KRNT - Kornit Digital: Total Disaster - Sell

• Leading digital textile printing solutions provider shocks investors with a severe earnings warning for both Q2 and Q3.
• Slower e-commerce growth in conjunction with macro headwinds has resulted in some customers being saddled with excess inventory which is expected to continue for the near term.
• Delays in the completion of new customer production facilities and the likely continuation of competitive pressures have added further to the company's woes.
• Revenues derived from its largest customer Amazon are likely to be down more than 40% sequentially.
• Given the magnitude of the miss and uncertain outlook, I expect a number of analysts to throw in the towel on the stock. Investors should abstain from chasing the shares or even consider selling existing positions.

Two months ago, leading digital textile printing solutions provider Kornit Digital Ltd. ( KRNT ) or "Kornit" shocked investors with mediocre first quarter results and a weaker-than-expected Q2 outlook due to slower customer demand and competitive pressures.

At that time, management was still optimistic for the second half of the year:

For the second quarter of 2022, the Company expects revenue to be in the range of $85 million to $95 million; non-GAAP operating income to be in the range of -2% to +2% of revenue; EBITDA Margins to be in the range of 0% to 4%. Consistent with past practice, this guidance excludes the impact of the fair value of issued warrants in the quarter.

The Company expects revenues in the third and fourth quarters to be stronger than the second quarter. The Company further expects higher operating margins in the second half of the year, with operating margins in the third and fourth quarters in the low to mid-teens.

But on Tuesday, the company issued an ugly warning for Q2 and indicated an equally disappointing Q3:

Based on the information currently available, for the second quarter ended June 30, 2022, the Company expects:

• Revenues to be in the range of $56.4 million to $59.4 million, net of non-cash warrant impact of approximately $4.6 million.
• Non-GAAP Operating Margin of between -34% and -28% and Adjusted EBITDA Margin between -30% to -24%, both net of non-cash warrant impact of approximately 10%.
• The Company currently expects third quarter revenues to be at or above second quarter revenues and will provide further details regarding its business outlook when it releases its full financial results.

Management blamed the shortfall on two major issues:

1. Slower e-commerce growth in conjunction with macro headwinds having resulted in some customers being saddled with excess inventory which is expected to continue for the near-term.
2. Delays in the completion of new customer production facilities.

Based on the anticipated $4.6 million charge related to warrants issued to Amazon ( AMZN ) as part of an up to $400 million purchase agreement , we can extrapolate a more than 40% sequential reduction in revenues derived from its largest customer.

Keep in mind that two months ago, management was still expecting healthy growth from Amazon with firm system orders allegedly having been placed for this year and 2023.

Remember also that on the Q1 conference call , management admitted to increased competitive pressures after two large customers started to use competing technology. I firmly expect this issue to have impacted demand further during Q2.

Bottom Line:

Kornit is getting hit by a triple-whammy of slowing e-commerce growth exacerbated by macro headwinds, delays in completion of new customer facilities and (likely) ongoing competitive pressures with no near-term relief in sight.

As a result, the company is likely to record losses for the remainder of the year. In addition, management might be required to dial back on its long-term goal of Kornit becoming a $500 million revenue run rate business by the end of next year.

Following Tuesday's after hours sell-off, Kornit's enterprise value has been reduced to approximately $500 million after giving consideration to the company's very strong balance sheet with more than $700 million in cash, cash equivalents and marketable securities with no debt but the severe uncertainty regarding the company's near- and medium prospects should keep investors sidelined at this point.

Quite frankly, even selling existing positions might still be a valid option here.

Given the magnitude of the miss and uncertain outlook, I expect a number of analysts to throw in the towel on the stock.

While I hate to advise investors selling the shares at $25 after pounding the table at $94 just five months ago, it is important to acknowledge that things have changed quite meaningfully at Kornit.

For further details see: