Earnings Call Transcript - KRNT Q2 2022

Operator, Operator

Greetings, everyone and welcome to Kornit Digital's Second Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I’d like to turn the floor over to our host, Andrew Backman, Global Head of Investor Relations for Kornit Digital. Mr. Backman, you may begin.

Andrew Backman, Global Head of Investor Relations

Thank you, operator. Good day, everyone and welcome to Kornit Digital's second quarter 2022 earnings conference call. Joining me today are Ronen Samuel, Kornit's Chief Executive Officer; Alon Rozner, Kornit's Chief Financial Officer; Amir Shaked-Mandel, EVP of Corporate Development, and I'm happy to welcome Lauri Hanover, who, as we announced this morning, will be transitioning to the CFO role in November. Welcome, Lauri. For today's call, Ronen will recap the results for the second quarter, discuss the current operating environment and review some of the actions we've undertaken to help successfully navigate the current market dynamics. Alon will then dive into the second quarter numbers and provide our current third quarter outlook before turning it over to Lauri for some brief commentary. After which, we will conclude today's call with a question-and-answer session. 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 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. I encourage you to read the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 20-F filed on March 30, 2022 which identifies specific risk factors that could 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, 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 our website in the Investor Relations section. At this time, I would like to now turn the call over to Ronen. Ronen?

Ronen Samuel, CEO

Thank you, Andy, and good day, everyone. Thank you for joining us on today's call. As we reported this morning, second quarter revenue was $58.1 million, net of approximately $4.5 million of noncash warrants impact related to a global strategic account, in line with the preliminary revenue range we announced on July 5. As a reminder, the gap between the guidance we provided in May and our second quarter results was driven by a shortfall in DTG systems revenues, mainly in the Americas region. Clearly, not the great first half that we were expecting as we entered the year. As we look across the business, we see some customers, particularly in certain e-commerce segments, continue to digest excess system capacity built in the past two years and navigate macro-related issues while others continue to grow nicely, although at a more normalized pace. We also see certain customers making good progress on their expansion plans and new production facilities. As a result, several deals we expected to complete at the very end of the second quarter have either already closed in the third quarter, remain in our backlog, or have moved to 2023. Looking at the consumables, revenues were in line with our expectations as some customers have worked through the inventory buildup experienced in the last few quarters. We continue to expect consumables to grow sequentially throughout the balance of 2022 as our customers gear up for the peak season in the third and fourth quarters. For the first half of the year, we saw good growth in both EMEA and Asia Pacific. In EMEA, the pipeline for the second half of the year is improving as the team continues to make progress with several major brands and retailers across the region, including CNA, Hype, and one of the world's top five fashion brands that is vertically integrating a number of Atlas MAX systems into one of their production facilities. They are also exploring a broader, larger-scale global deployment. In Asia Pacific, after a very long period of lockdowns, especially in China, the region continues to open up. Our team is traveling again, meeting with customers, prospects and making progress with several large brands, digital platforms, and strategic accounts. We are also engaged with several major manufacturers in the regions that are responding to the growing demand from global customers to transform their supply chain and shift more production volumes to nearshore shorter-run production. In the Americas, Latin America is ramping up nicely, driven particularly by demand for the press to MAX. We are seeing more new business opportunities with mid-market brands and retailers as the broader U.S. apparel industry focuses on margin and supply chain improvements. We believe this can be well achieved by shifting more production volumes from traditional offshore mass production to on-demand at a closer proximity to consumers. On the DTG side, we have recently started working with a specialty retailer of casual apparel operating over 200 stores across the U.S. In addition, a major onshore apparel manufacturer for some of the largest licensors and retailers in the U.S. is making their first entry into digital printing with Kornit, having historically produced 100% on analog equipment. And finally, we continue to work in a very close partnership with our largest global strategic account on their meaningful domestic and international expansion plans. We have a clear understanding of the key focus areas, potential meaningful new opportunities, and our relationship is stronger than ever. While the overall operating environment remains uncertain in parts of our business, the opportunities ahead of us remain firmly intact. However, to successfully navigate the current market dynamics, we are focused on three key areas within our business. First, we continue to work with brands, retailers, and fulfillers of all sizes on helping them better understand the operational and financial benefits of shifting production volume to Kornit's on-demand sustainable mass production digital solutions. Second, ensuring a successful rollout of our NPIs, including Presto MAX, Atlas MAX Poly, Atlas MAX upgrades, and a new user interface for our KornitX offerings, in addition to the widely anticipated launch of the Kornit Apollo in mid-2023. Feedback on the Apollo has been excellent, validating that our technology is superior and fits perfectly with their long-term growth plans. Simply stated, customers, including some of our largest strategics, want Apollo now. And third, returning to profitability, while we have made some tough but necessary decisions recently, including a forced reduction in force last month, we continue to strategically review all aspects of our business and will continue to adjust our cost structure as needed without sacrificing our key growth initiatives, investments in long-term programs, and our ability to support our customers. Two more comments before I turn it over to Alon. As announced this morning, our Board authorized the repurchase of up to $75 million of the company's ordinary shares. We believe this is a flexible way to return value to our shareholders while not adversely impacting our ability to execute on our strategic growth plans. We also announced that Alon will be stepping down as Kornit CFO in November for personal reasons. Alon has been an integral and trusted member of our executive management team and an extremely valued colleague to everyone here at Kornit. I am very proud of what Alon has built since joining the company, especially helping us navigate through the global pandemic. We are all extremely grateful for all his accomplishments and wish him only the best in his future endeavors. Thank you, Alon. Also announced was the appointment of Lauri Hanover as our new CFO. Lauri has served as a member of Kornit's Board of Directors since 2015 and served as our Audit Committee Chair and as a member of our Compensation Committee. Lauri knows the management team very well, has a deep understanding of our company and brings over 25 years of CFO experience across multiple industries. Since I joined Kornit as CEO four years ago, Lauri's advice and counsel have been invaluable to me. As such, I have no doubt that she is best positioned to energetically step into this role from day one to build upon and execute on Kornit's exciting long-term growth objectives. Welcome, Lauri. With that, let me turn the call over to Alon for a closer look at the numbers and the outlook. Alon?

Alon Rozner, CFO

Thanks, Ronen and good day to everyone. As Ronen mentioned, second quarter revenues were $58.1 million, net of the $4.5 million noncash warranty impact related to a global strategic account. Lower-than-expected DTG systems revenues drove the shortfall between the guidance we provided in May and our second quarter results, while consumables were in line with our second quarter plan. The top 10 customers were in line with our expectations and accounted for approximately 52% of total revenues this quarter. Moving to margins. Non-GAAP gross margin, net of the impact of the warrants, was 38.6% compared to 48.2% in the same period last year. The lower year-to-year gross margin was driven by materially lower systems revenues, mainly in the Americas region. Looking forward, we anticipate gross margins in the second half of the year to improve versus the second quarter as revenues from consumables and services increase throughout 2022 and as we gain operational efficiencies on the fixed cost structure of the business. Turning to expenses. Total second quarter non-GAAP operating expenses were $40.7 million for the second quarter compared to $29.2 million in the same period last year. The main drivers for the increase were higher research and development expenses, which increased 39% year-over-year to $12.8 million or 22% of revenues, and sales and marketing expenses which increased 55% year-over-year to $19.3 million and represented 33% of revenues. G&A expenses increased 15% year-over-year to $8.6 million and represented approximately 15% of revenues. As I mentioned last quarter, our second quarter spend was mainly associated with various NPIs such as the Atlas MAX Poly and the Presto MAX, as well as significant go-to-market and branding events, including Fashion Week Tel Aviv, Fashion Week London, and the FESPA industry event in Berlin, Germany. We currently expect operating expenses to level in the third and fourth quarters to be lower than the second quarter, in part due to lower marketing expenses and as we start to realize some of the benefits of the cost structure adjustments we have made in the business thus far. Non-GAAP operating loss was $18.3 million, net of the $4.5 million noncash warrants impact. As I mentioned, the substantially reduced level of second quarter revenues, coupled with materially higher sequential operating expenses drove the operating margin to negative 31%, inclusive of the noncash warrant impact of approximately 10%. We ended the second quarter with 1,009 employees, a year-over-year increase of 246 and an increase of 96 employees from the previous quarter, due mainly to additions from the acquisition of Tesoma. As Ronen mentioned earlier, we recently made the difficult but necessary decision to complete a focused reduction in force last month. Non-GAAP net loss for the second quarter was $15.6 million or a loss of $0.31 per basic share as compared to non-GAAP net income of $10.5 million or $0.22 per diluted share in the same period last year. Adjusted EBITDA loss for the second quarter was $16.1 million as compared to adjusted EBITDA of $11.4 million in the second quarter of 2021. Our cash balance, including bank deposits and marketable securities at quarter end, was $705 million. During the quarter, receivables decreased as expected due to a healthy collection associated with closing sales late in the first quarter. Inventories increased due to systems that are waiting for shipments to one of our customers who is experiencing delays in the completion of their new production facility. In addition, during the second quarter, we closed the acquisition of Tesoma. As Ronen mentioned, our Board authorized a share repurchase program of up to $75 million which, as an Israeli-based company, is subject to receipt of Israeli court approval. The Board and management agree that using a portion of the cash on our extremely strong balance sheet to repurchase shares is in the best interest of the company and our shareholders. Further, we believe that the share repurchase program won’t impact our ability to execute on our growth plans. Turning to guidance, we continue to adapt to the current market dynamics by strategically looking at all aspects of our business and adjusting as needed without sacrificing key growth initiatives, investments in long-term programs, and our ability to support customer needs. We have a good line of sight for the third quarter. We currently expect revenues to be between $66 million to $70 million based on the closing of some of the transactions that were delayed from the second quarter, our current systems backlog, and the expected growth contribution from consumables and services revenues. We further expect fourth quarter revenues to be at similar levels to the third quarter with a higher mix of consumables. We anticipate operating margins in the third quarter to be in the minus 15 to minus 11% range, with EBITDA margins in the minus 12% to minus 8% range. We further expect fourth quarter operating and EBITDA margins to improve sequentially as compared to the third quarter. I will remind everyone that all guidance provided today assumes zero impact from the fair value of issued warrants in the quarter with our global strategic account. And finally, as Ronen said, in about two months’ time, I will be leaving Kornit for personal reasons. This was an extremely difficult decision for me as I truly love working at Kornit and with its entire world-class team. I have no doubt the company is perfectly positioned to capture the tremendous opportunities ahead and wish everyone here only the best. I know the company is in great hands with Lauri, having worked so closely together since my time here and I look forward to working with her to transition the Chief Financial Officer role. And with that, let me turn it over to Lauri.

Lauri Hanover, Incoming CFO

Thank you, Alon. I joined Ronen in thanking you for all of your accomplishments and tireless efforts as our CFO over the past two years. I look forward to working closely with you through the transition and wish you the very best. For me personally, I'm very excited to join this amazing company at this point in its evolution and to work closely with the entire management team to execute on our long-term strategy and drive value creation. Having served on the Board for the last seven years and understanding the company, I strongly believe that the best is yet to come. I look forward to personally meeting many of you in the investment community over the coming months.

Andrew Backman, Global Head of Investor Relations

Great. Thank you, Lauri. Before we open it up for Q&A, I want to note that Ronen is joining us remotely today due to the passing of his mother. All of us want to express our deepest sympathies and condolences to Ronen and his family. Jamie, will you please open it up for Q&A.

Operator, Operator

Our first question today comes from Jim Suva from Citigroup.

Jim Suva, Analyst

I have a question and a follow-up. You mentioned since your July 5 negative press release that many of the hardware units or printers have been sold or are in the process. I just want to see, are they all going to be sold in Q3, are they lingering into Q4 or some cancellations? Just kind of an update on the Q4 shortfall due to inventory digestion and then I have a follow-up?

Ronen Samuel, CEO

So Jim, thank you for the question. If I understand, you mean the shortfall that we had in Q2 due to the site readiness of our strategic global customer. Am I correct? This was the question?

Jim Suva, Analyst

Yes.

Ronen Samuel, CEO

So, I would start by saying we have great visibility and a great working relationship with our global strategic customers. We actually met with them a month ago here in Israel. A week ago, there were management meetings with top senior management from our strategic customers in the U.S. and we got visibility to the continuous development on the site readiness across the world. Specifically on the Q2 site readiness, this site is being ready these days. We have seen the process of shipment of the systems to the site; we are going to install those systems during Q3 and Q4. Therefore, we will always see the revenue recognition on those systems that are delayed from Q2 during H2. On top of that, there are other sites that are being deployed and in the process of construction. Those sites, we got an update that made very good progress. We will start most likely to ship systems to those sites during Q4 and the beginning of 2023.

Jim Suva, Analyst

And then, my follow-up question was on the consumables. I believe in your prepared comments, references made that Q3 and Q4 should grow. Are we talking, I assume, sequentially quarter-over-quarter as normally people buy more stuff in the second half of the year. But also I wanted to know, is the magnitude tempered down a fair amount from prior years or similar perhaps should we think about that comment as far as the magnitude of the growth?

Ronen Samuel, CEO

So first of all, the comment was regarding sequentially. You will see Q3 higher than Q2 and of course, Q4 higher than Q3. Q4 is always the peak season, end of Q3 as well. So this is the comment. Now we have much better visibility. We don't see the volatility that we had in Q1. We start to see more normalization into Q2 and now that we are almost in the middle of Q3, we have great visibility on the consumable growth. We see some customers going back into the growth pace but in H1, they were declining year-over-year. We expect to see H2 supplies higher. We will see a growth versus H2 of 2021. So H2 2022, you will see a growth on supplies but at a lower pace compared to what we have seen in 2021 relative to 2022. So there will be growth, but the growth is still lower than what we saw in previous years.

Operator, Operator

Our next question comes from Rod Hall from Goldman Sachs.

Rod Hall, Analyst

I guess I wanted to kind of come back to the big picture here. We know that capital spending in a lot of areas has been weaker. I mean, I think it’s obvious the macro is causing a lot of uncertainty out there. But then, Ronen, your comments on the large customer, it sounds like you’ve got pretty good visibility there. And I’m just curious, as you look out into next year and I’m not really asking for guidance, but I’m curious about your visibility. Do you feel like the order pipeline looking into next year looks pretty good? Do you think you’ve got visibility on what might happen next year? Is it just sort of a wait-and-see situation with the customers and how they’ll behave as we enter the beginning of next year?

Ronen Samuel, CEO

Yes. So I would start by saying that it's too early now to give any direction for 2023. I will give you some direction, but it's too early to really forecast or give guidance. What we see right now, we have much better visibility in Q3 and we gave a clear guidance, and we feel very confident about the guidance we gave for Q3. We're also starting to get better visibility into Q4. It's too early to talk about visibility for 2023. Other than our global strategic accounts that we are working on a three-year plan, we have very clear visibility for 2023 and their deployment plans. On other areas, on other customers, it is still too early to forecast for 2023. Now we should remember that 2023 is based on many of the new products and the vessels that we have done in the second half of 2022, and we start to see a really strong momentum there. If it's the Atlas MAX, if it's Atlas MAX Poly, which we didn't have before, the Presto MAX is gaining really nice momentum and nice traction. We were talking about the upgrades of the Atlas to Atlas MAX. We have done a change in this kit, and we start now to deploying the kit. We start to see very nice momentum. Actually, one of our biggest customers decided to deploy the entire fleet of Atlases and update it to Atlas MAX. We expect that 2023 will be very strong in terms of upgrades to the Atlas MAX's. Remember, in the middle of the year, we are going to release the anticipated Apollo which is a totally different ball game going to a totally different market as a replacement, and we already have very high demand for this machine for the systems. Many of our key customers were here in Israel, and we introduced a system, and we got amazing feedback on it. I can tell you there were people even this week saying they want it now; they would like to be part of the beta. So we expect 2023 to be strong. We expect 2023 to be stronger than 2022, but it's too early now to give any indication on the growth rate of 2023 versus 2022.

Rod Hall, Analyst

And then, I also wanted to follow up on the OpEx and operating margins. Maybe a question for you, Alon, just sort of what the trajectory is expected there; when would you expect an improvement in operating margins? And I guess how are you thinking about operating cost control in different revenue scenarios? Do you feel like you’ve taken all the actions that you could take in any scenario, or do you think if the broader macro gets worse, would you look to cut more? I’m just kind of curious what you’re thinking there and if you can give us any guidance or thoughts on operating margin trajectory? And by the way, Alon, great working with you as well.

Alon Rozner, CFO

Thank you. So operating margins are impacted by revenues, obviously. The higher the revenues are in general, the better margins, gross margins are as the impact of the fixed cost getting lower. As we go towards the end of the year, third and fourth quarters, we expect a higher mix of consumables at higher margins. So we do expect to see higher margins towards the end of the year. So this is one driver to improve the overall operating margin. In terms of the OpEx, as we said before, the second quarter was high or the highest in the year in terms of OpEx, mostly because of the special events that we had in the quarter, and we expect lower OpEx in the third quarter. We don't see a big impact from the cost adjustments we've done last month in the third quarter. Some were in programs, and some were in reduction in force. So we do see some benefits or savings in the third quarter. We expect to see higher savings in the fourth quarter having a full quarter of savings as a result of the reduction in force. And we continue to look at our business. We said that we are committed to profitability, and we are taking measures to ensure that we will be profitable as soon as possible. Again, theoretically, we can do it very fast, but the cost will be very high in terms of sacrificing the future, and we don't believe this is the right thing. So we are doing it responsibly; we reduce wherever we can, with a clear target to get to profitability as soon as possible.

Ronen Samuel, CEO

Maybe I will add one more thing on that. Just to start on what Alon was mentioning, we had a long discussion with the Board of Directors. The discussion was, do we want to move back to profitability really in Q3. We couldn’t have done it by cutting even more cost. It was clear to the Board and the management that the potential of the company, the market, the place that we are, this is not the time to cut. We see massive growth ahead of us. In front of us, we’re coming with new products. There’s a lot of development in R&D in many aspects, and we need to be very careful where we cut in order not to sacrifice our growth trajectory moving forward. So we’re doing it in a responsible way, where we can cut, but we are committing to moving back to profitability as soon as possible. You will see an improvement in Q3. You will see an improvement in Q4, and definitely in 2023.

Operator, Operator

And our next question comes from Brian Drab from William Blair.

Brian Drab, Analyst

I'm going between two calls right now, so I may have missed something; I apologize for that. Ronen, did you comment at all on the call today regarding the longer-term $1 billion revenue target and your confidence in getting there?

Ronen Samuel, CEO

No, we did not discuss it. However, we discussed being confident about the fundamentals of the company. I can tell you that the fundamentals of the company are stronger than ever. We can see a massive move of production from China and from other places to nearshore and onshore. We see where the e-commerce, we have new normalizing growth; e-commerce has continued to grow. We saw it on the macro and we see it on the micro with our customers. The short run is happening. We can see the demand from brands, retailers for short-run on-demand production. Sustainability is a key factor today for all the brands and definitely for the consumers. Our technology is better than ever. The maturity of the technology, opening the DTF is becoming much larger in terms of revenue overall, but also the BTG and bringing Apollo forward in mid-2023. KornitX is starting to gain momentum with major brands, and some major digital platforms, and we have a very strong team. We have a very strong team and we have a very strong customer base; some of the biggest brands are using our technology. If it's going vertically using KornitX, we believe the future for Kornit is beyond the $1 billion that we mentioned. As for the timeframe, we are working very closely and planning in detail to be there by 2026. We will come back to you at a later stage. Let us take the next few months to see the progress on the business. As for the $500 million in 2023, at this moment, we do not want to commit to bringing it in 2023. However, of course, we are internally continuing building our plans to bring it. It's too early now to commit; give us one or two months, and we'll come back to you with more detailed plans on the $500 million and $1 billion.

Brian Drab, Analyst

And just one more question for now. But on the Apollo, you’re having, of course, a lot of conversations with customers talking about use cases for the Apollo, the need for the Apollo. Can you talk about what you’re learning from the customers about that? What are the use cases? Why do they need this machine? And you said the interest is high, but if you could just talk a little bit more about why exactly they need this machine, what types of runs they’re going to do on these machines, volumes, et cetera, that would be great.

Ronen Samuel, CEO

Yes. So we are engaging with many different types of customers, some of them existing customers, key and strategic customers, and some of them totally new customers which have never used digital or used it in a very low magnitude. There is a very clear story. There is a story of the replacement, the replacement of the analog. When we are talking about replacement, we're talking about short to mid-run and we are talking about up to 500 copies of short run or mid-run. There is a discussion about the enablement, which is more of the customized design of the one-off. We see a great fit for this product into those segments. However, in the initial stage, we are focusing on the replacement market. What we hear from those customers is that the jobs run are getting shorter and shorter. Three years ago, it was in the thousands; now it is in the tens or the hundreds—and I'm talking about big, big customers that we see many, many, many jobs in the 10 or 100, less than the 500. So they're looking for an efficient way to run those jobs, and also they have a huge need for on-demand production. The way that Apollo is entering it, Apollo actually can produce 400 t-shirts or hoodies in an hour. It's the most productive system in the industry. Not only that, Apollo brings the quality of the Atlas MAX, the MAX quality which is by far the highest and superior quality in the market. On top of that, the total cost of ownership is very important. Total cost of ownership is not only the price of the system and the price of the ink; it's the operator. When you can run such a system with one operator with full automation that the machine is connected to a dryer and unloading the shirts by automation and semi-automation loading brings massive benefits. Manpower now is expensive and difficult to reach. Apollo is the answer for productivity and cost-effectiveness for short to mid-run. It’s clear that brands and retailers are moving production that they used to do outside in China, they're moving it nearshore and onshore, and by moving and changing the supply chain to onshore gives them the flexibility to order shorter runs versus long runs that they had to order from China because of the time and the pattern of shipment of the products. So the entire market is shifting into short run, and Apollo has a great place to capture this.

Operator, Operator

Our next question comes from Jim Ricchiuti from Needham & Company.

Jim Ricchiuti, Analyst

A couple of questions. I wonder what can you say about customer plans to move forward with field upgrades on the existing Atlas fleet that are out there? Just given the overall market weakness, has any of that work that you anticipated been pushed out?

Ronen Samuel, CEO

Yes. So it's a very good question because in Q1 and Q2, we were experiencing some customers that said, we would like to have the upgrade, but actually, we have overcapacity; we have too many systems versus the jobs that we have. We actually start to see normalization. We start to see growth with some of those customers that were declining in H1 and we start to see some growth in H2. A great example is one of our top customers in the world that decided to upgrade the entire fleet after testing this upgrade. We actually did an upgrade for two office systems, and they tested it extensively and saw the benefits—the benefits of additional production, the benefit of the quality, the benefit of the flexibility of running a much wider range of fabrics and textiles. We just got an order for the entire fleet, which is great. We believe that Q3 will be strong in terms of upgrade. We need to remember that Q4, the average part will be only in October, November, December. Customers are fully—they need the capacity for the production for the fixes. We will start to see growth in upgrades starting Q1 2023. So we expect 2023 to be strong, both in the upgrades of the Atlas to Atlas MAX but also in the update of Presto to Presto MAX.

Jim Ricchiuti, Analyst

Got it. And I was intrigued by the comment or the line in your presentation deck talking about the top five fashion brand that’s using Atlas in one of their production facilities. I know you can’t identify the customer, but can you shed any light in terms of how they might be using it?

Ronen Samuel, CEO

Yes. Unfortunately, I cannot share the name. I would love to share with you the name; it will be announced soon. But working with those megabrands requires a lot of dedication and working with different levels inside the company. There's a difference between getting agreement on the contract and the deployment. So we have faster deployment. We already installed and did all the testing after the installation. Actually, these customers now are getting into production on multiple systems, and they started to be fully vertically integrated. Their aim is to add more capacity vertically but on top of that, to expand globally, leveraging KornitX across the world. So this will be a great example of the benefits of digital and KornitX as an enabler of on-demand production in a sustainable way all around the world.

Jim Ricchiuti, Analyst

And that just ties into the question on KornitX. Has that area of the business been impacted by the slowdown you experienced earlier this year in DTG?

Ronen Samuel, CEO

So on KornitX, we are still learning a lot. This is an exciting area. We see KornitX as the core strategy of Kornit and actually as the core driver of the change of the industry. We have a trial and we are still trying many different types of business models and many different types of customers. It's clear right now that we are working on a three-point approach. One is building the platform itself. We are just releasing a new UX and UI to the platform. We're adding more capability, and the system itself is in a much better position today in terms of the platform and stability compared to what we had in the past. The other area is building the global fulfillment network. We are starting to add more and more customers. Now when we are focusing on the global fulfillment network, leveraging Kornit technology, the latest and greatest Kornit technology with full visibility for quality control on each one of those sites, making sure that the quality is the best in class. The third one is really going after the megabrands, large brands, but also digital platforms like the Wix; the Wix implementation is progressing very, very well. I can tell you that there are a few mega but mega, mega digital platforms that we are engaged with which can change the entire game of the industry and create really on-demand production everywhere around the world in a sustainable way. So I'm very excited about that. There is still a lot of work, and we are learning every day on the politics.

Operator, Operator

Our next question comes from Chris Moore from CJS Securities.

Chris Moore, Analyst

Maybe just go back and talk a little bit more on the kind of the big product introductions. You talked about the Atlas MAX upgrade. I’m just trying to get a sense; when you look at the Presto MAX and the Atlas Poly over the next 12 months, do you see one of them as being a bigger driver of revenue? Or maybe just you kind of talk to that a little bit?

Ronen Samuel, CEO

So the Atlas MAX is a game changer; it's a game changer in terms of quality. For the first time, Kornit and digital as a whole is bringing a quality that meets the highest and the most sensitive brand's quality. On top of that, it brings capability that's never been seen before, like the XDI, which opened up vast applications that you couldn't do before with digital, and doing it with analog is expensive and a long process. So Atlas MAX is gaining really nice traction. We see traction in EMEA, we see traction in Asia Pacific, and of course, we see traction across the Americas with great feedback. This is why we start to see traction also on the installed base of Atlas users for upgrading the system to Atlas MAX. They understand that they need to have the latest and greatest quality and, of course, the productivity and the benefit of the total cost of ownership. This is on the Atlas. On the DTF side, actually two years ago, DTF was a very, very minor site business for Kornit. In the last two years, we managed to develop a substantial business. It's starting to be meaningful to our revenue, and we see really nice calls across the world with the DTS and now with the Presto MAX, which enables us to print on dark fabric, white inks, the hand feel is much better. We see traction with megabrands, and I can tell you that megabrands—both sports brands and fashion brands—leveraging this technology, but we see it across the world. We see Asia growing very nicely on the DTF. In EMEA, it's the strongest region in terms of the DTS, while in Latin America, it's a big, big growth engine on the DTF. We have a very strong pipeline moving forward on the DTS heading into 2023. The last one is the Atlas MAX Poly which we just released; we are just starting to build the pipeline. We already have some orders for Q3, and we are going to recognize new systems in Q3. We are building the pipeline into Q4. In Q4, there is a major trade show in Las Vegas, PRINTING United, which we are going to participate in, where we are going to show the entire portfolio of Kornit, including the Atlas MAX Poly for the first time in the Americas, and we expect to get many orders at this event. It’s a very important event for us.

Chris Moore, Analyst

Got it. Very helpful. Maybe just one quick follow-up. On the Apollo, given the high upfront cost and rising interest rate environment, would that likely have any impact on demand? Or are these bigger customers that normally won’t have to do any financing when they purchase the Apollo?

Ronen Samuel, CEO

So with Apollo, we are focusing on large customers that have lost volume. And in the end, those customers, large ones, are looking at the total cost of ownership. Total cost ownership is looking at the cost of the machine, cost of the ink, cost of the service, cost of the operator, cost of electricity, and so on, and dividing it by the number of t-shirts or garments you can print at an hour. We are aiming for the Apollo to be the most efficient and the best TCO in the market with the highest quality. So we see really huge excitement from customers, new customers that we've never been able to approach or penetrate before, but also existing customers that are really excited to grow with Kornit with the Apollo.

Operator, Operator

Our next question comes from Patrick Ho from Stifel.

Patrick Ho, Analyst

Alon, I wish you the best of luck. This is the second time we've worked together, so it's been a pleasure, once again, so best of luck. Maybe first off, Ronen, in terms of the market environment, I know it's very dynamic and volatile right now. But would you characterize your discussions with customers that you're starting to see any stabilization? There's not another drop, or is there the possibility that things could still fall further if the economy worsens or we go into kind of a more macroeconomic global recession? What's your kind of discussions with customers today?

Ronen Samuel, CEO

So as you mentioned, it's still a bit volatile and there is a mixed bag here. But overall, when we look at it, we've seen better stabilization versus what we saw in Q1 and the beginning of Q2. So we have much better visibility. Some of those customers that were declining year-over-year in Q1 and Q2 are starting to show growth in Q3, which is great. So we were expecting to see some normalization in the e-commerce space, and this is what we start to see now. When I'm saying mixed bag, it's different from region to region and customer to customer. We see very nice growth in EMEA, both in terms of sales and supplies. This is even on top of the currency impact that we have in EMEA. We see nice growth in Asia; really opening up Japan, Korea, and even China. We see very nice growth in Latin America. In North America, it's mixed. We have our strategic global customers that are continuing to grow at a very nice pace and per the plan. However, we have other customers in North America that are still very volatile and difficult to assess. But even there, we are starting to see new growth areas. We have many net new customers that are joining Kornit, both on the DTG and in the DTF categories. So we are a bit more optimistic also in North America. However, I guess that it will take another one or two months to get better visibility on the overall trend.

Patrick Ho, Analyst

Great. That’s helpful, Ron. And maybe for you, Alon, just in terms of the OpEx comments you made in your prepared remarks about some of the cost reductions and managing those line items. It’s good to see that you have the flexibility to adjust to the market environment. But I think I believe in the investments that are needed long term. How quickly can you adjust both in terms of this current downturn and adjust there, but quickly ramp up if the customers come back in a more aggressive fashion like they did over the past 1.5 years? How quickly can you ramp up OpEx to keep pace with customer demand?

Alon Rozner, CFO

Yes, it's a great question. So first of all, the variable expenses are ones we can reduce. So as volume goes down, we try to look at all costs that are associated directly with the lower volume and then we can ramp it back up without too big of an issue. In terms of the investments, we are investing in the long term. So we try to minimize the savings or the reductions in R&D overall and mainly in the main project in the R&D. So we look at the areas where either the ramp-up would be fast because we do expect recovery, and we want to be ready and not to sacrifice the future. So that's why we are saying that we are doing it in a very controlled way. We look at each and every activity in the company and assess the criticality of the activity and the ability to recover later on.

Operator, Operator

Our next question comes from Greg Palm from Craig-Hallum.

Greg Palm, Analyst

All right. I guess sticking to guidance a little bit more, just thinking about it from a first half and second half basis. I mean, I think generally, your guidance for Q3 and Q4 assumes normal seasonality patterns yet, it sounds like at this point, you have much better visibility into those plans from your large global strategic. I mean, it implies a pretty big ramp over the next few quarters relative to Q2. So I guess, first, can you confirm that? And second, if that’s the case, how do we tie that out; it just seems like the guy could’ve sold have been a lot better given those higher contribution levels?

Ronen Samuel, CEO

Maybe I'll start with the global strategic customers to clarify here, and Alon will continue if he has something to add. On the global strategic customers, you all remember that in Q2, we were supposed to shift units to a site that was not ready. Those units, we are going to ship and recognize revenue in H2. We do not expect additional systems revenue recognition in H2 from this global strategic customer. We expect to ship in Q4, but we expect to recognize most likely at the beginning of 2023 when the site will be ready. The other sites will be early, so we have strong visibility into 2023 for our global strategic customers, which is going to grow very nicely, and we have lots of opportunities there. But in H2, in terms of hardware revenue, we just expect to recognize the revenue from the Q2 units. Please remember that Q4 is a peak season. We expect a large order on supplies and revenue recognition of supplies from our global strategic customers.

Alon Rozner, CFO

If I may add, specifically for your question, we have better visibility for the third quarter. It comes from the backlog that we have; some came from the second quarter, and some are new backlog being booked in this quarter. As we move towards the end of the year, the mix goes toward consumables. We do expect to have a good peak season for our customers. We do expect to get larger orders of consumables which increased our level of visibility or confidence in the business in the third and fourth quarters. But we do need to remember that we are still operating in a volatile environment. The system sales are not yet at the level of what we were used to in quarters before. So we assess the situation, and we have better visibility at this point.

Greg Palm, Analyst

And then the comment on customer feedback for Apollo, I thought was intriguing. And I guess, if some of your customers want Apollo now, is there any risk that those customers that are existing Avalanche or Atlas purchasers probably—did they just wait for Apollo? It doesn’t sound like this is happening with your large global strategic, but I’m curious if that’s a risk for many of the other customers?

Ronen Samuel, CEO

It's a great question. Actually, it opens opportunities for us to approach those that we've never been able to penetrate. Some of them are already two quarters for Atlas MAX to start from being familiarized with digital with Kornit, and later on when the Apollo is ready, they will add on Apollo. We need to remember that our view and what we believe is that even the biggest strategic customers and even the biggest strategic screen players should have a mix of products between the Atlas MAX and Apollo. It’s not one size fits all. The Atlas MAX is focused on value proposition, running customized designs, and running different applications, while the focus on the Apollo is more of a replacement for short and mid-run. So we see a mix of those systems being sold together to large accounts.

Operator, Operator

Our next question comes from Tavy Rosner from Barclays.

Tavy Rosner, Analyst

First of all, Ronen, I’m very sorry for your loss. And Alon, it’s been a pleasure working together. You’ve proven that whoever water called Rosner is high quality, so I was happy for that; sorry, private joke. All my questions have been asked. I think the only one that no one touched on was M&A. I mean, I guess with depressed multiples out there and your $700 million cash balance— is it time to be opportunistic, or what’s the pipeline out there? Anything you can add would be helpful.

Ronen Samuel, CEO

Yes. So strategically, we are looking at areas to deploy our capital, and we see some strategic areas of potential M&A. As we mentioned in the past, we are focused very much on the software area around KornitX. We identified a few opportunities, and we are working together with the Board. We believe that in the next few quarters, we will be able to deploy some of it into M&As. We are not talking about a big acquisition right now, but there are some sizable acquisitions that can be very meaningful to Kornit technology moving forward—really connecting the world of designers and creators to Kornit anywhere around the world. So there's big opportunities there, and the team is very engaged, and we feel confident that in the next few quarters, we will be able to deploy some of it.

Operator, Operator

At this time, we have no further questions.

Andrew Backman, Global Head of Investor Relations

Great. Thank you very much. Ronen, let me turn it over to you for some closing remarks.

Ronen Samuel, CEO

Yes. Thank you, Andy, and thank you, operator, and thank you all again for joining us today. As mentioned earlier, our vision remains unchanged. We are taking actions to successfully navigate current market dynamics, and we have huge confidence in the long-term fundamentals of the business. I would like to thank all the amazing Kornit team and express appreciation for the continued support we have received till now from the investment community. We are working hard to execute on our plans to capture the massive opportunities ahead of us. I would like to thank you again and hope to see many of you at the upcoming investor conference that we are having in September. Andy, the floor is yours.

Andrew Backman, Global Head of Investor Relations

Thank you, Ronen and thank you, Alon, Lauri, and everyone for joining us today. As always, please do not hesitate to reach out to me directly should you have any follow-up questions. Jamie, can you please close the call?

Operator, Operator

Ladies and gentlemen, at this time, we'll end today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.