KRNT - Kornit Digital: Inflection Point Likely Still Several Quarters In The Future - Hold

2023-06-04 07:31:58 ET

Summary

• Last month, Kornit Digital reported weak Q1/2023 results, with revenues down by over 40% year-over-year as system sales remain impacted by challenging macroeconomic conditions.
• The company commenced buybacks under its recently announced up to $75 million share repurchase program.
• Despite some additional cash burn in Q1, Kornit Digital continues to command a fortress balance sheet with $623.9 million in cash, deposits, and marketable securities, and no debt.
• With an inflection point unlikely to be reached before some time next year, investors should remain on the sidelines until visibility has improved.

Note:

I have covered Kornit Digital Ltd. ( KRNT ) previously, so investors should view this as an update to my earlier articles on the company.

Last month, leading digital textile printing solutions provider Kornit Digital Ltd. or "Kornit" reported weak Q1/2023 results, but numbers came in largely in line with guidance provided by management on the Q4/2022 conference call in March.

Sales were down by more than 40% year-over-year as customers continue to show little appetite for new system purchases in a challenging macroeconomic environment.

Please note that the company does no longer break out the accounting charges related to warrants issued to key customer Amazon ( AMZN ) in recent years, which have had a material negative impact on both reported sales and profitability in the past:

The lower system sales contribution also impacted gross margins, which deteriorated to new multi-year lows just above 30%. With both substantially lower sales and margins, Kornit Digital reported a material net loss:

Adjusted EBITDA margin came in at negative 30.8%, right at the mid-point of management's guidance.

Cash, deposits and marketable securities of $623.9 million were down by $22.1 million from the end of Q4 due to negative free cash flow of $17.3 million and the commencement of buybacks under the company's recently approved up to $75 million share repurchase program .

During the quarter, approximately 338,000 shares were repurchased at an average price of $19.97. The company expects buybacks to continue at an accelerated pace in the current quarter.

Kornit Digital continues to have no debt.

For the second quarter, management expects sales to be in a range of $54 million to $59 million and Adjusted EBITDA margin to come in between negative 19% and negative 27%.

The company expects further improvement in the second half of the year with results approaching break-even on an Adjusted EBITDA basis, which would require a quarterly revenue run rate of $70 million and gross margins around 45%.

On the conference call , management discussed the company's efforts to grab market share in the so-called " Direct-to-Fabric " ("DTF") segment, as opposed to Kornit's traditional " Direct-to-Garment " ("DTG") target market.

I'm also pleased, to see the progress we have made in direct-to-fabric, which is now starting to contribute more meaningfully to our business. We are penetrating new markets and are building a very good funnel in key textile regions of Latin America, Europe and Asia Pacific.

During the first quarter, we added several new customers including one of the prominent printing houses in Italy and in Germany, with an international producer of high-tech functional textiles for a variety of industry, including for some of the world's highest end brands. We also successfully closed several Presto-to-Presto MAX upgrades.

With our innovative single-step solution, Kornit is the market leader in direct-to-fabric. We continue to strengthen our leading position, with Presto MAX and with new innovation including a revolutionary new ink, we will showcase at the upcoming ITMA tradeshow in Milan, that we believe will accelerate the penetration into the mainstream fashion industry.

In addition, Kornit has high hopes for its brand-new Apollo system, which will be showcased at the International Textile Machinery Association ("ITMA") exhibition in Milan next week:

And for the first time Kornit is going to penetrate the screen market . Just to remind everyone, more than 90% of our business as of today is coming from the enablement from customized design. Most of our customers are running very short run most of them running one off for the e-commerce.

For the first time, we are entering to a much, much bigger market bigger sum with the Apollo. Now, we couldn't do it before for several reasons. One of the reasons that is print quality, our print quality was always the best in the digital but wasn't good enough for the retail and for the brands as a replacement for screen.

Today with the MAX technology, our quality is not only as good as screen in many cases in photographic images much better and definitely in durability and other aspects. So this is one thing. Another milestone was the productivity. So we brought now the Atlas MAX but the Apollo can bring productivity like 3.5 times of the Atlas MAX, which is in part to the productivity or the speed of running (...) a very large screen machine.

However, the productivity is much, much better because if you look at the shift half of the time screen machine -- screen system is either because you need to replace screens and clean and change inks.

With digital, there is no idle time between jobs. So the machine is much more productive. And on top of that we are aiming with the total cost of ownership to be in a competitive position definitely in front of screen on every job below 500 run length. So if we're looking at this market of 500 run lengths and below, we are talking about billions of impressions that we are going after. So the opportunity here for Kornit is really to disturb the market and to become a big player in total incremental markets that till today we didn't address.

That said, it will likely take some time for the company to gain meaningful share in these new target markets. As Kornit's core business continues to deal with near-term challenges, investors should not expect operations to reach an inflection point before sometime next year.

Bottom Line

Kornit Digital's business continues to be impacted by macroeconomic pressures, with customers holding back on DTG system purchases in times of uncertain demand trends.

While management continues to expect improvements over the course of 2023, a return to profitability before 2024 looks unlikely at this point.

Going forward, much will depend on improvements in the DTG market and acceptance for the company's new Apollo system, which is targeted at replacing large-scale screen-printing systems.

With an inflection point unlikely to be reached before sometime next year, investors should remain on the side lines until visibility has improved.

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