Earnings Call Transcript - KRNT Q1 2020

Operator, Operator

Greetings and welcome to the Kornit Digital Limited First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to our host Kelsey Turcotte. Thank you. You may begin.

Kelsey Turcotte, Host

Thank you, operator, good afternoon everyone and welcome to Kornit Digital's First Quarter 2020 Earnings Conference Call. Before we begin, I would like to remind you that forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. Securities laws will be made on this call. These forward-looking statements include but are not limited to, statements relating to the Company's objectives, plans, strategies, statements of preliminary or projected results of operations or our financial condition and all statements that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future. Forward-looking statements are based on assumptions that are subject to known and unknown risks and uncertainties and could turn out to be incorrect, which could cause results to differ materially from those expected or implied by the forward-looking statements. Company's actual results could differ materially from those anticipated for many reasons and I encourage you to review the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 20-F filed March 23, 2020, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this call hereof and the Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Additionally, the Company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the Company's earnings release published today, which is posted on the Company's Investor Relations site. On the call today we have Ronen Samuel, Kornit's Chief Executive Officer; and Guy Avidan, Kornit's Chief Financial Officer. At this time, I would now like to turn the call over to Ronen. Ronen?

Ronen Samuel, CEO

Thank you, Kelsey. Good evening and thank you for joining us on this afternoon earnings call. I want to start by extending our thoughts and prayers to everyone who has been impacted by COVID-19, and wish all affected a safe and healthy recovery. After weeks of uncertainty, we are enthusiastic to see many countries progressing on the exit plans and business activities picking up. At the start of the pandemic, we acted decisively to ensure the safety and health of our staff while maintaining business continuity. Our manufacturing sites and R&D labs continue to operate in staggered shifts. Our service teams continue to work closely with our customers and our global staff shifted to work from home where needed. On the community front, we actively partnered with manufacturers and large brands for the production of protective personal equipment, with the use of our inks and our systems. Overall, I'm very proud of how well our team handled this incredibly stressful period. At this point, all our manufacturing and R&D sites are fully staffed again and our experience centers are open, operating in line with the safety guidelines of the local authorities. While Q1 results of total revenue of $26.8 million, including $564,000 of warrants related to global strategic account, we present the immediate and short-term impact of the pandemic on our business. We are already witnessing a very strong recovery path back to growth. I want to share with you our view of the industry, what we have seen over the past weeks, our readiness to execute, and how we expect the balance of the year to look. This crisis is fundamentally changing behaviors and how the textile industry is looking at both demand and supply. We believe this is an inflection point in the continued adoption of digital textile production. In the last few months, e-commerce has gone from a growing channel to the only channel of operation for all age groups and genders. We expect this to have a long and lasting effect on consumers, as they continue to embrace the flexibility and efficiency associated with this channel. At the same time, existing supply chains are not adequate to support a successful e-commerce business model at scale. The industry needs to adopt agile, digital, sustainable on-demand manufacturing models to succeed on that channel. Traditional retail will certainly return, but the crisis has exposed the massive inefficiency associated with this classic supply and demand offshore operating model in place, resulting in massive inventory write-offs and continued environmental disasters. It is clear to us that the mega-trends that have been fueling our growth are only going to accelerate once the short-term impact subsides. Over the last few weeks, we have seen that customer sites are starting to reopen, and strategic accounts with big projects have reengaged. Some major orders we expected in Q1 have already been received in Q2, with partial implementation in Q2 and the remainder in the second half of the year. Our partners, particularly those in the online customized design segment, as well as brands and retailers with solid e-commerce on-demand models, remain very active and we expect that they will continue gearing up for the holiday season. A great example of this is Printful, one of our strategic accounts and the leader in their own demand printing segment, which has been experiencing very strong demand throughout the pandemic, and has recently decided to invest in six additional Atlas systems as part of a larger plan, bringing the total system globally to more than 55 Kornit systems. Printful is adding significant on-demand capacity to capture business opportunities globally. Recent developments have only served to highlight the importance for brands and retailers to adopt flexible, digitally-enabled on-demand production models. One of our regional accounts in North and Central America, TSC, has recently contracted with well-known Tier 1 retailers for short run proximity production, addressing the flexible inventory management needs, resulting in a strategic investment in six additional new Atlas systems to replace the screen printing equipment. This order further underscores that what seemed at one point visionary is now a reality as customers embrace the market shifts to a proximity on-demand model. This is also a strong testament to our successful execution of the go-direct model put in place last year. Earlier this year, we announced the release of the Vulcan Plus. This system is our largest one and is intended for fulfillers with very high volumes of short to mid-run production orders. One of our regional accounts in North America ordered the first system in March and has now placed an order for a second system. Their production teams believe they will need to add at least two additional Vulcan Plus systems and four additional Atlas systems before the holiday season starts. As we hear from brands and retailers their needs for agile production and flexible inventory management can only be obtained with digital. We are very pleased with this early reception of our Vulcan Plus system. Interest continues to be strong, as innovative customers realize the massive opportunities this system can help them monetize. In March, we announced the release of our new NeoPigment softener solution for the Presto. This solution is a game changer for DTF offering, as it allows Kornit Presto users to produce on demand for top retailers and fashion brands without compromising on hand feel. Spoonflower, one of our strategic customers and long-time visionary partner, has placed an order for four additional Presto systems since the beginning of the quarter, in addition to the four Presto systems that were purchased mid-last year to respond to the increased demand they are experiencing for their innovative on-demand offerings. While we cannot share specific details associated with the business of our global strategic customer, our partnership is as strong as ever and we are investing in the preparation, resources allocation, and operational readiness required to deliver on their ambitious growth plans in North America, Europe, and Asia. As mentioned above, we are in the midst of re-accelerating growth. Our pipeline is getting stronger, our leadership position has only strengthened, customer engagement is high, and we see strong recovery with our installed base. That being said, we feel that it would be irresponsible to provide detailed guidance for the second quarter with macro volatility levels still high. At this point, we expect to do significantly better than the consensus revenue estimate, with at least 30% sequential growth in Q2 compared to Q1 2020. As for the rest of the year, we expect to deliver high single-digit year-over-year revenue growth in the second half of 2020, with gross margin in a similar range to the second half of 2019 and a positive operating profit for the entire year. Kornit is extremely well positioned with a healthy business model and a strong balance sheet. I'm more confident than ever in our value proposition, our leadership position, and our excellent people. The short-term dislocation is an inflection point for the entire textile industry, which will adopt flexible and sustainable inventory management enabled with on-demand digital production. We believe the market is now accelerating in our direction and we are ready to capture it. Now, I will turn the call over to Guy for a closer look at our numbers.

Guy Avidan, CFO

Thanks, Ronen, and good evening everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures, as well as non-GAAP pro forma results. Our first quarter non-GAAP pro forma results reflect adjustments for the following items: stock-based compensation expenses, which totaled $2.1 million; total amortization expenses related to the acquisition of intangible assets in the amount of $160,000; and a non-cash deferred tax benefit in the amount of negative $764,000. Adjustments related to the COVID-19 pandemic are non-cash inventory adjustments of $207,000, warehousing expenses of $37,000, and marketing expenses of $11,000. As the Company has significant operating lease liabilities in foreign currencies, the Company incurs foreign exchange gains or losses from the re-evaluation of these liabilities. These gains and losses may vary from period to period and do not reflect the true financial performance of the Company. This quarter, foreign exchange gains associated with ASC 842 were $610,000. A full reconciliation of our results on GAAP and non-GAAP bases is available in the earnings press release issued earlier today, and on the investor section of our website. First quarter revenue, net of $564,000 non-cash warrants impact, was $26.2 million, a decrease of 32.1% compared to $38.6 million in the prior year and 46.1% sequentially. First quarter business decreased 31.6% and 46.2% over the prior year period and the prior quarter respectively. Top-line results were impacted by delayed orders due to the COVID-19 pandemic. Services revenue for the first quarter was $3.8 million and net of $126,000 warrants impact, accounting for 14.6% of total revenues, a decrease of 39.7% from the prior year period. The amount attributed to the non-cash impact of warrants in the first quarter was $564,000 or 2.1% of revenues compared to $560,000 or 1.4% of revenues in the first quarter of 2019 and $1.1 million or 2.3% of revenue sequentially. By geography, 72% of our sales were from the Americas; 18% from Europe, the Middle East and Africa; and 10% from the Asia Pacific region. A number of significant deals, including purchase orders from strategic customers that were expected to close in March, were delayed. We do not believe that we have lost any of these deals to competition and currently anticipate these orders will be closed in 2020. This impact was flat across all territories. Moving to customer concentration in the first quarter: we had one customer that contributed more than 10% of revenues, while global strategic customers contributed 8.5% of revenues this quarter compared to 7.7% in the prior year period. Our Top 10 customers accounted for 49% of our total revenues, compared to 52.9% in the prior year. Moving to profitability. Over the past year, we have been deliberately building out the Company's infrastructure to support very healthy revenue growth given the significant market opportunity we see in front of us. Heading into 2020, our plan for the first half of the year was to continue that investment, including hiring across the organization, much of which was completed early in the quarter. Then the pandemic hit, with an associated decrease in revenue. As Ronen outlined in his remarks, we believe that this event is short-term in nature for Kornit and expect the business to reaccelerate in the back half of this year, and that our $500 million in five years objective is attainable. Accordingly, our view is that the investment made to support the growth is appropriate. We will continue to evaluate the business as we move forward and expect to return to our execution philosophy of balancing growth and profitability once we move through this year. Turning to numbers, non-GAAP gross margin in the quarter, net of warrants impact decreased to 33% from 45.5% in the first quarter of 2019 and 50.2% in the previous quarter, impacted by the decrease in revenue and to a lesser extent inventory write-offs and product mix. Given expectations that revenue growth will reaccelerate in the second half of the year, we expect gross margin in the second half of the year to return to normal levels. As a result, non-GAAP gross margin to exceed 50% without warrant impact. On a GAAP basis, gross margin in the quarter was 30.6% compared to 40.8% in the first quarter of 2019 and 49.4% sequentially. Moving to our OpEx items, I'll discuss these items non-GAAP basis, which exclude non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation included in today's press release. Each of these line items reflects the headcount investment I previously discussed. We ended the quarter with 565 employees, a year-over-year increase of 103 employees and a sequential increase of 18. Adjusted research and development was 23.4% of sales or $6.1 million compared to 13.5% of sales or $5.2 million in the prior year period. Sales and marketing expenses in the quarter were $7.7 million or 29.4% of sales compared to $6.8 million or 17.6% in the prior year period. General and administrative expenses in the first quarter were $5.3 million or 20.3% of sales compared to $3.5 million or 9% in the first quarter of 2019. In particular, we continue to be active in evaluating M&A opportunities, and some of the hiring and expense increases in G&A have been done to bolster our business development and integration capabilities to support these initiatives. Non-GAAP net loss for the first quarter was $8.9 million or $0.22 per share, net of $0.02 warrants impact. GAAP net loss was $10.1 million or $0.25 per share on a basic basis, compared with a net loss of $1.2 million or $0.03 loss per share for the year-ago quarter. Our non-GAAP financial income this quarter was $1.6 million as a result of accrued interest on our cash investments. Our GAAP financial income this quarter was $2.2 million. Next, I'll discuss our adjusted EBITDA. For the first quarter 2020, adjusted EBITDA was negative $9.2 million compared to $3.5 million for the first quarter of 2019. Net cash used in operating activities was $13.1 million this quarter compared to net cash provided by operating activities of $0.4 million in the first quarter of 2019 and $11 million net cash provided in the prior year. Cash balances including bank deposits and marketable securities at quarter-end were $247.5 million compared to $263.7 million as of December 31, 2019. The decrease in cash balances was primarily driven by the year-over-year decrease in revenues and associated net loss, as well as cash used in operating activities of $13.1 million, mainly due to the $9.9 million increase in inventory due to business disruption caused by COVID-19. Turning to our view on the second quarter and the second half of 2020. As Ronen said, while we believe that long-term trends in the textile industry are working in our favor and that our competitive position is stronger than ever, in the short-term, there continue to be uncertainties in the broader macro-environment. As a result, we do not believe it would be prudent to provide formal guidance for the second quarter. What we can say is we expect more than 30% sequential revenue growth in the second quarter of 2020 compared to the first quarter of 2020. As for the second half of 2020, we currently expect single-digit year-over-year revenue growth as compared to the second half of 2019, without warrant impact, and gross margin in a similar range to the second half of 2019. For the entire year, we expect positive operating profit. I'll now transfer the call to Ronen.

Ronen Samuel, CEO

Thank you, Guy. With that, we are ready to open the call for any questions.

Operator, Operator

Thank you. Ladies and gentlemen, at this time we'll conduct our question-and-answer session. Our first question comes from Patrick Ho with Stifel. Please state your question.

Patrick Ho, Analyst

Thank you very much, and it's great to hear that you are doing well. Ronen, could you start by discussing the impact of COVID-19 on the March quarter and your outlook moving forward? It’s promising to hear that orders are beginning to increase in the June quarter, which will be delivered over the remainder of the year. Are there still any constraints on your end regarding supply chain or manufacturing that could limit you in the June quarter and the upcoming quarters?

Ronen Samuel, CEO

Thanks for the question. We don't see any constraints on the manufacturing side; all our manufacturing sites are fully operational, ready to deliver. We have enough inventory to supply for Q2, and we are ready to produce for the peak season and for H2. We don't see any limitations.

Patrick Ho, Analyst

Great, that's helpful. And as my follow-up question on some of the long-term trends that you talked about in your prepared remarks, on how they are accelerating. Can you discuss especially, with some of your new products and the traction with new customers? You obviously have gotten good traction with existing customers on some of your products like the Polypro and the Presto with existing customers. Can you discuss, I guess, the traction you're making with new customers, especially as it relates to the pandemic? Do you feel some of those evaluation works have been pushed out somewhat? Or are you already starting to see a pickup once again?

Ronen Samuel, CEO

So we see a mix between strategic accounts, existing customers, and new customers. And as you know, we are focusing on three main segments: on-demand, the customized design segments, the brands and retailers and a promotional. We are engaged with new brands and retailers, helping them to change the supply chain, and helping them to move into on-demand manufacturing. I hope that later this year we will be able to publish a few names in this area on the on-demand side. In the customized design, we see many customers that used to build the screen market moving into the online business, into on-demand manufacturing. We see it both in the all-to-all in the direct-to-fabric and in the DTG market. We see a very strong adoption for our latest technology; the Atlas is by far the best product in the market. As of today, we have huge demand for the Atlas both on strategic accounts and new accounts as well. The Presto is, I would say, the biggest surprise for Kornit. We have by far the best pigment inks technology on the Presto, and we see strong adoption for this technology for the overall solution, with great adoption across the world and specifically in North America, EMEA and Latin America. As I mentioned, the Vulcan, we launched early this year; we see very good adoption on that. We see customers buying secondary machines and even more than that. Overall, the portfolio is very, very strong. At this period of time, we also, during the pandemic, took the leverage and continued to invest in R&D in the development to strengthen our continued leadership position and we believe that we opened a bigger moat compared to the competition. We are ready to capture the opportunity moving forward. Great. Thank you very much.

Operator, Operator

Our next question comes from Brian Drab with William Blair. Please state your question.

Brian Drab, Analyst

Hi, thanks for taking my questions. Just hearing your outlook makes me feel a little better about the whole pandemic, to be honest. This is a market that I thought was going to take a little longer to bounce back. This is great news today. And I just wanted to start by asking this activity that you're seeing and expecting for the second half of the year, is that driven more by customers resuming previously planned activities? Or are you seeing new customers with new programs, maybe stimulated by the pandemic or response to the pandemic like change in behaviors?

Ronen Samuel, CEO

Great questions. There is actually a mix. As we mentioned in Q1, we were very optimistic at the start because we knew about several significant projects with our strategic customers. However, the pandemic caused many of them to delay those projects. Now we're pleased to share that they have re-engaged, and some have already placed orders. We expect to see some of these orders come in during Q2 and others in H2, especially from our largest strategic accounts. These are important orders for both Q2 and H2. Additionally, we have key existing and new accounts that have already placed orders in Q2, and some accounts are preparing for the peak season. Our peak season begins in October, and many are getting ready for orders in June and July. We are also preparing for that. We can see customers reopening their sites, and print volumes are increasing. Many of our customers in the e-commerce sector who typically experience a peak season in December are already feeling the effects several weeks ahead, which is a positive sign for the future, including on the supply side.

Brian Drab, Analyst

All right. So Ronen, in that answer, I think you did say that you are seeing some new accounts and did you even say that you're developing some new key accounts? Did I mishear that?

Ronen Samuel, CEO

Yes, some new key accounts are relatively small and now really ramping up very quickly with multiple systems, echoing the DTF and the DTG.

Brian Drab, Analyst

Okay. Is the lack of professional and sports in general weighing on this industry quite a bit? Or do you think that's not a major issue?

Ronen Samuel, CEO

It is an issue in the short-term on the customers that are playing in the promotional space. We can see traditional screen printers, mainly small customers, they are suffering the most. But as I mentioned, many of them are changing the business model into e-commerce. Most of our business is with customized design, in the online. They are actually accelerating the business these days, and the brands and the retails understand that they need to change their business model, they understand that they need to move to proximity production. They're asking us to engage them with our customers, and so we will see a major growth coming from the retail and the brands as well.

Brian Drab, Analyst

Okay. And then one last quick one, your global strategic customer you mentioned ambitious growth plan, that included North America, Europe, Asia. Did anything change there? Did you mean to indicate that maybe that plan is more ambitious now? Or has it accelerated or are you just restating that you have a great relationship and that they have that plan?

Ronen Samuel, CEO

As you know, we cannot be very specific about the business with our global strategic account. If we mention it in my script about an ambitious growth plan, it is probably a plan that is going to be executed in the coming quarters and it's a significant growth plan.

Operator, Operator

Our next question comes from Peter Zdebski with Barclays. Please state your question.

Peter Zdebski, Analyst

Hi, this is Peter on for Tavy Rosner. Thank you for taking the question, I hope you all are well. Could you help us understand almost the nearly 50% sequential decline in Q1 when most of the quarter was intact outside of China compared with a strong rebound in Q2, where we had more widespread shutdowns? Was a large portion of shipment set for later in the first quarter that got postponed? And if so, should we understand that the majority of those will be pushed out and realized in Q2?

Ronen Samuel, CEO

The nature of the business in Kornit is back-end loaded in the quarter. It's not unique to Q1 2020. We see this in almost every quarter. The main impact was actually delayed in orders in the second half for most of March. As far as we know, we haven't lost any deals to competition. We expect most of those deals to return throughout 2020.

Peter Zdebski, Analyst

Great. Thanks. And then could you give us some color on how you see the COVID-19 pause impacting the service and consumables business growth? And how quickly that might rebound or how do you see that rebounding in 2H onwards?

Ronen Samuel, CEO

In the short term, there were some impacts because there were some sites that were closed across the globe. But longer term now, we see that they are reopening. We see that they are ramping up both on the supplies and working around the clock, some of them, of course, ordering new systems. So we expect that the service business will be breakeven by Q4 2020. By the end of this year, we will move to breakeven and it will continue to be positive moving forward.

Operator, Operator

Our next question comes from Jim Ricchiuti with Needham & Company. Please state your question.

Jim Ricchiuti, Analyst

Hi, thank you. Just a point of clarification for me. When you referred to a global strategic account and a global strategic customer, are we talking about one in the same customer or two customers?

Ronen Samuel, CEO

The same customer.

Jim Ricchiuti, Analyst

Fine, thank you for that. Just with respect to some of the push-downs that you saw, I'm wondering, how much of it was the fact that facilities and customers were reluctant to have you guys install equipment and facilities as opposed to concerns about the overall level of demand you might see?

Ronen Samuel, CEO

At the beginning of March, the industry experienced a significant shock as people paused to assess the situation globally and within the industry. Their primary concern was investing amidst the uncertainty of the pandemic. A few weeks later, in early April, they realized that the pandemic was actually accelerating e-commerce and the trends we had previously discussed. They began to reopen their sites and work continuously, asking us to supply more systems to keep up with the rising demand. It was a mix of an initial shock and the necessity to close sites, but shortly thereafter, they resumed operations around the clock.

Jim Ricchiuti, Analyst

And Ronen, you mentioned that if I heard you correctly, that Presto has emerged as perhaps the biggest surprise. From a standpoint of surprise, can you give us a sense as to how many customers now have this equipment or how many machines have gone down?

Ronen Samuel, CEO

We cannot share how many machines; I can tell you that it has surprised the targets that we put in front of us. We can see some big projects moving into on-demand manufacturing, leveraging our Presto solution as the micro-factory for on-demand manufacturing. We see those projects around the world and some massive projects. I'm not talking about one system, but multiple systems in each site.

Jim Ricchiuti, Analyst

But it sounds like these would include machines that are going to multiple customers?

Ronen Samuel, CEO

Yes, it's multiple customers but some of those customers have huge potential of multiple machines.

Operator, Operator

Our next question comes from Jim Suva with Citigroup. Please state your question.

Jim Suva, Analyst

Thank you very much for the details thus far, it's been very helpful. I have a couple of follow-ups. On your slide entitled, well positioned. The last bullet, you talk about, we believe the market is now moving more decidedly in our direction, and we are ready to execute. Can you help us understand about why that type of a statement shows your confidence moving forward? It seemed like the market was kind of going digital-printing steadily, but now you kind of throw an additional color of more decisively in your direction and things like that. So, just kind of curious about anything behind that, that we should think about. And then I have a few follow-ups.

Ronen Samuel, CEO

Thanks for the question. Over the last few years, we have been talking about changing the supply chain, moving into proximity production, e-commerce was booming. We were detailing on-demand manufacturing, with a few of our customers. We were discussing the trends of sustainability. All those were megatrends that we were pointing out. But what we've seen in the last few weeks due to the pandemic is that it's become an inflection point for the textile industry. The textile industry understood, and you see what's happened in the retail market; the retail market is really fully shut down. They understood that they have to change the way they are doing business. They cannot have any more massive inventory and write-offs, and they have to move into a more sustainable way and more agile way of production. This requires the shift to digital. We see that the brands and retailers are moving to proximity production, and they are engaging with the customers, and we are also getting some substantial orders with new customers which prove that we are in a different age of this industry.

Jim Suva, Analyst

Great. Then my follow-up question is, on your prepared comments, I may have heard it wrong, but did you mention you had some write-offs, and was that for this period or last year? And was that inventory or accounts receivable or any details on that?

Guy Avidan, CFO

We mentioned that we had some write-offs when we discussed our gross margin; it was related to inventory, and it was in Q1.

Jim Suva, Analyst

Okay. And does that inventory, that might be end-of-life inventory? Or it seems like with the economy coming back, there could be a market for it or was it like specially configured or designed or how should we think about it? Is it totally gone, or is there a chance that you could actually resell it or the concern of more risk of more write-downs?

Guy Avidan, CFO

Due to less revenues this quarter and less demand, this is actually an accounting treatment. We expect due to shelf life that this inventory will not come back, obviously. If demand comes back faster than expected, then this inventory will come back to life.

Jim Suva, Analyst

Okay. Then my last question; professional sports, when we think about all the fan gear, hats, T-shirts, all these things. Is that something you're closely monitoring and should we be mindful of that coming back in the second half of the year?

Ronen Samuel, CEO

We are working very closely with a few big brands. Of course, we announced about the partnership with Adidas. Some of our customers are really focusing on this segment, and we are developing some new solutions in our labs that will be focusing on capturing the opportunity in the professional sports market. We believe that in H2, we will see this market coming back and we will be ready to capture it.

Operator, Operator

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

Chris Moore, Analyst

Hey good evening guys. Yes, really, really helpful call. Just wanted to talk a little bit, you talked some on it Ronen, on the Vulcan. I'm just trying to understand kind of this, the acceleration towards the inflection point obviously Atlas, Presto, Polypro key systems. Does the thinking in terms of the Vulcan ramp up further as well, kind of given this whole movement that we're talking about?

Ronen Samuel, CEO

Yes, actually the Vulcan; the value proposition of the Vulcan is suited mainly for customers focusing on mid-run to long-run lengths, okay? Versus the Atlas that is more focused on short runs, for customization, for one-offs. So there is a different value proposition for those products. The Vulcan is more focused, if you're looking at the vertical market, is more into retail, into brands, while the Atlas is more into the customized design segment. Now that we are starting to enter in a bigger way into the retail market and to the brands market, we see a better adoption of the Vulcan in those markets.

Operator, Operator

Thank you. Our next question comes from Greg Palm with Craig Hallum. Please state your question.

Greg Palm, Analyst

Yes, thanks. I appreciate all the color and glad to hear you guys are doing well. Starting-off, I think it was, I don't know, because you Ronen or Guy who had mentioned, peak season like volume that some of your customers are seeing here recently, which presumably should bode well for consumable sales. Could you talk about growth rates for that segment? Maybe not specifically, but just directionally given everything, and what are your expectations for the year then?

Ronen Samuel, CEO

We are not breaking down the growth rate on supplies versus hardware at this stage. But as I mentioned, those customers in the customized design and the online are already in peak season for a few weeks. We see big consumption of inks coming from this vertical. We also see very, very nice growth on the DTF side. On the Presto, we see very, very high consumption there as well. So we expect to see the impact on the supplies in H2 alongside the growth that we see on the system side.

Greg Palm, Analyst

Got it. So no way to talk specifically at least directionally on maybe growth rates in Q1 or the first half? I just want to make sure the comments about...

Ronen Samuel, CEO

Overall, we provided some indication. However, we prefer not to give detailed guidance. The indication is that Q2 will show at least 30% growth compared to Q1. In the second half of the year, we expect to see strong single-digit growth compared to the same period last year. We anticipate that gross margin will remain in the same range as last year's in the second half, and we expect a positive operating profit for the year.

Greg Palm, Analyst

Great. Yes, that's really helpful. And then Guy, just following up on gross margins here in Q1, are you able to maybe quantify the impact from the inventory write-off? And then the negative mix, was that specifically among products? I would have thought there would have been a positive mix overall due to higher proportion of consumables relative to product and service but maybe I missed some.

Guy Avidan, CFO

Yes. So in terms of scales, we actually mentioned three points. The first one was the decline in revenue, which was predominantly the number one reason. The second one was mix, and when we say mix, it's system mix. We're not addressing the mix between ink and consumables and systems. This quarter we saw a less favorable mix in the systems. The third one was inventory write-offs.

Greg Palm, Analyst

Great. Okay, makes sense. And then I'm just kind of curious how you're thinking about changes in your go-to-market strategy, given everything going on? Trade shows and live events have obviously been an important part of that previously. And nobody knows how long we'll be in this pandemic. But are you thinking at all about sort of changes in that with less travel and less trade show going on in the near-term?

Ronen Samuel, CEO

Yes, we have actively prepared for this and have been implementing it over the past few weeks. We are conducting numerous virtual demonstrations and live visual presentations from all our demo centers worldwide. Customers are able to participate from their own locations and observe these live demonstrations. We send them materials in advance, and after the demonstration, we provide them with printed materials, ensuring a complete experience. Our plan is to bring this experience closer to customers by hosting open houses in North America, Europe, and Asia, rather than participating in large trade shows. We are also conducting many webinars, including an important one tomorrow that you are all invited to attend. We are engaging in a wide array of marketing activities, increasingly focusing on virtual options, which have proven to be very successful so far.

Greg Palm, Analyst

Yes, makes sense. And the last one, just for a quick clarification, following up on a previous question regarding your global strategic account. So just to clarify, do you currently support them in all regions, North America, Europe, and Asia?

Ronen Samuel, CEO

I was talking about its ambitious growth plan, and I mentioned those three regions. I cannot share more information about the current status, if they're playing in all those three regions or if it's new sites in those three areas.

Greg Palm, Analyst

Okay, perfect. All right. Best of luck going forward. Thanks for all the color.

Ronen Samuel, CEO

Thank you very much.

Operator, Operator

Our next question comes from Brian Drab with William Blair. Please state your question.

Brian Drab, Analyst

Hi, I wouldn't bother you with one more at this late hour unless I thought it was important. But on the direct-to-fabric market, it sounds like you're reaching an inflection point now with the new Presto. This is a market that, going back to the IPO slides, has always been talked about as multiples in size of the direct to garment, maybe like five times or more the size. Are you at the point where you can fully access that market with the products that you have? And second question is, are you introducing more roll-to-roll products this year in the near-term?

Ronen Samuel, CEO

Yes. The value proposition actually is; we are not addressing the mainstream market of the roll-to-roll. The value proposition is really about on-demand manufacturing of very short runs. As the market is moving now into proximity production, on-demand manufacturing of really short runs because of e-commerce, we see the momentum and we have a very strong momentum as I mentioned. Regarding development, yes, we are developing new products that will come to the market, sometimes hopefully soon.

Operator, Operator

Our next question comes from Jim Ricchiuti with Needham & Company. Please state your question.

Jim Ricchiuti, Analyst

I have just two quick questions. It seems that on the M&A side, you still have an active pipeline and may be moving forward soon. Is that a fair assessment?

Ronen Samuel, CEO

Correct. Yes, we are very advanced in evaluations and we identified a few good candidates. The focus is on the workflow as we mentioned in the past, and I hope that we will be able to announce something soon to the market about M&A activities.

Jim Ricchiuti, Analyst

Okay. And Ron, the second question is, and it may not be a fair question, just in light of the global economic environment. But you've laid out the $500 million exit run rate of revenues. How should we think about that? Do things get pushed to the right?

Ronen Samuel, CEO

It's a very good question, and I would be very open with you. We are super committed to the $500 million. Actually, we believe that we could be much bigger than $500 million. And obviously, due to the pandemic, there might be a slight delay. We might find ourselves sometimes in 2024 instead of 2023, meeting the $500 million goal. It's too early to commit to when exactly we are going to be there. We still aim to bring it as early as possible, but I don't want to say what will happen in Q4 2023. Due to the pandemic situation, I guess that in one quarter from now, we would be able to share more details on when we expect to reach the $500 million mark. If there will be a delay, it will be a small delay.

Operator, Operator

Thank you. There are no further questions. I'll now turn it back to management for closing remarks.

Ronen Samuel, CEO

So, thank you for joining today's call and appreciate your continued interest in Kornit. I want to thank all our employees for their hard work and dedication through this unprecedented time and I look forward to speaking with all of you throughout the quarter. Thank you very much and good evening all.

Operator, Operator

This concludes today's conference. All parties may disconnect. Have a good day.