Kornit Digital Ltd. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter report; the provided filing text does not give a clear Q4-only income statement or cash flow. Figures below are U.S. dollars unless stated otherwise.
Business context
Kornit develops and sells digital textile-printing systems, inks and consumables, software, and services for direct-to-garment (DTG) and roll-to-roll (R2R) printing. Its model combines equipment sales with recurring, generally higher-margin sales of proprietary inks and consumables. At year-end, it reported more than 1,100 customers and 412 employees.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $114.1m | $108.7m |
| Gross profit / margin | $54.1m / 47.4% | $49.4m / 45.5% |
| Operating income (loss) / margin | $(2.1)m / (1.8%) | $1.4m / 1.3% |
| Net income (loss) | $(2.0)m | $0.8m |
| Operating cash flow | $6.0m | $1.0m |
- Revenue comprised $50.5m of systems, $51.5m of ink and other consumables, and $12.1m of services. Services exceeded 10% of revenue for the first time.
- Cash and cash equivalents were $18.6m; short-term bank deposits were $4.5m; marketable securities totaled $74.4m. Combined, these were approximately $97.5m.
- Working capital was $63.9m, down from $68.7m. Total assets were $178.4m and shareholders’ equity was $150.7m.
- The company reported no borrowed debt. It had $3m of unsecured bank credit lines, undrawn at year-end, subject to covenants.
- Investing cash outflow was $46.7m, primarily reflecting purchases of marketable securities; financing cash inflow was $36.4m, principally from the company’s follow-on offering.
Material changes versus FY2016
- Revenue rose 5.0%, but systems revenue fell 12.9% to $50.5m. Management attributed the decline chiefly to delayed permits for a large U.S. customer site and longer Vulcan sales cycles.
- Ink and consumables revenue increased 20.1% to $51.5m, supported by higher sales volumes and a larger installed base. Service revenue grew 54.1% to $12.1m, helped by spare parts, service contracts and upgrades.
- Gross margin improved 1.9 percentage points, principally because ink and consumables formed a larger share of revenue and their margins improved with scale. Higher services margins also contributed; lower systems sales weighed on systems margin.
- Operating expenses increased 17.1% to $56.2m; R&D reached $20.8m and sales and marketing $21.3m. Kornit recorded a $0.5m restructuring charge related to moving its U.S. headquarters to New Jersey. The resulting operating loss was $2.1m.
- Operating cash flow improved to $6.0m, including a $9.1m reduction in receivables and lower days sales outstanding (74 days versus 106). This was partly offset by a $10.6m increase in inventory and lower trade payables.
Outlook, commentary, risks and unusual items
- Outlook: Management said cash resources and operating cash flows were expected to cover anticipated requirements for at least 12 months without drawing credit lines or using significant offering proceeds. No specific revenue or earnings guidance is provided in the filing text. Management anticipated continued investment in R&D, sales and marketing, and facilities, with operating expenses expected to rise in the near term.
- Products and growth plans: The company launched Avalanche R-Series systems in 2017 and its Avalanche-line improvements in January 2018. Strategy centers on growing existing accounts, winning high-volume customers, expanding digital printing adoption and broadening addressable markets. Acceptance and sales-cycle duration for newer systems remain uncertain.
- Customer concentration: Amazon accounted for approximately 13% of 2017 revenue, down from 16% in 2016; Hirsch, a U.S. distributor, accounted for 18%. The ten largest customers represented approximately 55% of revenue. Amazon-related revenue declined to $14.4m from $17.9m.
- Amazon arrangements: The five-year agreement has no minimum spending commitment and includes volume rebates, service requirements and potential delivery credits. Warrants for up to 2.93m shares vest based on Amazon payments; 513,126 shares had vested by year-end. The warrant’s noncash fair-value accounting reduced revenue by $2.9m in 2017.
- Supply and execution risks: FujiFilm Dimatix is the sole print-head supplier; certain ink chemicals and components also have limited sources. Assembly relies on third-party manufacturers in Israel, and a new manufacturing arrangement was still being negotiated. Disruption, qualification delays or component shortages could affect deliveries.
- Other key risks: Digital printing adoption may be slower than expected; analog and digital competition may pressure pricing and margins. Results are seasonal and can fluctuate with system delivery timing. Kornit is exposed to U.S. dollar/Israeli shekel and euro movements, geopolitical and operational risks in Israel, environmental permitting, and customer concentration.
- Unusual and accounting items: Inventory write-offs were $3.0m in 2017. The U.S. Tax Cuts and Jobs Act led to a provisional $0.355m deferred-tax remeasurement expense; estimates could be adjusted as guidance developed. The company reported $0.6m of unrecognized tax benefits at year-end and a $0.7m total contractual obligation for uncertain tax positions.
- Contingencies and controls: Management said ordinary-course legal matters were not expected to have a material adverse effect. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2017; the auditor did not provide an internal-control attestation because Kornit qualified as an emerging growth company.
Most important facts for investors to verify
- Whether delayed customer permits and slower Vulcan sales cycles were resolved, and whether systems revenue recovered after FY2017.
- Amazon order, payment and warrant-vesting activity; rebates, service-level credits and the customer’s share of future revenue.
- Whether ink and service growth can offset equipment volatility while sustaining gross-margin improvement and returning the company to operating profitability.
- Inventory levels, write-offs, receivables and cash conversion, including whether the 2017 inventory build produced expected demand.
- Status of manufacturing arrangements and continuity plans for sole- or limited-source print heads and other components.
- Effect of the Tax Act estimates, Israeli tax incentives and uncertain tax positions on future tax expense and cash taxes.