Earnings Call Transcript - KRNT Q4 2023

Operator, Operator

Ladies and gentlemen, good morning, and welcome to the Kornit Digital Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Mr. Jared Maymon, Investor Relations for Kornit Digital. Please go ahead, sir.

Jared Maymon, Investor Relations

Thank you, operator. Good day, everyone, and welcome to Kornit Digital's fourth quarter and full-year 2023 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 recap the full-year 2023, provide comments on the fourth quarter, and then discuss our view on 2024. Lauri will then review the fourth quarter and full-year numbers and provide our first quarter outlook before we open it up for Q&A. 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 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 30, 2023, 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 would now like to turn the call over to Ronen. Ronen?

Ronen Samuel, CEO

Thanks, Jared, and thanks to everyone for joining us on today's call. Before we dive into fourth quarter results, let's take a moment to reflect on the transformative journey of 2023, a year that reshaped not only our industry but also Kornit's standing in the market. In 2023, as the cost of capital rose and consumer preferences continued to shift, the industry recognized the need to reduce inventory, improve time to market, limit dependency on broken offshore supply chains, and produce sustainably. The traditional practice of overstocking does not make sense in a market characterized by ever-changing consumer preferences. As a result, many retailers spent 2023 working through excess inventories that had piled up since the pandemic, while shifting the focus towards fixing their operating models and supply chains. The ideal supply chain that these retailers are seeking utilizes lean inventory management and is backed by fast and constant in-season replenishments. Entering 2023, knowing that we were heading into a challenging macro environment, we defined a few key business objectives that would ensure Kornit was best prepared for its next phase of long-term profitable growth. These objectives included strengthening our product portfolio, broadening the applications we serve, diversifying our customer base, successfully launching our Apollo platform, expanding our Direct-To-Fabric business, and optimizing our operating model. A key pillar in our strategy of transitioning the market from analog to digital production has been to offer a portfolio of innovative digital solutions that deliver retail quality and efficiency. After a few years of major R&D investments, we arrived at ITMA 2023 with a remarkably wide portfolio of solutions for on-demand sustainable production. We cemented our leading position with the MAX technology as the new industry standard for quality, introduced the Apollo platform for bulk production, enhanced our DTF offering for unprecedented capabilities, expanded the application reach of our Poly offering, integrated Smart Curing Technology into our mass production solutions, made major software enhancements to the KornitX platform, and brought added-value ancillaries like our RSS smart pallet adjustment technology. With our evolutionary solutions, we managed to penetrate new market segments such as bulk apparel, athleisure, fashion, home decor, technical, and footwear, and new geographies such as India, Latin America, and other key textile production hubs across the globe. Our diversification efforts extend beyond market segments and geographies. We are also now engaged with new types of customers, such as Tier 1 manufacturers, value-added suppliers, and directly with major brands, digital platforms, and retailers. Turning to the Apollo. As you may have seen, after successfully installing all three Apollo beta systems for the peak season in Q4, we delivered on our plan of bringing digital apparel production to the mainstream with the launch of the Apollo in January. The feedback from industry leaders on the Apollo has been outstanding. Customers refer to the release of the Apollo as the start of a new era in direct-to-garment, pushing the boundaries of speed, quality, and sustainability further than ever before. The Apollo represents a quantum leap in direct-to-garment printing technology, ensuring businesses can meet the evolving demands of the fashion and textile industries. Simultaneously with the launch, we hosted customers and prospects at one of our beta sites with North American retailers to demonstrate the system at an industrial scale. The event was very successful, and I'm also pleased to report that one of our beta customers has already disclosed their plan to add several more Apollos to their facilities throughout 2024. In 2023, we also made significant strides in the direct-to-fabric market. Our new ink solution unveiled at ITMA, combined with our MAX technology, has created a best-in-class solution in the growing digital pigment market. This market is going through a massive transition into just-in-time sustainable production, and Kornit is leading the market. We continue to believe that the direct-to-fabric market represents a significant long-term growth opportunity, especially with global brands and retailers who are committed to moving to sustainable production and offering maximum flexibility. Turning to our operations. In 2023, we worked diligently to achieve our goal of returning to breakeven profitability on an adjusted EBITDA basis. Despite a more challenging environment than we anticipated in the second half, we achieved this goal in the fourth quarter. A key factor in this return to profitability was consistently strong growth in consumables through 2023. This year-over-year improvement in both impressions and consumables indicates continued digestion of capacity within our installed base, which we view as a positive leading indicator for future systems demand. Additionally, we have and continued to realign our operating expenses with the current market environment. In 2023, this realignment included cost reduction and efficiency initiatives across our operations. In the first quarter of 2024, we extended this effort through a restructuring and realignment initiative designed to prepare Kornit for its next phase of growth. This restructuring, including a meaningful reduction in force, adjustment to our go-to-market strategy, a reorganization of certain business segments, changes to our leadership team, and improved operating efficiencies in our supply chain. We expect these proactive measures to contribute to our return to consistent profitability and allow us to protect our robust balance sheet. Lauri will expand on the implications of these cost-saving measures in her prepared remarks. Turning now to the fourth quarter. Today, we reported fourth quarter revenues of $56.6 million, within the range of the guidance we provided in November and adjusted EBITDA margin of 0.3%, which was above the high end of our guidance range. As a reminder, this includes the impact of the fair value of the issued warrants. Despite the persistent macroeconomic headwinds, fourth quarter results were driven by a good peak season where we saw double-digit year-over-year growth in impressions and in our consumable revenues. This marks our fourth consecutive quarter of year-over-year impressions growth. Releasing the Apollo is also giving us the opportunity to introduce a creative recurring base revenue model which shifts CapEx to OpEx for some customers with this system. This offering sets a minimum level of production, reduces barriers to entry, provides more predictability and visibility for our customers and for us, shortens the sales cycle, and improves our opportunity to address screen printers. We expect this revenue model to generate around $1 million in revenue per system per year. With that said, in 2024, we continue to expect modest revenue growth and adjusted EBITDA profitability. Our outlook assumes that the challenging macroeconomic backdrop we experienced in 2023 continues into 2024. Based on the actions we have taken to date to improve our operating efficiency and our working capital position, we now anticipate generating positive cash flow from operations for the full year. So in conclusion, we ended the year on a solid footing. During the fourth quarter, we experienced a good peak season with nice growth from some of our key customers and worked diligently to bring the business back to breakeven results. Entering 2024, we are focused on our key long-term growth drivers, which include further movement into mainstream bulk production, expansion of our direct-to-fabric business, engagement with key demand generators, and further penetration of new segments in key textile production regions. We plan to focus on these areas while returning to profitability and cash flow generation on a full year basis. Before I pass the call over to Lauri, as you all know, Israel faced a horrific barbaric attack in the second half of 2023. While some of our people were impacted, we were resilient and continued to fully support our customers throughout the most important time of the year. We continue to prioritize the safety of our people in Israel and remain confident that our contingency plan secures our business continuity. I want to thank our tremendously dedicated people for their resilience during this difficult time and to thank many of you for your continued support. Now, let me turn the call over to Lauri for a closer look at our fourth quarter and full-year 2023 financials and first quarter guidance. Lauri?

Lauri Hanover, CFO

Thank you, Ronen, and good day to everyone. Fourth quarter revenues were $56.6 million, within the guidance range we provided in November. This quarter, we experienced double-digit year-over-year growth in consumable sales, which was more than offset by a decline in systems and services sales as expected. For the full-year 2023, revenues were $219.8 million compared with $271.5 million in 2022. Despite consumables and services demonstrating healthy growth for the full year, the year-over-year decline was primarily attributable to significantly lower system sales in 2023. Moving to margins. Fourth quarter non-GAAP gross margin was 48.6% compared with 36.4% in the same period last year. The year-over-year improvement can be attributed to high-margin consumables comprising the lion's share of total revenues. For the full-year 2023, the non-GAAP gross margin of 38.4% increased slightly from 38.2% in 2022, driven by higher volumes and average selling prices in consumables and solid profitable growth in services. This was offset by the sizable decline in system sales volumes, reflecting the challenging environment we faced throughout 2023, and particularly in the last quarter. Looking at expenses. Total fourth quarter non-GAAP operating expenses were $30.1 million, a decrease of about 9% from $32.9 million in the same period last year. For the full-year 2023, non-GAAP operating expenses decreased about 12% to $127.7 million compared to 2022. The continued reduction in expenses reflects the savings achieved by our ongoing cost-saving initiatives. In the fourth quarter, we took decisive actions to advance these cost-saving initiatives which resulted in a $19.1 million restructuring charge. This charge supports our strategy to align our cost structure with our revenue expectations and to enable operating leverage as we return to growth. Included in this restructuring is a meaningful workforce reduction, a consolidation of facilities, and a phasing out of our legacy platforms. We expect this restructuring plan to save approximately $20 million in operating expenses during 2024 versus the full-year 2023. Adjusting for these restructuring charges, our adjusted EBITDA was positive in the fourth quarter, marking a significant improvement over the adjusted EBITDA loss of $6.1 million in the same period last year and the adjusted EBITDA loss of $5.6 million last quarter. Adjusted EBITDA margin for the fourth quarter of 2023 was 0.3% at the top end of the guidance range we provided in November, again, reflecting an improvement year-over-year and sequentially. For the full-year 2023, the adjusted EBITDA loss of $30.9 million was essentially consistent with that of 2022. However, the adjusted EBITDA margin for 2023 decreased to minus 14% compared with minus 11.3% for 2022, primarily due to significantly lower revenues year-over-year. Our cash balance, including bank deposits and marketable securities at quarter end was approximately $556 million. Through cost-saving measures and healthy collections resulting in improvements to working capital, we generated positive cash flow from operations of $2.6 million during the fourth quarter. We remain committed to improving working capital to drive cash conversion. Moving on to our share repurchase program. For the full-year 2023, we repurchased approximately 2.7 million shares, spending an aggregate amount of $55.8 million. The average price paid per share net of fees was $21.03. On January 17, our second quarter proved share repurchase authorization expired. Subsequently, we applied for and obtained Israeli Court approval for a new 6-month period extending through July, allowing us to use the balance of our previously authorized share repurchase program. This unused balance currently amounts to approximately $19 million. Given our current enterprise value, we plan to continue repurchasing shares in the first quarter. Next, I'd like to take a moment to discuss the operating environment. As we discussed on our last earnings call, the consumer environment remains uncertain, which with regard to system sales impacts our customers' purchasing appetite and thus our visibility. Additionally, we continue to expect to face a challenging macro environment in 2024, similar to what we faced in 2023. While we will work proactively with our customers, invest in our product portfolio, and improve our operating model, we acknowledge that these macroeconomic headwinds will weigh on our ability to convert leads and plan confidently. With that said, we continue to expect modest growth and modest profitability in 2024 on a full-year basis. We are also expecting to deliver positive cash from operations in 2024 on a full-year basis. Turning to first quarter guidance. We currently expect revenues for the first quarter of 2024 to be between $43 million and $48 million and adjusted EBITDA margin to be in the negative 16% to negative 26% range. As a reminder, the guidance for revenue and adjusted EBITDA margin includes the impact of the non-cash expense associated with the fair value of the company's warrants to our largest global strategic account. That concludes our prepared remarks. And with that, I will now turn it back over to Ronen to open up the call for Q&A. Ronen?

Ronen Samuel, CEO

Thank you, Lauri. Operator, we are now ready for the Q&A session.

Operator, Operator

Our first question comes from Greg Palm with Craig-Hallum Capital Group.

Greg Palm, Analyst

I guess just kind of looking back at Q4 specifically, I'm wondering if you can maybe characterize the peak season. It sounded like it was maybe a little bit better than planned, but offset by really weak system sales. But just in terms of overall activity, can you comment on capacity in the industry relative to 2022, whether it was maybe a little bit tighter than the previous year? Any other color would be helpful.

Ronen Samuel, CEO

Thank you, Greg. In Q4, we observed positive developments, particularly in supplies, with notable double-digit growth in revenue and orders for inks. Additionally, we experienced strong growth in impressions, indicating that customers are beginning to improve their utilization and capacity of the systems. We expect to start receiving orders for additional systems in 2024 and well into 2025. Our customers are increasing both the number of impressions per system and the total number of impressions, which is a clear trend. Another encouraging trend is our service revenue, which also grew and remains robust, and we anticipate it will continue to be strong next year. However, for overall 2023 and specifically Q4, system revenue and sales were weak, primarily due to the macroeconomic environment. High interest rates persist, and several of our customers are hesitant to make decisions following the ITMA event. Many are dealing with excess inventory and are trying to reduce it. On a positive note, those we’ve conversed with believe that by 2024, these inventories will be cleared, enabling a return to production in the DTF or DTG markets. This summarizes the main trend we are witnessing. Our key and global strategic customers had a strong quarter in terms of impressions and growth. Overall, we are pleased to see this momentum continue, with Q4 marking our fourth consecutive quarter of growth on the ink side, highlighted by double-digit growth during the peak season.

Greg Palm, Analyst

And then my second question is related to the Apollo, maybe a two-parter. Can you confirm that the beta units will be or have been recognized as revenue in Q1? I'm guessing that is the assumption in the guide? And then just your overall outlook for that in terms of contribution for this year, and then a little bit more color on maybe this new recurring-based revenue model that you alluded to, which sounds pretty interesting. That's all I'll leave it there.

Ronen Samuel, CEO

Yes. So on Apollo, we are very excited. So first of all, Apollo represents for us a totally new incremental market that we didn't report before. This is the bulk apparel. This is large quantities or a large volume, much, much bigger than the customized design market that we were approaching till now. We are talking with many big customers, some of the fulfillers, brands, retailers, but looking into the Apollo. After 4.5 years of development, we installed three systems in North America with key customers and different types of customers. One of them is retailers, big retailers; one of them is more focused on screen for longer runs, and one of them is about mainly customized design, one-off. Each one of them worked on the system around the clock in the peak season, and the feedback is outstanding from all three beta customers. They were super impressed by the quality, the productivity can run up to 400 garments an hour. The automation that comes with one operator and the breakthrough total cost of ownership. This system is a breakthrough for the direct-to-garment, and we believe that we are going to really create an impact and replace mainstream screen jobs with digital. We also have a very strong pipeline into 2024 and beyond on the Apollo. One of our beta customers already indicated that they're going to add several more systems in 2024, and we are already working on it. We expect the other two betas as well towards more systems, and we are already engaged with other customers on finalizing contracts for additional systems. We need to understand that 2024 is still a ramp-up period for this product, and we are limited in the number of products we're expecting for 2024, while we are going to accelerate in 2025. Still, it will be meaningful in 2024. We also are introducing and actually piloting a new business model that is enabling customers to move from CapEx to OpEx. Customers that are going to build that and actually committing on a minimum level of production that they need to print on the machine. This reduces the barriers to entry, mainly for screen printers that are very interested in this model when we are discussing it with them. This will create more predictability and visibility both for us and for our customers that are using it. It will create shorter sales cycles and improves our opportunity to address screen printing as a whole. This business model is going to generate around $1 million per unit per year, and this is kind of the minimum. We expect it even to bring in more than this $1 million. The machine is able to bring much more than that. As you asked about the three systems, one of those systems is on this pilot from OpEx versus CapEx. So in terms of revenue recognition, you will not see the full amount recognized in Q1, but you will see it split into the years, with the specific customer planning to bring much more than the minimum commitment that we have on this plan. And of course, the rest are going to be recognized in the coming quarters. This pilot, we are going to limit it at this stage, mainly for the Apollo platform. And in only a few cases, we are going to learn a lot from it, and we are planning to report back to all of you on the success and how we are going to take it forward.

Chris Moore, Analyst

Maybe just stay with the Apollo for a moment. So obviously, it's fair to assume that from a recurring revenue standpoint, it's going to be significantly helpful. For someone like Amazon's purchase of the Apollo, do you expect it to have any impact on their other system purchases?

Ronen Samuel, CEO

So I didn't refer specifically to our global key customers or any specific names. We're currently targeting, as I mentioned, with the Apollo a new market, a new type of customers. This is mainly screen fulfillers that run in longer runs, working with mainly brands and retailers, and also major retailers that would like to change the supply chain. So this is our first priority to go after incremental market. As I mentioned, one of our beta customers is actually more on the customized design and doing one-off, and they found the products very suitable for them, and they're planning to continue to grow leveraging the Apollo for this product. We assume that in the future, some of our customized design customers, including some of our strategic customers, will continue to grow leveraging this platform as well, but not only this platform.

Chris Moore, Analyst

Got it. No, that's very helpful. It sounds like lots of new customers there. Any sense for the kind of time frame on the payback for the OpEx model versus the CapEx? Obviously, you're not getting the upfront dollars on the Apollo, but you're getting much more recurring. How long do you think it should take before you breakeven and then profitable there?

Ronen Samuel, CEO

So it's not that the model doesn't function this way. In fact, you start generating profit from the very first impression that the customer prints. The contract lasts for five years and requires a minimum number of impressions the customer must print each year; the customer knows precisely how much they must pay for each impression. Should they exceed the minimum, they will obviously incur additional charges. This structure provides visibility and a clear understanding of costs for the customer. It aligns the interests of both the customer and Kornit. We believe that this model is highly profitable for Kornit, moving us closer to a recurring revenue model, which offers us greater predictability and creates a strong loyalty among our customers as we collaborate closely with them.

Greg Palm, Analyst

Operator, sounds like many of my questions have already been answered. I just wanted to clarify one point before I turn it back. Regarding the cash flow upside you talked about, can you clarify how much of the $1 million run rate for the recurring model is expected to come from the Apollo in your initial assumption?

Ronen Samuel, CEO

So based on the plans we have on the Apollo, we align it before the model with the additional work, with all the commitments that we have. So around that, all our planning align there to have a smooth revenue generation out of the Apollo and it will increase as we go forward with the other systems. But initially, we expect a good base revenue upon the Apollo based on the commitment that we already got.

Lauri Hanover, CFO

Yes, just to clarify on that point. So it's approximately $1 million per system and the commitment base will allow us steady cash flow. And in terms of Apollo, since this is a new model for us, we're looking at actual volumes today, and we're trying to estimate the ramp-up and expectation going forward. But that $1 million metric will be based on the commitments that we will finalize with the customer.

Brian Drab, Analyst

First, I just wanted to ask about the restructuring to be sure that I understood. Did you say that the incremental cost takeout would be $20 million related to actions that were taken since the end of the year? And the $20 million in cost takeout in 2024 relative to '23?

Lauri Hanover, CFO

Yes, we did say that. We recorded the charge in the fourth quarter. The benefit of the restructuring efforts will be in 2024. When you look at OpEx on a year-over-year basis, we expect it to be approximately $20 million lower in 2024 than it was in 2023.

Brian Drab, Analyst

Okay. And it's all coming out of OpEx, not COGS?

Lauri Hanover, CFO

There is a portion that is in COGS, but the lion's share is in OpEx.

Brian Drab, Analyst

Okay. Got it. And then just one other question for Ronen. What is the update and outlook related to upgrades for the Atlas machines? Can you give us a sense for what percentage of the installed base has upgraded and what's the prospect for the balance to be upgraded to MAX?

Ronen Samuel, CEO

Yes. So first of all, as I mentioned in my script, MAX Technology and MAX Quality is the new standard of the industry. We are hearing it from the market, from our competitors, but we're also hearing it from our customers that are upgrading to the MAX Technology. I would say, in 2023, we had a very strong year on the MAX upgrade. We are starting this year with a few major orders that we already received from customers to upgrade their fleet to the MAX. So you will see in H1 a nice uptick or a nice revenue coming from those upgrades as well. I would say, in terms of the number of customers, the majority of our customers have already done the upgrades, and we only have a few customers. Some of them or one of them is very big, that is in the process of deciding if they are going to upgrade or not. Hopefully, this year there will be some upgrades also within these customers. I would say also that during this year in 2024, we are taking the MAX Technology and the Atlas MAX to the next level. We are going to introduce the Atlas MAX Plus. We've shown it at ITMA at FESPA in March in Amsterdam. We are going to show the Atlas MAX Plus with additional capabilities. These additional capabilities will open for our customers new markets, new applications and new capabilities, and it will be substantial. It is going to create a major buzz. I'm not going to get specifically now what are the applications, what are the capabilities; we are keeping it for FESPA. I can say, open your eyes and look for FESPA because there will be big news there.

Unidentified Analyst, Analyst

This is Maya on for Eric. Maybe just to start kind of as you speak to customers, what is the catalyst that they're looking for that would unlock that spend? I understand the recurring revenue model helps with that, but just in general, unlocking that spend? I'm just trying to understand what changes are going on in the spending dynamic because you're launching new compelling products, you're seeing growth in impressions and consumables demand. So what unlocks that next step?

Ronen Samuel, CEO

Thank you, Maya. It's an excellent question. Look, we have, by far, the best technology and the best products portfolio in the market. And as you mentioned, there are other elements that we need to go over in order to accelerate the growth of our system sales, and it's different from market to market. Let me start with the market with the direct-to-fabric market, okay, the fashion market. And certainly different dynamics from the direct-to-garment. In the fashion market, when we are talking today to customers and in the last few months, I traveled all over the world to visit those customers, both in India, in Latin America, and Eastern Europe to visit our key customers and key prospects. They are all telling me the same story. They're all telling me that they have to change the technology from reactive and acid inks to technologies that enable them flexibility to create on different materials, different fabrics without changing the ink or the technology that enables them just-in-time production and sustainability without consuming water and without pollution. They've been forced to do that by the brands, and they see the legislation and regulations coming over and capturing them. They have to change to pigment. Pigment is the only solution, and Kornit is by far the best pigment in the market, the best solution in the market not only in terms of the pigment but in terms of the capability of being able to print on dark fabric with white ink; we are the only player in the market doing it. All the big players, all the big fulfillers that I was talking to, are super interested in our technology. Some of them already adopted it, like one customer that I visited in India, which is a massive city with massive potential for acquisition of many systems and just starting now with one of our systems, on Presto MAX. So the market has to move there. What they are telling us is that currently their customers, the brands and retailers, are still struggling to get rid of the inventory that piled up from the COVID-19 pandemic. They all believe that by talking with those brands during 2024, it will be behind them, and they will go back into full production. We believe that this will open the gate for our technology, for moving to pigment now that we are also bringing the Visitor with a better hand feel and better black. This will accelerate growth in the market. As I mentioned, I believe this market is a major growth engine moving forward for Kornit. So this is on the direct-to-fabric front. In terms of the direct-to-garment, again, let's break it into two different markets. One is the traditional market that Kornit was working on, which is customized design. We can see that key customers in customized design are increasing utilization versus 2021. So many of them are not only printing more than they were printing in 2021 in the peak but are actually utilizing their systems better. We believe that some of them will get into the cycle of adding capacity in 2024 and definitely after the peak season of 2024 into 2025. So this is a very good indication. On the bulk apparel, the bulk apparel is replacing screen. We are going very strong with the Apollo. What is limiting us in 2024 in the Apollo is not the demand in the market. Actually, most of the systems that we are planning to shift and recognize in 2024, we are already in a very advanced stage of contracts with customers, and the list is almost full for 2024, and now we are working on 2025. As for the MAX Technology, I believe that events like FESPA in March and another event we have in May in Europe will be catalysts to generate more sales for those customers. Some of them are still struggling in terms of cash flow and financing; there, we need to be a bit more creative. This model of recurring revenue or moving from CapEx to OpEx will help some of them to jump ahead and move into digital or increase the fleet of digital that they're using.

Unidentified Analyst, Analyst

Great. And then kind of related to that, you mentioned further diversifying your customer base. Where and what products are you seeing kind of the most net new interest? And in your customer conversations, what's driving those competitive wins?

Ronen Samuel, CEO

Yes. So if we talk about diversification, let's understand that Kornit was based in the last years mainly on one segment, which is customized design, one-off customization. Most of our business was in North America, and most of our business was based on a few big customers that, together with us, grew this segment of customized design that did not exist before. Now, the first step that we did in diversification is getting into new market segments, like bulk apparel, athleisure that is growing very nicely for us with the Poly technology, fashion, home decor and footwear. We're getting into technical segments as well. So all of these are incremental and diversifying our type of customers. You can imagine that when we are going to these segments like footwear or technical, those are totally new types of customers that we didn't have before. Some of them are major players. I will repeat again, the customers that I visited in India represent a massive potential for growth for direct-to-fabric. So I see a really big potential of growth in the future for Kornit in the direct-to-fabric front, also expanding geography to places like India, Turkey, Morocco, but Latin America is also very strong. We see production moving nearshore and onshore to Mexico and even to North America and, of course, the EMEA region. This is one part. Another part that we put a lot of focus on in the last, I would say, two years, is really growing the business with retailers and brands. A major part of our business today is already coming from those retailers. Some of them are midsized retailers in the U.S. that have around 500 or 600 shops all around the U.S. and are changing their business model from outsourcing production to screen printing, moving production in-house into their warehouses in order to do just-in-time production and be relevant, shipping and replenishing directly to the shelves of their brick-and-mortar stores. So we see that very clearly, and we have a long list of customers that are already using our technology. Some of them have already scaled up, and we have one of them that is already utilizing the Apollo. So this is a totally new diversification that we didn't have before, and it's growing, and we are putting more focus on it. We are actually, with the new operating model, building a team that is just going after retailers and brands and the demand generation. We are getting into a pilot with a big digital platform, leveraging KornitX and leveraging our installed base. Those, of course, have never been our customers before with huge potential as well. So there is tons of diversification, new customers, new geographies, new products, new segments, and I am very pleased that we managed to do it in the last two years, and I really hope that soon we will see the result in the growth of system sales as well.

Tavy Rosner, Analyst

Most of them have been asked. I just wanted to ask about the cash. You mentioned about $550 million net cash. I'm wondering, are you looking into M&A? Are you looking to potentially buying back more shares? How should we think of the balance going forward?

Ronen Samuel, CEO

I'll start, and maybe Lauri will add on top of that. As we mentioned, we continue with the buyback of the shares. We got approval from the authorities in Israel to continue. We have about $90 million that we are planning to execute during Q1. As we mentioned before, we're always looking for opportunities of organic and inorganic activities to leverage our cash position. An example of organic leverage of the cash position is this move from CapEx to OpEx model. We will see the impact, and we believe that there will be a great justification to use our balance sheet for this direction. And of course, we are looking for inorganic opportunities in specific areas of growth in the companies. Once we have something to report, we will share it with you. Any additional question, Tavy?

Tavy Rosner, Analyst

Yes, just about the model. Like should we expect a similar seasonality in 2024?

Ronen Samuel, CEO

Yes. In fact, let me clarify; you're asking if we expect to see revenue from the model in 2024?

Tavy Rosner, Analyst

Yes. Like, will you see a more back-end loaded type of year similar to what we did in 2023?

Ronen Samuel, CEO

Yes. So in terms of 2024, you will see similar seasonality across the quarters. Q1 is the lowest quarter in terms of supplies and system sales. You will see stronger Q2, and H2 will be much stronger than H1, both from an ink perspective and a system perspective. In the same way, you will see an improvement in our EBITDA and profitability across the quarter. While we gave guidance of negative EBITDA in Q1, we expect Q2 to be closer to breakeven and H2 to be profitable on EBITDA.

Jim Ricchiuti, Analyst

Lauri, I want to make sure I heard you correctly. You're saying that you're expecting modest growth for the year in 2024?

Lauri Hanover, CFO

Yes, that's what we said. You can expect modest revenue growth.

Jim Ricchiuti, Analyst

Got it. It would be helpful to understand what factors contribute to that outlook. For example, what are the expectations regarding your large global customer in terms of new equipment purchases or upgrades? I realize you can't provide specifics, but any insights on how to approach that would be beneficial. Regarding the contribution from Apollo, it seems you're anticipating significant revenues; however, would it be accurate to say that these will predominantly come in the second half of the year?

Ronen Samuel, CEO

First, let me address the modest revenue growth and its sources. Our revenue is divided into three main categories: ink, services, and systems. We have high visibility and predictability for ink and systems, which leads us to expect continued year-over-year growth in ink. After a strong 2023, we anticipate this trend will persist into 2024, and early indicators from Q1 are aligning with this outlook. We also have good visibility in services since a significant portion comprises recurring revenue, along with orders for upgrades like the MAX upgrades we previously discussed. We believe service will continue to grow in 2024 as well. However, system sales present a different scenario, as we have lower visibility here. While we do have clarity on some components, such as Apollo, we know who our customer will be in 2024 and are actively collaborating with them. We also have better visibility in the direct-to-fabric market and to some extent in athleisure, but there is still considerable work needed to build the systems pipeline, which we aim to advance during the FESPA event and other key events. In summary, we anticipate modest overall revenue growth for 2024. Regarding our global strategic customers, while I can't comment on their specific purchasing plans for 2024, I can confirm that we are working closely with them and have good insight into their direction. The peak season was strong for them, and I believe they will continue to grow in line with their plans for 2024. Concerning the upgrades I mentioned before, we have yet to receive a decision on whether they will proceed with upgrading the fleet to the MAX in 2024 and, if so, how many units they will purchase. We are still in discussions, and we will provide updates as we obtain more material information.

Jim Ricchiuti, Analyst

The other question I had was just as it relates to Apollo, and I do have another follow-up. Apollo, should we assume that the scale-up on the revenue on Apollo is more skewed towards the second half of the year? Or do you see Apollo being a contributor throughout the year? I know you have some revenue in Q1, obviously.

Ronen Samuel, CEO

Yes. Of course, you will see revenue in Q1 and Q2, but it's fair to assume that more revenue from the Apollo will come in H2 of this year.

Jim Ricchiuti, Analyst

Got it. Regarding the recurring revenue model, it involves a minimum five-year contract with a set number of impressions each year. It seems reasonable to assume that this will increase each year. Is that correct?

Ronen Samuel, CEO

No, it's a minimum volume per year that the customer needs to achieve, and it doesn't change from year to year. It's a minimum, but we expect the customer will buy additional systems and grow between the years.

Jim Ricchiuti, Analyst

And it's mainly geared around the Apollo. It would seem like this would also lend itself to other products, I guess, including the direct-to-fabric business? Is this potentially a template for you looking out a couple of years?

Ronen Samuel, CEO

So right now, as I mentioned, we are starting with the Apollo, and it's at pilot. We will learn a lot from it, and of course, we are looking to leverage it if it will be successful to other products and segments. It can be very successful. It can be very profitable. It can open new markets for us. It's a very strong stickiness with our customers. Those customers that we are speaking with about it are very excited. Some of them in the end decided to go on CapEx and not the OpEx once they see the full cost of the OpEx. But for the others, it's very, very attractive. So it depends on the customer. This is part of the innovation that Kornit is bringing, not only on the technology but a lot of innovation in marketing and also innovation in the business model. We are taking it step by step, and we are starting only with these products and a limited number of customers. We will learn from it and then we'll decide how to roll it out to other products.

Jim Ricchiuti, Analyst

Can you say how many customers?

Ronen Samuel, CEO

Right now, we have one customer running in this model, and we expect to have a few more in the next few months.

Jared Maymon, Investor Relations

Thank you all very much for your time today. As always, should you have any questions, please feel free to reach out directly. And operator, you can close the call.

Operator, Operator

Thank you. The conference of Kornit Digital has now concluded. Thank you for your participation. You may now disconnect your lines.