Kornit Digital Ltd. (KRNT) Q3 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Kornit Digital Ltd. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Cook. Please go ahead, sir.

Thank you, Operator. Good afternoon everyone and welcome to Kornit Digital's third quarter 2019 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 US 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 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 26, 2019, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this call hereof and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, the Company will be making references 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 release published today, which is posted on the Company's Investor Relations site. On the call today, we have Ronen Samuel, Kornit's Chief Executive Officer and Guy Avidan, Kornit's Chief Financial Officer. At this time, I would now like to turn the call over to Ronen. Ronen?

Thank you, Tom. Good evening and thank you for joining our third quarter 2019 earnings conference call. Today, I will provide a brief summary of our strong performance in the quarter, followed by some key business updates as we continue to execute on our short and long-term strategy. I will then hand over the call to Guy to cover our financials. We are excited to report our third quarter results marked a record quarter for Kornit in industrial system sales and continuation of the strong momentum we have demonstrated all year. We continue to revolutionize the fashion, apparel and home decor markets by fueling the transition to on-demand and sustainable digital manufacturing and I am very pleased with the progress we are making with our growth strategy. Revenue in the quarter was $44.6 million, net of $5.1 million of warrants related to a global strategic account. As a reminder, our guidance policy assumes zero impact from warrants. This period, we experienced a significantly larger warrants impact of $5.1 million compared to $1.7 million in the prior year, resulting from an increase in business volume with a global strategic account and a higher share price. Overall, our third quarter business volume grew 26.7% during the period, driven by strong adoption of our recently introduced Atlas, Poly Pro, and Presto systems and continued adoption of our HD platforms. During the quarter, we sold multiple Atlas and Poly Pro system as our strategic customer adopts these new platforms in preparation for the peak holiday season, positioning us well for a peak consumable revenue as these systems ramping up for full capacity. We see new strategic customer including leading brands, increasing the focus on partnering with us, as they transition to digital production. This led for example, to new wins with the key players in the athleisure market and the beginning of partnership with one of the largest specialty use apparel retail brands in North America. I'm particularly proud to report on the phenomenal feedback we continue to receive from customers on our next-generation DTF system, the Presto. The Presto is a market-leading single step solution, which features our best-in-class ink and the ability to print at high-quality on wide range of fabrics. We recently announced an important win with OnPoint Manufacturing, an innovative leader in on-demand personalized apparel manufacturing, which adopted the Presto and we believe we will be able to disclose important new adoption of the Presto in both fashion and home decor environments in the quarters to come. Last month, we held a live showcase of the Presto together with an ecosystem of partners, where we demonstrated end-to-end microfactory in an unique industry event in New York City. This milestone event is the first time we brought the microfactory concept from vision to reality. We believe, textile manufacturing will adopt Industry 4.0 principal and Kornit's technology is an essential component to the feasibility of automation, while the microfactory enhances the economies of proximity manufacturing. Turning to our regional performance, our business grew year-over-year in all three of our geographies. In Americas, we posted a record quarter as a result of a new customer acquisition, and expansions within existing strategic account including very strong volume from a global strategic account. In EMEA, we continue to see good demand as we convert pipeline associated with ITMA Barcelona last June. And our performance in the Asia Pacific region was primarily driven by good momentum with key accounts in Japan. To that end, we announced the installation of two Poly Pro systems at a Tokyo-based customer, Image Magic. This is an existing customer that serves a mix of corporate clients, including some of Japan's leading apparel brands and general consumer via an e-com sales model. The installation of the Poly Pro expands Image Magic's DTG capabilities to print on polyester and poly blend fabrics and significantly improves the efficiency of the operations. During the third quarter, we attended over 20 regional and specialized shows across the globe, resulting in an impressive increase in leads and opportunities. We also continued our successful roadshows activities across North America, where we bring our technology to centralize an accessible location for prospective customers to experience. Last month, we participated in PRINTING United, which took place in Dallas this year. While some industry peers reported slow overall traffic at the show, our booth was busy and it was one of our most successful PRINTING United shows, which translated to orders and letter of intent received for our wide range of systems. At this event, we showcased Kornit Konnect, our powerful cloud-based software analytics platform, which was introduced last June. This was the first time we showcased the software in a large North American show and our customer and prospect were excited to learn about the productivity benefit that can be delivered to the operations. At the event, we also showcased the Presto, Poly Pro, Atlas and Storm HD systems and exhibited another live production in collaboration with Adidas. During the quarter, we were very active in strengthening our global workforce, adding 31 new team members, many of which are in customer-facing functions. In addition, today we are also formally announcing some exciting enhancements to our corporate structure, around two main theme customer success and scalability. First, we are strategically realigning our business with all Regional Presidents reporting directly to me and now part of the Company's executive management team. This brings the voice of the customer across region, closer to the day-to-day focus of the entire executive management team and will improve cross-functional enhancements, as we continue to scale the business. Second, we are also increasing our go-to-market focus by adding dedicated teams across fashion, sports and online customized design. We believe this will be a boost to our business as we continue to shift from equipment provider to a strategic solution provider and partner with the world's leading brands. As part of this organization alignment, after almost four successful years with Kornit, Gilad Yron, our EVP Global business will be leaving Kornit. The strong business and go-to-market infrastructures that we are now scaling is a product of his hard work in the last few years together with the very strong team he has built. And we are grateful for his contribution and leadership. Gilad will be transitioning his current day-to-day responsibilities by December 31, 2019 to assume few strategic initiatives for Kornit, until his final departure in April next year. As we focus on scalability, we are creating a new Chief Commercial Officer function and a few days ago we welcomed a seasoned executive for our team Mrs. Jecka Glasman, will assume responsibility for all our customer success function, including service, support, pre and post-sales. Jecka will also assume responsibility for managing of global strategic accounts team and will be responsible for global sales Operation with scalability in mind. Jecka's vast international experience in operation, sales, product distribution and customer service across multiple industries will be a huge asset to Kornit. As part of this important alignment, I'm also pleased to announce that we have elevated Kobi Mann, our VP of Consumable and Application to the newly created position of Chief Technology Officer, alongside his current responsibilities. As one of the first employees of Kornit and an industry guru, Kobi is uniquely qualified to lead this effort and we are grateful for his years of service and expertise. In total, we believe this alignment will strengthen our company as we continue to focus on customer success and scaling our business and operations. To summarize, with just a couple of months left in 2019, we are in a very strong position to deliver on all the goals we laid out last fall. We are growing in line with our long-term goals, our new product introduction are enjoying widespread of adoption, we are penetrating new markets and leading brands and have enhanced our managerial go-to-market and operational platform to scale the business. We are also making progress on adding adjacent products, services and software solutions like the Kornit Konnect and have been very active in identifying a pipeline of M&A opportunities that can expand our value proposition. The combination of all these factors leaves us well positioned to deliver on our business goal of being a $500 million run rate business by the end of 2023. I want to thank all our customers and investors for the confidence and loyalty to Kornit and our global workforce for their hard work and dedication to our collective success. Now, I will turn the call over to Guy for a closer look to the numbers and our guidance.

Thanks Ronen 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 third quarter non-GAAP pro forma results reflect adjustments for the following items: stock-based compensation expenses totaled $1.8 million; total amortization expenses relating to the acquisition of intangible assets in previous years in the amount of $249,000; taxes on income related to non-GAAP adjustment in the amount of minus $62,000; a non-cash deferred tax benefit in the amount of minus $347,000; amortization expenses relating to the acquisition of Hirsch's intangible assets of $78,000. The Company has significant operating lease liabilities in foreign currencies and incurred foreign exchange gains or losses from the revaluation of these liabilities. These gains and losses may vary from period to period and do not reflect the true financial performance of the Company. This quarter, foreign exchange losses associated with ASC 842 were $242,000. A full reconciliation of our results on GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investor section of our website. Third quarter revenue, net of the $5.1 million warrant impact increased by 18.6% to $44.6 million versus $37.6 million in the third quarter of 2018 and increased 1.6% sequentially. Third quarter business grew 26.7% year-over-year and 7.4% sequentially. Revenues grew to record level this quarter, driven by robust demand for our new high throughput product and strong demand from our strategic and global partners, especially in North America. Services revenues from the third quarter were $3.9 million, net of $0.2 million warrant impact, accounting for 8.7% of total revenues. The decrease in revenues of 8.3% year-over-year and 35.6% sequentially was predominantly driven by lower revenues from upgrade to HD technology. The non-cash impact of warrants in the third quarter was $5.1 million or 10.3% of revenues, $1.7 million or 4.2% of revenues in the third quarter of 2018 and $2.4 million or 5.2% of revenues in the second quarter of 2019. The sequential increase in warrants impact was mainly attributed to higher share price, higher revenues from Amazon and accelerated vesting. Details of the warrants impact on revenues and margin for this quarter versus the prior quarter and the previous-year are included in Slides Number 17 and 18. Additional information regarding the Amazon warrants agreement is available in Slide Number 19. By geography, 61% of our sales were from the Americas, 27% from Europe, the Middle East and Africa and 12% from the Asia Pacific region. As in previous quarters, the America remain our largest territory. Asia-Pacific revenue in the third quarter, showed continuous impressive growth of 51% year-over-year and 60% in the nine months of 2019 over the prior-year period. EMEA revenue increased by 2% over the prior period and increased 8% sequentially. Moving to customer concentration. We continue to diversify our customer base driven by the success of our go-to-market transition as we go direct to our customers. This quarter, we had two strategic customers that exceeded 10% of revenues. A global customer contributed 15.3% and another strategic customer contributed 12.9% of our overall revenue compared to 19.8% and 1% in the prior-year period. Our Top 10 customers accounted for 53.6% of our overall revenue compared to 60.2% in the prior-year period. Moving to profitability. Non-GAAP gross margin in the quarter decreased to 44.5% from 51.1% in the prior-year period and 45.9% in the second quarter of 2019. Lower margins this quarter versus the third quarter of 2018 were mainly the result of $5.1 million or 574 basis points warrant impact. On a GAAP basis, gross margin in the quarter was 43.8% versus 50.3% in the prior year period and 42.5% in the second quarter of 2019. Due to annual seasonality, we expect the fourth quarter versus third quarter product mix to lean more towards ink and consumables. Moving to our OpEx items, 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 reconciliation included in today's press release. Adjusted research and development was 11.8% of sales or $5.3 million compared to 12.8% of sales or $4.8 million in the prior year. In the third quarter of 2019, we capitalized certain qualified software development costs related to external vendors and independent contractors in the amount of $0.2 million. We expect additional $0.3 million software development cost capitalization in the fourth quarter of 2019. Sales and marketing expenses in the quarter were $7.1 million or 16% of sales compared to $5.9 million or 15.7% in the prior-year period. The increase was driven by additional headcount. General and administrative expenses in the third quarter were $4 million or 9% of sales compared to $3.6 million or 9.6% in 2018. Headcount as of September 30 was 515 employees, 31 employees more than the previous quarter. The growth in headcount is mainly attributed to operation functions, engineering, and customer support to strengthen our infrastructure. Non-GAAP net income for the third quarter was $3.9 million or $0.09 per diluted share, net of $0.12 warrants impact, a decrease of $0.9 million versus the prior year. Non-GAAP diluted earning per share without warrant impact increased by $0.02 over the previous-year period. GAAP net income was $2 million or $0.05 per share on a diluted basis, compared to a net income of $3.1 million or $0.09 per share for the year-ago quarter. Non-GAAP financial income this quarter was $0.8 million as a result of accrued interest of cash investments. GAAP financial income this quarter was $0.6 million. Cash balances including bank deposit and marketable securities at quarter end were $250.4 million compared to $110.9 million as of September 30 2018. Next, I'll discuss our adjusted EBITDA. For the third quarter 2019, adjusted EBITDA was $9.5 million compared to $7.5 million for the third quarter of 2018, an increase in adjusted EBITDA of $2 million. Net cash used in operating activities was $20,000 this quarter compared to $4.4 million in the second quarter and net cash provided from operating activities of $11 million in the third quarter of 2018. In the third quarter, DSO was higher than the previous quarter and we expect it to return to normal levels in the fourth quarter. Turning to our guidance for the fourth quarter of 2019. We expect revenues to be in the range of $46.5 million to $50.5 million and non-GAAP operating income to be in the range of 14% of revenues to 17% of revenues. As has been our practice in the past, these numbers assume no impact of fair value of issued warrants in the fourth quarter of 2019. As a reminder the calculation of warrants for values based on the combined effect of estimation of future revenues from Amazon, future Kornit share price in unknown dates, future stock volatility as well as other variables that currently are not predictable and some of which have no correlation to our business. Since as of today, we are not able to predict these variables, we assume the warrant impact at zero value for guidance purposes only. I'll now turn the call to Ronen.

Thank you, Guy. Now, we are ready to open the call for questions from the audience.

[Operator Instructions] Your first question comes from the line of Tavy Rosner with Barclays. Please proceed with your question. Your next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

Congratulations on another good quarter. Just - on gross margin, I'd like to just make sure that I understand the dynamics here and see if you could add any more color. So, you said mix was a headwind in the quarter. I'm wondering why we would be down still 300 basis points year-over-year. If you also have the positive effect of going direct and taking Hirsch out of the mix, that should be about a 300 basis point tailwind. So if you adjust for that, gross margin is down even more 500 basis points, 600 basis points year-over-year. And I'm wondering if you could just talk about how significant this mix shift is and specifically are you seeing degradation in gross margin in systems or you're seeing degradation in gross margin and consumables at all?

So, as we said in the previous call that we expect the second half of the year to be above 50% and we were above 50% without the warrants impact. We mentioned before and we still faced it in the last quarter. We launched three new products and gross margin is not perfect from this product yet due to ramping up. But we mentioned the fourth quarter in terms of product mix - as usual, due to seasonality, the fourth quarter is characterized with more ink and as a result, we expect gross margin to behave better.

So, I'll just add one more comment. Looking forward, we see gross margin improving as we discussed on previous calls. So, we continue to sell more high-end products. So, the mix is favorable in terms of the gross margin and we can see the growth coming also from impressions on the supply side, expecting in future quarter to see an improvement on the gross margin above the point that we are today.

And then, just to clarify, the new products and their impact on the gross margin, I was under the impression that the Poly Pro would be pretty immediately accretive, a tailwind to gross margin, and is it the Atlas and the Presto that are weighing on gross margin somewhat as those ramp?

The main issues on the gross margin is more on the ramping up of those systems. So, it's more on the service and support side, and this is why you see the impact on the service side which impact overall gross margin. So, it's less on the - it's not on the ink and on the hardware, a bit on the hardware, because we are still ramping up the production on all those three machine, but it's more owned on the service and support side.

Eventually as we said before, Brian, each product will carry higher gross margin than the product before. The Atlas will carry higher gross margin than the Avalanche and so is the Presto versus the Allegro. As mentioned, it take some time to ramp up.

And just my last question - just to be clear, the Poly Pro then, in terms of gross margin on the system itself is not in line with there. It's below the average gross margin for your systems. Is that fair? Is that right?

No.

No? So that is - the Poly Pro is already above it?

Yes, correct.

Okay, got it.

It's above.

Your next question comes from the line of Tavy Rosner with Barclays. Please proceed with your question.

So, this is Peter on for Tavy. I apologize for the technical difficulty earlier. My question was around strategic accounts and specifically the seasonality. Now that you have more accounts in the mix, especially large ones, how should we think about the prior seasonality in the fourth quarter in terms of mix of systems and consumables?

So, we have seasonality and we see it very clearly this year at strategic account ordering system, mainly in the second and third quarters. So, we hardly will see any of our top strategic account ordering in the fourth quarter. So, it's more medium size and small size account ordering systems in the fourth quarter. However, the fourth quarter is always the peak season for our entire installed base and definitely for our key strategic accounts. And so, we will see a mix - favorable mix into the supplies and overall impression from our installed base in Q4.

And if I could have a follow-up, is that - should we expect that to filter through on the services side?

On the services side, we expect normal behavior during the peak season.

Okay. Thank you.

Nothing special.

Your next question comes from the line of Greg Palm with Craig Hallum Capital Group. Please proceed with your question.

This is Danny Eggerichs on for Greg today. Thanks for taking my questions. Just starting with Amazon revenue, I guess just the breakdown. I was wondering if any of that revenue this quarter was from system contributions and if there was, was that a result of existing facility expansions or possible new facility openings. Just a little color there would be helpful.

So, as you know, unfortunately we cannot relate to a specific customer business and mix between hardware and supplies business with all the strategic account specific with the global strategic account is very, very strong. You can see it with the warrants as well, the impact on the warrants, it's - the relationship is as best as ever and we see great momentum moving forward.

All right, thanks. And then, I guess, looking back at the three big product introductions earlier this year, I guess, just breaking them in two categories, how much of that revenue has been driven by existing customers and I guess - and how much is that - of that has come from new customers and how are you kind of seeing the adoption and ramp-up of those new systems differ between those two.

It's a great questions. I don't have the exact number, but I would say it's about 50-50 between existing to net new and the difference is with the Poly Pro and the Presto, I would say, is more tending into net new customers that we are penetrating, net new brands that we are penetrating. Some of them big account, some of the mid-sized accounts, but we see the shift into net new accounts. On the Atlas, I would say it's more tending into our current installed base that now adding additional capacity, but we see also net news are starting with that as well.

And then, just last one from me, in the APAC region, are you seeing any impact from the macro volatility going on in the Hong Kong region. I'm not sure if you can quantify of how large that area is in the APAC region and if you are seeing any impacts?

So, our main business in Asia Pacific currently is focused on Japan, South-Pac, Korea and China, of course, less in Hong Kong. While we have the headquarter in Hong Kong, our businesses is outside of Hong Kong. So, we don't see an impact directly on our business. We do have the impact on the team of course in Hong Kong and we are taking care very closely on what's going on there and contact with our team there and supporting them. We see a very, very nice growth coming out of Japan and we see a real adoption both for our new products like the Poly Pro and the Atlas, but also the existing product.

Your next question comes from the line of Jim Suva with Citigroup. Please proceed with your question.

Could you just revisit the topic a little bit about the margin pressures in the product ramping and maybe it's just because I'm not the smartest person on this call, but if you can help me understand that the pressure is kind of like the duration that we expect the pressures in the margin ramping. Is it kind of like three quarters or should we think about the kind of always constant - where you're always inventing and having meetings come on. So, why wouldn't it be kind of more steady state about ramp headwinds and then layering off of efficiencies? Thank you.

So, it's not - it's not a margin pressure due to competition. We mentioned that before that we will see a gradual increase in gross margin. We said it's going to be above 50% in the second half and we also mentioned in the fourth quarter due to seasonality, we expect even better gross margin. Not every year we launch three very material product and the gross margin relative decline here is actually due to cost of good, not revenue.

But we already see an improvement, for example, in the cost of goods on the Atlas and you will start to see the positive impacts in the Atlas as we are selling it in big quantities. So, we will start to see an improvement in gross margin in the coming quarters.

Your next question comes from the line of Patrick Ho with Stifel. Please proceed with your question.

Ronen, it's encouraging to hear that new customer traction for a lot of new products, which at the highlights, the ability to grow the top line over the next several years. Can you give a little bit of color on the type of buys and what I mean by that is, are these new customers buy maybe one or two systems initially to try it. I don't want to say, evaluate the system, and you'll see these multiple system buys down the road as they increase capacity or are they really starting off at a kind of multiple system buys once they see the product.

So, there is no one clear answer for that. It's different from customer to customers and from segment to segment. If you're referring specifically to the brands, what we can see on the brand side, we see big-sized brands - really that biggest size brands and also the mid-sized brands going into on demand manufacturing, needing Kornit solution working very, very closely with us. Usually, those brands are starting with a few system, one or two system, evaluating starting a pilot and then they're going to full capacity and growing. So, we are in a stage with different brands and different evaluation. Some of them moved already to full production and they're scaling up. Some of them in early stage of evaluation as for customers, there's all kinds. We have the example in Japan that I mentioned. It's a new customer that is focusing on polyester and started with two Kornit Poly Pro. We see customers that are starting with multiple Atlas's, but usually, they're starting with one or two units, taking it for about six months up to one year, scaling the business and then increasing capacity.

And maybe as my follow-up question, given your strong growth in the Asia-Pacific region, is it coming from any one specific product where you're really seeing strong traction or is it very broad-based across all your product lines?

It's across, I would say, all product line, more on the mid range, more on the Avalanche HD. The Avalanche HD has a great traction in Asia Pacific. The Poly Pro, specifically in Japan, is doing fantastically. We start to see more adoption of the Atlas's across Asia Pacific. So, it's all of our product portfolio.

Your next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question.

Just a question on the service business. And thanks for a little bit of color on that. The decline that you're seeing. I mean, clearly you had a strong comparison a year ago, but the HD upgrade. I mean, how should we think about the service business and the profitability that you're trying to achieve in that area. It sounds like there are two factors. Number one, on the revenue line, but also number two on the fact that you continue to have to increase sales and support. So, as you guys have talked about targeting bringing that business to breakeven, when do you see that occurring?

As we said in the past, we still expect breakeven in services mid 2020.

Question on the brands and I know you can't disclose customer identities in most instances, but is there a way for you to give us a better feeling for how many of the brands you've penetrated thus far, whether it's in this past quarter or year-to-date? Any color along those lines would be helpful because it does sound like you're getting traction both with Atlas and Poly Pro with the brands.

So, I can say that we really have a great traction with brands and this is only the starting point. I cannot relate to specific numbers and names, other than Adidas that we already mentioned. This is the second time that we are doing demonstration, live demonstration together with Adidas and second time we did now in United Print a month ago. But as I mentioned before, we have mid-size brands buying our equipment. We have big-sized brands that some of them buying themselves and some them working with their fulfillers directly with us buying our systems. So there is a lot of traction. I can tell you that we are working in parallel on multiple - in multiple projects, exciting projects on a global base.

And if I may, last question for me. In Europe, it looks like in the EMEA region, you showed growth, but it looks like it's fairly modest. And I'm wondering if you're seeing any sign of - any kind of macro-related weakness that might be resulting in some hesitancy on the part of customers there?

So, I think, we see a very nice growth in Europe was something that misleading. Last year, the same quarter, we had a big deal with a global account in Europe that, this is the reason why you don't see, year-over-year. It was a very strong quarter for us last year. Overall the business in Europe is doing very well. We recruited very strong talented team there. We have the momentum out of ITMA. The funnel looks strong entering Q4 with strong pipeline. So, we feel very comfortable - confident about our European business, and we don't feel slowdown like in other industries.

Your next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Yes, maybe more of a big picture question, I mean 2019, obviously it's been an exceptional year rolling out new products and platforms. When you look at the $500 million run rate goal for 2023. Does it assume significant additional new product rollouts or does the kind of existing base really get you there?

So first of all, we are tracking, as you mentioned, 2019 very well on a direction for the $500 million run rate in 2023. And at this point of time, we feel very confident that we will continue this structure in the coming years. And the growth is coming from different areas. One is from the current new portfolio that we just released. We're just starting the growth on the Atlas. We're just starting the growth on the Poly Pro. And the Presto, we just released it and we have great, great traction on the Presto. So each of those products will bring growth. Of course, we will continue to innovate and bring new products and new solution to different market in the coming years. And we are building the growth also on new system that will come in the coming years as well. Major growth is coming from new segments that we are entering. The brands are a big, big growth engine for us, working directly with the brand now, we can really suit. We have a solution that meet the needs for the brands. We can see all the brands are moving to on-demand manufacturing. They're talking about it. All of them talking about sustainable production and the way to do on-demand in sustainable way is really using digital manufacturing and Kornit is the only solution that they have today in the marketplace. So, this is a major growth for us. Also, penetrating the polyester which is 20% of the global apparel market is about - is polyester. So this is a new market for us. And we continue to see a huge growth from the online segments. We can see new players are coming into the online and existing player going really, really fast, both on the global strategic account, but also mid range key accounts that are going very, very fast on the online production. And the last segment is promotional items. We can see as well their growth penetrating to net new screen printers that focusing on the promotional item. This is another growth engine. On top of all of that, we of course working very hard on the workflow and other solutions that we are bringing around our systems and we will start to see growth in this direction in next year. And the last point is really the growth that's coming from expansion of our teams, feet on street. We were very, very small team, selling the Presto or selling the DTG. Now, we're starting to have much better coverage. We're still missing coverage in many potential - big potential territories and we will continue to expand our team and services and the growth will come also from geographic expansion.

[Operator Instructions] Your next question is a follow-up from Brian Drab with William Blair. Please proceed with your question.

Had to take a quick break from emailing back and forth with the data aggregators trying to clarify what your real earnings result was. About 20 emails back and forth already regarding the warrants. My last question is just, if you look at next year because I know that this is a third quarter call, but I mean it's November and we're all trying to model 2020. So far, since you announced, Ron, in the target of the $500 million and that requires 25% to 30% revenue growth you're delivering on that. And if you were to do that in 2020 which I assume is roughly the plan, what kind of growth rate would you expect for operating expense just relative to revenue growth. Is it the year 2021 revenue growth will far exceed operating expense growth as those level off or is that investment in the team going to continue significantly, in the 2020?

So, Brian, first, as you know, we're talking about next quarter only, but since you mentioned the warrant before. So, just to let you know that November 2019 - actually very recently, Financial Accounting Standard Board, the FASB, issued final guidance that requires entities to measure and classify SBC shared-based compensation that are granted to customers in conjunction with revenue arrangement and are not exchange for distinct goods and services in according with ASC 718. What it means actually that it's going to be much easier for us and for you guys to predict the warrants impact in the future. This new standard is actually going to be effective next year, but management can have an early adoption. It is permitted based on the ASC 718. And obviously, we will give more data in the future regarding the warrants. We will be able to discuss OpEx of 2020, leverage and other things in the next call.

You can't - you won't even go directionally above or below revenue growth at this point. Sorry to push on that, but it would be helpful.

As Ronen mentioned, when you look back and when we guided for $500 million, you could imagine some CAGAR and this quarter the CAGR was above 26%, which means we're on track or above track actually. That's the plan.

Okay, all right. Thanks very much.

As for the OpEx, as we mentioned in the past, we will continue to grow to the $500 million run rate in 2023 while improving our gross margin and improving our operating profit, okay, during this period. So you should see continued improvement on the operating profit as well.

Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Ronen Samuel for closing remarks.

So, thank you everyone for joining on today's call. Again, I would like to thank all of our employees for their hard work and dedication and our customer for the continued support and finally for our investors for the trust they have in Kornit. I look forward to updating everyone on our fourth quarter call and I wish you have a beautiful and good evening. Thank you very much.

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