Kornit Digital Ltd. Q3 FY2020 Earnings Call

Greetings, and welcome to Kornit Digital's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to your host, Kelsey Turcotte of The Blueshirt Group. Thank you. You may proceed.

Thank you, operator. Good afternoon, everyone, and welcome to Kornit Digital's third quarter 2020 earnings conference call. 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 objectives, plans, strategies, statements of preliminary or projected results of operations or our financial condition and all statements that address activities, events or developments that the company intends, expects, projects, believes, or anticipates will or may occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties and are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by the forward-looking statements. The company's actual results could differ materially from those anticipated for many reasons, and I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's quarterly report on form 6-K, filed on August 11, 2020, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements made on this call hereafter, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, 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 measures to the most directly comparable GAAP measures can be found in the company's earnings release published today, which is posted on the company's Investor Relations site. Before I turn the call over to Ronen Samuel, Kornit's Chief Executive Officer, and Guy Avidan, Kornit's Chief Financial Officer, I would like to invite you to a virtual fireside chat next Tuesday, August 18, at 10:30 A.M. Eastern Time to further discuss Kornit's acquisition of Custom Gateway and the related market opportunity. This is an RSVP only event. For further information, please go to the Investor section of Kornit's website. I'll now turn the call over to Ronen Samuel, Kornit's Chief Executive Officer.

Thank you, Kelsey. Good evening and thank you for joining us on this afternoon earnings call. I'm pleased to share with you that we significantly exceeded our expectations for the third quarter, and we are improving our outlook for the second half of the year. Total revenue grew 21% year-over-year to $57.4 million net of $2.2 million in warrants related to a global strategic account, and we delivered exceptional sequential growth of 53%, reflecting the sharp growth in e-commerce and on-demand production. Top-line results were driven by a strong demand for industrial systems in North America and EMEA, and an extraordinary quarter for consumables and services across all regions. On the services side, I'm proud of the work our teams have done to bring this important business to sustainable profitability, a quarter ahead of plan, while maintaining focus on customer excellence. Now that we have reached this important milestone, we expect services margin to improve as we continue to scale the business. Bottom line, we delivered a strong operating margin for the quarter, and we expect to overachieve our operating profit objectives for 2020. Our industry is at an inflection point, and we are focused on leading the transformation of the industry into on-demand sustainable production. Globally, we are partnering with our customers to deliver incremental demand for systems, ink, and services as we enter the holiday season. In the Americas, we are engaged in large-scale expansion projects with key customers like Stakes, Printful, TSC, and others. One of these interesting projects is a unique partnership for integrated on-demand fulfillment of Delta Apparel and Hot Topics, the iconic retailer, both fueled by Kornit solutions. This revolutionary collaboration allows a seamless consumer experience of on-demand digitally printed apparel with reduced shipping costs to the end consumer. It also enables on-demand store-level replenishment and immediate out-of-stock fulfillment. In EMEA, customers and partners are fully reengaged, and we are experiencing a resurgence like what happened in the Americas in mid to late April. Our recent investment in scaling out direct UK operations is yielding immediate results and significant pipeline build-up. In APAC, we see encouraging signs of industry recovery, and we continue to scale the local sales and support infrastructure required to deliver on global expansion projects with strategic customers. As part of our continued focus on this important region, we are excited to welcome a Tokyo-based seasoned executive, Ilan Elad, to lead Asia Pacific and scale our operation in this region. From a product perspective, it was a record shipment quarter for the Atlas system. This unprecedented success gives us huge confidence to accelerate R&D efforts and go-to-market planning for the next generation of applications that this platform will support. We expect Atlas to be the foundation for continued growth in the years to come. Our Vulcan Plus also continues to have considerable traction with customers investing in fleets to produce large volumes of midsized ones. On the DTF side, we are seeing phenomenal momentum fueled by the accelerated transition of the fashion industry to on-demand sustainable textile manufacturing. Customers realize the huge benefits of this business model in the fashion and home decor markets and are telling us that Kornit offers the best end-to-end pigment-based retail quality solution to support this model. In the third quarter, we closed an important deal with Creazioni Digitali, a leading Italian digital fulfillment partner to some of the largest fashion brands in the world, including Versace. The single-step sustainable process of the Presto, alongside the desirable quality and sustainability, perfectly matches what both Creazioni and the brands are looking for. Important wins like this at the heart of the fashion industry make us confident in our ongoing ability to disrupt this large market with our unique technology, and we are already witnessing massive growth in our DTF supplies. Executing with our global strategic account remains very strong, and our teams are working around the clock to deliver on the various projects we have in place. The impact of our acquisition of Custom Gateway is exceeding expectations, and we are pleased with the progress of our integration. The expansion of our Cloud Software Workflow solutions is at the heart of our strategy, and with Custom Gateway, we offer a unique proposition to the market that handles all steps of data-driven efficient on-demand production. Since the announcement, our teams globally have generated over 80 new opportunities, and we have already received multiple orders. Exciting conversations with major brands and fulfillers that are looking to partner with Kornit to transform the supply chain and are now looking to adopt our Cloud Workflow platform to enable and streamline the entire on-demand production process. Our decision to continue to invest in the business during the pandemic is paying big dividends, and I'm very pleased that we are in a position to increase the outlook we provided for the second half of the year from low double-digit year-over-year revenue growth to 25% year-over-year growth. Looking forward, we see very strong momentum, and we are entering into 2021 with a very strong backlog. Before I turn the call over to Guy, I would like to welcome our new shareholders and thank them for the trust in our teams. These are exciting times for Kornit and for the entire textile industry. We are extremely confident in executing on the massive opportunity ahead of us. Now, I will turn the call over to Guy for a closer look at our numbers and guidance.

Thanks, Ronen, and good evening, everyone. We are very pleased with our strong third quarter results and our outlook for the final quarter of 2020. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP pro forma results. Our third quarter non-GAAP pro forma results reflect adjustment for the following items: stock-based compensation expenses, which totaled $2.7 million; total amortization expenses related to the acquisition of intangible assets in the amount of $396,000, including expenses related to the acquisition of Custom Gateway in the amount of $315,000; acquisition costs related to Custom Gateway, totaling $648,000; and non-cash deferred tax expenses in the amount of $121,000. Adjustments related to COVID-19 pandemic this quarter were $74,000. We do not expect additional COVID-related expenses. As the company has significant operating lease liability in foreign currency, we incur foreign exchange gains or losses from the revaluation of these liabilities. These gains and losses may vary from period to period and do not reflect the true financial performance of the company. This quarter, foreign exchange gains associated with ASC 842 were $110,000. A full reconciliation of our results on a GAAP to non-GAAP basis is available in our earnings press release issued earlier today and on the investor section of our website. Third quarter revenue net of $2.2 million net cash warrants impact was $57.4 million, an increase of 21.4% compared to the prior year period, and an increase of 53.3% sequentially. From a year-over-year perspective, we continue to see very healthy demand from our customers serving the online market in the US for our products and services and significant revenues from our global strategic customers outside of the US. Services revenue for the third quarter was $8.1 million net of $165,000 warrants impact, accounting for 14.1% of total revenues, an increase of 103.7% compared to the prior year period and an increase of 45.3% sequentially. Beginning this quarter, Custom Gateway revenue and cost of goods are included in services. Net of Custom Gateway and excluding the warrants impact, services generated high single-digit margin compared to a 44% loss in the prior year period. The amount attributed to the non-cash impact of warrants in the third quarter was $2.2 million, or 3.6% of revenues, compared to $2.4 million, or 4.9% of revenues in the third quarter of 2019 and $842,000, or 2.2% of revenues sequentially. As Ronen mentioned, it was a strong quarter in the Americas, with 59% of total revenues coming from that region, 33% from Europe, the Middle East and Africa, and 8% from the Asia Pacific region. In the third quarter, we had three customers that each contributed more than 10% of total revenue. Our top 10 customers accounted for 58.3% of our total revenue compared to 56.3% in the prior year period. Moving to profitability, non-GAAP gross margin in the quarter, net of warrants impact, was 48.1% compared to 47.7% in the prior year period and 44.1% sequentially. As previewed during our second-quarter earnings call, we're back to our pre-COVID gross margin level of 50% excluding the impact of warrants. On a GAAP basis, gross margin in the quarter was 47.1% compared to 47% in the prior year period and 42.2% sequentially. Moving to our OpEx items, I'll discuss these items on a non-GAAP basis, which exclude non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation included in today's press release. The textile industry is experiencing an evolution that we have predicted for some time and has been further accelerated by our customers' need to transition from analog printing to digital. Not only has this created a tailwind in our system sales, but also significantly boosted ink and consumable consumption. This evolution has been further accelerated by COVID and represents significant market opportunity for Kornit. As Ronen mentioned, we continue to invest in the business to accelerate growth. Each of the following line items reflect headcount investment to build the infrastructure necessary to support the growth opportunities ahead of us. We ended the quarter with 657 employees, a year-over-year increase of 142 employees, and a sequential increase of 83, predominantly due to 53 new employees joining us from Custom Gateway. Looking forward to the fourth quarter and the beginning of 2021, we're planning to net increase headcount organically by approximately 20 employees per quarter, predominantly in customer-facing and technology functions to strengthen our leading position in the market and merge our workflow solution. Adjusted research and development was 13.8% of sales, or $7.9 million compared to 11.2% of sales, or $5.3 million in the prior year period. Additional R&D costs are attributed to headcount addition and use of materials. Sales and marketing expenses in the quarter were $7.8 million, or 13.5% of sales, compared to $7.1 million, or 15.1% in the prior year period. The relative decline in sales and marketing expenses this quarter is mainly attributed to the absence of trade shows and reduced travel expenses. General and administrative expenses in the third quarter were $5.1 million, or 9.6% of sales, compared to $4 million, or 8.5% in the third quarter of 2019. The growth in G&A cost is attributed mainly to additional headcount cost and an increase in D&O insurance cost. Non-GAAP net profit for the third quarter was $7.7 million, or $0.18 per share on a fully diluted basis net of $0.05 warranty impact. Net GAAP profit was $3.9 million, or $0.09 per share on a fully diluted basis compared with net income of $4.7 million, or $0.11 income per share for the prior year period. Our non-GAAP financial income this quarter was $1.7 million as a result of accrued interest on our cash investments. Our GAAP financial income this quarter was $1.6 million. Turning to adjusted EBITDA, for the third quarter 2020 adjusted EBITDA was $9.4 million compared to adjusted EBITDA of $13.1 million for the prior year period. Net cash provided by operating activities was $20.4 million this quarter, mainly due to a $7.8 million increase in deferred revenues and advance from customers, a $10.4 million increase in payables and net profit of $3.9 million, offset by an $8.5 million increase in trade receivables and a $4.3 million increase in inventory compared to break-even in operating activities in the prior year period and $9.2 million net cash used in the previous quarter. We expect the deferred revenue balance to convert revenues over the coming three quarters. Cash balances, including bank deposits and marketable securities at quarter end, were $405 million compared to $237 million as of June 30, 2020. This increase in cash balances was primarily driven by $163 million in net proceeds from our last offering in September of this year and cash generated in operating activities of $20.4 million as previously discussed, mainly offset by cash used in the acquisition of Custom Gateway. In addition to the primary offering, Amazon sold 1.7 million shares converted on a cashless basis from 2.2 million warrants for net proceeds of $92 million. Turning to our view on the fourth quarter, we expect revenues to be in the range of $60 million to $64 million and non-GAAP operating income to be in the range of 13% of revenues to 16% of revenues. As has been our practice in the past, these numbers assume no impact of the fair value of issued warrants in the third quarter of 2020. I'll now transfer the call back to Ronen.

Thank you, Guy. With that, we are ready to take any questions from the audience.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Tavi Rosner with Barclays. Please shoot your question.

Hi, this is Peter on for Tavi. Thanks for taking my question. You mentioned the strong backlog entering 2021. Could you comment on the risk to that on account of the emerging COVID-19 trends? And then if I could have a follow-up, just wanted to ask about the drivers of the services expansion, if you could give a little more color on that and whether that's related to some of the renewed traction on the DTF side at all?

Yeah, so thanks for the questions. I'll start, and Guy maybe if you want to add later. So the COVID is definitely a tailwind to our industry. The industry is at an inflection point. We discussed it. What we can see is that e-commerce is booming. There's a clear move into e-commerce. The focus within 2020 for 66% of the apparel will be purchased through e-commerce. As the e-commerce booms and grows, on-demand manufacturing is really fueling the growth of our customers. We see the demand growing dramatically for our customers. We saw it already from May to end of April. Our customers are in peak season and now they're entering the peak of the peak and ordering systems. We have big projects that we are involved with across the world, both with strategic accounts and brands and marketplaces. Some of those projects are being implemented these days, and some of them will be implemented early in 2021. So this is the reason why we are saying we're entering with a strong backlog into 2021. We have very strong visibility for the first half, and we are very positive about the entirety of 2021. Guy, any additional points?

I guess the services question, we're talking about breakeven in services in the fourth quarter of 2020. We achieved this goal earlier than expected. The initiatives we were discussing in the last few quarters, for example, all the industrial machines going with a service contract are now yielding dividends.

Thank you both for the color. Congrats on the quarter.

Thanks, Peter.

Our next question comes from the line of Jim Suva with Citi. Please shoot your question.

Thank you very much, and congratulations on great results during a challenging time. My question is on your prepared comments. You mentioned something about COVID costs. I believe you said were going down or de minimis at this point. Can you talk just a little bit about COVID overall; is this still slowing down some deliveries, like the logistics for customers to receive and install your equipment or get engineering, architectural or electricity permits as installing these big devices a lot of times aren't simply plug and play? If you can talk to us about those logistics, if those are behind us or still causing a headwind? Thanks.

No, actually, we don't see any headwinds in terms of logistics due to the COVID; actually, the opposite. We see huge demand and pressure to installers to get the equipment, supplies, and services as soon as possible to be ready for the peak season. As I mentioned before, COVID is a very strong tailwind. We don't have any limitations in terms of production, logistics, shipments, and installation. The only limitation, of course, is about traveling. Luckily, we have our own team, both in the US and Europe and Asia, that can install and ramp up our customers and they're ready to implement all the demands needed.

Great, and then funding for small or midsized businesses. Is the funding a bit of a challenge if you're a small or midsized business, giving those challenges maybe a little more associated with Coronavirus or are they past those headwinds to where they could place more orders with you or they're at the point now returning back to normalcy?

Yeah, it looks like almost back to normal. In the first and second quarter, we thought there was going to be more of a credit crunch. But most of our customers have the ability to finance themselves. In some cases, based on specific business cases, we extended credit terms, but it looks like for credit, the market is back.

Okay, and my last question, just logistics was shipping since there's fewer airplanes and ships going around the world? Are you having any logistical challenges of getting supplies or components or anything or is that also well behind us?

No, clearly, no. We don't have any limitation on that.

Thank you and congratulations to you and your team. And thank you for the details.

Thank you very much.

Thanks, Jim.

Our next question comes from the line of Brian Drab with William Blair. Please shoot your question.

Hey, thanks for taking my questions. The first one, just can you give us at this point any clear idea what some of the new products might be for next year and what you're thinking about and how those might expand the addressable market further?

So we cannot get into too much detail. Next year is going to be an exciting year, both in the DTG and the DTF. We are going to extend our portfolio in both categories. The focus will be both on opening new applications, applications that we never - the customer never printed before. So enabling new applications, but also getting into adjacent markets as well as improving the productivities of our solution, the automation, the ease of use. So there are many, many aspects that we are looking into and that we're planning to deliver on them on top of, of course, win quality. Workflow is a big emphasis. Moving forward, you will see new products coming on the workflow side next year.

Okay, got it, thank you. And you mentioned DTF, how significant is DTF in terms of the revenue mix? How significant was it in the third quarter?

So DTF is still a small part of our business but is a fast-growing segment within our business. When we're looking at our outlook into Q4, we foresee strong growth within this segment. It still will be a small portion. We are not providing indication of what the size of DTF is out of the overall business. Within DTF, it's very interesting to see the strong growth on the supplies and it's really strong growth of the install base in terms of the use of consumables.

Got it and then can I just ask quickly, do you still think the service gross margin can get to approximately the 20% range over the longer term? And if so, like, over what period do you think it takes to get there? Thanks.

Again, we didn't - we're not ready to give indication of what we are aiming. We said though that we moved to a profitable service one quarter ahead of time, it's sustainable. We will continue to see profitability, we are going to improve the profitability, but currently, we are not going to give any guidance about what we are aiming for.

Okay, sorry. I've been covering the company too long, and I had heard that at one point, but I think those were before time, Ronen. Thanks.

Okay. Thank you. Bye.

Our next question comes from the line of James Ricchiuti with Needham & Company. Please shoot your question?

Hi, hopefully you can hear me. Okay. The question I have is - yeah, I thought I heard you say that you had three customers that were 10% or more of revenues in the quarter? Did I hear that correctly?

Yeah, correct.

That is memory serves me correctly, I don't recall there being a time where you had three 10% customers, is this the first time that's happened?

It's the first time we have three direct customers that exceed 10%.

And is there any color that you can provide us on the other two customers? I mean, I think in the past, you've had one or two surface, but is there any color on the type of customer you can give?

Again, we cannot get into the name of the customer. Those are big projects that we alluded to a quarter ago, two quarters ago that we are working on. Those are our top customers across the world, or actually two of them across the world, one of them in North America, but we cannot add more color on top of that.

Ronen, if we think about the traction that you're making in the market, you're obviously - you're raising your guidance and expectations for the second half. I'm wondering, and maybe you alluded to this before, I joined the call a couple of minutes late, but is the traction with some of these larger customers helping to drive some of the faster stronger growth that you're anticipating in the second half? And generally what sounds like a fairly strong outlook into the first half of next year.

Yeah, definitely part of the growth that we see is with our existing strategic accounts; not only with our global strategic accounts but with other strategic accounts that additional strategic accounts that we had before. What we see recently is new midsized accounts are becoming very material for Kornit on big projects. We are entering into some very interesting project with brands and marketplaces that are very interesting. The Presto is almost a new segment for us that we are entering, mostly net new customers, but each one of them, we see them growing very fast on multiple installations.

Okay, last question if I may, just you guys have had great success in a couple of geographic regions. And if I look at Asia Pacific, it's been a smaller part of your revenues for some time. Yet you think that would be a big opportunity. I'm wondering how we should think about that? You've announced that some additions to your management team there. What should we be thinking about in terms of the APAC region for you guys?

So we believe that Asia Pacific is going to be a big revenue growth pillar within Kornit's future business. We need to understand that currently, in the last, I would say one year or a bit less than one year, Asia Pacific is totally closed. Actually, you cannot travel from country to country within Asia Pacific, and only now they're starting to reopen. Our focus, as we mentioned in previous calls, is mainly around China, Japan, Australia, and Korea. We see very interesting moves both in China and Japan, some very strategic plays there with brands, marketplaces, and fulfillers, and also Australia we're starting to see very nice and constant business coming from Australia.

Got it. Thanks very much, congratulations.

Thank you very much.

Our next question comes from the line of Patrick Ho with Stifel. Please shoot your question.

Thank you very much, and congrats on the nice quarter and outlook. Ronen, I apologize, I joined a little bit late. So you may have addressed this. But if not, I was just wondering, with a strong outlook for the December quarter and as you look at 2021 as a whole, how has your visibility, I guess, improved probably over the last three months? And as we go into December quarter, in terms of say the first quarter, or the second quarter of '21. And I'm not looking for a quantitative, but qualitatively, how do you see visibility, the ability to add on more orders and continue to build backlog as we get into 2021?

I would say that we've never been in situation that has of today that we have very, very clear visibility to the entire first half. So we know how the first half will look like. We are very confident about the first half. We are engaged in big projects across the world. Some of them are in the middle of the implementations. So we have full confidence about the first half. The team is already engaged about building the second half, which we are starting to have line of sight as well. So we feel comfortable and confident about 2021.

Great and I see on your presentation, you talk about several of the products like the Atlas and the Vulcan Plus and the traction there. Can you detail the customer types particularly for the Atlas, are you seeing that broad base across both brands as well as fulfillers in terms of the adoption of the Atlas?

Yeah, so the Atlas we see adoption both with fulfillers that are playing in their own demand market in the e-commerce, some of them directly to consumers, some of them directly with businesses, B2B and B2C. We are entering into traditional screen printers. They understand that they have to move to do on-demand and they're buying digital and choosing Kornit. In terms of the brands, there are two types in general of brands, the brands that are getting into vertical; they're planning to go fully vertical, meaning producing and using digital technology to print, to embellish by themselves and they're adopting the Atlas's, but we see also many brands connecting to our installed base across the world and fulfilling for them, which really boosts demand and raises the volume for installed base.

Great, and final question for me, maybe for Guy in terms of OpEx, really strong OpEx management given the environment that's out there today. Obviously, some of your benefiting today because of fewer trade shows and things of that nature. As we look at 2021 and as the environment hopefully normalizes somewhat, how do you look at OpEx and I guess the potential ramp that we may see there as more trade shows begin to return?

So again, we're not guiding for 2021 yet, but just to remind you and the other folks on the call, when COVID started in Q1, we actually said we're going to double down on R&D, and we're going to increase investment in R&D and technology. You can see it throughout the first, second, and third quarters, and we expect to continue that trend. So OpEx-wise, we will continue to invest in R&D. Assuming trade shows will return to normal next year, we might see some increase in sales and marketing expenses; obviously, travel will return to normality in January 1; we will see that as well. But our assumption is that it will not return that fast. We are shifting marketing budget from physical events, trade shows, etc., to digital marketing today, and we will probably maintain and even increase this investment.

Great, thank you again.

Thank you.

Thank you.

Our next question comes from Chris Moore with CJS Securities. Please shoot your question.

Hey, good afternoon. Yeah, maybe just a couple of questions on Custom Gateway. So just wanted to know - is the integration fully complete at this point in time, and maybe just talk a little bit about the impact that you've seen already there? And is there still much more to do to really fully leverage those capabilities?

Yeah, the integration, of course, is in the middle of it. We are not fully integrated. But the team is working very closely together. The synergies are immense. The value propositions that we are bringing to the market are super important. It's at the heart of our strategy at Kornit. We are getting great feedback from customers. We engage with new business due to the workflow solutions that we have now. As I mentioned on the call, we have right now more than 80 new opportunities for both selling the Custom Gateway solution and Kornit systems solutions to those opportunities. The opportunities are both with brands and fulfillers. So it's really opened for us a huge opportunity in the market. The vision of Kornit of connecting the brands to the fulfillers is really about the platform and the workflow platform, and the Custom Gateway enables Kornit to really connect the brands to do on-demand manufacturing wherever they want through the fulfillment network of Kornit's installed base.

Got it. Very helpful, thanks. Last one for me, just in terms of thoughts on M&A activity moving forward. Obviously, very busy with what's going on here; is that something that you're spending much time on at this stage?

Yes, we have dedicated a team that is looking at M&A activities and opportunities. We are looking in two main areas. One is again, workflow software solutions. We identified a few very interesting opportunities that we are looking into. The other one is more about technology, extending technology solutions, whether it's on systems or adjacent markets, getting into new markets. So we're exploring that as well. Yeah, we have some very interesting opportunities in front of us.

Appreciate it, guys. Thank you.

Thank you.

Our final question comes from the line of Greg Palm with Craig Hallum. Please shoot your question.

Yeah. Thanks for taking the questions and congrats on the quarter as well. I'm curious how much of the current strength in demand is driven by new customers versus expansionary efforts or maybe replacement or upgrades? And I'm curious how you view the upgrade opportunities as you shift more customers to outlets. I mean do you view that as a meaningful driver for next year or not necessarily?

Excellent question. In terms of the upgrades, we are almost completed with the upgrades to the HD. We still have a few customers that didn't upgrade and we intend to, hopefully, upgrade them very soon. But this one, we almost completed. We expect next year to see some new upgrade opportunities once we announce a new portfolio and new solutions. These updates will be available for H2 next year. So we expect massive growth on upgrade opportunities in the second half of the year. In terms of net new to existing, it's very interesting. This really differs from region to region and segment to segment. In the DPF, it's mostly net new. As I mentioned, we see massive growth coming from the DTF market. In the DTG, in North America, this quarter, it was around 50-50 between the net new to existing customers. So while existing customers are going very fast, we have many, many new opportunities in the market and we're getting into many new market segments. It's similar in Europe, and in Asia is mostly net new opportunities.

Okay, interesting. And I guess based on what you've seen in October and the first part of November, any commentary on how this holiday season might be similar or different from past years? I'm specifically wondering about consumable consumption, so curious kind of what sorts of end demand trends you're seeing? Are you expecting a similar mix of consumables versus systems in this Q4, or will it skew more towards the systems just based on all the activity going on?

First of all, it's going to be a very strong peak season. Our customers are already fully engaged, and they're getting more systems. So they're going to be very, very busy. One thing that we're hearing from customers is that they believe this peak season will not end by the end of December; they all are talking about that the peak season will extend to January and February because they will not be able to deliver on time due to the huge demand and backlog of orders they have. This is kind of a unique situation that we didn't see before. In terms of the mix for Q4 between supplies and systems, it's a very good question. I would say it won't be very much different from the previous year. Guy, do you want to relate to that?

No, I think it's going to be like Q4 last year. Obviously, in terms of mix, Q4 normally sees heavier consumables, and we think it's going to be the same this year.

Okay, I guess if I exclude the warrant impact for Q3, it appears that you did a 14.5% operating margin with revenue well above Q3 levels expected for Q4, and you're I guess implying better mix because of more consumables. Why aren't you seeing higher flow-through in terms of the guide for non-GAAP operating income?

So again, we said it before. Obviously on the long run we're taking action and we expect higher gross margin and longer term, obviously higher operating and net profit. But we also said that we're seeing a lot of opportunities ahead of us and we're investing in OpEx, meaning customer-facing and technology. This is why we're not increasing operating margin that much.

Okay, so more of a function of just continued investments.

Right.

Okay, good. All right, I'll leave it there. Thanks. And best of luck going forward.

Thanks, Greg.

Thank you, any additional questions.

No questions at this time.

Okay, so I would like to thank everyone for joining this afternoon call. We are very pleased with our third-quarter results and our ability to increase our second half 2020 year-over-year revenue growth from low teens to 25% growth. The textile industry is clearly at an inflection point in its transition to digital sustainable on-demand manufacturing, and we have never been in a better position to execute against this opportunity. Looking ahead, we expect a strong close to 2020 and carry a great deal of momentum and a strong pipeline into 2021. I would like to end by thanking our team, our employees across the world for their hard work, commitment, and passion for our customers. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.