Kornit Digital Ltd (KRNT) 2015 Q4 法說會逐字稿

Good day, and welcome to the Kornit Digital Ltd Fourth Quarter 2015 Earnings Conference Call. As a reminder, today's conference call is being recorded. After prepared remarks, we will provide instructions to conduct a question-and-answer session.

At this time, I'd like to turn the conference over to Allison Cain of ICR. You may begin.

Thank you, operator, and good afternoon to everyone. 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 and strategies; statements of preliminary or projected results of operations or of financial condition; and all statements that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future.

Forward-looking statements are subject to known and unknown risks and uncertainties, and are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by 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 final prospectus, which identifies specific risk factors that may cause actual results or events to differ materially.

Any forward-looking statements are made as of the date hereof, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

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

On the call today 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 fourth quarter and full year 2015 earnings conference call. I will begin today's call by reviewing aspects of our performance during the fourth quarter. I will then elaborate on our main achievements for 2015, and review elements of our plans for 2016. Guy will then walk you through the full financial details for the fourth quarter and for the year as well, and state our guidance for the first quarter of 2016.

The fourth quarter of 2015 was a great way to end yet another year of steep growth. Fourth quarter revenues, which came in at $25.5 million, or the midpoint of our guidance, represented 35% year-over-year increase. Overall, full year revenues for 2015 of $86.4 million represent 30% year-over-year growth, in line with our CAGR for the past several years.

Growing our OpEx by close to 25% from 2014 to 2015, we were still able to generate a non-GAAP net income of close to 11%. This achievement clearly illustrates the strength of our business model, even before factoring in operational efficiencies, which will come at a later stage of our evolution as a company.

2015 included many significant achievements for Kornit. First and foremost, we successfully completed our IPO in April. We announced general availability of the Allegro in the middle of the year, and placed several units in several accounts in multiple regions during the second half of the year. As previously stated, the unique offering represented by the Allegro offers us an opportunity to address an additional market of over $1 billion.

During the year we continued to execute on our strategy to shift to industrial applications, and met our target of more than 90% of our systems revenues coming from the industrial part of the market. 2015 also saw service starting to take shape as a meaningful business. Service revenue grew throughout the year, and in light of the expanded infrastructure and headcount, coupled with value-added service packages which we now offer, we are confident that our customer experience will continue to improve. While it was still not profitable during the year, we believe that with a well-defined list of value-added services and upgrade opportunities, we have set the stage to breakeven in this part of our business during 2016, which we are certain will become a profitable part of our business in years to come.

Next we also saw a significant increase in the trend towards localized fulfilment on a global scale, with many of our existing and new customers becoming multi-system accounts. The most recent example was our announcement regarding Amazon, who acquired an existing customer called Woot, and transformed it into a fast-growing business under the guise of an initiative called [Merch].

As the trend towards mass customization continues to gain momentum, we expect to continue and partner with leading brands and businesses who will rely on our existing and future technologies, as well as on our strong global presence for their needs. The early demonstration of our Vulcan platform in November at ITMA Milan, strengthened our conviction that this product is truly a breakthrough.

As stated on several occasions, the productivity and cost of ownership offered by Vulcan significantly expands our addressable market and opens the path to mass customization for the retail market. Not only were we able to secure three beta sites with leading customers for the first half of 2016, we actually walked away with demand for multiple systems, which we intend to place during the second half of 2016, as that system ramps up and transitions to its general availability phase.

During the year we also expanded our presence in several parts of the world. We opened an office and demo facility in Shanghai. We also opened an office and demo facility in Florida in order to cater to the Latin American market, which has been an underserved market for us. In the fourth quarter we also inaugurated a state-of-the-art demo facility in Dusseldorf, Germany.

Lastly we completed the successful onboarding of close to 100 new employees across all parts of the Company, all of whom bring with them extensive knowledge and expertise to several fields of activity. We are excited to expand our capabilities and are grateful that the demonstrated success of Kornit has been able to attract top talent in our industry. I'd like to thank all of our new and existing and team members for their hard work in driving success of our Company.

Before reviewing our expectations in 2016, I wanted to take a moment to zoom out and provide some context of high-level operating and financial trends of the past couple of years. June 2013 we have grown revenue by approximately 30% per year, and while there has been some quarter-to-quarter volatility, when looking at a longer time period, you will notice consistent top-line performance.

This is driven by several factors, including a mix transition to higher-priced point industrial systems, a higher volume of ink and consumables as our install base has increased, and the launch of our service business. We have also been successful in expanding profitability, despite additional cost to build out a global infrastructure. This is demonstrated by the 560 basis point improvement in operating margins since 2013 to just over 12% in 2015. There have been several factors driving higher profitability, which include a mix shift to high throughput systems and the scale on higher overall volume. Bottom line, this has led to an 80% CAGR of operating income since 2013.

With this as a foundation, let's now turn to our plans for 2016. From a market perspective, we are seeing continued growth in the DTG and roll-to-roll markets. For Kornit, our strong market position in DTG and the momentum we are gaining in roll-to-roll, combined with our expanded infrastructure and very rich product roadmap, we believe the stage is set for another year of strong growth and profitability.

In our existing DTG market, we will be rolling out several new versions of existing products throughout the year, which will offer enhanced productivity, improve print quality and ease of use. These will be followed by extensive software and hardware upgrade packages, which we believe will be met with enthusiasm by customers who will appreciate investments made into extending the capabilities and usable lifetime of equipment they previously purchased from us.

During 2016 we plan to take advantage of our chemistry and application capabilities, and introduce products which will expand our application reach to more segments in the clothing and decor markets. One such market is the expansive dyed polyesters market, which is primarily used for sportswear.

Turning to the Vulcan platform, we plan on completing three early customer interactions in the first half of the year. We have carefully selected three very different customers in order to provide us with a wide variety of product circumstances. These early engagements include a large existing web-to-print customer, a large existing fulfilment shop for multiple websites, and finally a brand owner with extensive internal screen-printing capabilities looking to replace meaningful parts of their production with digital printing.

Given the strong demand and engagement which flowed from ITMA in November, we have a very solid pipeline of customers requesting receipt of systems, once we announce general availability around the middle of the year. We expect to recognize meaningful revenue from this platform during the second half of the year, as we proliferate the platform to multiple customers.

On the roll-to-roll front, we plan to continue to demonstrate the significant process advantages offered by our unique one-step solution. In recent months we have seen existing players in the roll-to-roll market contemplating alterations to their existing dye sublimation and reactive dye printers in order to offer pigment-based solutions. These efforts strengthen our conviction that there is a real need for pigment-based solutions. While these players are attempting to combine several manufacturing steps by lining up some of the needed pre- and post-press steps by linking several machines together, they are not able to provide the high-quality, cost-effective single-step solution offered by our proprietary process.

Equally as important, it is our understanding that no other company has achieved the maturity of inks and consumables necessary to be able to print at high quality, using pigments on wide format fabrics. You should expect Kornit to differentiate itself in the growing field of roll-to-roll by continuing to offer new capabilities during 2016 and beyond.

A key initiative for 2016 is to significantly increase the number of strategic collaborations we have with leading customers and brands. The onboarding of strategic account managers, which we started in [2015] and will continue through 2016, is already starting to pay off. Accounts which we define as strategic are respected leaders in their field. They are generally companies who have started to view digital printing as a viable alternative to existing manufacturing techniques, and who want to partner with us in order to qualify our technology for a wide range of applications as possible with as many of their contract manufacturers as possible as well.

In line with our vision of playing a key role in the revolution of the supply chain of printed textiles, feedback thus far has focused around the potential of offering a fast fashion print engine for these companies. As I have stated on many occasions, we plan to turn our services group into a profitable part of our business in the longer term. This is a process which takes times, and requires the introduction of service products, knowledge-sharing platforms, offering of extensive upgrades, and hiring of service and application professionals throughout the world. The progress we have made in this area during 2015 will enable us to turn services into a breakeven line of business during 2016.

Finally from an operational standpoint, we plan to selectively grow our infrastructure and headcount, doing so at a much smaller extent than in 2015.

Turning to our plans for the first quarter, during the first quarter we are engaging in a number of meaningful trade shows, two of which have already taken place. During January, we attended Heimtextil in Germany, and ISS in Long Beach. The first is a show focused on the office and home decor market, while the second is focused on the garment sector. Both shows generated lots of good leads and opportunities.

The next meaningful show will be FESPA in Amsterdam, which is scheduled to take place in early March, and for which you should expect us to announce new additions to our product lineup. As you may be aware, the first quarter of the year is seasonally our smallest in revenue. Accordingly, the guidance which Guy will provide later in today's call will be sequentially lower than the fourth quarter of 2015, but nevertheless show nice growth versus the first quarter of 2015.

Given the aggressive plan I just laid out for the year, which combines several compelling roadmap items with our strong market position, we are confident in our ability to continue to grow strongly during 2016. And with that operator, I will now turn the call over to Guy Avidan, our CFO, for a closer look at the numbers. 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 fourth quarter non-GAAP pro forma results reflect adjustment for the following three items. Stock-based compensation expenses, which total $757,000; depreciation and amortization expenses relating to the acquisitions of assets of Polymeric Imaging in the amount of $62,000, and continued amortization of IP acquired in 2010 in the amount of $53,000; and settlement of an intellectual property dispute with Direct Imaging Systems Inc., as well as with [these with the] Office of the Chief Scientist, in the aggregate amount of $255,000.

A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earning press release issued earlier today, and on the Investor section of our website.

Fourth quarter revenue increased 35.1% to $25.5 million, versus $18.9 million in the prior year, and increased 16% versus the prior quarter. Higher revenue was driven by several items in the quarter, including higher sales of high throughput systems, higher volume of ink, and growing revenue from the Allegro system addressing the roll-to-roll market.

By geography, 59% of our sales were from the Americas; 26% from Europe, the Middle East and Africa; and 15% from the Asia-Pacific region; compared to 57%, 23% and 20% at the fourth quarter of 2014, respectively.

As in previous quarters, the Americas remain our largest territory. Accordingly, our two US distributors contributed 24% of our overall revenue, compared to 39% in the prior year. For the year our annual revenue for 2015 increased 30.2% to $86.4 million, versus $66.4 million in 2014.

By geography 56% of our sales were from the Americas; 25% from Europe, the Middle East and Africa; and 19% from Asia-Pacific region. Our two US distributors contributed 32.7% of our overall revenue, compared to 40% in 2014.

Revenues from systems and services contributed 62% and revenue from ink and other consumables contributed 38% of total sales; compared to 61% and 39% respectively, in 2014. Revenue mix between systems and services and ink didn't change materially due to the rapid growth in systems revenue.

Revenues from industrial systems was $38.9 million or 86.8% from our systems revenue, and $5.9 million or 13.2% from our systems revenue for entry-level systems; compared to $29.1 million or 80% from industrial systems, and $7.3 million or 20% for entry-level systems in 2014.

Moving to profitability, non-GAAP gross margin in the quarter was 48.6% versus 47.9% in the prior quarter, and 45.6% in the prior year. Gross margin in the fourth quarter was higher than the gross margin in the fourth quarter in 2014 by 300 basis points, predominantly due to economies of scale. This quarter revenues were 35.1% higher than revenues in the fourth quarter last year.

On a GAAP basis, gross margin was 47.3%. Gross margin in 2015 was 47.8%, 350 basis points higher than the 44.3% gross margin in 2014.

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 in our press release.

Adjusted research and development was 12.7% of sales, or $3.2 million; compared to 13.7% of sales or $2.6 million in the prior year. The decrease in R&D expenses as a percentage of sales reflects an increase in headcount that contributed to an accelerated development of our Vulcan system. As part of our growth strategy, we expect to continue to invest in R&D, and anticipate a higher R&D run rate in 2016, predominantly as a result of additional chemistry scientists and engineering personnel.

For the year, adjusted research and development was 13.2% of sales, or $11.4 million; compared to 14.1% of sales or $9.4 million in the prior year.

Sales and marketing in the quarter were $4 million or 15.7% of sales, compared to $3 million or 15.7% in the prior year. Higher sales and marketing expenses were the result of an increase in headcount.

For the year, sales and marketing was 14.8% of sales, or $12.8 million compared to 15.7% of sales or $10.4 million in the prior year.

General and administrative expenses in the fourth quarter were $1.8 million or 7.1% of sales; compared to $1.3 million or 7.1% of sales in 2014. Higher G&A in the quarter results predominantly from management headcount addition, and increased expenses as a public company.

For the year general and administrative expenses was 7.6% of sales, or $6.6 million, compared to 7.2% of sales or $4.8 million in the prior year.

Headcount as of December 31st was 343 employees versus 251 employees at the end of 2014. The increase in personnel was primarily attributed to additions of R&D, sales and marketing and G&A personnel.

Our strategic focus is to take advantage of growth opportunity in the transitioning analog to digital printing on textile market. To that end, we have made investments in our engineering, sales and services team. We expect to continue adding new systems software and chemist 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 grow our market share in the roll-to-roll business line.

Non-GAAP net income for the fourth quarter was $3.2 million, or $0.10 per diluted share, an increase of $1.6 million versus the year-ago quarter. Non-GAAP net income for 2015 was $9.4 million, an increase of $5.4 million versus 2014, or $0.35 per diluted share.

On a non-GAAP basis, the denominator for diluted net EPS share count for Q4 2014 was 9 million shares. And in the fourth quarter, 32.1 million shares.

GAAP net income was $2.1 million or $0.07 per share on a diluted basis, compared with net income of $1.2 million or $0.13 per share for the year-ago quarter.

For the year non-GAAP income was 10.9% of sales, or $9.4 million, compared to 6.1% of sales, or $4 million in the prior year. GAAP net income was 5.5% of sales or $4.7 million, compared to 4.6% of sales or $3 million in the prior year.

Our financial expenses this quarter were $164,000, as a result of financial expenses related to bank expenses and FX changes, offset by accrued interest in our cash investment. Net cash provided by operating activities was $631,000 this quarter, compared to $4.9 million net cash used in the prior quarter, and net cash provided by operating activities of $1.4 million in the year-ago quarter. Decrease in cash was mainly a result of increase in net profit, offset by an increase in account receivable that was driven by revenue concentration at the end of the quarter.

Cash balances including long-term marketable securities at quarter end were $74.1 million, compared to $5 million as of December 31, 2014. With the increase of $75.9 million attributed to the net proceeds from our initial public offering in April, offset by cash used in operating activities.

Moving to our guidance for the first quarter of 2016, we expect revenue to be in the range of $21 million to $24 million, and non-GAAP operating income to be between breakeven to 5% of revenues.

As we mentioned, many of our new employees started to work during the second half of the year. In addition and as Gabi stated, we're expecting to continue hiring in 2016, but at a much slower pace, doing so in order to position the Company to meet our long-term product roadmap.

In the first quarter of 2016, we are planning numerous beta sites for the Vulcan system, and as a result, R&D expenses are expected to increase. Therefore we expect to see a controlled increase in our OpEx during the first quarter of 2016.

I will now transfer the call to Gabi.

Thank you, Guy. And with that, operator, we'd be happy to take any questions.

(Operator Instructions) Joseph Wolf, Barclays

Hi. Thank you. I was wondering if you could connect something you said about investing in chemistry to the competitive landscape polyester timing; is that the biggest investment you're making? And you mentioned some of the competitors moving towards pigment. But is there a possibility that you are thinking about moving towards dye? Does that bring you anything with either platform that you've got in the field?

So developing is going way beyond dyed polyesters. The dyed polyester market we've talked about. And the direct-to-garment segment is a very, very large market opportunity. It's a problem that the industry has been trying to solve for a long time. And Kornit is progressing extremely well. We expect a significant breakthrough in 2016 in that area. And that in itself offers a very interesting market potential for us. Also we've been able to establish joint development activity with leading accounts that are qualifying this capability. Because we want to be able to transfer it to production during 2016.

Our efforts with chemistry and application go way beyond that. And those I will not discuss actually for competitive reasons. But there's many other areas that we're actually investing in. As far as pigment is concerned, we believe that pigment is a significant solution that the industry can use and deploy in many, many different markets. So we're going to continue, actually proliferating with pigment.

Regarding dye solutions, I've got no specific comment to make on that.

Okay. And then just in terms of the-- you gave good breakdown of the move towards the industrial side of the business. But could you give us a little bit of a commentary on what percentage of sales this year were to new customers, and what were incremental sales to existing customers? And I didn't catch the name of the company that Amazon bought. But has Amazon bought more systems since they acquired your customer?

Yes. So the customer it called Woot. And they bought them a while ago. I'm not sure exactly when. But I believe it was about two years ago that they had actually bought them. They were already an existing customer of Kornit, albeit a small customer. And they became a very large customer of ours, and will be even a larger customer going forward.

With the initiation, and that's what we mentioned in the press release that we had about that, so I'm just reiterating. With the initiation of that effort we saw significant growth. And there was a significant order that we delivered and is included in the numbers of Q4 for that effort.

Regarding the breakdown between new and existing customers, we haven't provided that. I will say that we've added a lot of new customers during the year, and we see a trend which includes both. Meaning on the one hand, we add every year I would say a significant number of new customers. But also many of our customers are becoming larger customers, which is something that is changing in the environment very, very rapidly. This is much in line with what I've described in the past where there is a trend towards fulfilment by fulfilment houses working for multiple players, be they websites or small retailers, et cetera.

So this trend, I think, will continue on both fronts I think. You know, seeing a lot more customers coming every year, and then also each-- not each but many of the customers becoming larger accounts for us. Both trends are happening at the same time.

Okay. Thanks, Gabi.

Kenneth Wong, Citi

Hi, guys. How's it going? I guess I was going to ask a little bit about the (inaudible), but it looks like you guys already touched on it. I guess maybe I'll ask a little bit on the competitive landscape. Now that EFI has had some time to digest Reggiani, and Ricoh recently got involved with AnaJet. What are you seeing out there, any changes in tone from both your customers and kind of what you're hearing about the competition?

Yes, so the acquisition by Ricoh of AnaJet happened in an area of the market that we have specifically stated we're focusing away from. That is what we call the commercial segment. In that segment and I refer you to our investor presentation, you can see companies such as Epson, AnaJet, which is now Ricoh, Brother and a few other smaller ones. This is the market that sells systems for lower price, and also is producing at much lower rates.

So for us that is a part of the market that we're less and less interested in. We have stated to our customers, and this has actually shown itself in the results that we're focusing on the industrial segment. And our only remaining entry-level system is positioned truly as an entry-level industrial system and not a commercial system.

As far as EFI and Reggiani, I'm not the one to answer how well the integration is going there or the strategy. But as I did mention, at ITMA we saw not only from Reggiani, but also from others that they are starting and wanting to offer a pigment-based solution. You could see and you hear at ITMA, including different symposiums, that people are understanding what we have understood a long time ago that pigment-based ink is a good solution for digital printing, and obviously provides the flexibility that we've been talking about to work with multiple fabric types.

What I did distinguish very clearly in my prepared commentary and I feel very strongly about, is that our offering is high differentiated, especially from the direction of the quality of what it is that we're able to offer, but also from a productivity standpoint, given the fact that truly we're the only single-step solution. Whereas the others are trying to put together a line of different systems standing one after the other, each of which consumes a lot of energy, each of which has operational issues associated with them, et cetera.

So there still continues to be, and there will continue to be a very significant difference between the solutions. But from a market standpoint, yes indeed, pigment ink for wide format is becoming a market. This is what we have said. And I'm pleased to see that.

Got it. And then I guess as I look at Q1, I guess it's a little bit below where the Street was thinking, and you guys are also dialing back on your spending. I mean I guess do you think it would have made more sense to maybe amp up marketing and some of your sales initiatives a little bit, and I guess accelerate some of your sales behavior into the first half, versus kind of waiting it out into the second half?

Well, if you look at the guidance that we have provided, this guidance is actually quite strong guidance. At the high end of it it's even a faster growth rate than what we saw in the fourth quarter, which was about 35%. So first of all I think that's an important point to address or to draw your attention to.

Also the first quarter is always seasonally lower, because it's after the holiday season. It also has Chinese New Year. So we're not surprised to be presenting numbers which are lower. But still they do demonstrate a growth year over year. The range is, I believe, between 18% to about 36%.

As far as the timing of efforts, et cetera, actually if you think about it versus what we had published during the IPO process, with Vulcan we're way ahead of schedule. The intent for Vulcan during the IPO period was that it would start showing revenues at a much later stage. If you remember, we spoke about 18 to 24 months. And actually what we're seeing is it's going to be happening earlier than that.

So I'm actually pretty pleased with that. As far as ramping up expenses, you know you try to do as much as you can in as short amount of time in order to facilitate the fast growth rate of the Company. And I think we are executing to plan in that sense that we're moving forward, we're spending where we need to spend. We did grow sales and marketing significantly in 2015. It will continue to grow, but as I said, in a more selective manner throughout the Company.

So I feel comfortable with that, and I'm very happy actually that as I said during the second half, we expect to start showing meaningful revenues from Vulcan. Allegro will become more meaningful in 2016, and also the added capabilities that I mentioned, which are going to be coming for DTG, both on the upgrade standpoint, but also new versions of existing products. All of those, I think, offer us a really good year in 2016. And that's why I made the statement that we expect to continue to see strong growth in 2016 as well.

Finally, you know, as you know our revenues do tend to oscillate from one quarter to the other. There is this trend of low seasonality in the first quarter. But I would point your attention back to the third quarter, if you remember that the numbers came in at the lower end of guidance for the third quarter. But look at what happened during the fourth quarter. And if you look, as I drew everyone's attention to the multiyear analysis, you're seeing a company which continues to trend at a very high CAGR of 30%.

Thanks, guys.

Jim Ricchiuti, Needham & Company

Hi. Thank you. So with respect to Vulcan and the fact that it is moving a little ahead of schedule, would you anticipate that the revenue in 2016 from Vulcan would exceed Allegro, just given what you're hearing and seeing in the market?

You know, it's difficult to say. I'm bullish on both opportunities. I think both offer us a great opportunity. Obviously, you know we've said, and we're humble enough people to say that roll-to-roll is a market that we're new to, and we're establishing a name and reputation. Whereas with Vulcan, this is something that everyone has waited for in an area where we are the unquestionable leaders. So those are two distinct different opportunities.

We did start to proliferate with Allegro earlier, which is middle of 2015. So there are different things that you could point to. It would be difficult to say at this point in time which of them is going to grow faster. But I think what I'm really proud of and happy about is that we have these two platforms to rely on to continue to support the growth.

And Gabi, within the DTG segment of the business, clearly the larger piece, should we assume that the business-- the revenues you see from Vulcan as you go through the year will be largely incremental? Is there any cannibalization that you might anticipate from your high-end DTG equipment?

What we're seeing is that the first two accounts are actually existing Avalanche accounts, very large ones. And so they have drawn a distinction between the two, right? Because of the fact that the productivity levels are so much different. And they will be addressing, I would say, different manufacturing circumstances between Avalanche and the Vulcan.

More specifically the first two ones and actually the third one, which is a brand, which is very interesting--actually what they want to do is to displace layers of screen printing, which they could not do previously. So I do see a difference between the two. And I have drawn people's attention in the past to the fact that probably-- and this is just a generalization, so take it for what it's worth-- but probably you could say that the Avalanche usually helps people when they're producing up to about 100 units of a particular design. Vulcan is going to take them to 300 and 400, which is really a new world for us, if you know what I mean.

So I do draw a distinction between the two. I don't think it will be cannibalizing. On the other hand, this is expensive equipment. Not everyone will be able to afford it. So there will be those that say, you know what. I'll buy a couple of AVKs. And there will be those that say, okay, I'm going to buy a Vulcan and maybe a second one afterwards. Because I don't want to have a one-of-a-kind. So I don't think that this is going to cannibalize.

Okay, understood. And then last question-- just seems to be a lot of activity within your business in the web-to-print category. I don't know if there's a way that you can size that in terms of the percent of revenues and some sense as to whether in fact it is showing the fastest growth.

It is definitely showing the fastest growth, no question about it. It is a large part of our business. So both are true. It's a trend that is continuing, and it's taking on many shapes, which is one of the things that I've been drawing people's attention to with our latest investor presentation where I provide detail on the variety of different business models that exist around the web-to-print. This is really a very interesting market.

And I also think that it lays a foundation for changed shopping experiences when we talk about fast fashion and where things are going, and brick and mortar shutting down and direct-to-consumer becoming a real market for brands. So I think the web-to-print is going to continue to be the fastest growing. No question about it. But I am seeing that the modes of operation and businesses around it are just growing in their ingenuity, and new things that are coming online continuously.

Okay. Thank a lot.

Patrick Newton, Stifel

Yes. Good afternoon, Gabi and Guy. And thank you for taking my questions. Just digging in some of your comments on another year of strong growth. You've talked about Allegro increasing as we move through the year. DTG is still a growth industry, and the Vulcan moving from beta to general availability exiting the year.

Given where we're starting off the year with your guidance which you already highlighted very good growth, would it be reasonable to think that your growth rate could actually accelerate through the year, and outpace the level you just posted in 2015?

Well, I'd say we're not providing details on our annual revenues. We're going to continue with quarterly revenues. So I will avoid making specific commentary. I will say that obviously the addition of those revenues in the second half will have a good contribution. And if you refer back to our normal behavior it's usually the case-- actually it's probably repeating that the second half is the stronger half of the year.

Great. And I guess just for a baseline to understand progress and what the future holds, could you help us understand what the revenue contribution from Allegro was in 2015?

It's still at a level that we're not providing breakdown. And also mostly for competitive reasons, to be honest with you. But it became more meaningful obviously in the second half of the year. Because we placed multiple customers, both in the states and in Europe. But we're not going to provide a breakdown of the Allegro revenues, unfortunately.

Okay. And then just last one for, I guess either Gabi or Guy is that a few of your competitors did speak to macro concerns negatively impacted either orders or results, resulting in even longer sales cycle in their December quarter. I'm curious if you saw similar trends from a macro perspective. And could you either quantify that or comment on how that impacted either the December quarter or your outlook?

Yes. So December quarter you saw the significant growth. It makes you think could you show even better growth if macro was in better shape, which is I'll leave as a hypothetical question at this point. It's tough to say.

On the other hand, we all read the papers no matter where we sit in the world. There's these macro concerns. I think Wall Street in itself is creating a lot of noise. And I've said in the past, you know, buying decisions associated with capital equipment always take into consideration macro conditions. So I would say, you know, the fourth quarter you saw the growth.

In the first quarter, as I said, obviously it's seasonally our lowest quarter. Still this range of guidance that we're giving is showing at the high end of the guidance a very nice growth year over year. So I would say macro conditions are there. There are these clouds surrounding the business. We're not immune to macro conditions. But in general, I think what is even stronger is the secular growth of the sector that we're in. And that's what we're enjoying, right? The secular growth is still there. The need is there, unquestionably, which is what makes me so enthusiastic about what I see in 2016.

And there could be mitigation to that with macro conditions throughout the year, right? But this is my way to look at it.

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

Brian Drab, William Blair

Hi. Congrats on the great growth this year.

Thank you.

First question, is there any way you could try and size the collective expense for these three trade shows in the first quarter?

It's going to be dramatically lower, let's say than Q4. Q4 was ITMA, which is by far the most expensive trade show in the year. So it's going to be lower than Q4.

I'm trying to get a sense for what operating margin impact we're seeing from the trade shows. I mean, Guy is there any-- would you be open to giving us a sense of like $1 million or is it $2 million?

The trade shows in Q1 this year are not dramatically different than trade shows in Q1 last year.

Which was-- give us a ballpark.

Less than $1 million.

Okay. Okay. So (inaudible).

One of the things I'd like to draw-- sorry Brian. Just I'll let Guy look at the number and provide you a little bit more on that. But just to make sure that we're clear, right? The run rate of expenses obviously with which we exited 2015 is much higher than what we had started with, right? I had mentioned OpEx going up by about 25%. So operating margin, which is stated in the guidance obviously, should take that into consideration. We spoke about 343 employees versus 251, just as an example, right?

And then when you take your seasonally lowest quarter on revenue, obviously you're going to show some impact in the operating margin. So that is more specifically-- I'll just let Guy mention again on the trade shows?

Again, we're not breaking down OpEx in forecast in guidance. But if you compare Q1 2016 the way we see it to Q4, we're seeing some decrease in trade shows. But we do have an increase due to additional headcount. So all in all, we see some increase in Q1 over Q4 in sales and marketing.

As well as what Guy had mentioned on the R&D front, which is associated with the beta sites of Vulcan, right? So you're seeing an increase on R&D obviously as part of OpEx because of the beta sites of Vulcan, which is a good thing.

For sure. So the big-- just to summarize, the big delta in OpEx in 1Q 2016 versus 1Q 2015 isn't trade shows. It's really the--

No. It's R&D.

Increased headcount and the R&D related to Vulcan.

That's correct.

Okay. And so non-GAAP operating margin in 2015 was 12.2%. I'm wondering if you can give us, aggregate everything that you've talked about today, and give us some sense. Should operating margin be up in 2016 in as specific terms as you're willing to offer?

Yes. We're not going to discuss the year as a whole. So I'm not going to be able to provide you any color on that. We're going to continue with our guidance, which is a range of revenue and a range of operating margin. But I think in general it's another year of strong growth. I think what we have demonstrated to the Street is if you look at how we manage this, on the one hand we've made incremental investments which have been significant in 2015. And then we have said that we will reduce the pace significantly in 2016, and be more selective. Because we already have a big portion of the infrastructure that we were looking to put in place to support the growth. So there will be still growth in OpEx. Obviously that will translate into implications on the bottom line.

On the other hand, we're planning a significant year of growth. So I think that's what you should expect. That OpEx will definitely not grow at the rate that it grew in 2015. That is very clear. And then the implications on operating margin we won't discuss at this point for the entire year. But as the year progresses I think the picture will become clearer.

Okay. So the last comment is actually quite useful. So OpEx grew at about high 20s percent rate in 2015.

25%.

Yes, okay so 25%. So you're saying that OpEx will grow at a rate less than 25% in 2016?

Yes, less.

That's correct.

Okay. And then Guy, I want to clarify. You made a comment R&D you said would be up in 2016. Are you saying, of course on an absolute dollar basis; but are you saying that it would be up on a percentage of sales basis as well?

No. We plan to keep it at the same level as a percentage of sales.

Okay. That's helpful. And then one last question maybe, the gross margin was-- I know you mentioned it was up nicely year over year. But if you look at it sequentially, it's about flat. Any help you could give us in modeling where that's going as we trend through 2016?

As we mentioned before, Q1 is a lower quarter. We expect gross margin in Q1 to be lower than Q4, more or less in the area of Q1 2015. And as we continue, gross margin will go up. And we expect to be at the end of 2016, in obviously a higher gross margin.

Okay, great. If you don't mind, I'll sneak in one more. The Vulcan, I'm wondering, do you have any sense, or can you help us get any sense for the size of the market opportunity? Because in your filings there's this number that is so compelling, the 300,000 or so garment printing operations globally. Do you have any sense for what percentage of those would be the type of operations that would be interested in the Vulcan?

It's very difficult to say. And you and I have had this conversation in the past of how difficult it is to quantify this. You also need to understand that in the 300,000, there's even those that are still users of manual screen-printing capabilities, not even automated ones. We see this as an industrial revolution, which is happening, right?

Within those numbers there are many that are already in the digital world. And there are many that are analog but are automated. So there's a real variety here. But if you look let's say at the proportion of screen printing carousels, for instance, that are out there. We've said that they range between 80,000 to maybe 100,000 units out there. And with Vulcan, what we expect will start happening more and more is that we take away certain parts of manufacturing away from those carousels in favor of digital printing. And that's meaningful, very, very meaningful for us.

But it's very difficult unfortunately to quantify exactly. Suffice it to say that the level of excitement that we've met with this product and the breakthrough that it offers in productivity-- and as you can well imagine it has a roadmap ahead of it as well-- it is indeed considered to be a breakthrough. And we see. We've been doing more and more analysis with potential customers on how they breakdown the cost. And you can see that it's starting to take away interesting parts of screen-printing business.

So that's how we view it. Unfortunately it's difficult to quantify.

Sure. Okay. Thanks a lot for taking the question.

Bobby Burleson, Canaccord

Hey guys. Congratulations on a strong year. So I think a lot of my questions have been asked, but a couple more here. Wondering on Vulcan, you guys were talking about one of these early customers being a brand that wants to replace some of its production with digital. And I'm wondering, in the customers that are lining up for general availability of Vulcan, what percentage of those customers early on here look like they're coming from the brand side of things.

We're seeing a variety of different customers, potential customers. It was really interesting to see, I would say, the number of potential customers that haven't even used digital equipment in the past. Those we've actually pushed out further in 2016. Because we want to start with those that have already an appreciation and understanding of how to deploy digital.

But that as an indicator is really interesting where people are saying, you know what. I want to jump straight into the digital world with a really high throughput high-end capability.

Regarding other brands, more and more discussions are taking place right now. There are different stages of discussions with different brands. Some of them are just starting to evaluate the capability of digital printing, even before they go into detailed productivity analysis. Others already understand the productivity and will go there.

So there's going to be a mix between the two. The reason it was so important for us to have a brand amongst the first few is actually to get a clear understanding of the benefit, and then hopefully be able to create interest with other brands.

What I said on my prepared commentary, this brand obviously produces significantly with screen-printing. But they will move meaningful parts of the operation to digital with Vulcan. But still they will also for sure continue producing also with screen printing. And I expect that's going to happen with all of them that there will be portions of the business that they drives towards digital, and other portions that they continue with screen printing.

Okay. And you talked about the addition billion dollar TAM that Allegro brings. I'm wondering, just with Vulcan, is it a larger market ultimately, depending on how good this adoption ultimately goes? Do you think it can be larger than $1 billion?

That would take quite some time, if you think about it. Because we're the only game in town in this situation. And I hope that we will stay that for a while. Because there's truly very differentiated IP and technology that's being offered here. So making it into a billion dollar market opportunity is something that if it would happen, it would take quite a bit of time.

I do think though, that again, because this is a disruption of an existing well-founded analog market, the data points are a little bit more difficult to establish. Meaning at this point, obviously screen-printing equipment is generally much cheaper equipment than digital printing. So that would also be a difficult data point to say, okay, if you're cannibalizing this much of market that's maybe on the equipment side, maybe $200-250 million today.

And then the consumable are probably a little bit more than that for screen printing, for DTG. How much of that are you cannibalizing? Those are the little bit of data points I can't provide you, again, unfortunately. Being a disruptive technology, we're at the phase with this technology that there's no one that really provides good numbers on the size of the opportunity.

And what we focus on is the rate of penetration, which we want to make very high, the disruption that it offers, and the productivity that's associated with it. And that in itself creates, we think, a really strong secular growth trajectory for several years to come.

Great. And just last question on the services, profitability you talked about breakeven in 2016. Do you expect that to be on a run rate basis in one of the quarters? Or do you think that's for the year you could be breakeven?

I would say run rate for a particular quarter in which that happens, and not for the entire year. Because we're still not there, as I had said.

Okay. Great. Thank you.

Thank you very much.

And that will conclude today's question-and-answer session. At this time I'd like to turn the call back over to management for any additional or closing remarks.

Well, we'd like to thank everyone for attending the call. As stated, we're very excited to have finished a very successful year. We thank investors for the trust that they've instilled in us. And we look forward to communicating with you as 2016 progresses, and another strong year for the Company. Thank you.

That does conclude today's conference. Thank you for your participation.