Kornit Digital Ltd.

Greetings, and welcome to the Cornett Digital's third quarter 2023 earnings conference call. As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Jared Maimon, Global Head of Investor Relations for Cornett Digital. Mr. Maimon, you may begin, sir. Please go ahead.

Thank you, Operator. Good day, everyone, and welcome to Cornett Digital's third quarter 2023 earnings conference call. Joining me today are Chief Executive Officer Ronan Samuel, Lori Hanover, Courtney's Chief Financial Officer, and Amir Shaked Mendel, EVP of Corporate Development. For today's call, Ronan will provide comments on the third quarter of 2023. Lori 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 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 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, filed with the SEC on March 30th of 2023, 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 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 financial measures to the most directly comparable GAAP measures can be found in the company's earnings release published today, which is also posted on the company's investor relations website. At this time, I would now like to turn the call over to Ronan. Ronan?

Thanks, Jared, and thanks everyone for joining us on today's call. Before we go into our third quarter results, I would like to take a moment to address the situation in Israel. I am sure most of you are aware of the horrific events that have taken place in Israel over the past several weeks. I want to extend my deepest gratitude for the supportive messages we have received from many of you on this call, letting us know that Kornit is in your thoughts. Your support is greatly appreciated. I also want to stress to everyone that we are committed to the safety, security and well-being of our teams in Israel. Additionally, Three weeks ago, we sent a letter to our customers emphasizing our commitment to continuity and telling them to expect no disruption in their daily interaction with Cornit. As of today, I'm pleased to report that the situation in Israel has not materially impacted our business. We have also strategically bolstered our regional inventories to meet customer demands, not just for the upcoming peak season, but also for the first quarter of 2024. As this complex situation continues to evolve, we pledge to remain proactive and implement contingencies as needed. Now, let me talk about our third quarter results. Today, we reported revenues of 59.2 million, which is within the guidance range we provided in August. As a reminder, this includes the impacts of the fair value of issues warrants. Despite a challenging microeconomics environment, we continue to see consumable sales growth. Impressions also increased year over year, marking our third consecutive quarter of ear-over-ear impression growth. We anticipate continued growth in both impressions and consumable cells in the fourth quarter of 2023 and 2024. However, the macroeconomic situation we saw in the first half of 2023 is continuing the second half, constraining system cells in the third quarter as was expected. Despite these headwinds, system sales improved sequentially as we continue to convert orders from ITMA. We also continue to focus on diversifying our customer base, selling our solution to new customers in key growth regions, including LATAM and Asia Pacific, and accelerating our growth into market segments like screen replacement and retail. we are encouraged to see new key customers leverage our technology in emerging application, which we believe can generate meaningful growth for our systems and inks. Traditionally, these key customers have used analog technology, but recognize the quality capabilities and sustainability of our digital solutions. Additionally, we continue to see growth in our direct-to-fabric technology, as evidenced by Q3 being one of the strongest quarters for Presto system sales. We also saw additional upgrades to Max in Q3, as customers continue to see the value of our Max technology, which includes enhanced quality, durability, and productivity. Following the upcoming peak season in Q4, we anticipate hybrid momentum to resume in 2024. We are seeing strong interest for the Atlas Max Poly in the sports and at leisure market. In October, we attended Printing United in Atlanta, where we built additional momentum for this solution. Our customers are most excited about the system quality and vibrancy when printing on synthetic, natural, and blended fabrics. Moving on to the Apollo. Q3 was the first quarter where our initial beta systems were installed and operational. The feedback we have received from our customers is highly encouraging. and we have seen strong indications on systems' uptime, yield, quality, and unique economics. As of today, we have three systems installed in North America, and we expect these systems to be fully operational for the coming peak season. We continue to target general availability for the Apollo in the first quarter of 2024, and we are building a good pipeline of existing and new customers. In summary, this quarter we saw a continuation of macroeconomics headwinds. However, we were able to further diversify our customer base, expand into key textile production regions, and pursue growth opportunities in new applications. Looking ahead, we will continue to take proactive measures to resume sales growth while also focusing on enhancing operating efficiencies across our entire company. Our plan is still to approach break-even on an adjusted EBITDA basis during the fourth quarter and grow profitably in 2024. Now, let me turn the call over to Lori for a closer look to our third quarter financials and fourth quarter guidance. Lori.

Thank you, Ronen, and good day to everyone. As Ronen mentioned, third quarter revenues were 59.2 million within the guidance range that we provided in August. We saw revenue growth in consumables during the quarter, both year over year and sequentially. Services sales declined slightly year over year due to significant upgrade activity from a key customer in the comparable quarter of 2022. As anticipated, system sales were once again lower on a year-over-year basis, but were much improved sequentially as we continued to convert orders from ITMA. Excluding purchases in EMEA from our global strategic account, system sales were up year-over-year. In the Americas, year-over-year growth was driven by strong system sales in Latin America following ITMA. In EMEA, Consumables revenue grew nicely as utilization rose and upgrades to max continued. Turning to APAC, sales were flat compared with the same period last year. As Ronen described earlier, we continue to develop a meaningful pipeline of long-term opportunities in this region. Moving to margins. Non-GAAP gross margin was 37.4% compared with 35.5% in the same period last year. The year-over-year improvement is due primarily to comparatively higher margin consumables representing a greater portion of total revenues. We continue to expect gross margin improvement for the balance of this year as consumables typically comprise the highest percentage of sales in the fourth quarter. Looking at expenses. Total third quarter non-GAAP operating expenses were $31.1 million, a decrease of 15% from $36.7 million in the same period last year and down 9% from $34.1 million last quarter. This year-over-year improvement in expenses reflects the benefit of our active cost savings efforts, which includes our previously completed workforce reductions. The sequential improvement primarily reflects lower expenses attributable to our participation at the ITMA trade show, which, as a reminder, was a Q2 event. All of this resulted in an adjusted EBITDA loss for the third quarter of 2023 of $5.6 million. a significant improvement compared with the adjusted EBITDA loss of 10.5 million in the same period last year and the adjusted EBITDA loss of 10.7 million just last quarter. Adjusted EBITDA margin for the third quarter of 2023 was negative 9.5% again within the guidance range we provided in August and reflects a substantial improvement both year over year and sequentially. Our cash balance, including bank deposits and marketable securities at quarter end, was approximately $569 million. Cash used in operations during the third quarter was $7.7 million, driven primarily by the operating loss and changes in working capital. Accounts receivable increased due in part to a higher balance of extended payment terms related mainly to converted deals from ITMA. Other prospective customers are being directed to financing partners, including two new partners recently onboarded for extended payment plans. Inventories declined sequentially. We continue to remain focused on improving working capital to drive cash conversion. Since the beginning of the year, we have repurchased approximately 1.6 million shares under our share repurchase program for an aggregate amount of $36.8 million. representing an average price paid per share of $2297. The unused balance of our previously announced share repurchase program is approximately $38 million. We plan to be more aggressive in our repurchasing efforts given our current enterprise value. Turning to fourth quarter guidance. As we discussed last quarter, we continue to plan to approach breakeven on an adjusted EBITDA basis in the fourth quarter. We currently expect revenues for the fourth quarter of 2023 to be between 55 million and 60 million and adjusted EBITDA margin to be in the negative 6% to 0% range. As a reminder, 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. As Ronen noted earlier, While the pipeline we have built for our solutions coming out of ITMA and Printing United is encouraging, we continue to see macro headwinds weighing on our sales cycle. As we move into 2024, we anticipate that our customers will likely face similar pressures to those experienced during 2023. These headwinds include constrained CapEx budgets, high interest rates, and difficulty in securing financing. Similarly, we see rising risks to discretionary consumer spending stemming from tightening credit, rising rates, higher energy prices, and other such factors. The spending behavior of the end consumer therefore could impact the investments our customers are willing to make. To date, in 2023, we have worked closely with our key customers to mitigate some of their challenges while also focusing on improving our own operating model. we have reduced costs and reallocated resources towards long-term opportunities with the goal of generating improved returns on invested capital. In 2024, we will continue to proactively work with our customers, invest in our product roadmap as planned, and improve our operating model. We are therefore planning to deliver profitable growth for the full year 2024 on an adjusted EBITDA basis. To clarify, Our 2024 plan considers the typical seasonality inherent in our business model, which implies that revenue and adjusted EBITDA margin will be stronger in the second half of 2024 as compared to the first half of 2024. That concludes our prepared remarks. And with that, I will now turn it back over to Ronen to open up the call for Q&A. Ronen?

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

Thank you, Sal.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Again, if you would like to ask a question, please press star and then 1. The first question we have comes from Greg Palm from Craig Helleman Capsule Group. Please go ahead.

Yeah, thanks. Hey, everyone. Just first off, I wanted to offer my continued support Sympathies for all you and all Cornead employees and everyone in Israel. So, you know, with that said, can you just talk a little bit about, you know, contingency plans, you know, in light of everything going on? I think you alluded to building some inventories regionally, but what other steps have you taken or will you take in the coming months?

Thanks, Greg, for the question and supportive comments. Before I start talking about the contingency plan, just to remind everyone, yesterday it was exactly one month of the horrific event that happened in Israel where more than 1,500 people were slaughtered, many of them children and elderly, and more than 250 people were hostages, still hostages. and thousands of missiles were shooting all over Israel. We are still dealing with this situation with two primary focus areas. One is the well-being of our employees and supporting the community of the Israeli employees and their families. We have 10 employees that their families were directly impacted by this horrific event and supporting them and also other employees that are now serving in the army. And of course, in parallel, we are putting major focus on full business continuity. From the first day, our ink land was in full operation. I'm happy to say that it's still in full operation and we don't see any impact to the production. In parallel, we immediately shipped all the needed ink supplies and spare parts to the regions to be close to the customers and to be ready for the peak season. At this moment, we are actually shipping all the consumables and spare parts already for Q1, and our ink plant is full production. Our contact manufacturers are global companies and they are fully in production, and we don't see any issue. In parallel, we have a strong and clear contingency plan in place in case that we will need to move production out of Israel if necessary. So we are working very, very closely with our customers. We sent them an email explaining the situation already three weeks back. And from that moment, we are updating them on a weekly basis. And they know that they have the inks, spare parts, and even systems if they need in the regions. And we are committed that they will not feel any impact to their businesses.

Okay. Well, I appreciate all that, Culler. I guess my second question has to do with kind of your visibility aspect. into 2024. At this point, you made, you know, some comments, there's clearly a lot of things outside of your control. But, you know, I also think there's some, you know, company specific drivers, you know, as well, whether that's new products like Apollo, you've got, you know, maybe an accelerated upgrade cycle, the max pipeline conversions from MITMA. So, you know, it sounds like you're still committed to growing in 2024. But can you give us a little bit of more color on kind of what those expectations might be?

Yeah, so before going down to the bottom line, how do we see Q4? Let me give you the background. Of course, we're all familiar with the macroeconomic headwind that we're all suffering. Interest rate is high. It's very difficult to get financing and sales cycle being longer and customers delay decision and many of them delay decision after the peak season. From a more macro perspective of the textile industry and what we see on our industry, we see the continued momentum into the move of production from offshore to near-show and to on-show is very visible. Everybody's seeing it, our customers seeing it, if it's the fulfiller, but also brands and retailers moving production directly on-show, and it's a driver of growth for our business. On-demand is now everybody's talking about it. And sustainability is a major issue that the brands needs to report on how they produce the products. And overall, they are still having high inventory. And in order to reduce the inventory, they have to move into on-demand production. When we are looking at our customer base, it's already the third quarters in a row that we see INX grow. We see INX grow across the board. We see also the impression growing. And also very important is the improved utilization of systems across the fleet. This is a very, very good indication of the health of the business of our customers. In terms of the portfolio, we have by far the strongest portfolio ever. Our max technologies continue to be the mainstream And this is the new standard of the industry. We had in Q3 many upgrades and we expect that the upgrades will continue after the peak season into Q1 2024 from Atlas to Atlas Max. Our Presto Max, it was a very strong, actually the strongest quarter ever. for the Presto coming out of ITMA and also other activities that we had during Q3. So Presto Max was a very strong sales. Another indication of new products that we've released to the market last year is the Access Max Poly. Finally, we see traction on the Atlas Max Poly. Actually, it was the strongest quarter for the Atlas Max Poly in selling those products to mainly that leisure and sports market, a very good indication. If I would say that the best indication that we have is a diversity in our business. We're really putting a lot of focus on diversifying our customer base, We're entering more and more into the mainstream screen market across the board. Some major players that used to do it in analog are now moving into digital using the Max technology and some of them are using the Apollo and will use it more and more. And I will touch on the Apollo in a minute. We see the diversification across geographies. LATAM was a very strong quarter for LATAM in Q3, and we are entering Q4 with continued momentum for LATAM. We see new markets that are developing for us, like India, a very strong market. We are entering there to some of the biggest fulfiller textile manufacturers of the world. We installed to one of the biggest textile manufacturers in India this quarter. We installed at Presto, and we expect them to continue to grow and adding more capacity. We can see that a major part of our business is coming actually from retailers and brands that are adopting our technology and buying systems or producing through CornetX on the global fulfillment network. We actually, in percentage, we have a very high percentage of net new customers versus existing customers that are buying new systems. We saw it in the last few quarters and it's evident in Q3 and we expect the same in Q4. As for the Apollo, we are in the middle of the beta. We already installed three systems in North America. And the indication are very positive from all those three betas. They see the values of the Apollo in terms of productivity, in terms of print quality, in terms of automation. What they are all saying, they are amazed that one operator can run the system at full capacity of 400 T-shirts per hour or garments per hour. Another big advantage that we are hearing from them is the reduced consumption of energy. on the system and the dryer, which reduced consumption of energy by about 40%. Major advantages. We can see that the funnel and the opportunities are getting stronger for the Apollo. 2024 will be the year that we will ramp up the Apollo. We are going to commercially release it in Q1. and we are going to ramp up it in doing the year, and the accelerated goals of the Apollo will be in 2025. So overall, we are very, very excited on the Apollo, and we are starting to convert the opportunities that we have into sales. As for 2024, as I mentioned, our view is based on the current macroeconomics that we see today. As far, we believe that we need to take the current situation and focus a modest course on revenue and modest profitability for 2024. But we are seeing some upside opportunities ahead of us into 2024 that I didn't touch. One of the opportunities, for example, the potential upgrades of our global strategic customer from their atlases to Atlas Marks that currently we didn't take it into the account. There's other opportunities like we are entering into some exciting new markets and application. As I mentioned on previous call, we are working with some biggest brands of the world that connecting us with their fulfillers some of them in China, in Vietnam, in Korea, and we see a big potential to get into a new application, a new market segment through it. We already installed few systems at those customers, but now they are testing it, and potentially it can be a growth engine. Again, we didn't take it into account. So we are looking at 2024 more from a conservative approach. We expect modest growth in revenue and to become profitable in a modest way.

Okay. Appreciate all that. I will hop back in the queue. Thanks.

Thank you. The next question we have comes from Brian Draft from William Blair. Please go ahead.

Hi, thanks for taking my questions, Ronan. You know, we've spoken about this. You know, you and the team have my support, and really sorry for everything that you're going through in this situation. That said, I have to ask some questions here. So on the upgrades, you just mentioned that you're still hopeful that the large strategic account might upgrade to max. Have you learned anything between the last time you spoke to everyone and today that would give you more or less confidence that that is a possibility for 24?

Yeah, so thanks, Brian, again, for the supportive messages. And as for our strategic, global strategic customers, there's limited information that I can share, but I can tell you that only in the last few months we met several times together and not only about the MAX upgrades. We have a very close relationship, and we are talking about the plans for next year and even beyond that. The MAX, of course, was evaluated, as I mentioned before, and our global strategic, they see the value. We are still waiting for decision, final decision, from their perspective. But as I mentioned, we are not counting on it. It can be in 2024. It can be after. So we cannot put it at this stage in the plan. On top of that, of course, we are working in different angle with them. As I mentioned before, they are going to have the Apollo during 2024. They are going to test it at this stage. They are very excited about the future of the Apollo within their operation. And we believe that 2025 will see multiple Apollos within these strategic customers. Overall, the business is doing well. They continue to grow. And in Q3, we installed all the systems that we have shipped last year in 2022. So now those systems are ready for fully operational for the peak season. And of course, we will see some benefit on the supplies, on the ink from their side. And as I mentioned, we are working on potential expansion. But at this stage, we are not taking into account in our plans for 2024 any material investment, additional investment in capital from our strategic global account.

OK, thanks for that. And then can you say anything about what you've seen so far in the fourth quarter, since October 1st, in terms of impressions, system utilization, just to give us a sense for what you're seeing as far as early signs of the holiday season?

Yeah, so of course we are monitoring very, very closely now on a daily basis. We actually see a very promising growth, both on the ink side and on the impressions across the board. So when we're talking to our customers, they're very optimistic about Q4. They're ordering the supplies, and we can see the traction on the impression. Of course, the coming few weeks are critical, and we'll know more. This, of course, peak season is very, very important to many of our customers and also to new customers that now are in the sales cycle and waiting to take the decision if to acquire additional systems next year after the peak season. But all in all, In terms of impressions, it looks very good. The headwind that we still see in Q4, very visible, is on capital acquisition. Still very tough environment out there. Sales cycle getting longer. Customers looking for financing solution and payment terms, and some of them delay the decisions.

Okay, thank you very much. Good luck. Thank you. Thank you.

Thank you. The next question we have comes from Tavi Rosman from Barclays. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Ronan, you mentioned potentially expanding to new applications. Can you give us an example of the type of new applications that you can see out there and that has scope to turn into meaningful revenues down the road?

Thanks, Avi. At this stage, I prefer not to disclose it because it's a big potential application for us. It's a technical area. I can say that it's in the sports market, but I cannot say more than that. What I can tell you is that we are working with some of the biggest brands of the world with them and their direct fulfiller to change the way they are producing some of the technical stuff that they are doing, leveraging our technology, and we are talking here on the big potential if we will be able to materialize it. There's some technology innovation that we already brought to the table and we still continue to developing it. It looks promising. This is why I'm mentioning it today. But at this stage, I don't want to relate to specific application. and the specific numbers, hopefully in the next quarter we'll be able to provide a bit more details.

Okay, thanks. And then on operating leverage, like looking into 2024, do you expect to further reduce the absolute OPEX level or just growing revenues and as a result, you know, we'll return to profitable growth?

So at this stage, of course, as I mentioned, we are planning to have a modest growth of revenues. But we are taking steps on enhancing our operating efficiency and operating model moving forward. We understand that the dynamic out there is, from our perspective, still tough. And we will continue to adjust operating efficiencies and operating model accordingly. to be profitable for the entire year of 2024. As a reminder, there is a seasonality, and of course Q1 is the lowest quarter, while H2 is the strongest quarter of the year, both in terms of growth, revenues, and profitability.

Lori, do you want to add anything on that?

No, I think you covered it. Thank you.

great thank you guys and stay safe thank you thank you ladies and gentlemen just a reminder if you would like to ask a question please press star and then one now next question we have comes from Eric Woodring from Morgan Stanley please go ahead super good morning guys thank you for taking my questions and all the support to you guys from team Morgan Stanley here

Two questions. Maybe Ronan first for you. Some of us saw firsthand how successful the ITMA show was for Cornete. Across the different kind of new systems and or upgrades that you sold, do you still expect to convert about 90% of those letters of intent? And second, can you help us understand kind of what percent or directionally you know, how much of those deals you believe will convert, you know, in 2023 versus what is more so in the pipeline for 2024? And then I have a follow-up. Thank you.

Yeah, so I can tell you that we're working very, very closely on all those opportunities and letter of intent and PO that we received from ITMA. ITMA was indeed a very successful event And I can tell you that most of the opportunities that we had are still live and serious. We already converted close to 20 deals, customers, out of ITMA, and we expect to have a few more in Q4, with the rest coming into H1 2024. So we are working very closely. I can tell you that most of the deals are still alive and kicking. Yes, the sell cycle is taking longer than we expected. At TITMA, some deals that we closed at TITMA are still open to deliver the system because the financing is not closed yet. But the customer is serious. We hardly lost any deals out of those opportunities that we had at E2.

No, thank you. That is a very helpful color. And then maybe as my follow-up, you know, obviously it's a challenging world right now. I'm sure you're not necessarily happy with the level of underperformance in the stock since two key earnings. It's just the nature of the markets today, unfortunately. So maybe my question is, I can sense from you a belief in the products, a belief in the pipeline, your ability to manage costs more efficiently, and you have something like 70% of your market cap in cash and no material debt. So why aren't you buying back more stock in the near term to send a message of confidence to the market? And that's it for me. Thanks so much.

Hi, Eric. Well, let me just respond to you. If you remember what I said in my prepared remarks, the average execution price of our buyback has been about $22 per share. And at that price, we believe that the market had meaningfully undervalued us. So now with the stock price just a few dollars away from cash value, as you mentioned, we see an even more attractive opportunity to repurchase our shares. And as a result, we plan to be much more aggressive in using the remainder of our existing share repurchase program because we do believe that combined with our existing pipeline of investment opportunities, this is a very strong use of a portion of our cash balance.

Great. Thanks so much for the color and good luck, guys. Thank you, Eric.

Thank you. The next question is from Chris Moore with CJS Securities. Please proceed with your question.

Terrific. Thank you. Appreciate taking a couple questions. Obviously, we talk a lot about the macroeconomic headwinds continue to create uncertainty. Are there certain products that will likely be less impacted in fiscal 24 than others, regardless of the macro backdrop?

So when you relate to the products, I assume you relate to system because part of the products, of course, are the ink and supplies. And supplies, I mentioned, continue to go nicely in Q3. And we expect it to go in Q4. And I'm talking year over year and sequentially, of course. And also in 2024, we expect supplies to continue to go as we see the consumption going with our installed base. And also we are entering into new markets. a new customer and selling additional systems. In terms of systems, look, the entire dynamic is tough. What I mentioned before, the growth that we see more in the retails and brands, we see those customers getting and understanding that they have to change their business model into on-demand and to get rid of their inventory, to react faster to the market, and they have no choice. This is the time for them to change, and many of them are jumping into it, and Kornit is the only one that can provide them the quality and the productivity and the TCO that's required. So we expect to see the continued growth coming from these places and also from the screen replacement. The DTF, as I mentioned, direct to... Fabric is another growth engine within Cornete, and there we are seeing the growth coming more from places like Latin America, specifically Brazil, and India. Got it.

I appreciate that color. Maybe just as my follow-up, Laurie had mentioned two new partners on the financing side. Can you just give a little bit more information detail or an update there? Was Q3, for example, meaningfully helped by the financing options?

Sure. So as I said earlier, we have onboarded two new financing partners. In the third quarter, more than 20% of our systems were financed by financing partners, excluding the two new ones that we just onboarded. So it is providing a good source of support for our business, and we certainly hope to expand that in the future. These two new partners, one is in Europe and one is in the U.S., so we're covering those areas as best as we can as well.

Got it. That's a helpful number. Thanks, Lori.

Thank you. Our next question is coming from Jim Rusciutti with Needham. Please proceed with your question.

Hi. Good morning. This is Chris Grenga, honor for Jim. Thank you for taking the questions. You had mentioned that there was a bit of a pause on the upgrades in Q3 as people get ready for peak season. I'm just curious what the runway is for continued upgrades in Q4 and beyond, if you could elaborate on that potential. Thank you.

Thanks, Chris. Let me clarify. Q3 was another good quarter for upgrades from Atlas to Atlas Maxx. So Q1, Q2, Q3 was excellent quarter in terms of upgrades and meeting our expectation and plans for this year. We didn't expect to continue in Q4. Q4, our customers are focusing on peak season. They need the machines in full productivity, and they cannot allow the machine to be upgraded, which take the machine a few days off. So we don't expect in Q4, and this is the pause, On the upgrades, we do expect to continue the upgrade cycles in Q1 2024. We already have orders for customers for Q1 2004. And as I mentioned, we still didn't receive the order from our global strategic customer for that, and this is a potentially upside. Got it. Thank you.

And maybe just as a follow-up to the question asked earlier about the extended payment plans, have you found that for customers on the margin that this is something that is making their purchase decision easier and how much uptake do you expect with these financing plans longer term? Thank you.

I do believe that the opportunity to extend have extended payment terms on our products is helpful. In some cases, it does make all the difference for the timing of a customer when they're willing to step up to the plate. As to how much is going to depend in the future, it's unclear to me right now exactly how much that could be, but I do believe that it will represent a significant portion at least over the next 12 months or so.

Great. Thank you very much.

Thank you. Our next question is coming from Greg Palm with Craig Hallam Capital Group. Please proceed with your question.

Yeah, thanks. Just a couple of quick follow-ups. On the capital allocation front, following up on a previous question, is there anything that would preclude you from doing an accelerated share repurchase? Would that require the same kind of a court approval as a normal buyback?

We have the court approval for the buyback that we announced.

That court approval will take us all the way through into Q1. So we have that approval. And we can always ask for another.

Yeah, I guess I'm asking if you were to use that up, it sounds like you're going to be more aggressive. If you use that up, and want to do something like an accelerated share or purchase, are you able to do that? Would that require the same kind of court approval as a normal buyback?

Yes. Well, yes, you require the court's approval to do a buyback, whether you call it accelerated or not.

Yep. Okay. Understood. And I guess just, you gave some commentary on revenue and OPEX. What about gross margin, you know, for next year? Um, You know, I presume that mix will be, you know, positive if we still assume, you know, consumables are, you know, a greater portion of mix than in years past. But any other way to sort of qualify how you're thinking about gross margin and the continued improvement there in fiscal 24?

Well, let's start at the beginning. So as you mentioned, there's the issue of the mix between products and services and consumables. That certainly has an impact. The second impact is that we have been throughout this year taking cost saving measures in cost of sales, which we hope to also see the benefit. It takes a bit more time to see it, but we do expect to see some benefit. We also have other initiatives aimed at improving efficiencies in matters that affect gross margin. But again, the major benefit that you see from these types of programs usually takes a little bit more time than you can affect in operating expenses. And also, improvement in gross margin is, of course, in our case, somewhat dependent upon volume. So as volumes improve, we would also see better gross margins.

Okay, understood. Greg, I will just add on. You should expect a Q4, of course, improvement in the gross margin due to the mix of ink supplies versus systems. And for the overall 2024, we do expect a modest improvement on gross margin as well. Some of it on the efficiency that Laurie was mentioning, some of it is related to volume.

Yep. Okay. All right. Thanks again for taking the questions.

Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Jared Maiman for any additional closing remarks.

Hey, first of all, thank you all. Go ahead. Thank you, operator, and thank you for joining us all.

Should you have any follow-ups, please don't hesitate to reach out to me or Sarkis.

Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time. you you you Thank you. Thank you.

Greetings, and welcome to the Cornet Digital's third quarter 2023 earnings conference call.

As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Jared Maimon, Global Head of Investor Relations for Cornet Digital. Mr. Maimon, you may begin, sir. Please go ahead.

Thank you, Operator. Good day, everyone, and welcome to Courtney Digital's third quarter 2023 earnings conference call. Joining me today are Chief Executive Officer Ronan Samuel, Lori Hanover, Courtney's Chief Financial Officer, and Amir Shaked Mendel, EVP of Corporate Development. For today's call, Ronan will provide comments on the third quarter of 2023. Lori 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 US 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 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, filed with the SEC on March 30th of 2023. 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 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 financial measures to the most directly comparable GAAP measures can be found in the company's earnings release published today, which is also posted on the company's investor relations website. At this time, I would now like to turn the call over to Ronen. Ronen?

Thanks, Jared, and thanks, everyone, for joining us on today's call. Before we go into our third quarter results, I would like to take a moment to address the situation in Israel. I am sure most of you are aware of the horrific events that have taken place in Israel over the past several weeks. I want to extend my deepest gratitude for the supportive messages we have received from many of you on this call, letting us know that Kornit is in your thoughts. Your support is greatly appreciated. I also want to stress to everyone that we are committed to the safety, security, and well-being of our teams in Israel. Additionally, three weeks ago, we sent a letter to our customers emphasizing our commitment to continuity and telling them to expect no disruption in their daily interaction with Cornit. As of today, I'm pleased to report that the situation in Israel has not materially impacted our business. We have also strategically bolstered our regional inventories to meet customer demands, not just for the upcoming peak season, but also for the first quarter of 2024. As this complex situation continues to evolve, we pledge to remain proactive and implement contingencies as needed. Now, let me talk about our third quarter results. Today, we reported revenues of 59.2 million, which is within the guidance range we provided in August. As a reminder, this includes the impacts of the fair value of issues warrants. Despite a challenging microeconomics environment, we continue to see consumable sales growth. Impressions also increased year over year, marking our third consecutive quarter of year over year impression growth. We anticipate continued growth in both impressions and consumable sales in the fourth quarter of 2023 and 2024. However, the macroeconomic situation we saw in the first half of 2023 is continuing the second half constraining system sales in the third quarter as was expected. Despite these headwinds, system sales improved sequentially as we continue to convert orders from ITMA. We also continue to focus on diversifying our customer base, selling our solution to new customers in key growth regions, including LATAM and Asia-Pacific. and accelerating our growth into market segments like screen replacement and retail. We are encouraged to see new key customers leverage our technology in emerging application, which we believe can generate meaningful growth for our systems and inks. Traditionally, these key customers have used analog technology but recognize the quality, capabilities, and sustainability of our digital solutions. Additionally, we continue to see growth in our direct-to-fabric technology, as evidenced by Q3 being one of the strongest quarters for Presto system sales. We also saw additional upgrades to Max in Q3. as customers continue to see the value of our MAX technology, which includes enhanced quality, durability, and productivity. Following the upcoming peak season in Q4, we anticipate hybrid momentum to resume in 2024. We are seeing strong interest for the Atlas MAX Poly in the sports and at leisure markets. In October, we attended Printing United in Atlanta, where we built additional momentum for this solution. Our customers are most excited about the system quality and vibrancy when printing on synthetic, natural, and blended fabrics. Moving on to the Apollo. Q3 was the first quarter where initial beta systems were installed and operational. The feedback we have received from our customers is highly encouraging, and we have seen strong indications on systems' uptime, yield, quality, and unique economics. As of today, we have three systems installed in North America, and we expect these systems to be fully operational for the coming peak season. We continue to target general availability for the Apollo in the first quarter of 2024, and we are building a good pipeline of existing and new customers. In summary, this quarter we saw a continuation of macroeconomics headwinds. However, we were able to further diversify our customer base, expand into key textile production regions, and pursue growth opportunities in new applications. Looking ahead, we will continue to take proactive measures to resume sales growth while also focusing on enhancing operating efficiencies across our entire company. Our plan is still to approach break-even on an adjusted EBITDA basis during the fourth quarter and grow profitably in 2024. Now, let me turn the call over to Lori for a closer look to our third quarter financials and fourth quarter guidance. Lori.

Thank you, Ronen, and good day to everyone. As Ronen mentioned, third quarter revenues were $59.2 million within the guidance range that we provided in August. We saw revenue growth in consumables during the quarter, both year over year and sequentially. Services sales declined slightly year over year due to significant upgrade activity from a key customer in the comparable quarter of 2022. As anticipated, system sales were once again lower on a year over year basis, but were much improved sequentially as we continued to convert orders from ITMA. Excluding purchases in EMEA from our global strategic account, system sales were up year over year. In the Americas, year-over-year growth was driven by strong system sales in Latin America following ITMA. In EMEA, consumables revenue grew nicely as utilization rose and upgrades to MAX continued. Turning to APAC, sales were flat compared with the same period last year. As Ronen described earlier, we continue to develop a meaningful pipeline of long-term opportunities in this region. Moving to margins, non-GAAP gross margin was 37.4% compared with 35.5% in the same period last year. The year-over-year improvement is due primarily to comparatively higher margin consumables representing a greater portion of total revenues. We continue to expect gross margin improvement for the balance of this year as consumables typically comprise the highest percentage of sales in the fourth quarter. Looking at expenses, total third quarter non-GAAP operating expenses were $31.1 million, a decrease of 15% from $36.7 million in the same period last year and down 9% from $34.1 million last quarter. This year-over-year improvement in expenses reflects the benefit of our active cost savings efforts, which includes our previously completed workforce reductions. The sequential improvement primarily reflects lower expenses attributable to our participation at the ITMA trade show, which as a reminder was a Q2 event. All of this resulted in an adjusted EBITDA loss for the third quarter of 2023 of $5.6 million. a significant improvement compared with the adjusted EBITDA loss of 10.5 million in the same period last year and the adjusted EBITDA loss of 10.7 million just last quarter. Adjusted EBITDA margin for the third quarter of 2023 was negative 9.5% again within the guidance range we provided in August and reflects a substantial improvement both year over year and sequentially. Our cash balance, including bank deposits and marketable securities at quarter end, was approximately $569 million. Cash used in operations during the third quarter was $7.7 million, driven primarily by the operating loss and changes in working capital. Accounts receivable increased due in part to a higher balance of extended payment terms related mainly to converted deals from ITMA. Other prospective customers are being directed to financing partners, including two new partners recently onboarded for extended payment plans. Inventories declined sequentially. We continue to remain focused on improving working capital to drive cash conversion. Since the beginning of the year, we have repurchased approximately 1.6 million shares under our share repurchase program for an aggregate amount of $36.8 million. representing an average price paid per share of $22.97. The unused balance of our previously announced share repurchase program is approximately $38 million. We plan to be more aggressive in our repurchasing efforts given our current enterprise value. Turning to fourth quarter guidance. As we discussed last quarter, we continue to plan to approach breakeven on an adjusted EBITDA basis in the fourth quarter. We currently expect revenues for the fourth quarter of 2023 to be between 55 million and 60 million and adjusted EBITDA margin to be in the negative 6% to 0% range. As a reminder, 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. As Ronen noted earlier, While the pipeline we have built for our solutions coming out of ITMA and Printing United is encouraging, we continue to see macro headwinds weighing on our sales cycle. As we move into 2024, we anticipate that our customers will likely face similar pressures to those experienced during 2023. These headwinds include constrained CapEx budgets, high interest rates, and difficulty in securing financing. Similarly, we see rising risks to discretionary consumer spending stemming from tightening credit, rising rates, higher energy prices, and other such factors. The spending behavior of the end consumer therefore could impact the investments our customers are willing to make. To date, in 2023, we have worked closely with our key customers to mitigate some of their challenges while also focusing on improving our own operating model. We have reduced costs and reallocated resources towards long-term opportunities with the goal of generating improved returns on invested capital. In 2024, we will continue to proactively work with our customers, invest in our product roadmap as planned, and improve our operating model. We are therefore planning to deliver profitable growth for the full year 2024 on an adjusted EBITDA basis. To clarify, our 2024 plan considers the typical seasonality inherent in our business model, which implies that revenue and adjusted EBITDA margin will be stronger in the second half of 2024 as compared to the first half of 2024. That concludes our prepared remarks. And with that, I will now turn it back over to Ronen to open up the call for Q&A. Ronen?

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

Thank you, Sal.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Again, if you would like to ask a question, please press star and then 1. The first question we have comes from Greg Palm from Craig Halleman Capsule Group. Please go ahead.

Yeah, thanks. Hey, everyone. Just first off, I wanted to offer my continued support Sympathies for all you and all Cornead employees and everyone in Israel. So with that said, can you just talk a little bit about contingency plans in light of everything going on? I think you alluded to building some inventories regionally, but what other steps have you taken or will you take in the coming months?

Thanks, Greg, for the question and supportive comments. Before I start talking about the contingency plan, just to remind everyone, yesterday it was exactly one month of the horrific event that happened in Israel where more than 1,500 people were slaughtered, many of them children and elderly, and more than 250 people were hostages, still hostages. and thousands of missiles were shooting all over Israel. We are still dealing with this situation with two primary focus areas. One is the well-being of our employees and supporting the community of the Israeli employees and their families. We have ten employees that their families were directly impacted by this horrific event and supporting them and also other employees that are now serving in the army. And of course, in parallel, we are putting a major focus on full business continuity. From the first day, our ink land was in full operation. I'm happy to say that it's still in full operation and we don't see any impact to the production in parallel. we immediately shipped all the needed ink supplies and spare parts to the regions to be close to the customers and to be ready for the peak season. At this moment, we are actually shipping all the consumables and spare parts already for Q1, and our ink plant is full production. Our contact manufacturers are global companies and they are fully in production, and we don't see any issue. In parallel, we have a strong and clear contingency plan in place in case that we will need to move production out of Israel if necessary. So we are working very, very closely with our customers. We sent them an email explaining the situation already three weeks back, and from that moment we are updating them on a weekly basis. And they know that they have the inks, spare parts, and even systems if they need in the regions. And we are committed that they will not feel any impact to their businesses.

Okay. Well, I appreciate all that, Kallar. I guess my second question has to do with kind of your visibility aspect. into 2024. At this point, you made, you know, some comments, there's clearly a lot of things outside of your control. But, you know, I also think there's some, you know, company specific drivers, you know, as well, whether that's new products like Apollo, you've got, you know, maybe an accelerated upgrade cycle, the max pipeline conversions from MITMA. So, you know, it sounds like you're still committed to growing in 2024. But can you give us a little bit of more color on kind of what those expectations might be?

Yeah, so before going down to the bottom line, how do we seek you for, let me give you the background. Of course, we're all familiar with the macroeconomic headwind that we're all suffering. Interest rate is high. It's very difficult to get financing and sales cycle being longer and customers delay decision and many of them delay decision after the peak season. From a more macro perspective of the textile industry and what we see on our industry, we see the continued momentum into the move of production from offshore to near-show and to on-show is very visible. Everybody's seeing it, our customers seeing it, if it's the fulfiller, but also brands and retailers moving production directly on-show, and it's a driver of growth for our business. On-demand is now, everybody's talking about it, and sustainability is a major issue that the brands need to report on how they produce the products. And overall, they are still having high inventory, and in order to reduce the inventory, they have to move into on-demand production. When we are looking at our customer base, it's already the third quarter in a row that we see INX grow. We see INX grow across the board. We see also the impression growing. And also very important is the improved utilization of systems across the fleet. This is a very, very good indication of the health of the business of our customers. In terms of the portfolio, we have by far the strongest portfolio ever. Our max technologies continue to be the mainstream And this is the new standard of the industry. We had in Q3 many upgrades and we expect that the upgrades will continue after the peak season into Q1 2024 from Atlas to Atlas Max. Our Presto Max, it was a very strong, actually the strongest quarter ever. for the Presto coming out of ITMA and also other activities that we had during Q3. So Presto Max was a very strong sell. Another indication of new products that we've released to the market last year is the Atlas Max Poly. Finally, we see traction on the Atlas Max Poly. Actually, it was the strongest quarter for the Atlas Max Poly and selling those products to mainly that leisure and sports market, a very good indication. If I would say that the best indication that we have is a diversity in our business. We're really putting a lot of focus on diversifying our customer base. We're entering more and more into the mainstream screen markets across the board. and some major players that used to do it on analog now moving into digital are using the max technology and some of them are using the the apollo and will use it uh more and more and i will touch on the apollo in a minute we see a the diversification across geographies latam was a very strong quarter for for latin in q3 and we are entering q4 with continued momentum for LATAM. We see new markets that developing for us like India, a very strong market. We're entering there to some of the biggest fulfiller textile manufacturer of the world. We installed to one of the biggest textile manufacturer in India. This quarter we installed at Presto and we expect them to continue to grow and adding more capacity. We can see that major part of our business is coming actually from retailers and brands that are adopting our technology and buying systems or producing through CornetX on the global fulfillment network. We actually, in percentage, we have a very high percentage of net new customers versus existing customers that are buying new systems. We saw it in the last few quarters, and it's evident in Q3, and we expect the same in Q4. As for the Apollo, we are in the middle of the beta. We already installed three systems in North America, and the indications are very positive from all those three betas. They see the values of the Apollo in terms of productivity, in terms of print quality, In terms of automation, what they are all saying, they are amazed that one operator can run the system at full capacity of 400 T-shirts per hour or garments per hour. Another big advantage that we are hearing from them is the reduced consumption of energy on the system and the dryer, which reduced consumption of energy by about 40%. Major advantages. We can see that the funnel and the opportunities are getting stronger for the Apollo. 2024 will be the year that we will ramp up the Apollo. We are going to commercially release it in Q1, and we are going to ramp up it in during the year. And the accelerated goals of the Apollo will be in 2025. So overall, we are very, very excited on the Apollo, and we are starting to convert the opportunities that we have into sales. As for 2024, as I mentioned, our view is based on the current macroeconomics that we see today. As far, we believe that we need to be very, we need to take the current situation and forecast a modest growth on revenue and modest profitability for 2024. But we are seeing some upside opportunities ahead of us into 2024 that I didn't touch. One of the opportunities, for example, the potential upgrades of our global strategic customer from their atlases to Atlas Max that currently we didn't take it into the account. There are other opportunities, like we are entering into some exciting new markets and applications. As I mentioned on previous calls, we are working with some of the biggest brands of the world that are connecting us with their fulfillers, some of them in China, in Vietnam, in Korea, and we see a big potential to get into a new application, a new market segment through it. We already installed few systems at those customers, but now they are testing it, and potentially it can be a growth engine. Again, we didn't take it into account. So we are looking at 2024 more from a conservative approach, and we expect modest growth in revenue and to become profitable in a modest way.

Okay, appreciate all that. I will hop back in the queue, thanks.

Thank you. The next question we have comes from Brian Draff from William Blair. Please go ahead.

Hi, thanks for taking my questions, Ronan. You know, we've spoken about this. You know, you and the team have my support, and really sorry for everything that you're going through in this situation. That said, I have to ask some questions here. So on the upgrades, you just mentioned that you're still hopeful that the large strategic account might upgrade to max. Have you learned anything between the last time you spoke to everyone and today that would give you more or less confidence that that is a possibility for 24?

Yeah, so thanks, Brian, again, for the supportive messages. And as for our strategic, global strategic customers, there's limited information that I can share, but I can tell you that only in the last few months we met several times together, not only about the max upgrades. We have a very close relationship, and we are talking about the plans for next year and even beyond that. The max, of course, was evaluated, as I mentioned before, and our global strategic, they see the value. We are still waiting for final decision from their perspective, but as I mentioned, we are not counting on it. It can be in 2024, it can be after, so we cannot put it at this stage in the plan. On top of that, of course, we are working in a different angle with them. As I mentioned before, they are going to have the Apollo during 2024. They are going to test it. At this stage, they are very excited about the future of the Apollo within their operation, and we believe that 2025 will see multiple Apollos within these strategic customers. Overall, the business is doing well. They continue to grow. And in Q3, we installed all the systems that we have shipped last year in 2022. So now those systems are ready for fully operational for the peak season. And of course, we'll see some benefit on the supplies, on the ink from their side. And as I mentioned, we are working on potential expansion, but at this stage we are not taking into account in our plans for 2024 any material investment, additional investment in capital from our strategic global account.

Okay, thanks for that. And then can you say anything about, you know, what you've seen so far in the fourth quarter since October 1st in terms of impressions, system utilization, just to give us a sense for what you're seeing as far as early signs of the holiday season?

Yeah, so of course we are monitoring very, very closely now on a daily basis. We actually see a very promising growth both on the ink side and on the impressions across the board. So when we're talking to our customers, they're very optimistic about Q4. They're ordering the supplies and we can see the traction on the impression. Of course, the coming few weeks are critical and we'll know more. This, of course, peak season is very, very important to many of our customers and also to new customers that now are in the sales cycle. and waiting to take the decision if to acquire additional systems next year after the peak season. But all in all, in terms of impressions, it looks very good. The headwind that we still see in Q4, very visible, is on capital acquisition. Still very tough environment out there. sales cycle getting longer, customers looking for financing solution and payment terms, and some of them delaying the decision.

Okay. Thank you very much. Good luck. Thank you. Thank you.

Thank you. The next question we have comes from Tavi Rosman from Barclays. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. Ronan, you mentioned potentially expanding to new applications. Can you give us an example of the type of new applications that you can see out there and that has scope to turn into meaningful revenues down the road?

Thanks, Avi. At this stage, I prefer not to disclose it because it's a big potential application for us. It's a technical area. I can say that it's in the sports market, but I cannot say more than that. What I can tell you is that we are working with some of the biggest brands of the world with them and their direct fulfiller to change the way they are producing some of the technical stuff that they are doing leveraging our technology and we are talking here on the big potential uh if we will be able to materialize it uh there's some technology a innovation um that we already brought to the table and we still continue to developing it uh it looks it looks promising this is why i'm mentioning it today uh but at this day i don't want to relate to specific application uh and the specific numbers Hopefully, in the next quarter, we'll be able to provide a bit more details.

Okay, thanks. And then on operating leverage, like looking into 2024, do you expect to further reduce the absolute OPEX level or just growing revenues and as a result, we'll return to profitable growth?

So at this stage, of course, as I mentioned, we are planning to have a modest growth of revenues. But we are taking steps on enhancing our operating efficiency and operating model moving forward. We understand that the dynamic out there is, from our perspective, still tough. And we will continue to adjust operating efficiencies and operating model accordingly. to be profitable for the entire year of 2024. As a reminder, there is a seasonality, and of course Q1 is the lowest quarter, while H2 is the strongest quarter of the year, both in terms of growth, revenues, and profitability.

Lori, do you want to add anything on that?

No, I think you covered it. Thank you.

Great. Thank you, guys, and stay safe. Thank you.

Thank you.

Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. Next question we have comes from Eric Woodring from Morgan Stanley. Please go ahead.

Super good morning, guys. Thank you for taking my questions and all the support to you guys from Team Morgan Stanley here. Two questions. Maybe Ronan first for you. Some of us saw firsthand how successful the ITMA show was for Cornete. Across the different kind of new systems and or upgrades that you sold, do you still expect to convert about 90% of those letters of intent? And second, can you help us understand kind of what percent or directionally you know, how much of those deals you believe will convert, you know, in 2023 versus what is more so in the pipeline for 2024? And then I have a follow-up. Thank you.

Yeah, so I can tell you that we're working very, very closely on all those opportunities and letter of intent and PO that we received from ITMA. ITMA was indeed a very successful event And I can tell you that most of the opportunities that we had are still live and serious. We already converted close to 20 deals, customers, out of ITMA, and we expect to have a few more in Q4, with the rest coming into H1 2024. So we are working very closely. I can tell you that most of the deals are still alive and kicking. Yes, the sell cycle is taking longer than we expected. At TITMA, some deals that we closed at TITMA are still open to deliver the system because the financing is not closed yet. But the customer is serious. We hardly lost any deals out of those opportunities that we had.

No, thank you. That is a very helpful color. And then maybe as my follow-up, you know, obviously it's a challenging world right now. I'm sure you're not necessarily happy with the level of underperformance in the stock since 2Q earnings. It's just the nature of the markets today, unfortunately. So maybe my question is, I can sense from you a belief in the products, a belief in the pipeline, your ability to manage costs more efficiently, and you have something like 70% of your market cap in cash and no material debt. So why aren't you buying back more stock in the near term to send a message of confidence to the market? And that's it for me. Thanks so much.

Hi, Eric. Well, let me just respond to you. If you remember what I said in my prepared remarks, the average execution price of our buyback has been about $22 per share. And at that price, we believe that the market had meaningfully undervalued us. So now with the stock price just a few dollars away from cash value, as you mentioned, we see an even more attractive opportunity to repurchase our shares. And as a result, we plan to be much more aggressive in using the remainder of our existing share repurchase program because we do believe that combined with our existing pipeline of investment opportunities, this is a very strong use of a portion of our cash balance.

Great. Thanks so much for the color and good luck, guys. Thank you, Eric.

Thank you. The next question is from Chris Moore with CJS Securities. Please proceed with your question.

Terrific. Thank you. Appreciate taking a couple questions. Obviously, we talk a lot about the macroeconomic headwinds continue to create uncertainty. Are there certain products that will likely be less impacted in fiscal 24 than others, regardless of the macro backdrop?

So when you relate to the products, I assume you relate to system because part of the products, of course, are the ink and supplies. And supplies, I mentioned, continue to go nicely in Q3. And we expect it to go in Q4. And I'm talking year over year and sequentially, of course. And also in 2024, we expect supplies to continue to go as we see the consumption going with our installed base. And also we are entering into new markets. a new customer and selling additional systems. In terms of systems, look, the entire dynamic is tough. What I mentioned before, the growth that we see more in the retails and brands, we see those customers getting and understanding that they have to change their business model into on-demand and to get rid of their inventory, to react faster to the market, and they have no choice. This is the time for them to change, and many of them are jumping into it, and Kornit is the only one that can provide them the quality and the productivity and the TCO that's required. So we expect to see the continued growth coming from these places and also from the screen replacement. The DTF, as I mentioned, direct to... Fabric is another growth engine within Cornete, and there we are seeing the growth coming more from places like Latin America, specifically Brazil, and India. Got it. I appreciate that color.

Maybe just as my follow-up, Laurie had mentioned two new partners on the financing side. Can you just give a little bit more information detail or an update there? Was Q3, for example, meaningfully helped by the financing options?

Sure. So as I said earlier, we have onboarded two new financing partners. In the third quarter, more than 20% of our systems were financed by financing partners, excluding the two new ones that we just onboarded. So it is providing a good source of support for our business, and we certainly hope to expand that in the future. These two new partners, one is in Europe and one is in the U.S., so we're covering those areas as best as we can as well.

Got it. That's a helpful number. Thanks, Laurie.

Thank you. Our next question is coming from Jim Rusciutti with Needham. Please proceed with your question.

Hi. Good morning. This is Chris Grenga, honor for Jim. Thank you for taking the questions. You had mentioned that there was a bit of a pause on the upgrades in Q3 as people get ready for peak season. I'm just curious what the runway is for continued upgrades in Q4 and beyond, if you could elaborate on that potential. Thank you.

Thanks, Chris. Let me clarify. Q3 was another good quarter for upgrades from Atlas to Atlas Maxx. So Q1, Q2, Q3 was excellent quarter in terms of upgrades and meeting our expectation and plans for this year. We didn't expect to continue in Q4. Q4, our customers are focusing on peak season. They need the machines in full productivity, and they cannot allow the machine to be upgraded, which take the machine a few days off. So we don't expect in Q4, and this is the pause, On the upgrades, we do expect to continue the upgrade cycles in Q1 2024. We already have orders for customers for Q1 2004. And as I mentioned, we still didn't receive the order from our global strategic customer for that, and this is a potentially upside. Got it. Thank you.

And maybe just as a follow-up to the question asked earlier about the extended payment plans, have you found that for customers on the margin that this is something that is making their purchase decision easier and how much uptake do you expect with these financing plans longer term? Thank you.

I do believe that the opportunity to extend have extended payment terms on our products is helpful. In some cases, it does make all the difference for the timing of a customer when they're willing to step up to the plate. As to how much is going to depend in the future, it's unclear to me right now exactly how much that could be, but I do believe that it will represent a significant portion at least over the next 12 months or so.

Great. Thank you very much.

Thank you. Our next question is coming from Greg Palm with Craig Hallam Capital Group. Please proceed with your question.

Yeah, thanks. Just a couple of quick follow-ups. On the capital allocation front, following up on a previous question, is there anything that would preclude you from doing an accelerated share repurchase? Would that require the same kind of a court approval as a normal buyback?

We have the court approval for the buyback that we announced.

That court approval will take us all the way through into Q1. So we have that approval. And we can always ask for another.

Yeah, I guess I'm asking if you were to use that up, it sounds like you're going to be more aggressive. If you use that up, and want to do something like an accelerated share or purchase. Are you able to do that? Would that require the same kind of court approvals and normal buyback?

Yes. Well, yes, you require the court's approval to do a buyback, whether you call it accelerated or not.

Yep. Okay. Understood. And I guess just, you gave some commentary on, on revenue and OpEx. What about gross margin, you know, for, for next year? Um, I presume that mix will be positive if we still assume consumables are a greater portion of mix than in years past. But any other way to sort of qualify how you're thinking about gross margin and the continued improvement there in fiscal 24?

Well, let's start at the beginning. So as you mentioned, there's the issue of the mix between products and services and consumables. That certainly has an impact. The second impact is that we have been throughout this year taking cost-saving measures in cost of sales, which we hope to also see the benefit. It takes a bit more time to see it, but we do expect to see some benefit. We also have other initiatives aimed at improving efficiencies in matters that affect gross margin. But again, the major benefit that you see from these types of programs usually takes a little bit more time than you can affect in operating expenses. And also, improvement in gross margin is, of course, in our case, somewhat dependent upon volume. So as volumes improve, we would also see better gross margins.

Okay, understood. I would just add, you should expect a Q4, of course, improvement in the gross margin due to the mix of ink supplies versus the system. And for the overall 2024, we do expect a modest improvement on gross margin as well. Some of it on the efficiency that Laurie was mentioning, some of it is related to volume.

Yep. Okay. All right. Thanks again for taking the questions.

Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Jared Maiman for any additional closing remarks.

Hey, first of all, thank you all. Go ahead. Thank you, operator, and thank you for joining us all.

Should you have any follow-ups, please don't hesitate to reach out to me or Sarkis.

Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.