Kornit Digital Ltd (KRNT) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to Kornit Digital Limited fourth quarter 2016 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. At this time, I'd like to turn the conference over to Tom Cook. Please go ahead, sir.

Thank you, Matt. Good afternoon, everyone, and welcome to Kornit Digital's fourth quarter 2016 earnings conference call.

Before we begin, I would like to remind you that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other US securities laws will be made on this call.

These forward-looking statements include but are not limited to statements relating to the Company's objectives, plans, strategies; statements of preliminary or projected results of operations, or of financial condition; and all statements that address activities, events, or developments that the Company intends, expects, projects, believes, or anticipates will or may occur in the future.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by the forward-looking statements.

The Company's actual results could differ materially from those anticipated for many reasons, and I encourage you to review the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 20-F filed March 17, 2016, which identifies specific risk factors that may cause actual results or events to differ materially.

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

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

With that said, on the call today, we have 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, Tom, and hello, everyone, and welcome to our fourth quarter of 2016 and full-year earnings conference call. During today's call, I will review aspects of our performance, then provide an update on market conditions and our view on the year we are entering, 2017. Guy will then walk you through the full financial details for the fourth quarter and for the year, as well as state our guidance for the first quarter of 2017.

Q4 2016 was another record quarter for Kornit, reaching the high end of our revenue guidance and achieving record-level operating margins. 2016 as a whole represents 28% year-over-year growth and the fifth consecutive year of significant growth with a CAGR of 30% for that period.

Non-GAAP revenues during the quarter came in at $34 million, and non-GAAP operating margins came in at 15%, while non-GAAP gross margins came close to 50%. We achieved this performance on widespread product growth with deliveries to multiple new and existing customers, underscoring our momentum in the printed textile market.

Having recently completed our first follow-on offering, which was significantly oversubscribed, we are honored by the tremendous support we received from the investment community and thankful for the vote of confidence that are existing investors and new stakeholders put in our team.

2016 was a year of great achievements for Kornit. We executed on our plan to invest heavily in our future growth, increasing our OpEx by about 40%, while remaining very profitable. Looking forward to the opportunities we see ahead of us, we envision strong secular growth in our markets continuing and remain committed to taking full advantage of the opportunities offered to us.

Sitting here today, we are in a different place than we were only three years ago. We now have a very strong management team, combining veterans of the Company and new executives who come with rich managerial backgrounds.

Our global sales and marketing infrastructure has expanded significantly, and our service organization is able to support a much larger and diversified global customer base. Our product development efforts yielded a very successful launch of the new Storm platform for the midmarket, and we successfully rolled out the Vulcan, which is now installed at four customer sites.

In our first roll-to-roll system, the Allegro, we also reached an important milestone of having systems at 20 customer sites around the world.

Having expanded our employee base to close to 400 people and having completed extensive leasehold improvements and expansions, we expect to still grow our operating expenses this year but at a significantly slower rate, which will allow us to start enjoying some operating leverage. On a quarterly basis, our expectation for higher margins is dependent on discrete quarterly events and sales volume. But, in aggregate for the year, we anticipate a meaningful uptick in full-year operating margin.

Most satisfying to us at Kornit is seeing our vision unfold so rapidly. The trend towards online shopping for apparel is constantly gaining momentum, and we are uniquely positioned to take advantage of it.

In our quarterly gatherings, I have consistently mentioned that the number of mission-critical large accounts we are serving is rapidly growing. We have achieved these results through the support of important longstanding customers, whose businesses have grown and are dependent on delivery of highly productive and reliable solutions from us.

In addition, new and large multinational customers were a meaningful contributor to our growth. And perhaps the most impressive proving ground for our capabilities and that of our technology and our people was met during the ramp up of our first Amazon site.

Being able to meet the requirements of the steepest ramp up we have ever performed, enabling 24/7 operation of dozens of Avalanche 1000 systems, fulfilling tens of thousands of orders for unique garments per day, gives us a real sense of achievement.

The conscious decision we took to continue and expand our customer-facing support infrastructure at the price of delaying our services business ability to break even has really paid off. Knowing what expectations mission-critical customers have for uninterrupted operation has made this global and professional workforce another key point of differentiation for Kornit.

Let me now take a moment to walk you through some of our main achievements during the past year. In March, we rolled out our next-generation Storm platform for what we considered to be the middle market for DTG, starting with the Storm Hexa, which offers six colors for high-quality prints, a bulk ink system, and recirculating print heads for high reliability and significantly reduced ink consumption.

Customer feedback has been exceptionally positive, as this presents a new and improved user experience for them with much higher throughput. Later in the year, we rolled out the Storm 1000, which offers even higher throughput on four colors.

Between January and May, we installed our first three Vulcans at three different customers and a fourth one during the fourth quarter. Revenues during the fourth quarter included recognition of one of these systems.

All systems are running extensive production runs. We believe the Vulcan expands our addressable market into retail as it enables low-cost production of longer runs of up to hundreds of units of specific designs at a price that offers a real alternative to screen printing.

During 2016, we made serious progress in our efforts to penetrate the roll-to-roll market. Given the Allegro's unique process capabilities, it is most suitable to perform print-on-demand functions. Print on demand is characterized by customers who fulfill orders for relatively small quantities of specific designs and frequently change from one fabric type to another during normal production days.

A market for short runs of unique designs is developing, and online stores are growing in number. The unique capabilities of Allegro as the world's only true single-step printing solution, which prints at high quality on a huge variety of fabrics with a completely ecofriendly process allows for on-demand production for home decoration and furniture, swimwear, fashion, military applications, and more.

It is important to note that, because of the Allegro's unique process, customers do not need to be textile experts or have surrounding textile treatment or finishing suppliers in order to take part in this growing market segment.

As recently announced, we now have more than 20 customer sites worldwide, of which four will soon have two systems or more installed.

I'm happy to report that, by the end of 2016, 16% of our install base already had service contracts in place. This is a great achievement when bearing in mind that, only three years ago, no service contracts existed with Kornit.

Also important to note is the fact that we first started to recognize revenues for upgrades during the fourth quarter and have continued to take new orders for such upgrades in recent weeks.

We acquired the digital DTG assets of our US distributor SPSI in early July. This has allowed us to increase our customer intimacy in the region and more closely support larger customers. In order to take advantage of the opportunity associated with the screen printing market in the region, we are continuing to expand our salesforce in the United States.

Much has been said about our agreement with Amazon in recent weeks. I will only add that we are thrilled with the opportunity to play an enabling role in Amazon's penetration of the apparel market and will do our best to prove we are a reliable partner and position ourselves to take part in more efforts they will make in the future.

I would now like to provide some insights into our plan for 2017. We have started the year with several sales and marketing events. We have already attended three significant tradeshows and performed several regional sales meetings with our distribution partners to kick off the year.

Overall momentum continues to be positive, and we feel that our global presence is constantly improving. These activities are critical, albeit costly, and of course will impact our expense run rate during the first quarter.

During 2017, we plan to continue to execute on our growth strategic for enabling a revolution in the printed textile market. Key elements of our long-term strategy include deepening existing customer relationships through higher value add with existing customers, acquiring new high-volume customers, extending our servable addressable market by continuing to enhance our solutions, expanding our leadership position through ongoing investment in R&D and strategic acquisitions, and finally, leveraging our global infrastructure.

Retaining and extending our market leadership is a high priority for us. We are therefore planning several new product announcements throughout the year. We expect to see significant revenue growth during 2017 in both DTG and roll-to-roll markets.

As stated, we will continue to grow OpEx this year, but at a much slower pace. The impact of OpEx increase may vary from one quarter to the next, depending on various events or stages in our roadmap and other activities.

It is therefore that we expect to start enjoying some operating leverage. We are committed to doing so while securing our ability to take advantage of the vast opportunities we see ahead of us.

I will now turn the call over to Guy 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 adjustments for the following items: stock-based compensation expenses, which totaled $914,000; depreciation and amortization expenses relating to the acquisition of intangible assets in previous years in the amount of $106,000 and $203,000 for the assets of SPSI; non-cash inventory adjustment of $1 million related to the acquisition of SPSI's assets; and revenue adjustments reflecting the warrants issued to Amazons and vested from May 1st, 2016, in the amount of $2,000 -- $2 million, sorry.

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.

Fourth quarter non-GAAP revenue increased 33.4% to $34 million versus $25.5 million in the prior year and increased 10% versus the prior quarter. Higher revenue was driven by several items in the quarter, including higher sales of high throughput systems, a higher volume of ink, and growing revenues from the Allegro system addressing the roll-to-roll market. On GAAP basis, revenue was $32 million. The $2 million difference between the GAAP and non-GAAP revenue is attributed to Amazon warrants.

By geography, 60% of our sales were from the Americas; 27% from Europe, the Middle East, and Africa; and 10% from the Asia-Pacific region compared to 59%, 26%, and 15% in the fourth quarter 2015, respectively.

The warrants granted to Amazon are part of the inherent value creation and alignment of interest designed to strengthen the long-term relationship between the Company and Amazon under long-term commercial agreement announced on January 10th, 2017, and effective since May 1st, 2016.

On slide 12, you'll find an overview of our Amazon agreement and its impact on our GAAP results.

Moving to customer concentration, our US distributors contributed 17.9% of our overall revenues, and a global customer contributed 15% of our overall revenues in the fourth quarter. Our top 10 customers accounted for 64% of our overall revenue compared to 61% or 51% without SPSI in the fourth quarter of 2015.

For the year, our non-GAAP annual revenue for 2016 increased 28.1% to $110.7 million versus $86.4 million in 2015.

By geography 67% of our sales were from the Americas; 23% from Europe, the Middle East, and Africa; and 10% from Asia-Pacific region. Our US distributor contributed 20.2% of our overall revenue compared to 24% in 2015, and a global customer contributed 18.2% of our overall revenue compared to low single digits in the previous year.

Revenues from system and services contributed 61%, and revenues from ink and other consumables contributed 39% of total sales compared to 60% and 40%, respectively, in 2015. Revenue mix between system and services and ink didn't change materially due to the continued growth of system revenues.

Moving to profitability, non-GAAP gross margin in the quarter was 49.8% versus 49.2% in the prior quarter and 48.6% in the prior year. Gross margin in the fourth quarter was higher than the gross margin in the fourth quarter of 2015 by 120 basis points, predominately due to economies of scale. This quarter, revenues were 33.4% higher than revenues in the fourth quarter last year.

On a GAAP basis, gross margins were 45.5%. Gross margin was lower than the non-GAAP due to inventory adjustment related to the acquisition of SPSI's assets, and noncash accounting adjustment reflecting the warrants granted to Amazon and vested during 2016.

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 today's press release.

Adjusted research and development was 14.5% of sales or $4.9 million compared to 12.7% of sales or $3.2 million in the prior year. The increase in R&D expenses as a percentage of sales reflect an increase in headcount as well as expenses related to [better sites] to support the accelerated release of the Vulcan and several other development projects, which are underway.

As part of our growth strategy, we expect a moderate increase in R&D investment and anticipate higher R&D run rate in 2017. For the year, adjusted research and development was 15.3% of sales and $17 million compared to 13.2% of sales or $11.4 million in the prior year.

In addition to headcount increase, during 2016, we added lab space and test equipment that increased our expense in the fourth quarter 2016.

Sales and marketing in the quarter were $4.3 million or 12.7% of sales compared to $4 million or 15.7% in the prior year. Higher sales and marketing expenses were the result of increase in headcount. The decrease in sales and marketing expenses as a percentage of sales is attributed to economies of scale.

For the year, sales and marketing were 15.7% of sales or $17.3 million compared to 14.8% of sales or $12.8 million in the prior year.

General and administrative expenses in the fourth quarter were $2.5 million or 7.4% of sales compared to $1.8 million or 7.1% in 2015. Higher G&A in the quarter results predominantly from management headcount addition.

For the year, general and administrative expenses were 8.8% of sales or $9.7 million compared to 7.6% of sales or $6.6 million in the prior year. Year-over-year increase in G&A expenses is predominantly attributed to headcount increase and strengthening of our IT infrastructure.

Headcount as of December 31st was 390 employees versus 343 employees at the end of 2015. The increase in personnel was primarily attributed to additions of R&D and sales and marketing personnel.

Non-GAAP net income for the fourth quarter was $5.1 million or $0.16 per diluted share, an increase of $1.9 million versus the year-ago quarter. Non-GAAP net income for 2016 was $10 million, representing an increase of $600,000 versus 2015 or $0.31 per diluted share. Vested warrant did not impact EPS in 2016 and will increase number of shares in 2017.

GAAP net income was $820,000 or $0.03 per share on a diluted basis compared with net income of $2.1 million or $0.07 per diluted share for the year-ago quarter.

For the year, non-GAAP net income was 9.1% of sales or $10 million compared to 10.9% of sales or $9.4 million in the prior year. GAAP net income was 828,000 compared to $4.7 million in the prior year.

As Gabi mentioned, we're happy to deliver such numbers for the year, in which we increased our OpEx by around 40% and see this as a clear testament to the strength of our business model.

Our financial expenses this quarter were $46,000 as a result of bank expenses and FX changes offset by accrued interest of our cash investments.

Net cash provided by operating activities was $5.3 million this quarter compared to $2.5 million net cash provided in the prior quarter and net cash provided by operating activities of $631,000 in the year-ago quarter.

Increase in cash was mainly a result of increase in adjusted net profit and improvement in DSO.

For the year as a whole, we generated $1 million of cash from operating activities versus $2.2 million used in operating activities in 2015.

Cash balances, including long-term marketable securities, at quarter end were $61 million compared to $74.1 million as of December 31st, 2015.

On January 25, 2017, we offered 2 million shares and an option to purchase up to an additional 300,000 at $16.5 per share. Gross proceeds from the offering received in Q1 2017 were $37.95 million.

Moving to our guidance for the first quarter of 2017, we expect revenues to be in the range of $27.4 million to $30.4 million and non-GAAP operating income to be between 2% to 6% of revenues. As Gabi stated, this year, the first quarter is very active in tradeshows and sales events around the globe. And therefore, we expect to see controlled increase in our OpEx in the first quarter of 2017.

I'll now transfer the call to Gabi.

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

(Operator Instructions). Ken Wong, Citigroup.

Hey, how's it going, guys?

Good.

Can you give us a sense for how many high-volume customers you have? Again, I'm not sure how you guys kind of qualify high volume. And then any other largish type customers that you guys see in the pipeline that you might be able to talk about a little bit?

Yeah, in Q4, 15% of our revenues came from a large account, which is not Amazon. Okay? And this is a global customer as well.

As far as what we consider to be large accounts, large accounts are accounts that have typically 10 systems or more. They obviously invest in cycles. And therefore, you see them coming and going in specific quarters. So, for instance, in the fourth quarter, as we had mentioned on last quarter's conference call, we did not anticipate what we could then not say was Amazon system revenues, but we still were able to guide upwards because a very significant other global customer augmented for the difference.

So, we have multiple customers that have significantly higher than 10 systems by now. We've never provided an actual number. And I have to be honest, Ken. I don't have it off the top of my head right now. So, I don't want to just throw a number, but there's quite a few customers that have a large install base of systems that are growing, and many of them are becoming global.

Got it. No, that's actually very helpful. And then I guess, on Amazon, I know this one gets a little tricky, but any help you guys can give us in terms of how we should be thinking about revenue that's embedded in 2017 that's coming from Amazon?

Well, as you can imagine, given confidentiality with them, we cannot share their forecast. All we can say is that it's planned to be quite a strong year of continued deployment. But, I'm not allowed to say anything beyond that for strict business reasons, as you can well imagine.

But, it's clear to us that it's a strong year of continued growth. And by saying continued growth, it means that, obviously, what's been installed continues to run at very high volume, but a lot more other systems will be installed. That's the expectation. But, I'm not able to provide anymore color on that at this point.

Okay. Fair enough. And the last thing from me, and I'll pass it along, are you -- with a lot of border tax discussions going on, have you seen any uptick from retail customers, brands, or whatnot in terms of what they might want to do to try to kind of get around that, whether it's bringing more production home, doing some more on demand, and anything of that nature?

Well, first of all, I think the bring production home phenomena is something that Kornit's been serving quite well, with 65% or 60% of our revenues coming from the US. We know for a fact that a lot of jobs have been created relating to what it is that we do. And bringing textile back to the US is something we're very involved in.

Also, the localized fulfillment model is exactly that, right? This is what we've been saying that, with quick turnaround time, etc., you need localized fulfillment.

As far as brands talking about that, in various discussions that we have with them, it's not been brought up per se. I think, if anything, when we talk to brands, it's about localizing fulfillment as general phenomena. But, I have to admit that I haven't heard discussion that specifically relates to the implications of a border tax.

Got it. Okay. Thanks a lot. I will pass it along.

Thank you.

Joseph Wolf, Barclays.

Thank you for taking some questions. Just a follow up with the -- that comment on the global customer, do you mean that that customer is global and is taking product globally, or are they taking it in one place right now, and it just happens to have a global business where you could seed many sites, and that could turn into a more of a regular stream?

Multiple locations in the current project that we're working on. So, it's multiple locations. They are global in nature, and they have multiple locations around the globe.

Okay. And then there've been customers like the Australian company Redbubble, where there's a fulfillment model, but they don't actually own the equipment. The equipment that's being used for fulfillment of that -- of their brand, is that one -- how do you follow that in terms of one customer? Do you view them as the customer, or do you view each place that actually produces as a customer?

Well, first of all, we like to look at both of them as customers. But, to be very frank, the actual activity happens at the fulfillment partner locations, of which we have several that are serving, for instance, Redbubble business in the US and in Europe, right?

So, the day-to-day activity is with the customer that are the fulfillment places, the people that actually buy our equipment and utilize them for the benefit of, in this case, Redbubble. And the relationship with Redbubble is very important for us in order for us to accommodate the introduction of new applications and new capabilities.

And it's been a very positive relationship in that sense because they have a very, very high level of commitment to the quality of what they print because they represent mostly artists. And they have a big commitment to depict the exact colors and exact images that are included in the artwork that they are actually printing on fabric.

Okay. And then just the last question on services, you talked about expanding services dramatically, and that sort of was at the expense of the profitability of that that you've been talking about for a while. Where are we on that?

And just related to that and the services comment, I saw something about the new R-Series upgrade kit. Is that considered a services offering? How does that new upgrade with the recyclable printing heads fit into existing equipment? How do the customers pay for that? And what does that kind of pricing do for the -- for your revenue?

Sure. So, the initial upgrades that we started offering last year and in Q4 started seeing revenues was associated with the Storm 2, which is our midmarket version. And the Storm Hexa has really hit the ground running, and a lot of customers have expressed an interest and actually started installing these upgrades.

We consider that a service business because it's basically upgrading the install base. So, it's the service organization that is in charge of that. By the way, from a functional organization standpoint, that organization also reports into to Gilad, our Global Head of Business. So, service is included in his group as well. It helps us do it in a seamless manner, where we have sales and services in the same group.

As far as the R-Series upgrade that's not yet out there but will come out in the next few months, the reasoning behind being able to offer that is that these are recycling print heads that will reduce and have very nice and significant impact on ink waste, which is inherent to printing with inkjet heads, but also is expected to improve reliability because the continuous flow of ink through the heads keeps the nozzles open.

Also, in that kit of upgrade, once it's out there, we intend to include several reliability improvements that we worked on in the second half of last year in anticipation of this upgrade. So, customers that will go in this direction will get a nicely revised version of their system. It's a field retrofit. It's not a forklift upgrade or something like that. And it will include a variety of different elements in that offering.

Okay. Great. Thank you.

Sure.

Jim Ricchiuti, Needham & Co.

Hi. A question on --

Hi, Jim.

How are you, Gabi? On this other customer that you alluded to, can you say whether they were meaningful at all at other points during 2016, or is this a customer that you saw scale up in the last quarter of the year?

They've been an existing customer for quite a while. They have quite a large install base. And the project that we're doing with them is basically taking them to the latest and greatest.

And so, I would say that, on an ongoing basis, before the project started in Q4, they were primarily focused on ink consumption. And during the fourth quarter, we started deployment of the system installs that I spoke about. And that's what made them into a more meaningful customer in the quarter.

Okay. And a question on Allegro. I'm wondering, as you look at the customers that have taken on the equipment, how many of these could be considered traditional textile printers that might be using equipment from some of the other digital roll-to-roll equipment vendors, or are these really a different class of customers, more in the e-commerce area?

Actually, the last few months have been really interesting for us, in the sense that we're starting to see also textile -- classic textile manufacturers in places such as India, for instance, large-scale manufacturers that are surprised and very impressed by the process that we do and how ecofriendly it is because many of them work with major brands in Europe, for instance.

And so, now, we're seeing -- and I see this also in other countries in the region. Asia has become an important region now for Allegro. And so, we're starting to address also fashion needs, some areas of fashion with existing textile players that like the versatility, meaning the fact that they can move from one fabric type to another.

They love the fact that it's ecofriendly and a completely dry process, which if you remember, this is what I've always been alluding to that, when our competitors talk about an end-to-end process, when you look at the details, you don't really find the characteristics of what it is that we offer, which is truly a dry end-to-end process with nothing surrounding it.

So, this has actually become an interesting situation for us, where it expands to my mind what I thought to be the addressable market. At the same time, as I said on my prepared commentary, I think that the quickest part of Allegro to evolve right now is what I call the on-demand textile, where those are characterized just as the way you characterized them in your line of question, which is people that are specialty shops that want to offer a service which is basically supplying limited amounts of fabric in various stages for various applications.

And also, one more thing to point out, in the press release that we had after the JIAM textile tradeshow, we included the reference to the largest printer in Europe that was doing nothing in this area and is now expanding into this area, which is also a good sign, which means to me that our strategy that says we want to release our potential customers from the burden of having to deal with textile-related finishing and pretreatment processes really works because, essentially, what these people are saying: We're experts at printing. We're not experts at textile. But, with this system, we don't really need to be experts at textile. And that really bodes well for our strategy.

Got it. And, Guy, a question for you, and just want to see if the numbers I have are in the ballpark here. So, you're -- I look at this systems and services and ink and consumables for 2016. It looked like you saw stronger growth and accelerating growth in the systems business, a little bit of a deceleration in ink and consumables, which I guess is consistent with the early ramp in equipment sales in the year.

And then in Q4, did that kind of turn around where you had more of an acceleration in the ink and consumables, where utilization picked up? Is that a fair way to think about how the year was unfolded?

So, again, we do not break systems versus ink between quarter, only on an annual base. So, as we already mentioned, 2016 was very close to 2015, moving from 60/40 to 61/39. We did say it before that, usually, because of the holiday season, normally, we're seeing more ink than in other quarter in the fourth quarter. And that reversed in the first quarter. But, we cannot be more specific than that because we don't break it on a quarterly basis.

Yes, but, clearly, just to further amplify the point that Guy's making, Jim, clearly, ink consumption is highest in Q4 because, seasonally, that's a holiday season. And Q1 is post that season, right? So, that draws a distinction when you look at the types of revenue that we bring in those quarters, more strong in ink in Q4 and less strong in ink in Q1.

Yes, that makes sense. Okay. Thank you.

Sure.

Thanks.

Brian Drab, William Blair & Co.

Hi, thanks for taking my questions. And congratulations on all the accomplishments this year.

Thank you.

First, just a housekeeping item. According to your filing, you've got 15 customers with 10 or more machines as of December 31st, 2016, just to answer that previous question.

And I just want to ask about the OpEx, Gabi. I think, today, what you've told us is that it'll be up in 2017 I guess in terms of dollars, not as much as it was up in 2016, which was 43%. Can you possibly be any more specific regarding that OpEx growth, like maybe a range? Is it going to be up 10% to 20%, or is it going to be up less than sales growth? I guess you implied that. But, any more specifics on how much OpEx is up?

As you know, we provide guidance on a quarterly basis. So, I won't be able to give information on the year. To reiterate what we've said, so yes, there will continue to be OpEx increase, but at a lower rate. And you're right. That's the reason why we mentioned that revenue growth should be higher than the rate of growth of OpEx is as much as we're able to give right now.

But, I -- as a general comment, we're in a situation where we already have close to 400 employees. We've improved our facilities significantly. We have staffed many, many positions that we were looking to staff. We're improving on all fronts in the Company. But, there's many things that need to continue.

I spoke about the fact that we have a very important roadmap of deliveries in 2017 as well. We believe that's critical in order to retain the position that we have. The DTG market and roll-to-roll market are becoming more and more interesting. Everyone understands that.

And Kornit must retain its strong position. And that's something that we're not willing to give up on. Therefore, there will continue to be investment. But, again, we don't need to invest at such a high growth level as we did in the previous year because our starting point was much lower as far as infrastructure at the beginning of 2016 than it is in 2017.

Thanks. Okay. And just again on OpEx for a second, the tradeshow cadence throughout 2017, how does that look? First quarter sounds like it'll be the heaviest?

First quarter is pretty heavy. In Q2, I believe in May, we have a big tradeshow. FESPA in Europe is going to be a significant show. And later on in the year, usually, we have a couple of shows in Asia.

So, but yes, indeed, Q1 was pretty heavy. I'm happy to report that it was quite successful. ISS, JIAM textile, and C! Print in France were very successful shows for us, very well received. And also, in Q1, we do our kickoff meetings, which are very, very important to get the distribution partners as well as our own salespeople very strongly engaged. So, that's why we found it necessary to mention so that people would understand that that in itself will create an increase on OpEx.

Got it. And then on R&D guide, you mentioned I think that the R&D run rate would be up in 2017. Can you just be maybe a little more specific there? Is this fourth quarter run rate that we saw representative of maybe the quarterly run rate 2017, and the 2017 average is just up from the 2016 quarterly average, or what can you tell us about that run rate in a little more specifics?

Again, not much. I can just echo what Gabi mentioned. We're not really talking about the 2017 as a year. We did mention that we will see some increase in OpEx, and that includes R&D in the first quarter. And obviously, R&D expenses for 2017 are going to be higher than 2016 as a dollar value.

I guess, are there material additions, though, to the R&D operation from fourth quarter? I get it that it's going to be up in 2016, of course. But, is it up materially from fourth quarter run rate?

Not that material.

Okay. And then was there any Amazon equipment revenue in the end in the fourth quarter, or was it all consumables?

Consumables.

Okay. Thanks very much.

Sure.

(Operator Instructions). Patrick Newton, Stifel Nicolaus.

Yes, thank you, Gabi and Guy, for taking my questions.

Sure.

Jumping right in, I'm trying to reconcile your large customer comment in 4Q with your large customers for the full year. So, in 4Q, you said that this was a customer who started installing hardware and popped up to be 15% of revenue. But, for 2016, you have a 20.2% customer and an 18% customer. And then I believe that your follow on said that Amazon was 17% of sales. So, I'm assuming one of those customers is Hirsch, but I just want to clarify that the other is not Amazon and is also not the 10% customer from 4Q.

So, again, the -- what we said is that the customer which is above 20%, that's a distributor. Currently, we have only one large distributor in the US after the asset acquisition of SPSI. So, your guess could be right.

There are actually two numbers regarding -- the number that we mentioned in the prospectus supplement, it's a GAAP number, right? So, the 17% is a GAAP number. As mentioned before, the overall revenue goes down in terms of GAAP from 110 to 108. And it goes the same for Amazon revenue.

So, the numbers that we mentioned in our call now are non-GAAP numbers, right, so that the GAAP to non-GAAP bring us to a GAAP between 18-point-something percent to 17 in terms of the large customer.

Okay. So, and then -- I guess, just given the importance of Amazon for comparables in the future quarters, I want to make sure that I understand their contribution in 4Q and 1Q, given we know their revenue contribution levels in 2Q and 3Q of 2016. But, given those -- the prior disclosures, I calc that, in 4Q, the revenue contribution was about $1.4 million. And that's assuming that the March quarter was zero. Is that just an accurate baseline as we start to track revenue on a go-forward basis?

Your numbers are pretty accurate, but it will not really help you in forecast the future because, as Gabi mentioned in the previous questions, Q4 for Amazon didn't include systems. It was mainly ink and consumables. The thing is, as we do more business with Amazon, their ink consumption will go up as well. And your Q4 actually wouldn't be the right measure for future ink consumption.

Okay. I understand. And I guess, just looking at the Q1 guidance at the midpoint, it looks to be a sequential decline of about 15%. Although we don't have a ton of history on the Company I guess, the last three years, the sequential decline in Q1 was an average of 11% and never more than 14%.

Given that Amazon was not a material contributor in Q4, I'm curious as to what is causing that stepdown in Q1. And should we again expect that Amazon is not going to be material in Q1?

Well, first of all, in the range of guidance, year-over-year growth is 28% to 40%. Let's remember that. I think that number is an important number, right, between -- so, the 27.4% represents about 28% growth year over year, and the 30.4% represents about 40% year-over-year growth.

So, actually, we're quite pleased with year-over-year growth that this demonstrates. You're right about the Q4 versus Q1. And I think -- I don't have the numbers in front of me, but I think your numbers are probably right about the 14% being the highest ever.

As far as Amazon business in the quarter, we're not going to provide detail to that level. Again, I think that that would put us in an uncomfortable position with them. I have made a general directional comment about Amazon for 2017 that I think should help everyone by saying that it's going to be a very meaningful year, not just by way of consuming more ink on existing systems, but a significant continuation of the project.

But, I don't want to go specifically into the details on a quarterly basis. As much as I can, I'll try to avoid it, simply because that's what they've requested from us. So, I'm sorry that I can't give you more than that.

Okay. And fair point on the year-over-year growth. And just last one on the Allegro, pretty impressive that you have installed at more than 20 sites worldwide. Just two questions there. I think, previously, you talked to a relatively extended sales cycle. But, in your prepared remarks, I think you said at least four sites are going to be taking multiple units shortly.

So, I'm curious if, when selling to existing Allegro customers, if you're seeing a better or faster sales cycle relative to initial sale. And then just one last Allegro question after that.

Sure. So, I think my comment was misunderstood. What I meant to say was that, soon, in a matter of weeks, there will already be a fourth site with two systems or more, meaning there's already three. And a fourth one is going to become a multisystem customer. So, that was the comment I was trying to make. I guess I didn't describe it well enough.

As far as the sales cycle is concerned, it is indeed the case that, with the gains momentum, the improved momentum is shortening the sales cycle. That is correct. We've also more proficient at demoing the system, as you could imagine.

We've got an also demo center in Dusseldorf, a really good one in Milwaukie, and another one that we're putting in place now in Hong Kong, a revised location versus what we had before. So, that also helps quite a bit.

And a few of our distributors are now considering buying an Allegro as a demo capability of theirs. So, I think I would say that the momentum we're seeing with the product tends to shorten the sales cycle versus what it was before. The consideration is different once it's becoming more and more of a proved capability. And in this industry more than others that I've attended, customers are willing to tell other customers about how well they're doing.

Great. And I guess just dovetailing off the proved system, I think one of the early stage knocks on Allegro was that there were certain material types and/or certain types of inks that maybe were not necessarily compatible with your system. And I believe you've been taking some steps to address that to expand the materials that the Allegro can print on and the number of inks. And I guess, if you could just walk us through some of the progress you've made on that point.

Yes, this year, we will announce new capabilities, new types of ink on the Allegro that expand the application usage. I'm not going to steal the thunder from the marketing team yet. I'll let them announce it. And it's going to be pretty soon, new capabilities that expand the application usage.

As far as -- obviously, the system, as you know, is an end-to-end process, proprietary process, where no other ink is being offered on our system. And so, it's for us to continuously expand the offering.

Areas that we have spent time on are associated viscose, which is a very used -- very much used material in the fashion world. We've been asked to do more activity around nylon, and we're achieving good results there as well. Polyester has been fine because it's only white polyester that people use when they're doing it roll to roll and not dyed polyester. So, that works quite well as well.

So, what you're going to see this year is we will announce that we're adding more functionality as we go. What we've uncovered is that it's great for us to basically enable our own market growth by expanding the product offering. And people actually like that. And the idea will be to add these functionalities to systems that are already in the field so that people could use them on existing systems.

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

Thank you.

We have no further questions in the queue. I'll turn it back over to management for any additional or closing remarks.

Thank you, everyone, for attending the call. It was a wonderful year, 2016, and we're looking forward to a very successful year in 2017. Once again, to our investors, a great thank you for the support that you've given the Company. We look forward to delivering on results. Goodbye.

Once again, this does conclude today's conference. Thank you, all, for your participation.