Published in Globes on December 29, 2019
“It has been a crazy year and a half, very busy,” is how Israeli textile printing company Kornit Digital (Nasdaq: KRNT) CEO Ronen Samuel describes to “Globes” the time that has passed since he joined Kornit – initially in a handover period with the previous CEO, Gabi Seligsohn, and from August 2018 as CEO. Since then, Samuel has undergone two baptisms of fire on Wall Street: a secondary offering that went very well, and before that a negative recommendation from a well-known short player. In between, the company launched new products, expanded geographically, and expanded its workforce and its production capacity. Today, Samuel has no doubt: Kornit can become a billion dollar sales company.
Kornit produces digital printing systems for printing on textiles (both the printers and the ink). After a doubling of its share price in the past year, bringing it to peak levels, the company has a market cap of $1.4 billion.
Shortly after Samuel took up his post, he set an aggressive goal for the company: annual sales of $500 million by the end of 2023, which compares with $142 million in 2018. “I’m so optimistic that I think we’ll reach the target even earlier than that,” he says. “The target is based on us taking a 2% share of a market consisting of fifteen billion printings annually (mainly on shirts and trousers). We’re accelerating very rapidly.”
This acceleration, Samuel says, is based on the launch of new products with new applications and bringing new customers, such as the Poly Pro, which took Kornit into the fast growing field of printing on polyester. In addition, he says, the company expanded its activity in Asia and Europe, and switched to direct management in the US. Another factor is the company’s entry into the brands market, among them Adidas, for example, and Samuel stresses: “All the major brands use our technology, whether through direct purchases of systems or through third parties.”
The background is the rapid revolution, as Samuel terms it, that the fashion and textiles market is undergoing. “Today, everyone emphasizes the transition from a polluting world to a world that’s a little greener – instead of pouring waste into rivers and producing quantities of garbage of cotton and garments that are thrown away, companies are producing on demand, sustainably,” he says. “Kornit found itself in an ideal position, in which it offers fashion and textiles industry players the possibility of producing on-demand when they receive orders, and not according to forecasts, in a sustainable way, without waste or water. Our systems create no pollution. Even at the level of VOC (volatile organic compounds – S. H-V.) we want to reach a level of zero emissions. We’re not there yet, but we’re close.”
Still, when I order clothes on the Internet and they come from overseas, transporting them causes pollution and is not sustainable, so how does that work out?
“That’s true, but when you buy clothes in Israel at a Zara store or at an Israeli chain, the garment is made overseas. But at least in the US we are seeing a switch from manufacturing in China to the US, or to Mexico, which is close to it, and Zara in Europe is starting to manufacture in Europe or in nearby places such as North Africa.”
The transition to the on-demand market also stems from the desire on the part of customers to wear clothes that express their personalities, with slogans, colors and shapes that they choose. “The acceleration at our customers is crazy,” says Samuel, “Amazon, Fanatics and others are growing at a rate we never dreamed of, and are buying dozens of machines each. They’re using these machines around the clock and opening up more sites. When we talk about the coming year and they give us production forecasts, we see a strong year ahead of us.”
To meet the demand, Kornit has started working with another production partner besides Flextronics – Sanmina, and it is looking for a third production site as well. “We take pride in the fact that Kornit is a manufacturing company, and apart from technology we make Israeli products. We also generate jobs, not only directly but also at suppliers such as Flextronics, which provide employment to many Israeli families, and we’re very proud of that.”
Kornit’s main market is DTG – direct-to-garment printing on finished products such as shirts and trousers. This is a market of fifteen billion printings a year, of which digital printing currently accounts for just 1%, and it is growing at a rapid rate. “In the end, the entire market will switch to digital, but it will take many years,” Samuel says. Although digital currently represents only 1% of the market, Kornit estimates that it alone will be able to take a 2% share of the market as a whole by 2023, hence its optimistic forecasts.
In addition to the DTG market, Kornit is also entering the direct to fabric (DTF) market (curtains and sofas, for example). “Without getting into numbers, the fourth quarter will be very strong in this market,” says Samuel. “It’s a giant market, and there, also, to the digital market is very small, and we’re very small players who are entering it only now. The advantage of our pigment ink is so important, however, that we believe that we’ll get a large market share. We also want to build automation, and we’ve developed a very special capability by putting an element into our system that makes it possible to cut the cloth digitally, without a cutting machine, using a chemical we put into the ink itself. This is a revolution in the DTF segment.”
As part of its expansion, Kornit is building a new ink production plant in Kiryat Gat at an investment of NIS 62 million. The plant, which is scheduled to open in mid-2020, will triple Kornit’s output. The company is also planning on non-organic expansion through acquisitions. Kornit raised $137 million in June in a secondary offering on Nasdaq, and this money is also designated for acquisitions. “We researched it thoroughly, and found two areas for acquisition. The first is work flow – everything outside of the machine and the ink, which are the core. The solutions that will enable brands to connect to the consumers, and print what they want and where they want,” Samuel says. He cites Nike as an example, which enables consumers to buy the products in stores through its website.
What happens, however, if a consumer from China wants to buy a Nike shirt manufactured a decade ago, such as a Michael Jordan shirt from a specific Olympic Games?
“Nike has the design, but they don’t know how to manufacture and to lead quickly to the consumer, and that’s where we come in,” Samuel says. “The consumer will make the order, the printing will be done on location at the printer, and he or she will get the order within 24 hours. The work-flow solutions control the entire process, from receiving the order to transferring it to the printer and delivery, including feedback from the customer. What the brands are really afraid of is that Amazon and ecommerce companies will take control, and they will lose control with the consumer. They want to work with the end-consumer.”
Another area for a potential acquisition is solutions around the machine, such as dryers, automation solutions, quality control, and so forth.
As of now, Kornit provides customers with both products and services, such as repairs and such. At this stage, the services are not profitable and are a burden on the profit line. Samuel, however, expects to reach break-even in this activity late next year, which will push gross profit above 50%. He expects the services to contribute to profit.
“We doubled the market cap, and the sky’s the limit”
Samuel, a former air force pilot, was a senior officeholder at HP-Indigo before joining Kornit. In the last 13 years at Indigo, he was overseas, first in Asia and later in Europe. In Asia, the division he managed multiplied its sales ten-fold within eight years. Can Kornit do the same thing? “That’s a good question,” he says. “I think that there’s no reason why Kornit shouldn’t reach $1 billion in sales in the next ten years, simply no reason at all. I entered the company when it was close to $150 million, and it can certainly reach $1 billion and more. Incidentally, we’re doubled our market cap, and the sky’s the limit for this -the investors will determine it.”
How was it coming back to Israel after 13 years?
“Very easy, both for me and my family. It was easy for me because I immediately dived into work 24/7, but also for my family, because we have family, friends, warmth, and many advantages here in Israel. There’s a lot of accomplishment here in Israel, a lot of technology, and it’s a pleasure to be in an environment where you meet more people and you can learn a lot. The experience of living abroad and working in an international company is very constructive. It opens your mind to other cultures, and helps you realize that Israel is important, but not always the center of the universe. It makes your outlook much more balanced and global. When Kornit’s board of directors decided to hire me, they chose me because they realized that Kornit was on the verge of a breakthrough, and they were looking for someone who could build something scalable. The previous CEOs did excellent work. Gabi brought the company to its IPO, built many processes, designed the technology, and the board of directors looked for someone who could take the company and bring it to $1 billion and more. I come from the outlook of US corporations – scalability and globality. I’ve been exposed to the US market. I also bring a lot of enthusiasm, energy, and a very clear direction in the first six months – $500 million sales, and how to get there.
There is a difference between managing a division in a company and being CEO of a public company.
“A very big difference. The last business I managed was nearly $700 million, much larger in scope, but as CEO, you have broader responsibility: development, production, engineering, and all of the sales functions, of course. Before, I had less exposure to strategy and innovation. These are new regions. Beyond that, there are additional circles: dealing with the board of directors, investors, analysts, the capital market and Nasdaq, which was completely new to me. Gabi was very helpful to me in entering this world in which he navigated, and I feel very comfortable in it now. The same is true of working with the board of directors, headed by Yuval Cohen, who gives us full support. In the end, you feel it on your shoulders. I go to sleep with pains in my shoulders, because there’s a lot of pressure and responsibility, hundreds of decisions to make every day, and everyone’s looking at you: the employees, the suppliers, and the investors who put in their money because they believe in you and the company. Most of the decisions are made in state of uncertainty, and the trick is that when you make a wrong decision, to correct it very quickly, and not to be afraid of making decisions. Everyone makes mistakes.”
Yuval Cohen, the chairman mentioned by Samuel, remained in his position even though the fund that he heads, Fortissimo Capital, which was one of the first investors in Kornit, last year sold its remaining shares in the company at a respectable profit. “I don’t think he’ll leave soon,” predicts Samuel. “He meets with Kornit with a smile, and feels somewhere that it’s his baby that’s alone now. He brings a lot of value to the company from his experience.”
You spoke about correcting wrong decisions. Can you cite an example?
“We went to market with a new product, and decided at the last minute to change the ink chemistry, when we didn’t have enough time to test the chemistry. We went to market with the understanding that the product had a great many advantages. Only after the customers began using it did they spot both the advantages and the drawbacks. We had to change the chemistry. We stayed in the laboratory day and night, investment a lot of resources, money, and trouble to make changes with the customers themselves. We eventually succeeded in coming up with a different chemistry that solved the problems, but it was a difficult and risky decision. In retrospect, had we known, we would have waited a little longer in the laboratories and come out with a more mature product. But there’s always a dilemma in going to market with the maturity of the product, because you don’t want to get to the market late.”
Samuel says that he brought to Kornit the culture of inquiry and debriefing that he absorbed from the air force. “I was a pilot for 10 years. I brought a work method unique to the air force of openness to inquiry and debriefing. It’s acceptable here to say everything. I attend a lot of discussions, and people tell me, ‘We don’t agree with you’ – I don’t object; on the contrary. There’s readiness to investigate every event and every quarter.”
In view of the expected growth, what is the likelihood that a private equity fund will make an acquisition offer for Kornit that will be hard to refuse?
“We’re not planning on selling. That’s not what we want. We’re planning on growing and increasing production in Israel. We’re very proud that we’re an Israeli company that isn’t making an exit or seeking to be sold to a US or Chinese company. We want to be a large Israeli company with $1 billion in sales, employing thousands of families, revolutionizing the textile market, and contributing to the entire universe. We take the second largest pollutant in the world after oil, and help make it environmentally friendly. We believe in this, and the world will follow, because there’s no choice.
The short player and the arguments about options for Amazon: “We can’t manage the market. We believe in accelerated growth.”
Six months ago, Kornit held a secondary offering on Nasdaq, “An enjoyable and interesting event with very hard work,” says Samuel. Demand was strong and the discount minimal. Investors in the offering have already attained a 24% return. “It was an experience to meeting in two days the world’s biggest and most sophisticated investors. We had 30 minutes with each investor to tell the story, and with each one of them, we saw how their eyes suddenly opened, questions were asked, and an order was placed within minutes,” Samuel says.
A month before that, you got a very negative recommendation from a short player, Ben Axler from Spruce Point Capital Management, who argued that the company’s performance was not sustainable. Did the investors in the offering express concern?
“They asked a lot of questions about the short player, but we believe in what we’re doing, and not a single one of them wrote that it caused any doubt – only a nervous chuckle, because it’s simply nonsense. As far as I’m concerned, it’s criminal, but I can’t judge. We can’t manage the capital market; we manage the company, and believe in its accelerated growth, which makes it good for investors to invest in Kornit.”
One of the arguments used by the short player concerned Amazon’s options. When Kornit and Amazon signed an agreement in 2017, Amazon was granted five-year options to buy up to 8% of Kornit, with the rate of exercise depending on the rate at which Kornit’s products are purchased. “You have to look at it like options for employees. We grant options to employees worth $0, and for Amazon, it as $13 then, and it can rise or fall according to the share. The idea was to show that Amazon was committed to the company, but these options confuse the investors every time reports are published. The experienced investors already understand, and disregard the effect, but others are liable to think that we missed forecasts, and that didn’t happen,” Samuel explains, adding that the change in the accounting standard in the coming quarter will result in the options having an effect only on non-GAAP profit, not on revenue.
