Kornit Digital Ltd. Q2 FY2021 Earnings Call

Hello. Welcome to the Kornit Digital Second Quarter 2021 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to our host, Mr. Andrew Backman, Global Head of Investor Relations for Kornit Digital. You may begin.

Thank you, operator. And good morning, everyone. Welcome to Kornit Digital's second quarter 2021. With me today are Ronen Samuel, Chief Executive Officer; Alon Rozner, Chief Financial Officer, and Amir Shaked, Executive Vice President and Corporate Development. 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 SEC, including the company's annual report on Form 20-F filed March 25, 2021, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this call hereof, and 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. Now, I would now like to turn the call over to Ronen. Ronen?

Thank you, Andy. And thank you all for joining us on our earnings call. Before I jump into the review of the quarter, I first want to say that we are very pleased to have Andy recently joined the company as our new Global Head of Investor Relations. Andy, welcome. So let's turn to what was another truly amazing quarter for Kornit across the board, a quarter where we significantly beat expectations. We had tremendous top and bottom line growth, posted very strong gross margins, and ended the quarter with an extremely strong backlog and pipeline. We delivered total revenue of $81.7 million for the quarter, net of $6.6 million in warrants related to a global strategic account, significantly exceeding the high end of our guidance and reflecting a 118% year-over-year growth and 24% growth on a sequential basis. We saw very strong growth not only in our systems and consumable businesses, but also in our service organization, which posted over 70% year-over-year growth. We again saw very strong growth with a key customer, as well as with net new customers, and our pipeline has never been stronger. During the second quarter, we completed beta testing and began shipping Atlas Max systems. We are seeing very strong order backlog for the Max and have received excellent customer feedback not only on the increased productivity and unique XDi capabilities, but also on the unparalleled print quality and durability, which is truly on another level in the industry. Max upgrades for the Atlas installed base will be available in the first quarter of next year, and we expect significant revenue contributions from those upgrades next year. We continue to experience strong tailwinds when it comes to the market adoption of our DTS micro-factory solutions, as leading global brands continue to embrace the advantages of sustainable on-demand proximity production. For example, an Arizona-based full-service fashion design recently acquired Kornit Presto, the most advanced single-step solution for direct fabric printing. With the addition of the Presto, they are now able to offer sustainable on-demand print, cut, and sew services to their customers, which includes many emerging designers and brands. This is a perfect example of the Kornit DTS micro-factory solution. Turning to customer engagements, we continue to execute on massive global expansion projects with strategic customers, and we expect these projects to have a meaningful contribution to our business in the quarters to come. In parallel, we see strong growth of new customers, both in the DTG and DTF segments. Last month, we hosted a VIP customer event in Dusseldorf in addition to our first in-person customer event in the US since the start of the pandemic at our newly renovated customer experience center in New Jersey. We hosted more than 200 customers globally, and the event was a huge success as it provided the most comprehensive display of our capabilities, partnerships, and customer engagement since the outbreak of COVID-19. Customer feedback was extremely positive as evidenced by the number of committed orders we received as a result of those events, and the massive growth of opportunities in our pipelines. Building upon these great successes, we are already deepening the execution of our much-anticipated September event at the New York Fashion Week, as well as the formation of the first Kornit LA Fashion Week event in November. After a long pandemic pause, we are also very glad to be participating this fall in Printing United Orlando and Fespa, Amsterdam. So we have a lot of activities planned for the next several months that will further contribute to our growing 2022 pipeline. So stay tuned for additional details. We continue to see great momentum for KornitX, as evidenced by our recently announced partnership with Canva, the largest online design studio and content provider in the world. We have already begun implementation efforts with Canva. In addition to over 80 implementation projects, we currently have in backlog for KornitX, as well as multiple strategic partnership discussions with leading online marketplaces and fashion brands. We were very excited to announce this morning the acquisition of Voxel8, which will help us accelerate the execution of our 4.0 strategy to digitize on-demand sustainable textile production. Voxel8's advanced and proven 3D technology, which has been tested by some of the world's leading fashion and footwear brands, including Hush Puppies, which is part of Wolverine Worldwide, will disrupt the business of fashion, empowering completely new creative decorative concepts and never-before-seen functional textile applications while exploring new lucrative opportunities in the functional apparel and footwear markets. I want to welcome the Voxel8 team to the Kornit family and look forward to achieving many great things together. In summary, we had a very strong second quarter and first half of the year. We are more confident than ever in our outlook for the remainder of this year and into next year. We believe we are well on our way to becoming the operating system for on-demand sustainable fashion, and then a $1 billion revenue company by 2026. Now I will turn the call over to Alon for a closer look at the numbers and the guidance. Alon?

Thanks, Ronen, and good morning, everyone. As Ronen said, we are very pleased with our very strong second quarter results. Revenue increased 118% year-over-year and 24% sequentially to $81.7 million net of $6.6 million non-cash warrant impact. Revenue was also well ahead of our guidance of $76 million to $80 million, which excluded the impact of warrants. Our second quarter results were again driven by strong orders for DTG systems, in addition to increased demand for consumables and services. This significant growth was due in part to continued momentum with strategic accounts, which we expect to continue into the second half of the year. Services revenue for the second quarter was $9.5 million, net of the non-cash warrant impact of $0.4 million, accounting for 12% of total revenue, an increase of 70% year-over-year and 16% sequentially. Our top 10 customers accounted for approximately 64% of total revenue. Geographically, all regions were up both year-over-year and sequentially. The Americas and EMEA regions more than doubled their prior year quarter revenue and accounted for 71% and 22% of total revenue, respectively. While Asia Pacific continues to experience COVID-related travel limitations, we've been able to successfully manage the business. Revenue in Asia Pacific increased 56% from the second quarter of last year and accounted for just under 7% of total revenue. Moving to profitability; non-GAAP gross margin for the quarter, net of the impact of the warrant, was 48.2%, an improvement of over 400 basis points year-over-year. On a GAAP basis, gross margin in the quarter was 47.2%, an improvement of over 500 basis points year-over-year. Second quarter gross margin expansion was due to the increased mass production system sales, strong consumables, as well as continued profitability from our services business. Going forward, we expect the ongoing shift to higher mix of mass production systems to continue along with acceleration of services and software revenue growth to drive our gross margin expansion. Moving on to OpEx; as I mentioned last quarter, we continue to invest in the business to accelerate growth. For the second quarter, OpEx was $29.2 million higher than the previous quarter, but below our internal targets, mainly due to timing of hiring, which occurred later in the quarter. Research and development expenses were $9.2 million for the second quarter, or 11.3% of revenue compared to $6.7 million, or 17.8% of revenue in the second quarter of 2020. Sales and marketing expenses in the quarter were $12.5 million, or 15.2% of revenue, compared with $7.4 million, or 19.9% of revenue in the second quarter of 2020. The increase was due to the expansion of our go-to-market capabilities, marketing and brand awareness programs, and customer-facing activities. General and administrative expenses in the second quarter were $7.5 million, or 9.1% of revenue compared to $4.9 million, or 13.2% of revenue in the second quarter last year. Our non-GAAP operating margin, net of the warrant impact, was 12.5% versus negative 6.8% in the year-ago quarter. This increase was driven by the higher gross margin I discussed earlier combined with increased operating leverage in the quarter. We ended the quarter with 763 employees, a year-over-year increase of 189 employees and an increase of 63 employees as compared to the first quarter. For the balance of 2021, we will continue to invest in growing the organization to support the business, mainly in R&D and sales and marketing. Non-GAAP net profit for the second quarter was $10.5 million, or $0.22 per share on a fully diluted basis, compared to a loss of $1.3 million, or $0.03 per basic share in the second quarter of 2020. Second quarter GAAP net profit was $5.6 million, or $0.12 per share on a fully diluted basis, compared to a loss of $4.6 million, or $0.11 per basic share for the second quarter last year. Adjusted EBITDA for the second quarter was $18 million compared to negative adjusted EBITDA of $0.9 million in the year-ago quarter. Net cash provided by operating activities was $5.2 million this quarter compared to net cash used in operating activities of $9.2 million in the second quarter of 2020. We again ended the quarter with a very strong backlog, including $15.6 million of deferred revenue and customer advances. We continue to expect our deferred revenue balance to convert to revenues in 2021. And finally, our cash balance including bank deposits and marketable securities at quarter end was $441.8 million. With respect to Voxel8, we expect the revenue contribution for the remainder of this year and next year to be immaterial, with an OpEx impact of approximately $1 million per quarter. This acquisition is in line with the long-term financial model we previously discussed, which assumed the potential impact of technology acquisitions. Turning to guidance. Based on our current visibility in the business, including our very strong backlog and pipeline, we expect revenue for the third quarter to be in the range of $88 million to $92 million, and non-GAAP operating income to be in the range of 12% to 14% of revenue. As a reminder, consistent with our practice in the past, this guidance assumes no impact of fair value of issued warrants in the quarter. In summary, we are very proud of our very strong second quarter and first half 2021 performance, as it further validates our strategy, and is a result of all the hard work and dedication of the entire team at Kornit. And with that, I will now turn the call back to Ronen.

Thank you, Alon. And now we're ready to take questions from the audience.

Our first question is from Rod Hall with Goldman Sachs.

Yes, good morning, guys. Good evening, I guess, and thank you for the opportunity to ask the question. So I wanted to, I guess, make a comment. I mean, the revenue numbers here look very strong. The KornitX backlog to us seems very exciting. You're talking about 80 implementation projects in backlog. And we know that could be a huge driver of the business in the future. Just curious what the timeline on those is, how long does it take to implement those? And when do we see those impacting numbers? And then I have a follow-up question.

Great. Thanks, Rod Hall, for the questions. We see, first of all, a perfect storm in the industry. We really believe that this is about time to change this dirty industry to an on-demand sustainable way of production, in proximity production, and KornitX is the driver for changing this industry. On top of that, of course, digitizing the production flow. Yes, we have a big, long list of orders for more than 80 projects right now to implement the KornitX, both with fulfillers that would like to join the network as well as with marketplaces and brands. There is huge interest also from the retail environment. So we are very, very pleased with the adoption of KornitX and the visions that we are driving, the change we are making in the marketplace. Some of those projects are short-term projects, meaning within 90 days of implementation, while some will take longer. I would say about six months to nine months; we will be able to implement most of the 80 projects that are in the pipeline. In the meantime, I’m sure we will gain some more projects. There are a few major projects there that we are driving like the Canva project that we expect to drive a tremendous amount of volume to our customers.

Okay, thanks, Ronen. And then my follow-up on this is the margin guidance; the EBIT margin guidance is below what we were expecting. And I just wondered if you could give us a little color on that? Is that because of all the implementation projects you're doing, the speed of delivery, et cetera? I'm just curious what drove that sequential decline in those EBIT margins in the guide. And I think it's also a year-over-year decline. Thanks.

So the key drivers for the gross margin, as we all know, are first the level of business, the mix, and then going to the OpEx and the investment in the organization. In Q2, we had great results. We had great operational leverage, and we continued to invest in the organization. Our OpEx increased in Q2, as you saw, however, consider we are working alone to add more resources to accelerate the activities and we expect to see additional investments, additional OpEx in Q3, together with a bit different mix in Q3, which will take the operating margin back to the level that we expect again, according to our long-term plans, and continuous improvement of the operating margin.

So, are you a lot of you guys assuming some lockdown impacts there or is it just you're hiring to keep up with the growth? Or what should we think of as the main driver there?

Main drivers for what? Again, please?

The end of the margin guidance reflects the difference between the Q3 forecast and Q2 actual results. I'm curious if the increase is due to hiring efforts to manage growth, which would increase personnel costs, or if there are assumptions regarding lockdowns related to Delta that are influencing this. What would you say is the main factor driving this?

Yes, so, in terms of the mix, we don't expect a very different mix in Q3. So, the impact on gross margin from that side will be immaterial. We also invest in COG related activities in service supporting customers and also in building the system. So, overall, gross margin is not expected to be very different. And then the investment in the OpEx is going to be higher in Q3 than in Q2, and this is the main driver, yes.

Rod, just comments from my perspective, we see an expansion both on gross margin and on operating margin, even if you compare it to last year. You will see expansion both on gross margin and operating margin, Q3 versus Q3, definitely Q2 versus Q2. The reason why we guided 12% operating margin to 14% of revenue is because we intend to continue investing in OpEx, accelerating the growth of OpEx in order to continue to accelerate the growth of revenue. We see a massive opportunity there. But as we promised to our investors, we are heading into 2026 with about 20% operating profit, and we feel confident about it.

Our next question is from Jim Suva with Citi.

Thank you. And I'd like to add also great results. Can you talk a little bit about lead times? First of all, lead times for procuring all the parts and equipment that you need for your projects products? Or is it getting better? Or is it stable? Is it getting worse? And then I have a follow-up question. Thank you.

Yes, I started maybe Alon will add on top of that. We definitely see pressure on lead times for some of the products getting much longer if it took us weeks, sometimes months and even a year to wait for some of their long lead items. Luckily, we have very, very good visibility for this year, and we have excellent visibility for next year. For this year, we don't see any limitation on delivery, not on the system not on parts, not on ink. For next year, we already placed the orders with our suppliers for all the long lead time items so we don't see also any issue on the supply chain for next year. In parallel, we see some price increase, not too much impacting us in a big way. We feel we are in control but we see some price increase from our suppliers. Alon, anything from your side?

No, I think that the main point here is because of the great visibility we were able to secure production slots as well as the main lead times for quarters ahead. So we don't see any impact on supply at all. We do see some impact on cost, but as of now it's not material to our business.

Great. And then as my follow-up question, from the customer standpoint, their lead times if customers come in and want to order Atlas or something like that as an example, are those lead times starting to stabilize? And I assume we're looking at delivery dates probably now in the year 2022, as opposed to 2021? Or how should we think about the lead times from the customer perspective?

Yes, that's a great question. We are collaborating closely with most of our key strategic customers, some of whom we've been working with for a long time. We have clear visibility into the situation and are planning our inventory levels well in advance. We have sufficient inventories to meet any unexpected orders. Typically, we can deliver a system within one to two months of receiving an order. We're ramping up production. In Israel, we currently work with three major contract manufacturers—Flex, Sanmina, and another local company. Additionally, we plan to open another facility outside of Israel next year to boost our capacity and support the growth we're experiencing in the business.

Our next question is from Brian Drab with William Blair.

On Voxel8, can you talk a little bit about that acquisition? And just what you're acquiring there? I guess it looks like they have a proprietary print head, and it seems like they have proprietary consumables. Are you going to incorporate those print heads into your next-gen machines? And how long might that take? And have you done any calculations around how much that expands your addressable market?

Yes, we are acquiring a talented team with extensive knowledge and a great attitude. We believe there is a strong cultural and technological fit, along with proprietary technology that will enhance our decoration capabilities in various ways. This will allow us to offer unprecedented versatility in decoration, such as reflective, breathable features in sports apparel, high-density silicone, and metallic options. We will also be able to incorporate functional elements like improved compression materials for sportswear, cushioning, impact resistance, and waterproofing. This creates significant opportunities in our current markets and new ones we plan to explore, always leveraging Kornit's fully digitized single-step production process. We intend to integrate their technology with our existing solutions, such as the Presto and Atlas, enabling our customers to explore new applications with enhanced capabilities. While we are not yet revealing the market potential, we will share details on the rollout of applications and technology in the future, indicating a vast market ahead of us. As seen on the Voxel8 website, their focus on the footwear market presents a major opportunity, though it's not the first market we will target. We have immediate prospects with the marketers we are currently serving and have a clear plan to integrate and launch the technology as quickly as possible.

Right. Thank you. And can you make any comment on revenue for 4Q versus 3Q, given you have a little more visibility compared with the last time we asked that question?

We are not providing guidance for Q4; we are only guiding for one quarter. However, we have complete visibility for Q4 and feel very confident that it will be a strong year for us. Importantly, we are starting 2022 on a positive note. We are already taking orders and have a long list of customers requesting upgrades to their Atlas Max, as well as new purchases of Atlas Max and Presto, Presto Max. Additionally, we are introducing the Atlas Poly automation, which means we have an exciting quarter ahead in terms of growth and opportunities.

Our next question is from Jim Ricchiuti with Needham and Company.

Hi, thank you. Just a question on the upgrade opportunity for Atlas Max. It sounds like you'll be beginning that in Q1. When would you anticipate, just based on the interest level that you have now for upgrades from the existing installed base? When would you anticipate completing those upgrades? Would those go through a large part of 2022?

Jim, thanks for the question. But just to make sure that the audience understands the value of the Atlas Max. So we just ended beta testing and we got amazing feedback from our customers. I'm very proud to say that one of the feedbacks was that finally Kornit is bringing a product out of the box that is mature, like a mature company. So we are very proud to be in this position. On top of that, all of them are talking about the quality, that brings qualities that are different standards, placing the quality at different levels. Of course, the XDi, in terms of the 3D dimension, is opening to totally new applications and new markets. Of course, the productivity and many of our customers' also key customers were exposed to the automation, and they're very excited. So it's a really huge benefit to our customers and to the market. And we expect to start upgrading our installed base Q1, as you mentioned. We expect material revenue recognition already in Q1 for this upgrade for the installed base, as we have a large installed base of Atlas systems with some big accounts that we know are going to upgrade to the Atlas Max. It will take more than one quarter; I guess it will take the entire 2022 to upgrade most of the fleet to the Atlas Max.

Got it, thank you for that. And then just with respect to the pipeline on KornitX, when you talk about the ADM implementation projects, are the bulk of those fulfillers, or I'm just wondering if there's any way to give us a sense as to how that might break out between fulfillers, brands, and marketplaces? It's just some sense as to how those project pipelines look.

So that's a good question. We are not providing the detailed split on the 80 projects. I can tell you that a large amount of those 80s are fulfillers across the world, but we have some big names of marketplaces, brands, and retailers that also are part of those implementation projects. At this stage, we cannot share more splits on those 80 orders that we have in place.

Our next question is from David Mizrahi with Berenberg.

Hey guys, congrats on the quarter. I just wanted to go back to one of the earlier questions. And can you just comment potentially on the order backlog and maybe the book-to-bill? I know you talked about 80 projects for KornitX. But what are some of the Atlas Max and your other more legacy systems so far?

Yes, so David, thank you very much. I cannot say too much on the mix and the type of customers, as I mentioned, both of those 80 projects, with fulfillers, our installed base that would like to join the KornitX network. Some of those 80s are with big marketplaces, like Canva, and with brands and retailers, and those are the main customers that would like to join the network on those 80 projects.

Okay, I understand. I wanted to clarify that the acceleration seems to be more widespread. Are there specific areas that are performing better or showing stronger results? I would like to get a better sense of the primary factors driving the acceleration throughout the overall landscape.

Yes, so we've seen one of our very strong years. Yes, we're ready, as I mentioned, focusing on 2022. On all the new products are coming in Q1, we see a perfect storm, perfect storm in many directions, first of all, from the market, market trends online are continuing to boom. Sustainability is becoming the main discussion with every brand. They own demand manufacturing is super important. Consumers really want to have variety. So it's really a perfect storm from the market trend. But if you ask from a business, how do we see? We see a major explosion of growth with our strategic accounts across the board that are going within the current size that are expanding, opening new sites in multiple regions. We see the growth also in the supplies that are using the system around the clock. And we see actually many net new customers joining. This is great both from the brand perspective but also from new fulfillers that use traditional fulfillers are joining as well. DTF is definitely a major growth driver moving forward. We see the concept of micro-factory gaining momentum, both in the fashion world and in home decor. Absolutely Atlas Max and these events that we've done a few weeks ago created a massive funnel and opportunity for all of us for expansion this year and next year. Bringing up Voxel8 is another story and another value that we can bring to our customers and change the industry into a more on-demand sustainable way. We have massive events in front of us, think about the New York Fashion Week; think about the Kornit LA Fashion Week, Printed United, Fespa. Finally, we have face-to-face meetings with customers that will really create this momentum. And we're going to demonstrate all our technologies in those shows. And this is on top of a very, very strong pipeline that we already have. As you saw our guidance, if you calculated for Q3 is more than 50% growth year-over-year versus last year. And last year, Q3 was a very strong quarter for us. So we are very proud of the growth of the business and the momentum. And yes, we feel very comfortable about this year and next year.

Our next question is from Greg Palm with Craig-Hallum Capital Group.

Yes, thanks. This is Danny Eggerichs on for Greg today. Thanks for taking the questions. I guess maybe if you could just touch on progress with the big brands that you're working with and maybe how those partnerships are starting to materialize.

So, at this stage, I don't have much news to share with you other than we are working with an endless number of brands, both on the KornitX and both of changing the supply chain into on-demand. Some of them are really buying our equipment; we announced about the Atlas in the UK or getting into the micro-factory with the Presto. We announced the relationship with Adidas. There's many, many multiple interactions and both within the brand. But as of today, I don't have some news to share with you that I can disclose at this stage.

Got it, that's helpful. And then I guess, congrats on the acquisition this morning of Voxel8. In terms of the M&A pipeline looking forward, I guess, how are you guys looking at that?

Yes, so we are very excited. I think that looking at much different technology, this group will report to the CTO organization, the CTO was very involved in defining what technology we are looking for and what will help us to bring new applications to the market. We were evaluating Voxel8 technology for a few months; we found it suitable to print on garments together with our technology, the wet-on-wet, opening for us new applications for the textile and home decor, both on the DTG and DTF. So we see a huge potential for growth coming from this technology. As I mentioned, we are very pleased with the team there and the engagement of having this team based in Boston; it's also a huge benefit for us to attract more talent to our team. So, overall, I think it's a very strategic acquisition. And we will start seeing the fruits of this acquisition in the coming quarters.

If I can add, this acquisition is a great example of the accelerated execution that we are talking about organically and enormously of technologies that will support our business and will support our long-term financial model. So this is exactly according to our plan to take us to the long-term plan of $1 billion.

Our next question is from Tavy Rosner with Barclays.

Hi, good afternoon. Thanks for taking my questions. Most of them have been asked, I guess, just maintenance on Voxel8, I don't know if you touched on it already. But is there any ongoing revenue stream that you will be maintaining going forward?

Tavy, thank you for the question. Yes, the company generates some revenue but it's not material to Kornit's revenues. And as we are going to drive the technology to a bit different areas from where they are today, we don't see it impacting the top line. As we mentioned, in terms of the OpEx, it will add something like $1 million in OpEx expenses on a quarterly basis. But it was taken into account in our models, so we don't see a material impact on our operating profit as well.

Great. And then just looking at the growth when you look at this quarter, you look at momentum for the coming quarter. When you look at growth in general, would you say that the majority comes from incremental sales to your existing customer or conversely it is coming from new customers? How should we think of the split?

It's really a mix. As I mentioned, the explosion that we see with strategic key customers is something really unique. They continue to expand and buy more systems and ink and services when we are talking with them on long-term plans, even with some of them for three years length. So we are very optimistic there. On the other hand, we see many net new customers joining. On the DTF, of course, is a relative net new segment for us, a new product line for us. And we are going up there, so most of them are net new but we see it in the DTG too, many net new customers. We see net new customers coming both in our mature market like North America but we see it, of course, in Asia and in EMEA, across EMEA. EMEA had a very good quarter this time with growth both in Central Europe, UK, Germany, and we see also in Eastern Europe, Turkey, and Spain going very strong. We also see big potential in Latin America; mostly net new customers are joining in Latin America. So at this stage, we are not scratching the surface of the potential of net new customers joining us on top of the growth of our strategic customers, but expanding very fast.

Our next question is from Patrick Ho with Stifel.

Thank you very much, and congrats on the nice quarter. Ronen, first off, in terms of the Max upgrades you're talking about that will be introduced in the first quarter of 2022. Can you give a little bit of color on; are they the existing strategic plans that have been with you for a long time? Or are they recent new customers, say over the past year or two that have bought the Max product? Where are you seeing the greatest traction in terms of the upgrades?

So the Atlas for the Max, first of all, for the Atlas installed base. Many of those Atlas installed bases are already within our strategic accounts, as you mentioned, but many of them also with customers that have only one or two Atlases. We believe that it will most of them be both our strategic accounts that we are talking to them, and they were engaged in the beta testing and seeing the product in the lab and in the experience center will upgrade to Atlas Max. So they will buy the upgrade. But we believe that also the relatively small customers with one or two systems will also upgrade to the Atlas Max, there is a clear ROI for the upgrade. When you calculate the 20% production increase, when you calculate the quality and the variety of materials, you can print all the new applications that you can print with the Atlas Max is so clear, and there is no question that they are really fast. And we expect most of our installed base to do it during 2022.

Great, that's helpful. And maybe as my follow-up question for Alon, you mentioned about the supply chain and how you're managing through that situation. It sounds like it's being managed pretty well. Can you talk about the COVID-related costs? And what I'm kind of trying to get there is with some of the recent outbreaks, the situation changing again? Are you seeing any changes in logistics costs and freight costs? And is that part of what you're mentioning about some of the costs of pricing going up?

Yes, so in general, we see good impact, if I can say, to the whole situation by the acceleration of e-commerce and the development of our business. So this is, in general, that the momentum is very positive for our business, specifically for the supply chain and logistics. So, yes, we see the pressure on logistic costs. But I think that it comes together with operational leverage that we are talking, and we are able to deal with this increase enforced by moving more and more shipments doing it by sea rather than air and saving some costs. We have larger quantities, so we can secure better slots and better prices for logistics. So all-in-all, we see some impact, but it's really minor. And I mean, as we can see in the results, it doesn't really impact our profitability or gross margin. I would just say that I believe, I seriously believe that our team is doing a tremendous job in working with our suppliers to control the increase of cost, and also the logistic costs when we are monitoring it while we see an increase in costs compared to benchmarks, we are in a very good place. And we are very pleased with that. As we mentioned, and we continue to be committed to that you will see expansion on a gross margin you saw in this quarter, you will see the rest of the year. And we will enter 2022 with the new products with additional expansion on gross margin.

Our next question is from Chris Moore with CJS Securities.

Hey, thanks for taking my question. Yes, maybe just back to the Atlas Max upgrade for a second. So I'm just trying to get a sense of the scale of the upgrade opportunity. Is there any way you can put kind of rough numbers around either the number of Atlases they're out there that could potentially be upgraded? Or just kind of sense in terms of what that could mean from a revenue perspective? Even if you could choose any number, 100% upgrade in 2022. Just have no sense in terms of what that might mean from a revenue perspective.

So as you know, we're not providing the exact number of Atlases we have in the field, although we already mentioned a year ago that we crossed the 200 Atlases that we have in the field, we mentioned it, of course, we have much more than 200 Atlases in the field. We expect a large portion of them to upgrade to the Atlas Max. And we expect material revenue coming in 2022 out of it.

Got it, I'll leave that one there. And just one last one for me, as DTF becomes a more important part of the mix. Can you talk a little bit more about kind of DTF sales process for CTG? Does DTF create any significant challenge, new challenges? Does it require much incremental sales infrastructure?

Yes, that's a great question. We have a dedicated team focused on selling and supporting the DTS, which includes application support teams. There is also a business manager specifically for the DTF. This represents a completely different product line and target customers compared to the traditional offerings, particularly with the DTF and the Presto solutions. The focus here is on enabling on-demand manufacturing, something that traditional technology has not provided. Traditional methods using pigment and acid inks require lengthy processes involving pretreatment, printing, steaming, and washing, which consume a lot of water and create significant pollution. With our technology, we can print directly on any fabric without needing pretreatment or post-treatment, whether it’s blended or natural fabrics like cotton or polyester. This allows for one-off dresses or unique cotton designs for home use, which is revolutionary. The industry is shifting towards at-home coloration and diverse fashion options. Designers are excited about this technology, and it will be evident during events like New York Fashion Week and LA Fashion Week, showcasing their creativity. For consumers, they can now purchase unique designs that meet their needs for the first time. We anticipate a significant transformation in the industry, which we are actively driving, and we expect long-term growth from the DTF business.

We have one more question from Brian Drab with William Blair.

Hi, I have to admit I was a bit confused by the reporting, and it seems the data aggregators misrepresented your headline numbers compared to how they had been for the past year and a half. I just want to ensure I have this right. You reported $0.22, which matches the consensus of $0.22. However, your revenue guidance for this quarter was between 76 and 80, and if we compare that apples-to-apples, you achieved 88, correct? I just want to confirm if these numbers are accurate and if you're adjusting for the warrants.

Yes, thank you for clarifying, Brian. So if we take apples-to-apples, we are guiding without the impact of the warrant; we guided 76 to 80. We delivered more than 88, so it's well above what we guided well above what the market expected. And you can see the growth so far into Q3.

Yes, and your gross margin, I guess, would have been 52%, and your operating margin was 19. And adjusted EPS was $0.35 relative to consensus.

Right. Apples-to-apples on the operating margin, you should say 18%, 19% operating profit versus the guidance. So it's well above what we guided last quarter on operating profit.

And $0.35 cents per share, yes.

Understood, yes. I mean, I just got confused, right, because for at least the last six quarters, they were reporting it correctly. And I just assumed it was correct. So I just want to clarify that since if I am confused, I assume there are at least a couple of other people that might have been.

So it might help you, all of you. So it might help you all of you to look at the TR, there is a table that shows the comparison with the impact of the warrant and without the impact of the warrant. It will clarify this.

Right. Exactly. And then can you just maybe give a quick update if there's any evolution to your thinking regarding the best way to monetize KornitX? And is that business models that what can you tell us about the revenue model? Thanks.

As mentioned previously, our revenue nowadays primarily comes from transaction fees, which are generated from both the impression generator, whether it’s a marketplace or brand, and the fulfillers. We are currently exploring various business models. We have recently hired a strong COO who, together with the president of the business, is examining these models and will shape our future business strategy. The new COO has already begun to provide valuable insights and ideas. However, it's still too early to finalize our business model. I believe we will develop different models for diverse audiences. There are significant opportunities for monetizing the data generated by our systems, and we see great potential in this area as well. Please stay tuned for more updates in the future.

There are no more questions at this time. And I'd like to turn the call back to Ronen Samuel for closing remarks.

So I want to thank everyone for joining us this morning on this call. Although, this is afternoon in Israel, this is morning for the US. First of all, we'd like to thank our team for an amazing quarter for amazing momentum. I would like again to welcome Voxel8 to the family of Kornit, to the growing family of Kornit. We are very pleased with the quarter results, second quarter first half results, and fantastic results. But we are even more excited about the many growth opportunities ahead of us about H2 overall, about how 2020 is going to look like with all the new products in production. We look forward to sharing our progress with all of you after the LA Fashion Show and Kornit New York Fashion Show. So we have tons of excitement also on KornitX to share with you in the coming months. So in the meantime, thank you all again, and looking forward to meeting face-to-face soon. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation. Have a great day.