Kornit Digital Ltd. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP and audited by EY member firm Kost Forer Gabbay & Kasierer, which issued an unqualified opinion.
Business context
Kornit develops and sells digital textile-printing systems, inks and consumables, software, and services, principally for direct-to-garment (DTG) and direct-to-fabric (DTF) markets. Its recurring ink and consumables sales complement system sales. At year-end, the company reported more than 1,200 customers and 444 employees. Revenue was concentrated geographically in the Americas (57.2%), EMEA (31.8%), and Asia Pacific (11.0%).
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $142.4 | $114.1 |
| Gross profit / margin | $69.9 / 49.1% | $54.1 / 47.4% |
| Operating income (loss) / margin | $5.6 / 3.9% | $(2.1) / (1.8%) |
| Net income (loss) | $12.4 | $(2.0) |
| Diluted earnings (loss) per share | $0.35 | $(0.06) |
| Cash from operating activities | $33.4 | $6.0 |
| Cash and cash equivalents | $74.1 | $18.6 |
| Working capital | $107.6 | $63.9 |
- Revenue comprised systems of $65.8 million, ink and consumables of $59.9 million, and services of $16.6 million. Systems revenue rose 30.4%, ink and consumables 16.4%, and services 37.2% year over year.
- Gross margin improved as sales shifted toward higher-throughput industrial systems and inventory write-offs fell by $1.2 million. Operating expenses rose 14.4% to $64.3 million, but declined as a share of revenue.
- Net income included a $5.4 million income-tax benefit, primarily reflecting release of $5.5 million in deferred-tax valuation allowances. This benefit materially increased reported earnings.
- Investing cash flow was $16.7 million, including proceeds from marketable securities, partly offset by purchases of securities and $7.3 million of capital expenditures. Financing cash flow was $5.5 million, mainly from option exercises.
- Year-end liquidity included $74.1 million of cash, $5.0 million of short-term deposits, and $48.6 million of marketable securities, totaling $127.7 million. The company reported no borrowed debt and had $3.0 million of available, undrawn bank credit lines.
- Inventory was $30.0 million, down from $34.9 million; trade receivables were $22.0 million. Days sales outstanding improved to 56 from 74.
Material changes versus the prior year
- Revenue increased 24.8%, supported by growth across systems, consumables, and services; FY2017 had recorded an operating and net loss.
- Operating profitability recovered to $5.6 million, while gross margin increased 1.7 percentage points to 49.1%.
- Operating cash flow rose to $33.4 million. The filing attributes working-capital support to lower receivables and inventory and higher trade payables, alongside earnings and noncash adjustments.
- Amazon-related revenue was $24.2 million in 2018 versus $14.4 million in 2017. Amazon represented approximately 17% of 2018 revenue; the ten largest customers together represented 54%.
- In February 2019, Kornit ended its primary North American distributor arrangement with Hirsch and moved to a direct-sales model, acquiring related business assets for approximately $4.7 million. Hirsch had represented 15% of 2018 revenue.
Outlook, risks, and unusual items
- Outlook: No specific numerical revenue or earnings guidance is provided. Management believed cash flows and existing resources would fund anticipated requirements for at least 12 months without drawing credit lines or using significant offering proceeds. It planned continued R&D, sales and service investment and expected operating expenses to grow at a more controlled pace. Management noted historical seasonality, with the first quarter typically weakest.
- Channel transition: The North American shift to direct sales may disrupt sales temporarily and raise personnel and transition costs; the filing gives no assurance that direct selling will increase sales.
- Customer and contract concentration: Revenue depends significantly on a small group of customers. Amazon’s agreement includes volume-based rebates, service-level obligations and warrants; warrant fair-value reductions lowered recognized revenue by $4.6 million in 2018.
- Execution and supply risks: Digital-printing adoption, new-product acceptance, competition, and system sales timing may affect growth and margins. Key components include sole- or limited-source supplies, notably print heads. Manufacturing and most R&D are concentrated in Israel.
- Tax and facility matters: The Israeli Tax Authority was auditing tax years 2013–2016; uncertain tax positions were $2.2 million at year-end. A new Kiryat Gat facility was under construction, but the filing gives differing expected completion dates of 2020 and 2021; its land agreement also raises approval-related risk.
- Other exposures: Currency movements, especially the shekel, can affect costs; hedges cover only part of exposure. Political or military disruption in Israel, environmental compliance, cyber events, and product defects are identified risks. Management reported no litigation it believed would materially affect financial position or profitability.
- Controls: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor did not provide an internal-control attestation because Kornit qualified for the emerging-growth-company exemption.
Investor facts to verify
- How much of FY2018 earnings and future tax profile depends on the valuation-allowance release and Israeli tax incentives.
- Whether system-sales growth, consumables attachment, and service-margin performance continue as the installed base expands.
- The impact of the Hirsch transition on North American revenue, expenses, customer retention, and working capital.
- Amazon concentration, contract rebates and warrant-related revenue reductions, and the pace of Amazon orders.
- Progress, cost, approvals, and timing for the Kiryat Gat facility, given the filing’s differing completion estimates.
- Exposure to single-source suppliers, the Israeli Tax Authority audit, foreign-exchange movements, and potential future control-attestation requirements.