Kornit Digital Ltd. Q3 FY2024 Earnings Call

Ladies and gentlemen, good morning and welcome to the Kornit Digital Third Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jared Maymon, Investor Relations for Kornit Digital. Please go ahead, sir.

Thank you, operator. Good day everyone, and welcome to Kornit Digital's third quarter 2024 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel; and Lauri Hanover, Kornit's Chief Financial Officer. For today's call, Ronen will provide comments on the third quarter of 2024. Lauri will then review the third quarter numbers and provide our third quarter outlook before we open it up for Q&A. Before we begin, I’d 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 plans, strategies, projected results of operations or financial condition and all statements that address developments that the company expects will occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by the forward-looking statements. I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's Annual Report on Form 20-F filed with the SEC on March 28, 2024, which identifies specific risk factors that could cause actual results to differ materially. Any forward-looking statements are made currently and the company undertakes no obligation to publicly update any forward-looking statements, 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 also posted on the company's Investor Relations website. At this time, I’d now like to turn the call over to Ronen. Ronen?

Good morning, everyone, and welcome to our third quarter 2024 earnings conference call. Today, I'm pleased to report revenues of $50.7 million and adjusted EBITDA margin of 2.9%, both within the guidance ranges we set in August. Achieving positive EBITDA and generating cash from operations this quarter underscores our disciplined focus on cost control, working capital improvements, and operational infrastructure optimization, all positioning us for sustainable, profitable growth. Our gross margin also saw substantial improvement, climbing to over 50%. This shift reflects a more profitable sales mix and higher margin products and services, showcasing the operational gains we are realizing as we transform our business model. As we discussed during our investor event in September, our revamped go-to-market strategy is unlocking significant new market opportunities. Outdated fashion supply chains are struggling to keep pace with today's demands for speed, creativity, and sustainability, and brands are urgently seeking agile production solutions. Kornit's offerings meet these needs precisely, and we are seeing accelerating demand for analog screen production to digital conversion. Our Apollo system, coupled with the new All-Inclusive Click or AIC model, is driving this shift. With 12 out of 15 Apollos already shipped this year and the remainder scheduled for deployment before peak season. We are collaborating with industry leaders like Print Palace and T-Formation, and our pipeline of pure-play analog screen businesses, interested in Apollo and Max technology continues to grow. Our AIC model is a key driver, addressing the multibillion impression analog screen replacement opportunity by lowering the barriers of entry for high-volume manufacturers seeking a transition to digital production. AIC provides a predictable cost structure while eliminating the need for capital investment, enabling manufacturers to leverage digital agility while meeting the quality demands of global brands and retailers. This quarter, we also shipped multiple Atlas MAX systems on the AIC model and have added promising new opportunities for AIC on MAX into 2025. This combination of our innovative technologies and this powerful business model is expanding our market reach and accelerating the industry transition to on-demand digital production. Looking ahead to 2025, we are on track to deliver 30 Apollo systems, with approximately 20 expected to be on the AIC model. We already have the same visibility on more than half of these systems with some as confirmed orders. This aligns well with our long-term financial targets, which include double digit revenue growth and a growing base of recurring revenues from AIC and enhanced profitability. Beyond progress with Apollo and AIC, during the quarter, we upgraded some of the Atlas fleets of our global strategic account to the Atlas MAX. We are also advancing and seeing momentum in the roll-to-roll business, particularly in the footwear market. In China, we are making significant progress in this market with both existing and new customers. A strategic customer already using our technology has received large orders from major brands and is now ramping up production with our Presto MAX systems. This growth presents potential for expansion with additional systems early next year. We have also secured a new order from another prominent player in China's footwear market, both of whom supply two major global brands. This progress underscores our competitive edge and positions us for continued success in our roll-to-roll business into 2025. As we enter the fourth quarter peak season, the market is showing continued signs of improvement, validated by strong consumable and system orders for Q4 delivery. This visibility, paired with the growing momentum of AIC, supports our expectation for gradual recovery and year-over-year growth in Q4, consistent with our guidance for H2 to be at least 20% higher than H1. In closing, we are seeing good signs of stabilization and recovery, which are driving anticipated improvements in revenue growth and profitability. Kornit is well positioned to lead the digital transformation of the textile industry. Brands and retailers need agility, and our solutions meet this demand for speed, quality, and sustainability. Supported by the recurring revenue from AIC and our industry-leading technology, we are confident in Kornit's path towards 2025, delivering value for our customers, shareholders, and employees alike. Now let me turn the call over to Lauri for a closer look at our Q3 results and guidance for the fourth quarter.

Thank you, Ronen, and good day to everyone. Third quarter revenues were $50.7 million, within the guidance range of $48 million to $52 million we provided in August. As expected, year-over-year system sales declined, while service sales were approximately flat, and impressions and consumable sales grew. Sequential growth was primarily driven by higher system sales versus the second quarter. Moving to margins, third quarter non-GAAP gross margin reached 50.3% compared with 37.4% in the same period last year. The year-over-year improvement is largely attributable to a favorable mix shift as high-margin consumable sales represented a higher proportion of overall sales, with no warranty impact and lower inventory adjustments. Sequential improvement was driven principally by volume gains. Looking at operating expenses, total third quarter non-GAAP operating expenses were $26.8 million, a decrease of $4.3 million, or 14%, from the $31.1 million in the same period last year. The reduction in expenses reflects continued progress towards our goal of reducing operating expenses by $20 million year-over-year, which is driven primarily by the cost savings and restructuring initiatives implemented earlier this year. Moving to profitability, the third quarter adjusted EBITDA was positive $1.5 million. This return to positive adjusted EBITDA is a significant improvement versus the negative $5.6 million we reported in the same period last year and the negative $1.6 million we reported last quarter. Adjusted EBITDA margin for the third quarter of 2024 was positive 3% within the guidance range of 1% to 6% we provided in August. Our balance sheet remains robust, with our quarter-end cash balance, including bank deposits and marketable securities, increasing to $561 million. Operating cash flow, less capital expenditures and investment in long-term assets in Q3 was $3.1 million, including $1.5 million of restructuring outlays and compared with negative $8.7 million in the same period last year. This improvement in year-over-year free cash flow is attributable to cost savings and restructuring initiatives implemented earlier this year in addition to strong collections. As we shared at the investor event, growth investments in our AIC program are treated in the consolidated statements of cash flows as investments in long-term assets and are presented under cash flow from investing activities. In Q3, approximately $10 million of growth investments in our AIC program were reflected under cash from investing activities. Thus, reported cash flow from operating activities was $13.6 million in Q3, and investments in long-term assets and capital expenditures were $9.7 million and $0.8 million respectively. We remain focused on generating positive operating cash flow for the full year 2024. Moving on to our share repurchase program. According to Israeli law, we were subject to a 30-day waiting period, which concluded during our blackout period ahead of Q3 earnings. As our blackout period concludes following earnings, we will be able to begin repurchasing under our new $100 million repurchase plan. As Ronen mentioned, we are on track to ship 15 Apollo systems by the end of this year, with 10 of those and a growing number of Atlas MAX systems using the AIC model. This is expected to provide a solid base of recurring revenue going into 2025. Looking ahead, we plan to ship 30 Apollo systems in 2025, 20 of which we expect to be on the AIC model along with more Atlas MAX systems. This will expand our base of recurring revenue, making it a more significant part of our overall revenue. Turning to fourth quarter guidance, we currently expect to meet our target of at least 20% revenue growth in the second half of this year versus the first half and positive adjusted EBITDA for the full year. Accordingly, for the fourth quarter of 2024, we currently expect revenues to be between $58 million and $63 million, and adjusted EBITDA margin to be in the 12% to 16% range. That concludes our prepared remarks. And with that, I will now turn it back over to Ronen to open the call up for Q&A.

Thank you, Lauri. Operator, please open the line for Q&A.

Thank you. The first question comes from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, good afternoon, guys. Thanks for taking a couple of questions. Maybe we could just start with the overall market, kind of what you're seeing there. Obviously, you've seen lots of momentum on Apollo. Any momentum in the overall market?

Yes, Chris, thank you very much for the question. Overall, what is clearly being seen this quarter is that brands, retailers, and the entire market is shifting into on-demand production. When you are talking to brands and retailers, they are all talking about bringing products fast to the market, having the flexibility for short runs, mid runs, and long runs. They need the creativity to bring new SKUs to the market and sustainability is becoming more and more important. Overall, they need agility, and the agility they can get through on-demand which our technology has the perfect fit to meet those needs. We see overall market recovery and stabilization. It's too early to say that we are out of the woods, but we see it clearly both in our customers. We see the impressions growing. They are talking about getting more jobs from screen. We can see movement from screen to digital when we are talking with large manufacturers for brands, they are discussing large orders and we see retailers adopting their on-demand production. Overall, I can say that I'm pleased with our operational progress this quarter. We have set a clear target for our business looking into 2024. We said very clearly a few months back that we would like to see H2 growing by 20% versus H1. We also said very clearly that we would like to be on adjusted EBITDA margin positive for the full year, and we are tracking very, very well. Q3 set the tone for the year. Overall, in Q3, we saw the sequential growth on system. Finally, we start to see system growth. We saw a major improvement in the margin. We delivered positive EBITDA as we promised. We generated positive cash flow as we promised and we overall met our expectations in terms of cost structure that we brought in OpEx expenses. Overall, for the OpEx as Lauri mentioned in the prepared notes, we see a $20 million reduction versus last year, and this shows excellent execution by the team, setting the business into continued profitable growth moving forward. I'm also very pleased this year and specifically in Q3 about the execution. Execution on the Apollo, on the new products introduction. This is the first year of the Apollo with a great reception by the market. I'm very pleased with the introduction of the MAX Plus and the upgrades across the fleets of our installed base with the Plus. I'm very happy with the momentum that we see in the roll-to-roll and the upgrades that we are concluding on the Atlas from Atlas to Atlas MAX. We also introduced for the first time this quarter the AIC for the Atlas following the AIC for the Apollo, and we see a great reception. It's opening for us totally new markets, bringing us new customers, and they see the benefit of aligning the revenue into the cost of having predictable costs and it's really opening for us new opportunities. We shipped many systems during Q3 both on the Apollos and Atlas MAX that are going to generate nice recurring revenue, doing already in Q4, we will see some of it but definitely into 2025. Those technologies really open for us massive market opportunities. We are talking about the bulk apparel for the first time, and we are entering big time there. We see an expansion of the sum by $6 billion impression with the Presto MAX and the ability to print with white ink on dark fabric with XDi opening for us for fashion, but specific segments like footwear and footwear is a massive segment where we see advancement with new customers in China and existing customers are finally growing and ramping up into production. We are opening new markets like home decor, and we also see some recovery of customers in the customized design. We see growth in customized design, and some of them require additional capacity and are getting into additional systems into their fleet. Overall, we are working very hard to revamp our go-to-market strategy. We are bringing talented people to our team, moving from selling boxes to selling solutions and helping our customers to grow their impressions. The AIC model forces us to work hand-in-hand with our customers, which is great and will drive benefits for both our customers and Kornit. On top of that in Q3, I mentioned in our prepared remarks that we started to implement some upgrades to our global strategic account from Atlas to Atlas MAX, and at this stage, it looks very successful. On top of that, we see strong momentum in the Apollo. In Q3, as of today, we already shipped 12 out of the 15 systems. We are planning to ship all the 15 before the peak season, and we are already prepared for the 30 units for next year, of which we have commitments for more than half of them already. As I mentioned, the AIC together with the Apollo and together with the MAX is really opening for us new opportunities in the market. All of it is a great achievement of the team, and I'm very pleased to say that with a lot of hard work in front of us, 2025 will be the year of transformation of our business model from the AIC with the CapEx model. This will build recurring revenue and will set us for accelerated growth into 2026 with scaling up, of course, the Apollo in the market. Kornit is at a turning point right now, and with the current market evolving and improving with the technologies we have, with the new business model and the execution we showed in 2024, I'm confident that we'll have a solid 2025 and continue acceleration in the coming years.

Got it. Very helpful. Just one quick follow-up on the Apollo. So it sounds like two-thirds are going to be shipped both this year and next year under the AIC model. Just trying to understand where is the crossover when it becomes more effective to buy the Apollo upfront versus the AIC model? Is it a certain number of garments per day, per year, or just how you or customers think about that?

Yes. So, as I mentioned, the AIC is a new business model, and we are running it in parallel to the CapEx. We see today some of our customers buying on CapEx, while some of them are buying on AIC. What differentiates between them in general is that new customers, mainly from the screen market that are getting for the first time into digital, are looking for predictable costs, which they didn't have experience with before, and the AIC model provides them predictability. They know exactly how much every impression will cost them. Additionally, they have the volume that they know that they can move from analog, from screen to digital, which reduces a lot of their risks on the commitments they are making over the next five years on this model. So this model is a great fit for those customers who are a bit risk-averse on the costs and are getting for the first time into digital. On the other hand, customers that are already using Kornit and digital, who know how to operationalize it efficiently, sometimes have the volume, may do the calculation and find that if they take the systems on CapEx and buy the ink and services separately from us, they might find it a bit cheaper than the AIC model. So, it’s a great fit for different types of customers, and right now we see great adoption from AIC. We believe this momentum will continue to many new customers and those that would like to expand further and have some limitations on CapEx, and therefore, at this stage, we are focusing that 75% of our DTG business mainly from Apollo and Atlas Max's moving forward will be on AIC versus 2025 on CapEx.

Yes. Good morning. Thanks for taking the questions and helpful answer on the first answer, Ronen. So thanks for that, a lot of color. When you kind of put that all together, how does that make you feel about 2025, just given the ramp-up of Apollo, you've got maybe a little bit of a stabilization or recovery in the base business, a couple other one-offs in terms of order activity, sort of in light of your longer term mid-teens CAGR. I'm just kind of curious what your thoughts are overall next year?

Yeah. Thanks, Greg. So first of all, we provided longer-term directional guidance at our investor event about one and a half months ago. We didn't provide specific guidance for 2025, and I prefer not to comment on specific guidance for 2025. However, with all that I explained before, we see growth. We believe in growth. We believe that this year will be a year in which we will see profitability, but we need to approach it cautiously. The caution stems from the fact that the market is still volatile. Second, we are changing our business model and investing in new salespeople and education, changing much of the company's DNA. I would say that 2025 is a transition year in terms of our business model while you will see some growth and improvements in profitability during the year. We believe that more acceleration will come into 2026 and beyond.

Yes, understood. I know you have a lot of factors as more of this business goes through AIC. So I thought that was a good first question. And then in terms of your global strategy, you talked about just initial upgrade orders. Can you just give us a little bit more sense of how that went? I don't know if it's too early for feedback, but in terms of what plans are for potentially more upgrades and even capacity additions at some point in the future, maybe give us a bit more color on that as well? Thanks.

Yeah. So definitely, I will try to give a bit more color, but I cannot disclose the plans. We are working very closely with our global strategic account and they are sharing their longer plans with us, which I cannot share on this call. What I can say is that the overall business is growing very nicely and this quarter we implemented upgrades to some of their installed base. Those implementations have already been completed, and initial feedback has been positive. Of course, they will run it through the peak season. We don't have any commitment at this stage for additional upgrades for next year. Although, we are optimistic that if this peak season turns out to be successful, we will hopefully receive an order next year for additional upgrades. The potential is massive. We don't know if they will decide to upgrade part of the fleet, the whole fleet, or not at all. At this stage, we are hopeful and believe there will be momentum into 2025.

Just curious at what point might you have better visibility, I mean is it something shortly after this peak season to kind of figure out the success or would it be more like at this point next year or I guess in September when you talked or announced that initial upgrade order?

We are in constant engagement with them on a weekly basis. We have our quarterly business reviews with them and meetings face-to-face. They need to close their year and financials, so only then will we get an indication for next year. So, I really don't want to get into the timeline. I leave that decision to them. We have a great partnership with them, and hopefully, we will be able to provide indications or commitments from our global strategic customer either by the end of this year or early next year.

Great. Thanks so much for taking my questions. I have two as well. Ronen, I know a large part of your broader thesis for this business has been about the shift from analog to digital, but it does feel like your conviction in that shift has gotten stronger, and I'm just wondering if my interpretation of your comments is right and if so, what is changing? What is driving that higher conviction? What is driving the acceleration in the shift? Is it go-to-market? Is it really AIC? I'm just really trying to understand if you think the momentum is changing. It's what I hear in your voice, but just want to confirm that and if it is, what are the underlying drivers of that change in your mind? And then I have a follow-up. Thanks.

Yeah. Thanks, Erik. Yes, I'm super confident that this market needs a change and is moving to on-demand production, with a large portion transitioning to digital. It will take time, it's not going to happen overnight, but we see it. We can see it from different angles. One angle, of course, is the market itself. When you talk to any brand or retailer, they will tell you that they can no longer afford to wait for a product to hit the market for months. They now need it from today to tomorrow. Speed to market has become crucial. Thus, production is increasingly moving close to the consumer, and brands as well as retailers are placing orders with the expectation that they'll be delivered within days. Flexibility in terms of orders from brands and retailers has also become vital. They don't want to maintain excess inventory, which is leading to many shorter runs and many smaller volumes. All of this makes a lot of economic sense in utilizing digital production. Moreover, our technology is aiding this shift by allowing brands and retailers to do this sustainably and with the pigment, offering full agility for brands. So, from a market perspective, the shift is evident, and we are also seeing a move to having textile production done closer to home, particularly to places like Mexico, rather than relying solely on China. The technology angle plays a significant role as well; in the past, our technology wasn't the right fit to capture mid runs and meet brand and retailer quality standards. However, with MAX technology, we are not just meeting but exceeding those standards. With Apollo, we are entering mid-range runs and can shift a considerable amount from screen to digital. Lastly, we asked how we could accelerate this move into digital production, and talking to many screen printers, we noticed that for them, an investment of $1 million or $1.8 million in Apollo is significant. Not all have that capital available, and they can be risk-averse. By changing our business model and innovating the All-Inclusive Click while leveraging our strong balance sheet, we can accelerate the growth moving towards digital and making it a recurring, healthy business model moving forward, one we expect will flourish already in 2025. As we've mentioned since Q1, we will start reporting on the annual recurring revenue signed with our customers. All these components, along with the overhaul of our go-to-market strategy, bringing onboard experts from the screen market, reaching out to bigger accounts, and directly working with them, rather than just selling systems, is where we see real progress. We've seen tangible results with the likes of Print Palace, T-Formation, and Custom Ink transitioning tens of millions of impressions into digital with Kornit. Those are massive opportunities, and we can see the transition happening.

Great. That is really helpful. Thank you for all that color, Ronen. Maybe my second question is just kind of taking what you guys have done this year in terms of exhibiting your cost discipline and wondering how much more kind of gas you have in that tank, meaning obviously you kind of responded to the uneven demand environment this year with a renewed focus on profitability and cost. As you look to next year, I know you're not guiding, but again, your comments are directionally positive, and I'm just wondering, is there more cost discipline that you can exhibit to drive leverage in that model? Again, your long-term guidance would say so, but I'm just maybe more focused a bit on the next 12 months. How much cost discipline do you think you could exhibit and what that might do from an operating leverage standpoint in your model? And that's it for me. Thanks so much.

I'll start, and maybe Lauri will add something. As you mentioned, we are not guiding for 2025. On our long-term model, as we mentioned, we see an improvement in the EBITDA margin, adjusted EBITDA margin reaching 25% and gross margin expanding into 55%. We believe that some of this you will see in 2025, you will see improvement in profitability, and we believe you will also see overall gross margin expansion for the full year in 2025. But I don't want to color it right now, and we will come on the next call to provide some directional guidance for the year.

Maybe I will just add one thing. First of all, we have a clear focus on driving as much efficiency as we can in all parts of our business, but we did say in September that we were looking to reallocate resources from one bucket that served our purpose, let's say, in 2024, to drive those resources to grow our business for 2025 and beyond.

Thank you. Just on the Apollo systems that you're expecting to install next year, the 30 systems. How many of those would represent multi-unit customers, and maybe you can tell us how many you would anticipate being entirely new customers?

Thank you, Jim. It's a good question. As we mentioned for next year, we are planning to deliver 30 systems into the field on top of the 15 of this year, and also we mentioned that out of the 30 systems, about 20 of them will be All-Inclusive. We have a very healthy funnel of net new customers, but also existing customers. We need to understand that we are targeting with the Apollo and the AIC model, incremental volume. We are specifically targeting screen printers and our own installed base that have a fleet of carousels doing screen printing, and now they have the opportunity to shift that volume into digital, specifically to Apollo, and some Atlas MAX if they are on AIC or not. As you are asking about next year how many of them will be net new, it's too early to say. What we already mentioned in our PR that we released during the quarter is that we have one customer doing very well with Apollo. This year, we are installing their seven systems. We are currently delivering the last system for this year and are already committed to 10 additional systems next year. The main focus of this customer is to close the screen facility and move jobs from screen to digital. We have other customers like MedEngine and Zoomin, each of whom we believe will continue to grow with additional Apollos, and we already mentioned a few other names like Hybrid, Digital, DSS, etc., that will continue with us on the Apollo. Additionally, we have a list of net new customers, and we are placing a lot of focus there, and the sales cycle is progressing very positively. The aim is to build a strong funnel for 2026, which is the year we wish to accelerate the number of units shipped to the field, and we need to build that throughout 2025. Hopefully, I gave you the answer you were looking for.

It helps, Ronen. Thank you. And just one quick follow-up. What have you said what percentage of the Atlas installed base has been upgraded to MAX out in the field?

No, we didn't say. We say that most of our installed base has already upgraded from Atlas to Atlas MAX. Now we are in the process of upgrading our installed base even to Atlas MAX Plus, which is progressing very well. The upgrade to Atlas MAX Plus, one of the largest fleets that we didn't upgrade yet from Atlas to Atlas MAX is of our global strategic customer. As I mentioned, we started to do some upgrades during Q3 and hopefully it will be a good indication for next year.

Hi. Thanks for taking my questions. I wanted to ask if you could give any color; you did mention in your comments already the traction with the Atlas under the All-Inclusive model. I was wondering if you can comment a little more on that, what's the response been? And do you have any capacity constraints? Or are you comfortable with your ability to deliver relative to demand? And just part C, did you provide yet a minimum revenue number associated with the AIC model for the MAX machine?

Yes. Thank you. So let's first of all understand who fits Atlas MAX on AIC versus Apollo on AIC. This differentiation is mainly based on volume—on volume that the customer can commit they will use the system on an annual basis. For example, on the Apollo, without getting into impression numbers, the customer needs to commit to $1 million of impressions that will flow to Kornit. This is the revenue that we see on the Apollo. Not every customer has such a large volume of business that they can shift to digital. There are many smaller and medium-sized screen printers that would like to have the agility, flexibility, and on-demand of digital, along with the quality of Kornit, but they cannot afford the required volume necessary for the Apollo. For that, the Atlas MAX is a great fit. On the Atlas MAX, we had indicated during our investor event that the annual revenue we will receive from those customers using the Atlas MAX will be in the range of $300,000. This means about one-third of the volume and revenues that we will get from the Apollo. We see great momentum; in fact, this quarter we shipped a nice number of systems, some of them to entirely new customers, and some of them to existing customers that would like to expand mostly into screen replacement, and the funnel is very healthy moving forward into Q4 and next year. Of course, it will significantly contribute to our recurring revenue into next year.

Great, thanks. That's some really good color. Just one more for me around gross margin. You commented that the favorable mix this quarter contributed to the 50% gross margin. Given your long-term target of 55% when the All-Inclusive model is fully ramped, I'm just wondering where do you see maybe some pressure coming in over the next year or so that might change that? Or is this a new level going forward due to the mix?

Overall, as we said in our investor event, we believe there is potential for expansion over the next few years into the 55% gross margin. This expansion will partly come from the business transition leading to more impressions. Impressions correlate directly with ink sales, and ink typically has strong margins. Moving into more impressions, whether it’s through the AIC or selling systems with higher capacity, will contribute positively to gross margins, and this is our focus moving forward, aiming for larger players that generate a lot of impressions and selling ink with strong gross margins. We believe you will also see improvement in gross margins over time from the services side, and certainly, selling more systems and increasing the volume will also enhance gross margins. Hence, increasing the volume of systems we will sell on CapEx will also improve gross margins.

Hi, thanks. Most of my questions have been answered. I just wanted Ronen, can you say regarding the services revenue and any upgrade revenue? It just looks like service revenue is flat year-over-year. Are we seeing significant upgrade revenue in that number in the third quarter service revenue, or will we see that in the fourth quarter?

Thank you, Brian. The reason you see flat numbers compared to last year is because last year we had significantly more upgrades mainly from Atlas to Atlas MAX, which included this service revenue, and this year you see less upgrades. Some of these we already discussed about our strategic global customer, which is already included in those numbers but significantly less versus last year, and this is why you see it flat, while other parts of the service, like contracts, are going up, but you can see an improvement in margin, specifically gross margin on services this quarter.

Okay. And then can you just comment at all on how confident you are in your manufacturing capability for Apollo and the manufacturing partners' ability to deliver 30 of these machines next year, and if there's any concerns regarding where you're making them, given the unfortunate conflict ongoing in your region? Thanks.

Thank you. We have a very strong team working with our contract manufacturers to ramp up the production of the Apollos for next year. We already see a steep increase in the number of systems we are producing in Q4 and into Q1, and I have full confidence that we will be able to deliver those 30 systems, both from our perspective and our contract manufacturer’s perspective. Regarding the situation in Israel, we are taking all necessary steps to ensure there is no impact on our customers. We have built a healthy inventory of ink, more than six months' worth, in the regions. We also have plans in place to produce our inks and consumables in the U.S. in case we need to close the facility in Israel. Our spare parts are mainly produced outside of Israel and can be shipped worldwide. We are working with global contract manufacturers like Flex and Sanmina, which have redundancy plans and other means to shift production if necessary. Of course, we hope that it won’t be required, but we are preparing accordingly, and we will continue to produce and deliver what’s needed to our customers. Yes. So thanks everyone for joining today's call. Please reach out to Jared if you have any other questions or if you are interested in follow-up calls. Otherwise, we look forward to updating you on the progress again in the New Year, and I would like to take the opportunity to thank our team for really great operational execution and to all of you for being partners and believing in us.

The conference of Kornit Digital has now concluded. Thank you for your participation.