Kornit Digital Ltd (KRNT) 2017 Q3 法說會逐字稿

Good day everyone, and welcome to the Kornit Digital Ltd. Third Quarter 2017 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Tom Cook of ICR. Please go ahead, sir.

Thank you, Shayla. Good afternoon everyone, and welcome to Kornit Digital's third quarter 2017 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 U.S. securities laws will be made on this call.

These forward-looking statements include but are not limited to statements relating to the company's objectives, plans, strategies, statement 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 30, 2017, which identify 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 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.

On the call today we have Gabi Seligsohn, Kornit's Chief Executive Officer, and Guy Avidan, Kornit's Chief Financial Officer. And at this time, I would like to now turn the call over to Gabi. Please go ahead.

Thank you, Tom. And hello everyone, and welcome to our third quarter of 2017 earnings conference call.

I'd like to begin by apologizing and stating that our press release crossed the wire at 11:41 p.m. today as a result of a failure that NASDAQ Globe Wire has had over the last several hours. We apologize for the inconvenience, and we're certain that -- hopefully people have had a chance to take a look. But sorry for this being very short, just before the call.

Let me begin with the call. Since today's call comes a month after our preannouncement of September 26, I will spend less time than usual to review the main events of the third quarter, which we already discussed, and focus my commentary on market updates and refer to our expectations for the remainder of the year. Guy will then walk you through the full financial details for the third quarter, as well as state our guidance for the fourth quarter of 2017.

Third quarter non-GAAP revenues and operating margin came in a little above the high end of our preannounced guidance. Revenues were $28.6 million versus a guidance range of $27 million to $28.5 million, and operating margin was 6.1% versus a guidance range of 3% to 5%. Gross margin during the quarter was relatively high and came in at 52.3% as a result of a higher mix of inks and consumables, given the preannounced system shipment delay to our largest customer.

Specifically worth noting in this context of elevated gross margins is our services business, which for the first time reached an almost break-even result. This achievement of services is a direct result of our successful efforts to increase revenues from contracts and upgrades while containing costs at levels similar to those with which we exited last year.

Our most notable event since our last call was our attendance at SGIA in New Orleans, which is the largest screen and digital printing show in the U.S. We demonstrated the Vulcan, Allegro, and Avalanche systems. We also showcased a fully automated workflow from design through order and actual prints, combining a DTG printer with software developed by our partner, Custom Gateway. I would like to share a few key takeaways from that event.

First, it was clear that screen printers are primed and ready to really start using digital printers. The number of small and large screen printers who came to our booth was impressive. And unlike in the past, where screen users would usually come seeking a solution for printing one-offs, this time the discussion was also about medium to long runs. This is particularly encouraging for our higher throughput systems like Vulcan and Avalanche.

Screen printers widely shared with us that customers are asking them to decorate garment batches of 100 to 500 units with greater frequency and are seeking a cost effective solution which isn't viable with screen printing. Retaining customers is important for these shops, and when customers ask them to both manufacture thousands of units as well as hundreds, they will take on both job sizes even if doing so with screen may not be as profitable as they would like it to be.

It seems that the cost per print achieved when using the Vulcan is too attractive to ignore. And for those customers who want to start by using the Avalanche R series, which is about half the price of the Vulcan, there is an excellent cost model when running batches of 6 to 8 dozen garments of a particular design.

Also in meeting with existing customers at the show, we learned that several are already serving major retail names such as Costco, Kohl's, Dick's Sporting Goods, Target, Sam's, Walmart and others for their brick and mortar stores, supplying them with batches of a few hundred garments each. We expect this trend to continue and have an innovative roadmap to support constant reduction in cost per print, which will help solidify our entry into the screen market.

We also had an important product launch at SGIA as we introduced our first ever pigment-based neon solution using pink and yellow neon colors. These two additional colors expand application usage for our customers and very nicely extend our overall color gamut. I am happy to report that print quality, fabric hand feel, and color vividness in general blew people away versus other pigment-based solutions that were demonstrated at the show and displayed dull colors and marginal hand feel.

Despite showing a multistep inline process of pretreatment, printing, and curing, competitors at the show had to admit to a need to still separately wash and steam treat a fabric, while Allegro once again proved to be the only true end-to-end pigment-based printer.

Complementing the Allegro was a software package developed by our partner, Assist, which enables creation of a 3D model of a patterned outfit, which is then translated to a 2D file which optimizes fabric use of discrete cut pieces and marks out cutting locations for an automated cutting machine. This workflow caught a lot of interest by designers looking to produce limited quantities of discrete designs.

During our second quarter conference call, I mentioned several changes we are making to our U.S. operation in order to expand and strengthen our footprint in our largest market. I am happy to report that the project is progressing well and we have hired several strong leaders for sales, marketing, and operations. We have also added several salespeople to the team as part of our effort to split North America into 3 regions so as to more closely serve existing and future customers.

Given the positive dynamic we see in the North American market, coupled with the strong team which is developing in the region and the order pipeline that we're seeing, we feel confident that 2018 will be a year of significant growth in that region.

Furthermore, there are several drivers which should lead to significant growth across all our markets in coming years. First, the trend towards proximity decoration is expanding as people realize the benefits of moving to short turn production when serving same and next day delivery markets. This is particularly important when considering the huge variety of SKUs that websites need to show versus physical stores.

A recent survey conducted by Boston Retail Partners shows that more than 50% of retailers now offer same day delivery versus only 16% in 2016, with BRP mentioning competition from Amazon as the key reason for this change. Two-thirds of the companies surveyed were over $1 billion in revenue, so clearly this trend is meaningful. Our strategic goal is to increasingly plug into this market through our large network of existing and future customers.

We believe we have a solid strategy and an excellent product offering for screen printers who are looking to either add digital capacity or replace some of their existing screen capacity. Interest for the Allegro roll-to-roll printer in the U.S. market is growing. The market for specialty cut and sew is expanding rapidly, as is the market for customized home decoration.

Furthermore, we plan to roll out several new products in 2018 for both of our roll-to-roll and DTG product lines. These products will offer novel proprietary processes which are disruptive and unique in nature. New products will include both ink and systems.

Though we are cognizant of the limited growth we will show this year given the weak second half caused by the previously disclosed facility delay, we remain confident in our ability to return to significant growth in 2018.

I will now turn the call over to Guy for a closer look at the numbers and fourth quarter guidance. Guy?

Thanks, Gabi, and good evening to everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP pro forma results.

Our third quarter non-GAAP pro forma results reflect adjustments for the following non-cash items; stock-based compensation expenses which totaled $1.2 million; depreciation and amortization expenses relating to the acquisition of intangible assets in previous years in the amount of $291,000; taxes in income related to non-GAAP adjustment in the amount of $137,000; and $246,000 for restructuring expenses in the U.S.; revenue adjusting reflecting the warrant issued to Amazon and vested this quarter in the amount of $149,000. A full reconciliation of our results on the GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investor section of our website.

Third quarter non-GAAP revenue decreased 7.5 to $28.6 million versus $30.9 million in the prior year and decreased 4.7% versus the prior quarter. Revenues came a bit higher than our previous revenue guidance discussed in our conference call dated September 26, 2017. Low revenue versus the prior year and previous quarter was mainly driven by a postponement of a material purchase order from a major customer.

At the same time, we saw significant improvement in our business in Europe and the Asia-Pacific regions compared to the previous years. By geography, 61% of our sales were from the Americas, 26% from Europe, the Middle East and Africa, and 13% from the Asia-Pacific regions.

As in previous quarters, the Americas remain our largest territory. However, we have seen weakness in this territory compared to the third quarter in the previous year due to the significant delay mentioned above. As Gabi previously stated, in the previous quarter we started the process that includes changes in our personnel, headquarter locations, and go-to-market. Given the pace of implementation, we expect to see positive impact in the near term.

Moving to customer concentration, our main U.S. distributor contributed 29.2% of our overall revenue compared to 25.9% in the prior year. Our top 10 customers accounted for 67% of our overall revenue compared to 71% in the third quarter of 2016.

Moving to profitability, non-GAAP gross margin in the quarter increased to 52.3% versus 49.1% in the prior quarter and 49.2% in the prior year. On a GAAP basis, gross margins were 51.3% versus 46% in the prior quarter and 44.1% in the prior year period. GAAP and non-GAAP gross margin this quarter was higher than gross margin in the previous quarter and in the previous year due to favorable product mix that includes a higher revenue proportion of ink and consumables relative to overall revenue as well as an increase in service revenues, which brought this business close to a break even point.

Moving to our OpEx guidance, I'll discuss these items on a non-GAAP basis, which excludes non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliations included in today's press release.

Adjusted research and development was 19.5% of sales or $5.6 million compared with 14.2% of sales or $4.4 million in the prior year. The year-over-year increase in R&D expenses reflect an increase in headcount and increase in materials for future systems under development.

Sales and marketing in the quarter were $4.8 million or 16.7% of sales compared to $4.6 million or 14.8% in the prior year. Higher sales and marketing expenses were the result of increasing headcount.

General and administrative expenses in the third quarter were $2.9 million or 10.1% of sales compared to $2.4 million or 7.9% in 2016. Higher G&A in the quarter results predominantly from headcount additions. Headcount as of September 30 was 411 employees, an addition of 13 employees compared to the previous quarter.

Non-GAAP net income for the third quarter was $1.7 million or $0.05 per diluted share, an increase of $1.8 million versus the year ago quarter. GAAP net loss was $0.1 million or $0.00 per share on a diluted basis compared with net income of $0.4 million or $0.01 per share for the year ago quarter. Vested warrants reduced net profit by $0.1 million, and increased the number of fully diluted shares by 117,000.

Our financial income this quarter was $205,000 as a result of currency exchange rate changes and accrued interest of our cash investment offset by bank expenses. Cash balances including long term marketable securities at quarter end were $86.5 million compared to $56.7 million as of September 30, 2016.

Net cash used in operating activities was $5.9 million for the first nine months compared to $4.3 million net cash used in the first nine months of 2016. The decrease in cash from operation was mainly the result of an increase in inventory and accounts receivable.

We expect revenues in the fourth quarter to be in the range of $29 million to $32 million. We expect non-GAAP operating income to be in the range of 5% of revenues to 9% of revenues.

I'll now transfer the call to Gabi.

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

(Operator Instructions) Our first question comes from Ken Wong with Citigroup. Your line is open.

So looking at Q3, you guys obviously came in at the high end. Q4 looks like you guys are going to be a little better than most of us expected. Did you guys see a pick up in a specific area of the business that we should be aware of, anything that's worth highlighting there?

Well, I think our expectations were very similar -- right now are very similar to what we saw at the end of September. We did walk out of SGIA with a fair amount of pretty good leads. We do expect to recognize Vulcan revenues in the fourth quarter as well, actually multiple systems. So the range that we provided, $29 million to $32 million, is around what we were expecting. So that's my feedback on where we are for the fourth quarter.

In general, as we said the range of $29 million to $32 million is within what we had expected. But again, SGIA generally was a pretty good show. The fact that we have a very good sales force building up in the U.S. adds confidence to our feeling about the ability to execute on our plans. And also rolling into next year, having in place I think a stronger team is going to be very helpful as well. And Asia and Europe continue to be as we had expected before.

Got it. And then maybe if I could follow up on just a question on the roll-to-roll market and competition there, it looks like on one hand EFI didn't look that great this quarter, and then you also have HP touching on possibly entering the roll-to-roll fabric market. Any comments on your end on what you're hearing from the industry?

Yes, I think it's important that investors realize that the field of roll-to-roll is very, very diverse. If any one of us walks the floor of any of these tradeshows, you will see a variety of different types of printers, different types of processes, etc. So I think first and foremost, it's very difficult to generalize about the roll-to-roll market.

What we have chosen to do and has worked quite well so far is to utilization pigment inks in order to be able to cater to a variety of different fabrics. And as I mentioned, the fact that it's truly an end-to-end process provides extra flexibility for the type of customers that we're approaching.

Regarding the mention by HP in their Investor Day of the fact that they are planning to start entering the textile market, what I heard in the call and otherwise -- or in their Investor Day and otherwise was some talk about starting with soft signage and later on trying to get into other types of textiles.

But I will say our focus -- product focus is strong. This is a very, very, I would say, fragmented market. We've competed throughout our existence with larger companies. And we're also planning a major new product launch next year that we're not doing to discuss yet, but which is going to expand our position in the roll-to-roll market, something which is highly differentiated and disruptive in nature and solves for a significant issue in the industry.

So we're quite positive on our chances with roll-to-roll going forward and our opportunity there. And yes, there are competitors, but I think it's, as I said, a fragmented enough market that there's a good opportunity for us to continue to grow that business.

We will take our next question from Bobby Burleson with Canaccord. Your line is open.

Yes, thanks for taking my questions. So just curious, we talked about the delay of the major customer build out here that affected the second half. And I'm wondering kind of if orders are still coming in, obviously, for that customer, how the industry is kind of planning to cope with that order overflow. Are there fulfillment houses that are Kornit fulfillment houses that may be looking to add additional machines in order to address that order overflow? Is there an opportunity there for some unit volumes for you guys?

Yes. So first of all, obviously for obvious reasons we're not allowed to discuss exactly what's going on specifically with a customer.

Just to reiterate for everyone, what created the delay in revenues is a protracted printing issues. We're working very closely with the customer in the initial facility that we put together last year. That's working very well and running at very, very high volume.

As far as capacity moving around, without referring specifically to the customer maybe, because I -- again, I want to protect their confidentiality, I will make a general statement about what's going on the DTG market. The number of players that we now cater is quite significant. There have developed several fulfillment houses that do a very good job and print at a very high quality.

And what I think happens as a result of maybe capacity not existing in one place, and again without referring specifically to this customer, is that that in turn provides opportunity for some of the other players. I think the way that it demonstrates itself is through the ink volume and how the season is going. The holiday season is our highest of the year. And so from a capacity utilization standpoint, customers are running at very, very high utilization.

But I can't say anything specific about orders moving out of one customer to another. I will say that this market has become dynamic enough that orders do tend to move between Kornit customers. We have become a real golden standard for industrial printing in the market, and we do see that the requirement is to print on a Kornit. And many times capacity does tend to shift, and the competition many times is around the issue of turnaround time, quality, and price.

That's very helpful. And there's just one follow up, if I might. You have some nice momentum with Allegro this year. I'm wondering if you can update us on your goal of kind of doubling those units this year from where you were entering the year. And then are there any issues we should think about in terms of transitioning to the new machine? Does that cannibalize maybe any sales of the existing Allegro? What's the overlap time that you guys have to manage there in terms of maybe customers waiting to see what you come out with?

Yes. So we're progressing well with the objective that we set to try to double the number of customer sites this year. I'll report in the February call what we actually achieved, but we are progressing quite well. We're not sure yet whether we'll hit the exact number, but I do see quite a bit of activity also in the fourth quarter on the Allegro front.

To clarify, the new product that will come out next year is a different process altogether. It will expand our addressable market in the roll-to-roll market. It is not planned to be, from a process standpoint, anything like the existing Allegro, so I don't see cannibalization. On the contrary, I see an expansion of our footprint in that market and us being able to cater for a wider part of that market, which, as I said earlier on, is very fragmented and has a lot of opportunities in it.

So once again, Kornit will continue to focus on differentiated processes which are proprietary in nature, meaning once again we will provide an end-to-end solution which includes a process that we develop with consumables that we develop because of the fact that we want to be able to offer something that's truly unique. But to make very clear, without stating exactly what this process is, this is a different process from Allegro, and I have high expectations from it coming out sometime next year.

We will take our next question from Brian Drab with William Blair. Your line is open.

Have you said anything specific today about the facility delay in the second customer site, and whether the permit -- they're progressing toward getting the permit?

No, we haven't said anything and we cannot comment on that. Specifically on the issue of permitting, obviously that's not in our control. So we won't really be able to comment beyond what we had provided earlier on.

But just to reiterate, what we did say on the last call when we were asked specifically about when do we expect to ship these systems, we said that that shipment could take some time. We didn't give a specific date, but we said that we believe that that should happen before the end of the first half of the year, stating that it could be the situation that they do not want to increase capacity in the first quarter simply because that's seasonally the lowest quarter for the entire industry. But nothing to add beyond that at this point.

Okay. I'm not sure, but I think that we said on this call last time that November was kind of the timeframe where you were hoping to see the permits come through. Is that correct? And there's just no further comment as to whether that is going to happen in November?

Yes, no further comment. I did see that several individuals in the analyst community did go and try to get some feedback from the government authorities. So that could be a place, but we cannot comment specifically on this.

All right. Can you -- maybe looking into 2018, can you talk about some of the new products and maybe try to rank order them for us, just roughly how we should think about the impact of some of these? You've talked about the new roll-to-roll machine. Maybe you could talk about polyester and where you are with the introduction of that. And can you remind us how significant that opportunity can be and just kind of rank order all of the -- there's so many opportunities, it sounds like, for 2018, that would be helpful. Thanks.

Yes. Well, I'll try to do my best. But I will not quantify things and try to be a little bit vague for competitive reasons, but still try to give some color.

So as I said, what we're planning on doing is shipping a prerelease early availability unit to do dark polyester before the end of the year. We're hoping to still be able to achieve that. I believe that we should be able to. And then there will be a qualification process which should take some time.

I can't say yet when we're going to release that product simply because I want to see the progress in the early availability site before we do that. But this objective of shipping before the end of the year is still something that we're targeting. So that's on one front.

In general on the DTG front, next year we plan -- in light of what I said earlier on in my prepared commentary about the screen printing market, we plan to significantly increase our focus on the screen printing market because we've reached a state, and to that end our roadmap will increase that ability to achieve very, very advantageous cost per print numbers.

There will be consumable capabilities that we will add next year that will allow us to further go down that path and do so with a combination of large customers seeking Vulcan versus ones that may be a little bit smaller seeking Avalanche capabilities but with a new type of consumables that will allow us to be more aggressive in the pursuit of the screen printing market.

Because of the trend that I had mentioned earlier on and with some of our customers already serving brick and mortar players, as well as obviously websites, we do see that this opportunity of runs that are in the hundreds is really materializing, and we think that we really have a very good solution for that. I mentioned on one of our previous calls that when providing an alternative for screen printing, especially for ongoing shipments of existing products that have certain patterns and certain color behaviors which are screen, we will also offer customers a useful way in order to match between previously screen printed jobs with digital printed jobs. So that's going to be part of our effort as well, because we know it's going to impact our rate and capability of penetration.

Then the next thing is going to be, as I said, a new roll-to-roll product. We're not going to say exactly what it is right now, and the timing we haven't announced yet. And maybe we'll do that in the beginning of the year. We'll see whether we announce what the timing of that is going to be. But this is going to be, as I said, a different product that expand our roll-to-roll offering.

So there's going to platform capabilities and additions. There's going to be consumables. There's going to be software, as well as more upgrade capabilities that we're planning on offering next year. I think that in itself is going to help us demonstrate another significant growth year next year, or return to significant growth next year, as well as a strengthened presence in the field, with Asia-Pacific and Europe running quite well and expected to continue to grow and the U.S. revamped effort, which I'm very, very positive about now that I see that it's playing itself out the way it is. So that's as broad a summary I can provide at this point, Brian.

Yes, that's a great list. I kind of ran out of room on the page here. Thank you.

Okay. Thank you.

(Operator Instructions) Our next question comes from Patrick Newton with Stifel. Your line is open.

This is John-Michael on for Patrick Newton. So looking at the Vulcan, do you have any more visibility on the timing of the Vulcan orders that you've mentioned before that pushed out of 2017? And then also, did you recognize any Vulcan sales in the quarter and did you receive any new customer orders?

So we're expecting to recognize a few systems this quarter. We did not recognize Vulcan revenues last quarter, so not in the third quarter. But we're expecting to recognize multiple units in the fourth quarter.

Regarding 2018, there's a few opportunities we're working on right now. I can't provide more color at this point as to timing and the extent of it, but there's multiple opportunities we're working on right now, both in the U.S. and in Europe with Vulcan. Next year in general should be a growth year for Vulcan. I will say that, but won't go into more detail on that product.

And then for those system that you've recognized already, can you remind us of how long it takes for a Vulcan system to ramp up to full ink productivity and just what could ink revenues be -- for a Vulcan system installed today be for 2018?

Yes. So the ramp up is very much a function of the customer's knowledge of digital printing. In the mix we've got some customers that are new to digital printing and others that have been doing it and simply wanted to move capacity for medium and -- I'd say medium to large size runs to Vulcan. So those would ramp up faster than those that are new to the area.

In general, we have said in the past that ink consumption on an annualized basis of a Vulcan for an entire year, once it's ready to go, can reach around $120,000 to $150,000 of ink consumption per year.

As far as how long it takes, it's really a function of how a specific customer operates. But we're seeing that, because of the fact that in the second half of the year system reliability has improved significantly, ink performance is much better than it was before, reaching very good printing results. Throughput is meeting the numbers that we had set for it. So I'm optimistic that the length of the process won't be too long.

In some cases, it takes customers two to three months to start really ramping up. In other cases, they can hit the ground running pretty quickly. So it really is a matter of specific customer characteristics.

Got it. And last question for us on the uptick in inventory. Is it fair to characterize that as mostly Avalanche? And with your systems, do you do any customization by customer or could you sell pretty much all of this inventory to any of your customers?

You're pretty much correct. It's pretty much Avalanche, but it's all off the shelf. There are no unique products, so we can sell any Avalanche to all customers.

We will take our next question from Joseph Wolf with Barclays. Your line is open.

Sorry, I jumped on late so I may be asking something that you covered. But I just wanted to go through -- you talked about this -- the machine for the black polyester. Could you just -- it that a machine that your current customers would use? Is that a new customer base? Is that an add-on to try it out? How does that fit into the -- if the customer is adding or do you expect that -- is this a new customer base that's going to be looking at this when you guys think about it?

Our existing customer base is very much looking for a solution for dark polyester for many, many years. Some of our customers are using our existing ink even to do dark polyester, and they do various things in order to avoid dye migrations and things of that nature.

But what we are doing with this development right now is we want to do it in a sequence and a speed which is conducive to the speed that we're used to running at. So the customers that are relevant for this are existing customers as well as new customers. The system that we will use, because of the fact that this is a different ink set, we expect customers to dedicate systems to polyester and not move from one ink type to another on a regular basis.

So as a result of it, once it's out there we expect it to come obviously not just as an opportunity to increase ink sales, but actually to come with system sales. Also because of the fact that the curing profile of fabric will be different, more than likely customers will dedicate specific dryers to this process as well, because it's going to run at a different setting than normal.

Okay, that's helpful. The overall permitting, and I know you're a little bit -- or you're restricted in what you can say, but is the permitting issue that's going on with your customer teaching you any lessons about permitting in other areas? Is the region just very difficult, and is it transferrable in terms of how you have to approach new installations in the U.S. and in other geographies? And then I don't know if you commented on this in the prepared remarks, but if you could talk about that customer's European expansion plans and whether they've been impacted at all by what's going on in the U.S.

So we haven't run into these kind of permitting issues in the past. Obviously, any event that we have with any customer is something that we learn from, so I think it would be on a case by case basis depending on the relevant state laws in a given state. So just like anything, you live and learn, and we learned from this process. But we have not heard from other customers that they have any difficulties associated with permitting.

Regarding the large customer's activities outside the U.S., obviously I cannot comment whatsoever on that, unfortunately.

We will take our next question from Jim Ricchiuti with Needham & Company. Your line is open.

You may have answered some of this -- these questions. I joined a little late. But did you say if you had any 10% customers in the quarter other than your distributor?

No, just the distributor this quarter.

And we said that the largest 10 accounted for 67% of revenues versus 71% in the comparable quarter last year.

Got it. And can you give us an update, Gabi, on where you stand with the service business and your goal toward improving profitability in that business?

Yes, I did mention in my prepared commentary that I was very happy to say that this quarter, in the third quarter meaning, we really just scratched break even for the first time. So we're really getting there. I'm very excited about that. It also contributed to the gross margin somewhat because of the mix that included obviously relatively high consumables as well as services.

The services is becoming a real business for us, improvement evidenced both on the signing of service contracts as well as upgrades, which is an important piece of it. And so we're just scratching the break even. We may see in the future that we oscillate a little bit around that number, meaning I do expect this sometime in the next few quarters to actually reach profitability, but there could be certain quarters in which we're either break-even or below, very much depending on seasonality.

Just by way of example, usually in the fourth quarter because everyone's going gangbusters to run their existing systems, you wouldn't usually see customers upgrading systems in the fourth quarter, just an example. Usually they would do that as a preparation process. So I'm happy to say we're already hovering around that point of break-even. Okay?

Yes. You broke up a little bit at the end, but I think I got the gist of it. Did you provide any update on the availability of some of the new ink technology that you showed both at the FIT event and then at the recent tradeshow?

So at the tradeshow, we showed the new neon colors in the Allegro. Those are being tested by a customer right now. We expect them to be released right after this short testing that's being done, so I expect release to happen early 2018 of the neon colors to the general market.

Regarding other types of inks and applications that we showed at the FIT event, we did not provide a timeline for that. But some of those things will be rolling out next year, meaning in 2018. And that will include a new system with a new process that I was talking about in general terms that will expand our offering into roll-to-roll. So no specific dates yet, but some of this is rolling out in 2018, Jim.

Okay. And last question from me is recognizing the permitting delays and the uncertainty around that, I understand that's difficult to pinpoint when you might see orders pick up again from that customer. But can you talk a little bit about some of the other larger customers who have been purchasers -- who have purchased multiple units? Do you see any opportunity for multiunit sales over the next 1 to 2 quarters?

Well, I'll say only one that made themselves public so I can talk about them, which is Fanatics that presented at the FIT event and spoke about deployment on a global basis of both the Avalanche and the Vulcan system. So out of privacy to other customers, I won't say.

Obviously, we have multiple large customers. Each of them is at a different state of deployment of equipment, some of which we do expect will take multiple system orders next year. I'm very confident of that happening. But specifically, I can only say that -- reiterate what Fanatics' president had mentioned, that they're expanding and planning to extend the use of digital technology with us, which makes us very excited, with them becoming a global customer with activities, some of it through the acquisition they made of the Majestic business in the UK, in Japan and other regions as well.

(Operator Instructions) Our next question comes from Greg Palm with Craig-Hallum Capital Group. Your line is open.

I was hoping you could maybe expand on the Q4 guidance a bit. I guess what are the puts and takes on getting to the low versus the high end? And I'm just curious. What's your overall visibility like in light of some of these push outs that have occurred in the Vulcan? And just want to get your sort of overall confidence level in being able to recognize I think you said a few systems -- a few Vulcan systems during Q4.

Yes. So the general comment I'll make is obviously when we give guidance we stand behind it. And the $29 million to $32 million that we provided today is something we feel comfortable with. Otherwise it wouldn't be there.

Obviously, last quarter was an exceptional situation where we had this significant customer delay that we spoke about. And we did mention that the extent of Vulcan revenues in the second half won't be as much as we had hoped it to be. But still, as I mentioned earlier on, there will be multiple Vulcan systems recognized during the fourth quarter.

So just to say that range of $29 million to $32 million is built of a variety of different sources of revenue, systems, inks and consumables and services. We take a lot of time to analyze each of those when we prepare our guidance, looking at our various regions, looking at various customer types, be it key customers, strategic accounts, and regional accounts. And through a very thorough process, we analyze that and determine what our guidance will be.

Okay, fair enough. Gabi, I know you don't typically give guidance more than a quarter out. But you've mentioned a couple times in the call and it's in the press release that you expect significant growth in 2018. Care to expand on that at all? Would you be disappointed -- I think historically you've grown the business 30% top line. Would you be disappointed if you didn't grow that sort of stated historical rate next year?

Well, you know for a fact that we don't provide annual guidance, so I won't make any specific statements. And I do mean significant growth when I say significant growth, but I won't go as far as saying what I'd be disappointed with or not.

I tried to itemize in today's call what would be the sources of driving revenue growth. I think that the extensive product offering that we have, the expansion into the existing markets with new products, new capabilities to be able to go after the screen market, to which we have mostly been an add-on. And now starting to actually replace screen equipment also provides us quite a bit of confidence. Now that we see what kind of cost of print levels we can reach, we see the transition in the market going to smaller batches.

So all these things together, when we say significant growth, that's as much as we'd be able to give. But I can't say anything specifically about the year simply because we don't provide annual guidance. Clearly, this year is ending, because of the weaker second half, on a low point of growth year-over-year. That's clear to us. And next year we're talking about significant growth, so definitely more than we grew this year. I'll say that, but that's the obvious. I wouldn't say significant if it was just that.

Okay. I guess just last one from me, there has been a few questions already asked about the Allegro and overall roll-to-roll market. But I'm just curious to kind of get your thoughts on the overall opportunity there. Specifically, when we think about the non-apparel part of the textile market, I guess what are you seeing just in terms of overall adoption? Can you help us -- give us some sort of evidence that -- to help us kind of gauge the market size and growth rate from an industry perspective?

Well, the interesting thing about the Allegro is that it touches many types of markets. And I'd say that outside of apparel the most notable direction is customer home decoration. By now we have multiple customers in multiple regions that are going after the custom home decoration market.

For some of them, they've been in the existing print market, but they look at this as an expansion into a new market. Others have already been in this market and see this as a way to make themselves more user friendly so the customer experience moves from must choosing from a catalogue something that's already been designed to being able to choose a huge variety of different designs on an existing sofa that's basically covered with different types of fabrics that can be decided upon at the very last minute.

As far as the size of this market, home decoration in itself in general is -- one report that I read about home decoration in general, that's a very big market. But -- that's about a $600 million market, but that includes obviously the sofas themselves and not just the fabric. And what we're looking at is basically the transition of customers in the direction of being able to choose from a variety of different designs.

Some of our customers are already offering a user experience where you can actually play around with the design of the room and the colors of the room, and then look at what different types of designs -- how they would fit a certain color or tone of varied types of rooms. So I think that what's happening is that the customer experience is changing. This is also moving to become a much more advanced type of market.

So the market is big. We don't see any limitation on market size. What we're busy doing is showing customers the usefulness of the Allegro, how useful it is when wanting to move from one fabric type to another, allowing them to stock only white fabric of various types, be it canvas, cotton, cotton blends, acrylic, vinyl or whatever; only stock white and then at the very last minute commit to a particular design. That's a game changer for many of these players. So that's maybe a little bit outside the apparel market.

Yes, sounds like an interesting opportunity. All right, thanks for the color.

Thanks a lot, Greg.

There are no additional phone questions. I will not turn the call over to Gabi Seligsohn for additional closing or -- for additional remarks or closing remarks.

Thank you, operator. I want to thank everyone for being on today's call. Once again, apologies for the technicality which resulted from a misfortunate event on NASDAQ's side. And see you all next quarter.

That concludes today's conference. Thank you for your participation. You may now disconnect.