Greetings and welcome to Kornit Digital's Fourth Quarter and Full Year 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Backman, Global Head of Investor Relations for Kornit Digital. Mr. Backman, you may begin.

Thank you, operator. Good day, everyone, and welcome to Kornit Digital's fourth quarter and full year 2022 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel; Lauri Hanover, Kornit’s Chief Financial Officer; and Amir Shaked-Mandel, EVP of Corporate Development. For today’s call, Ronen will provide comments on our fourth quarter, recap the full year 2022 highlights and discuss key focus areas for 2023. Lauri will then review fourth quarter and full year numbers and provide our first quarter outlook before we open it up for Q&A. Before we begin, I would like to remind you that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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 financial condition and all statements that address developments that the company expect will occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by forward-looking statements. I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 20-F filed in March 2022, which identifies specific risk factors that could cause actual results to differ materially. Any forward-looking statements are made currently and the company undertakes no obligation to publicly update any forward-looking statements, except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measurements 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 also posted on the company's Investor Relations Web site. At this time, I would like to turn the call over to Ronen. Ronen?

Thank you, Andy, and good day, everyone. Thank you for joining us. Before we begin, I wanted to extend from all of us here at Kornit our thoughts and prayers to those who have been impacted by the recent devastation caused by the earthquakes. Turning to our results. As reported this morning, fourth quarter revenues were $63.3 million, net of approximately $4.3 million of non-cash flow impact related to a global strategic accounts and in line with the revenue guidance range provided in November, which as a reminder assumes zero impact from the fair value of the issued warrant. For the fourth quarter, consumable and services revenues were again up sequentially year-over-year and on a full year basis as compared to 2021. We saw a mixed peak season across regions and customers with some of our largest strategic accounts mainly in Americas experiencing a very good peak season. Others, especially in Europe, were generally flat to slightly up or down in terms of impressions and consumables. As expected, systems revenues were down meaningfully in the quarter given the ongoing macroeconomic backdrop. Some customers and prospects continue to take a wait-and-see approach on making meaningful investments, including adding production capacity to their existing fleet. As such, we continue to expect system sales to remain challenging in 2023 and expect to see growth for consumables and services. Like the broader global technology environment, 2022 was a tough year for all of us. We started '22 with a strong momentum and growth fueled by the introduction of groundbreaking new products that set the stage for sustainable long-term top line growth. We closed the acquisition of Tesoma, opened our new ink plant, and cemented the position of our MAX technology as the new industry standard for quality with several strategic customers, looking to upgrade…

Thank you, Ronen, and good day to everyone. Fourth quarter revenues were $63.3 million, net of $4.3 million non-cash warrant impact related to a global strategic account. For the full year 2022, revenues were $271.5 million, net of $22.5 million attributed to the non-cash warrant impact, compared with $322 million, net of $25.4 million attributed to the non-cash warrant impact in 2021. As Ronen described earlier, consumables and services revenues were each up year-over-year and on a full year basis as compared with 2021. While systems revenues were down meaningfully in the quarter, as we expected, and for the full year 2022. In the Americas, we had a solid quarter of consumables and services revenue growth, with some customers experience a strong peak season, while others continue to work through excess capacity. Although overall system sales remain challenging, we continue to gain traction for our DTF solutions in Latin America, with yet another encouraging quarter of growth. In EMEA, consumables and services revenues were generally flat compared with the same period last year. While system sales continued to be impacted by capacity utilization and higher financing costs. We are seeing encouraging results in important European countries like Italy, Portugal, Iberia and Turkey, with additional opportunities opening up in the UAE and Northwest Africa. The APAC region delivered stable performance despite the tough macro backdrop driven by China's zero COVID policy. Both consumables and services revenues were flat to slightly up and system sales were lower year-over-year. We do see encouraging penetration of the MAX technology in APAC, with installations in Japan and Australia, and as Ronen said, meaningful opportunities developing in India and in China. Moving to margins. Non-GAAP gross margin, net of a 4.1 margin-point warrants impact was 36.4% compared with 49.6% in the same period last year. The…

Thank you, Lauri. And we are ready now to open the call for the Q&A session.

Bernard [ph], could you open up the Q&A, please? Can you hear us, Bernard? Bernard, can you hear us?

Ladies and gentlemen, we apologize for the technical difficulties. We will begin our Q&A session. [Operator Instructions] We do have a question coming from the line of Jim Suva with Citigroup. Please proceed.

Thank you so much. Just a quick housekeeping item before I proceed with a more interesting question. The change in guidance to include the warrants, am I correct that's more just of a housekeeping and getting sell-side analysts and consensus numbers all on the same definitional term? And there's actually been no relationship change or contractual change between you and your larger strategic customer?

Hi. You're absolutely correct. We’ve been engaged in very frequent dialogue with our current investors, as well as the research analyst and we received very valuable feedback that we need to make our financial reporting easier to understand and less confusing, as well as aligned with our reported financials. And that's the reason that we've taken this.

Great. That was my understanding also. Thank you. And I think everybody will appreciate that. Then my more meaningful question. We all know interest rates have materially increased during the past year or so. With that, with Kornit selling their large printers for the purchase decisions, are they now starting to come back to a more normalized level and discussions or are your customers kind of still pausing and struggling for financial arrangements? And if they're struggling for financial arrangements, does Kornit kind of change the way that it helps its customers with getting across the finish line for that? Or how should we think about the impact from the closing phase of selling products and Kornit able to get it across the finish line for a sales contract? Thank you.

Yes, thank you for the question. So, we still see impact of the macro economics on decision taking by our customers, many of them are still sitting on the fence and waiting to see the direction of the market. The good size in Q4 what we have seen, we see -- we saw growth on the supplies, on the impressions versus last year. To remind you, Q4 2021 was very strong, peak season, to show a growth this year or the supply is very, very healthy. We see the utilization of the overall systems getting better. We still see some overcapacity, but our customers are closing it and there is better utilization. But some of the decision of buying new equipment are being delayed. Now, we are still selling. We have segments that we are actually accelerating. DTF, for example, direct-to-fabric is a growing segment, we had a very strong Q4 and we have a very strong Q1 for the DTF. We are starting to penetrate with the DTG to new markets, like the retails markets, the brands we starting to see very nice success. And Q4 was a nice peak season for some of the retailers. We can see interesting stories with retailers. They’re buying handful of system, Atlas MAX's and utilizing them to the max and different from the previous business. But it was mainly custom design business of one-off. They’re leveraging this equipment for [meter run length] [ph]. Some of them printing up to 3,000 linear copies or impression, fair job, which is a great testimonial of going after the retail market and the brand. As for financial solution, Lauri and her team are working very, very closely with partners to find financial solution to support our key customers moving forward. We are selective as of today. We are supporting our customers, but the customers are -- we believe in them longer-term, we're already supporting them on payment terms and, as I mentioned, sure, we will come with financial solution around it. Maybe Lauri can add a bit more on that point.

Yes, just to remind you, as I stated last time, what are my key initiatives for this year is to evaluate various programs and to ultimately formalize an alternative financing solution with third parties with whom we have relationships and who understand our business and how Kornit solutions help our customers. I really believe this kind of a program could provide the company with a significant competitive advantage in the marketplace.

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

Thank you very much.

Thank you.

Thanks. Appreciate it. Bernard, next question, please.

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

Hi, good afternoon. Thanks for taking my questions. I wanted to ask a little bit about the outlook. I was wondering if you can comment on the demand you are seeing through different end markets. I'm thinking the global strategy customers, the e-commerce channel, the brands, are you seeing kind of the same wait-and-see reaction from everyone or is it this particular segment? And I guess as a follow-up to that, is there any indication you can give with regards to potential top line growth in '23? Or is it too soon to talk about growth this year?

Thank you, Tavy. So 2023, as you can see, we are starting and Q1 always on the -- from a seasonality perspective on the low side. So we expect Q2 to be stronger than Q1 and H2 to be stronger than H1. And as I mentioned, we are aiming to move back to breakeven doing H2 and then to profitability. And the main driver for that, first of all, will come from systems sales. In the mid of the year in June, we have a big event, ITMA, where we are going to introduce and reveal the Apollo and start selling it. But we are going to also introduce many other new technology both on the DTG and the DTF and on KornitX. The ITMA show is a long show, its more than a week. And it's a sales show. And we know many customers that we're speaking with them today are waiting for the show to take final decision on purchasing of new equipment. So we expect ITMA to contribute already for Q2, but definitely for H2 and beyond that. On the system side, we see mix, we see customers that really sitting on the fence and some of them from the custom design segment, but we see some that are seeing the opportunity. We need to understand that the market, the textile market, the fashion market is going through a major transformation right now. Supply chain is fully broken. Inventory is the biggest issues of brands and retailers. Retailers require today to have many SKUs on a daily basis to attract the Gen Z. And for that they have to move into on demand production and in a sustainable way on show, a new show and the only solution that they can -- that can help them to…

Thank you, Ronen.

Tavy, thanks. Next question, Bernard, please.

Our next question comes from Brian Drab with William Blair.

Hi. Thanks for taking my questions. The first one, I just want to clarify something. I think on the last fall you said that you expected your large strategic customer to begin purchasing equipment again in the second quarter of '23. And I don't know, Ronen, if I misinterpreted, but it sounded like you made a comment along the lines of they've added the capacity in 2022 that they would need to -- that they would need for 2023. I don't know if I misinterpreted that.

No, no, you're absolutely right. And I mentioned on the previous call that we expect our strategic customers, our global strategic customers to add more capacity in 2023. Let me clarify. 2022 was a very strong year for our strategic global customer from our perspective. We saw an increased volume in terms of number of systems, opening new sites and definitely in terms of impression. There's a nice peak season and gaining [ph] very strong into 2023. We expect in 2023 that they will open new sites. However, they were going to leverage systems that we sold them in 2022 to deliver them into those sites in 2023, so they will open new site, will add more capacity and we expect to see increased volume in 2023. We are not expecting at this stage to sell additional systems to this strategic customer in 2023. We see massive opportunity of growth with this global strategic customers, not only by selling new system in 2024, and the relative new systems that we are going to release in 2023 like the Apollo, we see a major opportunity of upgrade the existing Atlas portfolio into the Atlas MAX trade in the old technology with [indiscernible] technology and potentially with the Apollo in the future and getting to new businesses with this account as well. So there's a lot of [technical difficulty] very, very close. We’ve mentioned in the calls before, we have [indiscernible] relationship and walking on field plans and we expect to see major growth coming in the years to come.

Okay, thanks. Thanks for clarifying that. And then I'll just have one more for now. Do you still see the potential for this business to generate greater than 50% gross margin or something changed structurally and what needs to happen, maybe, besides volume leverage to get the 50% plus.

So longer term, we still believe -- firmly believe in the model. We have a very strong business model with the supplies, we need to uplift the volume on the system. We definitely believe that we can be at the 50% [indiscernible] it. We believe longer term that we will be in operating profit of more than 20%. And as Lauri mentioned, for us to be in the breakeven [indiscernible] cost structure and right now we can be at breakeven around $70 million of revenue and into around the mid 40s gross margin with the current topic that we have to be at breakeven. So we are aiming to be the breakeven in the second half of the year and hopefully move to profitability later this year and beyond that. So longer term, yes, we firmly believe that Kornit can be multibillion dollar company with strong gross margin of above 50% and operating margin of above 20%.

Okay. And then one last quick one. To be clear, when you say breakeven, you're talking about an EBITDA basis?

Both. Both EBITDA and operating margin.

EBITDA. Okay, thank you very much.

Thanks, Brian. Next question, please, Bernard.

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

Hey, good morning, guys. Excited to be on the call. Thank you for taking my questions. Maybe Ronen first one from you -- for you, I should say. I very much hear you on the opportunities that you highlighted for the future in terms of better penetrating kind of midsize retailers, the creator economy, social platforms, transforming supply chain, that all make sense to me. I guess my question is, are you having customer conversations with these kind of customers today, and they're expressing kind of interest in your types of digital systems, or software enablement, or are you kind of more so saying, these are markets that make sense and we will approach them? I just kind of want to understand if those conversations are already happening, and you're hearing about demand, or if you're just saying these are ripe for opportunity, and we're going to go after them in the future. And then I have a follow-up. Thanks.

Thank you for the question. So it's not only discussion happening, actually major part of the new system that we're selling today is into those retailers, brands and digital platforms. And we see an increased volume of supplies of ink coming from those brands and retailers. This is a massive opportunity. Most of our team engage with those discussion and selling today, we are selling many systems to those type of customers that we were talking 2 years ago and it was a dream that we were aiming, and it's happening now. And it's happening now from two reasons. One is from the macro of the textile industry, of supply chain what we have discussed, of inventory of being able to be creative, and to invent yourself every day without having inventory and making it sustainable. So this is one thing which is happening now. And the other thing digital finally and Kornit finally, as the quality and the productivity and the total cost of ownership that can address this market and really transform it once and for all to more sustainable on demand production.

Great. That is very helpful. Thank you, Ronen. And then maybe Lauri, one for you is, seasonality does at least look a bit different than normal. Right now it looked a little different in 4Q, it looks a little bit different in 1Q, just in terms of forecasting kind of your second largest seasonal decline after the March 2020 quarter, which we know is impacted by COVID. And so I guess my question is, is there any visibility into when you believe revenue growth can return to more seasonal trends or even above seasonal trends? And if so, why would that be the case? Thank you.

In terms of seasonality, so currently in 2023, we are not expecting change in seasonality. Q1 will be the lower one and Q4 will be the strongest one in terms of supplies, Q3 will be the strongest one in terms of the systems and you will take Q2 higher than Q1. So we don't expect. Longer term getting into the retail market, more and more into the brand, we'll start to see a bit different seasonality across the year. Most of our business today, as I mentioned before is for the custom designed for those customers that are selling mainly in the peak in the holiday season. One-off, working with the retailers and the brands there needs to stay across the year and listening to the shops and to the retail. So we expect the seasonality in terms of supplies will moderate in the coming years.

Super. Thanks so much.

Thanks, Erik. Next question, Bernard, please.

Our next question comes from Jim Ricchiuti with Needham & Co.

Hi. Thank you. question I have is relates to the system's business in '23. You provided a framework in terms of how you get back to breakeven whether that's later in the year. But what my question relates to is, if we think about the system's business this year, do you expect more meaningful inroads with new customers? Or a possible recovery later in the year from existing or some combination? And to what extent does Apollo play into this? Maybe in broad strokes, the launch is midyear. But what are your expectations as it relates to Apollo [technical difficulty] '23?

Yes, so it makes, I mean fix between regions and between different segments. So as you know, I'll give you an example on the DTF side, direct-to-fabric is relative new segment for us. Most of the deals that we're doing in the DTF net new customers, if it's in Brazil, Argentina, Poland, Japan, et cetera. Turkey, we see good business there. Iberia, excellent business as well on the DTF side. So this is all net new customers. When we are talking about the retail and the screen replacement, there is mainly net new customer as well. Finally, we are getting to those retailers, many of them buying systems, many of them working with KornitX. So this is a new type of customer. On the custom design side, this is the mixed. We expect in 2023 some of our biggest customers to stop getting into the cycle of buying additional systems. We see it in the utilization of the current fleet that they have. We see that they need to trade in some of the old legacy system to new system, and we definitely see it in the upgrade from Atlas to Atlas Max's. So this is regarding the type of customer and the type of segments. And again between region in Asia Pacific, most of the customers that we're selling relatively new. And in the Latin America as well in North America and a Europe is kind of a mix. As for the Apollo, Apollo is the biggest lounge that we've done for the last 4 years. It's bringing tonnes of innovation. This is what the market was looking for [indiscernible] (). The highest quality of the mark technology quality with one operator full of automation, quality controls, and many, many more elements into it. Smart queuing and much more. We are going to reveal it in ITMA and stopped installation of better sites before each month. In the next few months, we're starting the installation of the beta. As I mentioned, I think in the previous call, we aim for 2023 to install less than 10 units. And it's mainly around the beta sites and around our [indiscernible] (4847) centers in the U.S and in Europe. And we expect them to be at the second order for better sites already this year. And real acceleration of growth will come in 2024 from the revenue perspective. I can tell you, we already have a list of customers that waiting for the Apollo. We expect ITMA to be a very, very strong demand generator for the Apollo. And we believe that after ITMA, we will be able to close already '24 in terms of the capacity for the Apollo.

Got it. And question for you. Some of this is going to be disclosed in the 20th. But I'm wondering if you can provide us, if you could share with us any color around the breakdown of systems in consumables and service. Is that any of that detail available? Or do we need to [indiscernible]?

Yes, it can certainly help you out here. Let's say, you're looking for about a year.

Well, it would be great, if we had it for the quarter as well. But I'll be back to you.

Hey, Jim, you'll see it in as we said in the 20 app, as you know we haven't any products and services throughout the quarter. We don't break it out yet. But you will weight [indiscernible] that segregation between systems and services. Okay. So, Jamie you can [indiscernible] between the system, which include a machine and an ink to the services. So you can see a major growth from the services side, which include the upgrades -- of the upgraded for the MAX, you don't see the breakdown on a quarterly basis right now on the 20th you will see the breakdown between the inks to the system. What I can say that we see larger portion of ink versus system versus previous years. So we see a growth on the inside versus 2021. And remind you that 2021 was a very strong year on the ink, but we see major decline on the system side. So overall, the mix is totally different from 2021.

Got it. Will look for that. Thank you.

Now next question, please.

Our next question comes from Chris Moore with CJS Securities.

Hey, good day, guys. May we'll talk a little bit about KornitX. I know it has changed or evolved quite a bit over the past 2 years. And I guess there's two questions. There's one kind of what do you know now, that you didn't know then. And two just from a marketing standpoint, you talked about mid-sized retailers, et cetera as being kind of a prime market? How will the marketing approach differ from what you're doing right now on the system side?

Yes, so we have learned a lot in the last 2 years from the acquisition of Custom Gateway, and we adjusted our business model. We developed dove solution. We have much more clarity and better traction than before. We have very high confidence about KornitX as material contributor in both in terms of revenue, and in terms of driving impression and volume to our systems and to the GFN, the global fulfillment network. What happened in the market, the many digital platforms as of today, would like to monetize and productize for their platforms. And the age of community is happening, yet our economy is happening, many of them are walking through those platforms. And those platforms are looking for a black box, that they can spend all the jobs and be fulfilled locally, closer to the consumer in a sustainable way, without dealing with production. This is KornitX. So in a nutshell, if you think about the Uber model, KornitX is the platform. It is the app that connects between volume of impressions that coming from brand, for marketplaces, from digital platform into a network, awful fillers, that using Kornit machine and driving volume to those machine will drive more machine, more ink, and more machine. As I mentioned, we see a very nice traction with some of very, very nice platform and some brands. And 2023 is a transition year also for KornitX. And we hope that by the end of 2023, we'll be able to start reporting more meaningful information and data, financial data and politics.

And just kind of a best guess, in terms of one KornitX does get to that meaningful revenue level that's likely at fiscal '25 versus fiscal '24, from where you sit today.

Yes, so the -- depends how you look at it. From a revenue perspective, it's already generated few millions of dollars, okay. And we expect to see growth in 2023 versus 2022. But even more important, what we are measuring is how many impressions are being routed to KornitX to our customers that are using [Indiscernible] () because of that they’re buying more systems and ,more ink. This is very, very material. And we start to see the volume picking up. And we are very, very focusing on those retailers and brands. Some of them do not want to go vertical and to buy system, but they're looking for solutions to produce for them all over the world leveraging Kornit.

Got it. Helpful. I will leave it there. Thanks, Ronen.

Thank you.

Bernard. Mr. [indiscernible] our last question comes from the line of Greg Palm from Craig-Hallum. Please go ahead.

Yes. Hey, everyone. Thanks for taking the questions here. I just wanted to follow-up on the commentary on your global strategic, I just want to make sure I understood that correctly. So they will not be purchasing any new systems in 2023 is what I is what I heard, but they're still opening up new sites. And so they -- are they using systems from other existing sites to fill the new sites? Is that essentially what's going on?

So first of all, the first sentence is correct. We are not expecting them to buy additional systems in 2020 space. This is the current assumption that we are taking into our model and how do we see 2023. We're still working with them on many other opportunities, as I mentioned before. As for the new site, as you remember last year, we discussed about delayed sites, Both system last year for those types. And some of those sites will be just open this year. So we will see the machines or the Boat last year being utilized on those new sites only this year. Okay? So from their perspective, there will be a major increase in potential volume.

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

Go ahead.

Understood. And I'm just following up on the Apollo. Last quarter, I think you said in selling and installing dozens of systems, I think you said less than 10, I don't know if I misunderstood you last quarter. But can you just -- can confirm that. And then just in terms of revenue recognition, are you expecting to recognize any of those systems this year for the beta sites or will rev rec in 2024?

Well, let me confirm. In 2023, our aim is to make the Apollo, the most successful product and by that we are very much focused and we are going to deliver less than 10 units, mainly for better size and for the demo centers and we are, expecting second order already from both beta sites in 2023. They're going to be very focused and making a successful. S4 recognize those system at this stage. We are not adding it to the plan. We are taking the conservative reports that we will recognize some of those units, only, beginning of 2024. So this is conservative approach from top of that, beginning of 2024 is a full acceleration plan of selling many more Apollo's beginning of the year.

Okay, perfect. And I guess just last one, if I can just maybe one more clarification. Your commentary implies approaching breakeven in the second half. And so I think that sort of implies revenue in the $70 million range, if that makes sense. And I just wanted to be clear, that is including the impact of the non-cash expense associated with [indiscernible] accounting as well.

So go away, so now we're talking only net and the $70 million is net. And yet we expect as I mentioned, to reach the breakeven in H2. So based on what we gave, around the $70 million, and around mid 40 gross margin, of course, it's different from Q3 to Q4. Q4 is a very strong quarter from our supplies perspective. So hopefully we will move into profitability.

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

Yes, Thanks, Bert. Thank you.

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

Great. Thank you. And thank you to everyone for joining us today. As always, if you should have any additional follow-up questions, please feel free to reach out to me directly. Have a great day. Thank you so much. Bernard, please [Indiscernible] for the call.

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