Kornit Digital Ltd.

Good day, everyone, and welcome to Cornete Digital's third quarter 2022 earnings conference call. Joining me today are Chief Executive Officer Ronan Samuel, Laurie Hanover, Cornete's incoming Chief Financial Officer, and Amir Shaked Mandel, EVP of Corporate Development. Unfortunately, Alon Rosner, Cornete's CFO, will not be joining us today due to the passing of his sister, Yael. On behalf of everyone here at Cornete, we would like to extend our condolences and support to Alon and his family. For today's call, Ronan will recap results for the third quarter, discuss the current market environment, and review some of the actions we are taking to help successfully navigate the current market dynamics. Laurie will then review the third quarter numbers and provide our fourth quarter outlook before we open it up for Q&A. 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 these events and activities or developments that the company intends, expects, projects, but leaves 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 Securities and Exchange Commission, including the company's annual report on Form 20F, followed by 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. I first want to echo Andy's comments and extend our deepest sympathies and condolences from everyone here at Cornete to Alon and his family for the recent loss of his sister. We wish everyone in Alon's family continuous strength during this very difficult time. As we reported this morning, third-quarter revenues were 66.8 million, net of approximately 5.6 million of non-cash warrants impacts related to a global strategic account, exceeding the revenue guidance range we provided in August, which, as a reminder, assumed zero impact from the fair value of issued warrants. In the third quarter, consumable and services revenue grew nicely from the second quarter and year over year due to the solid demand from our large strategic accounts as they gear up for their peak season, as well as the execution of a major fleet upgrade to Atlas Max with a large strategic customer. We continue to receive excellent feedback for our Max family of products from prospective customers and strategic accounts focusing on the excellent retail quality and superior total cost of ownership that these systems deliver. Macro-related headwinds such as inflation, general consumer sentiments and rising interest rates continue to impact our customers and prospects as they weight the impact on their projected pace of growth in the coming quarters. These macro pressures result in longer sales cycles, increased demand for robust financing options, and an overall slowdown in new systems orders. In Asia Pacific, we are facing the impact of a strong U.S. dollar, especially in Japan and Korea, and we continue to feel headwind in China due to its zero COVID policy. The long-term opportunity ahead of us remains firmly intact, and we continue to engage with large brands, retailers, major manufacturers, and e-commerce platforms focus on improving their operation, lowering inventory levels, and transforming the supply chain by shifting production volumes from mass offshore production to near-shore on-demand sustainable production using Kornit's digital solutions. Since our inception, Kornit has demonstrated its ability to transform and revolutionize the fashion and textile industry with sustainable on-demand production solutions. We continue to hear the need for shorter runs and shift to near and onshore production models from fashion brands, retailers, and digital platforms. We see the industry gradually transitioning from analog to digital and are receiving very good interest in our Apollo, the most comprehensive digital single-step solution with max quality and the lowest TCO targeting screen print mass production markets. Despite the interest we see in our recent NPIs, as well as the pipeline of potential business with existing and new accounts globally, we expect systems revenue to remain challenging for the next several quarters, balanced by healthy and growing contribution from consumable and service revenues. As a reminder, consumable revenues are seasonally lower in the first half of each year and traditionally build heading into our customer peak seasons. We continue working closely with our global strategic accounts and their future global expansion plans and shift the delay system during this quarter. Based on recent joint planning discussions, we anticipate systems revenues from these accounts next year to start likely in the second quarter and heading into their peak seasons. Over the past several years, we built this business and our cost structure to be profitable at a materially higher revenue run rate. In July, we took decisive actions in our operation, including a reduction in workforce to adjust to the market environment and reduce costs. Given our near-term view of the economics backdrop and the impact on our business, We are taking additional steps to reduce the company cost structure, reallocating resources to emphasize areas with higher ROI, and further adjusting our go-to-market initiatives in order to return to sustainable, profitable growth. We are a resilient company with a proven business model, pristine balance sheet, and remain committed to our long-term vision and strategy. Before I turn it over to Lori, I would like to invite everyone to read our second annual impact report issued a couple of weeks ago in conjunction with our participation at the Printing United trade show in Las Vegas. We are very proud of our progress and our significant long-term objectives. And the report details the action we are taking as a company and reinforces our commitment to transforming fashion and tech sales towards a responsible, efficient, low-waste, and eco-friendly industry. With that, let me turn the call over to Lori. Lori.

Thanks, Ronen, and good day to everyone. I'm happy to be joining you and stepping in for a loan for this earnings call. Third quarter revenues were $66.8 million, net of a $5.6 million non-cash warrant impact related to a global strategic account. We experienced solid demand for consumables from our key strategic accounts as they head into the peak season. Service revenues grew sequentially and year over year, due in part to a large North American customer who is completing the process of upgrading their entire fleet of Atlas to Atlas Maxx. Lastly, system revenues rose sequentially and included delayed shipments of systems to our global strategic account. As Ronan mentioned, sales cycles for systems in the regions are lengthening. While some customers wait for more certainty in the macro picture, others looking to buy systems are relying more heavily on financing, including extended payment terms. As such, we are currently exploring ways to assist qualified customers obtain financing and expand their businesses. Moving to margins. Non-GAAP gross margin, net of a five-point warrants impact, was 35.6%, compared with 47.8% in the same period last year. The lower year-over-year gross margin was driven primarily by significantly lower system revenues on a fixed-cost infrastructure, inventory write-offs for older generation systems, as well as the impact of the stronger U.S. dollar in the EMEA region. Looking forward, we anticipate gross margins in the fourth quarter to sequentially increase, driven by a higher proportion of consumables in the sales mix. Turning to expenses. Total third quarter non-GAAP operating expenses were $36.7 million, down approximately 10% from $40.7 million in the second quarter. The sequential decline was due to reduced levels of marketing activities, in addition to some benefit from the cost reduction and other expense management initiatives we took in the third quarter. We currently expect operating expenses in the fourth quarter to be lower as we further realize improvements to the cost structure, offset in part by expenses associated with the Printing United trade show we attended in October. Non-GAAP operating loss was $13 million, net of the $5.6 million non-cash warrants impact, which was slightly better than our guidance for the quarter. We ended the third quarter with 957 employees, a year-over-year increase of 108, and a decrease of 52 employees from the previous quarter. While the year-over-year increase mainly reflects the additions from the acquisition of Tesoma, the sequential decline reflects the reduction in force we initiated in July. Non gap net loss for the third quarter was 10.7 million or a loss of 21 cents per basic share compared with non gap net income of 11.5 million or 24 cents per diluted share in the same period last year. Our cash balance, including bank deposits and marketable securities at quarter end was approximately 690 million. with cash used in operations for the quarter of approximately 5 million. As discussed on our last earnings call in August, 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. We have submitted our application to the court, and as a reminder, expect the court approval process to take several months. We continue to believe 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, and that the share repurchase program will not impact our ability to execute on our growth initiatives. Turning to fourth quarter guidance. We expect fourth quarter revenues to be between 66 and 70 million. This outlook is consistent with what we provided on the third quarter earnings call in August. We expect to have a higher mix of consumable revenues compared to the third quarter, which is typical for our business in the fourth quarter due to our customers' annual peak season. We anticipate operating margins in the fourth quarter to be in the minus 6 to minus 10% range. I want to remind everyone that all guidance provided today assumes zero impact from the fair value of issued warrants to our global strategic account. And with that, let me turn it back to Ronen.

Thank you, Laurie. Now is the time to open the call for Q&A. Operator, please open the call.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

Our first question comes from Jim Sula with Citi.

Please go ahead.

Thank you very much. You mentioned that you're taking some additional actions to reduce some costs. Can you help us understand about kind of where those actions are? Because I believe now this is the second round this quarter, or not this quarter, this year. So if it's the second round this year, we're just kind of wondering, and I guess the concern will be how will this affect your strategy of go-to-market, if anything, or maybe it's in some areas that we don't see from the external people like myself. Thank you.

Yeah, Jim, thank you for your questions. Corning business was built, and the model that we built moving forward was built on the higher revenue run rate. As we see right now, ending Q3 and seeing Q4 and projecting the next year, we need to adjust our cost structure. We did adjustment, as you mentioned, in July. Some of it was reduction in workforce. The reduction that we are going to do right now is in specific projects that we prioritizing them in a lower priority versus other projects. First of all, we're reprioritizing projects, and we are putting the emphasis on projects that we have higher return on investment and those projects that will bring return on investment also in 2023. We are going to go also into some workforce reduction, but I'm expecting it to be lower than what we have done in July. On top of that, there is a massive focus on gross margins. There's a lot of initiatives there to reduce costs on the bomb of materials, both on the hardware, on supplies, on services, on spare parts, that will contribute moving forward to a gross margin and will impact the profitability of the companies. So those are the main areas that we are focusing. In terms of the OPEX, we are prioritizing things within project, within R&D. We are prioritizing activities within marketing and sales. And we are putting a lot of emphasis not to hurt the long-term projection of the company and the long-term strategy of the company. We believe in the long-term strategy of the company. We believe that this company will continue to be back into growth, into profitable growth. Our responsibility right now is is to focus and navigate the short terms and bringing the company as fast as possible to a profitable growth in order to accelerate the growth moving forward based on our strategy.

Great. Thank you so much for the details. It's greatly appreciated.

Thanks, Jim. Operator, next question, please.

The next question comes from Jared Damon with Bloomberg. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. First of all, really sorry to hear the news on Elan. Elan, if you listen to the replay, please know that our thoughts and condolences are with you and your family. For Rona and Lori, Amir and Andy, just two questions. First one, could you give us an update on the adoption from brand customers for the Atlas Presto and Apollo and then A little bit more specifically on that top five fashion brand, is that customer going to be purchasing at kind of high volumes, or is it more one-offs for a specific product or a single facility?

Yeah, so regarding the brands, so first of all, I'm very encouraged with the progress we see on the engagement with the brands and the adoption of the brands of the Kornit technology and the adoption of the brands of Kornit X. We see a lot of progress in many level of brands, and when I say brands, I'm meaning top brands, retail, e-commerce, and also entertainment commerce that we believe that there is a massive potential to go with them. We see some of them adopting our technology, the Atlas and the Presto, The main reason adopting our technology is because of the quality. With the Max technology, we deliver different level of quality. Actually, we standardize now the quality in the market into the Max technology, which perceived very, very well by the brands, by sensitive quality brands. And this gives us a big edge, and we brought the Max technology not only to the Atlas, we brought it to the Presto, and later on we are bringing it also to the Apollo. We are starting to get excellent feedback, both from brands and fulfillers, regarding the Apollo and the potential to help them to move into onshore, sustainable, on-demand production. What we see from brands, is that their interest is to move from offshore mass production into near-show and on-shore, on-demand production in a sustainable way while enabling endless capabilities. And by that, they have to use digital technology and they have to use cornice because we are We are the only technology that's bringing the level of quality that they are looking for. So as I mentioned, I'm very happy with the progress that we are seeing right now with the engagement with the brands.

Got it. Thanks, Ronan. And then just as a follow-up, can you I guess kind of on the Apollo, can you guys give us an update on just the MPI timeline in general and then more specifically on the Active Load Automation and the Apollo? I guess when do these release and then how much do you expect the kind of initial splash with customers to be versus the original expectations?

Yeah, so we're getting, as I mentioned, excellent feedback, both from our key customers, strategic customers, new prospects that are interested in the Apollo and also the brands and retailers. We actually demonstrated in a closed room a few weeks back in Printing United in Las Vegas to tens of prospective customers the Apollo, and the overall feedback was incredible. They are super, super excited about the productivity, the total cost of ownership, the automation that this machine requires only one operator to run 400 impressions per hour, and, of course, the quality, the max quality, which differentiates Kornil from all the rest. We already signed a few beta customers. Actually, I can tell you we have a line of customers that would like to be part of the beta and would like to be part of the initial introduction of these systems. So we are very, very happy with this engagement. Some of our key customers, strategic customers, building the future plans based on the Apollo. So they are now constructing already their future sites based on the Apollo. So we are very encouraged not only going selling the Apollo to existing customers for the enablement market of one-off, but we see a massive opportunity to sell these systems to the replacement market, replacing the screen market, And for the first time, Puneet is bringing qualities that is better than the screen. And with all the trends of moving on-show production and near-show production and shorter runs, Apollo is the perfect fit to replace screen for shorter runs in very high quality and in sustainable ways. So we are very encouraged. Next year will be, in terms of timeline, we are going to launch it around ITMA timeframe. ITMA is in June in Milan. It's a big show. We are going to introduce it there and launch the products. Next year, we are planning to sell and install dozens of those systems, but the scaling up of those systems will be in 2024. and we have big plans on 2024 with this system.

Thanks, Renan. That's all for me.

Thanks, Jared. Operator, next question, please.

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

Hi, good afternoon. Thanks for taking my questions. I have two questions for Renan, please. I guess I wanted to get a sense of the level of demand you're seeing across different end markets. So you mentioned, you know, your strategy customers, sales outcome, you know, very, very sharply compared to that quarter and you talked about the strong pipeline with them. So I guess I would want to focus with the other segments, perhaps the e-commerce, the What's the pushback right now? Is it really around timing of demand? And I guess my second one at the same time, it's related. So you're talking about cost optimization and every time I hear about cost optimization, I kind of worry that perhaps you're less optimistic about top line growth than you were before. And I guess is that concern warranted by anything or I'm just being overly optimistic right now. I guess, when do you see the inflection point in terms of revenue growth, or is it too soon to talk about?

Yes, I'll try to answer your question. I'm not sure I fully understand. It was difficult to hear exactly the question. First of all, I would say that the encouraging news that we start to see, we see a nice growth on the supplies, on the ink side. And I always said that this is the most important number that we need to track is the growth or indicator that we need to track is the growth of the supplies. As you remember, in Q1 and Q2, we were very worried because we saw some decline in some key customers and across the globe. on the supplies, and we were talking about over capacity. What we start to see right now that with our key customers across the globe, we start to see growth on the Inc side, on the supplies. In EMEA, we see very, very nice growth. In Asia, we see also nice growth. And in America, in our key customer, we see growth, including strong growth from our global strategic customer. So this is excellent indicator. Of course, it's too early to celebrate. We need to wait for the peak season. Peak season is just in front of us. And if the peak season will be strong as it started, and I can tell you that the initial indication are very, very nice from ordering of ink, then we believe that it will open the market a bit more for investment in new equipment next year. Right now, what we see is that the ink is growing, services is growing very nicely, and the slowdown that we are facing is mainly on new system sales. And this is mainly due to the macroeconomics that customers are standing and waiting to see how the macroeconomics will evolve, the interest rate. the inflation. We are helping customers with financing, but it's very difficult today to get attractive financing from the banks. So many customers, we see them are waiting. We believe that system sales will be challenged in the next few quarters because the macroeconomics, as we see, is going to be challenging in the first half of the year. However, longer term, we believe that it will go back to normality, and hopefully customers will start buying back systems as they used to do in the past. What we expect in terms of next year, we see Q1 as... quarter in terms of supplies business. As you know, we have seasonality. Q1 is the lowest one. We also expect that the systems level of Q1 will be very similar or a bit lower than what we expect in Q4. And regarding global customer, we expect that they will start ordering new systems starting Q2. So we will start slow next year, but we will start seeing the growth into Q2, and definitely H2 should be much stronger, both from supplies, services, but also from new products that we're introducing will start influencing H2 of next year.

Thank you, Eleni.

Thanks, Tavi. Operator, next question.

The next question comes from Brian with William Blair. Please go ahead.

Hi. Thanks for taking the questions. You talked about some good upgrade activity during the quarter. I know in the past talked about, you know, potential to upgrade somewhere around 75% of the existing Atlas fleet to Atlas Max. um where are you now in in terms of you know somewhere between zero and 75 percent and and also um you know what what do you what do you see in terms of upgrade activity going forward you know fourth quarter and into 2023 um great questions i will not be able to provide you exactly the numbers but i'll give you the kind of the symptoms that we are getting first of all

We started a bit slow on the upgrades. As you remember, in Q1, we changed the configuration of the upgrades due to cost reductions that we were doing, and we wanted to reduce the time of the upgrade. But right now, we have a very, very nice pace of upgrades. This quarter, one of our key customers upgraded the entire fleet of atlases, a few tens of atlases, into Atlas Max after extensive tests. They saw the increase in productivity of this upgrade and the increase of quality, of course, of the Max quality, and they are very, very pleased with that. We already have a few other key customers ordered for next year. We've done the testing, and we are planning to do the upgrade starting from Q1. and some additional strategic customers that we are planning to start upgrading next year. So overall, the feedbacks are very, very positive, and customers see the benefit of the cost, the benefit of the production, the productivity, and the benefit of the quality. What we are going to see, we will continue to see the growth on the service revenue due to this upgrades into next year, starting from Q1 onwards. We believe that we will be able to be in position to upgrade the 75% of the installed base somewhere in the mid of 2024. Got it.

Thanks. And then separately, you have the active load automation upgrade that I guess will be ready the first part of 2023. And Is that opportunity significant, and what are you hearing from customers in terms of interest in purchasing that upgrade?

This is an interesting point because we have actually two types of kits. We have the MSS and the automation. We are very much focusing right now on the MSS. which enables customers actually with one pallet to run different types of applications, different types of sizes of garments. It's a very, very efficient solution, and we see a lot of interest from customers that are coming here to look at the MSS and testing it to install it in the entire fleet. The intention is to release this MSS by end of Q1, so we will start to see a contribution in Q2 this year. Next year, for the MSS, we believe that the majority of our customers will upgrade their system with the MSS. As for the automation, it's still too early. At this stage, we're evaluating again the solution. We're looking into cost reduction on the solution. We are working also on bringing the uptime of this solution to a different level. We're leveraging this solution already in the Apollo. The Apollo system will come with this automation from the first day. So there's a big, big benefit as for taking this automation into the atlases. We are still evaluating it, and I don't have an exact date when we will go to the market with this solution.

Okay. Thank you.

Great. Thanks, Brian. Operator, next question, please.

The next question comes from Jim Rishudi with Needham. Please go ahead.

Hi, good morning. This is actually Chris Grengon for Jim. Thanks for taking the questions. On gross margins, you had cited a few items that had contributed to the headwind there. How did those components contribute? What were the relative contributions of those components to the margin compression? And could you expand on the nature of the inventory charge?

Yeah. Regarding the gross margin, there were a few impacts to the gross margin, and we compare it year over year. We're trying to analyze it deeply and to get into all the details. First of all is the volume. It's a volume play, and it's a fixed cost. Once what we see, the drop in gross margin is mainly related to systems. Actually, the in-gross margin looks good, and the service gross margin looks good. The issue is system, and it relates the volume to a fixed cost of volume. Of course, we are looking how we can reduce this fixed cost moving forward. The other point is the impact of the currency, mainly in Europe. The strong dollar, if you compare year over year, the impact of the strong dollar is something like 2.2%. negative contribution to the gross margin. And, of course, there are effects to the gross margin, like bill of materials that went up versus last year due to supply chain and other issues that we were facing during the COVID period. There was another one-timer impact of write-offs. We write off this quarter a few old systems that we are not planning to sell them, and potentially we expect similar write-offs as well in Q4. We're still evaluating the impact of it. So those are the main impact on the gross margin. We expect in Q4 gross margin to be in a better place versus Q3, mainly due to the mix of supplies, strong supplies of Q4. And also from a total mix, both of system and supplies, we expect gross margin to be stronger. We have a very high focus on improving gross margin moving forward. And as you know, a long-term gross margin plan is above the 50 and getting closer to the 55%. Got it.

Very helpful. Thank you.

One more, if I may. You had mentioned potentially helping certain customers with financing. What could that look like? Would that Could that potentially take the form of a lease or some sort of charge based on usage? If you could just discuss that.

Thank you. We're looking at different models. I cannot get into the details here. I can tell you what we see in the market. Many customers are going back to their banks and they find it difficult to finance things. to get financing. We see more and more customers that are requiring better payment terms, longer term payment terms. In some cases, with strong customers, we are facilitating it. With some other cases, we are trying to help them to find financing outside. Lori, who joined us, is the new CFO, putting a lot of focus on this area. and we believe that in the next few weeks we will have a few interesting programs and solutions in this space which we will address to the market.

Got it. Thank you very much. Thank you, operator. Next question. Thanks, Chris.

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

All right. Yeah, maybe just a question on the expense tightening issue. I'm just trying to figure, where does Cornedex development fit in terms of some of these further costs? Is that impacted at all?

A great question on Cornedex. I was looking forward to getting a question on Cornedex. Guys, Cornedex is critical for our strategy for our future. We're engaging with hundreds of brands marketplaces, creator, influencers, they all love the idea of CornetX. This is what they are dreaming for. And right now, we are focusing very much to establish CornetX. And the establishment of CornetX is building the GFN, the Global Fulfillment Network, all around the world, stabilizing the platform itself, and working with few major a demand generator to scale their business like the Canva of the world, like the Wix and few others, big ones, to scale it and to make it successful. 2023 will be the year that we'll take those few projects into a different level. And we believe that from that point, we will be able to scale this business to a totally different level. Right now, CornitX generates few millions of dollars, still not meaningful enough. But we need to differentiate between the direct contribution of CornitX as a software, which generates few millions of dollars, to the indirect revenue that it generates to Cornit by selling more systems, ink, and services. I can tell you that there are many engagement with customers, fulfillers, and brands that decided to use Kornit and to buy Kornit system due to Kornit X. And they see a major potential and a major growth opportunity for them. We see today customers, fulfillers that are using our system. And we are directing, routing jobs to them, enjoying from this business and going to business and investing more in Corniche systems. So overall, we are very, very optimistic about the future of Corniche. This is part of our strategy. We will continue to invest. However, we are directing some of the budget to specific projects next year. We would like to be very, very focused next year to be successful there and then to scale it further.

Perfect. I'll leave it there. Thanks.

Thanks, Chris. Operator, we have time for one more question, please.

Our last question comes from Mr. Greg Baum with Great Halem. Please go ahead.

Yeah, thanks for squeezing me in here. Just going back to Ronan, your comments last quarter around your global strategic, I think you mentioned shipping additional systems in Q4 and Q1 and recognizing those systems. I think in early 2023, it sounds like maybe that timeline has shifted a little bit. So can you confirm that? And I guess just in terms of visibility levels, has Has something worsened or maybe you just have more confidence around the exact timing of that, given what you said today?

Yeah, so first of all, I can say that again, that the relationship with our global strategic account is very strategic and a great relationship, very open. We just met them a few weeks back and we're sitting on the plan for 2023 and even beyond that. They are very, very close in testing, our future products, and their business is going very, very nicely. So we are working with them on the expansion plan. As you saw in Q3, we delivered the systems that were delayed from Q2, and we mentioned that we will deliver them all in Q3 or in Q4. We deliver all of them in Q3. Current expectation that the next delivery of systems will be end of Q2 into Q3. So we believe that we will start seeing revenue in Q2, Q3, and Q4 or new system from this account next year versus last year that it was mainly in Q1.

Okay, that's helpful. And, you know, outside of that, I'm just wondering if you can maybe just talk about your visibility here And if you had to, you know, rank some of these external factors, you know, being, you know, cost of financing, you know, being, you know, macro pressures related to an underlying business versus just, you know, uncertainty. What do you think sort of ranks highest in, you know, the culprit of, you know, lengthening sales cycles, you know, order pushouts, etc.? ?

You know, in the capital equipment, when you say capital, it's half a million and a million. Interest rate has a big impact, and we see the impact of the interest. The uncertainty and the way we went through, you know, what our customers were experiencing a year ago in the COVID, the boom of the e-commerce, and then the normalization after the COVID. make them a bit hesitant to understand how the end of the year will shape up. So it's really, really important now to look at the peak season, to see that the peak season is strong, and this will definitely will drive customers to continue to invest in additional systems. Of course, we are working to open new market segments, putting a lot of focus in the direct to fabric, The replacement market, the poly, all of those are new markets that we believe will contribute in 2023 and, of course, beyond that. So I think it's overall sentiment of uncertainty, of instability and interest rate that they're holding customers and they're waiting for the peak season to see how it will shape up.

Okay, fair enough. Best of luck going forward. Thanks. Thank you very much.

Thanks, Greg.

Mr. Brackman, as we have no further questions, I'm going to be turning the call back over to you.

Great. Thank you, operator. And thank you all for joining us today. As always, should you have any additional follow-up questions, please feel free to reach out to me directly. Thank you all and have a great day.