Kornit Digital (KRNT) Q3 2025 Earnings Transcript

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DATE

Wednesday, Nov. 5, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Ronen Samuel

Chief Financial Officer — Lori Heins

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RISKS

Negative Free Cash Flow — Lori Heins stated, "as we drive our penetration with the AIC approach, we would expect our free cash flow to be negative. Whereas our objective is to keep operating cash flow positive."

Gross Margin Headwinds — speaker 3 said, "we faced some headwinds resulting from adjustments in addition to a greater impact from the effects of U.S. tariffs," which were not present last year and impacted both product and service gross margins.

Year-Over-Year Revenue Decline Expected in Q4 — Ronen Samuel acknowledged that guidance for Q4 2025 "does imply a decline" due mainly to the transition from CapEx to recurring revenue models.

TAKEAWAYS

Revenue Guidance -- Revenue is projected between $56,000,000 and $60,000,000 for Q4 2025.

Adjusted EBITDA Margin Guidance -- The company expects an adjusted EBITDA margin in the 7%-10% range for Q4 2025.

Cash Position -- Cash, including bank deposits and marketable securities, was $490,000,000 at the end of Q3 2025.

Operating Cash Flow -- Operating cash flow was $4,300,000, compared with $13,600,000 in the same period last year.

Cash Flow Less CapEx -- Cash flow less capital expenditures was $800,000, compared to $3,100,000 in the same period last year, including AIC equipment investment, for Q3 2025.

Shift to All-Inclusive Click (AIC) Model -- The company is deliberately prioritizing recurring AIC model deals over traditional CapEx sales, resulting in deferred revenue recognition but improved long-term predictability and profitability.

Recurring Revenue Growth -- Annualized recurring revenue (non-GAAP) from shipped systems continues to grow, with management targeting further expansion through AIC adoption.

Geographical Revenue Mix -- North America currently represents approximately 65% of revenue, and Asia is now beginning to contribute via new AIC and screen deals.

Outlook for 2026 -- The company anticipates "low single-digit" revenue growth and substantial EBITDA margin expansion in 2026, driven by the recurring revenue mix, according to speaker 2.

Gross Margin Initiatives -- Management has announced targeted price increases to partially offset tariff-related margin headwinds in the coming quarters.

Footwear Opportunity -- Over 1,000,000 pairs of footwear have been printed using the company's solution as of the Q3 2025 earnings call. Early success in China and new orders in Vietnam and Germany have also been noted.

Service Revenue Dynamics -- Service revenue grew year over year in Q3 2025, aided by upgrades, though upgrade activity is expected to moderate for the remainder of the year and in 2026 unless new upgrade opportunities are introduced, as discussed in Q3 2025.

Operating Expense Efficiency -- Operating expenses were reduced despite adverse foreign exchange impacts, with continued focus on aligning costs to revenue growth.

Apollo Adoption -- There is reported acceleration in delivery of Apollo systems to multiple customers, supporting recurring revenue momentum.

SUMMARY

Kornit Digital (NASDAQ:KRNT) signaled an accelerated pivot to the AIC recurring revenue model, acknowledging that this transition will dampen near-term revenue, especially in the fourth quarter, but establish a longer-term profitability foundation. The company expects continued cash flow pressure due to up-front AIC investments, even as operating cash flow remains positive. Management outlined region-specific growth initiatives, including early traction in Asian markets and rapid expansion opportunities in decorated footwear, while confirming North America will remain the largest revenue contributor. Operational discipline was evident in reduced expenses despite currency pressures, as well as targeted price actions to counteract margin headwinds from tariffs.

Management will initiate standalone reporting of AIC revenue by the end of Q1 to improve transparency on the recurring revenue transition.

Future service revenue growth will increasingly depend on new upgrade cycles, as the major Atlas to Atlas MAX upgrades are largely complete, with additional updates planned for 2026.

Technical and fashion segments present incremental potential, with a strategic agreement under evaluation by a leading global sports brand that could trigger a step-change in orders.

The company sees a "a stronger pipeline" according to speaker 2 for both screen replacement and footwear markets supporting their visibility into moderate 2026 top-line growth and higher margin expansion.

INDUSTRY GLOSSARY

All-Inclusive Click (AIC) Model: A usage-based recurring revenue structure where customers pay per impression or print, substituting traditional up-front capital equipment sales with periodic payments.

ARR (Annualized Recurring Revenue): The expected annualized revenue run rate derived from active recurring contracts or systems in place.

Atlas MAX: A proprietary Kornit printing system platform referenced in the context of significant fleet upgrades.

Apollo: Kornit's industrial direct-to-garment (DTG) printing system, highlighted as a recurring revenue driver in the call.

Presto: Kornit's solution for direct-to-fabric printing, mentioned as a product adopted for customized garment production.

Full Conference Call Transcript

[speaker 3]: As a reminder, this figure does not represent recognized revenue but rather the annualized recurring revenue we expect to generate based on systems shipped to date. We are focused on moving a greater portion of our system shipments to the AIC model with the goal of expanding this base of recurring revenue. This effort will strengthen our ability to project the coming quarters and year and is expected to drive an improvement in our gross margin over time.

Moving to our balance sheet. Our balance sheet remains robust, with our quarter-end cash balance, including bank deposits and marketable securities, standing at $490,000,000. Operating cash flow was $4,300,000, compared with $13,600,000 in the same period last year. Cash flow less capital expenditures, including investment in equipment on lease for AIC in Q3, was $800,000, compared with $3,100,000 in the same period last year.

Ending with our fourth-quarter guidance, we currently expect fourth-quarter revenues to be between $56,000,000 and $60,000,000 and adjusted EBITDA margin to be in the 7% to 10% range. I'll now turn it back over to Ronen to open the call for Q and A.

[speaker 2]: Thank you, Lori. Operator, we are ready for the session of the Q and A.

[speaker 0]: Thank you. And at this time, we will be conducting a Q and A session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. One moment while we poll for questions.

And our first question comes from the line of Greg Palm with Craig Hallum. Please proceed with your question.

[speaker 4]: Thanks. This is Danny Eggerich on for Greg today. Maybe just one kind of on the broader demand environment and maybe if you could break out systems and consumables? And how what played out this quarter was maybe different or better or worse than you were expecting from what you saw a few months ago? Where are we at in kind of inventory levels on the consumable side? And how have customers' activity changed around, you know, capital sales and AIC for Apollo?

[speaker 2]: Yes. Thank you, Danny. So regarding this quarter, the way we look at it, for that, as you can see, grew year over year the same way the service. Service grew mainly due to upgrades that we delivered this quarter. Within the product, we see expansion both on the ink side but also, of course, on the AIC that's something to contribute to our revenue. Overall, we are shipping more and more systems on the AIC model. But they will contribute moving forward into Q4 and 2026. This is the major focus for us for growth. Hopefully, I answered your question.

[speaker 4]: Yeah. No. That's helpful. Maybe just one on gross margin. Maybe a little step down and little below expectations. I know you kind of mentioned that inventory-related adjustment in some tariff stuff. Is there any way to kind of break out into a little more depth some of those impacts that you saw and how we should think about maybe the price increase offsetting those tariff impacts going forward?

[speaker 2]: Yeah. I will leave this question to Laurie for beginning.

[speaker 3]: Okay. So as you mentioned, we faced some headwinds resulting from adjustments in addition to a greater impact from the effects of U.S. tariffs. Of course, we didn't have that last year. Both of these affected the product gross margin as well as the service gross margin this quarter. And as we said, we have communicated targeted price increases we expect to offset a part of the tariff impact in the coming quarters.

[speaker 2]: Yeah. What I can add as well is that you should expect to see expansion in gross margin, of course, in Q4. Q4 is traditionally the strongest quarter in terms of gross margin. And we are planning, of course, to continue to see expansion year over year into 2023 on gross margin.

[speaker 4]: Okay, great. Maybe just one last one for me. Appreciate you kind of giving that early 2026 outlook. I guess, what kind of visibility do you have at this point? I'm assuming a little bit more visibility transitioning to more recurring revenue. What kind of gives you that confidence in your ability to grow next year?

[speaker 2]: Yeah. So we're to have more and more visibility because of how we recurring revenue and reoccurring revenue. Of course, we have the ink revenue, which is the reoccurring. We have revenue that is reoccurring, and we are building more and more the ARR from the AIC model that is the recurring revenue while taking a relatively conservative view on the systems that we will deliver next year on CapEx. We still believe that we can deliver growth next year. As I mentioned, low single-digit growth but you will see much stronger expansion on the EBITDA and, of course, accelerated growth on the ARR during the year.

[speaker 4]: Alright. Appreciate the color. I'll leave it there.

[speaker 0]: Thank you. And our next question comes from the line of Brian Drab with William Blair. Please proceed with your question.

[speaker 4]: Hi, thanks for taking my questions. Would like to talk first just about the low single-digit outlook for 2026. Ronen, can you just talk about the thinking that goes into that, the components of that growth, and you know, I guess I would have thought that with ARR that you're entering 2026 with that you would have expected to grow a little bit faster than low single digits?

[speaker 2]: Yeah. Thank you, Brian. And you're right. For one hand, we're entering with a nice ARR into 2026. We're also having better visibility on our pipeline. We have a stronger pipeline than we had before. But when we are looking at our growth rates, it reflects a deliberate and strategic position towards building a more predictable, sustainable, profitable business. We are not only expanding our addressable market, we are really getting into the bulk apparel, footwear, and additional categories, but also transforming, and this is the main impact, our model from one-time equipment sales to recurring usage-based revenue under the all-inclusive click model.

This shift naturally moves part of the revenue recognition that we are planning for next year from the short term into future periods. But it creates a much stronger foundation of long-term growth profitability and visibility. While we expect 2026 to deliver low single revenue growth, we see meaningful expansion in EBITDA as we maintain a disciplined cost structure and continue scaling our recurring revenue base. The ability to grow ARR significantly while expanding profitability is a major milestone for us. And a strong indicator of the durable growth engine we are building over the years ahead. I hope I answered your question, Brian.

[speaker 4]: Yeah, Ron. That's helpful. Just a follow-up question: Are you leaning more away from outright equipment sales in '26? Like, has your strategy changed a little bit in the last few months regarding, you know, trying to just move customers to AIC rather than equipment?

[speaker 2]: That's a yes. We see the AIC model as saying that the answer is yes. Because you see the AIC model is the right, the preferred model for our customers. Reducing barriers of investing in capital in advance, aligning cost structure to revenues, and providing predictability to our customers. We see also that customers on this program are using the systems. The utilization is higher. The number of impressions is higher on systems that are on AIC model. For us, it creates much better visibility, much stronger recurring revenue, and better profitability and customer value that we are generating out of each of those systems. So we deliberately decided to move more and more into the recurring business, the AIC.

And therefore, we anticipate a reduction next year on the CapEx deals but increasing the number of systems overall. And we see the number of systems even this year is growing quite significantly versus last year. And we expect even more next year. But many of them, or most of them, will be on the AIC. We will not see the revenue recognition at the same quarter. We will see it over time. We will create a much stronger business moving forward for the years to come.

[speaker 4]: Okay. So just to put a final note on this, I guess, it seems like CapEx sales will be much lower. AIC revenue will probably increase significantly next year and maybe even more than double. But, really, you're positioning the company kind of for 2027 and beyond is my impression right now.

[speaker 2]: Yeah. As we mentioned, AIC revenue is becoming significant. And most likely, by the end of Q1, we will start reporting separately on the AIC revenue as it becomes even more significant. Next year, you will see more revenue, more revenue coming from the AIC. Some of this is offsetting the reduction of the CapEx revenue overall, we still expect growth for the full year.

[speaker 4]: Okay, thanks. I'll have more later.

[speaker 0]: Thank you. And our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

[speaker 8]: Hi. This is Will on for Chris. Do you think that the geographic mix of your revenue will look much different two to three years from now? And if so, what are the drivers?

[speaker 2]: Thanks, Chris. So for us, North America today represents something like 65%. In three years from now, we'll continue to be the largest region. And we definitely would like to see EMEA catching up, and there's much opportunity in Asia. We see specifically in Asia the opportunity around the footwear. We've been there last week at Itma. We got fantastic feedback, and we have many new prospects for this segment that we see, specifically with the screen market in Asia. As I mentioned in my prepared remarks, we closed two deals, the first deals in Asia, both in the screen market and in the AIC. We only now introduced the AIC model in Asia.

So we expect Asia to contribute more moving forward. But as we see today, North America is the largest opportunity both from the screen market, from the fashion perspective, from the installed base. We have a very large installed base, and we expect North America to continue to contribute and grow.

[speaker 8]: Thank you. And can you remind us, or add some color to what your thoughts are on free cash flow in 2026 and 2027?

[speaker 3]: Hi. As we presented earlier, as we drive our penetration with the AIC approach, we would expect our free cash flow to be negative. Whereas our objective is to keep operating cash flow positive.

[speaker 8]: Thank you. That answers the question.

[speaker 0]: Thank you. And our next question comes from the line of Erik Woodring with Morgan Stanley. Please proceed with your question.

[speaker 7]: Hi. This is Maya on for Erik. Last quarter, you told us that second half revenue would grow kind of in the low single-digit range year over year. Your guidance for 4Q implies flat to slight declines. Over the past three months, what has really changed and what's supporting evidence can you provide to give us the confidence that you'll achieve at least the midpoint of 4Q results? Thank you.

[speaker 2]: Yeah. So, first of all, you know, Q3, we grew 5% year over year. Q4, we expect sequential growth versus Q3. However, year over year, you're right, it does imply a decline based on our guidance. And the main driver is the move from CapEx deals to all-inclusive. So we do expect to see meaningful growth on the ink side. Service probably will be flat or a bit lower than last year. But the main impact versus last year will be the move from CapEx deals that we delivered last year to all-inclusive deals that become ARR.

[speaker 7]: Got it. Thank you. And then you kind of touched on this for 4Q, but it was good to see services return to year over year growth. This quarter I understand, maybe in 4Q, we're thinking flat to slightly down. I guess, how sustainable is upgrade activity as we look to 2026?

[speaker 2]: So in 2024, we had quite a significant amount of upgrades, which contributed to the service revenue. So we are taking there from the service revenue. The upgrade at all, service revenue continued to grow year over year. Once we are putting the upgrades inside, it depends on the upgrade of the deals that we are closing, the availability of the upgrades that we have, that we are offering. Most of the upgrades that we've done in 2024 were around the Atlas to Atlas MAX upgrades. We completed most of it. Some of it we continue to do this year, and we saw it in Q3.

We do expect in 2026 to have some new upgrades, which will contribute more capability to our systems. I cannot get into detail right now. We didn't disclose it yet. But we do plan on additional updates that will come in 2026 on top of our biggest customers potentially upgrading their fleet into max technology.

[speaker 7]: Great. Thank you.

[speaker 0]: Thank you. And our next question comes from the line of Chris Reimer with Barclays. Please proceed with your question.

[speaker 5]: Oh, hi. Thanks for taking my questions. Two quick ones. On demand in the footwear and in textile. I mean, the footwear I know you've been talking about this for a while. What's changed, and how do you see customer adoption as a growth driver over the next two years? And then on the textile, you mentioned some of the new customers in the branded printing. But how do you see traction with textile companies and customers?

[speaker 2]: Yeah. So let's start with footwear. You all remember that we started about two years ago, and we mentioned that we are looking into this segment with initial customers in China, and then it grew to additional customers. And over time, they took more systems. We work very closely with those customers and with major brands, and we have reached a point that we felt that we have the right solution. As of today, those customers deliver more than 1,000,000 pairs of footwear offering to the market. We learned a lot about this market. We didn't know anything about this market two years ago. And we met many new potential customers.

When we learned about the market, it's a big market. When we're looking at the decorated footwear market, we are talking about 1,000,000,000 pairs of shoes that are being decorated and printed on an annual level. If you translate it, it's about 2,000,000,000 impressions, and this is our addressable market that we are going after. We are only at the beginning. And what we are doing here is actually a replacement move of changing the current technology and moving a very complex way of production that takes months into a much more agile and one-step process, meeting the durability standard that this industry requires.

And right now, the stores of innovation that we are bringing to the market around this technology are very proud because we are unique. We are the only digital solution out there in the market. There was tons of excitement at Itma from footwear manufacturers that came and saw this as the magic. And what we are delivering there is really solving the main pain of this industry, which is the slow development that takes months to develop a footwear item, and you can move it now to days. Design freedom, no limitation on design, and produce exactly what you need without waste and without overproduction.

We have early success in China, with two major manufacturers that worked with most of the leading brands of the world. One of them at Itma ordered another two systems on top of the system they already have. And we're now entering into Vietnam and Germany with additional orders that we got already. There was a lot of interest, and we need to understand it's just the beginning. So while we see a big opportunity there, it will take time to capture it. But it's going to become a significant contributor to our growth in the next three years. This is on the footwear. On the fashion market, we are looking more at the technical aspects of fashion.

I mentioned on the previous call that we signed a very strategic agreement with one of the leading brands of the world, a sports brand of the world. The project is running. In a few months, we are reaching a point of decision, and this can open for us another very lucrative market. With a big order that will once the pilot is finalized. And there is a lot of interest in the technical area in Germany, Central Europe, in Asia, specifically around the sports market, but we continue to deliver systems also to the fashion market. One of our biggest customers, actually, in the customized design market, adopted the Presto a few months back.

And now is using the Presto for all of the print to print on hoodies and or create hoodies and create T-shirts and delivering to the markets with on-demand customization, a very innovative direction. We see it as an opportunity for them to grow rapidly with additional systems. And for others to follow up as well.

[speaker 5]: Great, great. Thanks for the color. That was very helpful.

[speaker 0]: Thank you. And our next question comes from the line of Kieran McKay with Cantor Fitzgerald. Please proceed with your question.

[speaker 10]: Yes. Thank you for taking my question. Was wondering maybe if you could maybe touch on the improvement in OpEx year over year and quarter over quarter, what are the drivers, and how they kind of met your plan? And really, what do you see as opportunities going forward to continue to optimize OpEx with your revenue line? Thank you.

[speaker 3]: Hi. So we have been focused on allocating resources to drive our growth. So resources that were not part of driving growth were reduced. That is in addition to constant efficiencies that we are looking to achieve. As I mentioned, this quarter, you can see even with unfavorable exchange impacts that we were successful in reducing our operating expenses. We will continue to look to drive our operating expenses to match our level of revenue growth so that we achieve our profitability targets. And we will do our best to manage that through what we expect will be a more significant impact next year because of exchange rates.

[speaker 10]: Is that helpful? Yes, it does. I guess I maybe had kind of a follow-up question. For demand for 2026, you know, kind of beyond the AIC model. But generally, what's your impression of the overall demand or business environment in 2026? Do you have a sense of more optimism, more of an uptick, or is it more of a sense overall that it's kind of pretty much the same as this year? Just kind of your general sense of the outside of company's spending change from the CapEx model to the AIC, but just the general business environment expected in 2026?

[speaker 2]: In terms of the pipeline, we feel that we are in a better place. We have better visibility on our pipeline both for the deals that are AIC model and also on CapEx deals, specifically, we have a very strong pipeline on the screen replacement market. As I mentioned, we have a nice pipeline for the footwear market as well. So we have visibility there. We have very good visibility, of course, on the ink and the services and what are the upgrades that we are planning to do next year.

So overall, we feel that we have a good plan, and we feel confident about what we described as the year of growth of modest growth on top-line, low single digits, and more significant growth on the EBITDA on the bottom line.

[speaker 10]: Great. Thank you so much.

[speaker 0]: Thank you. And with that, there are no further questions at this time. I'd like to turn the floor back to Mr. Ronen, who will provide some closing remarks.

[speaker 2]: Yeah. First of all, thank you, everyone, for joining us on this call. As you can see, Kornit Digital Ltd. is going through a major transformation, both in terms of the market, the addressable market that we are going after. Whether it's the screen market, which is totally new to us, a massive opportunity, and the main opportunity we are going after on top of the customized design market, and now also footwear and some other adjacencies that we are going after. On top of that, we are changing our business model into the recurring ARR AIC model, which is only now starting to gain momentum, penetrating new regions like Asia Pacific.

We see acceleration in adoption of Apollo, with multiple systems being delivered to many of our customers. Our pipeline is getting stronger. We have better visibility both to Q4 and for 2026. And we believe that we are executing with passion and clarity on our strategy. So, I would like to thank you again and hope to meet you soon at different events. Thank you very much.

[speaker 0]: Thank you. And with that, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time. Have a wonderful day.

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