Kornit Digital Ltd.

Thank you, Operator, and good morning, everyone. Welcome to Cornute Digital's second quarter 2021 earnings conference call. With me today are Ronan Samuel, Chief Executive Officer, Alon Rosner, Chief Financial Officer, and Amir Sharqed, Executive Vice President and 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 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 maturely from those expected or implied by the forward-looking statements. The company's actual results could differ maturely from those anticipated for many reasons, and I encourage you to review the company's filings with the SEC, including the company's annual report on Form 20F filed on March 25, 2021. which identify specific risk factors that may 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, whether as a result of new information, future events, or otherwise expected 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 release published today, which is posted on the company's investor relations site. Now, I would like to turn the call over to Ronan. Ronan?

Thank you, Andy, and thank you all for joining us on our earning call. Before I jump into the review of the quarter, I first want to say that we are very pleased to have Andy recently join the company as our new global head of investor relations. Andy, welcome. So let's turn to what was another truly amazing quarter for Cornete across the board, a quarter where we significantly beat expectations So tremendous top and bottom line growth posted a very strong gross margins and ended the quarter with an extremely strong backlog and pipeline. We delivered total revenue of 81.7 million for the quarter, net of 6.6 million in warrants related to a global strategic account, significantly exceeding the high end of our guidance and reflecting a 118% year-over-year growth and 24% growth on a sequential basis. We saw a very strong growth not only in our systems and consumable businesses, but also in our service organization, which posted over 70% year-over-year growth. we again saw very strong growth with key customers as well as with net new customers, and our pipeline has never been stronger. During the second quarter, we completed beta testing and began shipping our Atlas Max systems. We are seeing very strong order backlog for the Max and have received excellent customer feedback, not only on the increased productivity and unique XDI capabilities, but also on the unparalleled print quality and durability, which is truly on another level in the industry. Max upgrades for the Atlas install base will be available in the first quarter of next year and we expect significant revenue contribution from those upgrades next year. We continue to experience strong tailwinds as it comes to the market adoption of our DTS Microfactory solutions as leading global brands continue to embrace the advantages of sustainable on-demand proximity production. For example, an Arizona-based full-service fashion design recently acquired Chronit Presto, the most advanced single-step solution for direct-to-fabric printing. With the addition of the Presto, they are now able to offer sustainable on-demand print, cut-and-sew services to their customers who includes many emerging designers and brands. This is a perfect example of the KONE DTF Micro Factory solution. Turning to customer engagements, we continue to execute on massive global expansion projects with strategic customers, and we expect these projects to have a meaningful contribution to our business in the quarters to come. In parallel, we see strong growth of new customers, both in the DTG and DTF product lines. Last month, we hosted a VIP customer event in Düsseldorf, in addition to our first in-person customer event in the U.S. since the start of the pandemic at our newly renovated Customer Experience Center in New Jersey. we hosted more than 200 customers globally, and the event was a huge success as it provided the most comprehensive display of our capabilities, partnerships, and customer engagement since the outbreak of COVID-19. Customer feedback was extremely positive, as evidenced by the number of committed orders we received as a result of those events. and the massive growth of opportunities in our pipelines. Building upon this great success, we are already deep in the execution of our much anticipated September event at the New York Fashion Week, as well as the formation of the first Kornit LA Fashion Week event in November. After a long pandemic pause, we are also very glad to be participating this fall in printing United Orlando and FESPA Amsterdam. So, we have a ton of activities planned for the next several months that will further contribute to our growing 2022 pipeline, so stay tuned for additional details. We continue to see great momentum for Cornet X as evidenced by our recently announced partnership with Canva, the largest online design studio and content providers in the world. We have already began implementation efforts with Canva, in addition to over 80 implementation projects we currently have in backlog for CornetX, as well as multiple strategic partnership discussions with leading online marketplaces and fashion brands. We were very excited to announce this morning the acquisition of Voxel 8, which will help us to accelerate the execution of our 4.0 strategy to digitize on-demand sustainable textile production. Through Voxel 8 advanced and proven 3D technology, which has been tested by some of the world's leading fashion and footwear brands, including Hush Puppies, which is part of Wolverine Worldwide, we will disrupt the business of fashion, empowering completely new creative decorative concepts and never-before-seen functional textile applications, while exploring new lucrative opportunities in the functional apparel and footwear markets. I want to welcome the Voxel 8 team to the Cornice family and look forward to achieving many great things together. In summary, we had a very strong second quarter and first half of the year. We are more confident than ever in our outlook for the remainder of this year and into next year. We believe we are well on our way to becoming the operating system for on-demand sustainable fashion and a 1 billion revenue company by 2026. Now, I will turn the call over to Alon for a closer look at the numbers and the guidance. Alon.

Thanks, Ornan, and good morning, everyone. As Ronen said, we are very pleased with our very strong second quarter results. Revenue increased 118% year over year and 24% sequentially to $81.7 million, net of $6.6 million non-cash warrant impact. Revenue was also well ahead of our guidance of $76 million to $80 million, which excluded the impact of warrants. Our second quarter results were again driven by strong orders for DTG systems, in addition to increased demand for consumables and services. This significant growth was due in part to continued momentum with strategic accounts, which we expect to continue into the second half of the year. Services revenue for the second quarter was $9.5 million, net of the non-cash warrant impact of 0.4 million, accounting for 12% of total revenue, an increase of 70% year-over-year and 16% sequentially. Our top 10 customers accounted for approximately 64% of total revenue. Geographically, all regions were up both year-over-year and sequentially. The Americas and EMEA regions more than doubled their prior year quarter revenue and accounted for 71% and 22% of total revenue, respectively. While Asia Pacific continues to experience COVID-related travel limitations, we've been able to successfully manage the business. Revenue in Asia Pacific increased 56% from second quarter of last year and accounted for just under 7% of total revenue. Moving to profitability. Non-gap gross margin for the quarter, net of the impact of the warrants was 48.2%, an improvement of over 400 basis points year over year. On a gap basis, gross margin in the quarter was 47.2%, an improvement of over 500 basis points year over year. Second quarter gross margin expansion was due to the increased mass production system sales, strong consumables, as well as continued profitability from our services business. Going forward, we expect the ongoing shift to higher mix of mass production systems to continue, along with continued acceleration of services and software revenue growth to drive our gross margin expansion. Moving on to OPEX. As I mentioned last quarter, we continue to invest in the business to accelerate growth. For the second quarter, OPEX was $29.2 million higher than the previous quarter, but below our internal targets, mainly due to timing of hiring, which occurred later in the quarter. Research and development expenses were $9.2 million for the second quarter or 11.3% of revenue as compared to $6.7 million or 17.8% of revenue in the second quarter of 2020. Sales and marketing expenses in the quarter were $12.5 million or 15.2% of revenue compared with $7.4 million or 19.9% of revenue in the second quarter of 2020. The increase was due to the expansion of our go-to-market capabilities, marketing and brand awareness programs, and customer-facing activities. General and administrative expenses in the second quarter were 7.5 million or 9.1% of revenue. as compared to 4.9 million or 13.2% of revenue in the second quarter last year. Our non-GAAP operating margin net of the warrants impact was 12.5% versus negative 6.8% in the year-ago quarter. This increase was driven by the higher gross margin I discussed earlier combined with increased operating leverage in the quarter. We ended the quarter with 763 employees, a year-over-year increase of 189 employees and an increase of 63 employees as compared to the first quarter. For the balance of 2021, we will continue to invest in growing the organization to support the business, mainly in R&D and sales and marketing. Non-GAAP net profit for the second quarter was $10.5 million or $0.22 per share on a fully diluted basis compared to a loss of $1.3 million or $0.03 per basic share in the second quarter of 2020. Second quarter gap net profit was $5.6 million or $0.12 per share on a fully diluted basis compared to a loss of $4.6 million or $0.11 per basic share for the second quarter last year. Adjusted EBITDA for the second quarter was $18 million as compared to negative adjusted EBITDA of $0.9 million in the year-ago quarter. Net cash provided by operating activities was 5.2 million this quarter compared to net cash used in operating activities of 9.2 million in the second quarter of 2020. We again ended the quarter with a very strong backlog, including 15.6 million of deferred revenue and customer advances. We continue to expect our deferred revenue balance to convert to revenues in 2021. And finally, our cash balance including bank deposits and marketable securities at quarter end was 441.8 million. With respect to Voxel 8, we expect the revenue contribution for the remainder of this year and next year to be immaterial with an OPEX impact of approximately 1 million per quarter. This acquisition is in line with the long-term financial model we previously discussed which assumed the potential impact of technology acquisitions. Turning to guidance. Based on our current visibility in the business, including our very strong backlog and pipeline, we expect revenue for the third quarter to be in the range of $88 million to $92 million and non-GAAP operating income to be in the range of 12% to 14% of revenue. As a reminder, consistent with our practice in the past, this guidance assumes no impact or fair value of issued warrants in the quarter. In summary, we are very proud of our very strong second quarter and first half 2021 performance as it further validates our strategy and is a result of all the hard work and dedication of the entire team of Cornit. And with that, I will now turn the call back to Ronen.

Thank you, Alon. And now we are ready to take questions from the audience.

If you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the queue. You may press star 2 if you would like to remove your question from the queue. for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question is from Rod Hall with Goldman Sachs. Please proceed.

Yeah, good morning, guys, or good evening, I guess, and thank you for the opportunity to ask the question. So I wanted to... I guess a comment. I mean, the revenue numbers here look very strong. The Cornet X backlog to us seems very exciting. You're talking about 80 implementation projects in backlog. And we know that could be a huge driver of the business in the future. Just curious what the timeline on those is. How long does it take to implement those? And when do we see those impacting numbers? And then I have a follow-up question.

Great. Thanks, Rob Paul, for the questions. We see, first of all, a perfect storm in the industry. We really believe that this is about time to change this dirty industry to on-demand, sustainable way of production, in proximity production, and ConitX is the driver for changing this industry. On top of that, of course, digitizing the production flow. Yes, we have a big, long list of orders for more than 80 projects right now to implement the CornitX, both with fulfillers that would like to join the network, both with marketplaces, with brands. There's huge interest also from the retail environment. So we are very, very pleased. with the adoption of CornetX and the visions that we are driving and the change we are driving in the marketplace. Some of those projects are short-term projects, meaning within 90 days of implementation. Some of them will take longer. I would say about six months to nine months, we will be able to implement most of the 80 projects that are on the pipeline. In the meantime, I'm sure we will gain some more projects. There are a few major projects there that we are driving, like the Canva projects that we expected to drive tremendous amount of volume to our customers. Okay.

Thanks, Ronan. And then my follow-up on this is the margin guidance, EBIT margin guidance is below what we were expecting. And I just wondered if you could give us a little color on that. Is that because of all the implementation projects you're doing, the speed of delivery, et cetera? Just curious what drove that sequential decline in those EBIT margins in the guide. And I think it's also a year-over-year decline. Thanks.

So the key drivers for the gross margin, as we all know, First is the level of business, the mix, and then goes the OPEX and the investment in the organization. In Q2, we had great results. We had great operational leverage, and we continue to invest in the organization. Our OPEX increased in Q2, as you saw. However, it we are working a lot to add more resources to accelerate the activities, and we expect to see additional investments, additional OPEX in Q3, together with a bit different mix in Q3, which takes the operating margin back to the level that we expect, again, according to our long-term plans,

uh and continuous improvement of uh the operating margin so are you alone are you guys assuming some lockdown impacts there or or is it just that you you know you're hiring to keep up with the growth or you know what should we think of as the main driver there main drivers for what again please the um the mark in the margin guide you know for the the difference between um you know, the margin in the Q3 guide and the Q2 actuals, just, you know, is it you're hiring to try to keep up with all the growth, so you're adding personnel costs in there, or is there, you know, some assumption of increased lockdown due to Delta that drives that, or, you know, just kind of what is the, if we think about the main thing that drives it, what, you know, what would that be?

Yes, so in terms of the mix, we don't expect a very different mix in Q3. So the impact on gross margin from that side will be immaterial. We invest also in the COGS-related activities, in service, supporting the customers, and also in building the systems. So overall, gross margin is not expected to be very different. And then, you know, the investments in the OPEX are going to be higher in Q3 than in Q2. And this is the main driver.

Yes. Rod, just a comment from my perspective. We see an expansion both on gross margin and and on operating margin. Even if you compare it to last year, you will see expansion both on gross margin and operating margin Q3 versus Q3, definitely Q2 versus Q2. The reason why we got a 12 percent operating margin to 14 percent operating margin is because we are intending to continue investing in OPEX, accelerating the growth of OPEX, In order to continue to accelerate the growth of revenue, we see massive opportunity there. But as we promised to our investor, we are heading into 2026 with about 20% operating profit, and we feel confident about it.

All right. That's great, guys. Thank you for the answers, and congratulations on the really strong revenue numbers here. Okay. Thank you.

Thanks, Rob. Next question, Joe.

Our next question is from Jim Suva with Citi. Please proceed.

Thank you. And I'd like to add also great results. Can you talk a little bit about lead times? You know, first of all, lead times for procuring all the parts and equipment that you need for your projects, products. Is it getting better? Is it stable? Is it getting worse? And then I have a follow-up question. Thank you.

Yeah, so I'll start and maybe Alon will add on top of that. We definitely see pressure on lead time. Lead time for some of the parts are getting much longer. If it took us weeks, sometimes it's months and even years to wait for some of the long lead items. Luckily, we have very, very good visibility for this year, and we have excellent visibility for next year. For this year, we don't see any limitation on delivery, not on system, not on parts, not on ink. For next year, we already placed the orders with our suppliers for all the long lead time so we don't see also any issue in supply chain also for next year. In parallel, we see some price increase, not too much, but impacting us on a big way. We feel we are in control, but we see some price increase from our suppliers. Alon, anything from your side?

No, I think that the main point here is Because of the great visibility, we were able to secure production slots as well as the main lead times for quarters ahead. So we don't see any impact on supply at all. We do see some impact on cost, but as of now, it's not material to our business.

Great. And then as my follow-up question, from the customer standpoint, their lead times, you know, if customers come in and want to, you know, order a new Atlas or something like that, as an example, are those lead times starting to stabilize? And I assume we're looking at delivery dates probably now in the year 2022, as opposed to 2021, or how should we think about the lead times from the customer perspective?

Yeah, so it's a very good question. So with most of our strategic key customers, we are working on one-year plans with some of them even longer than that. So we have a very clear visibility and we are planning ahead of time. With some, of course, net new customers that are coming, we are planning ahead of time inventory levels and we have enough inventory to supply them if we're getting any surprise orders. So usually we can deliver a system within one month to two months of an order. We are increasing production in Israel. We already have three contract manufacturers, big contract manufacturers in Israel, Flex, Submina, and another local manufacturer. and we are about to open another site outside of Israel next year to increase the capacity and the growth that we see in the business.

Thank you, and congratulations to the great, strong results.

Thank you. Thank you, Jim. Next question, Jim.

Yes, our next question is from Brian Drab with William Blair. Please proceed.

On Voxel 8, can you talk a little bit about that acquisition and just, you know, what you're acquiring there? I guess it looks like they have a proprietary print head. It seems like they have proprietary consumables. Are you going to incorporate those print heads into your next-gen machines? And, you know, how long might that take? And have you done any calculations around how much that expands your addressable markets?

Well, the answer is yes and yes, of course. But look, first of all, we are acquiring a great group of people, super knowledgeable, great attitude. We feel that there is a great fit here in terms of culture. In terms of technology, they have a proprietary technology. With this technology, we can enhance our declaration capabilities. We can take it to many directions. We will be able to offer never-before-seen versatility of decoration. I would say something like, let's talk about reflective, printing reflective on sports apparel, printing high density, silicone, metallic capabilities. We will be able also to print practical features such as enhanced grips, compression materials for sportswear and therapists, cushioning and impact resistance and waterproofing. So it will open for us. major opportunity both in the market that we are serving now and also new market that we are planning to go after all within the fully digitized single step production process of Corniche. So we are planning to embed their technology on top of our solution today. If it's the Presto, if it's the Atlas and enabling a customer to enter to new application, more capabilities, and for us also to get to new markets. At this point of time, we are not sharing what is the increased market potential. In the later stage, we'll start sharing the role of the application and the technology, and by that, we'll share the increased market that we see. I can tell you it's a huge market that we see in front of us, as you can all see when you're looking at the Voxel 8 website. They were focusing on the footwear market. This is by itself is a huge opportunity, future opportunity. It's not the first market that we will go after. We have an immediate opportunity with markets that we are serving now, like as I mentioned, reflective and metallic, and we have a clear plan how to integrate it and to bring it to the market as soon as possible.

Great. Thank you. And can you make any comment on revenue 4Q versus 3Q, given you have a little more visibility compared with the last time we asked that question?

Yeah, so we are not guided for Q4. We, you know, we're getting only one quarter. I can say that we have full visibility for Q4. We feel very comfortable. It's going to be a very strong year for us. And more importantly, we're even starting 2021 on the right foot. We're already taking order for 2022. Q1, we are already taking orders. We have a long list of customers that are asking for upgrades of their Atlas to Atlas Max, and customers are asking to buy a new Atlas Max, as well as the Presto Max that we are bringing, the Atlas Poly, the automation. So we have an exciting quarter in front of us in terms of growth and opportunities.

Okay. Thanks a lot, Ronan.

Thank you.

Next question, Joe.

Our next question is from Jim Ricciuti with Needham & Company. Please proceed.

Hi, thank you. Just a question on the upgrade opportunity for Atlas Max. It sounds like you'll be beginning that in Q1. When would you anticipate, just based on the interest level that you have now for upgrades from the existing installed base, when would you anticipate completing those upgrades? Would those go through a large part of 2022?

Jim, thanks for the question. But just to make sure that our audience understand the value of the Atlas Marks. So we just ended better and we got amazing feedback from our customers. I'm very proud to say that one of the feedback was that finally Kornit is bringing a product out of the box that is mature, like a mature company. So we are very proud to be in this position. On top of that, all of them are talking about the quality, the print quality, that it's a different standard. It's placing the quality in a different level. Of course, the XDI in terms of the 3D dimension and opening to totally new application and new market. Of course, the productivities and many of our customers, also key customers, were exposed to the automation and are very excited. So it's a really huge benefit to our customers and to the market. And we expect to start upgrading our install base Q1, as you mentioned. We expect material revenue recognition already in Q1 for this. upgrade for the install base. As we have a large install base of Atlas system with some big accounts that we know they are going to upgrade to the Atlas Max, it will take more than one quarter. I guess it will take the entire 2022 to upgrade most of the fleet to the Atlas Max.

Got it. Thank you for that. Just with respect to the pipeline on the Granite X, when you talk about the AD implementation projects, are the bulk of those fulfillers? I'm just wondering if there's any way to give us a sense as to how that might break out between fulfillers, brands, marketplaces, just some sense as to how that project pipeline looks.

um so um it's a good question uh we are not providing the detail uh split on the 80s um i can tell you that a large amount of those 80s are fulfillers across the world that they're joining but we have some big names of marketplaces brands retails that are also a part of those implementation projects. At this stage, we cannot share more split on those 80s orders that we have in place.

Okay. Thanks. I'll jump back in the queue. Congratulations on the quarter.

Thank you very much. Thank you.

Our next question is from David Mizrahi with Virenberg. Please proceed.

Hey guys, congrats on the good quarter. I just wanted to go back to one of the earlier questions. Can you just comment potentially on all the backlog and maybe the book to fill? I know you talked about the AP project for Corny X, but what do you see with Atlas Max and your other more legacy systems so far?

Yeah, so, David, thank you very much. I cannot say too much on the mix and the type of customers. As I mentioned, most of those AT projects are with Fulfiller, our install base that would like to join KonectX network. Some of those ATs are with big marketplaces like Canva, and brands, retails, And those are the main customers that would like to join the network on those 80 projects.

Okay, got it. And then also, I wanted to clarify, it sounds like the acceleration is going to be more broad-based, but are there certain areas that are stronger or performing better

kind of just want to have a feel for what you know in particular the biggest drivers to acceleration through through the remainder of the year yeah so uh we are we see in front of our very strong gear yeah we already uh as i mentioned uh focusing on 2022 uh on the all the new products are coming in q1 We see a perfect storm, a perfect storm in many directions. First of all, from the market trends, online is continuing to booming. Sustainability is becoming the main discussion with every brand. The on-demand manufacturing is super important. Consumers really want to have variety. it's really a perfect storm from the market trend. But if you ask from a business, how do we see it? So we see a major growth, explosion, I would say, growth with our strategic accounts across the board. They're growing within the current size. They're expanding, opening new sites, multiple regions. We see the growth also in the supplies. They are using the system around the clock. We see actually many net new customers joining, and this is great both from the brand perspective, but new fulfillers that use traditional fulfillers are joining as well. DTF is definitely a major growth driver moving forward. We see the concept of microfactory gaining momentum, both in the fashion world and in the home decor world. Absolutely, Atlas Max and the event that we have done a few weeks ago created a massive funnel and opportunity for all of us for expansion this year and next year. You know, bringing up Voxel 8 is another story and another opportunity. value that we can bring to our customers and changing the industry into more on-demand, sustainable way. We have massive events in front of us. Think about the New York Fashion Week. Think about the Cognite LA Fashion Week, Printed United. FESPA. Finally, we have face-to-face meeting with customers that will really create this momentum, and we are going to demonstrate all our technologies in those shows. And this is on top of a very, very strong pipeline that we already have. As you saw, our guidance, if you calculated for Q3, is more than 50% growth year over year versus last year. And last year, Q3 was a very strong quarter for us. So we are very proud of the growth of the business and the momentum. And, yeah, we feel very comfortable about this year and next year.

Great. Thank you, guys.

Joe, next question, please.

Our next question is from Greg Palm with Craig Hallam Capital Group. Please proceed.

Yeah, thanks. This is Danny Egerich on for Greg today. Thanks for taking the questions. I guess maybe if you could just touch on progress with the big brands that you're working with and maybe how those partnerships are starting to materialize.

So at this stage, I don't have much news to share with you other than we are working with endless numbers of brands, both on the Kornit X platform both of changing the supply chain into on-demand. Some of them are really buying our equipment. We announced about the Hesos in the UK or getting into the Microfactory with the Presto. We announced about the relationship with Adidas. There's many, many multiple interactions and goals within the brand. But as of today, I don't have some news to share with you that I can disclose at this stage.

Got it. That's helpful. And then I guess congrats on the acquisition this morning of Voxel8 in terms of the M&A pipeline looking forward. I guess, how are you guys looking at that?

Yeah, so we are very excited. I think that looking at many different technology, this group will report to the CTO organization. The CTO was very involved in defining what technology we are looking for and what will help us to bring new applications to the market. We were evaluating Voxelate technology for a few months, We found it suitable to print on garment together with our technology, the wet-on-wet, opening for us new application for the textile and home decor, both on the DTG and the DTF. So we see a huge potential for growth coming from this technology. As I mentioned, we are very pleased with the team there and the engagement. you know having this team based in Boston it's also a huge benefit for us so to attract more talents to our team so overall I think it's a very strategic acquisition and we will start seeing the fruit of this acquisition in the coming quarters if I can add you know this acquisition is a great example of

of the accelerated execution that we are talking about organically and inorganically of technologies that will support our business and will support our long-term financial model. So this is exactly according to our plan to take us to the long-term plan of the $1 billion.

Great. Thanks for taking the questions and congrats on the results. Thank you.

Thank you.

So next question please. Our next question is from Tavi Rosner with Barclays. Please proceed.

Hi, good afternoon. Thanks for taking my questions. Most of them have been asked, I guess, just maintenance on the Voxel 8. I don't know if you touched on it already, but is there any ongoing revenue stream that you will be maintaining going forward?

Tavi, thank you for the question. Yeah, the company is generating some revenue. It's not materials to cornish revenues. And as we are going to drive the technology to a bit different areas from where they are today, we don't see any impact on top of the revenue top line. As we mentioned, in terms of the OPEX, it will add something like $1 million OPEX expenses on a quarterly basis. but it was taken into account in our model, so we don't see a material impact on our operating profit as well.

Great. And just looking at the growth, when you look at this quarter, you look at the momentum for the coming quarter, when you look at growth in general, would you say that but the majority come from incremental sales to your existing customer or conversities coming from new customer. How should we think of the split?

It's really a mix. As I mentioned, the explosion that we see with strategic key customers is something really unique. They continue to grow and expand and buy more systems and ink and services. We are talking with them on long-term plans, even with some of them for three-year plans. So we are very optimistic there. On the other hand, we see many net new customers joining. On the DTF, of course, it's a relatively new segment for us, new product line for us that we are going after. So most of them are net new, but we see it also in the DPG. Many net new. We see net new coming both in our mature market like North America, but we see it, of course, in Asia and in EMEA. Of course, EMEA had a very good quarter this quarter with both in the Central Europe, UK, Germany, but we see also Eastern Europe, Turkey, Spain are growing very strong. We also see big potential in Latin America, mostly net new customers are joining in Latin America. So at this stage, you know, we are not scratching the ground with the potential of net new that are joining us on top of the growth of our strategic customers that are expanding very fast.

Great. Thank you, Ronan, and congrats on the full score. Thank you. Thank you.

Next question, Joe. Our next question is from Patrick Ho with Stifel. Please proceed.

Thank you very much, and congrats on a nice quarter. Ronan, first off, in terms of the max upgrades you're talking about that will be introduced in the first quarter of 2022, can you give a little bit of color of, you know, Are they the existing strategic accounts that have been with you for a long time, or are they recent new customers, say, over the past year or two that have bought the Max product? Where are you seeing the greatest traction in terms of the upgrades?

So the average for the max is, first of all, for the Atlas install base. Many of those Atlas install base are already within our strategic account, as you mentioned, but many of them also with customers that are having only one Atlas or two Atlases. We believe that it will be most of them, both our strategic account that we are talking to them and they were engaged in the beta testing and seeing the products in the lab and in the experience center will upgrade to Atlas Max. So we'll buy the upgrade, but we believe also the relative small customer with one and two system will also upgrade to the Atlas Max. There is a a clear ROI for the upgrade. When you calculate the 20% production, when you calculate the quality and the variety of material you can print or the new application that you can print with the Atlas Max, it's so clear and there's no question that the ROI is really fast. and we expect most of our install base to do it during 2022.

Great. That's helpful. And maybe as my follow-up question for Alon, you mentioned about the supply chain and how you're managing through that situation. It sounds like it's being managed pretty well. Can you talk about the COVID-related costs? And what I'm kind of trying to get there is with some of the recent outbreaks, the situation changing again. Are you seeing any changes in logistics costs and freight costs? And is that part of what you're mentioning about some of the costs of pricing going up?

Yeah, so in general, you know, we see, you know, good impact, if I can say, you know, to the whole situation by the acceleration of the e-commerce and the development of our business. So this is, you know, in general, the momentum is very positive for our business, specifically for the supply chain and logistics. So, yes, we see the pressure on logistic costs. But I think that it comes together, you know, with the operational leverage that we are talking about. And we are able now to deal with this increase in cost by moving more and more shipments, doing it by sea rather than air, and saving some cost. We have larger quantities, so we can secure better slots and better prices for logistics. So all in all, we see some impact, but it's really minor. And I mean, as we can see in the results, it doesn't really impact our profitability or gross margin.

I would just say that I believe that I seriously believe that our team is doing a tremendous job in working with our suppliers to control the increase of cost and also the logistic cost. When we are monitoring it, while we see and increasing costs compared to benchmark. We are in a very good place, and we are very pleased on that. As we mentioned, and we continue to be committed to that, you will see expansion on our gross margin. You saw it this quarter. You will see it the rest of the year, and we will enter 2022 with the new products with additional expansion on gross margin.

Great, thank you very much.

Our next question is from Chris Moore with CJS Securities. Please proceed.

Hey, thanks for taking that question. Yeah, maybe just back to the Atlas Max upgrade for a second. So I'm just trying to get a sense of the scale of the upgrade opportunity. Is there any way you can put kind of rough numbers around either the number of atlases that are out there that, you know, could potentially be upgraded or, you know, just kind of a sense in terms of, you know, kind of what that could mean from a revenue perspective. You know, you could choose any number, 100% upgrade in 2022. I just have no sense in terms of what that might mean from a revenue perspective.

Yeah, so we're not providing the exact number of atlases we have in the field, although we already mentioned a year ago that we cost the 200 atlases that we have in the field. We mentioned it. Of course, we have much more than 200 atlases in the field. We expect a large portion of them to upgrade to the Atlas Maxx. and we expect materials revenue coming in 2022 out of it.

Got it. I'll leave that one there. One last one for me. As DTF becomes a more important part of the mix, can you talk a little bit more about the DTF sales process versus CTG? Does DTF create Any significant new challenges? Does it require, you know, much incremental sales infrastructure?

Yeah, so first of all, it's a great question. We are having a dedicated team that going after and selling the DTF. Not only selling, supporting, and the support is also application teams. We have business manager for the DTF. So it's totally different type of product line and customers that we are approaching with this, with the DTF and the Presto specifically. Solution around it is totally different and also the value proposition. We are really looking here on enablement. Enablement of on-demand manufacturing, which was not available and you couldn't do it with the traditional technology. Acid ink, which required long process of pre-treatment. of printing, then steaming, and then washing, using lots of tons of water in these forces, really a lot of pollution. And you cannot run it for 100 meters. You have to run it for hundreds of hundreds of meters in order to be able technology with the pigment ink. with one-step solution that you take any fabric, you print directly on top of it, doesn't matter if it's blended, natural fabric, cotton or polyester, without pre-treatment, without post-treatment. You can print one-off dress, you can print one-off cotton for the home. It's revolutionary, and the industry now is moving into decoration at home, into variety in fashion. We see the excitement of designers seeing this technology. You will see the excitement in New York Fashion Week, in LA Fashion Week. all those designer using the technology and now really can express themselves and more important for the consumer they really for the first time they can buy and be unique with their designs their needs so we are expecting a major change in the industry we are driving a major change in the industry and we expect long-term goals coming from from the DTF business

Well, very helpful. I'll leave it there. Thank you so much.

Thank you.

Thank you. We have one more question from Brian Drab with William Blair. Please proceed.

Hi. I'll be honest and say I was even confused by the fact that reporting and, you know, I think the data aggregators misreported uh relative to how they had been for the last year and a half your headline numbers i just want to make sure that i have this correct since facts that saying 22 cents versus consensus 22 but your your revenue guidance for this quarter was 76 to 80 and apples to apples with that you did 88 right and i just want to make sure these numbers are right and you're adjusting for okay correct Adjusting for the warrants.

Yes. Thank you for clarifying, Brian. So if we take apple to apple, we are guiding without the impact of the warrants. We guided 76 to 80. We delivered more than 88. So it's well above what we guided, well above what the market expected. And you can see the growth of Q3.

Yeah. And your gross margin, I guess, would have been 52%. And your operating margin was 19%. Adjusted EPS was 35 relative to consensus.

Apple to Apple on the operating margin, you should see 19% operating profit versus to the guidance. So it's well above what we guided last quarter on operating profit. And 35 cents per share. Yes.

Understood. Yeah, I mean, I just got confused because for at least the last six quarters, they were reporting it correctly, and I just assumed it was correct. So I just want to clarify that since I'm confused. I assume there's at least a couple other people that might have been.

So it might help you, all of you, to look at the PR. There is a table that shows the comparison with the impact of the warrants and without the impact of the warrants. It will clarify these.

Right, right. Exactly. And then can you just maybe give a quick update if there's any evolution to your thinking regarding how the best way to monetize Cornetex is? And is that business model set? What can you tell us about the revenue model?

As we mentioned in the past, our revenue model these days is mainly based on transaction fees. The transaction is both from the impression generator, if it's a marketplace or brand, and also from the fulfiller. We are exploring different business models. We just recruited a very strong COO into the company. And the CEO, together with the president of this business, Guy, are looking into it and will define the future business model. By the way, the CEO is Aaron Yaneli. who join us and already we see amazing ideas coming from his perspective. So it will be too early to say that their business model is already set. I believe there will be different business models to different audiences. This huge opportunity there also business model around the data. We see some great potential in the future, monetizing on the data that these systems is generating. So please stay tuned and we'll be able to provide you with more information in the future.

Thanks very much.

Thanks, Brian.

Finally, that's all our questions. Yes, there are no more questions at this time. And I'd like to turn the call back to Ron and Samuel for closing remarks.

So I want to thank everyone for joining us this morning on this call. Although this is afternoon in Israel, this is morning for the U.S. First of all, I would like to thank our team for an amazing quarter, for an amazing momentum. I would like again to welcome Voxel A team to the family of Cornice, to the growing family of Cornice. You know, we are very pleased with the quarter results, second quarter, first half results, fantastic results. But we're even more excited about the many growth opportunities ahead of us, about H2 overall, about how 2020 will look like with all the new products in production. And we look forward to sharing our progress with all of you after the LA fashion show, Cornit LA, New York fashion show. So we have tons of excitement also on Cornit X to share with you in the coming months. So in the meantime, thank you all again and looking forward to meet face-to-face soon. Thank you.