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Kornit Digital (NASDAQ:KRNT)
Q3 2018 Earnings Conference Call
Nov. 12, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to Kornit Digital Ltd. third-quarter 2018 earnings conference call. As a reminder, today's conference call is being recorded.

After prepared remarks, we'll provide instructions to conduct the question and answer. At this time, I'd like to turn the conference over to Tom Cook. Please go ahead, sir.

Tom Cook -- Investor Relations

Thank you, James. Good afternoon, everyone, and welcome to Kornit Digital's third-quarter 2018 earnings conference call. 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 objectives, plans, strategies, statements of preliminary or projected results of operations or our financial condition and all statements that address activities, events or developments that the company intends, expects, projects, believes or anticipates will or may occur in the future. Forward-looking statements are subject to known and unknown risks and uncertainties and are based potentially on inaccurate assumptions that could cause results to differ materially from those expected or implied by the forward-looking statements. The company's actual results could differ materially from those anticipated for many reasons, and 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 March 20, 2018, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this call hereof, and the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, 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 press release published today, which is posted on the company's investigation's site. On the call today, we have Ronen Samuel, Kornit's chief executive officer; and Guy Avidan, Kornit's chief financial officer. At this time, I would now like to turn the call over to Ronen.

Ronen?

Ronen Samuel -- Chief Executive Officer

Thank you, Tom. Good evening, and thank you for joining our third-quarter 2018 earnings conference call. I would like to begin today with providing a brief overview of our third-quarter results, followed by an update on our go-to-market activities, business development and incremental progress toward our strategic goals. I will then pass the call to Guy to cover our financials.

I'm pleased to report a strong results in the third quarter, highlighted by a 32.1% increase in sales to $37.6 million, net of $1.7 million of warrants related to Amazon. Higher growth in the period reflect higher demand across our product categories of industrial system ink and services. We continue to enjoy strong demand for our HD line of products, which feature higher print quality at a lower cost per print; and to date, we have secured orders for more than 200 systems and upgrades for this important product. Our gross margin was another highlight of the quarter, which came at 51.1%.

This was an excellent result after consideration of the 206 basis points drag margin from warrants in the current period. After consideration of the effect of the warrant, I'm pleased to report that our underlying gross margin is a quarterly record for Kornit. Turning to our operating profitability. Our non-GAAP operating profit more than tripled to $4.9 million from $1.6 million in the previous year.

Higher profitability stream from combination of revenue growth, strong gross margin performance and leverage on operating expenses from higher sales. OpEx of $14.3 million in the quarter was within the range we previously disclosed of $50 million plus or minus $1 million per quarter, and we continue to expect this range in the fourth quarter. It was also been a very active period for trade shows, which in total included more than 12 shows across the DTG and roll-to-roll markets in all of our key geographies of North America, Europe and Asia. Additionally, just after the close of the quarter, we participated in one of our key events of the year, SGIA in Las Vegas.

Our HD technology generated a lot of buzz around the event, leading to a substantial pipeline of new leads and LOIs for at least 25 new machines. In early October, we hosted Kornit Investor Day, along with the grand opening of our North America headquarter in New Jersey. During the event, we unveiled the goal of our strategic plan, which includes becoming a $500 million run rate company at the end of five years with expanding gross margins, while maintaining sustained profitable growth. As we noted during the event, we have identified four catalysts that will drive our business expansion effort, that includes removing market barriers for new customer; maximizing system utilization for existing customers; expanding our services and support business; and developing key adjacent markets.

The strength of our year-to-date performance in 2018 and business momentum headed into year-end position us well to make continued progress toward this goal. The market environment is supportive of our growth plan, and we continue to observe the shift in the retail supply chain from long-run screen prints to shorter runs, quick turnaround times and tighter inventory control, which is exactly where Kornit is able to provide value. We believe Kornit is the right company to provide technology solutions to facilitate the demand-driven changes in the retail supply chain. As part of this strategy, we are working to add headcounts in customer-facing function to seize the market opportunity across geographies, with a refined go-to-market by region.

In North America, we are seeing accelerating demand for our products, which we attribute to the strategic changes we have made to improve our sales efforts, align incentive compensation with our business goals and develop a stronger, regional presence with the recent opened North American headquarter and showroom in New Jersey. In EMEA, we are currently experiencing a solid demand, driven by higher adoption rates of high-end industrial systems. This is an important regional development as our EMEA business has traditionally been in our lower throughput system, and is now transitioned to higher throughput system as we have seen in North America. In Asia Pacific, we view this region as an important future growth area for us, and we are sharpening our focus to increase resources and enhance go-to-market strategy.

We have also been very busy with new product development. And during the quarter, we began beta testing on a new mass production system with customers and the feedbacks has been very positive. We expect beta testing to conclude by the end of the calendar year with general availability in early 2019. This new platform combined with our solution for dark poly product that was introduced at our investor day with expected availability in the mid of 2019, are both important development in the year ahead.

To conclude, three quarters of the way through 2018, things are shaping up for record year for Kornit. Our revenue growth is accelerating and the market is responding to the value proposition of Kornit solution. In the fourth quarter, and as Guy will detail in our guidance, we expect a strong finish to the year that looks similar to our third quarter performance, but with a notable shift in mix to ink and consumable as our customer execute to their holiday plans. Now I would like to turn the call over to Guy for a closer look at the number and our guidance.

Guy Avidan -- Chief Financial Officer

Thanks, Ronen, and good evening, everyone. Before beginning the financial overview, I would like to remind you that the following discussion will include GAAP financial measures as well as non-GAAP pro forma results. Our third quarter non-GAAP pro forma results reflect adjustments for the following guidance: Stock-based compensation expenses which totaled $1.5 million, amortization expenses relating to acquisition of intangible assets in previous years in the amount of $266,000, taxes on income related to non-GAAP adjustment in the amount of minus $105,000 and $55,000 for restructuring costs. A full reconciliation of our results on GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website.

Third quarter non-GAAP revenue, net of the $1.7 million warrants impact increased by 32.1% to $37.6 million versus $28.4 million in the prior year and increased 4.8% versus the prior quarter. Revenues grew to record level this quarter, thanks to successful launch of the HD product in the U.S. and in Europe as well as fruitful continuation of system deployment with one of our major global customers. Services revenue for the third quarter were $4.2 million, accounting for 11.3% of total revenues, an increase of 35.7% from the prior year and an increase of 11.9% from the prior quarter.

The amount attributed to noncash impact of warrants in the third quarter was $1.7 million or 4.2% of revenue versus $1.5 million in the previous quarter and $0.1 million or 0.5% of revenue in the third quarter of 2017. The increase in warrants impact this quarter versus the previous year was attributed to higher revenues to Amazon as well as higher share price this quarter. You can see the warrants impact this quarter versus the prior quarter and the previous year on revenues and margins in Slide No. 14.

By geography, 59% of our sales were from the Americas; 32% from Europe, the Middle East and Africa; and 9% from the Asia Pacific region. Moving to customer concentration. Our main U.S. distributor contributed 17.7% of our overall revenues compared to 29.4% in the prior year period, and a major customer contributed 19.8% of our overall revenues of global business this quarter compared to 8.8% in the previous year.

Our top 10 customers accounted for 60.2% of our overall revenue compared to 67.1% in the previous year. Moving to profitability. Non-GAAP gross margin in the quarter decreased to 51.1% from 52% in the prior year period, an increase from 49.2% in the previous quarter. Lower margin this quarter versus the year ago quarter were the result of 181 basis point net increase in the impact of the noncash warrants.

On a GAAP basis, gross margin were 50.3% versus 51.3% in the prior year period and 48.6% in the previous quarter. Warrants impact on non-GAAP gross margin were 206 basis points this quarter versus 25 basis points in the prior year period and 203 basis point in the prior -- previous quarter. Moving to our OpEx items. I'll discuss these items on a non-GAAP basis, which exclude nonoperating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation included in today's press release.

Adjusted research and development was 12.8% of sales or $4.8 million compared to 19.6% of sales or $5.6 million in the prior year. The decrease in R&D expenses primarily reflect a temporary decrease in headcount and materials for development. Sales and marketing expenses in the quarter were $5.9 million or 15.7% of sales compared to $4.8 million or 16.8% in the prior year. Higher sales and marketing expenses versus the prior year was the result of the expanded sales and marketing group in the U.S.

General and administrative expenses in the third quarter were $3.6 million or 9.6% of sales compared to $2.9 million or 10.1% in 2017. Higher G&A in the quarter resulted predominantly from headcount additions and expenses related to the CEO transition. Headcount as of September 30 was 432 employees, 20 employees more than the previous quarter. The increase in headcount is mainly attributed to customer support and sales and marketing in Europe and in North America.

As we have mentioned on previous calls and on the Investor Day early October, we are accelerating our investment in go-to-market and in customer-facing personnels. Forward-looking, we are planning to continue building our go-to-market infrastructure in order to take advantage of the expanded market opportunity we see evolving. In the fourth quarter, we expect similar growth in headcount. Non-GAAP operating income for the third quarter was $4.9 million, an increase of $3.3 million versus the year ago quarter.

Warrants impact on non-GAAP operating margin were 367 basis points this quarter versus 49 basis points in the prior year and 364 basis points in the previous quarter. Non-GAAP net income for the third quarter was $4.8 million or $0.13 per diluted share, an increase of $3.3 million versus the year ago quarter. GAAP net income was $3.1 million or $0.09 per share on a diluted basis compared with net loss of $124,000 or $0.00 per share for the year ago quarter. Warrants impact on non-GAAP net margin was 368 basis point this quarter versus 50 basis point in the prior year and 363 basis point in the previous quarter.

Our financial income this quarter was $264,000, predominantly as the result of accrued interest of our cash investment. Cash balances, including deposit and long-term marketable securities at quarter end were $110.9 million compared to $86.5 million at -- as of September 30, 2017. Net cash provided from operating activities was $11 million this quarter compared to $4.9 million net cash provided in the prior quarter and cash used in operating activities of $2.8 million in the year ago quarter. Cash provided from operation was mainly a result of profit, net of depreciation and amortization and decrease in trade receivables.

As mentioned in previous call, we are planning to build a new ink plant. For this purpose, we expect to use $3 million in investment activities till year-end. Turning to our guidance for the fourth quarter of 2018. We expect revenues to be in the range of $37 million to $39 million and non-GAAP operating income to be in the range of 10% of revenues to 14% of revenues.

This number assume no impact of the fair value of issued warrants in the fourth quarter of 2018. As a reminder, the calculation of warrants fair value is based on the combination -- on the combined effect of estimation of future revenues from Amazon, future Kornit share price in unknown base, future stock volatility as well as other variable that currently are not predictable and some of which have no correlation to our business. Since as of today, we are not able to predict these variables. We assume the warrants impact at zero value for guidance purposes only.

I'll now transfer the call to Ronen.

Ronen Samuel -- Chief Executive Officer

Thank you, Guy. And with that, operator, we'd be happy to take any questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] We'll take our first question today from Jim Suva with Citi.

Jim Suva -- Citi -- Analyst

Thank you very much. On your guidance for the December quarter, can you talk a little bit about when you exclude the warrants, it kind of implies that actually your guidance is going to be slightly down in the December quarter. And so how should we think about that versus the quarter that you just printed?

Guy Avidan -- Chief Financial Officer

Just to remind you, Jim, last quarter, we said that we expect the second half, we expect the two quarters, the third and the first to be more or less the same. So we guided for the third quarter, $36 million to $39 million. We're a little bit higher if you look at the mid range of the guidance right now, and that's the way we would like you guys to look at the guidance.

Jim Suva -- Citi -- Analyst

OK. And then my follow-up. I think, you mentioned you're building a new ink factory. How should we think about how to model CapEx going forward and the timing of that ink factory? And when it comes onto the burden margins a little bit or does it help margins or take a couple of quarters to get dialed in for the configurations of the ink?

Guy Avidan -- Chief Financial Officer

So we mentioned that we already start to invest, and we expect to see $3 million in terms of investment till the end of 2018. We mentioned before that we expect the total investment to vary between $17 million to $18 million. We're going to open this facility second half of 2020. So the majority of the investment will actually happen in 2019.

And in the next call, we'll discuss that in more details. On the long run, this site should take us 20 years ahead, and obviously will reduce our cost of goods sold for the ink. But obviously, at 2020, it might be lumpy in a quarter or two, so we might see a few hands of basis point related to ink in terms of growth, we are actually shifting from lease expenses to depreciation expenses in the term.

Jim Suva -- Citi -- Analyst

Thank you so much for the clarification. That's great. I appreciate it.

Guy Avidan -- Chief Financial Officer

You're welcome.

Operator

Next, we'll hear from Peter Zdebski with Barclays.

Peter Zdebski -- Barclays -- Analyst

Hi, thank you for taking my question. Under -- at the investor day last month, you had mentioned that you were working on a few projects with major brands, targeting the branded and the private-label markets. Are you able to talk anymore about traction there and any update on that?

Ronen Samuel -- Chief Executive Officer

Yes. So there's a good progress in one of the biggest brand. We just installed our mass production system there for evaluation. And the evaluation will take few months and hopefully, it will be successful.

It looks great at this stage. And we hope to scale the business during 2019.

Peter Zdebski -- Barclays -- Analyst

Thank you. And so the new mass production technology, that's directly related to that new opportunity or at least the big part of it?

Ronen Samuel -- Chief Executive Officer

Correct. It's related to that as well.

Peter Zdebski -- Barclays -- Analyst

Thank you.

Operator

We'll now hear from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi, thank you. You gave some color on the revenue mix for Q4. I was just wondering if you have any visibility looking out into the early part of 2019 on the systems demand side from some of your largest customers?

Guy Avidan -- Chief Financial Officer

Jim, usually, we discuss only the coming quarter. We feel very good about the fourth quarter. We have very solid pipeline and very good demand as Ronen mentioned in the call. We have orders for more than 280 systems and upgrade, and it give us a lot of confidence forward looking, even for next year.

But as mentioned, we're not discussing 2019 right now.

Jim Ricchiuti -- Needham & Company -- Analyst

OK. And on your R&D line, looks like it was -- I apologize, I don't have the data right in front of me, down quarter on quarter and year on year, is that right?

Guy Avidan -- Chief Financial Officer

Right, correct. And we said -- I mean, we had -- yes, it is partially due to we always have some kind of seasonality in R&D, when we we're starting beta sites, so we're actually shifting R&D systems to inventory beta. So we have less raw material -- we have less material in R&D. Specifically this quarter, we had some reduction in force that we expect to bounce back in the fourth quarter.

So these two reason actually caused R&D in Q3 to be lower than R&D costs in the second quarter.

Jim Ricchiuti -- Needham & Company -- Analyst

And expected to pick up again in Q4? OK.

Guy Avidan -- Chief Financial Officer

Yes, yes.

Jim Ricchiuti -- Needham & Company -- Analyst

And then trade show activity is fairly modest in the December quarter, is that right?

Ronen Samuel -- Chief Executive Officer

We have our biggest show. Next year, we have two big show, one is in January and the other one in May next year. In January, we are planning to unveil a new mass production system and it's a very important show for us.

Jim Ricchiuti -- Needham & Company -- Analyst

And last question from me, and I'll jump back in the queue. Just given the new product pipeline, do you anticipate any pushback from customers who may decide to hold of on purchasing equipment until they see some of their newer products?

Ronen Samuel -- Chief Executive Officer

No. For the strategic customer, the big customer, we have very, very, very close relationship and they are aware of what is coming. This system is targeted for specific customers, the big ones and the midsize customer, the Avalanche platform is the right fit for them.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. Thanks very much.

Ronen Samuel -- Chief Executive Officer

Thank you.

Operator

Brian Drab with William Blair has our next question.

Brian Drab -- William Blair & Company -- Analyst

Thanks for taking my questions and congratulations. I just want to clarify given -- I think, it's worth a little more clarity, again I asked the same question in the second quarter call. I think that the data aggregators are picking up. I think EPS estimates or EPS results and revenue results that aren't really directly comparable to what the consensus estimates were.

So I mean, Guy, would you consider the revenue figure that's most comparable to your $36 million to $39 million guidance and most comparable to the consensus estimate to be the $39.3 million warrant adjusted figure?

Guy Avidan -- Chief Financial Officer

Yes.

Brian Drab -- William Blair & Company -- Analyst

Yes. And would you consider the EPS result most comparable to the $0.11 consensus estimate to be the $0.19 warrant adjusted figure?

Guy Avidan -- Chief Financial Officer

Yes. Just to do the math, I mean, just for everybody to understand what you did, you actually took the revenue net of warrants impact at $37.6 million, you added the $1.7 million, and this way you got the $39.3 million. And you added $0.06 to the $0.13, and that way you got the $0.19 EPS.

Brian Drab -- William Blair & Company -- Analyst

OK. Thanks for clarifying that. And then excluding the warrants, it looks like operating margin was 16%, 17% -- you have 17% on the slide, I guess 16.7% is what I'm calculating, and as you look at the fourth quarter...

Guy Avidan -- Chief Financial Officer

Correct.

Brian Drab -- William Blair & Company -- Analyst

And -- thanks -- but the fourth quarter versus the third quarter, it looks like you're forecasting 10% to 14%, which would be below that. I'm just thinking about that, given you had all the trade shows in the third quarter, you typically get the strong consumables in the fourth quarter. I know in an earlier answer in this Q&A session, you said that R&D would be up slightly, but it still seems like a pretty significant downtick in operating income or operating margin in the fourth quarter. Could you talk about that?

Guy Avidan -- Chief Financial Officer

Yes. So we discussed -- in previous calls, we discussed product mix, and by now you know that we expect more ink and consumable in the fourth quarter. Therefore, we expect a little or slightly higher gross margin. And if you do the same math you did with EPS and operating profit, you'll see that this quarter on a gross number, it's above 53%.

So we expect a little bit better. That said, we mentioned before that we had additional 20 employees in the third quarter, and we said that we expect to continue hire more employees in the fourth quarter, more or less the same number. So large portion of the 20 employees actually started at the back end of the quarter. So you don't really see the expenses.

So we -- at year end, let's say, versus mid year, we expect around 40 employees more, which is just shy of 10%. So that's the reason we expect higher OpEx. So we expect the higher OpEx to offset the growth in gross margin and bring us to the range of 10% to 14%.

Brian Drab -- William Blair & Company -- Analyst

OK. Thanks. That helps. And those 40 people that are being added, I guess, those are primarily in selling and marketing?

Guy Avidan -- Chief Financial Officer

Right. Customer-facing, selling, marketing and customer support.

Brian Drab -- William Blair & Company -- Analyst

OK. Got it. And I don't know if, Ronen, you could give any more of an update just on progress you're having with the large brands. And at the analyst day, you had some exciting comments around hopefully some announcements, mid-year next year, how is that progressing? And maybe you could talk about some of the gating items and getting to those announcements.

Ronen Samuel -- Chief Executive Officer

So in general, there's a lot of interest from different brands. They're all looking for solution to connect to the consumer. And this year, Kornit has great partners to work with. We are working in parallel with few brands.

And as I mentioned before, we started a big project pilot with one of the biggest brands. We installed a beta system of our new mass production press, and this project will run for few months, and if it will be successful and hopefully it will be successful, it will scale to a big size.

Brian Drab -- William Blair & Company -- Analyst

OK. Thanks very much. Congrats again.

Ronen Samuel -- Chief Executive Officer

Thanks, Brian.

Guy Avidan -- Chief Financial Officer

Thank you.

Operator

Next, we'll hear from Patrick Ho with Stifel.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much and congrats on a nice quarter. Ronen, could you give a little bit more color on the traction to date with HD? You mentioned 200 orders, which is a great validation of the product. Two-part question. First, are they right now coming primarily from upgrade and existing customers who are moving to HD or are you also seeing a bunch of new customers? And the second question is, with those 200 orders that you've mentioned, what's kind of the road map in terms of revenue recognition, I guess, visibility you have, is it over the next six months that those 200 orders get, I guess, placed or is this something more into 2019?

Ronen Samuel -- Chief Executive Officer

OK. So we are getting great feedback from customer using the HD. They see major value in terms of screen quality, the handfeel, and of course, the overall cost per print. We -- the 200 system and upgrades, of course, mix of system and upgrades, and we are not disclosing what is the percentage between the system and upgrade.

But there is -- I can say, there's a big demand for new system and the installed base see the value to upgrade the system to the HD. Then in terms of -- what was the last question, the final one, can you repeat it?

Patrick Ho -- Stifel Financial Corp. -- Analyst

Yes. The visibility or the road map of these orders turning into revenues, is this kind of a six-month thing or is this well into 2019 where you've got a bit of run room?

Ronen Samuel -- Chief Executive Officer

So the 200 orders, some of them, we already recognized during the Q3 and even the Q2 when we release the product. Some of them will be recognized in Q4 and in Q1.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. And I guess, my final question for Guy. In terms of the operating model, there's a lot of moving pieces right now, gross margins going up because of the change in the product mix, you're adding on more headcount. As we look at 2019, is it fair to look at gross margins continuing to rise as 2019 progresses and maybe more on the qualitative basis, whereas headcount adjustments could keep OpEx also elevated and offsetting some of the gross margin there?

Guy Avidan -- Chief Financial Officer

So generally speaking, and again, we're not talking about 2019 specifically, but we're aiming to improve our gross margin, introducing higher throughput machines, more mission-critical machines that obviously will carry higher gross margin, and obviously introducing new type of inks that will carry higher gross margin as well. So the plan is to continue to grow our gross margin. At the same time, we also mentioned that we accelerate our go-to-market investments. So all in all, and again not talking about 2019, we're still and I'll repeat what Ronen said before, we're still very much on the plan for five years, $500 million, and growing gross margin and operating margin at the same time.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. Thank you very much.

Guy Avidan -- Chief Financial Officer

Thanks, Patrick.

Operator

[Operator instructions] We'll hear from Greg Palm with Craig-Hallum Capital Group.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yes, thanks. A nice quarter and congrats on the progress here.

Ronen Samuel -- Chief Executive Officer

Congrats to you, Greg.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

I guess, I'm curious, we're talking a lot about new products here. So how material can they be to revenue next year? I'm not asking you necessarily to quantify things, but can you just help us characterize it a little bit from a timing standpoint, if you could?

Ronen Samuel -- Chief Executive Officer

Yes, it's very much material for 2019. The new mass production system will be released in the Q1. We expect to get revenue already in Q1 of multiple systems and we expect it to accelerate during 2019. On top, we discussed during the investor event about the dark poly solutions that we are bringing to the market.

And this solution, as we discussed, will be ready during the second quarter of 2019, which mean we will start to recognize units in the second quarter and accelerate in the second half of 2019.

Guy Avidan -- Chief Financial Officer

Greg, just to add. You saw in 2018, we launched the HD and ISS, and we expect similar success with the mass production system. And regarding dark poly, it's going to be longer -- a little bit longer, but huge addressable market for us.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yes. And I guess, that's what I was getting at is I think the HD was a little bit different sales cycle than some of the past introductions in terms of how quick that was a contributor. It sounds like you're also expecting, at least, similar type of sale cycles at least initially for some of the new product lines in terms of being major contributors next year, if I'm understanding there correctly.

Ronen Samuel -- Chief Executive Officer

Correct. And this is on top, of course, of the HD that will continue to grow during 2019.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Got it. And as it relates to the HD, can you help us characterize what inning we are in at least in the upgrade opportunity for the Avalanche and how are you viewing that similar opportunities for the Storm?

Guy Avidan -- Chief Financial Officer

For '20 in terms, can you repeat the question, can you clarify it again?

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Yes. So I'm just trying to figure out. In terms of the upgrade opportunity, where are we in terms of -- I used the baseball analogy, what inning. But percent of maybe available customers that have -- you've already recognized revenue on the upgrade.

I'm just trying to get a sense for how much is left here as we go into 2019.

Guy Avidan -- Chief Financial Officer

We can actually split it to products. So we're in the game when it comes to Avalanche, when it comes to Storm upgrades. We're in first inning. So there's a lot of -- still lot of opportunities for upgrade and Storm HD.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

OK. Fair enough. Last one for me, Asia was sort of a weak spot, it sort of been like that the year. Is it macro? Is it competition? Maybe you can kind of give us an update on some of your near-term initiatives over there.

Ronen Samuel -- Chief Executive Officer

No. I think that in the last one year, we put a lot of focus on North America -- sorry, North America organization and also on EMEA organization, and we saw the growth coming from there. It's about time now to put more focus on the Asia Pacific, specifically I lived in Asia for 8 years, I know the potential. There's a huge potential there.

Now is the time for us to accelerate in Asia. As I mentioned, we are hiring additional salespeople and service people in Asia and we anticipate major growth in the Asia Pacific during 2019.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

So would you attribute the -- I guess, the weakness in that region this year more to do with the lack of the company's focus rather than whether it's competitive reasons or macro or overall market weakness, is that fair to say?

Ronen Samuel -- Chief Executive Officer

I would say that this is the company priorities. We put priorities, first of all, on North America and EMEA, and now it's about time to expand also to Asia.

Greg Palm -- Craig-Hallum Capital Group -- Analyst

OK. Great. I'll leave it there. Good luck.

Thanks.

Ronen Samuel -- Chief Executive Officer

Thank you.

Guy Avidan -- Chief Financial Officer

Thank you.

Operator

Our next question comes from Chris Moore with CJS Securities.

Chris Moore -- CJS Securities -- Analyst

Hey, good afternoon. Thanks, guys. Just a quick question on the services side. So in terms of kind of the ability to turn the corner to profitability there, is it a mix issue or is there kind of certain level that you need to get to from revenues to make that happen and maybe just talk to that a little bit?

Guy Avidan -- Chief Financial Officer

Again, we decided to invest more in improving SLA, improving level of services, and therefore we will grow. And then you saw very nice growth in terms of revenues from services. So we will continue to grow revenues, but the profitability will not come in the coming few quarters. And for us, it's a matter of adding more people and building more infrastructure, to be able to provide better support, better SLA.

In terms of years, probably going to come at the end of 2019, 2020.

Chris Moore -- CJS Securities -- Analyst

Got it. I appreciate it. Thanks, guys.

Operator

That will conclude today's question-and-answer session. I will now turn the call over to Ronen Samuel for any additional or closing remarks.

Ronen Samuel -- Chief Executive Officer

So thank you for everyone for joining today call. And we appreciate your continuing interest in Kornit. I want to thank all of our employees for their hard work and dedication through this exciting time at Kornit. I look forward to speaking with all of you on our fourth call -- fourth quarter call.

Thank you very much.

Operator

Operator signoff]

Duration: 45 minutes

Call Participants:

Tom Cook -- Investor Relations

Ronen Samuel -- Chief Executive Officer

Guy Avidan -- Chief Financial Officer

Jim Suva -- Citi -- Analyst

Peter Zdebski -- Barclays -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Brian Drab -- William Blair & Company -- Analyst

Patrick Ho -- Stifel Financial Corp. -- Analyst

Greg Palm -- Craig-Hallum Capital Group -- Analyst

Chris Moore -- CJS Securities -- Analyst

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