Kornit Digital Ltd. (KRNT) Q2 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to Kornit Digital Ltd. Second Quarter 2017 Earnings Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Tom Cook of ICR. Please go ahead, sir.

Thank you, Matt. Good afternoon, everyone, and welcome to Kornit Digital's second quarter 2017 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 30, 2017, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this 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 event 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. On the call today, we have Gabi Seligsohn, Kornit's Chief Executive Officer; and Guy Avidan, Kornit's Chief Financial Officer. And at this time, I'd like to turn the call over to Gabi. Please go ahead.

Thank you, Tom, and hello everyone and welcome to our second quarter of 2017 earnings conference call. During today's call I will review aspect of our performance and progress and discuss some recent organizational changes we have made. I will also provide an update on market conditions. Guy will then walk you through the full financial details for the second quarter, as well as state our guidance for the third quarter of 2017. Second quarter revenues showed a significant year-over-year increase of 25%. Overall for the first half of the year, our revenues have grown 27%. Our growth year-to-date has been widespread across product categories and customers including higher system sales and better mix to our higher throughput industrial solutions, the inclusion of system upgrades and service revenue and higher ink volume. We also recognize substantial operating leverage in the second quarter as our global infrastructure investments are now running below the pace of revenue growth. This led to a 500 basis point expansion in our adjusted operating margin which combined with our revenue growth nearly tripled our operating profit compared to the second quarter of 2016. We expect this level of operating leverage to increase as the year progresses which Guy will walk you through in a few moments. Regionally China was a highlight in the quarter with notably higher sales and a successful CITPE trade show which took place in Guangzhou in May. We are pleased to see this regional momentum as it speaks to the success of our infrastructure investment made during the past couple of quarters. As anticipated on our first quarter conference call, gross margins also returned to a more normal level of 49%. This improvement was both a result of the increase in overall revenues, as well as a more favorable revenue mix with servicing a significant increase in system upgrade revenues. In general, system upgrades are taking place as many of our customer sites, and a recent install with a key customers saw dramatic reduction of ink waste of over 70%. Coupled with this improved cost, common number of software and hardware improvement that are customers are happy to take advantage of. During the quarter we also attended a few trade shows in Europe and the U.S. Most notably we had an excellent FESPA Hamburg where we showcase the Vulcan and several other DTG systems and received multi-million-dollar orders for DTG and roll-to-roll systems. At Eventbrite, which took place at the Jarvis Center in Manhattan in July, we partner with two design factories and showcased creation of live art design and immediate printings. Eventbrite brings together designers fabric buyers and thousand professionals and was very well attended by an audience that was amazed at how far digital printing has come and the endless production were the design afforded by it. During the quarter we supplied multiple systems to Amazon and we expect to continue to supply them system during the third quarter. I would like to now take a moment and provide some color on the progress we see with the Vulcan and our expectations going forward. In the last several months our level of conviction with this product has increased based on several factors. All four existing customers have been working in large-scale production. System uptime and reliability have improved dramatically as a result of several software and hardware upgrades we have made. The latest version of ink we use in the system which we call Rapid has led to a broaden color gamut enriching the quality of graphics printed by the system. Cost for print reduction versus the Avalanche 1000 has exceeded 40% making this system a useful and viable alternative to screen printing for batches of up to 500 garments with designs encompassing eight colors and above. This is a critical attribute for potential large-scale retail customers. I'm happy to report that last week we received an order from a very meaningful and large new customer. As you may recall, we have in the past mentioned that we believe Vulcan will be a vehicle to expand our presence in the retail market. I’m happy to report that this new customer, as well as one of the existing ones have been serving well-known brands using the Vulcan. These brands include Vans, Timberland, JanSport's, Urban Outfitters, Nordstrom and Harley-Davidson. I'm especially excited about this development as it comes during a year in which the entire retail environment is reshaping. The retail transitions online is happening on a massive scale and with it major brands are starting to realize the potential of altering their supply chain characteristics. Since brands in our industry outsource their manufacturing and since we have a very large customer base around the globe, they can now tap into that customer base and transition gradually to print on demand or at the very least do better with their inventory management by moving to shorter run with frequent chase orders. As we now see in some cases brands also expect their existing supply chain which many times is not acquit to customer to adopt our technology as in the case with this new Vulcan customer. As experienced with the Allegro which hit a meaningful inflection after 2 to 3 years, we expect the Vulcan ramp-up will also take some time. Allegro is a relevant case study because it marked our first entry into roll-to-roll and required efforts to showcase and educate potential customers and then sufficient time for system trials before we began to see meaningful order rates. While Vulcan is in our traditional DTG market, it is similar as it marks the new addressable market for us which includes retail and brand owners where digital printing was largely out of reach at any meaningful scale. We are now 18 months from the installation of the first beta unit and feedback has been very encouraging. While we do expect to continue to bring more customers on board before the end of this year, and see possibility of repeat orders from some of the existing customers, we expect meaningful sales to start to materialize in 2018. With a price point of $750,000 to $900,000, we look for this to be an important catalyst to our future growth rate. As you can see there are several reasons that strengthen our conviction with our ability to continue on our path of see secular growth. The macro trend that retailers going through, the volume and capacity that our customers are taking on, the number of new customers that constantly bring our equipment online, our product strategy which is proving to be spot on and the developments that we are planning to roll out in the next few months which will expand our servable addressable market and increase our potential growth. As Guy will detail in our guidance, we are also facing the short term timing challenges of a few million dollars scheduled for the second half, as a result of two discrete issues. First, one of our key customers that experienced delay in the launch of a new facility which will lead to a delay of a certain quantity of systems to 2018. Second, as we have gained better visibility of Vulcan delivery scheduled through year-end, we now expect Vulcan revenues will be lower than originally anticipated for 2017. As I noted in my earlier comment, we are excited about the momentum and interest building for this platform and are confident in its ability to ramp in 2018. Let me now provide some organizational updates on changes we have made in the last few days. First, we are investing in our go-to-market strategy in our largest region North America. As part of this initiative, we will be moving our North American headquarters to New Jersey. The move to New Jersey will enable us to be close to the fashion world center of gravity, as well as to the many customers and potential customers we have on the East Coast. Heading this operation will be Shai Terem who joined us after several years in Stratasys where he operated from their U.S. headquarters in Minneapolis and was in charge of finance and operations for their entire U.S. operation, as well as sales for the West Coast. We will also be opening a demonstration location in California which will help to showcase our products to potential West Coast customers. Our Wisconsin office will remain a critical location which will have sales, marketing service and application personnel and demonstration facilities to serve customers in that region. Second, I'm happy to report that Mr. [Elon Givon] will be joining the Kornit team in September and will take over responsibilities as VP of Operations in place of over Ofer Sandelson whose retirement we previously announced. Elon brings many years of executive leadership experience in the field of operations and supply chain management from Intel, Avaya, and MKS. Third, we recently nominated two of our Kornit veterans to the position of VP. The first, [Koby Man] was one of the founders of Kornit and brings the rich chemistry and application background and will now be responsible for consumables and application development, two areas which are tightly coupled. Koby's role is quite strategic in nature as the field he now manages is responsible for 40% of our annual revenues and forms a large part of our technological differentiation. We also nominated Omar Kulka who has been with us for five years and led the successful introduction of the Allegro, as well as overall product management. Omar will take on the role of VP of Marketing and Product Strategy. As part of this change, Guy Zimmerman, our VP of Marketing and Business Development has decided to leave and seek new opportunities. Guy during his 4.5 year tenure with the company built a world-class global organization that Omar will now rely on to take us forward. We thank Guy for his contributions and wish him well in his future positions. I am certain that these changes further solidify our ability to continue with our rapid growth and market leadership. Looking forward at the second half of the year, we have several meaningful events in the making. On September 13, we will be hosting a special event at the Fashion Institute of Technology in Manhattan as part of fashion month. We've had a very fruitful collaboration with FIT introducing the concept of print, cut and so to their students and managing an annual design award to top students. At our event which will take place in FIT's Museum on 27th Street at Manhattan industry experts and analysts will get a chance to see a live demo of the Allegro, as well as hear presentations from leading industry players on the role of digital printing and the world of fashion and retail . We will be sending invitations over the next few days and look forward to your attendance. On October 10 we will be attending our largest U.S. annual tradeshow SGIA in New Orleans. At the event, we will be showcasing a variety of products and solutions. I will now turn the call over to Guy for a closer look at the numbers and third quarter guidance. Guy?

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 metrics, as well as non-GAAP pro forma results. Our second quarter non-GAAP pro forma results reflect adjustment for the following non-cash items. Stock-based compensation expenses which totaled $1 million, depreciation and amortization expenses relating to acquisition of intangible assets in previous years in the amount of 291,000 and 93,000 for restructuring expenses in the U.S. Revenue adjustment reflecting the warrant issued to Amazon and vested in the amount of $1.4 million. A full reconciliation of our results on the GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the investor section of our website. Second quarter non-GAAP revenue increased 25.3% to $30 million versus $24 million in the prior year and increased 7% versus the previous quarter. Higher revenues were attributable to an increase across all revenue sources most notably services which include an increase in system upgrade. We also saw significant a improvement in both Europe and Asia. By geography, 61% of our sales were from the Americas, 25% from Europe, the Middle East and Africa, and 14% from the Asia-Pacific region. As in previous quarters, the Americas remain our largest territory. As Gabi previously stated, during this quarter we started a process that include changes in our U.S. personnel, facilities and go-to-market. Moving to customer concentration. Our main U.S. distributor contributed 13.5% of our overall revenues compared to 15% in the prior-year, and a major customer contributed 26.8% of our overall revenues in the second quarter compared to 35% in the previous year. Our top 10 customers accounted for 65% of our overall revenue compared to 22% in the second quarter of 2016. Moving to profitability, non-GAAP gross margin in the quarter increased to 49.1% versus 46.4% in the first quarter and marginally decreased by 40 basis points from 49.5% in the prior-year. On a GAAP basis, gross margins were 46% versus 44% in the first quarter - 48.8% in the prior-year. Gross margin in this quarter and in previous quarter were lower than non-GAAP gross margin predominately due to non-cash accounting adjustment reflecting the warrant granted to Amazon and vested to June 30, 2017. Moving to our OpEx guidance. I'll discuss these items on a non-GAAP basis which exclude non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliations including in today's press release. Adjusted research and development was 14.6% of sales or $4.4 million compared to 16.8% of sales or $4 million in the prior-year. The year-over-year increase in R&D expenses reflect an increase in headcount. Sales and marketing in the quarter were $4.8 million or 16% of sales compared to $4.1 million or 17.3% in the prior-year. Higher sales and marketing expenses were the results of increase in headcount, as well as sales and marketing activities in the second quarter. General and administrative expenses in the second quarter were $2.8 million or 9.4% of sales compared to $2.7 million or 11.4% in 2016. Higher G&A in the quarter resulted predominantly from management headcount additions. Headcount as of June 30 was 398 employees. We have moderated our personnel growth and as we have mentioned on previous calls, we expect the pace of OpEx growth to be less than the pace of revenue growth in 2017. We expect this to drive operating leverage compared to the prior-year with an audible step up in the second half. Non-GAAP net income for the second quarter was $3 million or $0.09 per diluted share, an increase of $2.3 million versus the year ago quarter. GAAP net income was $0.2 million or $0.01 per share on a diluted basis compared with net loss of $0.1 million or zero loss per share for the year ago quarter. Vested warrants reduced GAAP net profit by $1.4 million, an increase number of fully diluted shares by 167,000 shares. Our financial income this quarter was 389,000 as a result of currency exchange rate changes and accrued interest of our cash investment offset by bank expenses. Cash balances including long-term marketable securities at quarter end were $89.3 million compared to $66.2 million as of June 30, 2016. Net cash used in operating activities was $3.2 million for the first six months compared to $6.8 million net cash used in the first six months of 2016. The decrease in cash from operation was mainly a result of increase in inventory. Importantly, higher inventory is attributed to inventory in support of our upgrade business plan and customer demonstration, while the increase in balance of production inventory is in line with growth plans. Moving on to our guidance for the third quarter. We expect revenues to be in the range of $34 million to $38 million. We expect non-cash operating to be in the range of 13% of revenues to 17% of revenue which mark the 250 basis points improvement at the midpoint as we gain leverage on higher sales and lower based of OpEx growth. I'll now transfer the call to Gabi.

Thank you, Guy. With that operator, we'll be happy to take questions.

[Operator Instructions] And at this time we'll go to Ken Wong with Citigroup. Please go ahead.

Gabi, in regards to the short-term signings challenges, could you maybe help quantify the impact that's coming from the delayed customer facilities versus the - just the timeline of Vulcan being pushed out a little bit.

It's a combination of the two. So it's for both side, it’s a delay end of Vulcan. I won't give an exact breakdown between the two but overall it amounts to a few million dollars as we have said, so that's why we decided to share with everyone a few million versus the original plan and again within the second half. So you can see what the guidance is and this looks at the overall second half when we talked about this delay.

And on the Vulcan delay specifically, any - in terms of just - is it more production ramp on your end or is it just you guys are kind of fine-tune the final bits and pieces before really pushing the pedal on production there.

There is no limitation on our ability to produce systems. It's more related to timing of moving forward with certain customers that are in various stages of the sales process and so our expectation was that, it would ramp faster than it has which is what I mentioned in my prepared commentary. On the other hand as I had mentioned, everything is going really well with this project meaning the results are looking good, customers are using this in high volume manufacturing extensively more than a single shift a day. You heard my commentary about two customers serving the retail market. So it's taking longer than we had anticipated to close specific deals but we are progressing with those and again the discussion is both with new customers, as well as repeat orders. I think some of it is also related obviously to the price point of the system right at $750,000 to $900,000 this is a different price point that we have sold before. So the sales process is a little bit longer but by no means is this related to an inability to execute delivery of systems or anything of that nature. Regarding the customer, this is a customer that is ramping up and in their case facility preparedness is what's getting in the way. So some of the systems we expect will be delayed into next year and that's why we decided to mention that but it’s completely associated with how quickly they can wrap up their facility and various permits that they are gaining.

And then maybe really quickly for Guy. The gross margins were definitely a nice uptick relative to last quarter and a mix always has a big part to play in terms of how that trend. How should we be thinking about the back half, is Q3 more of a kind of good consumable type of a quarter heading into Q4 or it is more like Q1?

And again we usually on a quarterly basis do not talk about product mix between system and ink but it’s going to be more or even little bit better than the second quarter.

No in any event I’ll say as a general comment, second half of the year is definitely the stronger part of the year as you know Ken we talked about this in the past. The third and fourth quarter are the strongest it’s very much associated with the holiday season. So I can say very clearly that you always see ramp up in that and so the expectation is positive as it relates to gross margin impact.

And then with Joseph Wolf with Barclays.

I just wanted to follow-up back up on, I guess the several millions that you said have I guess have been pushed out, that's into 2018? And then just if I look at in terms of the midpoint of the guidance with the growth rate for the second half be the same if these push-outs have not happened as they were in the first-half?

I don’t have a comparative analysis for you between your growth rate right now first and second half and again you know we’re not going to talk about second half growth rate because we only guide for the third quarter. But I will say there is a model out there on the street obviously that has been created for the work that analysts are doing. And I think the reference point that we’re providing is saying that there is several million dollars of revenue that we’d expect it to recognize in 2017 that will push out. This is still definitely a growth second half so we're going to keep on growing in the second half year-over-year there is no question about that. The extent of growth as you understand now is somewhat hampered by these $2 million that will be missed in the second half of the year. I can say that predominantly its associated with things in the fourth quarter so I can say that but not a lot more than that.

And then I think some of the mix has to do and it was in the press release I think you mentioned it was on the services organization and improvement there. Could just go into a little more detail there about the profitability that are you trying to measure profitability as a standalone yet and how we should be thinking about that going into 2018?

Sure, so we’re progressing very well I'm very pleased with what's going on. if you remember when we started talking about service a few years ago and the company had an operation which was truly a cost center before we took it public this is really becoming a business. Its several million dollars a quarter, it’s probably nearing the phase in which we’re going to have to break it out which is good news for me as far as I'm concerned of course. We are nearing the breakeven point and if you remember one of the things that we discussed was that, that in order to get there we need to expand what I call our service product offering and that's exactly what has transpired. So on all fronts be it contract, time and material, parts, training, application development and most notably upgrades we’re seeing an increase. And of course the upgrades I had high expectations as you remember for that and that’s playing out really well. It’s becoming a serious business, you heard my data point about the amount of ink waste which is saved customer see the ROI very quickly. And so I'm really pleased with the progress there. So we are progressing I remind investors that we spoke about wanting to reach breakeven level by end of this year beginning of next year, we consciously delayed that breakeven last year because we were in a very big investment cycle as you heard from Guy we have taper down the addition of new employees. And so with topline growth and service and slowdown and the amount of people we bring on board we’re really getting close.

And then just one final question you mentioned I think towards in the prepared remarks about the large new customer and you mentioned a bunch of different brands. Is this sort of a contract manufacturer, can you give us a geographic location and when you say large orders that put in the magnitude of some other large orders it’s going to be a couple of quarters of delivery are you starting to deliver in the third quarter?

So what I had mentioned was indeed these are two contract manufacturers. This is the way that the industry generally works. They won't allow me to give their geographic location apart from the fact that they are in the U.S. I will say so that's the geography Joseph that I'm able to give. Yes, I did mention multiple brands and for us that's really good news. As far as the ramp up, I did not say specifically about them how they’re going to ramp up the project. For them this is their first this specific new customer for instance. This is the first Vulcan. They are very excited about this. They see a very big potential and so the idea is to get the system installed up and running run at the capacity, hopefully very quickly and then see follow-on order. So I'm excited about this opportunity because I know how they operate, I know how significant they are, they are very, very large screen printing company as well so the potential is very big. And once again I think the most important data point there that I mentioned and I don't want investors to miss out on is what I spoke about when I mentioned the large batch manufacturing.. We have seen actual data at one of these customers that shows 500 prints for a single design in eight colors or more that is revolutionary for digital printing and truly becomes a vehicle for retail. So that’s the first of excitement but I have to be cautious and say we've not secured follow-on orders what we’re going to do with them specifically now and talking about our customer is do really good job ramping up and then hopefully see incremental business coming from that.

We’ll now move to Jim Ricchiuti with Needham & Company.

Hi, I just have follow-up question on that. Can you a little bit about the sales cycle with these screen printers and to what extent the brands were involved or we’re these customers the contract manufacturers driving this?

So in this case it was the contract manufacturers but in order for them to be able to get the brands to agree they must show them samples right because you could say that - it’s a copy exactly of screen printing but people that are from the industry will always look for differences. So what they typically do in this case is no different. Is do samples and then check that with their brands and see that it’s not only acceptable but is something that they like which is of good quality. So that's how that process works. On another note I haven't spoken about that today, but I will add separately of all this activity there's a lot more brand related activity in the last few months. The number of demos that we’re doing at headquarters is growing, specific teams are coming to take a look, many of those that have more detailed technical requirements take quite a while to evaluate things et cetera. But the beauty of this is with well over 1,000 customers there's already and installed base so they can tap into. And so part of what we do with them after doing successful demos is direct them to specific customers which in turn of course our customers really like because it’s expands their business potential, but in some cases they already have a supply chain as in the case of this customer they tell them you know what, we need to have for instance frequent chase orders of very, very complicated designs. We need a solution for that and that contact manufacturer comes and says well I have a good solution its digital printing.

Next question, Gabi do you have a line of sight and for the timing for the new facility for your larger customer, I’m wondering is there seasonality to this or is this just a function of them determining where and when they're going to be adding this capacity?

Well in this customer case the facility exists. It's basically the pace of ramp up has been hampered because of permits and things associated with that. So it's not a matter of an existing or non existing facilities it exist and as a result of it the pace of adding capacity is slower than they had anticipated previously so that’s the situation there. It’s not a matter of seasonality, it’s a matter of ramping up a facility that they really want to ramp up and its slower than they had wanted it to be. But we know and we feel very confident that this revenue is coming in 2018 so by no means that we expect it to disappear.

And last question for me is just on the Allegro. You have talked it in the past about ending 2017 with as many as 40 customer sites. And I wonder if you could just provide an update, lot of discussion around Vulcan but I'm just wondering if you could just give us an update on Allegro? Thank you.

Sure, we’re adding multiple customers every quarter, so I think we're on track to probably at least come close to that number it’s not even hit that number from the progress that I'm seeing. The variety of customers is continuing to expand and the variety of applications it's happening on a global basis. So in all regions I believe also these marketing efforts for instance what I had mentioned regarding FIT is going to be very instrumental. We know that the amount of visibility we’re giving to the system is opening and broadening the audience. And a lot of what we’re doing in the case of everything that we do is a little bit of a crusade of market education. So as this progresses and the amount of success story is growing, we see that the interest is growing as well. So I feel very good about the progress that’s continuing. Ink consumption is also increasing at these various customer sites. I just saw a report the other day which shows that it is improving. So it’s progressing nicely.

We’ll now move to Brian Drab with William Blair.

I’m in transit so I may have missed a couple of points, but we’re not mentioning the name Amazon too much in this call as far as I can tell. And I'm just wondering, can you say though whether this revenue that's being pushed out to 28 teams it doesn’t sound like much revenue at all. Does that – and the customer facility delay, is that related to your largest customer or is that a different customer?

We don't give specifics on whether it’s this customer or the other because it’s confidential information. So I won’t be able to comment on that specifically. Regarding Amazon, I provided what I usually provided which we started once we were able to start talking about them. We do stick about the fact that we did shift systems and we expect to shift systems in the third quarter as well. So that project in general with Amazon, I’ll say, is progressing well. So that's why you didn’t hear more than that, but basically as I had mentioned, we ship systems in Q2, we’re shipping systems in the third quarter as well.

And I think you told us here, what I heard was 26.5% I think related to your largest customer this quarter, 35% last year as we know who that is. And I'm wondering if the statement from the first quarter regarding second half revenue versus first half revenue being up – ramping in the second half for that largest customers. Is that still the case?

That’s correct.

So that hasn’t change. Okay, and then, Gabi sorry, if you went through this, but since you said and in a little more color, some color on the upgrades and that opportunity and how that’s progressing. Is that accelerating, or just any detail on the upgrade?

Yes we did provide some detail on that, Brian, but just to – help you out a little bit so it is progressing very well. It’s becoming meaningful revenues every quarter it’s helping us come closer to the breakeven point that we were looking for. So it is progressing extremely well. And again, in my prepared commentary I even gave an example of one of our customers reducing their ink waste by up to 70% as a result of the upgrade. So it’s going extremely well.

But you really still have hundreds of machines left in the pipeline that could potentially be upgraded is that still true?

That is correct.

At this time, we’ll move to Patrick Newton with Stifel.

I guess without tailing off the prior question on the upgrades. Could you help us understand which, I guess, product lines are seeing the highest upgrade rate, and maybe helping us understand if that's different between units and revenue. And then on the ink side where you talked about being a less ink waste being a significant driver of the upgrades, is there any notable impact to your consumables revenue? And maybe could help us frame that by talking about ink growth in the quarter relative to the corporate average?

Sure so I’ll try to answer a few of these questions. First of all regarding the upgrades so as stated in the past, the upgrades are focused on two product families, the Storm family and the Avalanche family. Within the Avalanche family, it's the Avalanche 1000 and the Avalanche Hexa that are upgradable. Within the Storm family, it’s the Storm II which is upgradable to several various versions which is the Storm Hexa, the Storm 1000 and the Storm Duo. So there’s a variety of upgrades that are possible here. The beginning of the upgrade cycle started primarily with the Storm. And now we see both the Storm and Avalanche gaining momentum. The example I gave was an Avalanche customer moving from the Avalanche 1000 to the Avalanche 1000 R-Series. And those were the results associated with that. As far as the revenue opportunity, prices of upgrades, because there's a variety, range anywhere between $50,000 and $80,000 a piece or a little bit more actually than that. And your last question, Patrick, was I apologize.

Sorry, got a bunch of them and at the same time on the significantly less ink weight. Is that impacting your consumables revenue and…?

So we’ve known each other for a while. I have been doing capital equipment for 20 years. I’ll tell you one thing all my career, every improvement in productivity that I have made has increased my company's revenue because it makes our equipment and solution more usable and more appealing from a cost standpoint. What this ultimately does, it create more use of the systems and more ink consumption. So you could look at this mathematically and say, well, wait a minute, you’re taking away 70% of the waste, but in actuality, if you think about it, when a customer looks at that and a cost of print is significantly impacted, he can take on many more jobs that he had problems competing on before. And so therefore, this is extremely beneficial to customers. And whatever is beneficial to customers, translates into something beneficial for us. I don't expect that the extent of upgrade that we are making, which are multiple, multiple every quarter, will translate into short-term reduction in revenues and in consumables. I don't anticipate that happening.

And then I guess, Gabi, and in response to your question, you stated that the revenue push-out for the Vulcan relative to your prior expectations and then also the delayed facilities predominantly in 4Q. So if we take the midpoint of 3Q guidance that starting year-over-year growth of about 16%, would we be right to think that the 4Q growth rate should be lower?

We can't comment on that right now. So there's nothing I can say about the fourth quarter, Patrick, unfortunately. The only thing we’re able to say about H2 is that it’s a few million dollars. And I want to point everyone's attention to the fact that, of course, a Vulcan system that sells at $750,000 to $900,000, a few systems amount to multiple millions of dollars as you can imagine, right? And so that in itself is impactful. And then there's a number of systems that I said will transition in that customer site to next year. But I cannot comment specifically on 4Q and the growth rate in 4Q unfortunately.

And then I guess just – as far as the Allegro you answered earlier about the kind of 40 customer sites worldwide. Can you give us a finer point on where you are currently and maybe a total installed base and then similarly on Vulcan, with the four beta customers, how many total systems do they have and how many have been recognized for revenue?

So right now, as far as the Allegro, I said that I would be providing information on an annual basis on the number of customer simply because this is competitive information for us and we don't want to give it as we go. But I will say that there's multiple customers that we’re adding every quarter. In the Allegro, and as mentioned, I believe we’re on track to at least come close if not even meet the number of doubling – the number of customer sites by the end of the year. Regarding Vulcan, what we have said was that we had four customer sites and now we have added a fifth one. One of those initial four customers has two systems. So you can get from that the number of systems of course, that have been installed and shipped. One of the things that I want to draw your attention to since we’re on the topic also of growth rate et cetera. Is that as you’ve seen in the past also last year, our growth is not necessarily linear from one quarter to the next. And you’ve see this last year where we had specific increases in revenues than increases that are a little bit mitigated et cetera. The situation that we’re in right now is no different from that. I want to make very clear to everyone, secular growth is continuing to be very strong in our business plan, and we’re in very good shape to continue the amount of secular growth that we've enjoyed in the past. But there will be situations in one quarter or another where you will see nonlinear performance in the second half of this year is no different from that.

You’ll now hear from Bobby Burleson with Cannacord.

Just curious, in terms of the customer - minus the customer readiness issues, in terms of the Vulcan sales cycle maybe being held a little bit longer than expected. Are there any particular things that you've learned in terms of why that is an issue that you guys can overcome. Just maybe a little bit more detailed on what exactly lengthen that sales cycle?

Yes, so the good news about the system which I think is blowing people away is that we've been able to bring cost of print down by 40% when I compare it to an Avalanche 1000. And in some cases even better than that. So from an ROI standpoint, people get it and they understand it. I think the upfront capital investment is larger than people in this industry versus, for instance, my previous industry are used to making. And so part of the length of time is approval cycles within these organizations and on the one hand, they see the potential. We have really good data that show from the customer sites on how they’re seeing a really good ROI, but I think the decision on the equipment is something that is also related to the amount of money associated with it. The other thing is, and I mentioned this in my prepared commentary, we’re constantly improving system reliability. We've reached a really good situation now in the last couple of months where we made some fixes of software, hardware. We significantly improved the ink and the capability of the ink et cetera. So going forward, I believe that this kind of system performance also lends itself to even better opportunities in business – with customers because basically the system is running in a much more higher capacity, throughput is reaching the numbers that we spoke about in the past, of reaching up to 250 garments an hour. So again, the sales cycle has been related to, I’d say on the one hand price, really seeing and understanding the ROI and product maturity. With the last one, I think we're really where we want to be from a maturity standpoint, there’s always going to be more capabilities that we add. But I think we’re reaching the stage where we wanted to be with product maturity. So that creates a situation where sales cycles can be longer. For instance, this new customer they spoke to us more than a year ago and they came and went et cetera. But when they saw the data, but one of these customer’s that was nice enough and open to show them what they’re able to do, that made the decision and they pulled the trigger immediately when they saw where the data is right now. So doesn't mean that every sales process is a year. In their case, it was a year and another customer site, actually it was four months. But it will vary from case to case and again, as I had mentioned, this is a little bit similar to the Allegro situation. There I think, it took a little bit longer two to three years. I don't think it’s going to take that long. I believe there’s going to be a nice ramp in 2018 with this product which beginning of 2018 means it’s two years from the shipment of beta, but these things do take time. And I'm not surprised. I've seen it in my entire career with new capital equipment.

And it sounds like part of that is a new kind of territory in terms of price point for these customers as they have been used to. I'm wondering in that context, does Kornit need to supply more help. Are there any frontend loaded costs associated with installing multiple machines at a customer that we should anticipate maybe next year as you get more kind of multi-machine sales?

Yes, I mean, part of this of course, this is a more complicated system as is the case with large equipment. So we’re training customers. Level of expertise in the company is growing. Level of support was higher six months ago than it needs to be right now. We’ve successfully handed over responsibility to these customers. So we’re evolving well with that. Having said that a ramp up of a product like this, does require more engineering attention and field service engineering attention as well.

And then I’m just wondering there’s a lot of talk about retail apparel kind of brick-and-mortar bankruptcies. And fast fashion is the answer, and in some cases, maybe the cause. I'm wondering kind of, can you revisit that topic in terms of all the inbound interest you guys are getting out from some of the brand owners themselves?

So I think it’s very much connected right. For instance, I presented at an e-commerce conference here in Israel where we had the CEO of eBay present as well. And what was interesting, it was actually -- and we had a fashion show there, it was a very well attended event, more than 1,500 people. And one other thing that was interesting was that most of the day was spent on apparel. The event was about e-commerce, but apparel being the fastest growing with over 30% growth is creating the most amount of interested. And I think people need to understand. This is truly a revolution because of shopping habits really completely changing. So I think, yes. I think the answer is that in order to accommodate and, let’s be honest, this is what we've been saying all along, that in order to accommodate a trend like this you must change your supply chain. Historical supply chains cannot deal with this. So they are faced with a reality which means they must take a look at this. But what I do believe is going to happen, from a strategy standpoint, it’s one thing to understand that you have a web store and you have less brick-and-mortar it's a much more difficult thing to change your supply habit. And I think that what people are starting to come to terms with, is that when you have a website part of what your shoppers want is endless variety. There is no way in the world that you’ll be able to stock endless variety. To be able to deal with that what we've been talking about which is proximity declaration must start happening more and more. And that's why we're so excited about this opportunity because truly everything is lining up in that direction.

We’ll move to Greg Palm with Craig-Hallum Capital Group.

Excluding the timing issues specifically on the Vulcan, can you talk about your expectations of maybe overall system sales in Q3 relative to maybe where what those expectations were at this time last quarter. I know you mentioned some sales slipping into 2018 but wonder if there's anything that might be slipping from Q3 to Q4 as well?

As I said the reference we're giving is, there is a few million dollars pushing out in H2. As far as pushing from Q3 to Q4 nothing specific that I can mention. As far as expectations a quarter ago as I said the expectations were a little bit higher, for the second half and the two comments that I made about why that pushing out a little bit is really the change in our understanding right. So we articulated what has changed and that’s what we mentioned.

Can you say whether you expect to recognize system sales specifically from your largest customer in Q4 this year just trying to get a sense of whether the buying patterns of some of your larger customers have changed or not?

We’re not going to comment specifically about Q4 Greg, I mean we really focus on the coming quarter always and the best that I can do which I tried my best to do today is to give general information about the second half I apologize for that.

I guess from a geographic standpoint, Asia has been a real standout so far this year albeit at a low base, but what are the thoughts on the sustainability of growth rates there for that reason specifically and I guess as you look at the second half in general what are the big drivers from a geographic standpoint?

So a few things that happened in Asia and indeed it’s a big growth year, but on smaller numbers you’re absolutely right with that observation. First of all I think that some parts of the region have been underutilized historically and starting to be better utilized. For example, we’re doing a better job in Japan, we initiated activity in Korea that started to gain some momentum. You heard me commenting about China which two years ago was strong and then came down and now is coming back up a little bit which is associate also with better coverage of that region from changes that we made with management in that region. So I think part of it is that some of the region was underutilized and we are improving that. Also work that’s being done looking at other parts of the region – such as Indonesia and Australia are also improving for us. So I think what I can say is that we’re more effective if you will in that region and that we were before and whereas maybe two or three years ago we were very China centric and China remains a very critical place and we do have an office in Shanghai and of course in Hong Kong. We understand that within the region there's other areas and paying more attention to those has yielded success and we expect that to continue going forward.

And I guess just last one the balance sheet obviously great shape following the raise earlier this year. At what point does it make sense to deploy some of that cash and from your standpoint what are the top priorities?

So we have said that that we will be acquisitive I'm happy to report that as of the beginning of the fourth quarter we’re going to have a VP of corporate development who is going to focus on that. We have started to put in place an inorganic growth strategy that person is going to be in charge of developing that strategy and looking outside. We definitely want to put cash to use for acquisitions and acquisitions that we would be looking at would be things that on the one hand expand our technology base and offer the possibility of expanding the servable addressable market. But also supporting the business model that we believe is so unique with this company versus any other company in this industry. With the profitability levels that we talk about, with the gross margins and operating margin opportunities. So these are the things obviously I want to articulate more details on that at this point, but definitely this is going to ramp up with the introduction of the person who is going to be focused on that. We’re at the stage now from a maturity standpoint that it’s time to take a serious look at that and I'm happy that someone of a very high caliber is joining us in order to take care of that.

Any reason why you would or I guess I’ll ask this way, should we expect that - if you make an acquisition you'll stay within the textile market or any reason why you had may be brought in outside textiles?

Textiles is the place for us. There is so much going on. There is so much market which is underutilized, Kornit is going to keep on focusing on this they just endless opportunities. So that makes all the sense in the world for us from a focused standpoint.

We'll now move to Patrick Newton with Stifel.

Yes just one quick follow-up Guy. Embedded in the guidance for the September quarter, is the Amazon related revenue expect to be flat now are up sequentially?

We expect it to be a little bit up.

And that will conclude the Q&A session. I’ll turn it back over to Gabi Seligsohn for additional or closing remarks.

Thank you Matt and thanks everyone for joining the call. We look forward to seeing you at the FIT event on September 13 where we’ll be able to share a lot of exciting things with you. Thank you and have a great day.

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