Amazon deal delay hits Kornit Digital

Gabi Seligsohn Photo: Eyal Yizhar

Delays in getting regulatory permits have led Amazon to postpone its purchase of Kornit Digital's digital printing systems.

A deal with online retailing giant Amazon, which previously sent the share of Israeli company Kornit Digital (Nasdaq:KRNT) soaring, had the opposite effect yesterday. Kornit Digital, which manufactures industrial digital printing systems for printing on fabric and clothing, yesterday published a profit warning for the third quarter. The company's announcement cited delays in deliveries to a single strategic customer - the market believes that the customer is Amazon - that is unprepared to receive the planned delivery of such a large number of systems, due to prolonged unanticipated delays in obtaining regulatory permits. These delays have prevented the commencement of activity at the new facility designed to receive the systems.

The delay has caused a steep drop in Kornit Digital's expected third quarter revenue, from a previous forecast of $34-38 million to $27-28.5 million, compared with $30.9 million in the third quarter of 2016. As a result, non-GAAP operating profit will be 3-5% of revenue, compared with the 13-17% forecast. Gross profit will improve because of composition of the company's sales.

Kornit Digital issued a warning about these delays already in August, when it publised its second quarter results, noting that an important customer had experienced delays in launching its new site, and that some of the deliveries would consequently be delayed until 2018. It now emerges that the effect is more significant than the company previously expected, and the negative impact will also extend to the fourth quarter. Kornit Digital CEO Gabi Seligsohn said, "We expect a decrease of $8-9 million in our revenue in the fourth quarter, compared with what we planned."

Kornit Digital's share price plunged 19.9% in later trading yesterday, bringing it back to the levels at which it was traded early this year. Seligsohn added that the share's response had not surprised him. "This announcement is dramatic in character, coming from a company that has grown very rapidly from the day it went to market, and was regarded as a company with a substantial and promising future. I'm not concerned about the share price; I'm concerned about what I do, which is to manage the company, but I can understand investors feeling nervous about it. On the other hand, analysts have lowered their target prices for the share, but are still supportive, because they understand Kornit Digital's long-term story," Seligsohn told "Globes."

The delay by Amazon is not the only factor. It turns out that a major part of the decline in the fourth quarter projection is the result of a longer process for selling the company's new Vulcan product, which affected the company's expected sales ahead of the US holidays. "There are a number of activities that will turn into substantial sales in 2018, but meanwhile, the situation is that 2017 revenue is $16-17 million less than expected," Seligsohn explains. Revenue in the second half of 2017 will be less than in the second half of 2016, which was especially strong because of large orders from Amazon and another major customer. Seligsohn nevertheless stresses that the company's sales in 2017 as a whole will still be greater than in 2016.

What about 2018? "We believe that the customer will obtain the regulatory permits this year, and the $64,000 question is whether the systems will be introduced in the first or second quarter. It very much depends on the demand. We'll launch new products and activities next year with other major customers, and this will be reflected in the following years. There's no doubt that when you work with large customers, your short-term plans can go awry in terms of money. In the long term, however, we have a very attractive business model"

It looks like the analysts agree with Seligsohn. Canaccord, for example, cut its target price for Kornit Digital's share from $24 to $18, but analyst Bobby Burleson says that it is merely growing pains, and that he is confident in the company's ability to achieve accelerated growth in revenue and net profit in the future. Stifel Nicolaus cut its target price for the share from $20 to $18, but analyst Patrick Newton remains positive, believing that it is a matter of timing, rather than something that should change the long-term thesis. Cooperation between Amazon and Kornit Digital began on 2016 (Amazon accounted for 18% of Kornit Digital's total sales for that year), but became more extensive in early 2017, when Amazon was granted options to buy up to 8% of Kornit Digital over a five-year period at a $13.05 strike price for the share, with the pace of exercising the options linked to the pace of buying Kornit Digital's products.

Kornit Digital's share price fell to $13.85 yesterday, compared with a peak of $22.40 less than two months ago. The largest shareholder in the company is Fortissimo Capital with a 13% stake, after having sold shares for $180 million in two offers for sale during the past year.

Published by Globes [online], Israel Business News - www.globes-online.com - on September 27, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Gabi Seligsohn Photo: Eyal Yizhar
Gabi Seligsohn Photo: Eyal Yizhar
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