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.