Kornit Digital Ltd. annual report, Q4 FY2020

Kornit Digital Ltd. — FY2020 Form 20-F Summary

Period and scope: This is an annual report for the fiscal year ended December 31, 2020, filed March 25, 2021—not a standalone Q4 report. Financial statements are prepared under U.S. GAAP and audited; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Amounts below are in U.S. dollars unless stated otherwise.

Business context

Kornit develops digital textile-printing systems, inks and consumables, software, and related services, primarily for direct-to-garment and direct-to-fabric markets. Its model combines system sales with recurring consumables and service revenue. The company reported approximately 1,300 active customers and 672 employees at year-end. In August 2020, it acquired cloud-workflow provider Custom Gateway for $16.9 million, expanding its on-demand production software offering.

Financial results and liquidity

MetricFY2020FY2019
Revenue$193.3 million$179.9 million
Gross profit / gross margin$87.8 million / 45.4%$82.1 million / 45.6%
Operating income (loss) / margin($6.7) million / (3.5%)$7.6 million / 4.2%
Net income (loss) / diluted EPS($4.8) million / ($0.11)$10.2 million / $0.26
Cash provided by operating activities$32.4 million$11.0 million
  • Revenue grew 7.5%. Ink and consumables rose 18.3% to $77.1 million, services rose 22.1% to $28.4 million, and systems revenue declined 3.9% to $87.8 million.
  • Gross margin edged down as higher payroll and a $2.4 million year-over-year increase in inventory write-offs weighed on results. Operating expenses increased 26.9% to $94.5 million, including R&D growth of 40.4% and G&A growth of 44.1%.
  • Operating cash flow improved, but included substantial working-capital movements: receivables used $9.5 million and inventory used $15.8 million, partly offset by a $24.3 million increase in deferred revenue and customer advances.
  • Year-end cash and cash equivalents were $125.8 million; short-term deposits were $224.8 million and marketable securities totaled $85.4 million. Together these were approximately $435.9 million. Working capital was $387.9 million; total assets were $629.0 million.
  • The company reported no borrowed debt outstanding. It had an undrawn $1.1 million bank credit line. Operating lease liabilities were $22.6 million.
  • Capital expenditures were $13.5 million. Investing cash outflow was $114.6 million, including investments in deposits and securities and the Custom Gateway acquisition. Financing cash inflow was $167.0 million, primarily from the September 2020 offering, which generated $162.0 million net proceeds for the company.

Changes versus the prior year

  • Revenue growth resumed despite COVID-19 disruption early in the year; management said Q3 and Q4 reflected a return to strong year-over-year revenue growth, but this filing does not provide standalone Q4 financial values.
  • Profitability weakened substantially: Kornit moved from operating and net income in 2019 to operating and net losses in 2020, despite higher revenue and gross profit.
  • Liquidity increased following the equity offering. Shares outstanding rose from 40.7 million at year-end 2019 to 46.0 million at year-end 2020.
  • Customer concentration increased: the ten largest customers represented approximately 55% of revenue in 2020, versus 45% in 2019. Amazon accounted for 11% of 2020 revenue, versus 12% in 2019, or $21.1 million.

Outlook, risks and unusual items

  • Outlook: The filing gives no quantified revenue or earnings guidance. Management expects to continue investing in R&D, sales and marketing, service capacity, and digital workflow solutions. It believes e-commerce growth, on-demand production and supply-chain reshoring may support demand, while cautioning that COVID-19 and longer sales cycles make forecasts and pipeline conversion less predictable.
  • COVID-19: Customer orders were deferred at the start of the pandemic; first-quarter revenue was significantly below management expectations, and second-quarter orders remained below the 2019 comparison. Supply-chain effects also pressured cost of goods sold and gross margin. Operations and customer activity remained subject to changing restrictions.
  • Amazon arrangements: Revenue is reduced for the fair value of customer warrants as related sales are recognized. The company disclosed $109.1 million of total unrecognized warrant-related revenue reductions. A new 2020 warrant can vest based on up to $400 million of Amazon purchases over five years; vesting depends on future payments and does not represent a purchase commitment.
  • Facility project: The new Kiryat Gat facility and production line were expected to be completed toward the end of 2021, at an estimated total cost of NIS 78.0 million (approximately $24.3 million). COVID-related delays had occurred; Kornit and contractor Galil had raised mutual claims, stopped production-line work, and were discussing a commercial settlement. The land agreement also presents risk if required Israeli Lands Authority approval is not obtained.
  • Other material risks: Dependence on certain single-source components and Israeli contract manufacturers; product acceptance and competition; customer concentration and order variability; foreign-exchange exposure; cybersecurity; tax assessments; and political, military and operational risks in Israel. The Israeli Tax Authority audit covers 2013–2018; the company appealed assessments for 2013–2014 and objected to assessments for 2015–2018.
  • The company recorded $5.0 million of inventory write-offs in 2020, compared with $2.6 million in 2019. Auditors identified inventory valuation and Custom Gateway acquisition accounting as critical audit matters; neither changed the unqualified audit opinion.

Most important facts for investors to verify

  • Whether revenue growth and consumables/service momentum continue, and whether systems sales recover after pandemic-related deferrals.
  • Whether expense growth moderates and operating margins recover from the 2020 loss; assess the effect of share-based compensation, which rose to $10.0 million from $6.6 million.
  • Cash conversion and working-capital quality, including rising receivables, days sales outstanding of 98 versus 82, inventory growth, and the large increase in customer advances.
  • Actual costs, timing, contractor resolution and regulatory approvals for the Kiryat Gat facility and production line.
  • Amazon revenue concentration, warrant vesting and associated future revenue deductions; also monitor top-customer concentration.
  • Outcome and potential financial impact of the Israeli tax dispute, and progress integrating Custom Gateway.