Kornit Digital Ltd (KRNT) 2021 Q4 法說會逐字稿

Greetings, and welcome to Kornit Digital's Fourth Quarter and Full Year 2021 Earnings Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Andrew Backman, Global Head of Investor Relations for Kornit Digital.

Mr. Backman, you may begin at this time.

Thank you, operator, and good day, everyone, and welcome to Kornit Digital's Fourth Quarter and Full Year 2021 Earnings Conference Call. With me today are Ronen Samuel, Kornit Digital's Chief Executive Officer; Alon Rozner, Kornit's Chief Financial Officer; and Amir Shaked-Mandel, Executive Vice President of Corporate Development.

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 related 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 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. 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 on March 25, 2021, which identifies specific risk factors that could cause actual results or events to differ materially.

Any forward-looking statements are made as of this call hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements, 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 website.

At this time, I would like to now turn the call over to Ronen. Ronen?

Thank you, Andy, and thank you all for joining us to summarize an excellent year and review our strong business momentum as we enter what will be one of the busiest and most exciting years in the history of Kornit. 2021 will be remembered as pivotal year in Kornit's path to become a $1 billion company in 2026 or before. Our annual performance reflects outstanding execution on the huge market opportunity we are after and the strength of our unique business model as we continue to exceed our growth and profitability goals across the board.

We delivered remarkable year-over-year total revenue growth of over 65% and shipped a large number of mass production systems that will continue to fuel the growth of our recurring revenue streams for years to come. System sales grew over 100% this year, and our recurring consumable and services revenues grew over 30%, reflecting a record growth of our customers. We also delivered an extraordinary operating margin, while continue investing in the business.

In 2021, we unveiled our 4.0 strategy and lay the foundation for the future growth of KornitX. We strengthened our team with talents in key leadership positions, scale R&D, and go-to-market function across regions, scale operations and infrastructure, launch groundbreaking technologies and with state-of-the-art customer experience centers and initiated innovating lead generation marketing platforms.

We also leveraged our strong balance sheet to enhance our organic efforts to digitize the production flow with smart inorganic technological innovation such as Voxel8. For the fourth quarter, we again exceeded the high end of our top line guidance and deliver record total revenue of $87.5 million, net of $7.9 million in warrants related to a global strategic account. Our record recurring consumables and services revenues were driven by an exceptional peak season. Gross margin expanded versus last year, and our operating margin was in line with our guidance.

We ended the quarter with a very strong backlog of orders and an extremely robust pipeline across all regions, giving us tremendous tailwind into 2022. Our business in EMEA is growing strongly with remarkable strategic projects with major Tier 1 brands and service providers, engaging in capacity buildup that we have seen mainly in the Americas to date, including an order for a double-digit number of ATLAS MAX systems and multiple integrated projects leveraging our KornitX platform. We see encouraging signs of recovery in Asian markets and had our strongest quarter ever in the region, with promising activities in China, Korea, Australia, and Japan, that fuels our expectation for a record year in 2022.

In the Americas, we had one of our best quarters for net new accounts purchasing mass production systems, and we expect many of these to rapidly grow their fleets in the quarter to come. Growth activities with our global strategic account, particularly this quarter in Americas continue to be tremendous and we expect these impressive volumes of activities to continue in 2022 and beyond as our relationship continues to be stronger than ever.

We started 2022 with outstanding momentum, the megatrends that have been fueling our business are intensifying in magnitude and transformation to digital on-demand sustainable production continue to accelerate. The digital fashion and apparel segment continues to outpace growth of the overall e-commerce sector, brands of all sizes, licensor, merchandisers, designers, and individual creators are all seeking to monetize the enormous traffic that creative offerings are capturing on the digital platform and are in desperate need for sustainable on-demand production. Traditional textile supply chains are completely broken and unreliable at this point. An alternative digital manufacturing supply chains based on proximity production and fast turnaround are becoming the new norm.

Additionally, the fashion industry is unfortunately responsible for severe ecological damage. As a result of excessive production, approximately 30% of manufactured garments are considered over production. Furthermore, the fashion industry produces nearly 20% of the global water waste. Kornit is the only company that offers high-quality, on-demand mass production digital solutions that can deliver to this massive need, and is also the only company that seamlessly connects the virtual and physical worlds of the textile industry. Moreover, Kornit is driving a massive positive ecological impact in the fashion and textile industry.

2022 will be exciting as we gear up for very strong growth and remarkable amount of groundbreaking new products introductions starting already in the first quarter. Backlog of orders for the remarkable MAX technology from our customers and prospects is very strong. Starting Q1, we expect approximately 75% of our installed ATLAS fleets to upgrade to the MAX and approximately 50% of the fleet to the active load automation throughout 2022 and into 2023. ATLAS POLY will be a game changer to the multibillion-dollar sports market. We expect this solution, especially when integrated with Kornit to unleash the massive untapped demand in this market for short-runs production, personalization and [disruptive] direct to funds and direct to recreational players business models. Our QUEST software-based solution is highly anticipated by customers scaling globally and seeking consistent quality. And we will also launch exciting upgrades to our cloud-based production analytics Kornit X platform.

Earlier this year, we shared that during H2 2022, we will unveil a groundbreaking high-productivity next-generation DTG platform. We believe this will be a revolution in how textiles are produced and will change forever the economical and sustainability balance of short-run mass production, shifting volumes to Kornit that have been traditionally untapped for digital production. We expect better testing in the end of this year with initial shipments in mid-'23.

On the DTF side of the production flow offering, the Presto Max will be made available during Q2 2022, we've never before seen applications and quality standard that meet the needs of the broader fashion industry. The pipeline for these products has been building strongly since we unveiled it, and we are very excited with our continued traction into the DTF market. We expect H1 '22 NPIs to meaningfully contribute to our goals in the second half of 2022 and well into 2023 and beyond.

The year started with another exciting announcement on our execution path to digitize the production flow with the announced acquisition of Tesoma. This acquisition will further empower Kornit's customers to operate end-to-end production process with greater automation and quality. We plan to take KornitX to an entirely new level in 2022. We see massive, massive opportunities for the end-to-end on-demand workflow that KornitX enables in both B2C, B2B environments across booming verticals, including sports, music, entertainment, influencers, gaming and broader creator communities.

We are laser-focused on 4 execution areas of this extremely strategic pillar: scaling our global fulfillment network, which is progressing extremely well; investing in tech layers of the platform such as automation, AI and data-driven decisioning; and reaching our front-end offering, such as content management, visualization and smart connectivity; and striking additional strategic alliances with mega platforms and marketplaces. Stay tuned for exciting developments with KornitX in the quarters ahead.

In 2021, Kornit delivered a strong message into the core of the fashion industry with the launch of the Kornit Fashion Week platform. This powerful platform is about unleashing key activity, driving on-demand sustainable production and promoting diversity. We will continue to expand the successful activities and are gearing up for Kornit Fashion Week Tel Aviv in April, and London during May. At these amazing events we will host tens of designers, brands, influencers and producers. At these events, we will plan to unveil our new production solutions showcase KornitX and demonstrate our vision for connecting the virtual and physical world in the fast approaching areas of Web 3.0 and the metaverse.

In summary, our fundamentals are excellence, the market opportunity we are after is endless and our competitive position is unmatched. Kornit has never been in a stronger position, and we are extremely confident in our ability to meet our $1 billion revenue goal by 2026, if not before. I am proud of our amazing team. Thank you for your commitment, and I'm looking forward to the exciting times ahead of us.

With that, let me turn the call over to Alon for a closer look at the numbers and the guidance. Alon?

Thanks, Ronen, and good day to everyone. As Ronen shared, we ended an outstanding 2021 and entered 2022 with a strong backlog and robust pipeline which gives us excellent visibility into 2022 and beyond. We had record revenue in the fourth quarter of $87.5 million net of $7.9 million noncash warrant impact related to a global strategic account, ahead of the top range of our guidance of $89 million to $93 million which, as a reminder, assumes 0 impact of the warrants.

For the full year, revenues were $322 million, net of $25.4 million noncash warrants an increase of 66.6% year-over-year. This was a very strong quarter for systems for both ATLAS and ATLAS MAX. Systems as a percentage of total revenue was 1 of the highest level we have ever experienced for fourth quarter. We view this as an extremely strong indicator of capacity needs, our customers are planning in 2022 and beyond and the associated ramp-up of future recurring revenues from these systems.

Not only were system sales strong in the quarter, but we also delivered record revenue from consumables and services, in what was an exceptional peak season for our customers. Services revenue came in at $11.6 million for the fourth quarter, net of noncash warrant impact of approximately 441,000 and were 13% of total revenue. This compares to $10.9 million in the year ago quarter, which included very strong upgrade revenue. For the full year 2021, services revenue was $39.4 million, net of the noncash warranty impact of approximately $1.5 million and were 12% of revenue, and approximately 39% year-over-year.

As we enter 2022, we are gearing up for a very busy upgrade cycle in addition to a number of innovative NPIs and have very strong backlog heading into the first and second quarter. Top 10 customers accounted for approximately 56% of total revenue this quarter. As we have said before, we expect our top 10 customers to be in the range of 60% to 65% of total revenue, but the composition of those top 10 will change given the progress we are making with new strategic and other customers.

Overall, we saw a very healthy mix of net new customers this quarter, especially in the Americas. And we are expecting some of these to rapidly grow with Kornit in the quarters and years to come.

Geographically, it was a record quarter and a record year for both EMEA and APAC and a record year for the Americas. In EMEA, we are seeing deals that are larger in size such as our expansion with print service provider and e-commerce customers, HFT71, market leader in Poland, who will purchase 10-plus ATLAS MAX systems, and Snuggle, a U.K.-based print on-demand provider who added a number of ATLAS MAX systems to their Kornit fleet. We also saw Printful move aggressively into the U.K. with new production sites and plans to expand capacity during 2022.

In APAC, we are seeing a very strong start to 2022 and a positive change in the market with nice growth in both high-end DTG and DTF. In the Americas, we saw excellent momentum with ATLAS MAX, which represented over 50% of total systems orders in the region. We had great traction with new accounts, which accounted for half of the systems order and excellent progress and strength with existing strategic accounts as evidenced by the significant warrants impact in the quarter. The team also secured our first ATLAS MAX sales in Latin America with 3 new clients and saw continued momentum with Presto throughout the Americas regions with multiple new clients.

Moving to profitability. We saw year-over-year progress in the fourth quarter with solid gross margins, driven by a mix of strong mass production system sales, a high volume of consumables as well as the impact of the improved profitability in service. Non-GAAP gross margins, net of the impact of the warrants came in at 49.6%. We expect gross margins to improve longer term given the ongoing shift to higher mix of mass production systems, profitability leverage in growing our recurring consumable business, continued operational efficiencies and margin improvement in our services business. We also expect continued acceleration of KornitX and other software-driven initiatives to positively impact margins over time.

Looking at the supply chain, our good visibility into the business and strategic planning combined with our experienced and proactive operations team gives us the confidence that we can deliver on our commitments for the balance of the year and into 2023.

From a cost perspective, we do see macro pressures and have experienced cost increases in certain areas. We have been able to mitigate some of this impact through cost reduction projects, and securing raw materials and production slots well in advance. We have had to share some of these cost increases through price increases in 2021 and plan an additional increase in the second quarter of this year.

Turning to OpEx. For the fourth quarter, OpEx was $38.4 million, up almost 17% from the third quarter and 50% year-over-year due to continued investment in scaling up our operations. As Ronen mentioned, we will continue to invest in the business in 2022 as we see vast opportunities for growth that will lead to long-term acceleration in revenues. Research and development expenses were $12.1 million for the fourth quarter or 13.8% of revenue as compared to $8.7 million or 12.1% of revenue in the fourth quarter of 2020.

R&D was up due to the continued investment in production floor innovations and new products, such as our new high throughput DTG system, which we will announce later this year. In addition to investments in Voxel8, KornitX and other advanced software applications.

Sales and marketing expenses were $16.6 million or 18.9% of revenue as compared with $10.2 million or 14.2% of revenue in the fourth quarter of 2020. The increase was due to continued expansion of our go-to-market capabilities gearing up lead generation and customer-facing activities in advance to the exciting NPIs that we are bringing to the market in 2022. And establishment of major marketing platforms, including our very successful Kornit Fashion Week Los Angeles last November.

General and administrative expenses in the fourth quarter were $9.7 million or 11% of revenue as compared to $6.7 million or 9.2% of revenue in the fourth quarter last year. The increase was due to continued staffing and other investments to support the overall business infrastructure, including investments in IT and data management as we move to our new ERP system. Looking forward, we would expect G&A for full year of 2022 to be in the high single digits.

Non-GAAP operating profit was $5.1 million or 5.8% of revenue for the quarter, net of $7.9 million or 7.8% warrant impact, in line with our guidance for the quarter, which assumes 0 impact of the warrants versus 16.3% in the year-ago quarter.

For the full year, non-GAAP operating profit was $30.3 million or 9.4% of revenue, net of $25.4 million or 6.6% warrant impact versus 2.7% for the full year 2020. We ended the quarter with 882 employees, a year-over-year increase of 210 employees and an increase of 33 employees from last quarter. The increase was again mainly in R&D, and sales and marketing.

Non-GAAP net income for the fourth quarter was $6.4 million or $0.13 per share on a fully diluted basis as compared to $11.5 million or $0.24 per share in the fourth quarter of 2020. Full year non-GAAP net income was $36.1 million or $0.74 per share on a fully diluted basis as compared to GAAP net loss of $9 million or $0.21 per basic share in 2020.

In the fourth quarter, GAAP tax income was $1.3 million, mostly due to the successful closure of tax assessment with the Israeli Tax Authority. Fourth quarter GAAP net income was $1 million or $0.02 per share on a fully diluted basis as compared to $5.9 million or $0.12 per share for the fourth quarter last year. Full year GAAP net income was $15.5 million or $0.32 per share on a fully diluted basis as compared to GAAP net loss of $4.8 million or $0.11 per basic share in 2020.

EBITDA for the fourth quarter was $6.7 million as compared to $12.7 million in the year ago quarter and adjusted EBITDA was $14.6 million as compared to $14.5 million in the year ago quarter. Full year EBITDA was $36 million compared to EBITDA of $9.1 million in 2020. Full year adjusted EBITDA was $61.4 million compared to adjusted EBITDA of $14.5 million in 2020.

Net cash provided by operating activities came in at $9.3 million for the fourth quarter and a record $52.5 million for the full year 2021 versus $32.4 million for 2020. We ended the quarter with a very strong backlog, including $5.4 million of deferred revenue and customer advances.

Our cash balance, including bank deposits and marketable securities at quarter end was $798 million, an increase of $341 million versus last quarter, mainly due to the successful equity offering in November. I will note that this was the first time in Kornit's history that we ended the quarter with over $1 billion in assets.

Turning to guidance. We expect a strong start to the year with first quarter revenues to be in the range of $87 million to $91 million, representing approximately 35% year-over-year growth at the midpoint. While we are not guiding for the full year, we expect the regular seasonality in our business with the second, third and fourth quarters of 2022 being stronger than Q1 and revenues in the second half of '22 exceeding total revenues for the first half of '22.

We expect to generate non-GAAP operating margins in the range of 7% to 9% in the first quarter, and EBITDA margins of 9% to 11%. We believe disclosing EBITDA margins is important given the increased depreciation expense associated with our new facilities and other planned investments. While we are not guiding for the full year, we expect higher operating margins in the second, third and fourth quarter of 2022 versus Q1 of '22, with operating margins in the second half quarters to be in the mid-teens. I want to reiterate that all guidance assumes 0 impact from fair value of issued warrants in the quarter with our global strategic account.

In summary, we are very proud of our full year performance and our strong fourth quarter with so many terrific accomplishments made by the entire Kornit team. Entering 2022, we have never been in a better position as a company, and we will continue to build and expand on our strong foundations with new product introductions, targeted investments in the business, strategic acquisitions and partnerships within the 3 key pillars of our strategy.

With that, let me turn it back to Ronen.

Thank you, Alon, and I believe now we are ready to take questions. Operator, please open the call for Q&A session. Thank you.

(Operator Instructions) Our first question today is coming from Rod Hall from Goldman Sachs.

I guess I wanted to kick off, given we're in reopening, Ronen and you have so much insight into the fashion industry. I wonder if you could talk a little bit about how you see reopening affecting demand, both for the kind of digital fashion that you guys are behind and your products? And then I have a follow-up.

So we see a major trend in the market, both from brands, designers, creators, many, many others companies that would like to go digital and would like to connect into -- from the digital to the physical. Kornit is playing a major role in connecting the digital to the physical. We see major demand going into the e-commerce into the different platform of the marketplaces. And the good -- what we have seen in Q4, we see a peak season from our customers. It was one of the strongest peak season ever. Our customer grew about 30%, and we saw demand around the clock. This is coming mainly from the digital world that would like to connect into the physical world.

Kornit is in a unique position and our customer is unique position to enable this connectivity from the virtual to physical and this is where we see the growth is coming also moving forward into 2022.

Do you -- I guess what I was getting at is, do you think demand could accelerate given reopening? People haven't really been too much into fashion in lockdown. But now as we continue to reopen, it seems like fashion would be more of interest to people? Or do you think that, that demand is already kind of there?

No, I think it's just the beginning. We actually -- what we are enabling is to unleashing the creativity for any creators. Till now, the supply chain was the limitation of being able to create. So brands were producing, well design products and producing it overseas and shipping it and taking 18 months till the product is coming to the shelf. In today's world, in the digital world, what Kornit is enabling is actually any creators, any designers to take their design, post it wherever they want, if they want to post it in Shopify, in Instagram, and enable them to sell it on the KornitX platform and connect it to the GSM network of our fulfiller of our customers are choosing Kornit technologies.

If I can add, we see much, much bigger exposure from Kornit to the fashion world. And this is part of our plan to open to these words with the fashion events that we are running and we plan to continue with this because we see the traction. We see the interest that is coming from not only the traditional customers of Kornit, but the ones who are running the fashion world. And this is -- it gives us a lot of confidence that it's in the right direction.

Okay. And then I had just a follow-up on question was on price increases. I know you've been putting some through. I wondered how customers are reacting to the price increases? And then what you're thinking in terms of increases as we move through this year?

Yes. So it's -- first of all, price increase is the last resort. This is not something that we would like to do. We're actually putting a lot of focus on cost reduction as much as we can, but there are areas that we have no choice. I'll give you an example, logistics. Logistics cost is going up dramatically, and we have to share it with our customers. So we are not taking the entire increase, of course, and pushing it to our customers. We are sharing some of the pain. We're actually communicating very, very clearly ahead of time, at least 3 months ahead of time with our customers, enabling to order ahead of time if they would like to order new systems or new or additional ink and we share the minimum possible with our customers. We've already done it last year, and we are planning to do it this year, overall customers understand the market dynamics and accepting it in a positive way.

Our next question today is coming from Patrick Ho from Stifel.

Congrats on a nice year. Ronen, maybe first off, in terms of the supply chain. It sounds like you guys managed through that very well. Can you give any color on maybe some of the challenges and the headwinds that you experienced during the quarter and how you look at the current environment from that angle?

So I think that we are facing the same issues at any other company is facing. First of all, logistics. So logistics -- first of all, the cost is going up. It's not predictable, many shipments that we were supposed to get being delayed, which carries components and materials for different products that we are trying to build and to sell. But overall, as we have a great visibility to our business, we managed to share the visibility and place order ahead of time with our suppliers, with our contract manufacturers, we secured space with a contract manufacturers to produce ahead of time. We leverage our balance sheet to place order ahead of time and increase inventory in areas that we felt that we have to secure, and you can see it on our balance sheet as well. And we feel right now secured for 2022 and even entering into 2023.

On top of that, I believe that we have the best operational team in the world working around the clock. Every morning, we have new surprises of things that are being delayed from our suppliers and our team here is fully committed to find solutions. Until now, we manage to deliver to fully to the SLA we are committed to our customers.

Great. That's helpful. And as my follow-up question, your recent acquisition of Tesoma. How are you going to manage their product base with yours? Is it something that you could still sell on a stand-alone basis to customers? Or is it going to be kind of integrated with your current system portfolio has kind of like an add-on or kind of complementary solution?

So as you know, the acquisition, we will complete it in the beginning of April, April 1, this is the aim. So we just cited, right now, we are entering into the PMI process. So there will be a transition period. Tesoma has products that they are selling, not all of them to the textile market. Gradually, we will change the focus of Tesoma with their technology into the textile market. There will be products that we will go to integrate fully to our solution that will be fully connected in line to our solution. There will be smart technologies that we are taking there from Tesoma. It will be more sustainable, better total cost of ownership and much better productivity. So we are excited about this acquisition. There's very strong capable engineering and technology teams there. We are eventually going to integrate them into Kornit team, but we are taking it 1 step at a time.

We have a very clear target for end of this year to bring to the market the new solution based on the integration of Kornit and Tesoma. Those would be smart solutions, some of them will connect in line to our solutions. Some of them will be near line to our solution.

I just want to highlight what the Ronen started with. We signed the agreement. We haven't closed the deal yet. So we are in discussions and working on the plan to be as ready as possible for PMI post closing, and then we'll take it from there to execution.

Our next question today is coming from Jim Suva from Citigroup.

Can you let us know kind of a little bit about what's normal or expected for the cadence of kind of your automation of these integration of acquisitions you're doing? Like, is there like a alpha phase and a beta phase and then a couple of quarters it starts to roll out more broadly, is that the way to think about it? Or are we already at some of those phases now? And what time line should we be thinking about?

Suva, as you know, last year, we shared our strategy, 4.0 strategy, which is based on 3 pillars. The base pillar is really about the operations side, the production flow with the aim to automate and to digitize the entire production flow. Until now, we are focusing very much on the printing engine, but there are other parts from the ERP, to picking of the garments, to printing, to drying, to folding, to shipping. All of this, the aim is to automate to digitize. By the end, we see it as a dark room with no operators. And then we are taking it 1 step at the time.

For example, this year, we announced that we are coming with automation into the ATLAS family, ATLAS MAX and the ATLAS, which will enable a much faster automation -- much faster loading and unloading on the ATLAS MAX with much better predictability and consistency. You will see later this year, we are going to unveil our next-generation platform for the DTG. I already mentioned it in previous call, we are going to unveil it here in Israel in an event in the beginning of April. This system is taking the automation to a totally different level, both from the loading and unloading, but also from the drying perspective and the overall smart capabilities of the entire solution. So we are looking at the entire solution on the flow, and the aim is fully to automate it.

Great. And then my follow-up question is, I believe you recently announced an expansion or new center for ink in Israel, if my memory is correct, I could be off on that. Is that new announcement? Or was that due to you had constraints at your other facility? Or is this more going to reduce lead times and shipment costs and delivery times to your customers? Or how should we think about that?

No. This was a project that we're already working for the last 3 years. Of course, we announced about it because it was included a massive CapEx investment. It was -- it's now ready. It was -- it's a very, very successful project, which actually we decided to go for it when we looked at our long-term strategy of becoming $1 billion in 2026 and even going beyond that. So we understood that we need more capacity to produce ink and the current ink plants would not be sufficient for 2026.

The situation right now is that we actually moved already to the new ink plant, we started to manufacture the quality is fantastic. We are going to see some benefit, not only in terms of quality and automation, but also in terms of sustainability, and longer term, we'll see improvement in the cost of producing those inks.

Our next question is coming from Brian Drab from William Blair.

I was wondering if I could just start with the upgrades. And can you give us a sense for what percentage of those upgrades do you think you can complete in 2022, the percentage of the total that you expect to do ultimately?

And are the margins -- can you make any comment on how the margins would be on those upgrades relative to your corporate average?

Yes. Good question. And I'll try to give you some color. I will not be able to provide you exact numbers. So we have 3 main new upgrades doing starting 2022. One of them is the obvious from the ATLAS to the ATLAS MAX. As we mentioned, we expect about 75% of our installed base to go through this update, some of them in 2022 and some of them in 2023. We expect to end this upgrade by the end of 2023.

The second upgrade is about automation. Automation first of all, we are aiming for those customers that are buying now ATLAS MAX, they will be able to add automation starting end of Q2 and later on also customers that have ATLAS will be able to add automation on top of the ATLAS. This will impact positively mainly H2 of the year and following, of course, 2023.

The third upgrade is about Presto MAX. So customers that are using the Presto will be able to upgrade to the Presto MAX during H2 of this year, which will provide them a huge benefit. As for the Presto MAX, we expect all our installed base to upgrade to the Presto MAX. For the automation, we expect 50% of our installed base and for the ATLAS MAX 75%. And in terms of time frame, we didn't share exactly how many we expect in 2022 and how many in 2023, but it's going to be along with those years.

Ronen is the automation upgrade coming you said at the end of the second quarter. I think originally, you were planning to have that in the first quarter. Is there anything to comment on there?

You are right. In terms of the ATLAS MAX, we started already the upgrades from ATLAS to ATLAS MAX. The automation, we decided to delay it a bit into Q2, end of Q2, some of it because we wanted to focus, first of all, on the ATLAS MAX before we are going to the installed base of the ATLAS. We had a bit to wait for the maturity of the ATLAS MAX to implement the solution, and we are starting now beta testing of this solution, we'll be ready to go to the market by end of Q2.

Okay. And then can you say anything about how the margins are going to be on these upgrades relative to the average?

The margins are very similar to the average margin that we have on other products.

Okay. And then I'll just try to ask 1 more. Can you give us any sense for, I know you're going to show -- announce this machine with more details on the DTG side, the high-volume machine later this year. But can you give us any sense for what sort of unit volumes become economical, potentially on this machine compared with today?

Great question, and we will be able to share much more information in April, but the aim of this technology and the DTG is really going after the mass market. So while the ATLAS and the entire portfolio that we have on the DTG is mainly going to the on-demand for the customization and one-off and very, very short runs, this solution systems is aiming for much longer run, aiming to go after screen replacement and after the traditional market that used to run on screen for brands and fashion industry.

So just to add on that, it's a totally additional market. It's really incremental market was untapped until now. We could -- we didn't play there. And for us, it's a huge potential moving forward. Again, this product we are going to unveil in April is going to be ready for the market mid of 2023.

Our next question today is coming from Tavy Rosner from Barclays.

I wanted to talk about KornitX a little bit. You mentioned the opportunities on the road. And I was wondering if you can comment on the different stages of the ramp-up coming from there? Is it to increase kind of the number of machines that are connected is to invest more to the front end of the back software? How should we think of the (inaudible) in next coming the quarters?

Tavy, Can you repeat the question, I couldn't hear you clear enough? Tavy, can you repeat please the question?

I changed my headset. Is it better now? .

Yes, we can hear clear now.

Okay. Sorry for that. Yes, I wanted to ask about KornitX. You mentioned the opportunity. And obviously, you have the long-term guidance. But I wanted to see about the next stages of the ramp-up from here, is it to increase kind of the number of machines that are connected to the system? Or is it to kind of invest in software? Or how should we think of the road map from here for the next coming quarters?

So KornitX is a massive, massive opportunity for Kornit and for the industry. And we are working right now, we are very much focused on 3 pillars under KornitX. One, is global fulfillment network. Working with our customers to define who is going to be a fulfiller for KornitX in all territories around the world. So not everyone will be part of this network. You have to meet defined criterias in terms of quality, capacities, SLA, pricing, and other stuff. So we are working very, very closely with defined fulfiller to meet the SLA on this pillar.

The other pillar is really the platform itself. The KornitX platform, which we're always adding more capability. Now we are coming with new UI and UX much more improved. There's a lot of capability in terms of designs and the ease of use of the system. So this is another focus area for the team.

And the third focus area is really about the demand generation. And there, we are looking on some really, really big deals. I hope that we will be able to announce very, very soon on some very, very big deals connecting Mega platform into KornitX, very similar to the Canva deal, but with even much bigger platform, driving the entire volume to KornitX. So we see many segments, interesting segments that can connect to KornitX, if it's in the fashion industry, if it's in the gaming industry, if it's in the corporate world, We are working on a few very interesting projects in teams, sports teams, connecting to fans and through KornitX. So the potential there is massive. The entire world is moving into the digital space and Kornit is the platform to connect the digital into the virtual into our customer base that's using the Kornit systems and enabling their own demand manufacturing anywhere around the world in a sustainable way.

Great. And last one for me, if I may. I mean you guys mentioned the significant net cash position that you have on the book. And historically, you mentioned some of the proceeds from the (inaudible) going into acquisitions. And I guess I was wondering how we should think of acquisition going forward? Should we think of kind of a lot of smaller ones that you guys have made, like complementary technology or perhaps down the world, you'll be thinking of kind of a large one on the software side?

So we are looking at -- on the 3 pillars, both on the production flow, digitizing the production flow both on the KornitX. There's a lot of solution around it that came complementary, the KornitX solution on data, managing data on AI, so it's really interesting. The other pillar is more in the digital world. We will looking into areas of playing more on the high value stream and capturing demand out there in terms of the size of the deals, there's a big range. We are looking for some small companies, but we are looking also for some more sizable M&A potential in front of us.

Our next question today is coming from Greg Palm from Craig-Hallum.

Yes. Congrats on the results here. I guess just as a follow-up to Q4. EMEA really stood out, and you gave us a little bit of color, but maybe we can dig into that a little bit more. I'm assuming that was sort of the big part of the upside relative to maybe your own expectations?

The upside versus the expectation, it cames both from EMEA both from Asia. Asia had a great quarter as well and Asia is entering into 2022 really with massive momentum and nice thing to see in Asia is also that they -- we start to see business also in the DTF, not only the DTG. But also from our global strategic accounts, so you should assume that some of the kind of surprise on the apps on the numbers, not only coming from systems or coming from the recurring. It was a peak season to the recurring ahead of what we expected. Our customers printed more than we expected and generated more revenue out of the ink, which is great because also it's in better gross margin.

If I refer to the different revenues, Ronen mentioned a very strong peak season with very nice consumables revenues. But in addition to that, we had very strong system sales in Q4. So the regular seasonality tends more to the consumables in Q4. In this quarter, we enjoyed both consumables and strong system sales.

Okay. That's helpful. And I mean, I guess, as we look back on the last year, clearly, a huge year for systems growth. And you mentioned that even Q4 was a lot better than normal seasonality. So I'm curious, as you're talking to customers, is the reason that they're accelerating their own investments changing at all? I don't know if that's just more replacement of screen, maybe it's got to do with supply chains. I don't know, maybe a bigger focus on sustainability. What are you seeing out there?

Is a different play between the DTG to DTF. The DTG, the main demand is coming from a from the digital world. Most of our customers are into the B2C or B2B2C business connecting through all kinds of e-commerce marketplaces. The demand is coming from there. As I mentioned, into the future with the new system that we are bringing in the DTG, we will start playing more in the traditional market, replacing screen printing in more longer run.

In the DTF is a different play. DTF, first of all, is a play of sustainability. As you know, DTF, the traditional way of producing own fabric is massive polluting, consume a lot of water, there's a lot of regulation right now in different countries that we cannot use it anymore and have to switch to pigment. And we have, by far, the best pigment fully sustainable. So this is a major driver into our technology.

Another driver that we will start to see, we start to see fashion and not only printing on garment, printing on roll of fabric to create fashion wear or fashionable home moving online as well. And customization is coming to the fashion world and consumers can order different design. And this market is moving also to on-demand production versus producing into inventory and trying to push it to the market. So those are the 2 main drivers on the DTS, and we're enjoying a massive growth.

We are entering Q1 with really strong backlog of order into the DTF, and we are adding more capacity and gearing up in terms of headcount on the DTF on the ground to go after these markets.

From a customer perspective, we see the larger customers continue to expand either in new sites or in new territories. We see it very clearly. And we see many new customers joining to this play. So we have a very nice ratio also of new customers, which can give you an indication on where the volume goes.

I would just add one more on is that the platform of the Kornit Fashion Week is really driving the awareness that for -- that was missing in the market for designers, that they really can unleash the creativity. They can design anything they want and getting the same day. They don't need to wait 6 months or 18 months to get them product. They don't need to order hundreds of meters, they can order, they can design a dress and print one dress and produce it and ship it the same day. This is a revolutionary concept the platform of Kornit Fashion Week that we've done in L.A. And this year, we are going to do it in London and in Israel again, is really driving this message to our market, and we feel the change. We feel the change due to this marketing activity.

Next question is coming from Jim Ricchiuti with Needham & Company.

You talked about the strength in Europe. And Ronen, I'm not sure if I heard you correctly, but I thought I heard something about a major Tier 1 brand in Europe. And I wonder if you could elaborate on that. Is this a new customer, existing customer, can you talk to that?

So we didn't mention the name, so I cannot mention the name, but we are dealing with some major, major brands in Europe. Some of them we mentioned in the past, like the ASOS and the Boohoo of the world, what I can tell you, those are Tier 1, few Tier 1 brands that we are dealing in Europe right now and potentially can lead to massive growth, both on KornitX and systems and ink. What we mentioned is few customers fulfillers that purchased multiple units, one of the more than double-digit number of units, it's HFC71 based in Poland, and they are growing very, very fast. Already have a few of our system and now they are scaling faster business, but also Snuggle in the U.K. We can see Printful expanding both in the U.S. and Europe, across Europe, in U.K., in Barcelona, in Poland and many other places. So this is another example of massive expansion of 1 of our customers.

And a question for you, Alon. Just you gave a little color on G&A. I'm wondering on the R&D side, is there going to be anything unusual in terms of the cadence of the R&D spend over the course of '22, just given the work you're doing towards developing the new DTG system?

So nothing unusual in terms of the expenses, a lot of unusual things in terms of innovation. So we are continuing to invest in R&D heavily. And this is for the great NPI coming this year and the investment in KornitX and other new applications. And -- but as you can see, we grow the R&D expenses in a responsible way and it continues to grow from quarter-to-quarter, but in a controlled way, and there is no something special that will happen in the future.

Our next question is coming from Jared Maymon from Berenberg Capital.

So first question for me. So I think 1 of the key benefits of the MAX technologies is obviously, XDi, which adds in the heat transfer vinyl, et cetera. And Ronen, I think you mentioned I think the number was 75% of your ATLAS installed base, you're expecting to upgrade to the ATLAS MAX. So I'm just wondering, I mean, if I think about it, if I own 100 ATLAS systems, and 10% of my jobs require XDi, then why would it go and upgrade 75% of my systems.

So I guess the question is kind of our -- are a lot of these customers that are upgrading -- are they doing it for kind of XDi and some of the additional capabilities? Or is it more about productivity and the kind of in system changes?

So of course, it's not only because of the XDi. So there's a massive benefit to the MAX technology. First of all, is the quality. The print quality is differently. When I'm saying print quality is not only the way it looks, but it's also the durability of the print, the ability to print on a much wider media range. So many, many different types of media that you couldn't print before. Using the ATLAS now you can do it with the ATLAS MAX. So on the print quality is a massive jump and it's meeting all the highest quality sensitive brand quality standard.

The second is productivity, actually by implementing Kornit -- by implementing the MAX technology, you've increased the productivity of the ATLAS by more than 20%. So just by calculating the 20% productivities that you are having, and this makes a lot of sense to upgrade and it was quite a lot for our customers to do that.

And of course, the third point is new application, which is leveraging the XDi. You're absolutely right, not everyone is going to leverage the XDi, but those that will leverage the XDi, they will be able to sell much higher premium products, get much better margin on the products they are selling to the market, and we will see the adoption rates increasing also in the XDi moving forward.

Okay. Great. That's really helpful. And then I guess the only other question for me. Just on KornitX, it sounds like this is already progressing pretty well. And I know you've mentioned before, you guys have a pretty sizable backlog of customers that are trying to apply this offering and kind of get in on it.

So I'm just wondering, is there any color you can kind of provide us on what KornitX might contribute in 2022, either from a top line perspective or how close the business might be to that kind of longer-term gross margin target?

Yes. So in terms of guidance, we are still not providing guidance for the KornitX as a business and the all business. I can tell you that it is already generating a few millions of dollars during 2021 and Q4 was a record quarter for KornitX. We see very, very nice growth coming into this platform. We have ambitious plan to grow the KornitX during 2022. And of course, the margins that you are going to see on this platform moving forward is higher than the margins that we even see on the system and ink side. So it should contribute very positively on the margin side.

Our final question today is coming from Chris Moore from CJS Securities.

I'll make it quick. So just trying to better understand kind of the evolution of the top 10 customer mix, specifically kind of how many global consumer brands are in there now? And are you expecting that too much differently 12 to 18 months from now?

So at this time, we are not providing color as how many brands are within the top 10, okay? The suspicious customer, you probably know, one of them is, of course, a global strategic account and is the biggest one. And we have most of the top customer fulfillers that are on this list. We expect to see a massive change or a major change moving forward in the next 2 to 3 years. You will start seeing new names coming into the top 10. Some of the brands and some of them other marketplaces are going to enter into this space as well. So while the top 10 will continue to be at around 60%, this is our assumption moving forward. The names will change dramatically, and you will see brands -- major Tier 1 brands part of this list.

Mr. Samuel, we have no further questions. I'll turn the floor back over to you for closing remarks.

So I would like to thank everyone for joining the call today. We are very, very proud about what we have achieved in 2021, and we're really looking forward for 2022, which is going to be an exciting and very, very busy year. And I'm really looking forward to share with you more in the next earnings call. It's also an opportunity to invite you again, all of you, analyst community and investors to come to the Fashion Week here in Tel Aviv in April, beginning of April, but also there's another opportunity to come to the Fashion Week, Kornit Fashion Week London second week of May, we will be happy to host all of you to share with you our plans and to show you the new technology, which we are going to unveil here in Israel in April. So we are excited about this year, and would like to thank all of you for your trust.

Last thing I would like again to thank our employees for doing an amazing job for caring about our customers, being so passionate about it, working day night and really making it happen. So thank you for our employees. And by that, I wish all of you a great day and I'm passing the call to Andy.

Great. Thank you, Ronen, and thank you, Alon and Amir, and thank you all for joining us today. As always, if you should have any follow-up questions, please do not hesitate to reach out to me directly. With that, have a great day. And Kevin, could you please go over the call? Thank you.

Certainly, that does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.