Kornit Digital Ltd (KRNT) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Kornit Digital First Quarter 2018 Earnings Conference Call. As a reminder, today's conference call is being recorded. (Operator Instructions)

At this time, I'd like to turn the conference over to [Tom Cook]. Please go ahead, sir.

Thank you, Catherine. Good afternoon, everyone, and welcome to Kornit Digital's First Quarter 2018 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, statements of preliminary or projected results of operations or our 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 20, 2018, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made, as of this call or 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.

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 now turn the call over to Gabi. Please go ahead.

Thank you, [Tom], and hello, everyone, and welcome to our First Quarter of 2018 Earnings Conference Call. During today's call, I will review aspects of our performance, then provide an update on market conditions and the business environment we are experiencing. Guy will then walk you through the full financial details for the first quarter as well as state our guidance for the second quarter.

As today's press release shows, Kornit is off to a great start for the year. We are very happy to report results, which are above the high end of our guidance range for both revenues and operating margins. Our first quarter was impacted by several discrete events, including the delay of a major customer facility that we have discussed for the past few quarters. We are pleased that we were able to more than offset this headwind through growth with other customers, which was bolstered by a successful launch of the Avalanche HD series. This year, the announcement of our breakthrough product, the Avalanche HD series, lead to great momentum. We've literally hit the ground running with this new platform, which was first demonstrated at the ISS trade show in mid-January. The reason this launch was so successful is that the Avalanche HD6 redefines the competitiveness of digital versus screen printing by drastically reducing cost per print and by proving -- providing, excuse me, high-definition image quality and an improved hand feel. As we noted last quarter, our systems have now demonstrated the ability to perform 2-color print jobs on more than 200 units at a cost which is better than screen printing and 6- and 8-color jobs with 450 to 500 prints and it costs lower than screen.

Both existing, as well as new digital printers, see this as an opportunity to redefine their cost structure and become more competitive. Screen printers view this product as a way to provide a cost-effective and simplistic solution for the demand they are seeing for shorter production runs.

As reported in our April 3 press release, multiple Kornit customers recently completed their evaluation of a system generation, confirming the cost per print savings and print quality improvements.

As a result, we received orders from several customers for the new systems, as well as upgrades of existing Avalanches amounting to over $5 million, which strongly impacted our first quarter revenues.

I am happy to report that this momentum has continued into the second quarter as evidenced by orders in excess of $10 million received in the last few days. These orders include large system and upgrade orders that we have been working on for some time, so we would not expect this trend to continue at this pace, but we do see a vast incremental upgrade opportunity given that our global install base comprises of a 3-digit number of systems that are suitable for upgrading.

Next week, we will be presenting at FESPA in Berlin, which is our largest annual trade show. In light of the success of the Avalanche HD launch, we have decided to roll out an HD6 version of the Storm platform as well. Next week at FESPA, we will showcase this product for the first time. We expect to move to general availability during the fourth quarter.

The Storm platform has been our most successful in the European and Asian markets, which are characterized by a large number of small and midsize businesses, and we would like to make the benefits of the HD6 technology available to both existing and new customers in these regions.

Kornit's exhibit at the show will be designed around 2 focus themes. In the direct-to-garment printing area, Kornit will demonstrate how the company's HD technology expand digital printing's competitiveness against screen printing, both in terms of cost per print and in terms of print quality. The key solutions in this area will be the Kornit Avalanche HD6 and the Kornit Storm HD6. Those systems will be driven by the ColorGATE textile production server and will be connected to a web-to-print ordering workflow.

In the direct-to-fabric section of the booth, the company will show an end-to-end production workflow in a micro-factory setup. The presented solution will be based on the Kornit Allegro single-step printing system equipped with neon inks. This setup will be complemented by a Zünd digital cutting system and a sewing stage, producing finished pieces from the fully cured fabrics coming off the Allegro printer.

The 3D visualization and CAD stage will be handled by a partner company called Assyst and their Vidya product. This setup will take customers all the way from 3D file preparations to finished product in a matter of minutes.

Being able to demonstrate 2 full production lines combined with advanced software and workflow solutions underpins the uniqueness of our product offering and the maturity level it has reached. All our developments are geared towards making digital textile printing more competitive, profitable and straightforward.

As mentioned, we have seen strong demand for the Avalanche HD since its announcement. High demand has primarily come from the U.S. market where we are seeing a real ramp-up in production volumes.

Some of the customers ordering these systems thus far are ones which deploy both screen printing and digital printing systems for their business. In some cases, these customers outsource their screen printer jobs and obviously see their profitability impacted by doing so. It is clear to us that by adding HD6 capacity, they are enabling themselves to bring many previously screen printed jobs in-house, utilizing an inherently lean digital production setup that we offer.

One of the drivers for growth in demand is the penetration we are seeing into the promotional goods market. According to a 2017 report by the Promotional Products Association, PPAI, the promotional goods market amounted to $21 billion in 2016 with online sales representing about 20%. 45% of this $21 billion market is represented by 3 categories, wearables, textiles and bags, all of which are addressable by Kornit. Since this market is inherently cost-sensitive, the introduction of the HD technology now allows us to more effectively compete and provide an alternative to screen printing. Promotional products serve a variety of purposes. One key attribute is that they are relied upon in order to create a direct relationship between the consumer and the brand. One of the areas we believe our digital printing solutions, will provide benefit for this need is richness of design without the need to commit to large quantities. Another interesting avenue will be ability to target customers -- sorry, excuse me, an ability of target customers to customize branded products.

Here, we are not talking about complete freedom of design, which could jeopardize brand identity, but rather, an ability to pick from predefined high-quality designs, which, on the one hand, provides uniqueness, but on the other hand, speak a particular brand's language.

Such in-depth market analysis in recent months is helping us uncover many potential new customers. We believe our product infrastructure for DTG is able to cater for various business models, such as licensing, event-driven, brand identity creation, personal identity and as mentioned, promotional product. Looking forward, we expect 2018 to play out as a significant growth year for the company. This outlook is driven by the delivery of HD systems and upgrade orders and the positive momentum we have in the market for these products, the resumption of a large customer program beginning in the second quarter, the launch of the Storm HD6, which was announced today and will become generally available in the fourth quarter. We also expect to enjoy margin expansion emanating from a few drivers. Continued growth of our Services business, driven by a large number of system upgrades, moving from a significantly negative gross margin profile to a positive one will have a positive impact on overall growth margins. Ramp up of our DTG business primarily in the high productivity sector, which comes with higher average selling prices and margins and the tempering of a new employee hiring, slowing down the pace of OpEx growth.

Longer-term, we believe our technology is at a pivotal moment, as we have now achieved critical cost-per-print metrics to be a viable alternative to screen printing at medium-sized runs. As we continue to achieve incremental improvements in quality, speed and cost, we are very well positioned to meaningfully expand our addressable market.

Now, I will 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 first quarter non-GAAP pro forma results reflect adjustments for the following items: stock-based compensation expenses which totaled $1.2 million; amortization expenses related to the acquisition of intangible assets in previous years in the amount of $292,000; taxes on income related to non-GAAP adjustment in the amount of minus $88,000; and $148,000 for restructuring expenses in the U.S.

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 Investors section of our website. First quarter non-GAAP revenue net of the $42,000 warrants impact increased 14.8% to $31.1 million versus $27.1 million in the prior year and increased to 3.9% versus the prior quarter as a result of successful launch of the Avalanche HD, both its new system as well as upgrades and also regional growth in North America. Services revenue for the first quarter was $4.4 million accounting for 14% total revenues, an increase of 76.5% from the prior year and 16.9% from the prior quarter. The amount attributed to the noncash impact of warrants in the first quarter was $42,000 or 0.28% of revenue, $393,000 or 1.3% of revenue in the previous quarter, and $938,000 or 3.4% of revenue in the first quarter of 2017. The decrease in warrants impact provided a tailwind to our growth this quarter versus the prior year and the prior quarter. The warrants impact added 370 and 130 basis points, respectively. By geography, 64% of our sales were from the Americas; 27% from Europe, Middle East and Africa; and 9% from Asia-Pacific region.

Moving to customer concentration. Our main U.S. distributor contributed 19.1% of our overall revenue compared to 12% in the prior year and a major customer contributed 11.4% of our overall revenue in the first quarter compared to 1% in the previous year. Our top 10 customers accounted for 58% of our overall revenue compared to 60% in the prior year.

Moving to profitability. Non-GAAP gross margin in the quarter increased to 50% from 44.5% in the prior year period and 48.9% in the fourth quarter of 2017. Higher margin this quarter versus the year-ago quarter was a result of more favorable revenue mix as well as improved margin from services. On a GAAP basis, gross margin was 49.5% versus 43.9% in the prior year period and 48.3% in the fourth quarter of 2017.

Moving to our OpEx guidance. I'll discuss these items on a non-GAAP basis, which excludes nonoperating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation included in today's press release. Adjusted research and development was 16.4% of sales or $5 million compared to 17.2% of sales or $4.6 million in the prior year. The increase in R&D expenses primarily reflects an increase in headcount and materials. Sales and marketing expenses in the quarter were $5.4 million or 17.3% of sales compared to $4.9 million or 18.2% in the prior year. Higher sales and marketing expenses were the result of extensive trade show activities in the first quarter and extended sales and marketing group in the U.S.

General and administrative expenses in the first quarter were $3.4 million or 10.8% of sales compared to $2.4 million or 8.8% in 2017. Higher G&A in the quarter resulted predominantly from headcount additions. Headcount as of March 31 was 410 employees, 2 employees left in the previous quarter. During the last few quarters, we have moderated our personnel growth. And as we have mentioned in previous calls, we expect the pace of OpEx growth to be less than the pace of revenue growth in 2018. We expect this to drive some operating leverage compared to the prior year.

Non-GAAP net income for the first quarter was $2.1 million or $0.06 per diluted share, an increase of $2.6 million versus the year-ago quarter. GAAP net income was $565,000 or $0.02 per share on a diluted basis compared with net loss of $1.7 million or $0.05 loss per share for the year-ago quarter.

Our financial income this quarter was $533,000, predominantly as a result of accrued interest of our cash investment. Cash balances, including long-term marketable securities at quarter-end, were $98.2 million compared to $97.5 million as of March 31, 2017. Net cash provided from operating activities was $1.8 million this quarter compared to $12 million net cash provided in the prior quarter and net cash provided from operating activities of $2.5 million in the year-ago quarter.

Cash provided from operating activities was mainly a result of profit, net of depreciation and amortization. Decrease in inventory was offset by a decrease in trade payables.

Turning to our guidance for the second quarter of 2018. We expect revenues to be in the range of $33.5 million to $37 million and non-GAAP operating income to be in the range of 8% of revenue to 12% of revenue. These numbers assume no impact of fair value of issued warrants in the first quarter of 2018.

As a reminder, the calculation of warrants per value is based on combined effect of estimation of future revenues from Amazon, future Kornit share price in an unknown date, future stock volatility as well as other variables that currently are not predictable and some of which has no correlation to our business. Since as of today, we're not able to predict these variables, we'll assume the warrants impact at 0 value for guidance purposes only.

I'll now transfer the call to Gabi.

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

(Operator Instructions) We'll hear first from Joseph Wolf with Barclays.

Just a question related to the guidance. Is the range of the guidance you mentioned in the prepared remarks that a large customer is coming back on, is the range of guidance dependent upon the pace of that or is it a more general sort of range of opportunities that's -- and the $10 million of new orders for the HD product that you've received so far in the second quarter, is that all going to be booked in 2Q?

So first of all, when we provide a range of guidance, it's through a combination of the business that we see. And our expectation's we feel very comfortable with this guidance. Obviously, I will not provide specific customer information. But we're at a point where we feel comfortable providing this guidance regarding the orders received from our large customer or you asked -- what did you ask? You asked about what has already been booked, what was the second question?

I guess, the $10 million that you said is already booked on the HD product, that's all 2Q, that'll all be booked in 2Q?

That's a combination of mostly 2Q, but not only 2Q.

Okay. And just -- is there -- with the large customer turning on, is there a pacing issue or is it just now a demand issue? I mean, is it coming on slowly for any reason or is there -- is it just business as usual?

I don't think it's coming on slowly. I think the customer is doing extremely well. And they have -- as I said, the only thing I'm able to say is that the activity has been reinitiated. I wouldn't say that there's any issue now standing in the way of a continued ramp-up if that's what you're alluding to. Customer's doing very well and proceeding at a very fast pace.

Okay, and then just -- I guess, another question on the gross margin. The range there, is that a mix question? If you have a similar mix to this quarter, do margins still go up? Or I guess, the variance in operating margin, how much of that depends on gross margin mix and how much of that is kind of where you end up on OpEx?

It's actually both. We did better than, let's say, some of you guys expected, both in gross margin as well as lowering our OpEx. But those actually contributed to the operating profit.

And is that -- that's the story for the second quarter as well? Like, you'd mentioned having a potential for operating leverage, are we seeing some of that already given the headcount stability? Or is the FESPA investment going to -- is that holding down the OpEx right now?

No. We think, and again, we said we expect leverage compared to the previous year. And yes, we expect the growth in revenue to be more than the growth in OpEx. So you'll see improvement in operating profits in the second quarter.

Our next question will come from Bobby Burleson with Canaccord.

So I'm curious in terms of large customer or program ramping here in Q2, strong HD demand for Avalanche here in the first half. What the impact might be on seasonality as we start thinking about what the peak quarterly revenue run rate might be this year, the shape of the second half versus the first, wondering if there's any impact there on normal seasonality.

It's a little bit too early to state what the second half is going to look like. Obviously, we provided today guidance for the second quarter. We already have improving visibility into what the plan is for the third quarter. So I believe that as the year progresses, also revenue increase will take place. But I'm not yet in a position to tell you exactly what Q3 or Q4 is going to look like. I think the guidance in the second quarter, obviously, we feel is good guidance, that shows that business is progressing well. And we see, as I said, that this year is going to be a significant growth year for us. So a little bit too early to state how it's going to play itself out for the rest of the year. General statement is, strong year, ramp-up continuing. I don't see it slowing down anytime soon is what I'm able to say at this point.

Okay. Great. And then, you described this end-to-end digital workflow, and I'm wondering how close is something like that to being implemented in its entirety by customers, is that something that's already happening or is that something you envision for 2019, what's the time frame of that becoming a meaningful way that customers start implementing your technology?

Yes. So in the direct-to-garment, it's already working that way. In the direct-to-garment area, customers have a web-to-print capability, that goes all the way from order and customization, if that's the way that they work through directly to the system, which prints and then everything is automated so that already exists in production. The micro-factory approach that I mentioned for roll-to-roll, or what we call now direct-to-fabric is what people are calling it. It's something that some customers are starting to actually test. It includes, as I mentioned, 3D -- a 3D setup of, if you can envision, let's say, a dress the 3D setup of a mannequin, so to speak, with exact sizes where you can play with the patterns in a very automated and useful and intuitive manner. That translates to a 2-dimensional file that actually prints in a way that optimizes the use of the fabric. So let's say, if you have a dress, you cut it into cut pieces from that 3D image that was rendered, that translates into 2D, optimizes the use of the fabric, then it goes to an automated Zünd cutter, so no physical contact with that. And then at the very end of that, is a seamstress, sitting and actually sewing it. So we will show that. That is already being tested by some customers. It's something that a lot of people are talking about recently. And what we're saying about our offering unlike other players in the industry is that because of the fact that our process is truly an end-to-end process, that does not require any separate treatment of the fabric before or after, it's truly an end-to-end process from white fabric, all the way to something that is sewn into, let's say, a pillow, a dress or whatever you want versus other players that maybe -- are trying to set up a setup like this. But if you ask them, they will admit that separate treatment for this fabric is necessary before and after. So this is becoming a reality and an exciting one for us as well.

Great. And just quickly on the HD, you've got some of those out there, obviously, now and I'm wondering what are the early indications of how much material they consume or how much ink they consume versus the prior generation of machines, if there is a metric kind of -- in terms of ASP per year, what does that run rate look like, is it different?

Well, average selling price has not changed. So we've been applying the same thing...

I'm just -- I'm relating -- no, I'm relating to -- sorry, I was just relating the consumption of ink to the ASP, that's all.

Sure. I understand. So consumption of ink goes down by 30% to 40% in a very consistent manner. And so that's out -- that's actually out there, it's not just evidence, it's working in production. In fact, it all adds up to numbers that are phenomenal for some of these customers because they are able to take jobs they couldn't take before. I was just watching a video clip that will soon be out of a customer of ours in the U.K. that's actually -- that actually even did a 1,000 print job at a cost that was lower than doing it with the screen printer that he was using as a third party. So when I talk about how exciting this is and the order traction we're getting, truly this is something completely different from what they had before. The economics are changing for them. And again, the other thing that's important for us is the print quality. If you remember in the last earnings call, I spoke about the fact that we can now do screen-like prints with large homogeneous areas, what we call solid areas. The hand feel is much improved because we're using less ink in many applications. And again, if you go online, you're going to see some customer testimonials shortly on this. In many applications, they have moved from having to apply 2 layers of a white under-base to a single layer of white because we've improved what's called the L value or the intensity of the white, if I could call it that. So all these benefits are realized, and from a cost standpoint, 30% to 40% reduction is very, very meaningful. And what we're starting to see, obviously, with many of these customers is they're running more jobs through the systems than they did before, which is what we have predicted would happen.

Our next question comes from Brian Drab with William Blair.

You had a nice sequential ramp from third quarter '17 to 4Q to 1Q, and now you're guiding for a sequential increase to 2Q. Gabi, when you say you don't see it slowing down anytime soon, can you just clarify or shall we think about that sequentially or you're just saying growth year-over-year, meaning can we expect you to ramp from 2Q to 3Q and 3Q to 4Q this year?

Well, I think, what we're seeing right now is, again, and I purposely did not want to allude specifically to the quarters 3Q, 4Q, second half, et cetera, what I was saying is that the momentum is continuing. We're seeing the momentum continues. So I believe our momentum is going to continue beyond the third quarter is what I'm alluding to. I don't want to make specific statements about sequential and year-over-year, et cetera. But again, my overlying statement is that this is a significant growth year for the company. I will have to allow you to speculate on what that means. I'm not able to, at this point, it's too early for me to state clearly whether this is sequential growth or year-over-year growth. In general, a strong growth year for the company and started on the right foot. Good guidance for the second quarter when I say, I don't see the momentum slowing down anytime soon is because we are seeing that the momentum is continuing. That should roll, obviously, beyond the second quarter, but I don't want to say now and try to quantify third and fourth quarter.

Okay. That's fair. And is there any reason why gross margin would be below the 50% that you reported in the first quarter as we move through the year?

No specific reason the gross margin will go down. The only unknown, as we always mention, is the warrant impact. But if you look at the real business, the same momentum that Gabi mentioned before should impact positively on gross margin as well.

Yes, just to add to that, as I mentioned in my prepared commentary, the upgrade opportunity is very vast and is progressing quite nicely. This is a significant endeavor for us as a company because we have a very large install base of relevant systems. Just to remind everyone, systems that are relevant for upgrade are the Avalanche 1000, the Avalanche Hexa and then the Avalanche 1000 R and the Avalanche Hexa R. So there's quite a big install base there, which will benefit service revenues. And if you remember, when we spoke in the past about reaching the breakeven level and hopefully even rolling into profitability, we spoke about business volume mattering a lot and having a wide-enough reaching product offering for the service. And so this year is a good year for that and that's supposed to have positive impact on blended gross margins as well.

Okay. Is it fair to think about it as in terms of gross margin that you have a little bit of headwind to gross margin as you're shipping more systems that are using slightly -- using less ink, and -- but that's offset by service and upgrades ramping in that margin improving?

Well, you need to realize that we are transitioning to the HD very quickly, at the same time, Kornit has an install base of thousands of systems in the field, right. And the consumption by those systems is still the way that it was before. So the transition, as far as the impact on the overall ink revenues, will be gradual. And what I believe is going to happen is that, of course, as we say 30% to 40% less ink consumption, but at the same time, we believe, more jobs that are being run through the systems, right. So I don't expect to see a decline in ink revenues as a result of this transition this year. And I think that, again, because of the fact that there is big install base, using a different type of ink on the one hand, the fact that gradually you will see this ramping up, but at the same time, you're going to see more capacity. Those things should blend together and now provide a headwind on the gross margin side.

Okay. And just a last one on -- the non-GAAP OpEx was $13.9 million in the first quarter, that's below your guidance for the $15 million plus or minus the $500,000. I'm wondering what we should expect for OpEx for the quarter, going forward. Should it continue to be slightly below that $15 million level for the balance of the year?

I remind you of our previous call where Gabi said plus minus $15 million through the year, but we're not changing the statement.

$0.5 million plus/minus...

Yes.

On the $15 million, yes. So it could trend up to those levels. We're going to keep ourselves within that range is what Guy is saying. There's still hiring that's going to happen this year, as we've said, it's going to be at a slower pace. But the pace of hiring impacts that, obviously. And what's important for us, because this is a big ramp-up year, is to have the right people in the right places at the right time, right. So to be able to support the customers properly, et cetera, so there will be some and it could be more impactful in one quarter versus another. But OpEx, we're very comfortable with that statement, it still gives us the range that we need to operate. So that comment still stands, if that's what you're asking.

Our next question will come from Chris Moore with CJS Securities.

Yes. Just maybe stay with the gross margins and services for a second. So services slightly negative gross margin this quarter was 14% of revenue versus a little more than 9% year-over-year. In terms of getting to that crossover point, do we need -- do the services need to be -- continue to grow north of $5 million towards $6 million, just trying to understand is there some efficiencies that's gained or kind of how to look at that service growth and getting to that crossover?

Yes, service as an organization, and as I've always said, is a part of the company that has a certain fixed cost, which is primarily associated with headcount and the surrounding infrastructure. And so it is a case that obviously adding revenue is the most important aspect there in order to reach the breakeven and go beyond that point. We're treading around the breakeven point where we could, in some quarters, go a little bit above breakeven, some quarters go a little bit below breakeven, right. These levels of $4.5 million, $5 million, there is some lumpiness, right. There's lumpiness associated with service revenues because there will be quarters in which there's more upgrades than others, right. For instance, we all know that the peak season for our customers generally is third and fourth quarter. And so you could see certain quarters in which there's less upgrades than other quarters. So you will see some lumpiness with Service revenues that could impact profitability. But trending around the breakeven point is very positive for us. To remind everyone, we started at a very negative number, right. We started at 50%, 60%, even 70% negative gross margin as we have reported. And so the scale of this business has really had the most important impact here. And also, at the same time, very important for us is the price, what it is that we do service-wise at a very reasonable level because we respect a lot. The fact that customers, when it comes to services, want to spend a certain amount of money and not more than that. So it's -- I would say we should stay around the breakeven level. But once we grow consistently above the $5 million, et cetera, on a quarterly basis, then we should consistently be in a profitable area.

Our next question will come from Jim Ricchiuti with Needham & Company.

I apologize, I joined your call late. So these questions may have been asked, and if so we can always discuss it off-line. But I was wondering if you talked at all about where you are with respect to a new roll-to-roll product?

No, we didn't talk about that. No commentary about that. At FESPA, which is next week, we're going to show the Allegro system but surrounded by a variety of workflow solutions that go around it as well as neon colors. So no new product announcement on as of yet.

Okay. And, Gabi, with respect to the large customers, the 10 largest customers that you alluded to in the deck, have you talked at all about the penetration you've seen for the new HD products within your 10 largest customers or just in general among your large customers?

We didn't but I'm happy to provide a little bit more color. The reason that the launch was so successful in the first quarter was because we went and worked with our largest accounts that we knew could hit the ground running, that we knew understood the benefit and can take advantage of it very, very quickly. And one of the things that amazed me and this is my opportunity to thank our employees because the focus was huge. Just imagine, you announced the product in mid-January and you're able to ship, demonstrate and also receive orders and recognize very, very quickly in a matter of weeks because the benefit was so pronounced. But we started with the 10 largest accounts. Everyone is very, very much into this. Each of them at a different stage, I would say. And the nice thing is also that it's new accounts that are very interested and engaged in this as well. So we've tapped into the largest accounts as the place where we knew the benefit is. But now this is continuing and the nice thing is that the demand is very strong for this product. Because to an extent a customer that does not take advantage of this technology is kind of disadvantaged from a cost standpoint. And so it kind begs the question of any proprietary large systems is, "Hey, I need to start doing this because I need to continue to be competitive." And what we're trying to do is to make that as available as possible through these upgrades and other things that we do or if they want to order more capacity, they do. The other thing I mentioned is that there is a ramp-up going on in the U.S., which we're very happy about. So we're seeing real -- I would say, a real change in the pace of activity and I would say even in the seasonally lowest quarter, which is the first quarter.

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

I guess, just first on the resumption of your large-scale customer program that you've talked about. I know previously you had talked about completion of those, I guess, we were calling them catch-up systems, but the incremental systems that got delayed last year and the expectation was that would be completed in Q2. So knowing the guidance in the commentary, is that still your expectation or is there some potential that some of those are getting pushed to the second half now?

No. I mean, the things that we generally talk about is revenues. We try not to talk about the pace in which capacity has increased at our customer's site. And so what we have said before and actually transpired as we've said it would was that we would expect to see this business coming back before the end of the first half and that is exactly the case.

Okay. But, I think, there was, I guess, talk of, I don't know, $8 million or so in incremental system, I think you called them catch-up orders and I'm just -- I just want to confirm whether any of those hit in Q1, how much of that is Q2 and whether some of that is sort of falling through the rest of the year, I don't know if you can comment directly on that or not?

Directly, I cannot. But I can say that there weren't any in the first quarter.

Okay. Fair enough. $15 million of HD orders so far, which is fantastic. Can you give us any sense of how the mix of that compares to sort of new systems versus existing upgrades and I know you've talked about adoption from key accounts there, but curious if you're seeing traction with new customers for HD, maybe ones that were previously hesitant, but now make a little bit more sense given the decrease in cost per print?

It's happening in both. So both upgrades as well as new systems, obviously, an upgrade per unit is much cheaper than a new system. New systems ship at well above $400,000 per unit and upgrades. They are lower price, range between $80,000 and $100,000. So we're seeing both happening, both additional capacity with HD because customers are looking at the ROI that they have and the capacity they want to bring online and it makes a lot of sense, and at the same time, they look at their existing fleet. The other thing that we're doing very effectively, that makes us really happy, you might be aware that we're really the only company that is supplying 6 colors plus white. So the Hexa, what we call HD6, is the direction that many of these customers are going because they see the richness of color and variety and their ability to do pantone color matching that we spoke about is very significant. So we're also seeing what we call cross upgrades, meaning people that have an Avalanche 1000 or Avalanche 1000 R moving to HD6. So they move from a 4-color plus white to a 6-color plus white, that makes us very happy. Because, again, as I said, we're in the only company that provides that kind of solution and I believe it provides, for the long time, very good customer stickiness for us because this is a unique approach that no one else is taking in the DTG market.

Yes. That's great to hear. And then I guess, just lastly, as it relates to the OpEx, I'm just trying to figure out if there's a change of thinking there. I know last quarter, you gave some pretty specific guidance on a quarterly basis of how we should be thinking about that. And in this quarter, there's some sort of talk of tempering of headcount growth. I just want to make sure, has there been a change in thinking around OpEx at all in terms of specific areas where you're targeting the tempering of growth rates or maybe not necessarily?

As I said earlier on, we're still hiring, but at a slower pace than we did before. There are still positions that we're hiring for in R&D, in sales and marketing. G&A, we're pretty much done. But there are additions. So the pace of hiring is a combination of the pace in which we wanted to grow our OpEx. Obviously, we're always looking very cautious and carefully, but also making sure that we get the right talent, sometimes takes longer. So as I had mentioned, I got the question from Brian earlier on about the $15 million plus or minus $0.5 million, that still stands even though we finished at $13.8 million. So we keep that freedom to ourselves to be able to spend that much when we think that it's necessary. That still puts us in a very comfortable point as far as improved margins are concerned.

And I'll turn the call back over to Gabi for any additional or closing remarks.

Thank you, operator. Thank you, everyone, for joining the call. I invite those investors that are able to come to see at Berlin, please come by. There's a lot of interesting new products to see there, and we'll talk to you the next quarter. Thank you.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all, again, for your participation. You may now disconnect.