Kornit Digital Ltd.

and welcome to Cornet Digital's fourth quarter and full year 2022 earnings conference call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Andrew Backman, Global Head of Investor Relations for Cornet Digital. Mr. Backman, you may begin.

Thank you, Operator. Good day, everyone, and welcome to Cornet Digital's fourth quarter and full year 2022 earnings conference call. Joining me today are Chief Executive Officer Ronan Samuel, Laurie Hanover, Cornete's Chief Financial Officer, and Amir Shakad-Mendel, EVP of Corporate Development. For today's call, Ronan will provide comments on our fourth quarter, recap the full year 2022 highlights, and discuss key focus areas for 2023. Laurie will then review fourth quarter and full year numbers and provide our first 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 plans, strategies, projected results of operations or financial condition, and all statements that address developments that the company expects will occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by 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 foreign 20F filed in March 2022, which identifies specific risk factors that could cause actual results to differ materially. Any forward-looking statements are made currently, and the company undertakes no obligation to publicly update any forward-looking statement except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measurements 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 press release published today. which is also posted on the company's investor relations website. At this time, I would like to turn the call over to Ronan. Ronan?

Thank you, Andy, and good day, everyone. Thank you for joining us. Before we begin, I wanted to extend from all of us here at Cornete our thoughts and prayers to those who have been impacted by the recent devastation caused by the earthquakes. Turning to our results, as reported this morning, fourth quarter revenues were 63.3 million, net of approximately 4.3 million of non-cash warrants, impact related to a global strategic account, and in line with the revenue guidance range provided in November, which as a reminder assumes zero impact from the fair value of the issues warrants. For the fourth quarter, consumable and services revenues were were again up sequentially year over year and on a full year basis as compared to 2021. We saw a mixed peak season across regions and customers, with some of our largest strategic accounts, mainly in Americas, experiencing a very good peak season. Others, especially in Europe, were generally flat to slightly up or down in terms of impressions and consumables. As expected, systems revenues were down meaningfully in the quarter, given the ongoing macroeconomics backdrop. Some customers and prospects continue to take a wait-and-see approach on making meaningful investments, including adding production capacity to their existing fleets. As such, we continue to expect system sales to remain challenging in 2023 and expect to see growth for consumables and services. Like the broader global technology environment, 2022 was a tough year for all of us. We started 2022 with a strong momentum and growth, fueled by the introduction of groundbreaking new products that set the stage for sustainable long-term top-line growth. We closed the acquisition of Tesoma, opened our new ink plant, and cemented the position of our MAX technology as the new industry standard for quality, with several strategic customers looking to upgrade to Atlas MAX, given its retail quality and superior TCO. Despite the macro backdrop, we experienced good demand and encouraging results for our DTF solutions, especially in Latin America and in important European fashion production countries such as Italy, Portugal, and Turkey. Results in Japan are trending well. and new meaningful opportunities are beginning to develop in India as well as in China, where the economy is slowly reopening. Our long-term partnership with our largest global strategic customer remains very strong. Relative to the market, they continue to grow nicely, contributing to the increase in our consumables and services revenues this quarter. Looking at 2023, we expect this customer to have new sites operational with added capacity driven by the systems we sold in 2022. While global uncertainties and what I call the big waves of the overall market environment are outside of our control, we are focused on what we can control. We view 2023 as an important year for Kurnit. a year of transition and execution. And the year we will focus on three key areas vital to our long-term profitable growth. First, returning to profitability. Over the past several quarters, we implemented decisive actions to reduce operating expenses, improve margins, and adjust our operations to the current market conditions. These actions include combined with improvements in system utilization in some of our install base, plus the rebuilding and scaling our system cells, should help us turn the corner during the second half of this year and approach breakeven and later on move to profitability. Second, we are laser focused on successfully launching Apollo, for which we expect to gain meaningful traction with retail brands and fulfillers and to help transform the retail industry supply chain. Better trials for the Apollo are set to begin over the next several months, with a formal unveiling in June at ITMA Global Trade Show in Milan, Italy. In addition to showcasing Apollo at ITMA, we will demonstrate how Cornit is leading the retail transformation with our strong portfolio of DTG, DTF, and CornitX solutions. We will show global brands and retailers how they can fundamentally change their business models with the highest quality, flexible, on-demand, sustainable digital production capabilities, all while unleashing unmatched creativity and being aligned with the new rules of supplies and demand. We hope many of you will join us for what will be an amazing conference. So stay tuned for more details. And third, we are focused on scaling CornetX by pursuing demand generators and further building our global fulfillment network of on-demand digital fulfillers. We have added several key customers and partners most recently with a number of global brands and marketplaces. Over the past two years, we have learned a great deal and reprioritized efforts to improve the customer experience for demand generators and further develop and scale the GFM. We continue to believe Kornit X will be a meaningful contributor to Kornit in the years to come. Okay, a couple of final comments before I turn it over to Lori. First, our long-term growth drivers remain firmly intact, the penetration of digital production remains low, and we fully expect demand for DTG systems to resume growth as capacity utilization and market conditions improve. We also see meaningful new market opportunities with Apollo, Atlas Max Poly, DTF, and scaling Conit X. We see meaningful system upgrades and replacement opportunities across our customer base. Further, we expect a higher mix of revenues from consumables to drive additional operating leverage on our adjusted cost structure over time. While current market dynamics have impacted the timing of reaching our 2026 financial objectives, we firmly believe we can achieve our long-term financial goals in the years to come as we continue to lead the retail and supply chain transformation in the industry. It is clear to me that our vision to transform the fashion industry is happening. While we expect customized design, which represents the vast majority of our current business, to resume growth and continue to be a meaningful part of our business, we see very meaningful growth opportunities in several new markets that we expect to really drive and accelerate long-term growth. For example, we see mid-sized retailers all over the world shifting their business models and transforming their supply chains with vertical on-demand digital production, or by using ConitX, as they test and change product SKUs daily in order to chase trends. In addition, we see massive opportunities within surging creator economies, influencers, and their communities, large digital, social, and content-generating platforms, all of whom can benefit from productizing and monetizing their individual brands and platforms using Cognizant's on-demand digital solutions to support their production needs. Finally, As we have seen over the last several years, supply chains in the broader apparel industry, including for the large traditional brands, are broken and are reliant on antiquated production cycles. We believe Kornit is best positioned to lead the retail transformation to a more efficient, profitable, and sustainable business model for years to come. As I've said before, we are a resilient company with a strong balance sheet, and we remain fully committed to long-term profitable growth. With that, let me turn the call over to Lori for a closer look at the fourth quarter and full year 2022 numbers and guidance. Lori.

Thank you, Ronan, and good day to everyone. Fourth quarter revenues were $63.3 million, net of $4.3 million non-cash warrant impact related to a global strategic account. For the full year 2022, revenues were $271.5 million, net of $22.5 million attributed to the non-cash warrant impact. compared with 322 million net of 25.4 million attributed to the non-cash warrant impact in 2021. As Ronen described earlier, consumables and services revenues were each up year over year and on a full year basis as compared with 2021, while systems revenues were down meaningfully in the quarter as we expected and for the full year 2022. In the Americas, we had a solid quarter of consumables and of services revenue growth, with some customers experience a strong peak season, while others continue to work through excess capacity. Although overall system sales remain challenging, we continue to gain traction for our DTF solutions in Latin America with yet another encouraging quarter of growth. In EMEA, consumables and services revenues were generally flat compared with the same period last year, while system sales continue to be impacted by capacity utilization and higher financing costs. We are seeing encouraging results in important European countries like Italy, Portugal, Iberia, and Turkey, with additional opportunities opening up in the UAE and Northwest Africa. The APAC region delivered stable performance despite the tough macro backdrop driven by China's zero-COVID policy. Both consumables and services revenues were flat to slightly up, and system sales were lower year over year. We do see encouraging penetration of the MAX technology in APAC, with installations in Japan and Australia, and as Ronen said, meaningful opportunities developing in India and in China. Moving to margins. Non-gap gross margins. net of a 4.1 margin point warrants impact was 36.4% compared with 49.6% in the same period last year. The lower year-over-year gross margin was driven primarily by reduced sales volumes compared with the same period last year, as well as approximately 6 million of inventory write-offs associated with older generation systems and spare parts as customers continue to move to our newer generation systems. We continue to examine our bill of materials, selectively raise prices, and seek opportunities to generate efficiencies within our services offerings. We therefore expect gross margin to improve over time, particularly as system sales volumes rebuild and recover to a run rate that generates operating leverage on our reduced cost structure. Turning to expenses, total fourth quarter non-GAAP operating expenses were $32.9 million, down approximately 14% from $38.4 million in the same period last year. The change was due to cost structure improvements across the board, including prioritizing R&D and sales and marketing initiatives and reallocating resources from non-customer facing activities to development and to customer engagement functions, thus enabling acceleration of our long-term growth engines. We also completed workforce reductions over the past two quarters, which will reduce overall headcount by approximately 10%. We ended the fourth quarter with 934 employees. Non-GAAP operating loss was $9.9 million, net of $4.3 million non-cash warrants impact, which was in line with our guidance for the quarter. For the full year 2022, non-GAAP operating loss was $41.8 million, net of $22.5 million attributed to the non-cash impact of warrants. compared with non-GAAP operating profit of $30.3 million, net of $25.4 million attributed to the non-cash impact of warrants for the full year 2021. Fourth quarter adjusted EBITDA loss was $6.1 million, compared with adjusted EBITDA of $6.8 million in the prior year period. For the full year 2022, adjusted EBITDA loss was $30.8 million compared with adjusted EBITDA of $36 million for the full year 2021. Please refer to our updated adjusted EBITDA disclosure in the earnings press release, as well as the details provided in the gap to non-gap reconciliation table for details. Next, I would like to address two special tax items impacting the reported fourth quarter and full year 2022 results. First, approximately $11.5 million or $0.23 per basic share was paid to the Israeli Tax Authority. Specifically, The company took advantage of a window of opportunity to pay taxes for trapped profits from prior years at a steeply discounted rate, which provided us with material tax savings compared with the higher rates we would have paid in the future, including tax associated with our previously announced share buyback program. Second, We took a valuation allowance against our deferred tax asset, given cumulative losses incurred over the past three years, of which approximately $10 million impacted the P&L, or $0.20 per basic share. From a P&L perspective, the Israeli Tax Authority payment was a one-time cash expense, while the deferred tax revaluation was non-cash. Please refer to the gap to non-gap reconciliations in our press release for further details. Our cash balance, including bank deposits and marketable securities at quarter end, was approximately $646 million. Cash used in operations during the fourth quarter was approximately $39.6 million, driven primarily by the operating loss, the Israeli tax authority payment I just discussed, and changes in working capital. As expected, inventories remained high, and our less-than-typical payables balance reflects lower material purchases and payments in advance of cutting over to the new ERP system, which we successfully transitioned to in January 2023. As described in our recent 6K filed in December, we are pleased to report that the Israeli court has approved our request to authorize a share repurchase program of up to $75 million. We continue to believe opportunistically purchasing 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 given our strong balance sheet. Before discussing first quarter guidance, I'd like to highlight key changes to the guidance that we will provide to the investment community going forward. As has been our historical practice, the guidance provided assumed no impact of the fair value of issued warrants related to our global strategic account. However, we received valuable feedback from the investment community to make our financial reporting easier to understand. To be better aligned with our reported financials, we have therefore decided to provide guidance net of the warrants impact on revenues and profitability going forward, starting with the first quarter of 2023. We are also providing a guidance range for adjusted EBITDA margin expectations going forward instead of a range for non-GAAP operating margin. In this regard, Depreciation expense has materially increased after the completion of our new ink manufacturing plant. As such, we believe adjusted EBITDA margin is a more useful financial metric instead of non-GAAP operating margin to measure the performance of our business. We have included a reconciliation table of our GAAP net income to adjusted EBITDA in our earnings press release for the last three years. So, Turning to first quarter guidance, we currently expect revenues for the first quarter 2023 to be between $47 million and $52 million, and adjusted EBITDA margins to be in the negative 27 to negative 35% range. Again, the guidance for revenue and adjusted EBITDA margin includes the impact of the non-cash expense associated with the fair value of the company's warrants to our largest global strategic account. I'd like to remind everyone that the first quarter guidance reflects the typical seasonality we see in our business, with the first quarter typically being the lowest quarter for higher margin consumable sales, and also factors in a difficult year-over-year comparison for system sales volumes. As a result, Generating operating leverage on the revenue range provided in our first quarter guidance is difficult, as our operations were built to be profitable at a higher revenue run rate. I will note, given the decisive actions we have taken over the past several quarters to adjust our operations, we see break-even on an adjusted EBITDA and operating margin basis at a quarterly revenue run rate of approximately $70 million, with gross margins in the mid-40% range, obviously depending upon mix, and OPEX in the mid-30s. As Ronen mentioned, we expect to turn the corner during the second half of this year and approach break-even, and later on move to profitability, again on both an adjusted EBITDA and operating margin basis. Looking out, we continue to believe substantial long-term growth drivers remain fully intact and that we can achieve our long-term financial objectives as overall markets improve, capacity utilization increases, and as we penetrate several new markets. And with that, let me turn it back to Ronen.

Thank you, Laurie. And we are ready now to open the call for the Q&A session.

Bernard, can you open up the Q&A, please?

Can you hear us right now?

Right now, can you hear us?

Ladies and gentlemen, we apologize for the technical difficulties. We will begin our Q&A session. Again, if you'd like to ask a question, please press star 1 at this time. We do have a question coming from the line of Jim Suva with Citigroup. Please proceed.

Thank you so much. Just a quick housekeeping item before I proceed with a more interesting question. The change in guidance to include the warrants, am I correct that's more just of a housekeeping and getting sell site analyst and consensus numbers all on the same definitional term and there's actually been no relationship change or contractual change between you and your larger strategic customer?

Hi, you're absolutely correct.

We have been engaged in very frequent dialogue with our current investors, as well as the research analysts, and we received very valuable feedback that we need to make our financial reporting easier to understand and less confusing, as well as aligned with our reported financials. And that's the reason that we've taken this step.

Great. That was my understanding also. Thank you. And I think everybody will appreciate that. Then my more meaningful question, we all know interest rates have materially increased during the past year or so. With that, with Cornete selling their large printers, for the purchase decisions, are they now starting to come back to a more normalized level of discussions or are your customers kind of still pausing and struggling for financial arrangements? And if they're struggling for financial arrangements, does Cornete kind of change the way that it helps its customers with getting across the finish line for that? Or how should we think about the impact from the closing phase of selling products and Courtney able to get it across the finish line for a sales contract? Thank you.

Yeah, thank you for the question. We still see impact of the macroeconomics on decision-taking by our customers. Many of them are still sitting on the fence and waiting to see the direction of the market. The good sides in Q4, what we have seen, we saw growth on the supplies, on the impressions, versus last year. To remind you, Q4 2021 was very strong peak season. to show a growth this year on the supply is very, very healthy. We see the utilization of the overall systems getting better. We still see some overcapacity, but our customers are closing it and there is better utilization. But some of the decision of buying new equipment are being delayed. We are still selling. We have segments that we're actually accelerating. DTF, for example, direct to fabric, is a growing segment. We had a very strong Q4, and we had a very strong Q1 for the DTF. We are starting to penetrate with the DTG to new markets, like the retail markets, the brands. We're starting to see very nice success, and Q4 was a nice big season for some of the retailers. We can see interesting stories with retailers that are buying products handful of system Atlas Maxes and utilizing them to the max. And different from the previous business, that it was mainly custom design business of one-off, they are leveraging this equipment for mid-run length, some of them printing up to 3,000 linear copies or impressions per job. which is a great testimonial of going after the retail market and the brands. As for financial solution, Lori and her team are working very, very close with partners to find financial solutions to support our key customers moving forward. We are selective as of today with supporting our customers, but the customers that we believe in them longer term, we're already supporting them. on payment terms, and as I mentioned, soon we will come with financial solution around it. Maybe Lori can add a bit more on that point.

Yes, just to remind you, as I stated last time, one of my key initiatives for this year is to evaluate various programs and to ultimately formalize an alternative financing solution with third parties with whom we have relationships and who understand our business and how Cornete's solutions help our customers. I really believe this kind of a program could provide the company with a significant competitive advantage in the marketplace.

Thank you, and congratulations to your team for getting through and navigating a challenging 2022, and we're all looking forward to 2023. Thank you. Thank you.

Thanks, Jen. Appreciate it. Renan, next question, please.

Thank you. Our next question comes from Taffy Rosner with Barclays.

Hi, good afternoon. Thanks for taking my questions. I wanted to ask a little bit about the outfit. I was wondering if you can comment on the demand you were seeing through the different end markets. I'm thinking the global strategy customers, the e-commerce channel, the brands. Are you seeing kind of the same wait and see reactions from everyone or is it this particular segment? And I guess as a follow up to that, is there any indication you can give with regards to potential, you know, top line growth in 23 or is it too soon to talk about growth this year?

Thank you, Tavi. So 2023, as you can see, we are starting in Q1 always from a seasonality perspective on the low side. So we expect Q2 to be stronger than Q1 and H2 to be stronger than H1. And as I mentioned, we are aiming to move back to break even doing H2 and then to profitability. And the main driver for that, first of all, will come from systems sales. In the middle of the year, in June, we have a big event, ITMA, where we are going to introduce and reveal the Apollo and start selling it. But we are going to also introduce many other new technologies, both on the DTG and the DTF and on CornetX. The ITMA show is a long show. It's more than a week long. And it's a self-show. And we know many customers that we are speaking with today are waiting for this show to take a final decision on purchasing of new equipment. So we expect ITMA to contribute already for Q2, but definitely for H2 and beyond that. On the system side, we see a mix. We see customers that are really sitting on the fence, and some of them from the custom design side. segment, but we see some that are seeing the opportunity. We need to understand that the market, the textile market, the fashion market, is going through a major transformation right now. Supply chain is fully broken. Inventory is the biggest issue of brands and retailers. Retailers require today to have many STUs on a daily basis to attract the Gen Z. And for that, they have to move into on-demand production and in a sustainable way onshore or nearshore. And the only solution that can help them to do that is leveraging cornite digital solution, both on the system side and cornite side. So we believe that long-term, when we're looking at 2023 and beyond that, we are in an inflection point that the market will accelerate and move to on-demand production. As for the supplies, Q1 is the slowest supplies quarter. We will see an increase in Q2 and definitely a strong increase in H2 and in Q4. Services, we expect a nice growth across the year. We see some major key customers adopting the MAX technology and going into upgrading the fleet of atlases to atlas max and we see across the year like we saw it also in the in q4 uh so those this is on the on the service interesting part on the on the segment side and and i mentioned it also before 90 percent of our businesses of today is coming from custom designs uh customers like you know the amazon and and and the printful of the world And they will continue to grow, and we expect these segments to continue to grow. But in overall impression, this is relatively a small segment. Much bigger segments, which is more than tenfold this segment, is the screen market and the screen replacement, and mainly going working with the retails and the brands. Now with the Max technology, which is the new standard, and it's much better than the screen quality. With all the market trends that I spoke about for years, and now it's really happening, and brands are moving into many SKUs, and retail needs to move to on-demand production on-show, now is the time for Cornelius really to go big time onto the replacement market, and we will start to see it in 2023, mainly in the H2, but definitely into 2024 and beyond that.

Thanks, Ramin.

Our next question comes from Brian Trapp with William Blair.

Hi. Thanks for taking my question. First of all, I just want to clarify something. I think in the last fall, you said that you expected your large strategic customer to begin purchasing equipment again in the second quarter of 23. I don't know, Ronan, if I misinterpreted, but it sounded like you made a comment along the lines of they've added the capacity in 2022 that they would need for 2023. I don't know if I misinterpreted that.

No, no, you're absolutely right. And I mentioned on the previous call that we expect our strategic customers, our global strategic customers to – add more capacity in 2023. Let me clarify. 2022 was a very strong year for our strategic global customer from our perspective. We saw an increased volume in terms of number of systems, opening new sites, and definitely in terms of impression. There's a nice peak season, and they're getting very strong into 2023. We expect in 2023 that they will open new sites. whether they are going to leverage systems that we sold them in 2022 to deliver them into those sites in 2023. So they will open new sites, will add more capacity, and we expect to see increased volume in 2023. We are not expecting at this stage to sell additional systems to this strategic customer in 2023. We see massive opportunity of growth with these global strategic customers, not only by selling new system in 2024 and the relative new system that we are going to release in 2023, like the Apollo. We see a major opportunity of upgrades, the existing Atlas portfolio into the Atlas Marks. trade-ins, they're all technology with the Atlas Max technology and potentially with the Apollo in the future, and getting to new businesses with this account as well. So there's a lot of activity. It's very, very close. As I mentioned in the calls before, we have transparently a relationship and working on three-year plans and we expect to see major goals coming in the years to come.

Okay.

Thanks for clarifying that. And then I'll just ask one more for now. Do you still see the potential for this business to generate greater than 50% gross margin, or has something changed structurally, and what needs to happen maybe besides volume leverage to get to 50% plus?

So longer term, we still firmly believe in the model. We have a very strong business model with the supplies. We need to uplift the volume on the systems. We definitely believe that we can be at the 50% and even crossing it. We believe longer term that we will be in operating profit of more than 20%. And as Laurie mentioned, for us to be in the break-even, we adjusted our cost structure And right now we can be at a break-even at around $70 million of revenue and at around the mid-40s gross margin with the current OPEX that we have to be at a break-even. So we are aiming to be at a break-even in the second half of the year and hopefully move to profitability later this year and beyond that. So longer term, yes, we firmly believe that Cornyn can be multi-billion dollar companies with a strong gross margin of above 50% and operating margin of above 20%.

Okay, and then one last quick one. To be clear, when you say break-even, you're talking about an EBITDA basis?

Both. Both EBITDA and operating margin.

EBITDA. Okay, thank you very much.

Thanks, Brian. Next question, please, Renan.

Thank you. Our next question comes from Eric Woodring with Morgan Stanley.

Hey, good morning, guys. Excited to be on the call. Thank you for taking my questions. Maybe, Ronan, first one from you, or for you, I should say. I very much hear you on the opportunities that you highlighted for the future in terms of that are penetrating kind of mid-sized retailers, the creator economy, social platforms, transforming supply chains. That all makes sense to me. I guess my question is, you know, are you having the, you know, are you having customer or conversations with these kind of customers today and they're expressing kind of interest in your types of digital systems or software enablement? Or are you kind of more so saying, these are markets that make sense and we will approach them. I just kind of want to understand if those conversations are already happening and you're hearing about demand or if you're just saying these are ripe for opportunity and we're going to go after them in the future. And then I have a follow-up. Thanks.

Thank you for the question. So it's not only discussion happening. Actually, a major part of the new system that we are selling today is into those retailers, brands, and digital platforms. And we see an increased volume of supplies of ink coming from those brands and retailers. This is a massive opportunity. Most of our team engaged with those discussions and selling. Today we are selling many systems to those types of customers that we were talking two years ago and it was a dream that we were aiming and it's happening now. And it's happening now from two reasons. One is from the macro of the textile industry, of supply chain, what we have discussed, of inventory, of being able to be creative and to invent yourself every day without having inventory and making it sustainable. So this is one thing which is happening now. And the other thing, digital finally and Kornit finally as the quality and the productivity and the total cost of ownership that can address this market and really transform it once and for all to more sustainable on-demand production.

Great. That is very helpful. Thank you, Ronan. And then maybe, Laurie, one for you is, you know, seasonality does at least look a bit different than normal right now. It looked a little different in 4Q. It looks a little bit different in 1Q just in terms of you know, forecasting kind of your second largest seasonal decline after the March 2020 quarter, which we know is impacted by COVID. And so I guess my question is, you know, is there any visibility into when you believe revenue growth can return to more seasonal trends or even above seasonal trends? And if so, why would that be the case? Thank you.

In terms of the seasonality, so currently in 2023, we are not expecting change in the seasonality. Q1 will be the lower one, and Q4 will be the strongest one in terms of supplies. Q3 will be the strongest one in terms of the systems, and you will see Q2 higher than Q1. So we don't expect longer term getting into the retail market more and more and to the brands. we'll start to see a big different seasonality across the year. Most of our business today, as I mentioned before, is for the custom design, for those customers that are selling mainly in the peak in the holiday season, one-off. Working with the retailers and the brands, they need to sell across the year, and the same to the shops and to the retailers. So we expect the seasonality in terms of supplies We'll moderate in the coming years.

Super. Thanks so much.

Thanks, Eric. Next question, please.

Our next question comes from Jim Rashudi with Needham & Co.

Hi. Thank you. The question I have relates to the systems business in 2013. You provided a framework in terms of how you get back to break even, whether that's later in the year. But what my question relates to is if we think about the systems business this year, do you expect more meaningful inroads with new customers or a possible recovery later in the year from existing or some combination? And to what extent does Apollo play into this? Maybe in broad strokes, the launch is mid-year, but what are your expectations as it relates to Apollo for 23?

Yeah, so it's mixed, and it's mixed between regions and between different segments. So as you know, I'll give you an example. On the DTF side, direct-to-public, as it's a relatively new segment for us, most of the deals that we are doing in the DTF are net new customers. If it's in Brazil, Argentina, Poland, Japan, et cetera, Turkey, we see good business there. Iberia, excellent business as well on the DTF side. So this is all net new customers. When we are talking about the retail and the screen replacements, There is mainly net new customers as well. Finally, we are getting to those retailers, many of them buying systems, many of them working with CornetX. So this is a new type of customer. On the custom design side, this is the mix. We expect in 2023 some of our bigger customers to start getting into the cycle of buying additional systems. We see it in the utilization of the current fleet that they have. We see it that they need to trade in some of the old legacy system to new system. And we definitely see it in the upgrade from Atlas to Atlas Maxis. So this is regarding the type of customer and the type of segment. And again, between region in Asia Pacific, most of the customers that we are selling are relatively new customers. um and uh um in the latin america as well in north america and europe is kind of a mix as for the apollo apollo is the biggest lounge that we have done for the last four years um is bringing tons of innovation this is what the market was looking for uh 400 garments per hours the highest quality of the max technology quality with one operator full of automation, quality controls, and many, many more elements into it. Smart queuing and much more. We are going to reveal it in ITMA and start installation of beta sites before ITMA. In the next few months, we are starting the installation of the betas. As I mentioned, I think on the previous call, we aim for 2023 to install less than 10 units. and it's mainly around the beta sites and around our demo centers in the U.S. and in Europe. And we're expecting to get the second order from our beta sites already this year. And the real acceleration of growth will come in 2024 from the revenue perspective. I can tell you we already have a list of customers that are waiting for the Apollos. We expect ITMA to be a very, very strong demand generator for the Apollo. And we believe that after ITMA, we will be able to close already 24 in terms of the capacity for the Apollo.

Got it. And a question for you, Laurie. Some of this is going to be disclosed in the 20F, but I'm wondering if you could provide us, if you could share with us any color around the breakdown of systems, ink and consumables and service. Is any of that detail available, or do we need to wait for the 20th?

Yes, it can certainly help you out here. You're looking for about on the year?

Well, it would be great if we had it for the quarter as well, but I'll leave that to you.

Jim, you'll see it, as you said, in the 20F. As you know, we have it in products and services throughout the quarter. We don't break it out yet, but you will wait to see that segregation between systems and services.

So, Jim, you can see today between the system, which includes machines and ink, to the services. So you can see a major growth on the services side, which includes the upgrades of the upgraded kits for the MAX. You don't see the breakdown on a quarterly basis right now. On the 20th, you will see the breakdown between the ink to the system. What I can say is that we see a larger portion of ink versus system versus previous years. So we see a growth on the ink side. versus 2021. And remind you that 2021 was a very strong year on the ink, but we see major decline on the system side. So overall, the mix is totally different from 2021.

Got it. We'll look for that. Thank you.

Thanks. Now next question, please.

Our next question comes from Chris Moore with CGS Securities.

Hey, good day, guys. Maybe talk a little bit about Cornidex. I know it has changed, evolved quite a bit over the past two years, and I guess there's two questions there. One, kind of, you know, what do you know now that you didn't know then? And two, just from a marketing standpoint, you know, you talked about midsize retailers, et cetera, as being kind of a prime market. How will the marketing approach differ from, you know, what you're doing right now on the system side?

Yeah, so we have learned a lot in the last two years from the acquisition of Custom Gateway. And we adjusted our business model. We developed our solution. We have much more clarity and better traction than before. We have very high confidence about Cornete X as material technology. contributor both in terms of revenue and in terms of driving impressions and volume to our systems and to the GFN, the Global Fulfillment Network. What happened in the market, the many digital platforms as of today would like to monetize and monetize their platforms. And the creator community is happening. Creator economy is happening. Many of them are working through those platforms, and those platforms are looking for a black box that they can send all the jobs and be fulfilled locally, closer to the consumer in a sustainable way without dealing with production. This is Cornet X. So in a nutshell, if you think about the Uber model, CornitX is the platform, is the app that connects between volume of impressions that's coming from brands, from marketplaces, from digital platforms, into a network of fulfillers that's using Cornit machines and driving volume to those machines. Driving volume to those machines will drive more ink and more machines. As I mentioned, we see a very nice traction with some very, very nice platform and some brands. And 2023 is a transition year also for Cornetics. And we hope that by the end of 2023, we'll be able to start reporting more meaningful information and data, financial data on Cornetics.

And just kind of a best guess in terms of when CoinEx does get to that meaningful revenue level that's likely at fiscal 25 versus fiscal 24 from where you sit today?

Yeah, so it depends how you look at it. Yeah, from a revenue perspective, it's already generated a few millions of dollars, okay? And we expect to see growth in 2023 versus 2022. but even more important, what we are measuring is how many impressions are being routed through CornetX to our customers that are using Cornet, and because of that, they're buying more systems and more ink. This is very, very material, and we start to see the volume picking up, and we are very, very focusing on those retailers and brands that some of them do not want to go vertical and to buy systems, but they're looking for solutions to produce for them all over the world, leveraging corneteers.

Got it. Helpful. I will leave it there. Thanks, Rona.

Thank you.

Mr. Backman, our last question comes from the line of Craig Palm from Craig Harlem. Please go ahead.

Yeah. Hey, everyone. Thanks for Taking the questions here, I just wanted to follow up on the commentary on your global strategic. I just want to make sure I understood that correctly. So they will not be purchasing any new systems in 2023 is what I heard, but they are still opening up new sites. And so are they using systems from other existing sites to fill the new sites? Is that correct? essentially what's going on?

First of all, the first sentence is correct. We are not expecting them to buy additional systems in 2023. This is the current assumption that we are taking into our model, and how do we see 2023? We are still working with them on many other opportunities, as I mentioned before. As for the new sites, as you remember, last year we discussed about delayed sites, They bought system last year for those sites. And some of those sites will be just open this year. So we will see the machines that they bought last year being utilized on those new sites only this year. Okay? So from their perspective, there will be a major increase in potential volume.

Okay, so some of the printers that you sold them in 2022 were for these new sites that they're opening this year.

Correct.

Understood. And I'm just following up on the Apollo. Last quarter, I think you said in selling and installing dozens of systems, I think you said less than 10. I don't know if I misunderstood you last quarter. But can you just confirm that? And then just in terms of revenue recognition, are you expecting to recognize any of those systems this year for the beta sites or will RevRec be in 2024?

Let me confirm. In 2023, our aim is to make the Apollo the most successful product. And by that, we are very much focused and we are going to deliver less than 10 units. mainly for beta size and for the demo centers, and we're expecting second order already from those beta sites in 2023. We're going to be very focused on making it successful. As for recognizing those systems, at this stage, we are not adding it to the plan. We are taking the conservative approach that we will recognize some of those units only beginning of 2024. So this is a conservative approach on top of that beginning of 2024. There is a full acceleration plan of selling many more Apollos beginning of the year.

Okay, perfect. And I guess just last one, if I can just maybe one more clarification. Your commentary implies approaching break-even in the second half, and so I think that sort of implies revenue in the $70 million range, if that makes sense. And I just wanted to be clear, that is – including the impact of the non-cash expense associated with warrant accounting. Is that correct?

Correct. So now we are talking only net and the $70 million is net. And yeah, we expect, as I mentioned, to reach the breakeven in H2. So based on what we gave around the $70 million and the around the mid-40 gross margin. Of course, it's different from Q3 to Q4. Q4 is a very strong quarter from a supply perspective, so hopefully we will move into profitability.

Perfect. Okay. Thank you so much for the call. Thanks, Greg. Thank you.

Mr. Bachman, we have no more questions at this time. I would like to turn the floor back over to Mr. Bachman for closing comments.

Great. Thank you, Renan. And thank you to everyone for joining us today. As always, if you should have any additional follow-up questions, please feel free to reach out to me directly. Have a great day. Thank you so much. Renan, please close the call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you. you

Thank you. Thank you. Thank you. I don't know. you Thank you.

Good day, everyone, and welcome to Corneet Digital's fourth quarter and full year 2022 earnings conference call. Joining me today are Chief Executive Officer Ronan Samuel, Laurie Hanover, Corneet's Chief Financial Officer, and Amir Shakad-Mendel, EVP of Corporate Development. For today's call, Ronan will provide comments on our fourth quarter, recap the full year 2022 highlights, and discuss key focus areas for 2023. Laurie will then review fourth quarter and full year numbers and provide our first-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 plans, strategies, projected results of operations or financial condition, and all statements that address developments that the company expects will occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by 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 foreign 20F filed in March 2022. which identifies specific risk factors that could cause actual results to differ materially. Any forward-looking statements are made currently, and the company undertakes no obligation to publicly update any forward-looking statement, except as required by law. Additionally, the company will be making reference to certain non-GAAP financial measurements 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 press release published today, which is also posted on the company's investor relations website. At this time, I would like to turn the call over to Ronan. Ronan?

Thank you, Andy, and good day, everyone. Thank you for joining us. Before we begin, I wanted to extend from all of us here at Cornete our thoughts and prayers to those who have been impacted by the recent devastation caused by the earthquakes. Turning to our results, as reported this morning, fourth quarter revenues were 63.3 million, net of approximately 4.3 million of non-cash warrants, impact related to a global strategic account, and in line with the revenue guidance range provided in November, which, as a reminder, assumes zero impact from the fair value of the issues warrants. For the fourth quarter, consumable and services revenues were were again up sequentially year over year and on a full year basis as compared to 2021. we saw a mixed peak season across regions and customers, with some of our largest strategic accounts, mainly in Americas, experiencing a very good peak season. Others, especially in Europe, were generally flat to slightly up or down in terms of impressions and consumables. As expected, Systems revenues were down meaningfully in the quarter, given the ongoing macroeconomics backdrop. Some customers and prospects continue to take a wait-and-see approach on making meaningful investments, including adding production capacity to their existing fleets. As such, we continue to expect system sales to remain challenging in 2023 and expect to see growth for consumables and services. Like the broader global technology environment, 2022 was a tough year for all of us. We started 22 with a strong momentum and growth, fueled by the introduction of groundbreaking new products that set the stage for sustainable long-term top-line growth. We closed the acquisition of Tesoma, opened our new ink plant, and cemented the position of our MAX technology as the new industry standard for quality, with several strategic customers looking to upgrade to Atlas MAX, given its retail quality and superior TCO. Despite the macro backdrop, we experienced good demand and encouraging results for our DTF solutions. especially in Latin America and in important European fashion production countries such as Italy, Portugal and Turkey. Results in Japan are trending well and new meaningful opportunities are beginning to develop in India as well as in China where the economy is slowly reopening. Our long-term partnership with our largest global strategic customer remains very strong. Relative to the market, they continue to grow nicely, contributing to the increase in our consumables and services revenues this quarter. Looking at 2023, we expect this customer to have new sites operational with added capacity driven by the systems we sold in 2022. While global uncertainties and what I call the big waves of the overall market environment are outside of our control, we are focused on what we can control. We view 2023 as an important year for Cornit, a year of transition and execution. And the year we will focus on three key areas vital to our long-term profitable growth. First, returning to profitability. Over the past several quarters, we implemented decisive actions to reduce operating expenses, improve margins, and adjust our operations to the current market conditions. These actions, combined with improvements in system utilization in some of our install bases, Plus, the rebuilding and scaling our system sales should help us turn the corner during the second half of this year and approach breakeven and later on move to profitability. Second, we are laser focused on successfully launching Apollo, for which we expect to gain meaningful traction with retail brands and fulfillers and to help transform the retail industry supply chain. Better trials for the Apollo are set to begin over the next several months, with a formal unveiling in June at ITMA Global Trade Show in Milan, Italy. In addition to showcasing Apollo at ITMA, we will demonstrate how Cornit is leading the retail transformation with our strong portfolio of DTG, DTF, and Cornit X solutions. We will show global brands and retailers how they can fundamentally change their business models with the highest quality, flexible, on-demand, sustainable digital production capabilities, all while unleashing unmatched creativity and being aligned with the new rules of supplies and demand. We hope many of you will join us for what will be an amazing conference. So stay tuned for more details. And third, we are focused on scaling CornetX by pursuing demand generators and further building our global fulfillment network of on-demand digital fulfillers. We have added several key customers and partners most recently with a number of global brands and marketplaces. Over the past two years, we have learned a great deal and reprioritized efforts to improve the customer experience for demand generators and further develop and scale the GFM. We continue to believe Kornit X will be a meaningful contributor to Kornit in the years to come. Okay, a couple of final comments before I turn it over to Lori. First, Our long-term growth drivers remain firmly intact. The penetration of digital production remains low, and we fully expect demand for DTG systems to resume growth as capacity utilization and market conditions improve. We also see meaningful new market opportunities with Apollo, Atlas Max Poly, DTF, and scaling ConitX. We see meaningful system upgrades and replacement opportunities across our customer base. Further, we expect a higher mix of revenues from consumables to drive additional operating leverage on our adjusted cost structure over time. While current market dynamics have impacted the timing of reaching our 2026 financial objectives, we firmly believe we can achieve our long-term financial goals in the years to come as we continue to lead the retail and supply chain transformation in the industry. It is clear to me that our vision to transform the fashion industry is happening. While we expect customized design, which represents the vast majority of our current business, to resume growth and continue to be a meaningful part of our business, we see very meaningful growth opportunities in several new markets that we expect to really drive and accelerate long-term growth. For example, we see mid-sized retailers all over the world shifting their business models and transforming their supply chains with vertical on-demand digital production or by using ConitX as they test and change product SKUs daily in order to chase trends. In addition, we see massive opportunities within surging creator economies, influencers, and their communities, large digital, social, and content-generating platforms, all of whom can benefit from productizing and monetizing their individual brands and platforms using Cognizant's on-demand digital solutions to support their production needs. Finally, As we have seen over the last several years, supply chains in the broader apparel industry, including for the large traditional brands, are broken and are reliant on antiquated production cycles. We believe Kornit is best positioned to lead the retail transformation to a more efficient, profitable, and sustainable business model for years to come. As I've said before, we are a resilient company with a strong balance sheet, and we remain fully committed to long-term profitable growth. With that, let me turn the call over to Lori for a closer look at the fourth quarter and full year 2022 numbers and guidance. Lori.

Thank you, Ronan, and good day to everyone. Fourth quarter revenues were 63.3 million, net of 4.3 million non-cash warrant impact related to a global strategic account. For the full year 2022, revenues were 271.5 million, net of 22.5 million attributed to the non-cash warrant impact, compared with 322 million, net of 25.4 million attributed to the non-cash warrant impact in 2021. As Ronen described earlier, consumables and services revenues were each up year over year and on a full year basis as compared with 2021, while systems revenues were down meaningfully in the quarter, as we expected, and for the full year 2022. In the Americas, we had a solid quarter of consumables and of services revenue growth, with some customers experience a strong peak season, while others continue to work through excess capacity. Although overall system sales remain challenging, we continued to gain traction for our DTF solutions in Latin America with yet another encouraging quarter of growth. In EMEA, consumables and services revenues were generally flat compared with the same period last year, while system sales continued to be impacted by capacity utilization and higher financing costs. we are seeing encouraging results in important European countries like Italy, Portugal, Iberia, and Turkey, with additional opportunities opening up in the UAE and Northwest Africa. The APAC region delivered stable performance despite the tough macro backdrop driven by China's zero-COVID policy. Both consumables and services revenues were flat to slightly up, and system sales were lower year over year. We do see encouraging penetration of the MAX technology in APAC, with installations in Japan and Australia, and as Ronen said, meaningful opportunities developing in India and in China. Moving to margins. Non-GAAP gross margin. net of a 4.1 margin point warrants impact was 36.4% compared with 49.6% in the same period last year. The lower year-over-year gross margin was driven primarily by reduced sales volumes compared with the same period last year, as well as approximately 6 million of inventory write-offs associated with older generation systems and spare parts as customers continue to move to our newer generation systems. We continue to examine our bill of materials, selectively raise prices, and seek opportunities to generate efficiencies within our services offerings. We therefore expect gross margin to improve over time particularly as system sales volumes rebuild and recover to a run rate that generates operating leverage on our reduced cost structure. Turning to expenses. Total fourth quarter non-GAAP operating expenses were $32.9 million, down approximately 14%. from $38.4 million in the same period last year. The change was due to cost structure improvements across the board, including prioritizing R&D and sales and marketing initiatives and reallocating resources from non-customer-facing activities to development and to customer engagement functions, thus enabling acceleration of our long-term growth engines. We also completed workforce reductions over the past two quarters, which will reduce overall headcount by approximately 10%. We ended the fourth quarter with 934 employees. Non-GAAP operating loss was $9.9 million, net of $4.3 million non-cash warrants impact, which was in line with our guidance for the quarter. For the full year 2022, non-GAAP operating loss was 41.8 million, net of 22.5 million attributed to the non-cash impact of warrants, compared with non-GAAP operating profit of 30.3 million, net of 25.4 million attributed to the non-cash impact of warrants for the full year 2021. Fourth quarter adjusted EBITDA loss was 6.1 million compared with adjusted EBITDA of 6.8 million in the prior year period. For the full year 2022, adjusted EBITDA loss was $30.8 million compared with adjusted EBITDA of $36 million for the full year 2021. Please refer to our updated adjusted EBITDA disclosure in the earnings press release, as well as the details provided in the gap to non-gap reconciliation table for details. Next, I would like to address two special tax items impacting the reported fourth quarter and full year 2022 results. First, approximately $11.5 million or $0.23 per basic share was paid to the Israeli tax authority. Specifically, The company took advantage of a window of opportunity to pay taxes for trapped profits from prior years at a steeply discounted rate, which provided us with material tax savings compared with the higher rates we would have paid in the future, including tax associated with our previously announced share buyback program. Second, We took a valuation allowance against our deferred tax asset, given cumulative losses incurred over the past three years, of which approximately $10 million impacted the P&L, or $0.20 per basic share. From a P&L perspective, the Israeli Tax Authority payment was a one-time cash expense, while the deferred tax revaluation was non-cash. Please refer to the gap to non-gap reconciliations in our press release for further details. Our cash balance, including bank deposits and marketable securities at quarter end, was approximately $646 million. Cash used in operations during the fourth quarter was approximately $39.6 million, driven primarily by the operating loss, the Israeli Tax Authority payment I just discussed, and changes in working capital. As expected, inventories remained high and our less than typical payables balance reflects lower material purchases and payments in advance of cutting over to the new ERP system, which we successfully transitioned to in January 2023. As described in our recent 6K filed in December, we are pleased to report that the Israeli court has approved our request to authorize a share repurchase program of up to $75 million. We continue to believe opportunistically purchasing 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 given our strong balance sheet. Before discussing first quarter guidance, I'd like to highlight key changes to the guidance that we will provide to the investment community going forward. As has been our historical practice, the guidance provided assumed no impact of the fair value of issued warrants related to our global strategic account. However, we received valuable feedback from the investment community to make our financial reporting easier to understand. To be better aligned with our reported financials, we have therefore decided to provide guidance net of the warrants impact on revenues and profitability going forward, starting with the first quarter of 2023. We are also providing a guidance range for adjusted EBITDA margin expectations going forward instead of a range for non-GAAP operating margin. In this regard, Depreciation expense has materially increased after the completion of our new ink manufacturing plant. As such, we believe adjusted EBITDA margin is a more useful financial metric instead of non-GAAP operating margin to measure the performance of our business. We have included a reconciliation table of our GAAP net income to adjusted EBITDA in our earnings press release for the last three years. So, Turning to first quarter guidance, we currently expect revenues for the first quarter 2023 to be between $47 million and $52 million, and adjusted EBITDA margins to be in the negative 27 to negative 35% range. Again, the guidance for revenue and adjusted EBITDA margin includes the impact of the non-cash expense associated with the fair value of the company's warrants to our largest global strategic account. I'd like to remind everyone that the first quarter guidance reflects the typical seasonality we see in our business, with the first quarter typically being the lowest quarter for higher margin consumable sales, and also factors in a difficult year-over-year comparison for system sales volumes. As a result, Generating operating leverage on the revenue range provided in our first quarter guidance is difficult, as our operations were built to be profitable at a higher revenue run rate. I will note, given the decisive actions we have taken over the past several quarters to adjust our operations, we see break-even on an adjusted EBITDA and operating margin basis at a quarterly revenue run rate of approximately $70 million, with gross margins in the mid-40% range, obviously depending upon mix, and OPEX in the mid-30s. As Ronen mentioned, we expect to turn the corner during the second half of this year and approach break-even, and later on move to profitability, again on both an adjusted EBITDA and operating margin basis. Looking out, we continue to believe substantial long-term growth drivers remain fully intact and that we can achieve our long-term financial objectives as overall markets improve, capacity utilization increases, and as we penetrate several new markets. And with that, let me turn it back to Ronen.

Thank you, Laurie. And we are ready now to open the call for the Q&A session.

Renata, can you open up the Q&A, please?

We will begin our Q&A session. Again, if you'd like to ask a question, please press star 1 at this time. We do have a question coming from the line of Jim Suva with Citigroup. Please proceed.

Thank you so much. Just a quick housekeeping item before I proceed with a more interesting question. The change in guidance to include the warrants, am I correct that's more just of a housekeeping and getting sell site analyst and consensus numbers all on the same definitional term and there's actually been no relationship change or contractual change between you and your larger strategic customer?

Hi, you're absolutely correct.

We have been engaged in very frequent dialogue with our current investors as well as the research analysts and we receive very valuable feedback that we need to make our financial reporting easier to understand and less confusing, as well as aligned with our reported financials. And that's the reason that we've taken this step.

Great. That was my understanding also. Thank you. And I think everybody will appreciate that. Then my more meaningful question, we all know interest rates have materially increased, you know, during the past year or so. With that, with Cornete selling their large printers, for the purchase decisions, are they now starting to come back to a more normalized level of discussions or are your customers kind of still pausing and struggling for financial arrangements? And if they're struggling for financial arrangements, does Cornete kind of change the way that it helps its customers with getting across the finish line for that? Or how should we think about the impact from the closing phase of of selling products and coordinate able to get it across the finish line for a sales contract? Thank you.

Yeah, thank you for the question. So we still see impact of the macroeconomics on decision taking by our customers. Many of them are still sitting on the fence and waiting to see the direction of the market. The good size in Q4, what we have seen, We saw growth on the supplies, on the impressions versus last year. To remind you, Q4 2021 was very strong peak season. To show a growth this year on the supply is very, very healthy. We see the utilization of the overall systems getting better. We still see some overcapacity, but our customers are closing it and there is better utilization. but some of the decision of buying new equipment are being delayed. Now, we are still selling. We have segments that we're actually accelerating. A DTF, for example, direct-to-fabric is a growing segment. We had a very strong Q4, and we had a very strong Q1 for the DTF. We are starting to penetrate with the DTG to new markets like the retail markets. The brands, we're starting to see very nice success. and Q4 was a nice big season for some of the retailers. We can see interesting stories with retailers that are buying a handful of system Atlas Maxes and utilizing them to the max. And different from the previous business, that it was mainly custom design business of one-off, they are leveraging this equipment for mid-run length, some of them printing up to 3,000 linear copies or or impressions per job, which is a great testimonial of going after the retail market and the brands. As for financial solution, Lori and her team are working very, very close with partners to find financial solutions to support our key customers moving forward. We are selective as of today with supporting our customers. But the customers that we believe in them longer term, we're already supporting them on payment terms. And as I mentioned, soon we will come with financial solution around it. Maybe Lori can add a bit more on that point.

Yes, just to remind you, as I stated last time, one of my key initiatives for this year is to evaluate various programs and to ultimately formalize an alternative financing solution with third parties with whom we have relationships and who understand our business and how core needs solutions help our customers. I really believe this kind of a program could provide the company with a significant competitive advantage in the marketplace.

Thank you, and congratulations to your team for getting through and navigating a challenging 2022, and we're all looking forward to 2023. Thank you.

Thank you very much. Thanks, Jen. Appreciate it. Renan, next question, please.

Thank you. Our next question comes from Taffy Rosner with Barclays.

Hi. Good afternoon. Thanks for taking my questions. I wanted to ask a little bit about the outlook. I was wondering if you can comment on the demand you were seeing through the different end markets. I'm thinking the global strategy customers, the e-commerce channel, the brands. Are you seeing kind of the same wait-and-see reaction from everyone, or is it just a particular segment? And I guess as a follow-up to that, is there any indication you can give with regards to potential top-line growth in 2023, or is it too soon to talk about growth this year?

Thank you, Tavi. So 2023, as you can see, we are starting in Q1 always from a seasonality perspective on the low side. So we expect Q2 to be stronger than Q1 and H2 to be stronger than H1. And as I mentioned, we are aiming to move back to break even doing H2 and then to profitability. And the main driver for that, first of all, will come from systems sales. In the middle of the year, in June, we have a big event, ITMA, where we are going to introduce and reveal the Apollo and start selling it. But we are going to also introduce many other new technologies, both on the DTG and the DTF and on CornetX. The ITMA show is a long show. It's more than a week long. And it's a self-show. And we know many customers that we are speaking with today are waiting for this show to take a final decision on purchasing of new equipment. So we expect ITMA to contribute already for Q2, but definitely for H2 and beyond that. On the system side, we see a mix. We see customers that are really sitting on the fence, and some of them from the custom design side. segment, but we see some that are seeing the opportunity. We need to understand that the market, the textile market, the fashion market, is going through a major transformation right now. Supply chain is fully broken. Inventory is the biggest issue of brands and retailers. Retailers require today to have many SKUs on a daily basis to attract the Gen Z. And for that, they have to move into on-demand production and in a sustainable way onshore or nearshore. And the only solution that can help them to do that is leveraging cornite digital solution, both on the system side and cornite side. So we believe that long-term when we're looking at 2023 and beyond that, we are in an inflection point that the market will accelerate and move to on-demand production. As for the supplies, Q1 is the slowest supplies quarter. We will see an increase in Q2 and definitely a strong increase in H2 and in Q4. Services, we expect a nice growth across the year. We see some major key customers adopting the Max technology and going into upgrading their fleet of Atlases to Atlas Max, and we see across the year, like we saw it also in Q4. So those are the services. Interesting part on the segment side, and I mentioned it also before, 90% of our businesses of today is coming from custom designs. Customers like the Amazon and the Printful of the world, and they will continue to grow, and we expect these segments to continue to grow. But in overall impression, this is relatively a small segment. Much bigger segments, which is more than tenfold this segment, is the screen market and the screen replacement, and mainly going and working with the retails and the brands. Now with the Max technology, which is the new standard, and it's much better than the screen quality, with all the market trends that I spoke about for years, and now it's really happening, and brands are moving into many SKUs, and retail needs to move to on-demand production on-show. Now is the time for Cornelius really to go big time onto the replacement market, And we will start to see it in 2023, mainly in the H2, but definitely into 2024 and beyond that.

Thank you.

Our next question comes from Brian Trapp with William Blair.

Hi, thanks for taking my question. First of all, I just want to clarify something. I think I'm the last. fall, you said that you expected your large strategic customer to begin purchasing equipment again in the second quarter of 23. And I don't know, Ronan, if I misinterpreted, but it sounded like you made a comment along the lines of they've added the capacity in 2022 that they would need for 2023. I don't know if I misinterpreted that.

No, no, you're absolutely right. And I mentioned on the previous call that we expect our strategic customers, our global strategic customers, to add more capacity in 2023. Let me clarify. 2022 was a very strong year for our strategic global customers from our perspective. We saw an increased volume in terms of number of systems, opening new sites, and definitely in terms of impression. There's a nice peak season, and they're getting very strong into 2023. We expect in 2023 that they will open new sites, whether they are going to leverage systems that we sold them in 2022 to deliver them into those sites in 2023. So they will open new sites, will add more capacity, and we expect to see increased volume in 2023. We are not expecting at this stage to sell additional systems to these strategic customers in 2023. We see massive opportunity of growth with these global strategic customers, not only by selling new systems in 2024 and the relative new systems that we are going to release in 2023, like the Apollo, We see a major opportunity of upgrades, existing Atlas portfolio into the Atlas Max, trade-ins, the old technology with the Atlas Max technology and potentially with the Apollo in the future, and getting to new businesses with this account as well. So there's a lot of activity. is very, very close. As I mentioned in the calls before, we have a transparent relationship and working on three-year plans, and we expect to see major growth coming in the years to come.

Okay.

Thanks for clarifying that. And then I'll just ask one more for now. Do you still see the potential for this business to generate greater than 50% gross margin? Or has something changed structurally? And what needs to happen maybe besides volume leverage to get to 50% plus?

So longer term, we still firmly believe in the model. We have a very strong business model with the supplies. We need to uplift the volume on the systems. We definitely believe that we can be at the 50% and even crossing it. We believe longer term that we will be in operating profit of more than 20%. And as Lori mentioned, for us to be in the break-even, we adjusted our cost structure, and right now we can be at a break-even around $70 million of revenue and around the mid-40s gross margin. with the current topics that we have to be at the break-even. So we are aiming to be at the break-even in the second half of the year and hopefully move to profitability later this year and beyond that. So longer term, yes, we firmly believe that Corny can be multi-billion dollar companies with a strong gross margin of above 50% and operating margin of above 20%.

Okay, and then one last quick one. To be clear, when you say break even, you're talking about an EBITDA basis?

Both. Both EBITDA and operating margin.

EBITDA. Okay, thank you very much.

Thanks, Brian. Next question, please, Renan.

Thank you. Our next question comes from Eric Woodring with Morgan Stanley.

Hey, good morning, guys. Excited to be on the call. Thank you for taking my questions. Maybe, Ronan, first one from you, or for you, I should say. I very much hear you on the opportunities that you highlighted for the future in terms of better penetrating mid-sized retailers, the creator economy, social platforms, transforming supply chains. That all makes sense to me. I guess my question is, are you having... you know, are you having customer or conversations with these kind of customers today and they're expressing kind of interest in your types of digital systems or software enablement? Or are you kind of more so saying these are markets that make sense and we will approach them? I just kind of want to understand if those conversations are already happening and you're hearing about demand and or if you're just saying these are ripe for opportunity and we're going to go after them in the future. And then I have a follow-up. Thanks.

Thank you for the question. So it's not only discussion happening. Actually, a major part of the new system that we are selling today is into those retailers, brands, and digital platforms. And we see an increased volume of supplies of ink coming from those brands and retailers. This is a massive opportunity. Most of our team engaged with those discussions and selling. Today we are selling many systems to those type of customers that we were talking two years ago and it was a dream that we were aiming and it's happening now. And it's happening now from two reasons. One is from the macro of the textile industry, of supply chain, what we have discussed, of inventory, of being able to be creative and to invent yourself every day without having inventory and making it sustainable. So this is one thing which is happening now. And the other thing, digital finally and Kornit finally has the quality and the productivity and the total cost of ownership that can address this market and really transform it once and for all to more sustainable on-demand production.

Great. That is very helpful. Thank you, Ronen. And then maybe, Laurie, one for you is, you know, seasonality does at least look a bit different than normal right now. It looked a little different in 4Q. It looks a little bit different in 1Q just in terms of, you know, forecasting kind of your second largest seasonal decline. after the March 2020 quarter, which we know is impacted by COVID. And so I guess my question is, is there any visibility into when you believe revenue growth can return to more seasonal trends or even above seasonal trends? And if so, why would that be the case? Thank you.

In terms of the seasonality, so currently in 2023, we are not expecting change in the seasonality. Q1 will be the lower one. And Q4 will be the strongest one in terms of supplies. Q3 will be the strongest one in terms of the systems. And you will see Q2 higher than Q1. So we don't expect. Longer term, getting into the retail market more and more and to the brand, we'll start to see a big difference seasonality across the year. Most of our business today, as I mentioned before, is for the custom design, for those customers that are selling mainly in the peak in the in the holiday season, one-off. Working with the retailers and the brands, they need to sell across the year. And the same to the shops and to the retail. So we expect the seasonality in terms of supplies will moderate in the coming years.

Super. Thanks so much.

Thanks, Eric. Next question, please.

Our next question comes from Jim Rashidi with Needham & Co.

Hi, thank you. The question I have relates to the systems business in 23. You provided a framework in terms of how you get back to break even, whether that's later in the year. But what my question relates to is, If we think about the systems business this year, do you expect more meaningful inroads with new customers or a possible recovery later in the year from existing or some combination? And to what extent does Apollo play into this? Maybe in broad strokes, the launch is mid-year, but what are your expectations as it relates to Apollo?

Yeah, so it's mixed, and it's mixed between regions and between different segments. So as you know, I'll give you an example. On the DTF side, direct-to-fabric, as it's a relatively new segment for us, most of the deals that we are doing in the DTF are net new customers. If it's in Brazil, Argentina, Poland, Japan, et cetera, Turkey, we see good business there. Iberia, excellent business as well on the DTF side. So this is all net new customers. When we are talking about the retail and the screen replacement, there is mainly net new customers as well. Finally, we are getting to those retailers, many of them buying systems, many of them working with CornetX. So this is a new type of customers. On the custom design side, this is the mix. We expect in 2023 some of our bigger customers to start getting into the cycle of buying additional systems. We see it in the utilization of the current fleet that they have. We see it that they need to trade in some of the old legacy system to new system, and we definitely see it in the upgrade from Atlas to Atlas Maxis. So this is regarding the type of customer and the type of segment. And, again, between regions in Asia Pacific, most of the customers that we are selling are relatively new. And in Latin America as well, in North America and Europe, it's kind of a mix. As for the Apollo, Apollo is the biggest launch that we have done for the last four years. It's bringing tons of innovation. This is what the market was looking for, 400 garments per hour, the highest quality of the max technology quality with one operator, full of automation, quality controls, and many, many more elements into it, smart queuing, and much more. We are going to reveal it in ITMA and start installation of beta sites before ITMA. In the next few months, we're starting the installation of the betas. As I mentioned, I think on the previous call, we aim for 2023 to install less than 10 units. And it's mainly around the beta sites and around our demo centers in the U.S. and in Europe. And we're expecting to get the second order from our beta sites already this year. And the real acceleration of growth uh will come uh in 2024 from the revenue perspective i can tell you we already have a list of customers that waiting for the apollo uh we expect itma to be a very very strong demand generator generator for the apollo uh and we believe that after itma we will be able to close already 24 in terms of the capacity for the apollo got it and a question for you uh

Laurie, some of this is going to be disclosed in the 20F, but I'm wondering if you could provide us, if you could share with us any color around the breakdown of systems, ink and consumables and service. Is any of that detail available, or do we need to wait for the 20F?

Yes, it can certainly help you out here. You're looking for about on the year?

Well, it would be great if we had it for the quarter as well, but I'll leave that to you.

Hey, James, you'll see it, as you said, in the 20F. As you know, we have it in products and services throughout the quarter. We don't break it out yet, but you will wait to see that segregation between

So, Jamie, you can see today between the system, which includes machines and ink, to the services. So you can see a major growth on the services side, which includes the upgrades kits for the Macs. You don't see the breakdown on a quarterly basis right now. On the 20th, you will see the breakdown between the ink to the system, what I can say that we see larger portion of ink versus system versus previous year. So we see a growth on the ink side versus 2021. And remind you that 2021 was a very strong year on the ink, but we see major decline on the system side. So overall, the mix is totally different from 2021. And one.

Got it. We'll look for that. Thank you.

Next question, please.

Our next question comes from Chris Moore with SlateJS Securities.

Hey, good day, guys. Maybe we can talk a little bit about Cornidex. I know it has changed, evolved quite a bit over the past two years, and I guess there's two questions there is, One, what do you know now that you didn't know then? And two, just from a marketing standpoint, you talked about midsize retailers, et cetera, as being kind of a prime market. How will the marketing approach differ from what you're doing right now on the system side?

Yeah, so we have learned a lot in the last two years from the acquisition of Custom Gateway. And we adjusted our business model. We developed our solution. We have much more clarity and better traction than before. We have very high confidence about CornitX as material contributor, both in terms of revenue and in terms of driving impression and volume to our systems and to the GFN, the Global Fulfillment Network. What happened in the market is that many digital platforms, as of today, would like to monetize and productize their platforms. And the creator community is happening. The creator economy is happening. Many of them are working through those platforms, and those platforms are looking for a black box that they can send all the jobs and be fulfilled locally, closer to the consumer in a sustainable way without dealing with production. This is CornetX. So in a nutshell, if you think about the Uber model, CornetX is the platform, is the app that connects between volume of impressions that are coming from brands from marketplaces, from digital platforms, into a network of fulfillers that are using cornet machines and driving volume to those machines. Driving volume to those machines will drive more ink and more machines. As I mentioned, we see a very nice traction with some very, very nice platforms and some brands. And in 2023, is a transition year also for CorneteX, and we hope that by the end of 2023, we'll be able to start reporting more meaningful information and data, financial data on CorneteX.

And just kind of a best guess in terms of when CorneteX does get to that meaningful revenue level that's likely at fiscal 25 versus fiscal 24 from where you sit today?

Yeah, so it depends how you look at it. Yeah, from a revenue perspective, it's already generated a few millions of dollars, okay? And we expect to see growth in 2023 versus 2022. But even more important, what we are measuring is how many impressions are being routed through CornetX to our customers that are using Cornet. And because of that, they're buying more systems and more ink. This is very, very material, and we start to see the volume picking up, and we are very, very focusing on those retailers and brands. Some of them do not want to go vertical and to buy systems, but they're looking for solutions to produce for them all over the world, leveraging Kornitis.

Got it. Helpful. I will leave it there. Thanks, Rona.

Thank you. Thanks, Chris.

Mr. Backman, our last question comes from the line of Greg Palm from Craig Harlem. Please go ahead.

Yeah. Hey, everyone. Thanks for taking the questions here. I just wanted to follow up on the commentary on your global strategic. I just want to make sure I understood that correctly. So they will not be purchasing any new systems in 2023 is what I heard yesterday. but they are still opening up new sites. And so are they using systems from other existing sites to fill the new sites? Is that essentially what's going on?

So first of all, the first sentence is correct. We are not expecting them to buy additional systems in 2023. This is the current assumption that we are taking into our model. And how do we see 2023? We're still working with them on many other opportunities, as I mentioned before. As for the new site, as you remember last year, we discussed about delayed sites. They bought system last year for those sites. And some of those sites will be just open this year. So we will see the machines that they bought last year being utilized on those new sites only this year. So from their perspective, they will see a major increase in potential volume.

Okay. So some of the printers that you sold them in 2022 were for these new sites that they're opening this year.

Correct.

Understood. And I'm just following up on the Apollo. Last quarter, I think you said – In selling and installing dozens of systems, I think you said less than 10. I don't know if I misunderstood you last quarter, but can you just confirm that? And then just in terms of revenue recognition, are you expecting to recognize any of those systems this year for the beta sites, or will RevRec be in 2024?

Let me confirm. In 2023, our aim is to make the Apollo the most successful product. And by that, we are very much focused, and we are going to deliver less than 10 units. Many for better size, for the demo centers, and we're expecting second order already from those better size in 2023. We're going to be very focused and making it successful. As for recognize those systems, at this stage, we are not adding it to the plan. We are taking the conservative approach that we will recognize some of those units only beginning of 2024. So this is a conservative approach. On top of that, beginning of 2024 is a full acceleration plan of selling many more Apollos beginning of the year.

Okay, perfect. And I guess just last one, if I can just maybe one more clarification. Your commentary implies approaching break-even in the second half, and so I think that sort of implies revenue in the $70 million range, if that makes sense. And I just wanted to be clear, that is including the impact of the non-cash expense associated with warrant accounting. Is that correct?

Correct. So now we are talking only net, and the $70 million is net. And, yeah, we expect, as I mentioned, to reach the break-even in H2. So based on what we gave, around $70 million. And around the mid-40s, gross margin, of course, is different from Q3 to Q4. Q4 is a very strong quarter from a supply perspective. So hopefully we will move into profitability.

Perfect. Okay. Thank you so much for the call. Thanks, Greg. Thank you.

Mr. Backman, we have no more questions at this time. I would like to turn the floor back over to Mr. Backman for closing comments.

Great. Thank you, Renan. And thank you to everyone for joining us today. As always, if you should have any additional follow-up questions, please feel free to reach out to me directly. Have a great day. Thank you so much. Renan, please close the call.