Kornit Digital Ltd (KRNT) 2015 Q1 法說會逐字稿

Thank you operator and good afternoon to everyone. Before we begin I would like to remind you that forward-looking statements will be made on this call. Forward-looking statements provide the Company's current expectations and forecasts on future events and include statements about the Company's expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.

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 forward-looking statements. The Company's actual results could differ materially from those anticipated in the forward-looking statements for many reasons and I encourage you to review the Company's filings with the Securities and Exchange Commission including without limitation the Company's Forms F-1 and 6-K which identify specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Unless required by law the Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect circumstances or events that are after the date of this call.

Additionally the Company will make reference to certain non-GAAP financial measures on this call including non-GAAP net income and non-GAAP net income per share. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Company's earnings press release published today which is posted on the Company's Investor Relations site.

With us on the call today are Gabi Seligsohn, Kornit's Chief Executive Officer, and Guy Avidan, Kornit's Chief Financial Officer. At this time I would like to turn the call over to Gabi. Please go ahead.

Thank you Allison. Hello everyone and welcome to our first quarter of 2015 earnings conference call.

Today marks a special day in the life of Kornit, our first quarterly conference call after becoming a publicly traded company. We believe that these calls as well as other opportunities to meet investors are important in order to allow you to understand how the Company is performing versus plan and where we are headed in the short and longer term.

On our quarterly calls we will summarize the main events that took place during the reported quarter, provide updates on progress with new products as they roll out to the market, describe significant business trends and events as well as meaningful customer penetrations. We will also guide on revenues and non-GAAP operating margin for the coming quarter.

I will begin today's call by describing the main aspects of our financial and overall business performance during the first quarter of 2015. I will then provide some color on the current state of the industry as it relates to us and provide some color on some of the activities of the second quarter. Guy will provide our guidance for the second-quarter 2015 towards the end of his prepared commentary.

As evidenced in today's published results we are clearly off to a very good start for the year. For the first quarter of 2015 sales amounted to $17.6 million, representing an increase of 33% over the same period in 2014. Net income on a non-GAAP basis for the first quarter was $1 million versus a net loss of $1.6 million for the first quarter of 2014. We were able to achieve such net income on seasonally low revenues as a result of a favorable product mix as well as lower than anticipated onboarding of new employees.

During the first quarter of 2015 we also showed a significant improvement of gross margins by about 1,200 basis points going from 33.4% in the first quarter of 2014 to 45.7% in the first quarter of 2015. This is especially meaningful in light of the fact that our first quarter is always seasonally our lowest revenue quarter. These financial achievements demonstrate the effectiveness of our focus on high throughput industrial solutions which provide customers with a cost-effective scalable solution.

We believe this transition also provides several benefits to Kornit including a higher average selling price on high throughput systems and higher consumption levels of ink and consumables due to the higher throughput. Higher ink sales continued to accelerate in the first quarter and were driven by the continuing strong trends towards mass customization and personalization with many of our online customers consistently quoting growth of 30% to 40% month. As well as, excuse me, the active approach we started taking towards ink consumption per system by effectively mobilizing our growing field service and application teams to help customers continuously extend system utilization by adding applications and maintaining higher system availability.

Turning to milestones in the quarter, our most significant event was the successful consummation of the IPO. I would like to take this opportunity to thank investors for instilling their confidence in Kornit and the management team. This is a burden we are committed to carry with pride.

Having built a strong management team in the past year which combines several Company veterans with several new faces has allowed us to achieve this great start for the year despite the significant efforts associated with completing the IPO. Not only did we execute well on the business we were also able to complete the small yet meaningful acquisition of assets from Polymeric Imaging of Kansas City, Missouri.

Polymeric had very useful patents which complement our strong IP portfolio and will allow us to further solidify our position as market leader in DTG market. Guy will provide more insight into the costs associated with this acquisition in his prepared remarks later in the call.

In January we attended the ISS exhibition in Long Beach. This year we showcased two very important platforms: the Paradigm II and the Avalanche Hexa.

The Paradigm was running at the show integrated with the screenprinting carousel performing very high-quality prints. Ever since the show we have performed several customer demonstrations around the world and have received multiple orders for the Paradigm.

Traction for this product continues to gain momentum as we introduce the integration of the NeoPigment ink with plastisol pace which are used by screen printers as a base layer. We believe that the Paradigm II will become a meaningful segue for screen printers into the digital world by allowing them to continue operating their existing businesses as they have done thus far but at the same time being able to cater for orders of limited quantities per design which they previously could not. With an installed base of over of over 80,000 carousels out there we believe the opportunity for Kornit is vast.

At ISS we also showcase the Avalanche Hexa which adds red and green to the common CMYK palette to further expand the printed color gamut. The Avalanche Hexa has been gaining ground with many Asian customers in recent months. We are also pleased to report that several such systems were recently installed at Teespring's up-and-coming Kentucky 105,000 square foot manufacturing facility.

Teespring is set to be one of the fastest growing e-commerce sites in history. This plant will be significantly ramped up in the coming months and carry significant business potential for Kornit. Teespring has said in an interview to Bloomberg that it plans to combine its current outsourced manufacturing with in-house capabilities.

In the past year we have seen a growing trend of global collaborations being formed between our customers in order to facilitate short order leadtimes in locations around the world. We are happy to be playing a very active role in connecting our leading customers in these instances and see great mutual benefits in doing so. Teespring is one such example whereby they have relied on manufacturing by some of our largest customers for Kornit printed outputs.

During the first quarter we also rolled out a tailored solution for several of our customers to be able to print on cationic dyed polyester. This capability marked a significant step forward in solving the technological challenge of dye migration on digitally printed polyesters. This area is an important focus for our technology development and application development teams and we intend to continuously and rapidly expand our solutions for this massive market opportunity.

The first quarter also marks an important milestone for our roll to roll program where we installed a second Allegro system for a leading customer. That system has been running flawlessly in high-volume manufacturing for the past two months and significantly improves cost per print through the introduction of recirculating heads which we have been testing internally for several months.

I am happy to report that the Allegro is now very close to becoming generally available for customers and that we are very actively engaged in several demonstrations with interested parties. These customers are especially appreciative of the unique capabilities offered by the Allegro which removes the need for several prepress and post-press steps that are required in the case of alternative digital roll to roll systems in the market.

Now let me provide more color and more insight as to our industry and the efforts we are making to take advantage of its evolution. As you may be aware Kornit generally addresses four customer categories: customer decorators, online businesses, contract manufacturers and brand owners. As a Company but equally as important as an industry, the adoption of digital printing technologies is at different phases in each of these customer categories.

The custom decorators that we address generally include screen printers and companies specializing in embroidery. Kornit offers these customers an opportunity to expand their addressable market by being able to cater for small and medium order sizes of particular designs with almost no overhead associated with the preparation process. Moreover, these customers are generally able to achieve higher average selling prices and margins running digital jobs.

From an adoption standpoint we see a strengthening trend towards digital and believe the addition of the Paradigm II platform will speed up that transition even further.

In the online business we see two types of customers: B2B and B2C. The growth rate of both types of customers has been exponential in the last couple of years and digital technology has truly become an enabler of the business model.

We see customers that focus on either business models but we also see a growing number of B2C customers moving to a fully or partially outsourced business model. Manufacturers and websites are looking to differentiate themselves in four areas: order turnaround time, minimum order quantities, product quality and design complexity and obviously web traffic management.

Kornit offers a solution that caters very well for the first three elements. As this business progresses and as global alliances are formed we are looking to play an even more meaningful role in ensuring that equal quality is achieved in all manufacturing facilities of a given web store wherever they may be situated around the globe.

As for contract manufacturers we have decided to strengthen our focus on delivering on their needs. More and more brands are demanding manufacturing of smaller batches of particular designs and we believe digital technology is well suited to support this trend. We have started hiring people for these key accounts in order to transition our sporadic success with contract manufacturers into meaningful ongoing customers.

One such effort is already yielding results whereby creative prints imitating tears on thousands of jeans are being made by Crystal in China for next in the United Kingdom. Crystal is China's third-largest jeans and denim manufacturer and works with all leading brands.

Finally in the case of brands we are also starting to engage more closely and plan to hire professionals that have experience serving the needs of brands. These strategic accounts will be engaged in joint development and proof-of-concept with brand R&D teams. Collaborative efforts with the key accounts will create a push-pull business effort linking between brands and particular contract manufacturers looking to utilize the benefits offered by digital technology.

We believe the trend towards fast fashion will continue to gain momentum and believe that digital printing is an enabling technology for such transitions to succeed. As these activities with contract printers and brands gain momentum, we will provide updates on a more regular basis.

During the second quarter we will be attending two significant trade shows: FESPA in Cologne and ShanghaiTex in China. This year's FESPA is considered a big FESPA which takes place every three years.

At FESPA we plan on having very significant presence this year. We will be showcasing the Allegro roll to roll, the Paradigm II in conjunction with a screenprinting carousel, the Avalanche Hexa and the entry-level Breeze.

In addition our commitment to innovation across applications will be featured at our FESPA booth. This includes very high-quality NeoPigment-based industrial applications of jeans printing, dark cationic polyester printing, industrial discharge printing plus advances in color management and print quality.

ShanghaiTex is also an important event for us in light of the very rapid growth we have been enjoying in China in the past couple of years. These two events will bring an increase to our operating expenses during the second quarter, money which we are happy to invest.

Given this lower than anticipated new employee intake during the first quarter we plan on catching up during the second quarter. Given the momentum we have seen in the last few months and with the business' ability afforded by our close customer interaction we feel very positive about the way 2015 is shaping up.

And with that let me now turn over to Guy for a closer view on the numbers and our guidance for the second quarter of 2015. 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 measures as well as non-GAAP pro forma results.

Our first-quarter non-GAAP pro forma results reflect adjustments for the following two non-cash items: stock-based compensation expenses which totaled $440,000 and depreciation and amortization expenses relating to the acquisition of assets from Polymeric Imaging in the amount of $638,000 and continued amortization of IP acquired in 2010 in the amount of $31,000. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the investor section of our website.

First-quarter revenue increased 32.8% to $17.6 million versus $13.3 million in the prior year. Higher revenue was driven by several items in the quarter including higher sales of high throughput systems, a higher volume of ink and a stronger contribution from our services business.

Moving to revenue by geography, 55% of our sales were from the Americas, 24% from Europe, the Middle East and Africa and 21% from Asia-Pacific region. As in previous quarters the Americas remained our largest territory.

Accordingly, our two US distributors contributed 44% of our overall revenues versus 29% in the prior year. It is important to note however that customer concentration is not indicative of our end-users as we supply our product mainly through distribution agreements.

Moving to profitability, non-GAAP gross margin in the quarter was 45.7% versus 34.3% in the prior year. On a GAAP basis gross margins were 45.1%.

Higher margins were the result of several factors in the quarter including a higher mix of high throughput systems, an increased volume of ink and leverage on higher sales. Higher service revenue also benefited our gross margin as the loss narrowed in this business as we continue to build towards profitability. Kornit's services remain on track and we continue to target breakeven in 2016.

Moving to OpEx items, I will now discuss these items on a non-GAAP basis which excludes non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation in our press release. Adjusted research and development was 15.5% of sales or $2.7 million compared to 16.1% of sales, or $2.1 million in the prior year. Higher R&D expenses reflect our continued focus on new product releases as well as development of several upgrade kits and capabilities for existing products.

Sales and marketing in the quarter were $2.6 million, or 14.6% of sales compared to $2.9 million or 21.6% in the prior year. Lower sales and marketing as a percentage of sales and in absolute dollars was a result of higher marketing expenses in the prior year mainly related to a unique marketing event that did not repeat this quarter.

In addition first-quarter sales and marketing expenses were lower than expected as we brought on a lower number of employees than anticipated. General and administrative expenses in the first quarter were $1.4 million or 7.7% of sales compared to $1 million or 7.8% in 2014. Higher G&A in the quarter result predominantly from management headcount additions including new CEO, CFO, VP, Product Development and VP, HR.

Headcount as of March 31 was 269 employees. The increase in personnel was primarily attributed to addition of service and support personnel as well as a few new positions in R&D. Our strategic focus is to take advantage of the growth opportunity in the transitioning analog to digital printing on textile market.

To that end we have made investment in our engineering sales and services team. We will continue to add new engineers as well as additional sales application and service personnel to further develop and strengthen our leadership position in the fast-growing DTG market and facilitate our penetration to the roll to roll market.

Non-GAAP net income for the first quarter was $908,000, or $0.08 per diluted share, an increase of $2.5 million versus the year-ago quarter. GAAP net loss was $201,000 or $0.02 per share on a diluted EPS basis compared with net loss of $1.7 million or $0.19 per share for the year-ago quarter.

Our financial expenses this quarter were higher than our normal financial expenses by more than $300,000 due to the unusual strengthening of the US dollar compared to the euro by more than 11%. Net cash provided by operating activities was $1.4 million this quarter compared to $0.3 million cash yield in the prior quarter and net cash yield in operating activities of $1.7 million in the year-ago quarter.

Cash balances at quarter-end were $4.6 million compared to $5 million as of December 31, 2014. The decrease in cash balances in the first quarter was mainly attributed to an investment activity in the amount of $1.5 million including the purchase of Polymeric Imaging certain assets.

Turning to our guidance for the second quarter of 2015, we expect revenue to be in the range of $19.5 million to $22.5 million and non-GAAP operating income to be in the range of 5.9% of revenues to 9.9% revenue. As we mentioned in our remarks, we're expecting to accelerate the hiring of additional personnel to meet our top-line and product long-term goals and increase our marketing expenses in Q2 due to the FESPA tradeshow.

Therefore we expect an increase in our OpEx during the second quarter. Adjusted through the IPO share count in the second quarter will increase by 8,165,000 to a total amount of 32 million fully diluted share count.

I will now transfer the call back to Gabi.

Thank you. And with that we be happy to take any questions.

(Operator Instructions) Ken Wong, Citi.

Hey guys, congratulations on the first quarter. Gabi, you mentioned seeing good traction across your high throughput machines.

I recall in 2014 you guys did something around 60% high throughput. Was the mix in Q1 consistent, a little better, any color there would be great.

Sure. We're trending upwards and as we have mentioned also during the roadshow we expect to transition much more meaningfully in 2015 to above 85% and even 90% during the year to the high throughput systems. And we see that trend already happening according to plan in the first quarter.

Got you. And I guess another trend I noticed was your APAC mix was up to 21%. I believe in the past it was more like mid-teens.

And there are a lot of kind of clothing manufacturers out in that region. Just wondering is this sort of a one-quarter blip here or are you actually seeing a little more traction in the Asian markets?

I have to say that I'm very pleased with the progress in Asia. We're gaining more and more momentum there. Even when we look from one year to the next on a revenue basis that area of the world is growing right now at the fastest pace.

I'm actually happy to report that there is a widespread adoption of multiple types of systems. The Avalanche Discharge is enjoying a lot of traction right now. The Hexa that I mentioned in my prepared commentary also going very well.

China is increasing also quite meaningfully. And so I'm also excited about the fact that not only will I be visiting FESPA but I'm also going to be at ShanghaiTex.

So Asia in general is doing better. China is doing quite well, Sri Lanka is picking up. That region is doing very nicely.

Got you. Then last one for me and I will pass the mic.

On the gross margins you mentioned making some progress in terms of your march towards getting that breakeven. Can you elaborate on some of the things that you guys have already done to start this process and what else needs to happen over the next 12 months or so to get to breakeven?

Sure. So this relating to services I understand.

On the service side I think first of all as we have mentioned in the past we're growing that group very rapidly. The growth obviously is associated with increasing fixed cost by adding new engineers, field service engineers, application people and infrastructure.

But what's been happening at the same time is a process that we started more than six months ago to focus a lot on offering customers a variety of service contracts as well as a variety of different services. And what we saw this quarter which is meaningful for us is that we're seeing revenues increasing. And obviously that being applied against fixed cost is improving the overall net results, meaning it's narrowing somewhat the loss that had been there.

So really it's a matter of increase in business. It is growing quite rapidly and I'm very pleased to see that because it really means that what we understood is correct. Customers are looking to buy services from us.

They see the benefit, they understand the value. And now that we're adding a lot more professional headcount in that area I see that continuing to grow. And we feel very confident in our ability to breakeven in the first half of 2016 as we have said in the past and after that turn it into profitable business.

Great, thanks a lot, guys.

Joseph Wolf, Barclays.

Thanks, guys. I guess just -- I misheard the OpEx.

Could we just repeat that quickly? I apologize.

Operating expenses?

The guidance for the OpEx.

During the quarter?

The guidance for the (multiple speakers)

We did not provide -- we didn't provide (multiple speakers). So operating margin if that's what you're asking about.

Yes.

Guy, do you want to reiterate operating margin?

In terms of --

Percent of revenue as you had guided.

In terms of percent -- I'll actually start from the revenue. So we guided between $19.5 million to $22.5 million in revenue and also between 5.9% of revenue to 9.9% of revenue in terms of non-GAAP operating income.

Perfect. This is the first quarter you guys have given guidance. And so I'm wondering just if you could talk to us a little bit about the range on the revenue side.

Is it based on your look at the deals right now, what would tighten that up? I guess we're just at the beginning of May so one month is done. Is there any specific or it's a bunch of things up in the air including the expansions into new countries and perhaps some big new builds by some of your bigger customers?

Sure. The spread is not that big. It's 7% in either direction so it is a range of 14% not huge.

That relates to the fact that we on the one hand we see good traction as I have mentioned. We're early in the quarter, five weeks into the quarter. As we said we feel very good about the quarter but I think we need to leave ourselves space for revenue timing issues.

At the same time as I said momentum is quite good. So that kind of range I think is comfortable for us to provide and give everyone an understanding that revenue timing could impact how we finish a given quarter.

But again the feeling is quite strong about where we are right now. So that's what's behind that.

Could you just give us an indication I guess in the first quarter that you just reported and I guess within the guidance what do you guys consider to be a large order from one customer? And did you have any of those in the first quarter and do you expect any in the second quarter or throughout 2015?

So large orders are usually multiple system orders and it depends what kind of system that particular customer is buying. As you know the prices of our systems are pretty well known because they are available online. And so it depends, if it's a high-end system it could be, if it's a few systems, high-end systems it could be well over $1 million.

If it's a lower end system it would be a little bit less than that. So we really pay attention to the number of units that are being ordered as a function of is it a meaningful order for us or not.

So if you look at that are those significant with a couple of customers right now?

You know again I mentioned I gave one example which was Teespring which is multiple systems so I used that as one example. I didn't provide any other examples in my prepared commentary but there are -- the good news is that there are several customers that buy multiple systems. There are several new customers continuing to come online.

So it's a combination of those things. As far as what's meaningful for us as I said it's multiple systems and it could also be a meaningful customer penetration, which is someone that is ramping up rapidly and we see great potential coming as a result of multiple systems being installed. These are the things that you will hear more about from us as we talk in the future.

All right, thanks. I'll pass it along.

Patrick Newton, Stifel.

Yes, thank you, good afternoon. Congratulations Gabi and Guy.

I guess starting on the roll to roll market you discussed your progress in entering that market. Could you remind us again of the number of Allegro beta customers, the number of printers in the field?

And then as you sit here today you talked about approaching GA for the product being close. If you could help us understand what close means and how we should think about feathering in revenue into 2015.

Sure. So as we said before we have four systems out there.

One of the things that I had mentioned in our prepared commentary was that one of those customers has taken a second system. And that was an upgraded version that we wanted to see performing for a few months in the field. As I mentioned it is performing flawlessly not only from a reliability standpoint but has significantly improved the cost per print and that is very much related to the efficiency afforded by the recirculating printheads which are relatively new technology on our systems.

As I had mentioned to people in the past what's very important for us as we launch new products is to launch products when they are at a stage of maturity which is in line with what Kornit represents for the market. Being at FESPA and showing the system, showcasing it is part of an overall marketing effort.

We are in the process in the last three months of multiple, multiple customer demonstrations that are going quite well. And general availability is set to be ready before the end of the first half meaning access but we expect order traction to start increasing and start placing more systems out there. So you can start -- you can expect starting to roll in some initial revenues primarily in the second half of the year.

Great. And then on the Teespring commentary, I'm just trying to understand it, as this customer moves its production in-house, does this represent new business for you? Or is capacity simply shifting from outsource players that are Kornit customers to Teespring that is also a Kornit customer?

Well I will try to choose my words carefully out of confidentiality to the customer and I will reiterate what's been said publicly by Teespring. What they are talking about and many customers are going in the same direction is a hybrid business model whereby they have their own manufacturing facility but at the same time they leverage a combination of contract manufacturers. They started their business which has been growing as I mentioned probably one of the fastest ever e-commerce business in history.

The growth has been with the use of contract manufacturers. Now they have decided to combine the two. The Kentucky facility is a great indication.

Once that ramps up it's a huge opportunity for Kornit. But what we're also doing is hooking them up with fulfillment around the world, our leading customers in each country that they want to operate in. That linkage obviously is driving business for Kornit as well because we're adding capacity requirements in those locations.

It's a recurring revenue opportunity obviously from the direction of inks and consumables. And as demand for those particular manufacturers who are our customers grows actually they will need even more systems.

So we see that happening on both sides. On the one hand a very aggressive plan from Teespring that they've communicated publicly. Their recent interview into Bloomberg provided a lot of indication so I'm able to reiterate that.

They have an aggressive internal plan as well as fanning out around the world. And for us as I said this is extremely strategic because we're seeing more and more of these situations. Customers are really coming to us and asking us to hook them up more and more.

As I have alluded to in the past as well I see that we can play an even more meaningful role not just of creating relationships between customers but also offering advanced software solutions. And we have many of those in mind that we will be adding over time in order to allow these fleets to operate on a global basis in a very efficient way.

Great. And just one more if I made for Guy is given the commentary and leaving room for revenue timing embedded in the June quarter guidance, can you remind us what normal linearity looked like in any given quarter and what it looks like in the March quarter?

You mean linearity within the quarter itself?

Correct.

Well, we're not going to provide details of how the quarter progresses within. The guidance is something that we stand very strongly behind. We are -- I would say as a qualitative statement we're progressing well in this quarter and given the visibility that we have we feel very strong about the guidance that we've provided.

Great. Thank you for taking my questions. Good luck.

Bobby Burleson, Canaccord Genuity.

Yes, good afternoon and congratulations on the strong results. So I just have a couple of quick ones.

It seems like some of your competition or one competitor in particular in the high throughput category has been less vocal recently. And I'm wondering just from your perspective what some of the challenges might be for competing digital solutions that may have led to some potential difficulties there and how that relates to your wet-on-wet process?

So you're talking about difficulties that the competition is running into? I just want to make sure that I'm clear on the question.

Yes, I think there's been some pretty heavy marketing coming out of one of your competitors and just over the past few months it seems like they've really quieted it down and it seems like there might be some quality issues there. I don't know how much you've heard but I'm just wondering if you can remind us what the key real barrier is for competition when they try to deploy a digital solution without a wet-on-wet process like yours.

Sure. Let me walk you through that.

So the attempt to enter the industrial area obviously is for good reason this is a very good growing business. The problem is inherently for alternative technologies is that they are not able to combine the pretreatment process with the actual printing itself.

What Kornit offers truly unique and the efficiency level which is afforded is very, very significant. Customers, and we have our customer testimonial video on our website that I encourage investors to listen to, talk about exponential savings of time associated with printing on Kornit versus the competition.

But it's not only that. It's not only the issue of being able to combine pretreatment in the process itself. It's also the process quality over time, being able to run thousands and thousands of shirts or garments per day at a very, very uniform quality is also another issue.

So it's a combination of getting an efficient process where they have very inherent inefficiencies, very strong inherent inefficiencies as well as difficulty achieving a uniform stable process over lengthy manufacturing runs. Our customers, many of them these days, are running thousands and thousands of shirts on a 7 by 24 basis with many of them actually focusing either on one-offs or 5 or 10 garments per order.

If you think about that manufacturing variability and what's associated with driving so much work in progress through the systems you really need to get the process well dialed in. Here the combination of the NeoPigment ink with the very good inherent capabilities of pretreatment being integrated and the robustness of the platform that we have, these are true differentiators. And I think that's why competition is having a hard time in really achieving meaningful results.

Great. Thank you for that thorough answer.

I just had a follow-up on the Allegro commentary. If we assume that some revenue starts to get layered in even modest amounts in the second half, just wondering directionally what your thoughts are in terms of materials mix without obviously holding you to any absolute percentage.

Well, I think first of all obviously as everyone I think understands the transition to roll to roll being inherently a wide format application consumes a lot more ink. I think that what you're going to start seeing, first of all obviously we're going to start turning some systems into revenue in the second half of the year. But one of the most important things and we have a lot of experience with this is the pace of ramp up.

Customers will ramp up production not just as a function of the system working in a production conducive manner but it's also associated with the order intake that actually they bring to the system itself. So I think as we have seen also with direct to garment there should always be some delay between the placing of systems, even sometimes the recognition of revenues, and significant ramp up of the amount of ink that's being consumed.

We see this obviously is another meaningful led to our business. The consumable aspect is going to be meaningful. As you know average selling price of these systems is also on the high side.

But as we have said in the past for the most part we see on an annualized basis we see ourselves in the same range that we have been which has been pretty much 60/40 in favor of systems and services continuing for the foreseeable future. And as we have said in the past it can be somewhat different from one quarter to the next.

Okay great and just one final quick one in terms of Allegro, do you see Allegro customers being more likely to sign two-year service agreements or is there no distinction that can be drawn there?

It's a little bit too early to say. I think that one of the things that you realize, and I've been doing capital equipment for many years, one of the things that is meaningful when you think about extended warranty being purchased with the system itself is that many times people need to understand how a system performs and what is the running cost of it.

So some of them are on the cautious side and they say you know what I just want to guarantee a good price for second year. Let me purchase that in advance. Others will say let's see how well we run and let's understand what the running cost is going to be.

So I think we're going to see a mixed bag but I have to admit it's a bit too early to predict how it's going to play itself out. We will make effort, obviously, as much is possible to sell second-year warranty with systems but it's not guaranteed that that will be the case.

Understood. Thank you.

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Thanks. Just a question on a comment that you made about headcount.

It sounds like if I heard you correctly there were perhaps fewer hires than you had maybe initially expected or planned. What are some of the dynamics there? Obviously you've had a lot on your plate, but how should we think about headcount going forward maybe over the balance of the year?

We have a plan to grow headcount quite significantly this year. We're overall for the year our plan has not changed. So it's still the same plan.

And as far as the speed of employee intake, that's a function of a few things. First of all when you're hiring people and we're trying to hire the best people possible, you need to dedicate sufficient time in order to work through the various candidates that are coming.

The good news is that especially since we've gone public people really want to come work for Kornit because they recognize the huge potential this Company has. So I think first of all a very enthusiastic about the number of applications we have for every job. At the same time we're taking this process very seriously and we want to make sure that we hire the right people.

The other part obviously is management attention, is being available to run this process as efficiently as possible. And the third thing is that we're growing our HR department which plays a very critical role.

You need to also realize this is a global effort. We're actually hiring around the world, not just here in Israel. So I expect us to meaningfully catch up by the end of the second quarter and that's why I decided to mention that in our prepared commentary as did Guy.

At the same time we're very happy and we feel very good about the operating margin that we have quoted in the range of guidance which really speaks very well for on the one hand increasing our expenses, on the other hand being able to show very nice profitability as we grow. And that's what we're committed to: growing the expense but at the same time remaining nicely profitable as we do that.

Got it. And next question is on FESPA, the upcoming FESPA show.

And I realize this is a different show, a bigger show than last year. But I'm just wondering if you look at last year's show how was it from an order taking standpoint? And where I'm going with this is I'm trying to anticipate is this a very significant show, Gabi, for orders for you particularly in that it's a big FESPA?

So you know what happens and the dynamics that happens with trade shows especially with the big ones is that those deals that get closed at the show or maybe a little bit after are actually deals in the making that we already see. Many people like to come to the show because they want to look around, they want to see the systems, they want to meet executive management and they know that they will be able to have access to executive management.

And so yes there is anticipation in the printing world and that's not just unique to direct to garment or roll to roll, it's I think all printing behaves this way. These shows are meaningful, but the good news is with the place that we are at right now given our distributors around the world, our channel managers, etc., we have access to understand and expect and foresee who's going to come to the show.

So you should treat the shows as a meaningful milestone but at the same time it's a continuation of an already existing sales process which tends to materialize sometimes at the show or right after the show. So I would say the answer is yes, this is a meaningful show. It plays an important role in achieving results but being able to guide is a function of the fact that we actually know what to expect.

It's not that we come to the show we say hey, guess what, here's a new customer that we never knew about. That's not the case. These are really events that support an existing process and maybe help things materialize and people like to look at that milestone many times as an important one for them as customers.

Okay, and then a final question for me just relates to service margins. It sounds like you're making good progress in this area.

How should we think about the progress? Because I assume you also have to add some headcount and maybe there's some bumpiness to the progress and the improvement you're making. Or do you anticipate this is going to be pretty consistent progress as you move toward breakeven in 2016?

As you know we don't break service revenues down outside of systems, so it's systems and services together. But directionally just to tell you we've seen good traction, good progress, but one of the most important things assigning of contracts.

Contracts in themselves turn into recurring revenues. The more contracts we sign the more meaningful the predictable part of the revenue becomes.

I see this continuing as a general trend. Am I able or wanting to draw a line right now? Not wanting to it this point in time.

But I see exactly what I was expecting to see which is a lot more traction around services, a lot more order intake, a lot more customer engagement and what we have done at the same time and Guy was mentioning we're adding service products, we're adding upgrade capabilities, we're adding software as we go. The turnaround of parts.

Everything is really improving there. So we're making the right steps in the right direction. And again I will reiterate the fact that we believe we're going to turn it into breakeven in the first half of 2016.

Okay, thanks a lot.

Brian Drab, William Blair.

It's Brian Drab. Hi, Gabi, hi Guy. Congrats on a great first quarter here.

So at this point I think we've touched on just about everything. But I did want to ask you we've been seeing a slowdown in CapEx, especially in North America, especially in March and it looks like you're not seeing that in your business. Is it fair to say that you're not seeing customers pullback?

Historically the United States has been a region in which you generated more sales than any other region. And I guess I'm wondering if we didn't have this type of environment do you think we would have seen even stronger growth? Are you seeing any customers defer purchases?

No, what we're seeing in the US I think the US is the leader of the trend towards wet-to-print. And web-to-print as a business is just growing so rapidly. So I would venture to say that it's a branch of its own right now.

I don't know the data points you're looking at on the CapEx so it's tough for me to refer specifically to what those are. But I think that what's helping the US continue to move forward is this wet-to-print model that has become so effective. But also the steps that we are making into the screen printing and embroidery market where people are realizing as I had mentioned that this business model offers them the ability to really expand their business and improve their margin profile.

And case in point the dynamic is completely different, they are able to cater for jobs that they couldn't cater for before. They understand now the margin opportunity that's associated with it. And now that we have made a big step forward on the technology with the Paradigm II we're making it more accessible.

And just to explain some of the participants of the call may have not understood what I was talking about when I spoke about the ink being incompatible now with the plastisol paste. And so what that talks about is that when you are actually embellishing a dyed garment you need to put a layer of white color which is primarily done in the US using a paste called plastisol.

In the last six to eight months we have perfected that capability. And what we've been showing customers over the last three months that it works really well in conjunction with our NeoPigment ink which is helping us further push that product into the market. So I think we're seeing robust behavior in the US market and as I mentioned Asia-Pacific is doing really well.

The adoption rate is very good over there. We're adding more and more headcount in that region right now, both marketing and sales which is really helping us as well.

And finally I would say is I had mentioned the addition of application people and application know-how since I joined the Company has become very meaningful. It's helping us drive customers to consume more inks and consumables because we're adding applications as we go.

So broadening the application span is also an important aspect of that. So these other measures we're taking and in general we feel quite good about where the market is.

Okay, that detail is really helpful. I don't think you're really exposed to some of the trends that we're seeing in other companies. But in the industrial world you are seeing people not buy replacement filters or even holding back on the purchase of screws and washers right now, and I think with a more consumer-driven business you're not seeing that.

So one other question I had for you is the visibility, you talked a couple of times during this call about the confidence that you had in the revenue forecast for the second quarter. And I certainly believe that having talked to in the past I think that you said you typically have pretty good visibility three months, even out to six months.

But to put a really fine point on it for the second quarter what percentage of the revenue that you're going to book between today and June 30 do you have either in backlog or in a sales pipeline, etc.? Could you comment on that?

Yes, I will reiterate what I said before. We're not going to comment on where we are exactly within the quarter. But what we do continuously is analyze where we are internally.

And we feel good about where we are right now. And we feel good about the visibility that we have in the quarter.

But it's a little bit too granular for us, mostly for competitive reasons, to talk about where we are. But again I will reiterate with a strong message we feel very comfortable with the guidance that we provided today and the ability to achieve that guidance.

Okay. I'm not sure that you understood my question. I'm just wondering do you have backlog and if so how far out is that go or on order book how far out does that go?

I don't want you to reveal anything. I'm just wondering in general what is your visibility and how far out does it go?

Yes, so of course we have backlog, no question about it and meaningful backlog. And it takes us as I had said in the past backlog is for the quarter and into the next quarter after that, part of it as well. As we progress in the quarter, obviously, we build a backlog for the next quarter to start it on the right foot.

Yes, so I guess is it fair to say that you'd have to see some meaningful order cancellations for you not to hit the revenue guidance then?

I'm happy to say that this Company has not seen meaningful order cancellations in the past. And as we had said in the past our sales process is very robust in the sense that not only did we just receive the order and celebrate the receipt of the order, we actually evaluate and understand the particular customer that we're dealing with and how serious they are standing behind that.

That's why we don't tend to bring into our order intake orders that are shaky or not meaningful that we could ultimately recognize. So we feel very comfortable with the validity of the pipeline that we build as we go.

Understood. I guess the point I'm just trying to work out here is I think we should have a very high level of confidence given that you have that backlog and we've got seven weeks left in the quarter.

And then you're not going to comment on consumables growth versus systems growth specifically or you're not going to quantify that. But are you potentially going to tell us if consumables grew faster than systems or about the same rate as systems, any color?

So maybe it's important that you're raising that. So we've decided that we will not be breaking down the types of revenue on a quarterly basis.

We will provide that information on an annual basis because we do know and understand that that's important for our investors. But for competitive reasons we've decided not to break it down on a quarterly basis to remind everyone the breakdown on an annual basis will be systems and services versus inks and consumables.

We see behavior in the quarter which is per our expectations as far as the breakdown between the two. And the ink consumption, one of the important things in the Company is that we're not passive about it. We don't just sit and wait for the orders but actually becoming more and more proactive.

That is as you know quite a predictable line of business. And with the knowledge that we built over the last six months we have a much better understanding now of the dynamic associated with it.

And again it came within the expectations what we had expected for all sides of the business. That's what I'm able to provide right now.

Okay, thank you very much.

At this time I would like to turn the conference back to Mr. Seligsohn for closing remarks.

I want to thank everyone for joining today's call. I look forward to meeting you at various conferences and looking forward to also seeing you on the next conference call. Thank you for attending the call.