of the opportunities offered to us. Sitting here today, we are in a different place than we were only three years ago. We now have a very strong…

Thanks, Gabi, and good evening, everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP pro forma results. Our fourth quarter non-GAAP pro forma results reflect adjustment for the following items; stock-based compensation expenses which totaled $914,000; depreciation and amortization expenses relating to the acquisition of intangible assets in the previous year in the amount of $106,000; and $203,000 for the assets of SPSI; non-cash inventory adjustment of $1 million related to the acquisition of SPSI's asset and revenue adjustment reflecting the warrant issued to Amazon and vested from May 1, 2016 in the amount of [$2 million] [ph]. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our Web site. Fourth quarter non-GAAP revenue increased 33.4% to $34 million versus $25.5 million in the prior year and increased 10% versus the prior quarter. Higher revenue was driven by several items in the quarter including higher sales of high throughput systems, a higher volume of ink, and growing revenues from the Allegro system addressing the roll to roll market. On a GAAP basis, revenues were $32 million. The $2 million difference between the GAAP and non-GAAP revenue is attributed to Amazon warrants. By geography, 60% of our sales were from the Americas, 27% from Europe, the Middle East and Africa, and 10% from Asia Pacific region, compared to 59%, 26% and 15% in the fourth quarter 2016 respectively. The warrants granted to Amazon are a part of the inherent value creation and alignment of inputs designed to strengthen the long-term relationship between the company and Amazon and the long-term commercial agreement announced in January 10, 2017,…

Thank you, Guy, and with that, operator, we would be happy to take any calls.

[Operator Instructions] At this time we will take our first question. This will be from Ken Wong with Citigroup. Please go ahead.

Can you give us a sense for how many high volumes customers you have? Again, I am not sure how you guys kind of qualify high volume. And then any other largest type customers that you guys see in the pipeline that you might be able to talk about a little bit.

Yes. In Q4, 15% of our revenue came from a large account which is not Amazon, okay. And this is a global customer as well. As far as what we consider to be large accounts, large accounts are accounts that have typically ten systems or more. They obviously invest in cycles and therefore you see them coming and going in specific quarters. So, for instance, in the fourth quarter as we had mentioned on last quarter's conference call, we did not anticipate what we could then not say was Amazon system revenues but we still -- we were able to guide upwards because of any significant other global customer augmented for the difference. So we have multiple customers that have significantly higher than ten systems by now. We have never provided an actual number and I have to be honest, Ken, I don’t have it off the top of my head right now. So I don’t want to just throw a number but there is quite a few customers that have a large installed base of systems that are growing and many of them are becoming global.

Got it. No, that’s actually very helpful. And then I guess on Amazon, I know this one gets a little tricky, but any help you guys can give us in terms of how should we be thinking about revenue that’s embedded in '17 that’s coming from Amazon?

Well, as you can imagine, given the confidentiality with them we cannot share their forecast. All we can say is that it's planned to be quite a strong year of continued deployment but I am not allowed to say anything beyond that for strict business reasons as you can well imagine. But it's clear to us that it's a strong year of continued growth and by saying continued growth it means that obviously what's been installed continues to run a very high volume but a lot more other systems will be installed, that’s the expectation. But I am not able to provide anymore color on that at this point.

Okay. Fair enough. And the last thing from me and I will pass it along. With a lot of border tax discussions going on, have you see any uptick from retail customer brands or whatnot in terms of what they might want to do to try the, kind of get around that, whether it's bringing more production home, doing some more on demand and anything of that nature?

Well, first of all I think that the bring production home phenomena is something that Kornit has been serving quite well with 65% or 60% of our revenues coming from the U.S. We know for a fact that a lot of jobs have been created relating to what it is that we do in bringing textile back to the U.S. is something we are very involved in. Also the localized fulfillment model is exactly that, right. I mean this is what we have been saying that with quick turnaround times etcetera, you need localized fulfillment. As far as brands talking about that, in various discussions that we have them, there is nothing brought up per say. I think if anything, when we talk to brands, it's about localizing fulfillment as a general phenomena but have to admit that I haven't heard discussions that’s specifically relates to the implications of a border tax.

At this time we will take a question from Joseph Wolf with Barclays.

Just as a follow up. With that comment on the global customer, do you mean that that customer is global and is taking product globally or are they taking one place right now and it just happens to have a global business where you could feed many sites and that could turn into more of a regular revenue stream.

Multiple locations, in the current project that we are working on. So it's multiple locations. They are global in nature and they have multiple locations around the globe.

Okay. And then there have been customers like the Australian company RedBubble, where there is a fulfillment model but they don’t actually own the equipment. The equipment that’s being used for fulfillment of that, of their brand, is that one -- how do you follow that in terms of one customer? Do you view them as the customer or do you view each place that actually produces as a customer?

Well, first of all, we like to look as both of them as customers but to be very Frank, the actual activity happens at the fulfillment partner locations of which we have several that are serving, for instance RedBubble business in the U.S. and in Europe, right. So the day to day activity is with the customers that are the fulfillment places, the people that actually buy our equipment and utilize them for the benefit of, in this case, RedBubble. And the relationship with RedBubble is very important for us in order for us to accommodate the introduction of new applications and new capabilities and it's been a very positive relationship in that sense because they have a very very high level of commitment to the quality of what they print because they represent mostly artists and they have a big commitment to depict the exact colors and exact images that are included in the artwork that they are actually printing on fabric.

Okay. And then just the last question on services. You talked about expanding services dramatically and that sort of was at the expense of the profitability of that, that you have been talking about for a while. Where are we on that and just related to that services comment, I saw something about the new R Series upgrade kit. Is that considered a services offering? How does that new upgrade with the recyclable printing heads fit into existing equipment? How do the customers pay for that and what does that kind of pricing do for your revenue.

Sure. So the initial upgrades that we started offering last year and in Q4 started seeing revenues was associated with the Storm II, which is our mid-market version. And the Storm Hexa has really hit the ground running and a lot of customers have expressed an interest and actually started installing these upgrades. We consider that as service business because it's basically upgrading the installed base. So it's the service organization that is in-charge of that. By the way, from a functional organizational standpoint, that organization also reports in to Gilad, our Global Head of Business. So services included in his group as well. It helps us do it in a seamless manner where we have sales and services in the same group. As far as the R Series upgrade that’s not yet out there but will come out in the next few months, the reasoning behind being able to offer that is that these are recycling print heads that will reduce and have very nice and significant impact on ink waste which is inherent to printing with inkjet heads, but also is expected to improve reliability because the continuous flow of inks through the heads keeps the nozzles open. Also in that kit of upgrade, once it's out there we intend to include several reliability improvements that we worked on in the second half of last year in anticipation of this upgrade. So customers that will go in this direction will get a nicely revised version of their system. It's a field retrofit. It's not a forklift upgrade or something like that and it will include a variety of different elements in that offering.

We will now move to Jim Ricchiuti with Needham & Company.

Question on -- on this other customer that you alluded to, can you say whether they were meaningful at all at other points during 2016 or is this a customer that you saw scale up in the last quarter of the year.

They have been an existing customer for quite a while. They have quite a large installed base and the projects that we are doing with them is basically taking them to the latest and greatest. And so I would say that on a ongoing basis before the project started in Q4, they were primarily focused on ink consumption and during the fourth quarter we started deployment of the system installs that I spoke about and that’s what made them into a more meaningful customer in the quarter.

Okay. And question on Allegro. I am wondering, as you look at the customers that have taken on the equipment, how many of these could be considered traditional textile printers that might be using equipment from some of the other digital roll to roll equipment vendors. Or are these really a different class of customers, more in the ecommerce area?

Actually the last few months have been really interesting for us in the sense that we are starting to see also textile, classic textile manufacturers in places such as India, for instance, large scale manufacturers that are surprised and very impressed by the process that we do and how eco-friendly it is, because many of them work with major brands in Europe, for instance. And so now we are seeing, and I see this also I other countries in the region, Asia has become an important region out for Allegro. And so we are starting to address also fashion needs. Some areas of fashion with existing textile players that like the versatility, meaning the fact that they can move from one fabric type to another. They love the fact that it's eco-friendly and a completely dry process which if you remember, this is what I have always been alluding to. That when our competitors talk about an end to end process, when you look at the details you don’t really find the characteristics of what it is that we offer, which is truly a dry end to end process with nothing surrounding it. So this has actually become an interesting situation for us where it spans, to my mind, what I thought to be the addressable at the same time as I have said on my prepared commentary, I think that the quickest part of Allegro to evolve right now is what I call the on-demand textile. Where those are characterized just as the way you characterize them in your line of questions which is people that are specialty shops that want to offer a service which is basically supplying limited amounts of fabric in various stages for various applications. And also one more thing to point out, in the press release that we had after the HeimTextil Trade Show, we included their reference to the largest printer in Europe that was doing nothing in this area and is now expanding into this area, which is also a good sign. Which means to me that our strategy that says we want to release our potential customers from the burden of having to deal with textile related finishing and pre-treatment processes, really works. Because essentially what these people are saying, we are experts at printing, we are not experts at textile but with this system we don’t really need to be experts at textile and that really bodes well for our strategy.

Got it. And, Guy, a question for you. Just want to see if the numbers I have are in the ballpark here. So your -- if I look at this systems and services and ink and consumables for 2016, it looked you saw stronger growth, an accelerating growth, an accelerating growth in the systems business. A little bit of a deceleration in ink and consumables, which I guess is consistent with the early ramp in equipment sales in the year. And then in Q4, did that kind of turnaround where you had more of an acceleration in the ink and consumables where utilization picked up. Is that a fair way to think about how the year was unfolding.

So, again, we do not break system versus ink between quarter, only on an annual basis. So as we already mentioned, 2016 was very close to 2015, moving from [60.40 to 61.39] [ph]. We did say before that usually because of the holiday season, normally we are seeing more ink then in other quarters in the fourth quarter and that reversed in the first quarter. But we cannot be more specific than that because we don’t break it on a quarterly basis.

Yes. But clearly, just to further amplify the point that guy is making, Jim, clearly ink consumption is highest in Q4 because seasonally that’s the holiday season and Q1 is post that season, right. So that draws a distinction when you look at the types of revenue that we bring in those quarters, more strong in ink and Q4 and less strong in ink and Q1.

At this time we will move to Brian Drab with William Blair.

Congratulations on all the accomplishments this year. First just a housekeeping item. According to your filing, you have got 15 customers with ten or more machines as of December 31, 2016, just in answer to that previous question. And I just want to ask about the OpEx, Gabi. I think today you have told is that it will be up in 2017, I guess in terms of dollars, not as much as it was up in 2016, which was 43%. Can you possibly be any more specific regarding that OpEx growth? Like maybe a range, is it going to be up 10% to 20%, or is it going to be up less than sales growth, I guess you implied that. But any more specifics on how much OpEx is up?

As you know we provide guidance on a quarterly basis, so I won't be able to able to give information on the year. To reiterate what we said, so yes there will continue to be OpEx increase but at a low rate and you are right, that’s the reason why we mentioned that revenue growth should be higher than the rate of growth of OpEx, is as much as we are able to give right now. But as a general comment, we are in a situation where we already have close to 400 employees, we have improved our facilities significantly. We have staffed many many positions that we were looking to staff. We are improving on all fronts in the company but there is many things that need to continue. I spoke about the fact that we have a very important roadmap of deliveries in 2017 as well. We believe that’s critical in order to retain the position that we have. The DTG market and roll to roll market are becoming more and more interesting. Everyone understands that. And Kornit must retain its strong position and that’s something that we are not willing to give up on. Therefore there will continue to be investment but, again, we don’t need to invest at such a high growth level as we did in the previous year because our starting point was much lower as far as infrastructure at the beginning of 2016 than it is in 2017.

Thanks. And speaking on OpEx for a second, the trade show cadence throughout 2017, how does that look? First quarter sounds like it will be heaviest.

First quarter is pretty heavy. In Q2 I believe in May we have a big trade show [indiscernible] in Europe. It's going to be a significant show. And later on the year usually we have a couple of shows in Asia. But, yes, indeed, Q1 was pretty heavy. I am happy to report that it was quite successful. [indiscernible] Heimtextil and C!Print in France, were very successful shows for us. Very well received. And also in Q1 we do our kick off meetings which are very very important to get the distribution partners as well as our own sales people very strongly engaged. So that’s why we found it necessary to mention so that people would understand that that in itself would create an increase on OpEx.

Got it. And then on R&D, Guy, you mentioned, I think that the R&D run rate would be up in 2017. Can you maybe a little more specific there. Is this fourth quarter run rate that we saw representative of maybe the quarterly run rate in 2017 and the 2017 average is just up from the 2016 quarterly average or what can you tell us about that run rate a little more specific.

Again, not much. I can just echo what Gabi mentioned. We are not really talking about the 2017 as the year. We did mention that we will see some increase in OpEx and that includes R&D in the first quarter and obviously R&D expenses for 2017 are going to be higher than 2016 as a dollar value.

Are there material additions though to the R&D operation from fourth quarter. I get that it's going to be up in 2016, of course, but is it up materially from fourth quarter run rate.

Not that material.

Okay. And then was there any Amazon equipment revenue in the end, in the fourth quarter, or was it all consumables?

Consumables.

[Operator Instructions] We will now move to Patrick Newton with Stifel.

Jumping right in, I am trying to reconcile your large customer comment. In 4Q with your large customers for the full year. So in 4Q you said that this was a customer who started installing hardware and popped up to be 15% of revenue. But for 2016 you have a 20.2% customer and an 18% and then I believe that your follow on said that Amazon was 17% of sales. So I am assuming one of those customers as Hirsch but I just want to clarify that the other is not Amazon and is also not the 10% customer from 4Q.

So again, what we said is that the customer which is about 20%, that’s a distributor. Currently we have only large distributor in the U.S. after asset acquisition of SPSI. So your guess could be right. There are actually two numbers regarding -- the numbers that we mentioned in the prospective supplement, it's a GAAP number. Right. So the 17% is the GAAP number. As mentioned before, the overall revenue goes down in terms of GAAP 110 to 108. That goes to say for Amazon revenue. So the numbers that we mentioned in our call now are non-GAAP numbers. So that the GAAP to non-GAAP bring us to a gap between 18 point something percent to 17 in terms of the large customer.

Okay. And then I guess just given the importance of Amazon for comparables in future quarters, I want to make sure that I understand their contribution in 4Q and 1Q, given we know there are revenue contribution levels in 2Q and 3Q of '16. But given those, the prior disclosures, I calculate that in 4Q the revenue contribution was about $1.4 million and that’s assuming that the March quarter was zero. Is that just an accurate baseline as we start to track revenue on a go forward basis.

Your numbers are pretty accurate but it will not really help you in forecasting the future because as Gabi mentioned in the previous question, Q4 for Amazon did include systems. It was mainly ink and consumables. The thing is, as we do more business with Amazon, their ink consumption will go up as well. And Q4 actually wouldn’t be the right measure for future ink consumption.

Okay, I understand. And I guess just looking at the Q1 guidance, at the midpoint it looks to be sequential decline of about 15%. Although we don’t have a ton of history on the company, I guess the last three years the sequential decline in Q1 was an average of 11% and never more than 14%. Given that Amazon was not a material contributor in Q4, I am curious as to what is causing that step down in Q1 and should we, again, expect that Amazon is not going to be material in Q1.

Well, first of all, in the range of guidance, year-over-year growth is 28% to 40%. Let's remember that. I think that number is an important number, right. So the 27.4% represents about 28% growth year-over-year and the 30.4% represents about 40% year-over-year growth. So actually we are quite pleased with year-over-year growth that this demonstrates. You are right about the Q4 versus Q1 and I think, I don’t have the numbers in front of me but I think your numbers are probably right about the 14% being the highest ever. As far as Amazon business in the quarter, we are not going to provide detail to that level again. I think that that would put us in an uncomfortable position with them. I have made a general directional comment about Amazon for 2017 that I think should help everyone by saying that it's going to be a very meaningful year, not just by way of consuming more ink on existing systems but a significant continuation of the project. But I don’t want to go specifically into the details on a quarterly basis, as much as I can I will try to avoid it simply because that’s what they have requested from us. So I am sorry that I can't give you more than that.

Okay. Fair point on the year-over-year growth. And just last one on the Allegro. Pretty impressive that you now have installed it on more than 20 sites worldwide. Two questions there. I think previously you talked to a relatively extended sales cycle but in your prepared remarks I think you said at least four sites are going to be taking multiple units shortly. So I am curious if when selling to existing Allegro customers, if you are seeing a better or faster sales cycle relative to initial sale. And then just one last Allegro question after that.

Sure. So I think my comment was misunderstood. What I meant to say was that soon in a matter of weeks there will already be a fourth site with two systems or more. Meaning there is already three and a fourth one is going to because a multisystem customer. So that was the comment I was trying to make. I guess I didn’t describe it well enough. As far as the sales cycle is concerned, it is indeed the case that with the gains in momentum, the improved momentum is shortening the sales cycle. That is correct. We have also become more proficient at demoing the system as you can imagine. We have got an awesome demo center in Dusseldorf, a really good one in Milwaukee, and another one that we are putting in place now in Hong Kong, a revised location versus what we had before. So that also helps quite a bit. And a few of our distributors are now considering buying an Allegro as a demo capability of there. So I think I would say that the momentum we are seeing with the products tends to shorten the sales cycle versus what it was before. The consideration is different once it's becoming more and more of a proved capability and in this industry more than others that I have attended, customers are willing to tell other customers about how well they are doing.

Great. And I guess just dovetailing off the proved system, I think one of the early stage knocks on Allegro is that there were certain material types or certain types of inks that maybe were not necessarily compatible with your systems. And I believe you have been taking some steps to address that to expand the materials that the Allegro can print on and the number of inks. And I guess if you could just walk us through some of the progress you have made on that point.

Yes. This year we will announce new capabilities. New types of inks on the Allegro that expand the application usage. I am not going to steal the thunder from the marketing team yet, I will let them announce it and it's going to be pretty soon, new capability that expands the application usage. As far as, obviously the system as you know is an end to end process, proprietary process where no other ink is being offered in our system and so it's for us to continuously expand the offering. Areas that we have spend time on are associated with things such as viscose which is a very much used material in the fashion world. We have been asked to do more activity around nylon and we are achieving good results there as well. Polyester has been fine because it's only white polyester that people use when they are doing it roll to roll and not dye polyester, so that works quite well as well. So what you are going to see this year is we will announce that we are adding more functionality as we go. What we have uncovered is that it's great for us to basically enable our own market growth by expanding the product offering and people actually like that. And the idea will be to add these functionalities to systems that are already in the field so that people could use them on existing systems.

And I have no further questions in the queue. I will turn it back over to management for any additional or closing remarks.

Thank you, everyone for attending the call. It was a wonderful year 2016 and we are looking forward to a very successful year in '17. Once again to our investors, a great thank you for the support that you have given the company. We look forward to delivering on results. Good bye.

Once again this does conclude today's conference call. Thank you all for participation.