Kornit Digital Ltd. — FY2016 Form 20-F Summary
Business context and reporting period
This is Kornit Digital’s annual report for the fiscal year ended December 31, 2016, not a standalone fourth-quarter report. The Israeli company develops and sells digital textile-printing systems, inks and consumables, software, and services for direct-to-garment (DTG) and roll-to-roll (R2R) printing. Financial statements are prepared under U.S. GAAP; amounts below are U.S. dollars.
Financial performance and condition
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $108.7 million | $86.4 million |
| Gross profit / margin | $49.4 million / 45.5% | $40.6 million / 47.0% |
| Operating expenses | $48.0 million | $34.8 million |
| Operating income / margin | $1.4 million / 1.3% | $5.8 million / 6.7% |
| Net income | $0.8 million | $4.7 million |
| Diluted earnings per share | $0.03 | $0.18 |
| Operating cash flow | $1.0 million | $(2.2) million |
Revenue grew 25.8%. Systems and services revenue rose 27.2% to $65.9 million, while ink and consumables rose 23.8% to $42.8 million. Americas contributed 66.3% of revenue, EMEA 22.7%, and Asia Pacific 11.0%.
Gross margin declined 1.5 percentage points, as higher-margin systems, scale benefits and service-contract growth were more than offset by a $2.5 million nonrecurring inventory repurchase charge associated with the SPSI acquisition and approximately $2.0 million of Amazon-warrant-related revenue reduction. Excluding those two items, management reported gross profit of $53.9 million and gross margin of 48.7% for 2016.
Operating expenses increased 37.7%, with R&D up 45.5%, sales and marketing up 37.2%, and general and administrative expense up 29.0%. The filing attributes the increase mainly to hiring, product development, marketing, facilities expansion, and acquisition-related amortization and integration costs. Share-based compensation was $3.0 million, versus $2.4 million in 2015.
At year-end, cash and cash equivalents were $22.8 million and marketable securities were $38.2 million, for $61.0 million in combined cash and investments. Working capital was $68.7 million; total assets were $140.0 million and shareholders’ equity was $107.2 million. The company reported no borrowed debt; $4.1 million of bank credit lines were undrawn. Operating cash flow was modest despite positive net income, with receivables increasing $9.3 million and inventory increasing $6.1 million. DSO rose to 106 days from 95.
Material changes versus the prior comparable period
- Revenue rose 25.8%, but operating income fell to $1.4 million from $5.8 million and net income fell to $0.8 million from $4.7 million.
- Gross margin decreased to 45.5% from 47.0%; operating margin decreased to 1.3% from 6.7%.
- Cash and cash equivalents increased to $22.8 million from $18.5 million. Marketable securities totaled $38.2 million at year-end, compared with $33.7 million in 2015.
- In July 2016, Kornit acquired SPSI’s DTG printing assets for stated consideration of $11.4 million, including $9.2 million cash and contingent payments. The acquisition added customer relationships, goodwill, and direct access to a large screen-printing customer base.
- Vulcan entered commercial sales in the fourth quarter of 2016. Capital expenditures, including the SPSI asset purchase, were $14.7 million.
Outlook, management commentary, risks and unusual items
Management expects continued investment in R&D, sales and marketing, and international operations, while seeking growth through existing customers, high-volume accounts, new products, and increased recurring ink and consumables sales. It expects operating expenses to rise in absolute terms in the near term, but more slowly than in prior years. No quantified FY2017 revenue or earnings guidance is provided. Management said existing resources and operating cash flows were expected to meet anticipated requirements for at least 12 months.
In January 2017, Kornit entered a five-year master purchase agreement with an Amazon affiliate. There are no minimum purchase commitments. Kornit agreed to supply systems and consumables, provide services and warranties, and issued an affiliate warrants for up to 2,932,176 shares at $13.03, vesting in connection with qualifying customer payments up to $150 million. Warrant fair value reduces reported revenue as related sales are recognized; rebates, delivery penalties, support obligations, and supply-continuity requirements may affect results.
Other notable items include the January 2017 follow-on offering, which provided approximately $35.1 million net proceeds to the company, and the $2.5 million SPSI-related inventory charge. The filing identifies material risks from customer and distributor concentration (Hirsch accounted for 21% of 2016 revenue; Amazon approximately 16%, net of the warrant-related amount), seasonality, dependence on digital-printing adoption, competition, reliance on limited-source suppliers including print-head supplier Fujifilm Dimatix, and operations concentrated in Israel. Currency exposure, tax-benefit eligibility, product acceptance, and execution of growth plans also pose risks. The company said it had no off-balance-sheet financing arrangements and that pending or recent legal matters were not expected by management to materially affect financial condition or results.
The filing reports effective disclosure controls and effective internal control over financial reporting as of December 31, 2016. The external auditor audited the financial statements, but did not provide an internal-control attestation because Kornit qualified for the emerging-growth-company exemption.
Important facts for investors to verify
- Assess whether revenue growth can translate into improved operating margins after the sharp FY2016 profit decline and expense expansion.
- Track cash conversion, receivables, DSO, inventory, and the company’s $34.2 million of year-end purchase commitments.
- Monitor actual Amazon purchases, warrant vesting and dilution, rebates, delivery penalties, and the agreement’s lack of minimum spending commitments.
- Evaluate customer and channel concentration, including the renewal and performance of the Hirsch distribution relationship, and the integration and returns from the SPSI acquisition.
- Review the filing’s internal numerical inconsistency: the selected financial data table shows FY2016 net finance income of $464,000, while the audited statements and related discussion show $46,000. The audited statements report $46,000.