Kornit Digital (KRNT), which is an Israel-based supplier of digital printing systems for the apparel/textile industries, is ticking higher this morning after the company reported Q1 results last night. Non-GAAP EPS was cut in half yr/yr to $0.03 while revenue rose 22.8% yr/yr to $38.2 mln. The EPS result was a bit light of expectations while revenue saw slight upside, so in summary, the quarter was relatively mixed overall.
Non-GAAP operating margin, a metric that's closely watched with Kornit Digital, slipped a bit to 4.2% from 5.5% in the prior year period. Contextualizing that margin dip, the company cited "a higher impact from warrants during the period and the shift in revenue mix derived by record quarterly revenues from system and service and the one-time impact of approximately $2 mln distribution replenishment ink revenues due to completion timing of the transition to a direct business model in North America" for contributing to the lower result.
The good thing here, and why apparently the market is giving KRNT a pass, is that the reasons for the margin decline appear to be from accounting issues (warrants/transitioning to direct model) and a bit of a revenue mix shift. In other words, it's not some big drop off in demand or pricing pressures for its core products. In fact, CEO Ronan Samuel went on to say that KRNT "kicked off 2019 with an excellent start.... [It] experienced continued business momentum with [its] HD platforms and the roll-out of [its] odorless Eco Rapid consumables."
Quickly turning to the guidance, on the call, KRNT guided to Q2 revenue of $44-48 mln, which was above market expectations and, just as importantly, KRNT guided to Q2 non-GAAP operating margin of 8.5-12.5%, which would present, as you can see, a big sequential improvement from 4.2% in Q1.
Excitement about certain new products coming up through the company's pipeline have helped the stock make a strong move during the past few months. Specifically, investors are excited about its NeoPoly technology, which allows for digital printing on polyester. Polyester has always been a difficult fabric with which to properly work digital printing. However, it now seems that KRNT has solved the problem, and the company has described this as a game-changer because polyester is the second largest category in the T-shirt market. Kornit Avalanche Poly Pro is the first system using this NeoPoly technology. KRNT expects that this product could have a material impact on revenue, starting in Q2.
In sum, most times when a company misses on the EPS line and there was margin compression, the stock would be down. However, it seems with KRNT today that investors understand that the miss was not related to demand. Investors also have to be impressed with the Q2 guidance for both revenue and non-GAAP operating margin as it seems KRNT will post some nice sequential growth in the next quarter. Also, the commentary about new products making a meaningful impact starting in Q2 is helping as well.