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spk12: Greetings, and welcome to Corneek Digital's third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. Our question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Backman, Global Head of Investor Relations for Corneek Digital.
spk03: Thank you, Operator. Good morning, everyone, and welcome to Cornete Digital's third quarter 2021 earnings conference call. With me today are Ronan Samuel, Cornete Digital's chief executive officer, Alon Rosner, Cornete's chief financial officer, and Amir Chaked, 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 Security Exchange Commission, including the company's annual report on Form 20F, 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 direct comparable GAAP measures can be found in the company's earnings release published today, which is also posted on the company's investor relations website. At this time, I would like to turn the call over to Ronan. Ronan?
spk01: Thank you, Andy, and good morning, everyone. We are here in New Jersey at our beautiful Customer Experience Center, having just returned from an inspirational and industry-transforming Cornette Fashion Week in LA. This groundbreaking alternative fashion week, pioneered by Cornette, brings endless creativity, sustainability, diversity, and inclusiveness to the forefront of the fashion world, all by leveraging Cornet's on-demand digital technology. It was an amazing week with more than a thousand inspirational designers, brands, customers, and partners coming together to establish a new reality for the fashion industry. We are at a revolutionary moment in how we all think and act about fashion. It's about giving people the style, trends, comfort, and quality they desire when they desire it in a sustainable and ethical means of production using innovative digital technologies. I believe the fashion industry will look back at the Corniche Fashion Week LA 2021 and remember it as the pivotal point in its journey to transform and adjust to the needs and beliefs of the current and future generations. Turning to our results, it was a phenomenal quarter with record revenue across all regions, strong profitability and operating cash flows. We delivered a total revenue of $86.7 million net of $7.9 million in warrants related to a global strategic account. We again exceeded the high end of our guidance, posting 51% year-over-year growth as we saw a great mix of sales across systems, consumables, and services. The impact of the warrants this quarter associated with our global strategic account was higher than historical quarters, due to their continued growth and global expansion, and we expect to see continued accelerated growth with this strategic account. We are also making progress with other strategic accounts, including well-known fashion and e-commerce companies. For example, we recently began an important relationship with Boohoo, one of the largest e-commerce fashion retailers in the UK, with an incredible portfolio of over a dozen market-leading fashion brands. Boo is adopting the very essence of our Kornit 4.0 vision by incorporating our technology vertically into their supply chain, while also utilizing our global fulfillment network powered by Kornit X to broaden their capabilities and expand into new geographies. Earlier this month, we announced the availability of Presto Max, the platform that reinvents textile designs and application capabilities and will change the textile industry forever. The single-step PrestoMax solution breaks the barriers between imagination and physical applications. It is the first in the market to bring unique groundbreaking capabilities like white printing on colored fabrics, neon colors, and Kornit XDI technology for 3D decorative applications. Last week in Los Angeles, following an event we hosted in Crezioni Digitale in Como, Italy, we showcased PrestoMax and its amazing capabilities to hundreds of prospective customers, and the reaction was incredible, which led to strong order pipelines. Looking at DTG, we continue to see very strong momentum with our Atlas platform. Recently, Sticker Mool, a global leader of fully customized B2C products, integrated a fleet of our Atlas systems into their business and are utilizing their growing customer base to support a strong DTG revenue channel. We began shipping the Atlas maps in the third quarter and feedback from our customers has been extremely positive. TSC who owns and operates more than 25 Atlas systems, not only decided to add additional Atlas Maxes to their operation, but also to upgrade their entire Atlas fleet to Atlas Maxes. Looking ahead into 2022, the NPI pipeline is unprecedented. On the immediate horizon, we are gearing up to start executing in Q1 2022 for our customers on extremely valuable upgrades to their Atlas fleets, including MAX, XDI, next-generation pallets, and a much-anticipated automated robotic garments handling system. These innovative upgrades have a tremendous ROI for our customers, and we expect them to have a material contribution to our business throughout the next year. Also being released in early 2022 will be our new Atlas Poly, which will completely transform the sport apparel and leisure segments of the market. We will also release our Quest Quality Control, the first of its kind solution, ensuring color and quality consistency across any type of garment and machine. We continue to see great traction for Kornit X across brands, marketplaces, and retailers. For example, we recently integrated Hype, a young and fast-growing UK brand, onto the CornitX platform. This will enable them to onshore their on-demand production, reduce lead time from 12 to 16 weeks to less than a day, and minimize their 12 weeks of stock. They will now be able to launch five times as many new products per week due to their new virtual approach with Kornit X. In Asia, Deps Textiles, one of the largest fashion apparel textile manufacturers in Japan, started to use our Presto system to enter the sustainable on-demand production utilizing our Kornit X platform. Hype, Boohoo, and Devs are just a few of great examples of a huge opportunity we see for Kornit X. Before concluding, I'd like to share with you some additional news. Guy Avidan will be leaving Kornit. Guy started at Kornit as Chief Financial Officer and had a long and successful career with the company, taking us through our IPO before leading KornitX. Aaron Yaneli has been promoted to the role of the President of KornitX and will be joining the Executive Management Team. Aaron joined Cornite a few months ago as Chief Operating Officer of Cornite X and together with Guy has been laser focused on successfully implementing our execution plans for scaling Cornite X. Prior to joining Cornite, Aaron was Head of Operations for Merch by Amazon. Throughout his career, he has built and scaled large global on-demand businesses utilizing cloud-based software and advanced printing technologies. Guy will be working closely with Aaron in the coming months to assist in the transition process, after which he will be moving on to his next chapter in life. Okay, so in summary, we had a tremendous third quarter and first nine months of the year. We are currently focused on closing the year strong and supporting our customers to ensure they are ready for a successful peak season. We are also gearing up to what we expect to be an amazing 2022 for the company. Based on our strong momentum and with the guidance Alon is going to provide, we expect to end 2021 with over 65% revenue growth year over year. With that, let me turn the call over to Alon for a closer look at the numbers and guidance before I come back and provide some concluding remarks. Alon.
spk05: Thanks, Ronen, and good morning, everyone. As Ronen said, we are very pleased with our outstanding third quarter results. Record total revenues, strong operating margins, very good cash flow from operations, and a very solid balance sheet. Revenue increased 51% year-over-year to $86.7 million, net of $7.9 million non-cash warrant impact. Revenue was also well ahead of our guidance of $88 million to $92 million, which, as a reminder, excluded the impact of the warrants. We again saw very strong demand for systems, consumables, and services as our customers began to get ready for their peak season. As Ronen mentioned, we made great progress with new customers while continuing our very strong momentum with large strategic customers, which we expect to continue for the balance of 2021 and throughout 2022. Our services revenue was $10.1 million for the third quarter, net of the non-cash warrant impact of approximately $400,000. services revenue was 11.7% of total revenue and increased 25% year-over-year. Top 10 customers accounted for approximately 65% of total revenue. As we have said before, we would expect our top 10 customers to remain in the 65% of total revenue range, but the composition of those top 10 customers should change given the progress we are making with new strategic and other customers. Geographically, it was a record quarter for all regions, with a very strong growth in North America and Asia-Pacific. Moving to profitability. Non-gap gross margin for the quarter, net of the impact of the warrants, was 47.8%. On a gap basis, gross margin in the quarter was 46.8%. We expect gross margins to improve longer term, given the ongoing shift to higher mix of mass production systems, contribution from our recurring consumable business, along with the acceleration of Cornite X. Looking at supply chain, despite major disruption in the global supply chain, we have experienced minimal impact on our business results in this challenging environment. Given our very good visibility into the business and our experienced operations team, we've been able to proactively manage our supply chain, enabling us to meet our customers' requirements. Turning to OPEX. For the third quarter, OPEX was $32.9 million, up almost 13% from the second quarter and 55% year-over-year, due to continued investments mainly in R&D and sales and marketing. Research and development expenses were $10.8 million for the third quarter, or 12.4% of revenue, as compared to $7.9 million, or 13.8% of revenue, in the third quarter of 2020. R&D was up due to continued investments in innovations and new products, including the addition of Voxel 8, for which the integration is going extremely well. Sales and marketing expenses were 14.4 million or 16.6% of revenue as compared to 7.8 million or 13.5% of revenue in the third quarter of 2020. The increase was due to the expansion of our go-to-market capabilities, marketing, and customer-facing activities. General and administrative expenses in the third quarter were 7.7 million or 8.9% of revenue, as compared to 5.5 million, or 9.6% of revenue, in the third quarter last year. Non-GAAP operating margin net of the warrants impact was 9.9% versus 11.3% in the year-ago quarter. This decrease was driven by the expected increase in OPEX I just discussed. We ended the quarter with 849 employees, a year-over-year increase of 192 employees and an increase of 86 employees from last quarter. The increase was mainly in R&D and sales and marketing. Non-GAAP net profit for the third quarter was 11.5 million or 24 cents per share on a fully diluted basis compared to 7.7 million or 18 cents per share in the third quarter of 2020. Third quarter gap net profit was 3.9 million, or 8 cents per share on a fully diluted basis, compared to 3.9 million, or 9 cents per share, for the third quarter last year. Adjusted EBITDA for the third quarter was 18 million, as compared to 9.4 million in the year-ago quarter, with very strong cash flow from operations. Net cash provided by operating activities came in at nearly $33 million, up over 60% from the third quarter of 2020. We ended the quarter with a very strong backlog, including $11.7 million of deferred revenue and customer advances. Our cash balance, including bank deposits and marketable securities at quarter end, was $457.5 million. Turning to guidance. Based on our current visibility in the business, including our very strong backlog and pipeline, we expect revenue for the fourth quarter to be in the range of $89 million to $93 million and non-GAAP operating income to be in the range of 13% to 15% of revenue. As a reminder, consistent with our practice in the past, this guidance assume no impact or fair value of issued warrants in the quarter with our global strategic account. As Ronen said, we do expect to see continued growth with this strategic account. In summary, we are very proud with our strong quarter and year-to-date performance. On a personal note, as I approach my one-year anniversary as Cornets CFO, I am very happy and excited to be part of this amazing team as we continue to execute together and lead the transformation of this industry. With that, let me turn it back to Ronen for some closing remarks.
spk01: Thanks, Alon. Okay, a couple of comments before opening up for Q&A. Shortly following our last earning call, we issued our ESG report and received extremely positive feedback from major fashion brands and global investors. At Cornit, ESG is not just a check-the-box issue. It's a mission. We are going to lead the way in transforming the second most pollutive industry in the world. If you haven't done so, I invite you to read our report and reach out to us with any questions you may have. I would also like to take this opportunity to welcome Steph Strack and Jay Lee, who have recently been appointed as strategic advisors to the board and whose insights and immense experience at Nike and eBay will be invaluable to the company. We plan to nominate both Steph and Jay for election for the board at our 2022 annual meeting. Welcome, Steph and Jay. And finally, I would like to thank all the amazing Kornit employees around the globe who continue to work extremely hard with the most extreme level of passion and dedication. I could not be prouder to be the CEO of this amazing company led by the best employees in the industry. Operator, we are now ready for the Q&A session.
spk12: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation signal will indicate your line is in the queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Tabby Rosner with Barclays. Please proceed.
spk00: Hi, this is Chris Reimer on for TAVI. Thank you for taking my questions. On the direct-to-fabric sector, can you talk a little bit about the level of interest you're seeing across the DTF market?
spk01: Yeah, thank you, Chris, for your question, and good morning. And so the DTF market, we believe that we are in a verge of really creating a huge transformation of this industry. This industry is the most polluted industry or the second most polluted industry in the world, creating huge amount of waste, both of water and waste of material. Cornets innovation bringing to the market the Presto Max, really enabling to do on-demand production with fully sustainable, without wasting water, and producing exactly what's needed. On top of that, we are enabling endless creativity with this solution. You don't need anymore to plan one year ahead of time what will be the design, what the consumer will want to wear. You can react fast to market trends and changes, and this is the perfect solution for the market. We released the Presto Max. We demonstrated last week both in L.A. and the week before in New York. in Italy, and we got amazing feedback. The Presto Max actually bringing on top of what the Presto bought before, the capability to print on dark fabrics with white ink, also the XDI printing 3D elements on top of the fabric, and also neon color. Really enabling a huge amount of creativity this industry needs a major change and Last week at LA we actually got the feedback from thousands of designers brands retails that were with us and this was saying this is exactly what we needed what we demonstrated with designers last week is exactly what the market needs in terms of creativity and in terms of sustainability, in terms of on-demand, in terms of unleashing really the creativity and democratizing fashion into anyone that wants to create designs.
spk00: Uh-huh. Okay, thank you. And just on Cornete X, you mentioned in your opening comments a little bit about the system, but could you talk about the pace of adoption and how brand and fulfillers have been responding to the Cornete X?
spk01: Yeah, again, here we have great, great feedback from many, many brands, retails, marketplaces. We gave a few examples on my earning call before of adoption of this technology. What brands are looking for and marketplaces and retail are looking for is connecting the virtual world to the physical world. What ConnectX is enabling is really this connectivity. The world is moving digital. E-commerce is growing, enabling endless creativity. But what we are doing is unleashing this creativity and connecting it to the physical world. We believe CornetX will be a major driver of growth and change for this industry. We see a very strong adoption. We are building the team. Now Aaron Yaneli is taking the lead and building a very strong team around him. And I'm fully confident that this will take Cornet beyond the $1 billion that we are talking about.
spk00: Okay. Thank you for that. I'll go back to the queue.
spk04: Thank you, Chris. Next question, please, Joe.
spk12: Our next question comes from Rod Hall with Goldman Sachs. Please proceed.
spk08: Yeah. Hi guys. Thanks for the question. I guess I wanted to start off with the product trajectory. Obviously the growth continues to be really high here. You know, we were able to attend that fashion week last week. It's pretty exciting to see how engaged the industry is with these products. And I think, I just wonder, as you look into 22, what products are you most excited about from a revenue growth point of view? I mean, what do you think the main drivers will be next year in terms of products? It just seems like you're coming out with so many different things. You know, it's kind of hard for us to keep track in a way of what might be the primary drivers of growth, and then I have a follow-up.
spk01: Yeah, it's a great question, Rob, and thanks for participating last week in L.A., Yeah, we are in a pivotal point. Pivotal point in terms of the industry, but also in terms of the product introduction and innovation. The Atlas Max, what we see today and we believe for next year will be the main product that we will continue selling. This product is really unleashing endless creativity on the D2G, DTG, and we see a great adoption. So Atlas Max not only will continue to sell many new systems, but we already got POs and requests from our customers to implement the upgrades on their atlases for the Atlas Max. It's bringing totally new level of quality, productivity, creativity into these market segments. On top of that, I already touched on the Prestomax. We see a very strong pipeline now after we demonstrated the capabilities and the fashion show into 2022. So we will see a major growth coming from our DTF platform and specifically The Presto Max. And we, of course, going to release end of Q1 the Atlas Poly, which is targeted for the sports market and the leisure market. This is a really big market that now with this technology we are going to penetrate and we believe that we are going to transform this industry into digital. And on top of that, we have lines of upgrades to the install base. So I haven't touched on the max upgrade, but the max is not only for the DTGs, also for the DTF, for the Presto in terms of upgrades. The automation for the install base, super, super important. We're getting huge, great feedback from our customer base, and many of them would like to upgrade it already first half of 2022. The Quest, the quality control and color control is very, very important capability for our install base to control the quality between system and between sites. And, of course, it's very important for the Cornet X as a platform to control quality across the world. And many more. There will be surprises next year. We cannot share it right now, but big surprises of product release during 2022. So, yes, it's a lot of products, but we are really excited about 2022 and the opportunities, and there's a lot of work for the team to start implementing it.
spk08: Okay, thanks, Ron. And then on the numbers, I just wondered, I mean, this line's been pretty volatile, but the services gross margins were a little bit lower than last quarter at zero. And I know they've ranged negative, they've ranged positive. Just wondering what's going on in the services gross margin line this particular quarter. Do you have any color on that?
spk05: Yes. Hi, Rod. This is Alon. So, yeah. The service business for us, it became profitable business and will continue to be such. We are investing a lot in customer support. We see the great potential and we build the organization, we build the infrastructure. And sometimes, you know, there is no perfect fit of expenses and business. We need to be ready with our organization now for the peak season and ramp up of a few big projects. So we are investing. So this is one side. The other one is related to CornetX, which we also invest a lot now in building the organization. Ronen just discussed some of the changes that we are making. We are building a very strong management team for CorneteX. We see the potential there. This is the time for us to build it, and then we start seeing the fruits coming in a rapid pace.
spk01: So customer success and customer support are super important for Cornete, not only for the success of our customers, but in terms of the growth engine for the future. We believe that 2022, you will see a massive growth both in revenue and in terms of profitability on the customer success line of business.
spk08: Do you guys think that will remain depressed a little bit then as you continue to invest, or is it kind of a one-off thing this quarter?
spk01: It's more a one-off this quarter. Again, the results are good. It's a bit lower than the previous quarter because of the investment. As I mentioned, next year you will see a massive expansion both in revenue and gross margin on this line of business.
spk08: Okay. All right.
spk01: Great. Thank you, guys. Appreciate it.
spk04: Thanks, Rod. Joe, next question, please.
spk12: Our next question is from Jim Suva with Citigroup. Please proceed.
spk11: Thank you so much, and congratulations to you and your team for the great results. I found it very interesting and encouraging that you are one of the, I would say, few or even only companies that I've heard in the past few months that didn't blame an excuse on the tech supply chain about inability to procure parts and components, both on the results and the outlook. So can you talk to us a little bit about those efforts and maybe as we look ahead, I guess the question will be is, Oh, were you able to pull in some of that? And are there going to be some challenges of securing your, your parts and products in 2022? Okay.
spk05: Hi Jim. Uh, so, uh, yeah, I mean, uh, you know, the environment is, is very challenging. We see it everywhere. And as you said, I mean, it's really an effort. We are investing a lot of effort managing this challenge. We are doing it in a few different ways. First, I think we have the benefit, or I would say even luxury, to have great visibility into the business. So we are able to place orders and secure production slots for many quarters ahead and We are doing so we have long-term engagements with vendors which You know allow us to secure the raw materials We are increasing the capacity with our contract manufacturers. So We added another contract manufacturer this year third one and we have started a process of Qualifying another contract manufacturer most likely will be in in America so it will allow us again additional flexibility and bandwidth in terms of of production and So it's really a day a daily effort by the operations team We see the pressure we get some some heat by by prices and longer lead times on the other way Of managing it, we did increase our ASPs this year, again, to offset this impact. And as a result, currently, the impact is quite minimal to our business.
spk01: Yeah, I would like to jump in first of all to really acknowledge the hard work from our operational team. it's actually phenomenal what they're doing. They're working day and night. I can tell you that on a daily basis, we have surprises of things that are being delayed, are not coming, parts that are missing, and our team is fully committed, passionate to deliver to our SLA, to our customers. So first of all, really big thanks for the team. As Alon mentioned, we see a lot of pressures coming from the from our suppliers, both in terms of cost increase, logistics. It's a nightmare on the logistics side. So we are not skipping what other companies are facing. The benefit that we have, as Alon mentioned, we have a very strong pipeline and visibility to our business. We already placed an order for next year, for the entire year with our suppliers. We have a very, very strong professional operational team that they are working day and night to deliver to the business needs. And we have confidence that we'll continue to deliver on that.
spk11: And then my quick follow-up is at the beginning of the conference call in the prepared remarks, Ronan, I think you made a comment about the upgrades. And I couldn't tell if you said you were getting out or giving out. And I just wanted to understand kind of that a little bit about is that, you know, just a giving out as in free a loss leader or getting out as in getting the upgrades out and your customers are paying for that upgrade?
spk01: So we are getting out, meaning releasing the upgrades already in Q1. We already have many orders for upgrades from the Atlas to Atlas Max. Of course, there's a huge value for those upgrades both in terms of quality and productivity, and of course we are charging our customers. It will be meaningful, very meaningful revenues, additional revenue, incremental revenue to our P&L for the entire year. We will not finish all the upgrades in Q1, It will take us probably for the full year and even the year after because it's not only the upgrades of the Max. There's many other upgrades. Max is both for the Atlases and for the Prestos. But as I mentioned, there's also the automation as well. We are not giving it away. We are selling it. It will bring huge value to our customers. It will be very meaningful to our revenues during 2022.
spk11: Thank you so much for the clarifications and the details.
spk04: Great. Thanks, Jim. Appreciate it. Joe, next question, please.
spk12: The next question is from Brian Drab with William Blair. Please proceed.
spk10: Thanks for taking my questions. First, I just want to start by saying, Ronan, you're just talking about how hard the team is working, and then you see these headlines that come out when you report your results, and it must be frustrating to still have this recording issue, but I just want to Make sure that I understand this correctly, but if you adjust for the warrants that were issued, revenue for the quarter would have been 94.6 million. Consensus was at 89 million, and that's apples to apples, the 94.6 to 89.2. And then I just want to clarify that the apples to apples comparison for EPS, adjusted EPS, adjusting for the warrants would be, you reported 40 cents. relative to the consensus of $0.24. Am I looking at that correctly?
spk01: You're looking at it 100% correctly. This is a record quarter, both in terms of revenue and EPS, yes.
spk10: Right. And also the gross margin would have been 52.1%, I guess, if you make that adjustment as well, which is really at the high end of what you've done in the past. So I just wanted to make sure that I was interpreting that correctly, because I know the consensus doesn't take into account anything related to warrants when they, you know, when the analysts post those estimates.
spk01: Yes. I know it's confusing, and thank you for the clarification. Okay. Thank you.
spk10: So I just wanted to ask about CornydX and, you know, the very interesting, you know, change in leadership there that's taken place this year. How does that, if at all, affect the business model for Cornidex? And maybe it's not the change that's affecting the business, but has the business model for Cornidex changed in terms of how you're thinking about monetizing the valuable service?
spk01: So Aaron joined us a few months back, so Aaron is fully, fully involved in all the development of the business models, I don't see this change as driving a change in the business model. However, we have tons of opportunities of different business models within Cornetics. At this point of time, we are more experimenting different types of business models with different customers to see what will be the future mainstream business models. And Aaron and the team are working on various alternative business models, and we will be able to share some more information early next year about how do we take the business moving forward. I can tell you that the opportunity here is really incredible, and we see huge both adoption and great feedback from customers who would like to join both in terms of fulfillment, brands, Retails and marketplaces. Recently, Jay Lee joined us from eBay to the board. Jay Lee has a tremendous amount of experience in marketplaces, in the digital world, came with tons of ideas. He decided to join Kornit not only because of our technology and people. He's really excited about Kornit X. He's believing in it and he raised his hand to be the main mentor and work very, very closely with Aaron and the team to drive this business to a great success. So I'm very confident now that we have a very strong team. to take it forward and looking forward to share some more, uh, information on business model early next year.
spk10: Okay. And can I just ask, uh, now, you know, I think it was May when you had the analyst day, you talked about a hundred million revenue expectation for this business by 2026 for Corny Dax. And is, is that anything that you've seen or they get, you know, as you understand the opportunity better for that business, um, make you feel like a hundred million might be a little bit conservative for five years from now?
spk01: So I can only tell you that the opportunity for this business and forget put aside the timeline right now is much much bigger than the 100 million. We're talking about billions of dollars opportunities here. We're talking about really enabling more than just connectivity of the virtual world to the physical world. There's a lot of activities around how do we leverage the data around these systems How do we add value in the creativity, in the design side? You will see some very exciting direction that we are taking and leveraging the cornetics moving forward. Okay. Thanks for taking my questions.
spk04: Thanks, Brian. Joe, next question, please.
spk12: Our next question is from Patrick Ho with Stiefel. Please proceed.
spk09: Thank you very much, and congrats on the quarter and the LA Fashion Week. Ronan, maybe first off, just to get a little bit of clarification and some of the demand trends, I think in your prepared remarks you talked about the Atlas Max, the adoption there, it's getting with new customers. But I think you also said something that you're seeing existing customers transition their fleet from the Atlas to the Atlas Max. What is that happening there? And two, would you still expect more of your existing customers to get the upgrades when they're available in the first quarter of next year?
spk01: Yeah. So, yes, absolutely. You're right. We see massive order taking from new customer and existing customer for additional Atlas Maxes. We already delivered some of them in Q3. We are delivering Q4 and a lot of them, of course, in Q1 next year and beyond that. But we're also receiving orders from our install base that's using Atlases to upgrade their fleet into Atlas Maxis. The example I gave is TSC. It's one of our key accounts. that having more than 25 atlases, very happy. It was part of the beta of the Atlas Max. It was testing it extensively. They were very, very happy. They placed an order for additional Atlas Maxes, so they are going to have a much larger fleet than 25 atlases. On top of that, During early next year, we are going to upgrade the entire 25 systems, atlases to the Atlas Max. When you're talking about when are we going to do that, so for the TSE will happen during Q1. In terms of capability to do much more than that, the order will be placed along the year, and we believe that they will continue the updates for the install base along the year of 2022, and it might even take us to 2023. Those are a heavy upgrade for each system, and we need to do it gradually, so we are not expecting everything in Q1. We're expecting massive orders already in Q1 and some implementation in Q1, but most of the implementation will happen along the year.
spk09: Great. That's helpful. And maybe as my follow-up question, I thought your LA Fashion Week was really informative in terms of seeing the eco-friendly nature of your systems, the Presto Max and the Atlas Max. But one thing I also found, I guess, really interesting is, the consumables, the ink, how water-based it is. Can you just give a little bit of color, one, on that opportunity, and two, how that also fits into the whole sustainability initiative you have at the company?
spk01: Yeah, so first of all, I actually want to touch on the Fashion Week and what we created in L.A. and before that in New York and Crizioni and and also in Israel and what we are planning to do moving forward. You all need to understand, we are a change agent for this industry. We are really the one that's driving the industry to become more sustainable, on demand, and with endless creativities. We are unleashing the creativity. We are democratizing it. And this is what we presented in L.A. The intention of those events, the L.A. Fashion Week and next year in other places around the world, is to create an alternative fashion week. In those alternative fashion, we're demonstrating the capability of digital. We are partnering with many designer brands and enabling them to create their design with limited time, actually less than three weeks from the design to the creation and demonstration. But on top of that, what the company is driving is driving an industry that is much more diverse and inclusive, and we are very, very proud of it. It's not only in the culture of our team, but we are taking it to the industry. This industry needs change, not only change in terms of sustainability, in terms of becoming cleaner, but also in terms of diversity. We would like to see all ages on the catwalk, all sizes, and this is what we demonstrated. People were amazed. I can tell you the feedback we are receiving from the industry is unbelievable. You need courage to do that and who needs leading the change. And we are the one that really not only bringing the innovation in terms of production flow on sustainability. Yes, water-based ink, pigment ink that does not require pre-treatment, not post-treatment. There is no waste of water. No use of water. There's no waste of material because you produce exactly what you want when you want. But we're also changing the industry and connecting to the virtual world, enabling really this diversity on demand and creativity. So we are very, very proud. And our aim is to become, in 2026, in terms of branding, number one brand in fashion tech.
spk05: Just to add the business side of the consumables. So the consumables is a very important part in our business model. It's a very stable and recurring revenues for us over time. And with the new product, the new application, we see the consumption of the consumables getting higher. If we are talking about the Atlas Max, the XDI, So we see much higher consumption of consumables, for sure, if we are talking about the new Prestos. So this is a great contributor to our business model.
spk04: Thank you. Great. Thanks, Patrick. Joe, next question, please.
spk12: Our next question is from Jim Ricciuti with Needham & Company. Please proceed.
spk02: Hi. Thanks. Most of the questions have been answered. I wanted to follow up on some of the commentary, though, on the automated robotic garment handling. Ronan, is this going to be an upgrade to much of the install base, or is it going to be for the more recent products? Atlas, does it have any implications for Presto? And can you say, you know, clearly the max upgrade is going to be a big opportunity for you. I'm just curious how we should view this, the robotic handling opportunity for you.
spk01: Yeah, so maybe before I'm getting into specifically the robotic handling that we are about to release to the market, Let's understand what we are aiming to do. Actually, with KORNIT 4.0, we are aiming to automate the entire production flow from the ERP to automate the warehouse to the entire production flow. And we are aiming that one day it will be a dark room with no people running those systems and operations. As we know, there's a lot of constraints now on people, and this is what the industry needs, needs much more cleaner environment of operation. So this is where we are aiming. What you see now is the first step, is the first step of automation onto the systems. We are taking this automation on the Atlases and the Atlas Max. So Atlas Max will come out of the line with this automation. You will be able to order this automation. The automation will increase productivity by more than 20%, will enable consistency, and will really enable operators to run more than one system in a very consistent and easy way. This is the first steps. In the future, you will see some more automation coming to different type of systems. At this point of time, the focus is on Atlas and Atlas Max. As I mentioned, it's just the beginning of the roadmap of automation.
spk02: Got it. Thank you. Just on OpEx, should we anticipate similar things like you did in L.A.? ? trade show activity coming up over the next 12 months? Should we assume there's going to be a higher level of that type of expense in the model? And then on R&D, I don't know if you can comment. It was a fairly significant step up from Q2 levels. Can you say how much of that might have been influenced by Voxel 8?
spk05: Yes. So we are investing heavily No doubt. I mean we see that the potential we see the acceleration of The transformation in in the market and this is the time for us to invest and be ready with the right product and the best in class Go to market and and this is where we are investing in terms of the R&D. So We are recruiting Qualified and professional people to our team and We hired 86 new employees this quarter, which is a lot, and we continue to do it. Part of it is, as you said, it relates to Voxel 8. Voxel 8 is not a huge increment on our costs, about around $1 million per quarter. This is the run rate. And we continue to invest in the R&D. Regarding the events, so yes, I mean, this whole new world of exposing and penetrating into the fashion world, it requires a lot of attention, a lot of investment in getting to these events. And we will continue doing it also next year.
spk01: Yeah, I may add a lot of stuff with it, but I really want to emphasize it. Guys, we are in the beginning of a tornado. We're just in the beginning of a tornado of this industry. Now we have a window of opportunity to invest and change this market and capture the tornado. We need to invest. Actually, the limitation is how fast we can do that. We need to recruit more people. We need to do more of those events, innovative events, transformational events, and we will continue to invest because the payouts later on will be much faster and much greater.
spk02: Got it. Thanks. Congrats on the quarter, by the way.
spk04: Thank you. John, next question, please.
spk12: Our next question is from Greg Palm with Craig Hallam Capital Group. Please proceed.
spk06: Good morning, everyone. And I guess I'll add my congratulations as well as a very, very good quarter, especially in light of everything going on from a supply chain standpoint.
spk04: Thank you very much.
spk06: Thank you. If I heard you right, I think you mentioned that you're qualifying not one but two additional contract manufacturers now. And so my question is, was the second edition a byproduct of what you view to be higher than expected demand over the coming years versus, you know, maybe six months ago, or was it more your desire to localize more production given what we're seeing in the supply chain?
spk05: So we have already qualified the third contract manufacturer. They moved to mass production, and now we have three contract manufacturers, and we have started the process of qualifying the fourth contractor. which is most likely going to be in the Americas.
spk06: Okay, but was the fourth specifically a byproduct of trying to, you know, localize some production, or are you seeing more demand where you needed to qualify an additional one? I think we all knew that a third was coming, but... Qualifying a fourth was at least a surprise to me. I didn't hear that before.
spk05: Yeah, so it's both. For sure, you know, we need more capacity. And, you know, we want to be closer to our customers and deal with some of the pressure on the supply chain. It goes also with, you know, the sustainability concept that we are promoting of working closer to our customers. So it's all together.
spk06: Yep, makes sense. And then from a geographic standpoint, it really looks like America's kind of led the quarter again. Can you just give us some sense of what activity is like in EMEA, what the pipeline looks like in that region?
spk01: Yeah, so actually, while we see a very strong momentum, continued momentum in America, and America is built of North America and South America, we are very positive about also South America. We see Growth coming, massive growth in Mexico. So Nielsen is going very fast, but also Brazil. We expect to see next year Brazil coming with a strong growth. EMEA is our second largest region. And I can tell you there is a big, big shift now in EMEA. You will see it in Q4, and you will see it in next year. Our pipeline is very, very strong in EMEA. We just ended a very successful event in Como, in the heart of the fashion industry. We have a very strong pipeline, both for the DTF and the DTG side. And Cornet X is really accelerating, very strong in EMEA, both for onshore and for being able to export outside of EMEA. So you should see... massive growth that's coming from EMEA in the coming quarters. I will touch also on Asia. I'll take the opportunity to touch on Asia. It was a record quarter for Asia this quarter. The business situation in Asia is still tough. We still have some limitation on traveling inside Asia between countries, but we start to see the momentum coming. So I'm expecting 2022 to be also a strong year for Asia. We are building the team. Specifically, we are focusing on China, Japan, Korea, and of course, Australia.
spk06: Okay, that's great. Best of luck going forward. Thanks.
spk03: Thank you. Joe, we have time for one more question, please.
spk12: Yes. Our last question comes from Chris Moore with CJS Securities. Please proceed.
spk07: Hey, good morning, guys. I know we're at the witching hour here. I'll be quick. So just to follow up on one of the earlier questions in terms of product drivers in 2022, and really specifically the Atlas Poly, are you looking at that as kind of a wild card for 2022 and more of a 23 revenue event? I'm just trying to get a feel for for traction that you're looking for, you know, the key buyers, they're already part of your top 10 customers or these new companies that we're talking about, or, you know, just trying to get your thoughts when you look into 2022 and layer that with the Atlas Poly.
spk01: So Atas Poly is a big, big opportunity. It's a market that we hardly touched. We had the Avalanche Poly, but it was kind of an entry-level product. We tested the market. We learned a lot. And now we are coming with a totally different level of products in terms of productivity, quality, the wide range of application and materials that we can print on. So this board is going to change the market This is a big market 16% of all the material in the DTG on all the government DTG are polyester many of them are died polyester and many of them require this technology and So the potential is huge we are going to release it as I mentioned by the end of Q1 and we will start to see meaningful revenue coming from this product in the second half of the year, and we expect to accelerate with this product line into 2023. So it's just the beginning, but we will see meaningful revenue during 2022 already. Got it. I will leave it there. I appreciate it, guys.
spk04: Thank you very much. Thanks, Chris.
spk01: Good. There's no more questions? Okay. So thank you, everyone, and thank you for joining this call today. It was a great quarter and a great first nine months for Cornit. We are so excited about the opportunity in front of us. We are just in the beginning. As I mentioned, this is a tornado that we are entering right now. We believe, again, it's just the beginning of a great journey. And we are very happy and honored that you are with us and supporting us and believing in this industry, believing in us and believing the change that this industry needs to go through. We look forward to updating you again very soon on some of the strategies and directions that we are taking as a company. And we would like to thank you all for being on the call and wishing you a wonderful day. Thank you very much.
spk03: Great. Thank you, Ronan. Thank you, Alon. And thank you all for joining us today. As always, if you have any questions, please feel free to reach out to me here in New Jersey. Thank you, everyone. Have a great day.
spk12: This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.
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