Kornit Digital Ltd.

Greetings, everyone, and welcome to Cornete Digital's second quarter 2022 earnings conference call. As a reminder, this conference is being recorded. At this time, I'd like to turn the floor over to our host, Andrew Backman, Global Head of Investor Relations for Cornete Digital. Mr. Backman, you may begin.

Thank you, Operator. Good day, everyone, and welcome to Cornete Digital's second quarter 2022 earnings conference call. Joining me today are Ronan Samuel, Cornete's chief executive officer, Alon Rosner, Cornete's chief financial officer, Amir Shakad-Mendel, EVP of corporate development, and I'm happy to welcome Laurie Hanover, who, as we announced this morning, will be transitioning to the CFO role in November. Welcome, Laurie. For today's call, Ronan will recap the results for the second quarter discuss the current operating environment, and review some of the actions we've undertaken to help successfully navigate the current market dynamics. Alam will then dive into the second quarter numbers and provide our current third quarter outlook before turning it over to Lori for some brief commentary, after which we will conclude today's call with a question and answer session. 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 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 read the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 20F filed on March 30, 2022, which identifies specific risk factors that could cause actual results or events to differ materially. Any forward-looking statements are made as of this call hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings release published today, which is posted on our website in the Investor Relations section. At this time... I would like to now turn the call over to Ronan. Ronan?

Thank you, Andy, and good day, everyone. Thank you for joining us on today's call. As we reported this morning, second quarter's revenue were $58.1 million, net of approximately $4.5 million of non-cash warrants impact related to a global strategic account, in line with the preliminary revenue range we announced on July 5th. As a reminder, the gap between the guidance we provided in May and our second quarter results was driven by a shortfall in DTG systems revenues, mainly in the American regions. Clearly, not the great first half that we were expecting as we entered the year. As we look across the business, we see some customers, particularly in certain e-commerce segments, continue to digest excess system capacity built in the past two years and navigate macro-related issues, while others continue to grow nicely, although at a more normalized pace. We also see certain customers make good progress on their expansion plans and new production facilities. As a result, Several deals we expected to complete at the very end of the second quarter have either already closed in the third quarter, remain in our backlog, or have moved to 2023. Looking at the consumables, revenues were in line with our expectations, as some customers have walked through the inventory build-up experience in the last few quarters. we continue to expect consumables to grow sequentially throughout the balance of 2022 as our customers gear up for the peak seasons in the third and fourth quarters. For the first half of the year, we saw good growth in both EMEA and Asia Pacific. In EMEA, The pipeline for the second half of the year is improving as the team continues to make progress with several major brands and retailers across the region. This includes C&A, Hype, and one of the world's top five fashion brands that is vertically integrating a number of Atlas Max systems into one of their production facilities. They are also exploring a broader, larger-scale global deployment. In Asia-Pacific, after a very long period of lockdowns, especially in China, the region continues to open up. Our team is traveling again, meeting with customers, prospects, and making progress with several large brands, digital platforms, and strategic accounts. We are also engaged with several major manufacturers in the region that are responding to the growing demand from their global customers to transform their supply chain and shift more production volumes to near-shore, shorter-range production. In the Americas, Latin America is ramping up nicely, driven particularly by demand for the Presto Maxx. We are seeing more new business opportunities with mid-market brands and retailers as the broader U.S. apparel industry focuses on margin and supply chain improvements. We believe this can be well achieved by shifting more production volumes from traditional offshore mass production to on-demand at a closer proximity to consumers. On the DTG side, we have recently started working with a specialty retailer of casual apparel operating over 200 stores across the U.S. In addition, a major onshore apparel manufacturer for some of the largest licenses and retailers in the U.S. is making their first entry into digital printing with Cornit, having historically produced 100% on analog equipment. And finally, we continue to work in a very close partnership with our largest global strategic account on their meaningful domestic and international expansion plans. We have a clear understanding of their key focus areas potential meaningful new opportunities, and our relationship is stronger than ever. While the overall operating environment remains uncertain in parts of our business, the opportunities ahead of us remain firmly intact. However, to successfully navigate the current market dynamics, we are focused on three key areas within our business. First, we continue to work with brands, retailers, and fulfillers of all sizes on helping them better understand the operational and financial benefits of shifting production volume to Kornit's on-demand sustainable mass production digital solutions. Second, ensuring a successful rollout of our NPIs, including Presto Max, Atlas Max Poly, Atlas Max Upgrades, and a new user interface for our CornetX offerings, in addition to the widely anticipated launch of the Cornet Apollo in mid of 2023. Feedback on the Apollo has been excellent, validating that our technology is superior and fits perfectly with their long-term growth plans. Simply stated, customers, including some of our largest strategics, want Apollo now. And third, returning to profitability. While we have made some tough but necessary decisions recently, including a forced reduction in force last month, we continue to strategically review all aspects of our business and will continue to adjust our cost structure as needed without sacrificing our key growth initiatives, investments in long-term programs, and our ability to support our customers. Okay, two more comments before I turn it over to Alon. As announced this morning, Our board authorized the repurchase up to 75 million of the company's ordinary shares. We believe this is a flexible way to return value to our shareholders while not adversely impacting our ability to execute on our strategic growth plans. We also announced that Talon will be stepping down as Cronit CFO in November for personal reasons. Alon has been an integral and trusted member of our executive management team and an extremely valued colleague to everyone here at Cornit. I am very proud of what Alon has built since joining the company, especially helping us navigate through the global pandemic. We are all extremely grateful for all his accomplishments and wish him only the best in his future endeavors. Thank you, Alon. Also announced was the appointment of Lori Hanover as our new CFO. Lori has served as a member of Cronit's board of directors since 2015 and served as our audit committee chair and as a member of our compensation committee. Lori knows the management team very well has a deep understanding of our company and brings over 25 years of CFO experience from multiple industries. Since I joined Cornet as CEO four years ago, Lori's advice and counsel have been invaluable to me. As such, I have no doubt that she is best positioned to energetically step into this role from day one to build upon and execute on Kornit's exciting long-term growth objectives. Welcome, Lori. With that, let me turn the call over to Alon for a closer look at the numbers and the outlook. Alon.

Thanks, Ronen, and good day to everyone. As Ronen mentioned, second quarter revenues were $58.1 million net of 4.5 million non-cash warranty impact related to a global strategic account. Lower than expected DTG systems revenues drove the shortfall between the guidance we provided in May and our second quarter results, while consumables were in line with our second quarter plan. Top 10 customers were in line with our expectations and accounted for approximately 52% of total revenues this quarter. Moving to margins, non-GAAP gross margin net of the impact of the warrants was 38.6% compared to 48.2% in the same period last year. The lower year-to-year gross margin was driven by materially lower systems revenues, mainly in the Americas region. looking forward we anticipate gross margins in the second half of the year to improve versus second quarter as revenues from consumables and services increase throughout 2022 and as we gain operational efficiencies on the fixed cost structure of the business turning to expenses total second quarter non-gap operating expenses were 40.7 million for the second quarter as compared to $29.2 million in the same period last year. The main drivers for the increase were higher research and development expenses, which increased 39% year-over-year to $12.8 million, or 22% of revenues, and sales and marketing expenses, which increased 55% year-over-year to $19.3 million and represented 33% of revenues. G&A expenses increased 15% year-over-year to $8.6 million and represented approximately 15% of revenues. As I mentioned last quarter, our second quarter spend was mainly associated with readying multiple NPIs, such as the Atlas Max Poly and the Presto Max, as well as significant go-to-market and branding events, including Fashion Week Tel Aviv, Fashion Week London and the FESPA industry event in Berlin, Germany. We currently expect operating expenses level in the third and fourth quarter to be lower than the second quarter, in part due to lower marketing expenses and as we start to realize some of the benefits of the cost structure adjustments we have made in the business thus far. Non-GAAP operating loss was 18.3 million, net of 4.5 million non-cash warrants impact. As I mentioned, the substantially reduced level of second quarter revenues coupled with materially higher sequential operating expenses drove the operating margin to negative 31% inclusive of the non-cash warrant impact of approximately 10%. We ended the second quarter with 1,009 employees a year-over-year increase of 246, and an increase of 96 employees from the previous quarter, due mainly to additions from the acquisition of Tesoma. As Ronen mentioned earlier, we recently made the difficult but necessary decision to complete a focused reduction in force last month. Non-GAAP net loss for the second quarter was $15.6 million or a loss of $0.31 per basic share as compared to non-GAAP net income of $10.5 million or $0.22 per diluted share in the same period last year. Adjusted EBITDA loss for the second quarter was $16.1 million as compared to adjusted EBITDA of $11.4 million in the second quarter of 2021. Our cash balance, including bank deposits and marketable securities at quarter end, was $705 million. During the quarter, receivables decreased as expected due to a healthy collection associated with closing sales late in the first quarter. Inventories increased due to systems that are awaiting for shipment to one of our customers who is experiencing delays in the completion of their new production facility. In addition, during the second quarter, we closed the acquisition of the SOMA. As Ronen mentioned, our board authorized a share repurchase program of up to $75 million. which as an Israeli-based company is subject to receipt of Israeli court approval. The board and management agree that using a portion of the cash on our extremely strong balance sheet to repurchase shares is in the best interest of the company and our shareholders. Further, we believe that the share repurchase program won't impact our ability to execute on our growth plans. Turning to guidance. We continue to adapt to the current market dynamics by strategically looking at all aspects of our business and adjusting as needed without sacrificing key growth initiatives, investments in long-term programs, and our ability to support customers' needs. We have a good line of sight for the third quarter. We currently expect revenues to be between 66 million to 70 million based on the closing of some of the transactions that were delayed from the second quarter, our current system's backlog, and the expected growth contribution from consumables and services revenues. We further expect fourth quarter revenues to be at the similar levels to the third quarter, with a higher mix of consumables. We anticipate operating margins in the third quarter to be in the minus 15 to minus 11% range with EBITDA margins in the minus 12 to minus 8% range. We further expect fourth quarter operating and EBITDA margins to improve sequentially as compared to the third quarter. I will remind everyone that all guidance provided today assumes zero impact from the fair value of issued warrants in the quarter with our global strategic account. And finally, as Ronen said, in about two months' time, I will be leaving Cornete for personal reasons. This was an extremely difficult decision for me, as I truly love working at Cornete and with its entire world-class team. I have no doubt the company is perfectly positioned to capture the tremendous opportunities ahead and wish everyone here only the best. I know the company is in great hands with Lori. Having worked so closely together since my time here, and I look forward to working with her to transition the CFO role. And with that, let me turn it over to Lori.

Thank you, Alon. I join Ronen in thanking you for all of your accomplishments and tireless efforts as our CFO over the past two years. I look forward to working closely with you through the transition and wish you the very best. For me personally, I'm very excited to join this amazing company at this point in its evolution and to working closely with the entire management team to execute on our long-term strategy, and drive value creation. Having served on the board for the last seven years and understanding the company, I strongly believe that the best is yet to come. I look forward to personally meeting many of you in the investment community over the coming months. Andy?

Great. Thank you, Laurie. Before we open it up for Q&A, I want to note that Ronan is joining us remotely today due to the passing of his mother. All of us want to express our deepest sympathies and condolences to Ronan and his family. Jamie, will you please open it up for Q&A?

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the numbers to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from Jim Suva from Citigroup. Please go ahead with your question.

Thank you. I have a question and a follow-up. You mentioned since your July 5th negative press release that many of the hardware units or printers have been sold or are in the process. I just wanted to see Are they all going to be sold in Q3? Are they lingering into Q4 or some cancellations? Just kind of an update on the Q4 shortfall due to the inventory digestion. And then I have a follow-up. Thank you.

So, Jim, thank you for the question. If I understand correctly, you mean the shortfall that we had in Q2 due to the site readiness of our strategic global customers? Am I correct, this was the question?

Yes, yes.

Yes, okay. So I would start with saying we have a great visibility and a great working relationship with our global strategic customers. We actually met with them a month ago here in Israel, and a week ago there was management meetings with top senior management from our strategic customer in the U.S., and we got visibility. to the continuous development on the site readiness across the world. Specifically on the Q2 site readiness, this site is being ready these days. We are actually in the process of shipment of systems to this site. We are going to install those systems during Q3 and Q4. And therefore, we will all be able to see the revenue recognition on those systems that were delayed from Q2 during H2. On top of that, there are other sites that are being deployed on the process of constructions. Those sites, we got an update that there is very good progress. We will start most likely to ship systems to those sites during Q4 and the beginning of 2023.

Great. And then my follow-up question was on the consumables. I believe in your prepared comments, references made that Q3 and Q4 should grow. Are we talking, I assume, sequentially quarter over quarter as normally people buy more stuff in the second half of the year? But also, I wanted to know, is the magnitude tempered down a fair amount from prior years or similar? Or how should we think about that comment as far as the magnitude about the growth?

So first of all, the comments was regarding sequential. You will see Q3 higher than Q2, and of course, Q4 higher than Q3. Q4 is always the peak season and end of Q3 as well. So this is the comments. we have much better visibility. We don't see the volatility that we had in Q1. We start to see more normalization into Q2. And now that we are almost in the middle of Q3, we have great visibility on the consumable growth. We see some customers going back into the growth phase. But in H1, they were declining year over year. we expect to see H2 supplies higher. We will see a growth versus H2 of 2021. So H2 2022, you will see a growth on supplies, but in a lower pace versus what we have seen in 2021 compared to 2022. So there will be growth, but the growth is still lower than what we saw in previous years.

Great. Thank you so much. Great. Thanks, Jim. Jamie, next question, please.

Our next question comes from Rod Hall from Goldman Sachs. Please go ahead with your question.

Yeah. Hi, guys. Thanks for the question. I guess I wanted to kind of come back to the big picture here. We know that capital spending in a lot of areas has been weaker. I mean, I think it's obvious the macro is causing a lot of uncertainty out there. But then, Ronan, your comments on the large customer, it sounds like you've got pretty good visibility there. And I'm just curious, as you look out into next year, and I'm not really asking for guidance, but I'm curious about your visibility. Do you feel like the order pipeline looking into next year, you know, looks pretty good? Do you think you've got visibility on what might happen next year? Or is it just sort of a wait-and-see situation with the customers and and how they'll behave as we enter the beginning of next year. Yeah.

So I would start by saying that it's too early now to give any direction for 2023. I will give you some direction, but it's too early to really focus or to give guidance. What we see right now, we have much better visibility in Q3, and we gave clear guidance, and we feel very confident about the guidance we gave to Q3. We're also starting to get better visibility to Q4. It's too early to talk about visibility for 2023, other than our global strategic account that we are working on a three-year plan, and we have a very clear visibility for 2023 and their deployment plans. On other areas, on other customers, it's still too early to forecast 2023. Now, we should remember that 2023 is is based on many of the new product introductions that we have done in the second half of 2022. And we start to see a really strong momentum of that. If it's the Atlas Max, if it's the Atlas Max Poly, which we didn't have before, the Presto Max is gaining really nice momentum and nice traction. We were talking about the upgrades of the Atlas to Atlas Max. We have done a change in this kit, and we are starting now to deploy the kit. We start to see very nice momentum. Actually, one of our biggest customers decided to deploy the entire fleet of Atlases and to upgrade it to Atlas Max. And we expect that 2023 will be very strong in terms of upgrades to the Atlas Maxes. And to remember, in the middle of the year, we are going to release the Apollo, the anticipated Apollo, which is a totally different ball game going to a totally different market as a replacement. And we already have a very, very nice demand for this machine, for the systems. Many of our key customers were here in Israel and we introduced the system. We got amazing feedback on the system. I can tell you there were people even this week saying we want it now. We would like to be part of the beta. So we expect 2023 to be strong. We expect 2023 to be stronger than 2022, but it's too early now to give any indication on the growth rate of 2023 versus 2022.

Okay. Thanks, Ronan. And then I also wanted to follow up on the OPEX and operating margins. Maybe a question for you, Alon. Just you know, sort of what the trajectory expected there is. When would you expect an improvement in operating margins? And I guess, how are you thinking about operating cost control in different revenue scenarios? Do you feel like you kind of had taken all the actions, you know, that you could take in any scenario? Or do you think if things, you know, the broader macro gets worse, would you look to cut more? I'm just kind of curious what you're thinking there and, you know, if you can give us any guidance on or thoughts on operating margin trajectory. And by the way, Alon, great working with you as well.

Thank you. Thanks a lot, Rod. So operating margin is impacted by revenues, obviously, and the higher the revenues are in general, the better margins, gross margins are, as the impact of the fixed costs getting lower. As we go towards the end of the year, third and fourth quarter, we expect higher mix of consumables at higher margins. So we do expect to see higher margins towards the end of the year. So this is one driver to improve the overall operating margin. In terms of the OPEX, so we said before, I mean, second quarter was high or the highest in the year in terms of OPEX, mostly because of the special events that we had in the quarter and we expect lower OPEX in third quarter. We don't see a big impact of the cost adjustments we've done last month in third quarter. Some were in programs and some was in reduction in force. So we do see some benefits or savings in third quarter. We expect to see higher savings in fourth quarter. having a full quarter of saving as a result of the reduction in force. And we continue to look at our business. We say that we are committed to profitability, and we are taking measures to ensure that we will be profitable as soon as possible. Again, theoretically, we can do it very fast, but the cost will be very high in terms of sacrificing the future and we don't believe this is the right thing. So we do it in a responsible way, reduce wherever we can with a clear target to get to profitability as much as possible.

As early as possible. Maybe we'll add one more thing on that and just to what Alon was mentioning. We had a long discussion with the board of directors and The discussion was, do we want to move back to profitability already in Q3? We could have done it by cutting even more costs. It was clear with the board and the management that the potential of the company, the market, the place that we are, this is not the time to cut. We see a massive growth ahead of us, in front of us. We're coming with new products. There's a lot of development in R&D. in many aspects, and we need to be very careful where do we cut in order to sacrifice seeing our growth trajectory moving forward. So we're doing it in a responsible way where we can cut, but we are committing to moving back to profitability as soon as possible. You will see an improvement in Q3, you will see an improvement in Q4, and definitely in 2023.

Great. Okay. Thanks a lot, Ronan. I appreciate the answers, guys.

Okay.

Thanks, Ronan.

Jamie, next question, please. And our next question comes from Brian Drab from William Blair.

Please go ahead with your question.

Hi. Thanks for taking my questions. I'm going between two calls right now, so I may have missed something. I apologize for that. Ronan, did you comment at all on the call today regarding the longer-term $1 billion revenue target and your confidence in getting there?

No, we did not discuss about it. We discussed about being confident about the fundamentals of the companies. I can tell you that the fundamentals of the companies are stronger than ever. We can see a massive move of production growth. from China and from other places to near-show, to on-show. We see where the e-commerce, we have new normalizing growth. E-commerce is continue to grow. We saw it on the macro and we see it in the micro with our customers. The short runs is happening. We can see the demand from brands, retailers for short run on-demand production Sustainability is the key factor today for all the brands and definitely for the consumer, for the people. Our technology is better than ever. The maturity of the technology, opening the DTF and DTF becoming much more bigger in terms of revenue overall. but also the DTG and bringing the Apollo moving forward in the middle of 2023. Kornit X is starting to gain momentum with major, major brands and some major digital platforms, and we have a very, very strong team. We have a very strong team, and we have a very strong customer base. Some of the biggest brands are using our technology. If it's going vertically, it's using Kornit X. um and uh we we believe that uh the future focal needs is beyond the one billion dollar that we was mentioning now as for time frame uh we are working very uh closely and and planning very details to be there with uh 2026 uh we will come back to you in a later stage let us uh take the next few months to see the uh the progress on the on the business As for the $500 million in 2023, at this moment, we do not want to commit to bringing it in 2023. However, of course, we are internally building our plans to bring it. It's too early now to commit. Give us one, two months, and we'll come back to you with more detailed plans on the $500 and the $1 billion.

Thanks, Ronan. And just one more question for now. But on the Apollo, you're having, of course, a lot of conversations with customers talking about use cases for the Apollo, the need for the Apollo. Can you talk about what you're learning from the customers about that? What are the use cases? Why do they need this machine? And you said the interest is high, but if you could just talk a little bit more about why exactly they need this machine, what types of runs they're going to do on these machines, volume, et cetera. That'd be great. Thanks.

Yeah. So we're engaging with many different types of customers, some of them existing customers, key and strategic customers, some of them totally new customers, which never use digital or use it in a very low magnitude. There is a very clear story. There is a story of the replacement, the replacement of the analog. And when we are talking about replacement, we are talking about short to mid-runs, and we are talking about up to 500 copies of short runs or mid-runs. And there is a discussion about the enablement, which is more of the customized design of the one-off. We see a great fit for this product in two of those segments. However, in the initial stage, we are focusing on the replacement market. What we hear from those customers, what they see today, is that their jobs are getting shorter and shorter. Three years ago, it was in the thousands. Now it's in the tens or the hundreds. And I'm talking about big, big customers that receive many, many, many jobs in the 10th or in the 100th and less than the 500th. So they're looking for efficient way to run those jobs. And also, they have a huge need for on-demand production. Now, the way that Apollo is answering it, Apollo actually can produce 400 T-shirts or hoodies in an hour. and it's the most productive system in the industry. Not only that, Polo brings the quality of the Atlas Max, the max quality, which is by far the highest and superior quality in the market. On top of that, the total cost of ownership is very important, and total cost of ownership is not only the price of the system and the price of the ink, It's the operator. When you can run such a system with one operator, with full automation, the machine is connected to a dryer, and unloading the shirts by automation and semi-automation loading, there's massive benefits. Manpower now is expensive and difficult to reach, and Apollo is the answer to for productivity and cost effectiveness for short to mid-run. And it's clear direction that we see from brands and retailers. Now, on top of that, we need to understand that those brands and retailers are moving production that they used to do outside in China, they're moving it near-show and on-show. And by moving and changing supply chain to on-show, gives them the flexibility to provide to order shorter runs versus long runs that they had to order from China because of the time frame of shipment of the products. So the entire market is shifting into short runs and Apollo has a great place to capture it.

Thanks a lot, Ronan.

Thanks, Brian.

Jamie, next question, please.

Our next question comes from Jim Rashudi from Needham & Company. Please go ahead with your question.

Hi, thank you. A couple of questions. I wonder what can you say about customer plans to move forward with field upgrades on the existing Atlas fleet that are out there, just given the overall market weakness? Has any of that work that you anticipated been pushed out there?

Yeah, so it's a very good question because, you know, in Q1 and Q2, we were experiencing some customers that say we would like to add the upgrade, but actually we have overcapacity. We have too many systems versus the jobs that we have. We actually start to see normalization. We start to see growth with some of those customers that were declining in H1, and we start to see some growth in H2. Another great example is one of our top customers in the world that decided to upgrade the entire fleet after testing this upgrade. We actually did an upgrade for two of his systems and he tested it extensively and they saw the benefit, the benefit of additional production, the benefit of the quality, the benefit of the flexibility of running much wider range of fabrics and textile. And we just got an order for the entire fleet, which is great. We believe that Q3 will be strong in terms of upgrades. We need to remember that Q4, the upgrades part will be only in October. November, December, customers are fully they need the capacity for the production, for the peak season, and we will start to see growth on the upgrades starting Q1 2023. So we expect 2023 to be strong, both in the upgrades of the Atlas to Atlas Max, but also in the upgrades of Presto to Presto Max.

Got it. And I was intrigued by the comment or the line in your presentation presentation deck talking about the top five fashion brand that's using Atlas in one of their production facilities. I know you can't identify the customer, but can you shed any light in terms of how they might be using it?

Yeah, unfortunately, I cannot share the name. I would love to share with you the name. Hopefully, it will be announced soon. But, you know, working with those mega-brands, this is a mega-brand, required a lot of dedication and working with different levels inside the company. There's a difference between getting agreement on the contract, the deployment. So we have passed the deployment. We already installed and we did all the testing after the installation. Actually, this customer now is getting into production on multiple systems, and they started fully vertical integrated. Their aim is to add more capacity vertically, but on top of that, to expand globally, leveraging Kornit X across the world. So this would be a great example of the benefits of digital and Cornete X as enablement of on-demand production in a sustainable way all around the world.

Thank you. And that just ties into the question on Cornete X. Has that area of the business been impacted by the slowdown you experienced earlier this year in DTG?

So on CornitX we are still learning a lot. This is an excitement area. We see CornitX as the core strategy of Cornit and actually the core driver of the change of the industry. We have a trial and we are still trying many different types of business models, many different types of customers. It's clear right now that we are working on three points approach. One is building the platform itself. We are just releasing a new UX and UI to the platform. We are adding more capability and the system itself is in a much better position today in terms of the platform and stability versus what it was in the past. The other area is building the global fulfillment network. We are starting to add more and more customers And now when we are focusing on global fulfillment network, leveraging Cornei technology, the latest and greatest Cornei technology with full visibility for quality control on each one of those sites. So making sure that the quality is the best in class. And the third one is really going after the mega brands, large brands, but also digital platform. like the Canva of the world, like the Wix. The Wix implementation is progressing very, very well. And I can tell you that there are a few mega, but mega, mega digital platforms that we are engaged with, which can change the entire game of the industry and creating really on-demand production everywhere around the world, in a sustainable way. So I'm very excited about that. There's still a lot of work, and we are learning every day on politics. Thank you.

Great. Thanks, Tim. Jamie, next question, please.

Our next question comes from Chris Moore from CJS Securities. Please go ahead with your question.

Hey, good morning, guys. Yeah, maybe just go back and talk a little bit more on the kind of the big product introductions. You talked about the Atlas Max upgrade. And just trying to get a sense, when you look at the Presto Max and the Atlas Poly over the next 12 months, do you see one of them as being a bigger driver of revenue? Or maybe just you kind of talk to that a little bit.

So the Atlas Max is a game-changer. It's a game changer in terms of quality. For the first time, Kornit and digital as a whole bringing a quality that meets the highest and the most sensitive brand's quality. And on top of that, it brings capability that's never been seen before, like the XDI, which open up very vast applications but you couldn't do it before with digital. And doing it with analog is an expensive and long process. So Atlas Max is gaining really nice traction. We see traction in EMEA. We see traction in Asia Pacific. And, of course, we see traction across America with great feedback. And this is why we start to see traction also on the install base of Atlas users for upgrading the system to Atlas Max. They understand that they need to have the latest and greatest quality and, of course, the productivity and the benefit of the total cost of ownership. So this is on the Atlas. On the DTF, you know, actually two years ago, DTF was a very, very minor side business for Kornit. In the last two years, we managed to develop a substantial business. It's starting to be meaningful to our revenue, and we see really nice growth Across the world with the DTF and now with the Presto masks that are able to print on dark fabric, white inks, the hand feel is much better. We see traction with mega brands, and I can tell you mega, mega brands, both sports brands and fashion brands, leveraging this technology. But we see it across the world. We see Asia is growing very nicely on the DTF. EMEA is the strongest region in terms of the DTF. And Latin America is a big, big growth engine on the DTF. And we have a very strong pipeline moving forward on the DTF and into 2023. The last one is the Atlas Max Poly, which we just released. We are just starting to build the pipeline. We already have a few orders for Q3, and we are going to recognize the new system in Q3. We are building the pipeline into Q4. In Q4, there is a major trade show in Las Vegas, Printing United, which we are going to participate. There we are going to show the entire portfolio of Cornet, including the Atlas Max Poly for the first time in America. And we expect to get many orders in this event. It's a very important event for us.

Got it. Very helpful. Maybe just one quick follow-up on the Apollo. You know, given the high upfront cost and rising interest rate environment, likely any impact on demand or these are bigger customers that normally won't have to do any financing when they purchase the Apollo?

So with Apollo, we are focusing on large customers, but they have large volume. And In the end, those customers, large ones, are looking at the total cost of ownership. Total cost of ownership is looking at the cost of the machine, cost of the ink, cost of the service, cost of the operator, cost of the electricity, and so on, and dividing it by the number of T-shirts or garments you can print per hour. We are aiming the Apollo to be the most efficient machine is the best TCO in the market with the highest quality. So we see really huge excitement from customers, new customers that we've never been able to approach or to penetrate, but also existing customers that are really excited to grow with Cognit with that product.

Very helpful. I'll leave it there. Thanks, guys.

Thanks, Chris. Jamie, next question, please.

Our next question comes from Patrick Ho from Stifel. Please go ahead with your question.

Thank you very much, Alan. I wish you the best of luck. This is the second time we've worked together, so it's been a pleasure once again. So best of luck. Maybe first off, Ronan, in terms of the market environment, I know it's very dynamic and it's volatile right now. but would you characterize your discussions with customers that you're starting to see any stabilization, there's not another, quote, shoe to drop, or is there the possibility that things could still fall further if the economy worsens or we go into kind of a more macroeconomic global recession? What's your kind of discussions with customers today?

So as you mentioned, it's still a bit volatile and there's a mixed bag here. But overall, when we look at it, we see better stabilization versus what we see at Q1 and the beginning of Q2. We have much better visibility. Some of those customers up in Q1 and Q2 really declined over here. We see them in Q3 going to a normalization of growth. So it's not the same goal that we've seen in 2021 versus 2020, but we see them continue to getting into a growth area, which is great. So we were expecting to see some normalization on the e-commerce, and this is what we start to see now. Now, when I say mixed bag, it's different from region to region and customer to customer. We see a very nice growth in EMEA. both in terms of seed themselves and supplies. We see very, and this is even on top of the currency impact that we have in EMEA, we see a nice growth in Asia, really opening up Japan, Korea, and even China. We see a very nice growth, as I mentioned before, in Latin America. In North America, it's mixed. So, of course, we have our strategic global customers that is globally, and they continue to grow in a very, very nice pace and bear the plan. But we have other customers in North America that still it's very volatile and difficult to say. But even there, we start to see new growth areas. We start to see, well, we have many net new customers. new customers that are joining Corniche, both on the DPG and, of course, in the DTF. So we are a bit more optimistic also in North America, but I guess that it will take another one or two months to get better visibility on the overall trend.

Great. That's helpful, Rona. And maybe for you, Alon, just in terms of the OPEX comments you made in your prepared remarks about some of the cost reductions and managing those line items, it's good to see that you have the flexibility to kind of adjust to the market environments. But I think, you know, I believe in the investments that are needed long term. How quickly can you adjust both, you know, in terms of this current kind of downturn and adjust there, but quickly ramp up, you know, if the customers come back more aggressive fashion like they did over the past year and a half? How quickly can you ramp up OpEx to keep pace with customer demand?

Yes, it's a great question. So first of all, you know, the variable expenses are the ones to reduce. And so as volume goes down, we try to look at all costs that are associated directly with the lower volume, and then we cut it. without too big of an issue to get it back. In terms of the investment, we are investing in the long term. So we try to minimize the savings or the reductions in the R&D overall and mainly in the main projects in the R&D. So we are looking at the areas where either the ramp up would be fast because we do expect, you know, recovery and we want to be ready and not to sacrifice the future so that's why we are saying that we are doing it in a very controlled way and we look at each and every activity in the company and assess whether it's you know the criticality of the activity and the ability to to recover later thank you very much thank you thanks a lot thanks patrick

Jamie, next question, please.

Our next question comes from Greg Palm from Craig Hallam. Please go ahead with your question.

All righty, thanks. I guess digging into guidance a little bit more, just thinking about it, you know, from a first half, second half basis. I mean, I think generally your guidance for Q3 and Q4 assumes, you know, normal seasonality patterns. Yes. It sounds like at this point you have much better visibility into those plans from your large global strategic. I mean, it implies a pretty big ramp over the next few quarters relative to Q2. So I guess, first, can you confirm that? And second, if that's the case, you know, how do we tie that out? It just seems like the guy, you know, could have or should have been a lot better given those higher contribution levels.

Maybe I'll start with the global strategic customers to clarify here, and alone we'll continue if you have something to add. So on the global strategic customers, you all remember that in Q2 we were supposed to ship units to a site that was not ready. Those units, we are going to ship them during H2. And so you will see the revenue that we meet in Q2 coming into H2. However, we do not expect additional systems revenue recognition in H2 out of this global strategic customer. We expect to shift in Q4, but to recognize most likely beginning of 2023 when the sites will be ready, the other sites will be ready. So we have visibility, strong visibility in 2023, As I mentioned, our global strategy customer is going to grow very nicely, and we have lots of opportunities there. But in H2, in terms of revenue of hardware, we just expect to recognize the revenue from the Q2. Please remember that Q4 is a peak season, so we expect a large order on supplies and revenue recognition of supply from our global supply chain customers.

Okay.

If I may add, so specifically for the question, we have better visibility for third quarter. It comes from the backlog that we have some came from second quarter and some is new backlog that is being booked in this quarter. And as we move towards the end of the year, the mix goes towards the consumables. We do expect to have a good peak season for our customers. And we do expect to get larger orders of consumables, which increase our level of visibility or confidence in the business in the third and fourth quarter. But we do need to remember that we are still operating in a volatile environment. The system sales is not yet at the level of what we were used to in quarters before. So we assessed the situation and we have better visibility at this point.

Yep. Understood. Okay. And then the comment on the customer feedback for Apollo, I thought it was intriguing. And I guess if some of your customers want Apollo now, is there any risk that those customers that are existing Avalanche or Atlas purchasers probably, do they just wait for the Apollo? It doesn't sound like this is happening with your large global strategic, but curious if that's a risk for many of the other customers.

It's a great question. And actually, it's opening for us opportunity to open doors where we've never been able to open doors. And those customers, some of them already took orders for Atlas Maxis to start being familiarized with digital, with Kurnit, and later on when Apollo will be ready, they will add on Apollo. We need to remember that our view... and what we believe that even the biggest strategic customers and even the biggest strategic screen player, they should have a mix of products between the Atlas Maxes and the Apollo. It's not one size fits all. The Atlas Maxes is based on value proposition, running customized designs, running different applications, unique applications, while the focus on the Apollo is more replacement for short and mid-run. So we see a mix of those systems being sold together to large accounts.

Okay, great. I'll leave it there. Best of luck going forward. Thanks. Thank you.

Thanks, Greg. Jamie, we have time for one more question, please.

Our next question comes from Tavi Rosner from Barclays. Please go ahead with your question.

Thank you for taking my question. First of all, Ronen, I'm very sorry for your loss. And Alon, you know, it's been a pleasure working together. You've proven that whatever is called Rosner is high quality, so I was happy for that. Sorry, private joke. All my questions have been asked. I think the only one that no one touched on was M&A. I mean, I guess with depressed multiples out there and your $700 million, you know, cash balance, you know, is it time to be opportunistic or, you know, what's the pipeline out there and anything you can add would be helpful?

Yeah, so strategically we are looking at areas to deploy our capitals, and we see some strategic area of potential M&As. As we mentioned in the past, we are focused very much on the software area and the run cornetics. We identify a few opportunities. We are working together with the boards, and we believe that in the next few quarters we will be able to deploy some of it into M&As. We are not talking about right now a big acquisition, but there are some sizable acquisitions that can be very meaningful to Kornit technology moving forward, really to connecting the world of designers and creators as a whole. into co-needs anywhere around the world. So there's big opportunities there, and the team is very engaged, and we feel comfortable, confident that in the next few quarters we'll be able to deploy some of it.

Thank you. Great. Thanks, Tavi. Thank you, Tavi. Thank you, Tavi. Jamie, any other questions? Mr. Badman, is this time?

At this time, we have no further questions.

Great. Thank you very much. Ronan, let me turn it over to you for some closing remarks.

Yeah. Thank you, Andy, and thank you, Operator, and thank you all again for joining us today. As mentioned earlier, our vision remains unchanged. We are taking action to successfully navigate current market dynamics, and we have huge confidence in the long-term fundamentals of the business. I would like to thank all the amazing Corne team and express appreciation for the continued support we have received till now from the investment community. We are working hard to execute on our plans to capture the massive opportunities ahead of us. And we'd like to thank you again and hope to see many of you in the upcoming investor conferences that we are having in September. Andy, the floor is yours.

Thank you, Ronan, and thank you, Alon, Laurie, and everyone for joining us today. As always, please do not hesitate to reach out to me directly should you have any follow-up questions. Jamie, can you please close the call?

Ladies and gentlemen, at this time, we'll end today's conference call. We do thank you for joining today's presentation. You may now disconnect your line.