Kornit Digital Ltd. Aktie

Greetings, and welcome to Kornit Digital's First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Andy Backman, Chief Capital Markets Officer for Kornit Digital. Mr. Backman, you may begin.

Thank you, operator. Good day, everyone, and welcome to Kornit Digital's First Quarter 2026 Earnings Conference Call. Joining me today are Ronen Samuel, Kornit's Chief Executive Officer; and Assaf Zipori, our Chief Financial Officer.

For today's call, Ronen will share his overall commentary on the first quarter, followed by Assaf, who will review our first quarter 2026 results and provide our guidance for the second quarter 2026 before we open up the call for Q&A.

Before we begin, I would like to remind you that forward-looking statements within the meaning of the 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 and financial condition and similar statements regarding the company's expectations for the future.

The fulfillment of forward-looking statements is subject to known and unknown risks and uncertainties. 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 26, 2026, 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 them, 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 like to turn the call over to Ronen. Ronen?

Thank you, Andy, and good day, everyone. Q1 was a strong start to the year and a clear proof point that our strategy is translating into execution and measurable results.

We delivered revenues of approximately $48.5 million at the high end of our guidance with adjusted EBITDA loss of $2.8 million and continue to generate positive operating cash flow for the 10th consecutive quarter. We are seeing continued strong impression growth with trailing 12 months year-over-year growth of approximately 12%, driven by higher utilization across our installed base and the ongoing shift from screen to digital.

Momentum is being driven by both new and existing customers. Approximately 40% of our system sales in the first quarter came from new customers, while approximately 65% were to traditional screen printing customers, primarily targeting long-run production environments. At the same time, relatively new customers are already expanding their fleets after seeing the operational and economic benefits of digital production.

Together, these trends reinforce the shift from analog to digital manufacturing. As an example, Promos Ink, who become a Kornit customer just last year, expanded its Apollo and ATLAS MAX fleet with multiple ATLAS MAX Plus systems through Kornit AIC platform.

The company is also beta testing our newly unveiled ATLAS MATRIX platform. Another example is Printis, a high-volume Canadian screen printer focused on sports and athleisure, which expanded its ATLAS MAX Poly fleet with multiple ATLAS MAX Plus systems during the first quarter.

The company has also committed to upgrade all its systems to ATLAS MATRIX platform, including its planned expansions into the U.S. market. Our pipeline and backlog continued to strengthen, improving visibility into Q2 and the second half of the year and reinforcing our confidence in the business momentum.

In the first quarter, we added ARR of approximately $2.1 million, ending Q1 with about $27 million in ARR. Based on our signed backlog, advanced pipeline and customers already committed to AIC, we expect a meaningful step-up in ARR in Q2 with continued acceleration throughout the second half of the year.

A few weeks ago, we hosted Konnection 2026, which was a defining moment for Kornit and for the industry. We had close to 600 participants, including hundreds of existing customers and a strong mix of new prospects, brands, retailers, fulfillers and solution partners.

The energy and feedback around our vision, strategy and solutions was extremely strong. Konnections is becoming much more than an event. It is evolving into a platform where the industry comes together to shape the future of on-demand production and demonstrates Kornit's leadership in that transformation.

What becomes very clear during the event was that the industry is accelerating towards agile demand-driven manufacturing models and customers are actively looking for technologies and integrated platforms that can reduce inventory risk, improving speed to market and drive more sustainable production.

At Konnections, we demonstrated Atlas MATRIX for the first time, and the response exceeded our expectations. Customers immediately recognize the breakthrough value of a single platform capable of producing across cotton, polyesters and blends with industrial scale quality, durability, consistency and efficiency.

Powered by our unique Carbon Shield technology, MATRIX addresses one of the industry's biggest challenges, enabling high-quality digital production on polyester fabrics while preventing die migration. A critical limitation that has constrained digital apparel printing for years. This breakthrough significantly expands our addressable market into polyester, sportswear, performance apparel and other high-growth segments, opening new applications and production opportunities for our customers.

Customers and partner feedback has been extremely positive, and we are already building a meaningful backlog of new and upgrade orders, reinforcing Atlas MATRIX potential to accelerate the transition from analog to digital production across a much broader portion of the market.

We also showcased Apollo in live production environments, demonstrating the level of automation, throughput and consistency required to address bulk and mid-run production at scale. For the first time, we demonstrated production on cut pieces using Apollo, opening new market opportunities in applications and workflows that historically were difficult to automate digitally at scale.

The response from customers looking to replace analog screen printing was very strong, reinforcing the significant market opportunities ahead of us. In parallel, we announced the acquisition of PrintFactory, a strategic transaction that significantly strengthens our software workflow and production automation capabilities. What we are seeing more clearly now is that digital production is no longer limited to short-run customization.

It is increasingly moving into scaled manufacturing environments. PrintFactory is already deployed across thousands of production sites globally, bringing advanced color management, workflow automation and production control capabilities that are becoming increasingly critical in scaled digital manufacturing environments. More importantly, PrintFactory accelerates our long-term strategy to build the connected digital infrastructure for the textile and apparel industry, connecting demand generation, workflow, production and fulfillment into one scalable ecosystem.

Customers increasingly recognize that the future of production lies in intelligent connected platforms, not just hardware. Very few companies in the industry can bring together production systems, workflow, automation, consumable and fulfillment connectivity into a single integrated offering the way Kornit can. Following Konnection, we continue to build momentum at text process in Frankfurt, where we introduced and demonstrated Presto MAX Plus for the first time.

Interest levels were extremely high, particularly in the footwear, technical apparel, camouflage, performance wear, home decor and other high-performance applications. And we are already seeing a growing pipeline of opportunities and orders for the new platform. Presto MAX Plus represents another important expansion of our addressable market, bringing Kornit's digital production capabilities into entirely new categories and applications.

Powered by our new DuraTech architecture, the system delivers exceptional durability and print performance on demanding fabrics and applications that historically were impossible to address with digital production. Combined with our advanced vision system and intelligent production capabilities, Presto MAX PLUS brings a new level of automation, consistency and production control to roll-to-roll digital textile manufacturing.

Customer feedback around print durability, fabric flexibility, sustainability and the ability to eliminate traditional pre- and post-processing steps was extremely positive. Taken together, these developments reinforce the strength of our innovation pipeline, the breadth of our platform and the momentum we are building across products, customers and markets, positioning Kornit well to capture the growing shift towards on-demand production.

Looking ahead, the momentum we built in Q1 continues to strengthen into Q2. Our Q2 guidance reflects the continued progress and execution we are seeing across the business. In addition, our growing pipeline, backlog and customer activity are providing us with better visibility and confidence as we look towards the second half of the year. We also remain disciplined on cost.

While the strengthening of the shekel creates some pressure, we are taking the right actions to manage our cost structure and protect profitability as we scale. Stepping back, over the past 2 years, we focused on stabilizing the business, strengthening our foundation and redefining our strategy. Today, we are seeing the results through a stronger product portfolio, expansion into new markets and applications, a growing recurring revenue model through AIC and a clear position as the technology and platform leader, enabling the shift towards on-demand manufacturing at scale.

Most importantly, we are executing consistently and building the foundation to scale and grow from here. With that, I will turn the call over to Assaf. Assaf?

Thank you, Ronen, and good day, everyone. Total revenues for the first quarter were $48.5 million at the top end of our guidance range. Revenue performance in the quarter reflected year-over-year product and services growth of 4% and 7%, respectively, supported by growing customer activity and expansion across our installed base.

AIC revenue continued to grow strongly year-over-year, increasing approximately 103% compared to the first quarter last year. We ended the quarter with approximately $27 million in ARR and entered Q2 with a strong backlog, pipeline and customer activity level, supporting our confidence in continued sequential growth in both AIC revenue and ARR throughout the year.

As Ronen discussed, impressions, a strong leading indicator of system utilization and consumables demand grew by approximately 12% year-over-year on a trailing 12-month basis, supported by continued utilization across our installed base and the ongoing shift from screen to digital production. Moving to margins. First quarter non-GAAP gross margins was 41% compared to 45.2% in Q1 2025, mainly reflecting a higher mix of systems and services relative to consumables, driven primarily by normal seasonality patterns in the business.

As a reminder, our business typically sees strong consumables demand and utilization levels in the second half of the year following normal season patterns. Compared to Q1 2025, gross margin was also affected by FX movement related to the shekel strengthening as well as certain tariff-related costs during the quarter, which together reduced gross margins by approximately 190 basis points year-over-year.

As we move through Q2, we are seeing continued strengthening in our pipeline, order flow and backlog, providing us with improved visibility into the second half of the year. As utilization and recurring revenues continue to scale, we expect gross margin improvements in Q2 with more meaningful setup during the second half of the year, driven by higher utilization, recurring revenues and improved operating leverage. Turning to operating expenses. First quarter non-GAAP operating expenses were $25.5 million, down 7% year-over-year despite an unfavorable FX impact of approximately $2 million related to shekel strengthening. Our OpEx performance reflects continued discipline around cost management while maintaining investment in our key growth initiatives, innovation road map and go-to-market activities. Non-GAAP operating expenses exclude approximately $2 million in legal costs related to a prior class action lawsuit.

We recently reached an agreement in principle to resolve the matter pending final documentation and court approval. The settlement is largely covered by insurance, and we are pleased to put this matter behind us. Adjusted EBITDA loss for the first quarter was $2.8 million compared to an adjusted EBITDA loss of $3.9 million in the same period last year. Adjusted EBITDA margin for the quarter was negative 5.8%, representing an improvement of approximately 260 basis points year-over-year and better than the midpoint of our guidance range.

Turning to cash and balance sheet. Our cash balance, including bank deposits, marketable securities at quarter end was approximately $462.2 million. Operating cash flow for the first quarter was $6.3 million, representing our 10th consecutive quarter of positive operating cash flow and reflecting our continued focus on working capital efficiency and disciplined financial management.

During the first quarter, we repurchased just over $30 million under our share repurchase program. Since the launch of our initial repurchase program in 2023 and through the end of the first quarter of 2026, we have repurchased approximately 9.1 million shares for a total gross amount of approximately $200 million. Our balance sheet remains very strong and provides us with significant flexibility to support organic growth initiatives, including AIC deployments, new product innovation and strategic investments that support our long-term strategy.

PrintFactory is a strong example of that strategy. Announced after the quarter end, the acquisition strengthened our software workflow and production automation capabilities by supporting our long-term vision to build connected digital infrastructure for the textile and apparel industry. We expect the transaction to close during the second quarter. Turning to guidance. For the second quarter of 2026, we expect revenue between $51 million and $55 million with adjusted EBITDA margin between negative 5% and breakeven.

Our guidance reflects the continued momentum we're seeing across customer activity, backlog growth and execution across the business. As expected, second quarter profitability includes continued investments in strategic initiatives, including Konnections 2026 as well as some ongoing FX pressure from shekel strengthening. Looking ahead, we continue to improve visibility into the second half of the year, supported by strengthening backlog, growing recurring revenues and continued momentum across the business.

We expect continued revenue growth, improving profitability and ongoing positive operating cash flow generation as we continue scaling the business through 2026. With that, I will now turn the call back to Ronen to open the line for Q&A. Ronen?

Thank you, Assaf. And operator, we are ready for the Q&A session.

[Operator Instructions] The first question comes from the line of Brian Drab with William Blair.

First, I just wanted to -- I think Assaf mentioned it, so the second quarter is off to a good start, and it's obviously evident in the guidance as well. But Ronen, can you just talk a little bit more about what you're seeing here early in the second quarter momentum coming out of Konnections and just talk a little bit more about what the setup is for the quarter and the rest of the year.

Yes. Thanks, Brian, for the question. I'll give some kind of an overview and where we stand today and how do we see Q2. I'll start with the market. The industry is -- we see it is moving to on-demand production.

We felt it that Konnection, and I will talk a bit more about Konnection later on but it was a strong sentiment, both from brands, retailers and of course, fulfillers looking to on-demand just-in-time production to meet the demand of the consumer. So this is a clear sentiment in the overall market. In the last 2 years, we worked very hard to shift our strategy to go after the mainstream of the market, the high production in the screen market and getting into new segments like the footwear.

And Q1 results represent the success of this strategy. Overall, in Q1, you saw that we grew our revenue both in products and services and services include upgrades. Some of the upgrades for the Atlas MAX PLUS, but we are looking forward into Q2 that we're already getting a very, very strong pipeline for updates for the metrics.

Impression, which is a leading indicator, grew by 12% on trailing 12 months. We continue to see the impression growing across the board, both from customer and customized design installed base, but also new customers that just joined us and adding more capacity and specifically in the screen replacement from analog to digital conversion. We see the growth from customers, really interesting to see that when we look at the system mix, 40% of the systems that we delivered in Q1, some of them on the all-inclusive clip, some of them on CapEx came from net new. And 65% of the deals came from the screen market, the market that we are targeting, which we see a massive potential there.

And overall, when we look at the new business model of the AIC, it is really growing very nicely, both the AIC revenues and the ARR, both of them at around 100% growth year-over-year, and we expect it to continue to grow significantly in Q2 and the rest of the year. In parallel, we're working very hard to maintain our OpEx while the shekel is strengthening and it's a headwind for us. But actually, we managed to reduce OpEx year-over-year by 7% despite, as I mentioned, the shekel.

On top of that, of course, we continue to generate cash. This is for the 10th consecutive quarter, and we believe that we'll continue to generate cash for the full year. And what we've done this quarter, and we worked very hard in Q1 to deliver Konnection event in the beginning of Q2 that generate a lot of momentum. And I will talk about this momentum in a minute. Not forgetting that we work to announce the acquisition of PrintFactory, which is a very strategic acquisition, which we are planning to close it during Q2.

But I'm most proud of -- it's not about the number. It's really about being able to bring the innovation that the market was looking for. MATRIX is a game changer for the industry. The feedback we got from customers in Konnection was really unbelievable, above our expectation. The technology of Carbon Shield really is unique. Nobody has it on the digital side.

And now customers can have one system that can really print on agnostically on any type of fabric from cotton to polyester to blended. And this provides a lot of potential. If we try to quantify this market, we mentioned in the past that we see our SAM is the $6 billion. Those are run below 1,000. About 30% of those run lengths are made today on polyester, specifically for the sports and athleisure and some blended, which was very difficult to approach them before with digital.

And now we can definitely go after them and the feedback from customers, as I mentioned, very excited. We're already getting very strong pipeline for upgrades of the installed base of ATLAS MAX PLUS and ATLAS MAX Poly to the MATRIX and customer also adding additional systems.

We also demonstrated the Apollo. We took the Apollo another step forward with being able to print on cut pieces, opening up markets in Portugal, in Latin America, in some Eastern countries, but printing on cut pieces to really automate printing on cut pieces is very complex, and we've demonstrated it and we're already having a good pipeline and even an order specifically in India for this application.

Presto MAX that we presented first Presto MAX PLUS, it's a product that we worked for a long time to be able to penetrate totally new markets that digital was never there before. We are the only one that can go after technical, camouflage, footwear, performance wear, home decor. Those are totally new markets, new sums that we are going after. The feedback on the durability on the DuraTech and the vision systems really are impressive.

And as I mentioned, we had a good Q1 for the Presto MAX, and we believe that moving forward, we will see a growing pipeline and order for the Presto MAX specifically in those marketplace. Overall, if you're asking looking forward, what we see, we are seeing growing backlog into Q2 and H2, providing us with confidence for the full year to continue to bring growth and possible growth. Bottom line, we see stronger product portfolio, expansion into new markets and application, growing recurring revenue and a very clear position of Kornit as the technology and the platform leader.

That was a very extensive answer. I appreciate it. And I kind of feel like I should just pass it on. But just quickly, I'll tack on one more question related to the MATRIX and the Presto MAX PLUS. Can you talk at all about like just the amount of revenue that you expect to come from either upgrades or new system sales from those machines in the next -- in 2026, 2027?

Yes. So I can give you some kind of directional not numbers, but where do we see the growth on this platform. So specifically on the MATRIX, first of all, for many of our customers that are choosing today ATLAS MAX and they were trying to be able to print on polyester on blended, they face issues.

Those are incremental impressions that each customer now will be able to print on digital, leveraging Kornit and leveraging MAX and MATRIX. So from one hand, we will see a stream of revenue coming from upgrades of the installed base, and we have hundreds of systems, Atlas systems, ATLAS MAX system in the field, which we expect many of them, large quantities out of them to upgrade to the MATRIX. The second phenomenon that we are going to see is really impression growth on each one of them opening the market.

Also because these systems, while you're using on printing on polyester using another chemicals, we will see revenue per impression going up on printing on polyester. And of course, what we see today is that customers that were sitting on the fence saw the MATRIX, understand that the flexibility is much, much broader right now.

The system much more agnostic jumping in. We already have nice backlog of new customers and existing customers that adding more systems already in Q2, but also into H2.

So we feel very, very strong about the feedback and the results on demonstrating the MATRIX. Next week, we are going actually to announce the release of the MATRIX at [indiscernible] Barcelona. We are going to demonstrate it. We have many, many meetings with customers, mainly from the European countries, but we know customers also flying from around the world to see the MATRIX, and we expect orders both for upgrades and new systems there.

And as for the Presto MAX PLUS, the Presto MAX PLUS, as I mentioned, opening for us totally new markets. We demonstrated about 2 weeks ago, a tech process in Frankfurt, which is very much focused on the technical market. And we saw how unique we are in this market, going after really the footwear. We see growth in the footwear, both in installed base but adding more system and growing the impression, but also from new customers that are joining with our technology and a very strong pipeline moving forward.

We found out that our technology really has a great fit to go after other applications like camouflage for military. We have a lot of interest there, and this is a massive market. We believe that we have a very strong value proposition, and you will hear a bit more about that later on.

And there are other technical and functional applications that we are going after. So on top of the value of digital being able to print on almost any fabric without pretreatment, without posttreatment, now we have the layer of durability that's really entering us not only into the fashion market, but much more into the technical and performance, which will generate for us additional revenue, both from the installed base that will upgrade to the Plus, but also newcomers in those segments that will buy the system and will print impression on top of the system.

Next question comes from the line of Greg Palm with Craig-Hallum Capital Group.

As you guys know, I was at Konnections myself. So I sensed, I think, everybody's excitement at the event. I'm just curious in terms of the actual event, what did you see from like an order booking standpoint? Can you give us just a little bit of kind of actual feedback that you got from customers that were there as well?

Yes. Thanks, Greg, and thanks for being in the event as well. The event -- the aim of the event, strategically, we are trying to build the center of this movement of this industry, textile, apparel industry into on-demand manufacturing.

We cannot do it ourselves. We have to have the entire ecosystem. And this event was about the ecosystem, and you've seen it. There were close to 600 participants in this event flying over to Miami. Many of them, more than 300 customers and prospective customers, a lot of many brands, retailers, solution providers and partners that join us for this event with one aim in their mind is how we can accelerate the move to on-demand manufacturing, not only for customized design, but really for the long run for the brands and retailers.

And there were speakers that was there on the stage. Most of the speaker was not from Kornit actually, it was from the industry talking about really about the move, the needs to move to the on-demand manufacturing and how important is. On top of that, of course, we have a solution showcase with many of other solution providers.

We introduced, of course, for the first time, the MATRIX, as I mentioned before, many applications. We had the Apollo there as well. And you saw the excitement. People were really standing around the machines, checking it.

We had tens of live demos that people bought their file, bought their media, tested the machine, and we got order on sport. Some orders that were surprising from all kinds of countries. And we are coming out of this event with 2 things. One is really being able to position these Konnections event as an industry event as a movement for the industry where Kornit is in the center of it.

The second, of course, is an outcome of numbers. We have a very strong pipeline coming out of this event, some orders already in for Q2. We expect a large number of the pipeline to convert into H2 and already to the new year. The nice thing, the pipeline, a lot of it is from net new customers, some of them like it was the second or third meeting with Kornit that came to the event and this accelerated decision to move to digital.

Okay. Perfect. And then just a follow-up on the MATRIX. In terms of actual like revenue recognition, I mean, do we expect later this year to see a meaningful uptick in revenue? Is it more of a '27 event? And just to be clear, is the bigger opportunity, whether it's initial or long term, upgrading the existing installed base? Or do you think there's a bigger opportunity for new system sales? I mean I'm sure it's a combination of both.

Yes. So we already started taking orders at Konnection. Once we show the system, we already took orders at Konnection. As I mentioned, the product will be released next week. We have a few beta sites with extremely good feedback, both in the U.S. and in Europe.

All of them will convert to revenue in Q2. Q2, we are going to have already revenues both in new shipment of MATRIX to the market and some upgrades. So we're starting to upgrade the installed base already in Q2. We believe that most of the upgrades for MATRIX will come into Q3 and a bit beginning of Q4 and of course, into the next year.

But it's definitely open for us the pipeline. And it's a question of when are we going to deliver and see the revenue start in Q2 this quarter.

Next question comes from the line of Erik Woodring with Morgan Stanley.

This is Maya on for Erik. I kind of just want to touch on the AIC model for a second. What percentage of new customers would you say are entering through AIC versus kind of the traditional CapEx method? And where do you kind of ultimately see that mix stabilizing? And are you also seeing like existing customers maybe shift their preference to AIC? Just any way to understand that mix.

Yes, it's a very good question, Maya. Thank you. Look, it's different from different type of markets that we are serving, okay? In the screen market, most of the new customers that we are going after the screen market we see very high adoption of the AIC model.

So most of them will be the AIC. And as you can -- as we mentioned many times, this is a major focus area for us of growth and it's already a major growth area for us. Most of them will be on AIC. And when I say most, it's more than 90% of them will be on the AIC.

In the customized design, we need to differentiate between existing customers to new customers. Existing customers, they have much more knowledgeable confidence and they know the cost structure of the CapEx. Some of them prefer to stay on CapEx while comparing to the price of the AIC. So there, we see a mix with newcomer into customized design, we see also the tendency into more at the AIC.

As the company growing and maturing with the move to AIC, we are pushing more and more into the AIC model, which provides us better predictability of recurring revenue, better gross margin longer term. And the gross margin, when you think about it, is mainly coming because customers on AIC on average printing more impression the customer on CapEx. It's not really that the price there is much higher. It's very competitive to the CapEx, but what we see is that customers on AIC printing more because they have a commitment to print more and they have incentive to move above the commitment.

So if you look ahead, you will see more and more revenue or more and more deals moving into the AIC versus the CapEx. I must say that Q1 was relatively strong in terms of CapEx deals.

Got it. And then just one more for me. You had a pretty healthy quarter of buybacks this quarter. Is that the right quarterly run rate to think about for the rest of the year? Or just any kind of outlook you can help with there?

Maya, this is Assaf. I would say that we are continuously evaluating our capital allocation through the strategic priorities that the company has.

We have the plan to buy up to $100 million. It doesn't necessarily mean that we have a consistent run rate. It changes based on our priorities. We have the organic growth that we're supporting AIC. We have the nonorganic M&A stuff, like Ronen mentioned, we just acquired a very strategic company in the software space, and then we have the buyback.

Our commitment is to provide the ideal value to our shareholders through kind of leveraging the 3 components.

Next question comes from the line of Jim Ricchiuti with Needham & Co.

So you're clearly making progress with system sales to new customers. I'm curious, what is -- what's the average selling cycle like now in terms of time lines for bringing on some of these newer customers?

Thanks, Jim. Look, there's a few things that are happening. First of all, the market is maturing. If in the past, we needed to convince customers to move to digital. Today, we see more customers as the edge to move to digital, which by itself shorten the sales cycle.

AIC model, by definition, makes the sales cycle shorter. And we see some deals being closed in a matter of 1 or 2 months really from the demonstration of the systems. So it's really shortening. On the CapEx side, it really depends if it's existing customers or new customers or existing customers in many deals, they are coming to us and asking for additional system or upgrades.

So sales cycle is quite short. With new customers, it really depends again which market segment we screen is a bit longer with customized design is shorter. Overall, the bottom line answer is that our sales cycle is becoming shorter versus what we used to have.

And Ronen, as you think about the newer customers, what is your line of sight? Or how would you characterize the opportunity to drive multiple machines at these customer locations?

This is the really nice thing that we see right now. I mentioned in my prepared remarks, I gave 2 examples of customers that just joined Kornit a year ago and taking one Apollo and a few Atlas MAX and in Q1, really take it to the next level.

So within a year, they really grew very fast. I gave the example of [indiscernible], Printis, but we have a few others.

Look, with the screen market, which is the main focus for us as the biggest market we are going after, the initial sales is the most complex one because they are not used to digital, they are not used to their workflow. [indiscernible] factor. Now that they see the competitors are using digital, some of them has no choice, they are moving to digital, but they are moving with caution.

So they're taking 1 system or 2 systems in the beginning with a hope if it's successful to really move big time. And this is exactly what we see. We see many of them are starting with 1 or 2 systems within 6 months, adding additional capacity, moving to the Apollo or taking additional Atlas MAXs.

Got it. And just quickly, I was curious at the activity with your large global strategic customer. I may have missed any reference to it in the call so far.

Yes. So as you know, we have confidentiality agreement with them, and we cannot talk too much about their business. As I mentioned, in end of Q4, we got an order for them for upgrading -- continue upgrading their fleet into the MAX platform, which we are executing.

And of course, they are very involved in looking at our technologies, both on the PLUS, the MATRIX, the Apollo's. We have a very close relationship, very good discussion with them, and we are very happy to support them with their growth moving forward.

The last question comes from the line of Kieran McCabe with Cantor Fitzgerald.

This is Kieran on for Troy Jensen. I think part of my question was already answered when you answered Jim's question about the sales cycle.

But maybe especially with the Presto MAX, maybe if you can kind of give a little color on the new markets, kind of either the size of the opportunity of some of those new markets and maybe growth potential or adoption in those maybe newer markets like home decor.

I think also you mentioned strong interest in camouflage. So maybe a little more color maybe on the opportunity and sort of rank ordering the potential of some of those newer markets.

Yes. So we are still in an initial stage, yes, first of all, to understand really the sum that we are going after. Those markets are massive, the camouflage market, military, you can imagine that there are billions of billions of impressions that we can go after.

We are trying to understand exactly where can we play and what is our sum. Specifically on the footwear, we were talking about 2 billion impressions that this is our sum. And we are going after it, and we see a really nice scale up within our customer base, within new customers are joining and really strong pipeline.

We believe that we have a very differentiated value proposition, and we are starting to get a lot of interest not only from fulfiller, but with -- from the biggest, biggest brands out there that you're all familiar with. So it's really a good sign, and we believe that this is -- will be a growth engine, one of the growth engines for Kornit.

In the camouflage, of course, this is a big market. The first time that we really saw the interest is now that we introduced the DuraTech on the Presto MAX PLUS. Before that, we didn't have it. [indiscernible] was perfect to show it.

And I can tell you that we had tens of meetings there with all kinds of militaries personnel that show a lot of interest with our capabilities and unique solutions that we are bringing there. On top of that, home decor is a massive market. You will see some more development in the home decor coming later this year from Kornit.

And we believe that this is a big opportunity. Another market is the performance. We were spoking about compression. We have a specific project on compression with one of the biggest brands. And once I will be able to speak about it a bit more, I will share a bit more information in a later stage.

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Mr. Samuel for closing comments.

First of all, thank you all for joining the call. Before we close the call, I wanted to sincerely thank the entire Kornit team.

Also to thank our customers and our partners for the passion, for the commitment, for the support behind the strong progress we are making together.

Q1 was an important quarter for Kornit. The industry continued to accelerate toward the digital on-demand production and Kornit is increasingly becoming a key platform enabling that transformation. We are seeing growing customer momentum, strong engagement across markets and a very positive feedback on the newest innovation and solution.

We are entering the rest of 2026 with a strong momentum, improving visibility and growing confidence in our strategy, execution and long-term opportunity. Thanks again for joining today's call. Andy?

Great. Thanks, Ronen, and thanks, Assaf, and thank you all for joining us today and for your continued interest in Kornit. As always, please feel free to reach out to me directly should you have any follow-up questions. Renju, could you please close the call?

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to Kornit Digital's Fourth Quarter and Full Year 2025 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Andy Backman, Chief Capital Markets Officer for Kornit Digital. Mr. Backman, you may begin.

Thank you, operator. Good day, everyone, and welcome to Kornit Digital's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today are Ronen Samuel, Kornit's Chief Executive Officer; and Assaf Zipori, our Chief Financial Officer. For today's call, Ronen will share his overall commentary on the fourth quarter and the full year, followed by Assaf, who will review our fourth quarter and full year 2025 results and provide guidance for the first quarter of 2026, before we open the call up for Q&A.

Before we begin, I would like to remind you that forward-looking statements within the meaning of the 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 similar statements regarding the company's expectations for the future. The fulfillment of forward-looking statements is subject to known and unknown risks and uncertainties.

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 28, 2025, 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 them, except as required by law.

Additionally, the company will be making reference to certain non-GAAP financial measurements 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 like to now turn the call over to Ronen. Ronen?

Thank you, Andy. Good morning, everyone, and thank you for joining our Q4 and full year 2025 earnings call. Before I begin, I want to briefly welcome Assaf, who recently joined as the CFO and Andy, who returned to Kornit to lead our capital markets activities. Let me turn directly to our business performance. When we entered 2025, we set a clear and measurable targets for the year. We set up to move the company back to revenue growth while at the same time, transitioning the business towards a more recurring ARR model, a shift that naturally changes near-term revenue timing as we build stronger longer-term revenue foundation.

We also committed to delivering positive EBITDA and generating positive cash flow from operations, all while capturing a meaningful share of bulk apparel production and driving impression growth across our installed base. I'm very pleased to share that we achieved all of these objectives. Q4 marked a solid finish to the year. Our customers had a successful peak season, reflected in a strong double-digit impression growth in Q4 year-over-year and 11% growth for the full year, reaching 243 million impressions. This growth was driven by higher utilization across our installed base and an increased adoption of digital production for the longer runs.

We delivered Q4 revenues of $58.9 million and adjusted EBITDA of $5.5 million, both at the upper end of our guidance. We also generated approximately $11 million in operating cash flow in Q4 making our ninth consecutive quarter of positive operating cash generation. For the full year 2025, we moved back to growth, achieved positive adjusted EBITDA and generated strong operating cash flow of approximately $24 million. At the same time, we continued executing the transition towards a more recurring business model. We exited the year with approximately $25 million in ARR from AIC program. This ARR is typically supported by multiyear customer commitments usually around 5 years, providing strong revenue visibility and durability.

In 2025, AIC contributed [ $15.2 ] million in revenues and continue to scale as adoption expands. Together, these results reflects disciplined execution and meaningful progress in building a more recurring, predictable business model. One of the most important drivers of this progress is the accelerating shift from screen production to digital. We clearly see a shift of impression into longer runs and incremental bulk apparel production moving to digital.

Over 40% of our system deals in 2025, including Q4, came from net new customers, many of them traditional screen printers adopting digital production for the first time. For example, in Europe, top few in Poland, one of the leading screen printers in the region recently ordered an Apollo system for bulk apparel production under our AIC model. This represents a strategic move as they began transitioning part of their high-volume screen production to digital to improve flexibility, reduce labor dependency and respond faster to customer demand.

In the U.S., midsized screen printers are adopting our Atlas MAX platform to replace screen production for the first time. Customers like Cedarstream, a U.S. apparel decoration company, focused on high-volume production and Real Thread, a U.S.-based custom apparel and merchandise producer serving brands, creators and e-commerce customers are moving bulk apparel impression to digital to gain speed, consistency and efficiency.

At the same time, we are seeing clear expansion of bulk apparel impression from existing Kornit customers, reinforcing the strength of our value proposition and the business outcomes we deliver. For example, Zumiez, a specialty retailer of action sports-related apparel, added its second Apollo system in Q4 on top of an existing fleet of Atlas MAX PLUS systems to support higher volumes, faster replenishment and improve speed to market. 500 Level, a U.S. leader in licensed sports fan apparel and merchandise production, added an Apollo system on top of its Atlas MAX PLUS fleet under the AIC model to support licensed sport apparel production, improve automation and scale bulk and replenishment programs more efficiently.

Basic Thinking, a leader U.K. screen apparel producer added a second Apollo system under the AIC program as its business continued to scale following its initial transition to digital. Together, these examples show a consistent pattern. Over 40% of our existing Apollo customers added a second system or more in 2025, reflecting strong ROI, meaningful improvements in availability, uptime and utilization across our Apollo installed base and growing confidence in digital for bulk and mid-run production. In parallel, our Atlas MAX family continues to gain traction among small and midsized screen printers taking the first step into digital production.

We are also seeing encouraging momentum in our customized design segment with growth momentum returning across several of our key accounts. This momentum is driven by higher utilization of existing systems as well as customer adding capacity through upgrading to Atlas MAX PLUS and by deploying additional systems to support growing demand. A good example is MARUI in Japan, which expanded its production for adding a fleet of Atlas MAX PLUS systems to meet increasing demand for speed, quality and operational agility in one of the most advanced print on-demand markets globally.

We are also pleased to share that our global strategic customer recently placed an order to continue upgrading its fleet to Atlas MAX platform, reinforcing the long-term confidence in our technology and partnership. This also reinforces the broader trend we are seeing across our customer base with continued investment in capacity as utilization and demand grow. Beyond apparel, we continue to see growth in impression and pipeline development in the sports and footwear market. We expect 2026 to be a stronger year for our roll-to-roll business, both in the footwear and technical and functional apparel segments, supported by new technologies and capabilities we plan to introduce later in the year that will further expand applications and drive future growth. We are entering 2026 with a growing pipeline of opportunities and much better visibility for the year.

Today, more than 83% of our revenues are recurring or highly predictable. We expect low single-digit revenue growth in 2026, reflecting our deliberate decision to accelerate the transition towards the AIC model. Alongside this, we expect stronger profitability expansion and continued positive cash flow from operations, while ARR continues to grow through additional AIC system deployments. As more customers move to AIC, our recurring revenue base growth, enhancing visibility and strengthening the long-term scalability of our business. Our priorities remain clear. We will continue driving incremental impressions from the screen market, expanding the AIC program and delivering on our innovation road map to support growth beyond 2026.

Before we close, I would like to personally invite you to join us at our connection event in Miami on April 12 to 14. This will be an opportunity to experience firsthand the progress we are making across screen, AIC, DTG and roll-to-roll. You will meet hundreds of customers from around the world and see live demonstrations of the latest technology shaping the future of our industry. During the event, we will unveil breakthrough innovations designed to expand our addressable market, accelerate digital adoption and enable our customers to capture new growth opportunities. Connection is where strategy meet execution and where the shift towards digital on-demand production becomes tangible. We look forward to seeing many of you there.

I will now turn the call over to Assaf to further discuss our fourth quarter and full year results and our guidance for the first quarter. Assaf?

Thank you, Ronen, and good day, everyone. I am excited to be joining Kornit at such an important moment in the company's journey. Over the past few months, I've had the opportunity to engage closely with customers, investors and the leadership team, gathering direct feedback on our strategy and execution, which reinforces my conviction in the company's direction and opportunity ahead.

Turning to our results. Total revenue for the fourth quarter were $58.9 million, well within our guidance. Our revenue mix reflects the strategic shift in our business. AIC revenue grew 104% year-over-year. We ended the quarter with $24.8 million in ARR. Impressions, a strong leading indicator of system utilization and consumption grew at a strong double-digit rate for the quarter.

For the full year 2025, total revenue was $208.2 million, up 2% year-over-year, driven by continued expansion of our AIC program. AIC revenue increased to $15.2 (sic) [ $15.0 ] million from $3.3 million last year, strengthening the quality of our revenue through predictability, higher system utilization and deeper customer engagement.

Moving to margins. Fourth quarter non-GAAP gross margin was 50.7% compared with 55.1% in Q4 '24, reflecting in part changes in product mix and the impact of tariffs. Similarly, for the full year '25, non-GAAP gross margin was 47.2% compared with 48.6% last year. Long term, we expect annual gross margins to expand as AIC continues to scale.

Turning to operating expenses. Fourth quarter non-GAAP operating expenses were $27.1 million, down 3.1% year-over-year and included an unfavorable $1.1 million impact from FX. For the full year '25, non-GAAP operating expenses were $107.1 million, down 2.5% year-over-year, again, including an unfavorable $2.6 million impact from FX. Our OpEx improvement is a reflection of our commitment to remain disciplined with costs while continuing to invest in the company's growth initiatives.

Adjusted EBITDA for the fourth quarter was $5.5 million, compared with $8.4 million in the same period last year. Adjusted EBITDA margin for the fourth quarter was [ 9.3% ] compared to 13.8% in 2024. For the full year 2025, adjusted EBITDA was $1.5 million compared with $0.3 million last year. On a constant currency basis, adjusted EBITDA margin was 11.5% and 1.9% for the fourth quarter and full year 2025, respectively.

Turning to cash and the balance sheet. Our cash balance, including bank deposits and marketable securities at quarter end was approximately $491.2 million. Operating cash flow for the fourth quarter was $10.6 million and [ $24.4 ] million for the full year 2025, reflecting continued focus on improving working capital. During 2025, we repurchased $27 million under our share purchase program, including $2 million under the new $100 million program we announced in November '25. Since our first program was announced in 2023 and through the fourth quarter of 2025, we have repurchased a total of 6.9 million shares for a total gross amount of approximately $167 million.

We enter 2026 with a solid balance sheet that has sufficient capacity to fund organic growth, including AIC deployments and new product innovations. We will also continue to evaluate inorganic opportunities that align with our strategy.

Turning to guidance. For the first quarter of 2026, we expect revenue of $45 million to $49 million and an adjusted EBITDA margin between negative 10% and negative 4%. As a reminder, our business is seasonal with adjusted EBITDA margin typically negative in the first half of the year. As the year progresses, we anticipate improvement in both revenue and margins, supported by increased utilization in the later part of the year and continued operational efficiency gains. 2026 will be a year of focused execution as we translate our strategy, innovation and business model into tangible financial and operational results. We expect low single-digit revenue growth, improved profitability and a positive operating cash flow.

With that, I will now turn the call back to Ronen to open it up for Q&A.

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

[Operator Instructions] The first question is from Greg Palm from Craig-Hallum.

I wanted to start with a little bit of color on peak season run. I think you talked -- you gave us impression growth double digits, but just can you give us a little bit more color on how it went and specifically performance of Apollo?

Yes. Thank you, Greg. So first of all, on the peak season, it indeed was a strong peak season for our customer. And the best indicator for a strong peak season is impression growth. And impression growth for Q4 was a very strong double digit. And specifically, it closed a year of -- when we're looking at 12 months for the full year is 11% growth of impression.

Now when we are looking from where is it coming, those nice growth of impression, it's coming from 3 main areas. One, we see major growth coming from customers that actually on the AIC program. We see utilization on this program or those systems relative high versus machines that on CapEx. So major growth is coming from the AIC on impression. The second thing is the major growth is coming from the screen market. We start to see a shift of long run, bulk apparel coming into Kornit systems. And there, we see a really nice growth of impression.

And the fourth growth is connected to your question is about the Apollo. And Apollo is really a machine or systems that are driving really high volume. We had a very strong peak season for our customers leveraging the Apollo. We worked very hard and what we found out that in Q4, when it was the peak, the uptime of the system more than 90% across the board. So very high utilization, very high stability of the system. Customer satisfaction is super, super high on the Apollo.

Actually, in 2025, 40% of the existing customers that's using Apollo order a second machine or more on the Apollo. We can see many newcomers, new screen printers, big size screen printers are taking for the first time a Kornit and specifically the Apollo. And Apollo is where we see, as I mentioned before, the long run. So we see customers running on the Apollo 500 copies, but also 5,000 copies. So it's fantastic. And of course, there are customers that are also using the Apollo for very short for one-off, but we see more and more longer run coming for the Apollo.

Other than that, what I recommend for all of you is to come to Connection. As I mentioned, in the Connection, we are going to demonstrate also the Apollo, and there will be some game changer applications and additional capabilities on Apollo that we will show for the first time at Connection. Apollo by itself is a game changer for the industry.

Okay. Look forward to that event. As you look back on 2025, and what do you view as the most major accomplishments? I know it's a pretty busy year on a lot of fronts, but talk to us about that? And how does that guide some of your priorities this year and beyond?

Well, so 2025 was very busy, as you mentioned. It was a transition year, but it's a year that when we're looking back, it's a year that we flip the page. We are a different company right now. When we started 2025, we set clear targets, very measurable targets, and we deliver on them. I will start saying a few of those targets and what we have achieved.

First of all, we moved back to growth. So finally, we are growing. And this growth is coming in parallel in transition of the business model into more recurring model through the ARR and AIC, which is really gaining traction, which, as you know, moving to this model has some short-term impact but has a major positive long-term or midterm long-term impact to the business. We ended the year with significant ARR of approximately $25 million of ARR. For the full year, we recognized $15 million of AIC. This is a growth versus 2024 from $3 million to $15 million, more than 300% growth.

And those ARR and AIC or ARR contracts, you need to remember that our multiyear contract with our customers. So traditionally most of those contracts are 5 years contract, which provides predictability, consistency and stability to our business. Also, we delivered positive EBITDA, which is super important. We generate very healthy cash from operations for the full year and also for Q4. And the main focus of which I also discussed on my prepared remarks is really penetrating the screen market. And I would say that we ended the year with really penetrating some key customers in the screen market. We start to see a real shift of major screen printer into digital, leveraging our technology.

And today, we are in a position that we have lighthouse almost all around the world, and we are starting to [indiscernible] with biggest opportunity in front of Kornit is really in the screen market, and we feel that now we can start to scale on top of that. And the screen is really where the long run and the impression is being driven. I talked about the impression for the full year, we grew 11%, but we saw it from better utilization of the systems of our installed base, which is very important. We can see some of our key customers that now needs more capacity or they are upgrading into Atlas MAX PLUS or adding additional system, which is a very, very strong signal.

In Apollo, as I mentioned before, this is a major milestone that we have achieved to see the stability to see that customers are buying the second and third and even more systems. This is really, really encouraging. 40% of the customers that we acquired in 2025 were net new customers, and each one of them has a potential to add additional capacity. So those are the main achievement, I would say, that we are entering 2026 with much better visibility, predictability, almost 83% of our revenue for 2026 is a recurring or reoccurring revenue. So we feel very confident getting into 2026.

Okay. That's great. And I guess last one before I hand it off. How should we think about the system placements this year versus last just in light of this continued, I think you said accelerated shift towards AIC. I mean I assume volumes -- unit volumes will be up probably quite a bit. So I'm not looking for specifics, but just a little bit of color on how we should think about that dynamic.

Yes. This is a very good question because what you see is the product and you compare products on CapEx and you don't see the products that we are shipping on AIC. Overall, the number of systems that we've delivered in 2025 was higher than 2024. So we are delivering more systems to the field. But even more importantly, that we are delivering more capacity because we are selling more high-end products to the market, which is system can generate more volume. So those are very strong indication for the future, more systems, more capacity, which will generate more revenue coming from in services and AIC.

The next question is from Brian Drab from William Blair.

Congrats on a good quarter. And Andy and Assaf, nice to connect with you again. Can you talk, Ronen, a little bit about the low single-digit forecast? And you have -- in the past, you've given us a good bridge kind of breaking down the business into the components of the consumables, services and upgrades, et cetera. And can you help us bridge from 2025 revenue to 2026 forecast, also kind of incorporating what you're expecting from that Amazon upgrade order that you mentioned?

Yes. So first of all, we are very pleased with the decision of our global strategic customers to continue to grow with us. It shows the confidence in the technology in our partnerships moving forward. It's something that we anticipated, hope to get, and we received it definitely will have some impact on the 2026 in terms of growth of revenue.

But we need to remember, we are in the beginning of the year. We would like to be very prudent about what we are saying to the market at this stage. While we have much better visibility and predictability for 2026, we are really continue to push more into the AIC ARR revenue. So whenever we can move customers and deals into this model, this is where we are motivating our team to go and the customer, to show the customers the value in the ARR, which means that there is some impact in the short term in order to build the long-term quality of the revenue and predictability.

We are focusing on lot in 2026 on improvement of the profitability. So you will see expansion on the profitability. We will continue to focus on penetrating the screen market, growing the ARR drastically. This is the focus of 2026. And you will see a lot of innovation as well coming in 2026 that will start contributing for the second half of 2026. So I understand the question of guiding the market into low single digits. Remember, we would like to be prudent. We would like to be in a position that we are in a good size and not missing our numbers.

Okay. Can you talk at all about the significance of an order from your strategic customer for the upgrades? I mean how many machines roughly we're talking about? Is that substantial? And how will that progress throughout 2026? Is it all in 1 quarter? Is it throughout the year?

Yes. So I would start to say we have a very close relationship, very strategic relationship, and we are very proud of this partnership between us working very, very close together. As you can imagine, I cannot disclose any sensitive information of this strategic customer or any customer without getting that permission and I don't have the permission to share this information.

What I can say is that after last year, we started the initial upgrade in part of the portfolio. It was very successful. They saw the benefit and they placed an order for continue upgrading it during 2026. These updates will take time. It's not one quarter, it's a few quarters because we're talking about a fleet of upgrades. Again, it shows the confidence in the solution. It shows that they need to grow the main benefit of the MAX really providing more capacity and they need more capacity to grow, which is a very good sign. And of course, we continue to evaluate together a new technology into the future.

The next question is from Erik Woodring from Morgan Stanley.

Congrats on the solid execution to end the year here. Ronen, I would love for you to maybe help us understand where the Apollo story stands today. It's taken a few turns -- it took a few turns in 2025. Obviously, starting the year, I think we learned about the longer sales cycles with new customers. As we sit here today, what have you learned about the time to onboard and ramp these new customers to make sure that you can kind of maintain momentum in this product into 2026? And are these new customers using Apollo any differently than existing customers? Like if you have any cohort observations, I'd love to better understand that. And then a quick follow-up for Assaf, please.

Okay. Excellent question. Look, remember that we started actually deploying the Apollo in 2024. 2024 was after the beta. And in the beginning, we actually deployed the Apollo mainly into existing customers, those that used to run digital, they have the ATLAS MAX and they have the digital workflow. And the deployment was quite easy. Of course, we had to continue to improve the stability and the productivity, but we grew quite quickly in 2024 with those customers. But the aim of the Apollo was to go after an incremental market, not only in the one-off customer design, but really going after the screen and replace the screen analog technologies. And this was the focus 2025.

And what we have achieved in 2025, while 2024 was focused on a few customers with large fleet of Apollo, 2025 was focused on net new customers from the screen printers or penetrating for the first time with digital and taking the Apollo. And what we found out that the sales cycle is different. It's much easier to penetrate digital player because they have the workflow, they have the understanding, they already has the need with the screen market, you need to show them the need. You need to show them that the quality at least as good as screen market. You need to work with them on the workflow, you need to train them. It's a different mindset. Many of them are traditional.

So we worked very hard in 2025 to start building lighthouses. And within 2025, we already saw few of them going with the second Apollo or taking a fleet of Apollo and ATLAS MAX together, and we started to see successes. And what we see right now in all kinds of open houses that we have in those customers that they're becoming a lighthouse and they are telling the story to other screen printers, how it changed their business and what benefit it provides them, and it wasn't too complex. So we've learned a lot. We've learned the type of quality that they expect, the type of productivity that they expect, the different garments that they would like to run. We're focusing a lot on the workflow, how do we automate their workflow versus digital players are coming already with workflows are designed for digital. So you will see some innovation on the workflow side as connection events, specifically addressing the screen market in order to make it easier for them and to shorten the sales cycle of penetrating and growing the screen market.

Okay. Awesome. And then Assaf, nice to, I guess, reach over the phone here. But I'd love to get your insights just at a high level of how we see better profitability in 2026? Obviously, you gave us what you think about revenue growth, but how should we be thinking about gross margins given AIC mix improves, that's higher profitability, ink and consumables growth should seemingly follow impressions at least somewhat. And then what's the approach to expenses this year? I'd just love to understand the moving pieces there.

Yes. Erik, thanks for the question. So I would say that our biggest growth driver is AIC. AIC has accretive gross margin to the overall company. And as it scales further, you should expect to see expansion continues. With that, we have a very disciplined approach towards expenses and adjusting the expenses in line with our growth rates as we look into 2026.

In '26, I would not expect to see significant deviation for our gross margins as AIC continues to scale. So you should expect reasonable levels as you're seeing now. In terms of OpEx, we are also not expecting any significant changes in OpEx for as long as we continue to grow as we expect. We remain very disciplined in our approach and in the way that we evaluate the impact of tariffs, the impact of foreign exchange and so on.

Next question is from Troy Jensen from Lake Street Capital Markets.

It's actually Cantor Fitzgerald now, but gentleman, congrats on the great quarter and Assaf and Andy, nice working with you guys again. Quick, maybe just, Ronen, for you. Just looking back to that '25, can you just talk about the overall market? Do you think the industry is stagnant, you guys maintained share? Or was there growth and you guys lost share because of the AIC conversion? Or kind of any thoughts there would be great.

Thanks for the question. Look, the market is shifting. Market is really changing. We are talking with many, many brands, retailers, demand generators. They're all talking about in any boardroom talking about how they can stay relevant. Product life cycle is getting shorter and shorter, changing by the minute. And the way that they were focusing in the past and producing in the past is not remit.

And we see it in life. We see brands and retailers and demand generators moving production, nearshore and onshore, talking about how can they produced closer to the consumer without excess inventory, how they become more sustainable, how they can become more relevant by bringing new products to the market. And it's a clear change that we see. We see some leading brands. And I mentioned Zumiez that the way that they change the fully move to vertical production. And we see more and more retailers and brands starting to move to on-demand production. This has become a necessity. This is not any more a discussion like what was in the past.

And of course, tariffs and the minimums really pushed even further the move to onshore production. We see it also within our customers, they are gaining volume, which reflect in the impression volume. So overall, the trend is very, very clear. It's being now accelerated. It's obvious that fashion industry, apparel industry is going to change. It's going to change dramatically. How fast is very difficult to forecast. But now with necessity, this world is moving to digital, like many, many other industries that we know that move to digital textile and fashion is not exceptional.

All right, understood. Assaf, just for you, just to follow up on the cost question, too. Non-GAAP OpEx was $27 million. Would you assume that it's that number or higher going forward on a sequential basis?

I would say that you should not expect any significant changes as we move forward. Obviously, we have a certain exposure to FX. We also hedged. So the exposure is somewhat contained. We are also well positioned. And in our plans, we've assumed that FX would remain at reasonably similar levels to what it is today. So I would not expect any material changes.

Okay. If you look at just in the model, too, on that FX, was that all kind of in the R&D? It looks like that had a big sequential growth.

It's mostly on the operational side. We have a significant team in Israel that is being paid in the local currency, not necessarily just R&D.

All right. Understood. If I could get one last question. You guys kind of mentioned cash and use funds and inorganic opportunities. What types of like applications or technology, Ronen, do you think you guys would be interested for you guys to absorb?

Yes. So in general, we need to wait to see in Connection. I expect to see you at Connection because we are going to have a lot of unwilling new technologies. I'm going to say that it will be across the board. It will be on the direct-to-garment. It will be on the roll-to-roll. It will be on workflow. It will be on new application. Think about it. Kornit was always in the decoration area. We will continue to bring innovation on the decoration, but we are taking it to the technical area as well with new capability, with new chemistry, with new processes. We are taking it to the functional area after the technical, and you will see some tractional revolution that we are bringing with our technology and even to the smart area, smart apparel, but you will see some innovation at Connection.

Overall, it will be a breakthrough capability that we are bringing. It will be unique. We are the only one what we are going to present in terms of technology and innovation. We will be unique in the market. We will approach new market segments. It will be a major differentiator versus other things that you can see in the market. Specifically, I'm going to say that there will be a lot of focus also on the sports market and sports innovation at the event. So other than that, again, I welcome all of you to join us. It will give you the opportunity not only to see the technology, but to interact with many of our customers, prospects brands and retailers that will be there and major brands that will be there and they tell the stories. So you're all welcome to join us.

Next question is from Jim Ricchiuti from Needham & Co.

I was wondering if I can get an update on the direct-to-fabric market. I'm assuming that was probably a more challenging area of the business. In 2025, it sounds like you're looking to introduce some new products into that market. How do we think about that and the timing? Is that second half '26? Or can you give us some color on that?

Yes. So indeed, 2025 wasn't a great year for the roll-to-roll business. We had higher expectations. What I can say is that we are starting the year with much stronger pipeline, first of all, with a tangible pipeline that we can convert and we feel much more confidence. Now this confidence is not only about the pipeline. It's also about the new market that we invested in 2025, specifically in the footwear market with new players that are entering this market. Part of this innovation you will see in Connection, again, about the footwear is revolutionary what we brought to this market, and this will continue to expand.

On the technical market, we are getting to new market segment on the technical, and you will see some innovative applications there and the functional in the sports market, which there's some big news that hopefully will come later this year, working with some the biggest brands of the world on functional apparel that it all relates also to the roll-to-roll business. We are going to unveil some new technology, both in terms of the systems but also in terms of the process chemistry, but also some features that will enable our customers to enter to new applications, very innovative applications that till today, traditionally, was done by analog and digital can do it much faster, much better with unleashing the flexibility and better economics. So we are much more confident that 2026 will be a year that we will start to see a very nice growth on the roll-to-roll business. And definitely, late second half of the year and getting into 2027, this is where we would expect to see acceleration in this market.

Can you talk about the -- there were some targeted price increases, I think, that the company called out in the last earnings call. Were those fully realized in Q4? Or will there be some benefit from that in the early part of 2026?

So this is a gradual process that the company is evaluating and executing. I think that we remain committed to the guidance that we've given and everything is reflected within that guidance. So yes, that's...

Yes, I would just say, as we mentioned in the last call, we implemented a small price increase to our installed base due to the tariffs. We already implemented it, and we are running it at the beginning of the year. Overall, the market received it with fully acceptance, and we are running and it's baked into the model.

Okay. And one last question, just a quick one. In '26, would you expect more activity with new customers or just greater multiunit deployments with existing given some of the traction you saw with new customers last year?

It is a mix. We -- as I mentioned, in 2025, 40% of dealers were with new customers. Almost every one of them, we expect to grow in 2026. So it will be repeated itself on top of some of our key customers that continue to grow if it's for upgrade, if it's for additional systems. But our focus is, of course, on penetrating the screen market and penetrating in the roll-to-roll into new markets. By definition, penetrating to the screen market and the roll-to-roll mostly will come from net new customers. So we expect many net new customers adding into 2026. And of course, later on, each one of them can take multiple systems.

Next question is from Chris Moore from CJS Securities.

So obviously, the shift to AIC slows the revenue growth near term, talking about low single digits today. Given where you sit and the pace of progression on ARR, likely 2 to 3 years before that annual revenue growth starts to pick up? Or just kind of any thoughts on how you're looking at that?

Yes. So first of all, look, the ARR by itself is $25 million ending this year is a major milestone. It's starting to be also significant in terms of revenue per quarter, and we ended the year with $50 million of revenue. This revenue has higher -- is accretive in terms of gross margin to the mix of the gross margin. And we expect that this growth margin will expand as the program will continue to grow. So it will have a major contribution both in revenue, gross margin, but the predictability is very important. Each one of those deals usually is being signed for 5 years commitment. So we have 5-year horizon of those deals. So with a clear commitment.

And the ARR that we are reporting is the minimum commitment on the contract. Of course, customers can print more impression and deliver additional. So this is a significant milestone. Now we believe that we will start seeing a faster growth in the top line revenue once the AIC or the ARR will reach around $50 million. So now we are at $25 million. When we will reach to the $50 million of the ARR, the AIC revenue will be such so significant that we will start to see acceleration on the top line versus where we see today.

Got it. That's helpful. What about -- from a geographic standpoint, geographic mix, do you expect your revenue to be much different 2 to 3 years from now?

No. We still see the fastest growth in the Americas, specifically North America. While it's the largest territories and work in revenue, it's also the fastest growing territories for us. We see that EMEA is catching up. And now with the new technologies that we are bringing both on the DTG and the roll-to-roll, we expect to see some acceleration in Asia, specifically around the footwear, specifically around the sports market and technical market. But in the next 2 to 3 years, Americas will continue to lead and probably will continue to be the fastest-growing region for us.

Got it. Helpful. Last one for me is just are you hearing anything in terms of competitors looking to create similar AIC model?

We have some rumors. We have competitors saying that they can provide it as well. Tangibly, we don't see it. We think that it will be very difficult for them from a cash flow perspective to go forward with it. This is -- AIC is not just a financial model. It's a change of DNA. There's a ton of tools around it. There's a lot of AI to support it. There's a change of the entire mindset of the service organization and support and customer success. We are much stronger today as a team, as an organization, in terms of ways that we are supporting our customers. We're getting great feedback on the TCE reports for our customers about the way we're supporting them, that we are much more proactive. This model forced us to be in partnership with our customers only when a customer is being successful, we are successful. When they are printing more, we are earning more. So it's holding hand together. We don't see this capability from any other company in the market, and we don't see it as of today. We might see it in the future.

The next question is from Tavy Rosner from Barclays.

I wanted to welcome Assaf and welcome back, Andy. It's great to have you back with the company. Two very quick ones. Most of them have been asked. I wanted to ask about footwear. How do you see the market as an opportunity? And what are the solutions that Kornit had to address the opportunity?

Tavy, great to hear from you again. And the footwear is a new market for Kornit. Kornit is the only company that's innovating in the footwear in the digital space. I can tell you that we had major meetings with some of the leading sports brand around the world, and they are super impressed with the capabilities that we are bringing to the market. We're actually enabling the footwear, specifically the sports footwear to become -- to unleash the creativity to produce any type of footwear in terms of design without the limitation of quantities. You will see it in Connection. You will see the type of design that we are creating and the things that being sold today, there are more than 1 million pairs of shoes that are already being sold today in the market.

And in terms of market opportunity, we believe the opportunity in front of us is something like 2 billion impressions in this footwear that we can capture. We see consistent growth within my customer, both in terms of utilization of the system, the production, but adding more capacities and our funnel and pipeline is getting stronger and stronger.

There are no further questions at this time. I would like to turn the floor back over to Mr. Ronen Samuel, CEO, for closing comments.

Okay. So thank you. And before we close the call, I really want to thank, first of all, the entire Kornit team, also, our customers, the partnership that we have with customers and all the partners that help us to make 2025 a year of many achievements. While there are certainly more work to ahead, we are very much focusing on the work ahead. I'm truly excited about what we have accomplished as a team together in 2025, and I'm really looking forward for 2026 into those areas that I mentioned in the call.

I would like to thank for all your support and being on this call, and I would like to remind all of you that we are looking forward to see you at Connection in April. It will be a milestone event and there will be Kornit before and after. So looking forward to see all of you. Thank you very much.

Great. Thank you, Ronen. Thank you, Assaf. And thank you all for joining us today. As always, please reach out to me directly should you have any follow-up questions. And as Ronen said, we are looking forward to seeing everybody at Connections in April. Sati, can you close the call, please? Thank you.

Certainly. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Kornit Digital's Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded.

I would now like to turn the conference over to our host, Mr. Jared Maymon, Investor Relations for Kornit Digital. Mr. Maymon, you may begin.

Thank you, operator. Good day, everyone, and welcome to Kornit Digital's Third Quarter 2025 Earnings Conference Call.

Joining me today are our Chief Executive Officer, Ronen Samuel; and Lauri Hanover, Kornit's Chief Financial Officer. For today's call, Ronen will provide comments on the third quarter of 2025 and provide an update on our progress. Lauri will then review the third quarter results and provide our fourth 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 28, 2025, 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?

Good morning, everyone, and thank you for joining our third quarter 2025 earnings call. This quarter, we delivered results above the midpoint of our guidance range with revenues of $53.1 million, representing 5% growth year-over-year.

When including deals under our All-Inclusive Click (AIC) model, which are recognized over time, underlining business activity was even stronger this quarter. Under this model, revenue is recognized as customer print and consumer impressions rather than upfront, which builds recurring revenue over time even though it shifts part of the recognition to a later periods.

Our EBITDA margin came in at approximately 2%, reflecting continued progress towards full year profitability as we maintain disciplined cost control. I'm particularly pleased that we have achieved this growth while continuing to generate positive cash flow from operations for the eighth consecutive quarter.

This performance reflects not only strong operational execution but also continued progress in transforming Kornit into a business driven by recurring revenues, expanding the addressable market while driving sustainable profitability.

Beyond the financials, I would like to provide an update on our key focus areas: screen market penetration, Apollo adoptions and the expansion of our All-Inclusive Click model. The global screen printing market for bulk apparel represents around 14 billion annual impressions and more than 40% of those production runs are under 1,000 units, representing an addressable market of roughly 6 billion impressions.

As production continues shifting towards shorter runs and faster delivery, Kornit is uniquely positioned to lead the transition from screen printing to agile, high-volume digital production powered by our advanced technology portfolio and the AIC model that lowers barriers to entry. Our goal remains to capture approximately 5% of this addressable market by 2030.

In just 18 months since the first Apollo installation, adoption continues to accelerate as customers expand their fleets, increase utilization and push production to new levels. Across our early Apollo users, production has scaled rapidly with systems now averaging more than 1 million impression annually and now over 40% of those impressions produced for bulk apparel. About 25% of these bulk jobs are above 500 copies, proving that digital is moving beyond short runs and increasingly replacing traditional screen printing in high-volume production.

With a growing number of customers installing multiple Apollo systems, the shift towards digital as the preferred production method is clearly gaining momentum. Importantly, approximately 40% of all Apollo and Atlas MAX systems sold this year were to new customers, reflecting the growing confidence in Kornit's technology and the expanding opportunity ahead.

Another area of progress is the continued expansion of our All-Inclusive Click model. Today, about 80% of Apollo systems operate under the AIC model, which removes barriers for customers and drives a growing stream of recurring revenue.

AIC is strengthening Kornit's leadership in digital production, serving as a clear differentiator that attracts new customers and generates strong momentum across the industry. At the end of the third quarter, annual recurring revenue from AIC reached $21.5 million, up $2.6 million sequentially. Several deals that shifted into early Q4 have since closed, bringing ARR to $23.1 million today, and we expect further expansion by year-end as the program continue to scale.

This milestone is especially meaningful given that the AIC is still in its early stages of global rollout and was only recently introduced in Asia, where we delivered our first Atlas MAX PLUS systems, and early in Q4 closed our first Apollo deal under the program.

Asia is the largest textile producing region in the world, and early success there is another encouraging validation of our technology and business model. Over the past 12 months, Kornit customers produced approximately 232 million impressions, reflecting 5% growth on a trailing 12-month basis.

We expect a solid increase in the growth rate of impressions on a trailing 12-month basis as we move through the fourth quarter, driven by continued ramp-up of Apollo systems and higher utilization across our installed base. Our progress can also be seen clearly in the success of our customers who are expanding capacity, scaling production and increasing utilization across their operations.

In the third quarter, Mad Engine Global, one of the world's largest manufacturer of licensed and branded apparel added another Apollo under the AIC model on top of 2 existing Apollos and a large fleet of Atlas MAX PLUS systems. This expansion allows them to replace screen jobs, shorten production time and reduce waste and energy use.

Hybrid Digital, a fast-growing wholesaler, added a second Apollo under AIC to better support peak season POD demand, move more of its bulk apparel production into digital and meet faster delivery requirements.

Basic Thinking, a European manufacturer installed a second Apollo within 6 months to meet growing demand from leading fashion brands and strengthen its position as a digital-first producer.

HFT71, part of the [ TBI ] Group, integrated Apollo with its existing Atlas MAX PLUS fleet to meet surging bulk demand and set a new production standard in Central Europe.

And in Asia, Webling in South Korea became the first customer to adopt AIC, operating 2 Atlas MAX PLUS systems as part of a full digital transformation that replaced legacy screen capacity while improving time to market and production efficiency. This example show that Kornit's technology and business model are delivering tangible results and accelerating the industry transition from screen to digital.

I also want to touch on our expansion beyond our traditional apparel market segments. Last week at ITMA Asia in Singapore, we showcased our portfolio and announced the commercial launch of Kornit's digital footwear solution for the sports and athleisure markets.

After 2 years of pilot programs with leading global brands, the solution is now commercially available and has already crossed the milestone of more than 1 million pairs of shoes produced using Kornit technology under well-known international brands. This achievement marks an important step forward in applying our digital platform to adjacent categories and demonstrate that our focused innovation engine continues to create new growth opportunities.

We view footwear as a significant pillar of our long-term growth plan. The total addressable market is approximately 1 billion pairs annually equal to about 2 billion print impressions and Kornit is well positioned to capture a meaningful share of this opportunity.

Our solution directly addresses the footwear industry biggest challenges such as slow development cycles, design limitations and overproduction by replacing complex analog decoration with a single-step digital process that delivers unlimited design freedom, durability and efficiency.

Customers are excited because the design to production cycle, which once took months can now be done in days, enabling faster response to trends, lower waste and local on-demand production at scale. Following successful deployments of our new solution in China, we are expanding into Vietnam and Germany, establishing a new global standard for digital footwear production.

These efforts are further supported by additional orders from existing customers secured during ITMA Singapore. Ten days ago, we also participated in PRINTING United in Orlando, where we engaged with many new potential customers and partners. The feedback was consistent. The industry's needs for agile, high-quality and sustainable digital production continues to grow, and Kornit remains the most advanced and trusted partner to enable that transformation.

Before I close, I want to take a step back and reflect on the broader transition we are executing. Kornit is transitioning from onetime equipment sales to a recurring usage-based model through AIC and ARR. While this naturally shifts the timing of revenue recognition, it is a deliberate move. It strengthens long-term profitability, predictability and customer lifetime value.

We are already seeing the benefits through stronger customer retention, higher engagement and increasing system utilization. Our plan for 2025 was to deliver profitability, generate cash from operations and drive growth both in revenue and even more importantly, in recurring revenue from the AIC model. We are on track to deliver on this plan.

Looking ahead to the fourth quarter, we expect sequential growth in revenue, gross margin and EBITDA while continuing to expand our recurring revenue base through the AIC program.

As we look ahead into 2026, we expect modest top line growth in the low-single digits as we continue to deliberately transition more customers to AIC while driving strong growth in annual recurring revenue. At the same time, we expect continued EBITDA expansion driven by higher utilization, scaling recurring revenues and disciplined cost management. This evolution position Kornit for sustainable, profitable growth and long-term value creation.

In summary, we are executing with discipline, capturing a multibillion-dollar market opportunity as we transform how apparel is produced. Our recurring business model is scaling. Our technology is driving real impact, and we continue to look ahead with innovation into new segments like footwear and other adjacencies. The progress so far is just the beginning, and there is much more to come.

I will now turn the call over to Lauri to further discuss our third quarter results and our guidance for the fourth quarter. Lauri?

Thank you, Ronen, and good day to everyone. Third quarter revenues were $53.1 million, within our guidance range of $49 million to $55 million provided in August. Year-over-year, we saw growth in product revenues, primarily attributable to an increase in consumable sales and continued growth of revenue from the AIC model. Service revenue also increased year-over-year due primarily to greater upgrade activity.

Moving to margins. Third quarter non-GAAP gross margin was 45.8% compared with 50.3% in the same period last year. The year-over-year decline was primarily the result of inventory-related adjustments, U.S. tariff costs and lower service gross margin as expected. We have communicated targeted price increases that are expected to offset part of the tariff impact in the coming quarters.

Looking at operating expenses; total third quarter non-GAAP operating expenses were $25.8 million, a decrease of $1 million or about 3.7% from $26.8 million in the same period last year. A large portion of our operating expenses are Israeli shekel denominated. The shekel appreciated more than 9% in the third quarter year-over-year.

Had the U.S. dollar shekel exchange rate remained at the prior year level, operating expenses would have been $25 million or 7% below Q3 2024. Managing our operating expenses closely is within our control even in an uncertain environment, and we are expecting to realize more meaningful operating leverage over time as we continue to align our expenses with our base of revenue and near-term needs.

For the third quarter, adjusted EBITDA was $1.1 million compared with $1.5 million in the same period last year. Had exchange rates in Q3 '25 remained at the level of the year earlier period, adjusted EBITDA would have reached $1.8 million.

Adjusted EBITDA margin for the third quarter of 2025 was 2%, above the midpoint of the guidance range we provided in August. We still anticipate delivering adjusted EBITDA profitability on a full year basis in 2025.

As we move into 2026, we plan to continue shifting a greater share of system volume from the traditional CapEx model to AIC. As Ronen said earlier, ARR from systems shipped under the AIC model reached $21.5 million at the end of Q3. 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 million. Operating cash flow was $4.3 million compared with $13.6 million 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 $3.1 million in the same period last year.

Ending with our fourth quarter guidance. We currently expect fourth quarter revenues to be between $56 million and $60 million 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&A.

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

[Operator Instructions] And our first question comes from the line of Greg Palm with Craig-Hallum.

This is Danny Eggerichs 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' kind of activity changed around capital sales and AIC for Apollo.

Yes. Thank you, Danny. So regarding this quarter, the way we look at it, product, 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 starting to contribute to our revenue.

Overall, we are shipping more and more systems. You don't see the systems, of course, that we are shipping on the AIC model, but they're going to contribute moving forward into Q4 and 2026. This is a major focus for us for growth. Hopefully, I answer your question.

Yes. No, that's helpful. Maybe just one on gross margin, maybe a little step down and a little below expectations. I know you kind of mentioned that inventory-related adjustment and 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?

Yes, I will leave this question to Lauri for beginning.

Okay. So as you mentioned, we faced some headwinds resulting from inventory adjustments in addition to a greater impact from the effects of U.S. tariffs, which, of course, we didn't have 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 that we expect to offset a part of the tariff impact in the coming quarters.

Yes. What I can add as well that, you should expect to see expansion in gross margin, of course, in Q4. Q4 is traditionally stronger on -- is the most -- is 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.

Okay. Great. Maybe just one last one for me. I 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. And what kind of gives you that confidence in your ability to grow next year?

Yes. So we are starting to have more and more visibility because of our recurring revenue and reaccruing revenue. Of course, we have the ink revenue, which is the reaccruing. We have the service revenue that is reaccruing, and we are building more and more the ARR from the AIC model that is the recurring revenue.

And while taking relative 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 a much stronger expansion on the EBITDA and of course, accelerated growth on the ARR during the year.

And our next question comes from the line of Brian Drab with William Blair.

I 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 I guess, I would have thought that with the ARR that you're entering 2026 with that you would have expected to grow a little bit faster than low-single digits?

Yes. Thank you, Brian. And you're right. From one hand, we're entering with a nice ARR into 2026. We're also having better visibility on our pipeline. We have stronger pipeline than we had before. But when we are looking at our growth rate, it reflects a deliberate and strategic transition 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 onetime 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 to 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. So I hope I answered your question, Brian.

Yes, Ronen, that's helpful. My follow-up to that is just, 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 -- trying to just move customers to AIC rather than equipment?

The answer is yes, because we 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 impression 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 deliberate decided to move more and more into the recurring business, the AIC. And therefore, we anticipate a reduction next year on the CapEx deal 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, and we will not see the revenue recognition at the same quarter. We'll see it over time and will create much stronger business moving forward for the years to come.

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, in terms of revenue drop.

Yes, as we mentioned, AIC revenue is becoming significant. And most likely, by the end of Q1, we'll start reporting separately on the AIC revenue as it becomes even more significant. So next year, you will see more revenue -- significantly more revenue coming from the AIC. Some of it is offsetting the reduction of the CapEx revenue. Overall, we still expect a growth for the full year.

And our next question comes from the line of Chris Moore with CJS Securities.

This is [ Will ] on for Chris. Do you think the geographic mix of your revenue will look much different 2 to 3 years from now? And if so, what are the drivers?

Geographically -- thanks, Chris. So for us, North America today represents something like 65%. In 3 years from now, will continue to be the largest region. And we definitely would like to see EMEA catching up and a massive opportunity in Asia.

We see specifically in Asia, the opportunity around the footwear. We've been there last week at ITMA, and we got fantastic feedback, and we have many new prospects for this segment. But we see the penetration also into the screen market in Asia. And as I mentioned in my prepared remarks, we closed 2 deals, the first deal is in Asia, both in the screen market, but also 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 very large installed base, and we expect North America to continue to contribute and grow.

And can you remind us or add some color to what your thoughts are on free cash flow in 2026 and 2027?

Lauri?

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. Does that answer the question?

Yes.

And our next question comes from the line of Erik Woodring with Morgan Stanley.

This is [ Maya ] on for Eric. 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 3 months, what has really changed? And what supporting evidence can you provide to give us the confidence that you'll achieve at least the midpoint of 4Q results?

Yes. So first of all, Q3 we grew 5% year-over-year. Q4, we expect sequentially growth versus Q3. However, year-over-year, you're right, it's 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 sides 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.

Got it. 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?

So in 2024, we have quite significant amount of upgrades, which contributed to the service revenue. So if we are taking the -- from the service revenue, the upgrade at all, service revenue continued to grow year-over-year. Once we are putting the inside the upgrade, it depends on the upgrades or 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, but we completed most of it. Some of it we continue to do this year, and we saw it in Q3.

We do expect in 2024, at least from the midpoint of 2024 to have some new upgrades, which will contribute for more capability to our systems. I cannot get into detail right now. We didn't disclose it yet, but we do plan on additional upgrades that will come in 2026 on top of our biggest customers that potentially can continue and upgrade their fleet into MAX technology.

And our next question comes from the line of Chris Reimer with Barclays.

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 2 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 customers?

Yes. So let's start with the footwear. You all remember that we started it about 2 years ago, and we mentioned that we are looking into these segments 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 million pairs of footwear upper into the market. We learned a lot about this market. We didn't know anything about this market 2 years ago, and we met many customers, new potential customers when we learned about the market. The market is a big market.

When we're looking at the decorated footwear market, we are talking about 1 billion pairs of shoes that are being decorated and printed on an annual level. If you translate it, it's about 2 billion impression. And this is our addressable market that we are going after it.

We are only in 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 much more agile and in one-step process, meeting the durability standard that this industry requires. And right now, there is tons of innovation that we are bringing to the market around this technology.

We 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 -- look at it as a magic. And what we are delivering there is really solving the main pain of this industry, which is a slow development is taking months to develop a footwear and you can move it now to days. Design freedom, no limitation anymore on design and produce exactly what you need without waste and without overproduction.

We have early success in China with 2 major manufacturers that's working with most of the leading brands of the world. One of them at ITMA order another 2 systems on top of the system that is they already have. And we're now entering into Vietnam and Germany with additional orders that we got already.

As I mentioned, lots 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 3 years. This is on the footwear.

On the fashion, on the fashion market, we are looking more the technical aspects of the fashion. I mentioned on the previous call that we signed a very strategic agreement with one of the leading brands of the world, 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, very lucrative and interesting market with a big order that will follow up once the pilot will finalize.

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 is adopted a Presto a few months back and now is using the Presto for all over print to print on hoodies and create hoodies and create T-shirts and delivering to the market with on demand, with customization. Very innovative direction, and we see it as an opportunity for them to grow rapidly with additional systems and for others to follow up as well.

And our next question comes from the line of Kieran McCabe with Cantor Fitzgerald.

I was wondering maybe if you could maybe touch on the improvement in OpEx year-over-year, kind of quarter-over-quarter, kind of what were the drivers and how they kind of met your plan? And really kind of what do you see as opportunities going forward to continue to optimize OpEx with your revenue line?

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 the unfavorable exchange impact 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'll do our best to manage that through what we expect will be a more significant impact next year because of exchange rates. Is that helpful?

Yes, it does. And I guess, maybe I had a kind of -- for demand for 2026, kind of the AIC model. But generally, what's your kind of impression of the overall demand or business environment in 2026, 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 change from a CapEx model to the AIC, but just a general overall business environment expected in 2026.

So it was very difficult to understand the line was breaking. Can you repeat the question, please?

I was just wondering what your sense of the business environment or you're kind of visibility in 2026 is versus this year? Do you see kind of overall more optimistic view of the year or kind of more of the same given geopolitical tariffs and the like?

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 on AIC models, but also on CapEx deals. Specifically, we have a very strong pipeline on 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 a year of growth -- of modest growth on top line of low-single digits and more significant growth on the EBITDA on the bottom line.

And with that, there are no further questions at this time. I'd like to turn the floor back to Mr. Samuel, who will provide some closing remarks.

Yes. So first of all, thank you, everyone, for joining us on this call. As you can see, Kornit is going through a major transformation, both in terms of the markets, the addressable market that we are going after. It is the screen market, which is totally new to us, which is 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 and penetrating new regions like Asia Pacific. And we see acceleration and adoption of Apollo with multiple systems being delivered to many of our customers.

Our pipeline is getting stronger. We have better visibility both through Q4 and for 2026. And we believe that we are executing with passion and clarity to our strategy. So I would like to thank you again and hope to meet you soon in different events. Thank you very much.

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, and have a wonderful day.

Greetings, and welcome to Kornit Digital's Second Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded. 

I would now like to turn the conference over to our host, Mr. Jared Maymon, Investor Relations for Kornit Digital. Mr. Maymon, you may begin.

Thank you, Operator. Good day, everyone, and welcome to Kornit Digital's Second Quarter 2025 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 provide comments on the second quarter of 2025 and provide an update on our market. Lauri will then review the second-quarter results and provide our third-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 28, 2025, 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?

Good morning, and thank you for joining us. We delivered second-quarter revenues of approximately $49.8 million within our guidance range but below the midpoint. Gross margin was 46.3% and adjusted EBITDA margin came in at negative 2.3%. While service and consumable revenues were softer than expected, system sales and our all-inclusive click business model continue to drive growth. 

Q2 marked modest year-over-year revenue growth of 2%, bringing total first-half growth to approximately 5%. During the quarter, we increased our annual recurring revenues by $4 million, reaching approximately $19 million, which is a clear reflection of our progress in building a more predictable and resilient Atlas business. Service revenues declined year-over-year, primarily due to a fewer Atlas MAX upgrades, which had contributed meaningfully to service revenue in the comparable period of 2024. While overall consumer sentiments remain relative soft, which continues to affect our customer appetite for new capital investment, we are seeing consistent and encouraging growth in production across our installed base. 

Impression grew 5% to $222.7 million on a trailing 12-month basis, with strong double-digit growth among our top customers in both the DTG and roll-to-roll segments. Despite this increase in impression, Q2 consumable revenues declined year-over-year, largely due to the lingering impact of October 7 war, which led several key customers to significantly increase in inventory in late 2023 and early 2024. In the first half of this year, those customers adjusted their inventory approach and began drawing down existing stock, temporarily reducing replenishment activity. We expect this to normalize in the second half of the year. 

Our strategy remains sharply focused, driving impression growth across our customized design installed base while accelerating our penetration into the screen market by transforming analog workflows to digital and capturing net new impressions in bulk apparel. The opportunity ahead is significant, and we are executing with discipline and intent. In the customized design segment, momentum is continuing. These customers, many of whom have partnered with us for years, continue to increase utilization of their systems, translating into higher throughput and stronger productivity. 

This quarter, we saw clear examples of capacity expansion across our installed base. Cimpress, a global leader in mass customization, added the second Apollo system, along with 3 additional Atlas MAX Plus units, to their large fleets of Kornit systems, reinforcing both their confidence in our technology and their intent to scale globally. 

T-Shirt & Sons in the U.K., part of PF Concept Group, added a second Apollo as well to their Poland site under AIC, building on their growing Atlas MAX fleet. Snuggle in the U.K. added multiple Atlas MAX Plus systems to their growing fleet of Atlas MAX as a response to strong demand and consistently high performance. Another exciting addition is Flashship Print, a net new digital customer that joined our installed base with 1 Apollo and 2 Atlas MAX Plus systems under the AIC model. On top of that, our global strategic customer placed a follow-on orders to expand their MAX technology deployment across several sites, further validating the value they see in our platform. 

While many long-standing customers continue operating under our traditional CapEx model, new customers are increasingly adopting AIC as a way to align cost with production and scale more efficiently. We expect this model to remain a key driver of growth as both utilization and footprint expand. In parallel, we are making strong progress in the screen printing market, which is a critical pillar of our long-term growth plan. This segment, long dominated by analog, is starting to embrace digital solutions, driven by the need for shorter lead times, labor efficiency, and the ability to profitably handle mid- to short-run jobs. 

Our Atlas MAX Plus and Apollo systems, especially under the AIC model, are now opening doors to customers who just a year ago would not have considered digital a viable alternative. A standout example is Promos, one of the largest screen printers in the U.S., serving major brands and national retailers. They installed their first Atlas MAX Plus just 6 months ago, expanded to 3, and added an Apollo under AIC in Q2, with more Apollo's units now in discussion. 

We are also seeing strong adoption from new screen customers globally. In the U.K., Basic Thinking installed an Apollo under AIC. In Quebec, Printeez adopted 2 Atlas MAX Poly systems focused on performance sportswear. And T-Shirt Factory in the U.K. added 2 Atlas MAX Plus units under AIC to replace screen. These are just a few examples of how traditional screen printers are turning to Kornit to modernize their offering and stimulate growth. This rapid expansion and growing confidence from analog players is a powerful validation of our technology, business model, and strategic direction. 

Looking at production across these accounts, we are seeing a clear increase in net new impression for bulk apparel. Many jobs now fall within the 250 to 500 unit range, and we are seeing more runs produce well above 1,000 units, which were volumes unreachable for digital before the Apollo and the Atlas MAX Plus. The screen market pipeline continues to build with most deals aligned to the AIC model. Midsized players are adopting Atlas MAX Plus and Atlas MAX Poly, while larger customers are deploying Apollo or combining both platforms to address broader range of application and run length. 

Our value proposition is clear, better total cost of ownership, superior print quality, and unmatched agility. These customers are already seeing measurable improvements in productivity, flexibility, and economics. To accelerate this momentum, we are investing in application development automation, print quality, and ASC offerings designed for longer-run production and large-scale operators. While the transformation is underway, adoption in the screen market is progressing at a measured pace. Bulk apparel remain a highly established analog-driven segment, and shifting production model takes time. That said, it is far the largest opportunity in front of us with a massive installed base ready for disruption. Kornit is uniquely positioned to lead this shift. We are in the midst of paradigm shift. 

The strength of our customer relationship, expanding pipelines, and differentiated technology position Kornit at the forefront of the analog-to-digital transformation in the screen market. Apollo, Atlas MAX Plus, Atlas MAX Poly, and our AIC model together create a powerful foundation for long-term disruption and market leadership. We also made meaningful progress this quarter in expanding into new verticals with additional systems being installed at key footwear customers across China, Vietnam, and Europe. Each of these customers is adopting Kornit's technology to meet the specific demands of mass market sports footwear production, which demonstrate the scalability and adaptability of our technology across regions and use cases. 

In parallel, we are advancing breakthrough innovations for functional applications and plan to unveil new capabilities later this year that will open entirely new high-value markets where Kornit has not previously participated. We also signed a strategic development agreement with one of the world's top sports brands to co-develop a proprietary application, leveraging our unique functional technology. While details remain confidential for now, this partnership highlights the increasing relevance of our technology for global brands looking to innovate, design, and deliver with speed, sustainability, and agility at the core. 

Looking ahead to the second half of the year, we expect modest top-line growth of low single digit while further expanding our ARR base and setting the stage for a meaningful growth in 2026. We are executing against a defined plan, scaling Apollo, accelerating ASC adoption, strengthening our screen market funnel, and maximizing utilization across global installed base. At the same time, we are maintaining tight operational discipline, continuing to target full-year adjusted EBITDA profitability and positive cash flow from operations. In addition, we're actively managing potential impact from the recently announced 15% tariff on products originating from Israel. While we do not expect a material effect on our financials, we have developed mitigation strategies and cost-saving initiatives to minimize any impact. 

In closing, we remain confident in our strategy and our ability to deliver on our long-term goals. We are in the midst of a profound transformation. On-demand sustainable digital production is no longer a future vision. It is happening now. Our value proposition is clear. Our strategy is aligned with long-term industry trends, and we have intense focus on execution. While this change takes time, we are building a healthier, more resilient, and more scalable business with the right technology, the right model, and the right team in place. 

Thank you for your continued support. Now I'll turn the call over to Lauri. Lauri?

Thank you, Ronen, and good day to everyone. Second quarter revenues were $49.8 million at the low end of the guidance range of $49 million to $55 million we provided in May. Year-over-year, we saw growth in product revenues, largely attributable to an increase in system sales and the continued expansion of our AIC program. Growth in systems and AIC was partially offset by a decline in consumable sales, largely reflective of customers returning to more normal levels of inventory after last year's buildup in the wake of tensions in the Middle East. Service revenue declined year-over-year due mainly to fewer Atlas MAX upgrades as expected. 

Moving to margins. Second quarter non-GAAP gross margin was 46.3% compared with 48.6% in the same period last year. The year-over-year decline in gross margin was primarily the result of the lower sales of consumables and Atlas MAX upgrades. 

Looking at operating expenses. Total second quarter non-GAAP operating expenses were $26.7 million, a decrease of $1.2 million or about 4.4% from $28 million in the same period last year. We continue to manage operating expenses closely and plan to deliver positive adjusted EBITDA on a full-year basis in 2025. 

For the second quarter, adjusted EBITDA was negative $1.2 million. This was an improvement versus the negative $1.6 million we reported in the same period last year. Adjusted EBITDA margin for the second quarter of 2025 was negative 2.3%, within the guidance range we provided in May. Our balance sheet remains robust with our quarter-end cash balance, including bank deposits and marketable securities, standing at $489 million. 

Operating cash flow was $3.7 million compared with $4.5 million in the same period last year. Cash flow less capital expenditures and investment in equipment on lease for AIC in Q2 was negative $2.1 million, which was in line with our plan. This compared to positive $3 million in the same period last year. 

Moving to our share repurchase activity. During the second quarter, we completed our $100 million accelerated share repurchase program, which ran subsequent to our initial $75 million plan announced in 2023. Through a mix of an accelerated share repurchase and a traditional open market repurchase, we purchased approximately 3.6 million shares at an average price paid of $28.1 per share. Repurchases during Q2 specifically were 758,000 shares at an average price paid of $22.67 per share. This brings our total repurchases since 2023 to 6.7 million shares for a total consideration of $164.8 million, reflecting an average price paid of $24.54 per share. 

Ending with our third quarter guidance. We currently expect third quarter revenues to be between $49 million and $55 million and adjusted EBITDA margin to be in the negative 3% to positive 3% range. 

I'll now turn it back over to Ronen to open the call for Q&A.

Thank you, Lauri. 

Operator, please open the call for Q&A.

[Operator Instructions] And we will take our first question from Greg Palm with Craig-Hallum.

I guess I'd like to just start with maybe some kind of broader commentary relative to what we talked about back in May. I don't know if it's easier to sort of break down the sort of the new implied second half outlook by segment. But just kind of curious kind of what's changed? How much of the maybe more subdued outlook is inventory destocking? How much is system sales or at least placements shipping to 2026, less upgrade orders? I don't know, maybe just a little bit more color on all that.

Yes. Thanks, Greg, for the question. I will start by saying we are in the mid of transforming our company, both in terms of technology, in terms of the market that we are serving, in terms of the customer base, our go-to-market, and business model. While Q2 results came below where we expected, although within the guidance that we gave to the market, this was reflected due to softness in some areas, but we also see a very positive sign in other areas, which I will touch probably later on, on this call. I actually would like to start with areas that we saw some softness in Q2 and to explain them. 

First of all, in Q2, in primarily driven from lower-than-expected ink and service revenue. This, despite a very strong growth that we saw in system sales, actually, system sales doubled versus last year, and a strong growth in the AIC revenue. So we saw a soft and actually decline revenue in ink and services. Let me explain from where is it coming. In the ink revenue decline, this is due to the inventory buildup that was done by a few customers in late 2023, a few key customers, much of which was consumed during the first half of 2025, and they didn't order much of ink. And therefore, we saw a decline on this revenue. This is more of a technical correction versus any fundamental issues on the ink because we see an increase of impression across our installed base. 

In terms of the service revenue decline, this decline came mainly due to fewer Atlas MAX or MAX upgrades compared to the same period last year, which was very strong in terms of upgrades to the MAX platform. We expect when looking ahead for ink and services to normalize in the second half of the year, in the second half of this year. Additionally, we need to remember that a portion of the ink and service revenue is now embedded within the growing ARR or the AIC revenue that now is embedded within our product category. So we differentiate between the growth that we see on the ink line to the AIC. So this is the main impact in terms of the softness of Q2. 

A few more points that I would like to mention, which is relevant to what we've seen in Q2. One is about Apollo system shipment, which currently are tracking below what we were intending to ship this year. This is mainly due to the longer sales cycle and particularly with net new customers from the traditional screen market. As you know, this year, we are focusing very much to take the Apollo to net new customers. Each one of those Apollo, most of the installation of the Apollo are going to net new customers, and this takes longer in terms of implementation, but also longer sales cycle. 

We are actively building lighthouse accounts. I mentioned a few lighthouse accounts in my prepared notes. And some of them will, of course, influence those lighthouse accounts will demonstrate Apollo performance and reduce the fear factor of switching to digital from other screen printers. And we believe that this will accelerate the growth of the Apollo moving forward. We have a very strong pipeline for the screen market and specifically for the Apollo, and we believe that this will be a major growth engine moving forward. 

The third point that I would like to mention is regarding the ARR. And it's currently the ARR that we reported close to $19 million, but it's tracking below our expectation. And it's primarily due to slower-than-anticipated rollout and adoption of the AIC model. And it's coming from different area. Launching the AIC required really a shift in mindset, both internally within Kornit, but also educating our customers about this model, especially in this year that we are selling both CapEx and AIC, and we need to meet the CapEx revenue. So even inside Kornit, we are debating which deal we should drive into CapEx deal versus AIC. 

Moving forward, you will start seeing that our focus is increasingly shifting towards AIC first engagement. And this model is -- will gain traction with new deals that we will sign and many more that we have right now in the pipeline, particularly within the screen segment. We expect that our ARR exiting in 2025 will be meaningful for the beginning of 2026 to deliver a momentum and meaningful growth in 2026. So I was trying, Greg, to cover those areas that were relative softer from what we internally expected to deliver. There are many areas of strength and growth, and I'm sure that I will touch on them later on in other questions.

No, that's very helpful. Appreciate the color. And I mean just on the ink, I'm kind of surprised that it's taken this long to see an impact. So I'm curious how many months of inventory would a customer typically have on hand? And again, just kind of thinking back to when you saw the initial kind of stockpiling, why is it taking sort of this long? Like what's changed more recently where all of a sudden, they're destocking now, versus why didn't they do it 6 or 9 months ago?

Yes. First of all, we need to understand that in specifically a few key large customers, okay? And usually, those key customer -- large customers are keeping inventory between 2 to 3 months. What we have seen in late 2023 and H1 2024, they have increased their safety inventory into about 6 months of inventory. And we were assuming that they will consume along 2024, but they have decided to change their inventory level only in beginning of 2025 and gradually now reducing their inventory and starting to replenish it into, again, back into 2 months or 3 months of inventory. This takes time, and we saw the impacts specifically in Q2. We assume that most of the impact is behind us. There will be continued some impact in H2.

And our next question comes from Chris Moore with CJS Securities.

This is Will on for Chris. You're targeting 30 Apollos in 2025. How many do you already have orders for? And how concentrated is the customer base on that 30?

Yes. So as I mentioned before, we are very, very encouraged by the feedback that we are receiving from the Apollo and bringing the Apollo and installing it in net new customers. However, we are tracking below the 30 system targets that we put in front of ourselves. And I'm not going to provide more detail on that in terms of numbers. But what I'm going to say is that what we see right now is that we see more and more customers adopting their second systems. Of course, we have customers that are having already 7 systems and planning to place more systems very soon. But more and more customers are placing their second system. 

When we are monitoring those systems, we really see that many of them running long runs, many jobs above 1,000, while most of the jobs are between 250 to 500. Those are ranges that have never been seen in digital before. Those are all incremental volumes to Kornit and showing that our value proposition and the Apollo itself is the right fit to the market. 

During the first year of the Apollo, of course, we worked heavily in making sure that the product utilization and stability is in best of class. We see a lot of improvement. We have some work to do ahead of us as well, but we are fully confident that these products, including the MAX product line of Atlas MAX and Atlas MAX Poly, will change a market that we've never been there. The screen market for the first time, and this is happening only this year, we are penetrating. We've never been there before. This market -- the addressable market is 5 billion impression below the 1,000 run. Just to remind everyone, our customers today are doing something like 220 million. This is a massive growth potential. We have the right technology. We have the right business model with the all-inclusive click. Now we have the right go-to-market with the right team to really go and change, transform this market into digital.

And could you add any color to what you roughly expect the mix to be for FY '25 between systems, consumables, and services? And will it be much different in FY '26?

So I don't have it exactly in front of me. I can try to go back to you later on to all of you. But what I can say is like this, first of all, what we see, we see a massive, and this is part of the good news, a massive change in system shipment and revenue from system. Actually, when you look at system, we doubled the revenue on system and we doubled the number of systems that we have shipped to the market. Some of it because of the CapEx, some of it because of the AIC model. This is a very important indicator for the future growth of impression and the growth of Kornit. So you should assume that the portion of the system is starting to get bigger, although still the ink is massive. 

Of course, the AIC is trending very, very strongly up. And we believe that the ARR that we will end 2025 will be very meaningful for the growth into 2026. Other thing that we see and help you as well, we see a significant penetration into the screen market. You will see there by penetrating the screen market is both in terms of new systems, because most of them or all of them are new customers, but you will see a massive growth on the ink and on the AIC in each one of those installations. A lot of it is related to Apollo. 

We also see a recovery in the customized design, which you will see the implication on the ink revenue moving forward. We see impression growth in the customized design in many of our customers, strong double digit. And many of them are adding additional systems. I mentioned Cimpress as an example. Cimpress is a global strategic customer added another Apollo and 3 Atlas MAXes to a very large fleet of addresses that they already have. It's just one example of the customized design that's growing very rapidly right now. We see the pipeline both for the screen and the customized design are growing. And the most encouraging that we have is that the model that we just launched about a year ago, the AIC model is gaining massive traction. This is a game-changer for the industry. We are the only one that's providing it. And we see that it's open almost every door and customers adopting it, and this will be one of the main vehicles of growth and penetration into the screen market moving forward.

And our next question comes from Jim Ricchiuti with Needham & Company.

I'm trying to reconcile your comments that ARR is tracking below expectations, but that you expect to exit the year with much stronger ARR, which presumably is going to contribute to stronger growth in 2026. So what are you seeing or anticipating that really contributes to that view?

First of all, everything is against expectation. So in 1 year, from the moment we've launched the AIC program, we announced today that we have already $19 million of ARR. And we are starting to have a more meaningful revenue from AIC every quarter. And of course, H2 is in front of us, and we have a pipeline to increase the ARR further. So you should see a meaningful increase during 2025, and we will start the next year with ARR that actually everything is revenue already for the beginning of the year. And what we see why we believe that this growth continue. First of all, we have a pipeline. We see the funnel is getting stronger. It took us a while as a company to really change the DNA to understand deeply what does it mean the AIC and to balance between the CapEx deal to the AIC. 

Remember that we still need to deliver the revenue on a quarterly basis on system, while the ARR is more longer-term. But as I mentioned, we are driving the company into more of an ARR business. And we see that the adoption of the AIC model is now not only within the net new customer in the screen market, but also some of key customers in the customized design, existing customers when they want to expand adopting this model, which is fantastic to see the gap between us.

Maybe just shifting to the Atlas MAX upgrade business. I'm wondering how we should be thinking about that upgrade business in the second half, just given the order you noted from your global strategic account. Are you anticipating that more skewed toward Q3 in preparation for higher utilization in Q4?

Yes. So first of all, most of our installed base already been upgraded to Atlas MAX. Now we are very busy to upgrade most of our installed base to Atlas MAX Plus. It's true that our global strategic customers started to upgrade their installed base last year in Q4, and we were anticipating to know when they will continue. And now I'm coming and mentioning that we got a PO for continuation of the upgrade for their -- some of their installed base, which is a very good sign of believing in our technology and in our platform moving forward. Those upgrades will be part of Q3 and Q4 revenues and implementation during the second half of the year. It's already embedded in the comments that I said that we expect H2 to grow by low single digit in H2. Of course, it will contribute to the revenue from the service -- for the service business.

If I could just slip one quick one in. How many customers do you feel have adjusted their inventory levels going back to what you referenced earlier?

It's only a few, which we believe that we have an impact. It's less than a handful of customers, but some of them are very meaningful without getting into more detail.

And our next question comes from Brian Drab with William Blair.

I'm just wondering, first of all, some of these larger deals that have been -- that were in the works earlier in 2025, I think some of that got pushed out. You said the sales cycle is longer. Do you have visibility, Ron, into some of those deals may be happening in 2026? Or these customers just delayed decisions and are likely probably going to come back to the table and close some of these deals once they figure out where they want to put machines, et cetera. Can you talk about that a little bit?

Yes. But before that, I just want to emphasize once again, if you look at the systems line by itself, both in terms of revenue and in terms of number of systems that we are shipping, we actually doubled the number of systems that we are shipping in the revenue versus last year, okay? So we see a very good momentum. While we would like to see more and some of it related to the AIC, what we found out that what we need to do is really shorten the time between the funnel development to closing the deal, and to the implementation. 

On the screen market specifically, what we identify as a barrier really to get the acceleration is to have more Lighthouse across the world. And we are very much focusing on building those lighthouse-like promos, just 8 months back or 6 months back, installed 1 Atlas MAX. Now they have 3-plus Apollo and very soon, hopefully, more Apollo. This will be a lighthouse in North America. And the same thing will be a lighthouse in U.K. with Basic Thinking and more and more. And by that, we'll spread the confidence in the screen market that not only we have the right quality, the right productivity, the right automation, but the TCO and those customers are successful. 

So it's taking time to do this transformation of an industry. This industry, many of those accounts that we are knocking on the door never heard about Kornit. The perception about Kornit is that Kornit is digital and not relevant for longer run. And only when we sit with them and showing them the technology, the ROI, the total cost of ownership, then they're realizing that they have a massive opportunity to change and to improve their business. This takes time, but it's going now to accelerate because we are gaining momentum, we are gaining experience, and the rumors is starting to spread in the market.

And I guess I'll ask just a little more directly. There was one customer that had -- at one point, you're talking a couple of quarters in a row about they have 7 Apollos, more Apollos than anyone. Can you talk about -- I think you said they could take on 10 more Apollos. Where are we with those 10 Apollos?

Yes. So this customer, he mentioned that they're planning to take 10 more Apollos and we hopefully that they will do it. I cannot get to the specific their business. There were some changes moving to one new site. I cannot get into more details than that. But what I can say is that those 7 Apollo's performances are incredible, incredible performances, running around the clock 24/7. They are super pleased with the performance. They are great partners, and they will go -- we are going to grow together moving forward.

And then -- can you comment at all on whether you're seeing -- are your customers commenting on whether they're increasingly possibly motivated by the big bill that was passed here and the accelerated depreciation associated with that? And could that result in any activity before year-end?

Yes, definitely. It's very relevant for our North America business. Our North America team is engaged with many customers that see it as an opportunity. And of course, this will move some of the deals from AIC into CapEx, but it's great for the customer. It's great for us. It's great for the economy. So it's definitely going to influence also H2. We still don't have clarity on how many additional deals we are going to gain from it, how many deals it's going to accelerate, but it's a positive indication to the capital markets.

[Operator Instructions] And we will take our next question from Erik Woodring with Morgan Stanley.

This is Maya on for Erik. You've talked a lot about the success you're seeing with screen printing customers. Can you maybe quantify that for us a little bit more? How much revenue comes from these customers? I understand it's largely Apollo-based, but what they're buying? And what kind of revenue or impression growth did you see from them? And as we look into the second half, how does this change at all?

Yes. I'll try to give you some colors on this market. This market is new to us. We are learning a lot every day. There are different types of customers. There are the giant ones, like the Promos, and there are smaller ones that we are penetrating. Usually, the small ones, the way we -- sorry, the way we are dealing with those customers is to try to understand the business. What is the volume that they have that they can move to digital? How much of the volume below 1,000 copies they have on an annual basis? And therefore, we are trying to fit the right solution to their volume. 

So many of the small customers, they don't have enough volume to justify to have an Apollo. And therefore, we see a very nice adoption for the small and mid-sized screen printers for the Atlas MAX and the Atlas MAX Poly. The big one, usually, they have enough volume to justify more than one Apollo. And some of them will start actually with Atlas MAX to learn about the technology, and later on, we'll add Apollo, and then we'll continue to go with the Apollo. The automation is very, very important. And the tendency is to go with the Apollo, but some of them, as they are risk-averse, will start with the Atlas MAX. 

What we're also learning is that we need to adapt our AIC model to the different types of customers. For example, there are many screen printers which are running their business differently from the customized design customer. Customized design customer as their mind is on demand, usually working almost 24 hours, at least 2 shifts. Many of the screen printers are working only 1 shift. And even if they are a big customer in 1 shift, the commitment that they need to give for the Apollo AIC is putting them on in a high risk, they see it in a high risk if they can reach to that. 

So we are now working on adjusting our AIC model to fit also those customers that are running only 1 shift and not running 2 shifts. We're also adjusting our AIC model to motivate customers to run longer runs. So they will see cost per impression on longer runs lower than if they're running shorter runs. So there is a massive opportunity here. I can tell you that every door that we are knocking is opening up and serious discussion. The only thing -- the main thing that we need to clear is the fear factor because many of them are analog, traditional analog, and this is the first time that they are touching digital. And there is a fear factor. And to overcome it, we need, first of all, to spread the rumour in the market about the success that we have, about the qualities that we have, about the productivity. We need to create those lighthouses. 

So the team is very much focused on that. And I've been in previous life in those transformation of industry in the print market, it's happening, and screen market will move to digital. It's not an exception. It will move to digital. It's a matter of time. And now we're accelerating it with our AIC, which is a very unique proposition to this market, which will make it much easier and reduce the risk for those customers to move to digital.

And then one last one for me. Trailing 12-month impressions were up about 5% year-over-year. That's a deceleration from what we saw in 1Q. Obviously, we don't have a lot of history. But why are impressions slowing? And how does this trend differ by customer segment? Are you seeing stronger growth in one area of the market versus another?

Excellent point, Maya. First of all, I mentioned in my script already that we see many of our installed base are growing strong double digit. And our top customer, the 20 top customers, most of them are really growing very, very strong. So then you ask yourself, how come it's only 5% on trailing 12 months. So let me explain. It's a bit complex, but listen carefully. 

As Lauri mentioned last quarter in her prepared remarks, the impressions are in 2 ways. For customers that connected to our Connect system, we track the actual impression printed in real time. So this is accurate. However, we have customers for those that are not connected to Connect, and the way we are calculating it, and within those customers, there are a few big customers, we are estimating impression by translating the ink shipments into an average consumption rate, okay? So we are translating how much shipments of ink that took this quarter and translating into impression. 

Specifically in Q2, this method was impacted by lower ink shipment because of the issues of October 7 that I mentioned before. This is a temporarily -- this temporarily reduced the estimated impression, even though that actually production remained very steady and the growth is much more than the 5% that we have mentioned.

And it appears that there are no further questions at this time. I will now turn the program back to Mr. Samuel.

Okay. So thank you very much for being on the call. My last comment is while we are still in a transition phase, we are confidently building a stronger, more resilient, more profitable growth business for mid- and long term. Our technology, customers win pipeline, and business model are laying the foundation for leadership in both customized design and the large-scale digital transformation of the screen market. We have confidence in our positioning to drive meaningful growth in 2026, not only in the customized design, but also in the massive opportunity of digitizing the screen printing market. 

Thank you very much, and hope to see you soon.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.