Kornit Digital: New Go-To-Market Approach Holds Long-Term Promise - Buy

seekingalpha05-14

Kornit Digital Ltd. reported mediocre first quarter results as the company continues to operate in a challenging business environment.However, Kornit managed to generate $2.7 million in free cash flow...

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Cash and cash equivalents at the end of Q1 amounted to $551 million.The company will introduce a new sales approach called the \"All-Inclusive Click Program\" designed to remove entry barriers for prospective customers.If executed successfully, the company should build a material stream of recurring high-margin revenues over time. However, the initial impact on revenues and cash flows will be negative.With 2025 expected to show early results from the new program, I am reiterating my \"Buy\" rating for Kornit Digital Ltd. with a slightly lowered price target of $20.   sergeyryzhov Note: I have covered Kornit Digital Ltd. (KRNT) previously, so investors should view this as an update to my earlier articles on the company. Last week, leading digital textile printing solutions provider Kornit Digital Ltd., or \"Kornit,\" reported first quarter 2024 results. Revenues came in at the lower end, and adjusted EBITDA margins at the higher end, of management's guidance:   Company Press Releases While revenues were down year-over-year, gross margins improved significantly. In addition, operating expenses decreased to new multi-year lows:   Company Press Releases Despite the top-line headwinds, Kornit managed to generate $2.7 million in free cash flow for the quarter. The company utilized $7.9 million for share repurchases and finished Q1 with $551 million in cash, bank deposits and marketable securities. The company continues to have no debt. For the second quarter, management guided revenues in a range of $47 million to $52 million, with adjusted EBITDA margins between -10% and 0%. Management also guided H2/2024 revenues to increase between 20% and 25% over H1 levels, which would calculate to full-year revenues of between $205 million and $210 million. The company expects to report positive adjusted EBITDA for the full year. As market conditions continue to be challenging, the company will introduce a new sales approach, which is essentially a lease model with a minimum volume commitment by the customer:   Company Presentation After successful pilot testing, Kornit will start to roll out the so-called \"All-Inclusive Click Program\" or \"AIC-Program\" at a larger scale in the second half of the year. The AIC-Program is designed to overcome key barriers for prospective customers, like major upfront capex requirements and uncertain unit economics. In exchange, customers will have to commit to certain minimum volumes, which should provide the company with a growing stream of recurring revenues over time. However, with customers no longer being required to purchase the company's textile printing systems, Kornit's revenues and cash flows will be impacted going forward. On the conference call, management was reluctant to go into financial details of the AIC-Program as pilot testing hasn't been completed, but Kornit expects the program to deliver similar or even better margins as compared to the company's traditional sales model. Management expects to enter 2025 with \"substantial revenues\" provided by the AIC-Program, and also projected meaningful growth for the company's business as a whole next year. For my part, I applaud management's decision to pursue some sort of \"textile printing-as-a-service\" offering with the potential to vastly increase recurring revenues and lift margins over time, as Kornit has the financial resources to withstand the initial cash flow impact. In addition, with the company's enterprise value now below $200 million or approximately 1x projected 2024 revenues, further downside appears to be limited, particularly when considering Kornit's massive cash position. However, with the AIC-Program likely to impact near-term financial results, I have reduced my estimates for both 2024 and 2025:   Author's Estimates Based on my revised estimates, the company is trading at approximately 5x my 2025 EV/Adjusted EBITDA estimate, which is substantially below the corporate average in the machinery sector. Assigning an EV/Adjusted EBITDA multiple of 10x would yield a $20.00 price target for the shares, which translates into more than 25% upside from current levels:   Author's Estimates Bottom Line Kornit continues to operate in a challenging business environment, with customers still reluctant to outright purchase the company's digital printing systems. The introduction of the AIC-Program at a larger scale will hopefully result in Kornit securing a new stream of recurring high-margin revenues which should be more predictable than the lumpy systems business. However, the initial impact on revenues and cash flow will be negative, but if the company successfully executes on the new program, these headwinds could turn into tailwinds a couple of years from now.  Consequently, I am reiterating my \"Buy\" rating on Kornit Digital Ltd. shares with a slightly lowered price target of $20.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435304580"}