Kornit Digital Ltd. (KRNT) Earnings

Management highlights

- Business Model Transformation * 80% of current revenue is now recurring or highly recurring, up from a historical focus on one-time capital equipment sales, improving revenue visibility, business resilience, and long-term profitability predictability * The AIC model, a five-year minimum commitment all-inclusive offering, lowers upfront capital investment for customers and aligns Kornit's revenue with customer production growth, driving higher system utilization and deeper platform adoption * The split of new system shipments is approximately 50% to outright capital expenditure sales and 50% to AIC agreements, varying slightly quarter to quarter - Market and Adoption Trends * 60% of all system shipments in Q2 2026 and H1 2026 went to traditional screen printers, confirming accelerating industry transition from analog to digital production * Management characterizes this shift as a structural, long-term change driven by customer demand for flexible production, shorter run lengths, faster turnaround, onshore/nearshore manufacturing, inventory risk reduction, and labor cost savings from automation * Trailing 12-month production impressions grew 15% year-over-year, reflecting higher utilization across the entire installed base, with particularly strong growth in North America and among large strategic screen printer customers - Product and Innovation * New industrial systems including Apollo, Atlas Metrics, and Presto Max Plus deliver the quality, throughput, and total cost of ownership required for mainstream screen printer adoption, expanding the company's addressable market beyond the niche custom apparel segment * The company has expanded beyond hardware into integrated software, AI, automation, and workflow solutions (via the Print Factory acquisition), positioning itself as a full end-to-end digital manufacturing platform rather than just an equipment seller * Roll-to-roll direct fabric printing is gaining momentum following the launch of Presto Max Plus, with new product innovation planned for this segment by the end of 2026, targeting footwear, home decor, and technical performance apparel applications - Capital Allocation * The company ended Q2 with $451 million in cash, deposits, and marketable securities, providing a strong balance sheet to support AIC program growth, inventory builds, product innovation, and targeted strategic acquisitions * The company repurchased $5.4 million in shares during Q2 under its ongoing repurchase program; since 2023, it has repurchased 9.5 million shares for $205 million, with $60 million remaining in current authorization

Guidance

- For Q3 2026, management guides revenue of $55 million to $60 million, with adjusted EBITDA margin between break-even and 3% - Management expects H2 2026 revenue to be approximately 15% higher than H1 2026, which is a typical seasonal pattern for the company, and expects gross margin and profitability to expand sequentially in the second half - Full year 2026 revenue guidance is for high single-digit year-over-year growth, which is an upward revision from the low single-digit growth that management expected at the start of 2026

Segment performance

Total company Q2 2026 revenue was $55.3 million, growing 11.2% year-over-year. Product revenue grew 1% year-over-year, accounting for approximately 20% of total revenue (including outright capital expenditure system sales, consumables, and all-inclusive click (AIC) model hardware shipments). Services revenue increased 34.7% year-over-year, and when combined with annual recurring revenue (ARR) from software and long-term agreements, recurring and highly recurring revenue makes up approximately 80% of total company revenue. Annual recurring revenue reached $33.8 million, growing 79% year-over-year and 26% sequentially. AIC revenue increased 112% year-over-year and 32.7% sequentially, with total contracted value across all five-year AIC agreements reaching $142 million. Non-GAAP gross margin was 47.4%, an improvement of 110 basis points year-over-year, including an $830,000 net tariff benefit from a $2 million tariff refund. Non-GAAP operating expenses were $28.8 million, up $2.1 million year-over-year, driven by Connection Conference costs and $1.9 million in foreign exchange headwinds. Adjusted EBITDA was $0.3 million (0.6% margin), an improvement from a $1.2 million loss in Q2 2025, with margins expanding 290 basis points year-over-year. Operating cash flow was $8.5 million, marking the 11th consecutive quarter of positive operating cash flow.

Risks & headwinds

No specific material new risks or operational failures were discussed explicitly on the call. Management noted that forward-looking statements are subject to inherent unknown risks and uncertainties per U.S. securities regulations, and referenced ongoing foreign exchange headwinds that impacted operating expenses in Q2 2026. The overall apparel market was noted to have uneven performance, with weakness in some long-tail customer segments.

Analyst Q&A

• Q: What fundamental changes at Cornet Digital have driven the recent acceleration in growth and adoption, compared to a few years ago? /

  A: Management says the biggest change is the successful execution of the 2.5-year-old transformation strategy, shifting from a one-time capital equipment model to a recurring revenue model. Today 80% of revenue is recurring, providing far greater visibility and business resilience. The product portfolio has also transformed, with new high-volume systems like Apollo and Atlas Metrics that meet traditional screen printer needs, plus added software and AI capabilities that turn the business into a full manufacturing platform, rather than just an equipment seller. The addressable market has also expanded far beyond the niche custom apparel segment into the much larger bulk screen printing market.

• Q: Is the analog-to-digital transition driven mostly by new traditional screen printer customers, or by existing Cornet customers expanding? /

  A: Management says the transition is driven mainly by new customer penetration into the traditional screen printing market, though there is also growth from existing customers expanding into bulk apparel production. Multiple industry factors are accelerating this shift: screen printers face growing pressure for faster turnaround, shorter production runs, on-demand production, and labor cost savings, which digital technology delivers. The AIC model, which reduces upfront capital costs and delivers predictable per-impression pricing, has also accelerated adoption, with 60% of new systems now going to screen printer customers globally.

• Q: What is driving accelerating growth in trailing 12-month impressions across the installed base? /

  A: Management notes that overall apparel market demand is uneven, but digital production is growing much faster than analog overall because of the industry-wide shift to short-run and on-demand production. Growth is strongest in North America, and among large strategic screen printer customers, while there is softer performance in some long-tail customer segments. Management notes Cornet is gaining market share in the growing digital segment as traditional screen printers transition.

• Q: What share of new system shipments goes to traditional screen printers, and are these the majority of new customers? /

  A: Management confirms that 60% of all systems delivered in Q2 2026 and H1 2026 went to traditional screen printers, the majority of which are new Cornet Digital customers. This adoption is a global trend, with strong growth in the U.S., Europe, India, and other Asian manufacturing markets, all facing the same industry pressures driving the shift to digital.