Kornit Digital (KRNT) Q1 2019 Earnings Call Transcript

Kornit Digital (KRNT -3.12%)
Q1 2019 Earnings Call
May 13, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Kornit Digital Ltd. first-quarter 2019 earnings conference call. As a reminder, today's conference call is being recorded. After prepared remarks, we will provide instructions on how you will ask questions during today's question-and-answer session.

At this time, I'd like to turn the conference over to Tom Cook. Please go ahead, sir.

Tom Cook -- Investor Relations

Thank you, Dory. Good afternoon, everyone, and welcome to Kornit Digital's first-quarter 2019 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 accurate 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 26, 2019, which identify 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. A 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 investor relations 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 first-quarter 2019 earnings conference call. I will start today by providing a brief overview of our first-quarter performance, update you on our operational highlights and share key business updates as we continue to execute on our short and long-term goals. I will then hand the call over to Guy to cover our financials.

We are off to a strong start to 2019 with 22.6% year-over-year revenue growth fueled by the strongest ever quarterly revenues from system sales. Our first quarter of 2019 ended with revenues of $38.2 million, net of $1 million of warrants related to Amazon. Our performance was driven by growth across our product portfolio and customers as our mix continued to shift toward industrial and mass production system. This achievement is even more notable given the technical element associated with internalizing our distribution in North America that resulted in the absence of a normal quarterly replenishment order.

The effect of this was approximately $2 million to our consumable quarterly revenues and is onetime in nature. Kornit continues to benefit from favorable megatrends that pull industry demand for our innovative products and solutions. This was another strong quarter of system growth across our HD platform and adoption of our next-generation odorless fixation and Eco Rapid inks. We had remarkable new product introduction this quarter and we feel extremely encouraged with the level of interest and adoption.

Importantly, both new and existing customers were enthusiastic with the performance of our new product platforms. The newly launched Atlas, the best industrial DTG system on the market, was off to a strong start. This is evidenced by phenomenal feedback and a record-breaking number of orders received from a double-digit number of customers. Our order pipeline for the Atlas into the rest of the year and beyond is very strong.

And I will add anecdotally that in my long history of product introduction, this is one of the most successful I have ever experienced. In early April, we launched the revolutionary Avalanche Poly Pro in a series of open houses events across the experience centers globally. As we have discussed extensively, the Poly Pro solved an immense industry challenge and is a breakthrough achievement of our ongoing focus on removing industry barriers. This technology extends our addressable market and increases our footprint in lucrative segments such as sportswear and athleisure.

Through the first few weeks of availability, interest in the Poly Pro has been very strong. We have a growing pipeline of orders and we predict that the sales of this product will represent a material part of our revenues in the quarter to come. Several leading brands and private labels are testing this product and initial feedback is very positive as they recognize the immense possibilities. In mid-April, we announced the Kornit Presto, our next-generation product servicing primarily the on-demand direct-to-fabric market.

The environmentally friendly Presto eliminates the need to pre and post treatment of fabric and in combination with our new set of pigment inks, allows for high-quality printing on a broad variety of fabric types. Initial feedback to the product are very encouraging and we are confident in the pace of our pipeline buildup. We will officially unveil the solution in June at the highly anticipated ITMA event in Barcelona. We expect this product to add significant contribution already to our second quarter revenues.

We remain laser-focused on operational execution of our strategic business plan, as well as to scale our go-to-market. In North America, we successfully completed our transition to a direct business model. This transition has been well-received by customers and prospects. In the EMEA region, our business performance continues to be strong as we scale our organization and onboard industry talents.

On previous call, I highlighted the large potential we see in Asia Pacific region. Starting in Q4 of last year and continuing to Q1, we had made many changes and investment in this operation, including onboarding new leadership and talent across customer-facing functions. These actions led to another strong quarter in the region in Asia Pacific with more than double the regional sales volume compared to the prior year. We are very encouraged by the progress and expect to see material growth coming from this region in 2019.

Our continued investment in our customer service infrastructure and in implementation of our customer empowerment strategy is progressing on plan, and we experienced another strong quarter in our service business with over 50% year-over-year growth. Additionally, in the first quarter, we executed on plan to build and scale our aftermarket regional organizations. This important initiative is focused on improving the total customer experience and driving customer success. We anticipate that this will yield incremental recurring business in the quarter to come as it relates to upsell and cross-sell of consumable and value-added services.

Looking ahead to the upcoming quarter, we are engaged in large number of marketing roadshow events across North America, supporting our new product introductions. This allows customers and prospects that could not physically attend our open houses the ability to experience these great solutions at a closer proximity to their bases. In Europe, we will be attending this week the important FESPA Print Expo show in Munich. Next week, we will be attending the high profile CITPE show in China, the most influential event in the textile industry of that region.

Lastly and much anticipate, ITMA show will take place in Barcelona this June. As referenced on previous calls, ITMA is referred as the Summer Olympics of our industry and an opportunity to showcase innovation in the textile industry. We are planning to have a significant presence at the show and have confidence that it will have material impact on our business toward the second half of the year and into 2020. I am pleased we continue to add talents to our team across all functions.

The appointment of Steve Nigro as a strategic advisor to our company and to the board of directors is an example of a strong vote of confidence in our strategic growth plan. We are very excited Steve has come on board and he is making his presence felt already. We remain focused on executing on our short and long-term business plan to achieve our strategic goals of being a $500 million revenue run rate company by the end of 2023. We are very well-positioned for the balance of 2019 as we work to scale up our business, drive adoption of our new system introduction and execute on our strategic initiatives.

Guy will detail our outlook for the second quarter in a moment, but we expect our pipeline of new business with our strategic customers and new prospects to remain strong as we build on the momentum we achieved throughout the balance of the year. I want to thank all our customers and investors for the confidence and loyalty to Kornit and our global workforce for their dedication to our collective success. Now, I will turn the call over to Guy for a closer look to the number and our guidance.

Guy Avidan -- Chief Financial Officer

Thank you, 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 first quarter non-GAAP pro forma results reflect adjustment for the following items: Stock-based compensation expenses, which totaled $1.3 million; amortization expenses relating to the acquisition of intangible assets acquired in previous years in the amount of $108,000; taxes on income related to non-GAAP adjustment in the amount of $489,000; a noncash deferred tax benefit in the amount of $165,000; adjustment related to the acquisition of Hirsch's assets were noncash inventory adjustment of $1.6 million; amortization expenses related to the acquisition of intangible assets of $46,000; and acquisition and other cost of $85,000. We expect additional $1.2 million inventory adjustment in the second quarter, quarterly $78,000 for amortization of intangible assets acquired for the next quarters of 2019 and an additional total amortization of $0.6 million in the following five years.

As the company has significant operating lease liability in foreign currencies, the company incurred foreign exchange gains or losses from the reevaluation of these liabilities. These gains and losses may vary from period to period and do not reflect the true financial performance of the company. This quarter, foreign exchange losses associated with ASC 842 were $335,000. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website.

First-quarter revenue net of the $1 million warrant impact increased by 22.6% to $38.2 million versus $31.1 million in the prior year and increased 1% versus the prior quarter. Importantly, given the absence of the U.S. distribution replenishment order in the first quarter resulted from the termination of the Hirsch agreement, underlying volume was stronger than we expected, which resulted from strong introduction of new product as Ronen noted. These were very successful launches for the company and this was the most robust cost quarter in the company's history from a system sales perspective.

Services revenues from the first quarter were $6.2 million net of $0.4 million warrants impact, accounting for 16.1% of total revenues, an impressive increase of 41.1% from the prior year and 44.3% from the prior quarter. The amount attributed to the noncash impact of warrants in the first quarter was $1 million or 2.5% of revenues, $1.4 million or 3.7% of revenues in the previous quarter and $42,000 or 0.1% of revenues in the first quarter of 2018. The increase in warrants impact this quarter versus the previous year was mainly attributed to higher share price and higher revenues to Amazon. You can see the warrant impact this quarter versus prior quarter and the previous year on revenues and margins in Slide #18 and 19.

Additional information regarding the Amazon warrants agreement is available in Slide 20. By geography, 56% of our sales were from the Americas, 29% from Europe, the Middle East and Africa and 15% from the Asia Pacific region. As in previous quarters, the Americas remain our largest territory. Our Asia Pacific revenue in the first quarter showed impressive improvement of 103% year over year and 15% from the previous quarter.

As Ronen mentioned earlier in his remarks, the investment we made in the region started to pay back and we expect the momentum to continue throughout the year. Moving to customer concentration. Our main U.S. distributor in previous years contributed 0.2% to our overall revenues, compared to 18.3% in the prior year.

A major customer contributed 16.7% and a global customer contributed 6.7% of our overall revenues in the first quarter, compared to 7.3% in the previous year. Our top 10 customers accounted for 52.9% of our overall revenues, compared to 57.2% in the prior year. This points to our continuous customer diversification as Kornit continues to grow in scale. Moving to profitability.

Non-GAAP gross margin in the quarter decreased to 44.9% from 50% in the prior-year period and 48.8% in the fourth quarter of 2018. Lower margin this quarter versus the year-ago quarter were mainly the result of a nontypical system versus ink revenue mix and $1 million warrants impact. Direct product mix this quarter was a result of terminating the Hirsch distribution agreement and asset purchase mid-quarter that led us to the lower revenue from consumable in the U.S. Assuming similar product mix and warrant impact to what we observed in the first quarter of 2018, the non-GAAP gross margin would have been similar to that quarter.

We expect product mix to return to normal in the second quarter and, as a result, non-GAAP, without warrant impact, gross margin to exceed 50%. On a GAAP basis, gross margin were 40.1% versus 49.5% in the prior-year period and 48% in the fourth quarter of 2018. Again, as I just noted, this quarter's gross margin was impacted by a number of nonrecurring items and we expect our underlying gross margin to return to more normalized level, excluding any impact from warrants, in Q2 this year. Moving to our opex item.

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, including in today's press release. Adjusted research and development was 13.7% of sales or $5.2 million, compared to 16.4% of sales or $5.1 million in the prior-year. Sales and marketing expenses in the quarter were $6.8 million or 17.8% of sales, compared to $5.4 million or 17.3% in the prior year. Higher sales and marketing expenses were the result of extensive trade show and global launch event to our new product.

We expect our customer-facing and marketing headcount to continue to grow in the second quarter, as well as additional extraordinary ITMA costs of approximately $1 million. We plan to moderate the increase in spending in that regard in the second half of the year. General and administrative expenses in the first quarter were $3.5 million or 9.2% of sales, compared to $3.4 million or 10.8% in 2018. Headcount as of March 31 was 462 employees, 18 employees more than the previous quarter.

Most of the growth is related to customer-facing functions. During the last three quarters, we have accelerated our personnel growth to adjust our workforce to the changes in our go-to-market. As we have already mentioned, we expect to moderate personnel growth rate in the second half of the year. Non-GAAP net income for the first quarter was $1.2 million or $0.03 per diluted share, net of $0.03 warrant impact, a decrease of $0.9 million versus the year-ago quarter.

GAAP net loss was $1.6 million or minus $0.05 per share on a diluted basis, compared with net income of $0.6 million or $0.02 earnings per share for the year-ago quarter. Our non-GAAP financial income this quarter was $0.3 million. As a result of accrued interest of our cash investment, our GAAP financial income this quarter was $0. Cash balances, including loans and marketable securities, at quarter end were $124.3 million, compared to $98.2 million as of March 31, 2018.

The decrease in cash balances from $127.7 million in the previous quarter was mainly attributed to $4.7 million cash paid in connection with the acquisition of Hirsch assets. As discussed in previous quarter, to optimize the transition process to direct in U.S., we decided to advance the transition date and to buy Hirsch's relevant asset, including customer data and relationship backlog and inventory, in total gross amount of $4.7 million. The impact of the acquisition on our financial this quarter was noncash inventory adjustment of $1.6 million, amortization expenses related to the acquisition of intangible assets of $46,000 and acquisition and other cost of $85,000. We expect the impact on the second quarter financials to be $1.2 million inventory adjustment and $78,000 quarterly amortization of intangible assets during 2019 and additional accumulated amortization of $0.6 million in the following five years that will be adjusted in our non-GAAP pro forma results.

Naturally, forward-looking, we expect that going direct will increase our revenues, gross margin and, to a lesser account -- a lesser extent, sales and marketing expenses from Hirsch customers. Next, I'll discuss our adjusted EBITDA. For the first-quarter 2019, adjusted EBITDA was $3.5 million, compared to $2.5 million for the first quarter of 2018, an increase of the adjusted EBITDA of $1 million or 40.9%. Net cash provided from operating activities was $0.4 million this quarter, compared to $15.7 million net cash provided in the prior quarter and net cash provided from operating activities of $1.8 million in the year-ago quarter.

Turning to our guidance for the second quarter of 2019. We expect revenue to be in the range of $44 million to $48 million and non-GAAP operating income to be in the range of 8.5% of revenues to 12.5% of revenues. As has been our practice in the past, these numbers assume no impact of the fair value of issued warrants in the second quarter of 2019. As a reminder, the calculation of warrants per value is based on a combined effect of estimation of future revenue for Amazon, future Kornit share price in unknown date, future stock volatility, as well as other variables that currently are not predictable and some of which have no correlation to our business.

Since as of today, we're not able to predict these variables, we assume that warrant impact at zero value for guidance purposes only. I'll now transfer the call to Ronen.

Ronen Samuel -- Chief Executive Officer

Thank you, Guy. With that, we are ready to open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from Jim Suva with Citibank. Please go ahead.

Jim Suva -- Citi -- Analyst

Thank you very much. I have a couple of questions, but I'll start with one. The news talks a lot about the trade wars and the tariffs and sourcing and production and shipping of product. Can you help me remember? I believe my memory might be correct.

A lot of your products are actually assembled through EMS and companies in your consumables through non-China suppliers. Can you confirm if that's the case? And also, do we need to look into also like sub-sub components or some of your chips coming from China or metal casing, housing or plastics or anything like that? We're just trying to figure out the impact of tariffs on some of your procurement.

Guy Avidan -- Chief Financial Officer

Sure. Thanks, Jim. So we manufacture our printing system, as well as ink in Israel. They were examined several times by the U.S.

Customs. So they're Israeli and based on the U.S. Israeli custom freight. There is minor -- a fraction of a percent made out of Israel and -- but it's still considered to be made in Israel and custom freight.

Actually, the trade war, we're not saying it's a good thing, but it will definitely simulate the reshoring, which is a big driver for printing in the U.S. U.S. is our main market.

Jim Suva -- Citi -- Analyst

Great. And then as a follow-up maybe for your chief financial officer, the cash flow. If I do my numbers correctly, it looks like the cash flow from operations declined year over year a fair amount. Can you help us understand about the cash flow dynamics? Was last year boosted a little bit too much? Or this year, was it pulled down, whether it be purchasing or integration of acquisitions? Or how should we think about the change in cash flow from operations year over year?

Guy Avidan -- Chief Financial Officer

So first, we generate cash from operations this quarter, yes, less than we did last year. We had some increase in AR due to the growth in the business we did toward the end of the quarter. From an annual base perspective, we expect to generate cash this year, cash from operations.

Jim Suva -- Citi -- Analyst

OK. Thanks you very much for the details.

Guy Avidan -- Chief Financial Officer

Thank you.

Operator

And our next question will come from Tavy Rosner with Barclays. Please go ahead.

Tavy Rosner -- Barclays -- Analyst

Hi, thanks for taking the question. I was wondering if you could talk a little bit about Amazon. You mentioned that sales were up. But looking at the cost of warrants a year ago compared to this year, so they increased significantly but sales were not that high so -- I mean, in terms of growth.

So is there a timing issue in terms of revenue recognition from Amazon?

Guy Avidan -- Chief Financial Officer

Actually, if you try to do reverse based on the warrants impact, so warrant -- Q1 versus Q1, if you compare the warrants impact in 2018, it was $42,000. And if you do -- we mentioned the percentage was more than $2 million versus more than $3 million this quarter, the impact was $1 million. And basically, the main -- or the main reason for the increase in impact is due to the increase in share price. So it's not rev rec, it's share price, which is a good thing.

Tavy Rosner -- Barclays -- Analyst

So what was the growth from Amazon? Is there a way to go inside [inaudible]?

Guy Avidan -- Chief Financial Officer

Yes. You can look again at the script when we talk about customer concentration. So we mentioned a customer called global customer and we compared global customer in Q1 this year versus Q1 2018. This way, you can extract the revenue from this specific customer you ask about.

And the impact of the warrant we also mentioned this quarter was around $1 million versus $42,000 last year. And most of the increase in impact is due to the increase in share price year over year.

Tavy Rosner -- Barclays -- Analyst

Got it. And earlier this year, you mentioned the goal toward reaching $150 million in sales of [inaudible]. Where are you so far? And are you still on track to reach that goal?

Ronen Samuel -- Chief Executive Officer

Yes. We are on track to reach the goal of $500 million run rate of business in 2023. Yes, we are on track and we are confident that 2019 will be on track to reach this goal.

Tavy Rosner -- Barclays -- Analyst

And then maybe last one, if I may, a quick one. The product gross margin was down sequentially, also down compared to a year ago. Is that attributable to the onetime shift that you mentioned in your prepared remarks?

Guy Avidan -- Chief Financial Officer

Yes, definitely. So we mentioned that due to the termination of the distribution agreement, we missed the replenishment order, which is predominantly consumables. And we also mentioned strongly that second quarter, we go back to a normal rate. And we expect gross margin, without the impact of the warrants, to be about 50%.

Tavy Rosner -- Barclays -- Analyst

Thank you for the color, I'll get back to the queue.

Guy Avidan -- Chief Financial Officer

Thanks, Tavy.

Tavy Rosner -- Barclays -- Analyst

Thanks.

Operator

Our next question comes from Brian Drab with William Blair. Please go ahead.

Brian Drab -- William Blair and Company -- Analyst

Hi, thanks for taking my question. Just first on gross margin, which I think you're just touching on there, 45% non-GAAP in this quarter. And just trying to quantify this a little bit more precisely. You have the impact of the $2 million in consumables, I'm calculating that that's about a 400 basis point headwind or close to 400 basis points, and the warrant headwind.

So if you add all that back, you get 50.5%, getting close to 51%. And then you have the Poly Pro, which I will believe will be the highest margin printer that you'll -- that you've ever had in the mix. So as we move through 2019, could we see gross margin in the 51%, 52%, 53% range as you start to see the Poly Pro gain traction and we take these other one-time issues out of the picture?

Guy Avidan -- Chief Financial Officer

So your analysis is pretty good. The warrant impact was worth 39 basis points. Obviously, everything that we're doing, we're actually aiming to increase gross margin going direct, the product that you mentioned, but we're not guiding for gross margin.

Brian Drab -- William Blair and Company -- Analyst

OK. OK. And then on the operating expense, and it's confusing if I think about the operating expense in terms of percentage of sales because of the warrant issue and how that affects the denominator in that calculation. But if we just look at the non-GAAP operating expense in terms of dollars, and specifically the selling and marketing at $6.8 million, that was materially below what I was expecting.

And then research and development was actually a little bit below what I was expecting. It's down sequentially. So can you at least just comment on the trajectory of both of those line items in terms of non-GAAP dollars? And of course, we understand you've got a step up due to ITMA.

Guy Avidan -- Chief Financial Officer

Right. So we mentioned that we will continue to grow our go-to-market, customer-facing, etc. And as a result, sales and marketing expenses will continue to go up in the second quarter with additional bumps due to ITMA. In the second half of the year, we expect to moderate this growth.

We will see -- when we talked about 2019, we talked about some leverage that we will see from R&D and G&A, and we're still on track.

Brian Drab -- William Blair and Company -- Analyst

But Guy, can you say at all if the second half of the year, quarterly selling and marketing run rate would resemble what we just saw in the first quarter? Can you put a finer point on moderate?

Guy Avidan -- Chief Financial Officer

Moderate means that the growth rate in terms of quarter-over-quarter will go down. We will still -- in terms of dollars, the numbers will continue to grow in the third and fourth -- well, third quarter due to the -- after ITMA quarter will -- most probably will not go up. But on an ongoing basis, our sales and marketing will continue to grow.

Brian Drab -- William Blair and Company -- Analyst

OK. Sorry, just to be really clear on that, after ITMA in the second quarter, you would expect it to step back down somewhat in terms of dollars in the third and fourth?

Guy Avidan -- Chief Financial Officer

The third, right. The third quarter, right. Forward-looking, longer-term, so we -- there's a lot of opportunities ahead of us and we're investing in sales and marketing to seize these opportunities.

Brian Drab -- William Blair and Company -- Analyst

OK. But does R&D kind of stay at this run rate? Or where do you expect that to be in the second, third, fourth quarter relative to first quarter?

Guy Avidan -- Chief Financial Officer

As usual, we're not guiding for more than one quarter. As we said before, we expect R&D to grow slower than the growth of revenue and obviously slower than the growth of gross profit.

Brian Drab -- William Blair and Company -- Analyst

OK. Thanks. That's really helpful, congrats on a great quarter.

Guy Avidan -- Chief Financial Officer

Thanks. Thanks, Brian.

Operator

Our next come from -- Our next question comes from Jim Ricchiuti with -- with Need -- with Needham & Company.

Jim Ricchiuti -- Needham and Company -- Analyst

Good evening. And I know you're not giving guidance on the quarter, Guy, but -- or Ronen, if you could, is there any way to think about the second-half? Last year, as we looked at the way the year progressed, it was fairly linear. This year, clearly you have new products contributing more meaningfully. So should we think about the second-half showing a steeper ramp? And again, I am not trying to pin you down.

Just trying to think about how the new products could begin to contribute in the second-half.

Guy Avidan -- Chief Financial Officer

Well, Jim, we are just going to guide for Q2. I think we -- in previous call and this call, we gave enough color regarding our expectation. We're very optimistic about all the three products that we announced during the quarter, but we're not going to talk about numbers now.

Jim Ricchiuti -- Needham and Company -- Analyst

Wonder if we could dig a little more deeply into Atlas. I think in Q1 -- I'm sorry, in the Q4 call, you mentioned that you had, I believe, 10 customers for Atlas. This quarter, I think, Q1, I think you're talking about double-digit. Can you say whether many of the customers that you took orders from in Q1 were multiple unit customers? I'm trying to get a sense as to how dispersed, how well distributed the orders that you're seeing for Atlas are.

Ronen Samuel -- Chief Executive Officer

So we see the order from Atlas coming from existing customer but also from net new customer. Some of the existing customers, we are talking about multiple units, orders that are coming in. And of course, the existing customers, most of them starting with one unit and later on, the intention is to go ahead and processing more units. But if you're asking, yes, in Q1, there was one deal that was multiple units in one big account.

Jim Ricchiuti -- Needham and Company -- Analyst

Thank you, Ronen. And I know it's early -- still very early for Poly Pro, but can you talk a little bit about the market reception to that? And I'm also curious if you're seeing -- if you anticipate any cannibalization from the Avalanche product family from Poly Pro?

Ronen Samuel -- Chief Executive Officer

OK. So start with the second question. The Poly Pro is totally different products. It's based on the Avalanche platform, but has a totally different ink set, totally different process, totally different software and it's going for a different application.

So there is zero cannibalization between the Avalanche to the Poly Pro. What we -- going back to your first question, we're getting fantastic feedback on the Poly Pro in terms of the quality, durability, functionality of the print. We see net new customers that we never have been able to penetrate going after the Poly Pro. We see brands, major brands, the top brands of the world testing it, evaluating it and soon we'll get into a reproduction.

We see our biggest customers starting to add into their own portfolio of Avalanches and Atlases also the Poly Pro. So it's really big, big success. And as I mentioned, it will be a strong influence on our Q2 results and I believe moving forward for Kornit results overall.

Jim Ricchiuti -- Needham and Company -- Analyst

Thank you.

Operator

Our next question comes from Chris Moore with CJS Securities. 

Chris Moore -- CJS Securities -- Analyst

Hey, thanks, guys. Can you maybe just talk a little bit about the opportunity in Japan in terms of -- I know it's limited presence at this stage, but kind of your thoughts on that market and the opportunity there?

Ronen Samuel -- Chief Executive Officer

Yes. So I'll start with Asia Pacific. I have a lot of experience there working in Asia Pacific and, I believe, in this region. And in the last six months to eight months, we started to invest a lot.

We did major changes there in the organization. We invested in center of excellence, in marketing activities and we are starting to see great results. This quarter specifically, we really grew 100% year over year and we already saw also in Q4 a nice increase. We have a good very strong pipeline into Q2 and we believe that Q2 will be also a very strong quarter to Asia.

Within Asia, of course, there's a few markets that are very important for us and we are focusing on. Obviously, China is the biggest market and the biggest opportunity for Kornit. We are going after -- we have our own team there. We have our channel partners that we are working very closely.

Japan, of course, is the second biggest market for us in Asia Pacific. We have two channel partners that we are working very, very closely. We have a small team within Japan supporting the channel partner and supporting our customer on a daily basis. We see Japan as a potential growth engine for Asia Pacific and for overall Kornit and we are taking this market very seriously.

Chris Moore -- CJS Securities -- Analyst

Got it. That's helpful. And maybe just with respect to the Presto, is the competitive landscape that you were -- that you will see with that product, is that much different than Allegro or is it just the product itself is just that much more efficient and powerful compared to what you were?

Ronen Samuel -- Chief Executive Officer

So first, the product itself, these are major differences between this product to the Allegro product. It's two-and-a half-time more productive, the ink set is totally new ink set, the durability of the ink is much stronger, the quality is better and there's many more attributes to the overall solution. And the issue about competition and the market, so we are focusing with the Presto to go after the home decor. We believe the home decor market will go through the same transition as the direct-to-garment market went through.

We're starting to see a lot of customization, personalization and shows are coming to the home decor. And we believe we have the best pigment ink in the market and the home decor require pigment ink and therefore, we believe that our solution is the best fit for this market segment which is growing. And we intend to capture a major market share within this market segment.

Chris Moore -- CJS Securities -- Analyst

Got it. Very helpful. I'll jump back in line. Thanks, guys.

Operator

And our next question comes from Patrick Ho with Stifel. Please go ahead.

Patrick Ho -- Stifel Financial Corp -- Analyst

Thank you very much. Ronen, maybe as a follow-up to the question on Japan but Asia in general, are you seeing traction in Asia coming from one specific product or across your product portfolio?

Ronen Samuel -- Chief Executive Officer

It's a great question. You might think that in Asia, a customer will buy the entry-level products, the low end of our portfolio. Actually, what we are starting to see, both in China and Japan, rest of Asia, customers are buying both the Atlas, getting orders also for the Poly Pro and, of course, the Avalanche. So we see the trends moving more to the high end also in Asia.

Patrick Ho -- Stifel Financial Corp -- Analyst

Great. That's helpful. And maybe as my follow-up question, your services revenue had a really nice uptick, both on a quarter-to-quarter and year-over-year basis. Should we look at that as kind of the new run rate? Or will things kind of, I guess, normalize itself back into the $4 million plus range on a quarterly basis?

Guy Avidan -- Chief Financial Officer

Generally speaking, it's still going to be lumpy before it's really going to be a big business. For second quarter, we expect more or less same level of revenues from services.

Patrick Ho -- Stifel Financial Corp -- Analyst

OK. And then maybe as a final, just as a follow-up to that response. In terms of services, I understand some of the lumpiness that comes on a quarterly basis, what are some of the key longer-term growth drivers that will continue to drive services higher? Is it just simply growing the installed base? What other avenues are there that gets it to the $6 million or higher revenue level mark on a quarterly basis?

Ronen Samuel -- Chief Executive Officer

So we are changing the entire way we are approaching our service. We call it our customer empowerment program, starting with making sure that customers are in contracts versus time and material. So we see a growing attach rate of contracts to every sale that we are doing. We see conversion from customers that are on time and material into contracts.

And by that, you will see higher revenues coming to Kornit. Also, we are focusing on providing training, business development activities and upgrades to our installed base, which will also will flow revenue into the service business.

Patrick Ho -- Stifel Financial Corp -- Analyst

Great. Thanks so much, guys.

Operator

[Operator instructions] We will take our next question from Greg Palm with Craig-Hallum. Please go ahead.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

Hi, guys. This is actually Danny Eggerichs on for Greg today. Was just hoping you could -- the new customer events you've been doing have seem to be really good. I was just hoping you could kind of give us a feel on like new interest that you've seen from that or opportunities in the pipeline that you've seen resulting from those new events.

Ronen Samuel -- Chief Executive Officer

Yes. So the open house is an opportunity for customers to have a first look into the technology, to test the technology, to test it and to speak to the experts that are on the technology, both in the application side, on the R&D side and, of course, we have our service and sales team there. We see actually in the open houses that we have, both in the U.S. and Europe and Asia, a mix between net new to existing customers.

I would say roughly 70% of the audience are net new accounts that are coming there and 30% are existing customers that are coming and looking on new technologies that they would like to add to the current solutions that they have.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

OK. Great. That's really helpful. And then just the last one here.

Any update on any changes in the competitive landscape in general in Q1 here?

Ronen Samuel -- Chief Executive Officer

Not major updates. I would say, again, that our main competitor is in the DTG, the screen. In the screen market, 99% of the impression are still being printed on the screen market, on the analog, and this is what we need to go after. This is what we need to focus on, how can we convert those impressions into digital.

Within the digital market, in DTG, we are by far the market leader. And with the latest technology, we will continue to lead this market.

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

OK. Great. Thanks, guys.

Ronen Samuel -- Chief Executive Officer

Thanks.

Operator

And we will take a follow-up question from Jim Ricchiuti with Needham & Company. Please go ahead.

Jim Ricchiuti -- Needham and Company -- Analyst

I was just wondering -- thank you. I was just wondering if you can provide any early color on Atlas utilization? What are the consumable usage? I'm curious what you're seeing from the early customers that have been using the equipment.

Ronen Samuel -- Chief Executive Officer

Well, it's a bit early to talk about it, but a good indication is the announcement about DTG2Go that we are better sized. We tested the system and later also decided to add another 10 units. We can see a few more customers that bought the first unit and really less than one month later, two months later, decided to buy the second unit. We just posted a video on LinkedIn.

You can see a testimonial of a customer from U.K., T Shirt & Sons. He's talking about the latest Atlas that he acquired. He bought the first one. He was part of the beta.

And recently, they bought the second one. I think the best to hear from the customer. Just go to LinkedIn and look for it.

Jim Ricchiuti -- Needham and Company -- Analyst

OK. Thanks a lot. Congrats on the quarter.

Ronen Samuel -- Chief Executive Officer

Thanks, Jim.

Operator

And we will take another follow-up question from Brian Drab with William Blair. Please go ahead, sir.

Brian Drab -- William Blair and Company -- Analyst

I was just wondering if you could just comment a little bit further on opportunity with some of the larger brands? And do you have a sense for the -- whether the Poly Pro or the Atlas might be your first foot in the door with one of the big brands?

Ronen Samuel -- Chief Executive Officer

Yes. So thanks for that, Brian. So we have a few brands, I would say the leading brands of the world that currently are testing both the Poly Pro and the Atlas. We have great progress with few of them.

One of them is already in a pilot, live pilot in the market. The others are still in different stage of testing and evaluation of the system. We are getting great feedback. We are working with them very, very closely and it looks very promising.

Brian Drab -- William Blair and Company -- Analyst

And then, Guy, this is just to clarify for everyone, when you report percentage of revenue and we think we know -- if someone thinks they know which number applies to Amazon in terms of percentage of revenue in your slides, would that number be reported net of warrants, meaning that the warrant impact would be taken out of the numerator and denominator in that calculation?

Guy Avidan -- Chief Financial Officer

Yes, yes.

Brian Drab -- William Blair and Company -- Analyst

The answer to that is yes, right? I just want to make sure.

Guy Avidan -- Chief Financial Officer

Yes, the answer is yes. Yes.

Brian Drab -- William Blair and Company -- Analyst

OK. Because that's material. If the number was 7% of revenue, you're going to get a single-digit level of revenue, but warrants are -- you add back $1 million to that. So it's a significant --

Guy Avidan -- Chief Financial Officer

Exactly. Right. It is -- if you would like to know what the real number of business with Amazon this quarter, you actually have to take the global customer from customer concentration. You have a percentage.

Do the percentage from revenue net of impact and then add $1 million.

Brian Drab -- William Blair and Company -- Analyst

OK. Thanks for clarifying that.

Guy Avidan -- Chief Financial Officer

Thanks, Brian.

Operator

And it appears there are no further questions in the queue at this time. Mr. Samuel, I would like to turn the conference back to you for any additional or closing remarks.

Ronen Samuel -- Chief Executive Officer

So thank you for joining today's call and we appreciate your continued interest in Kornit. We are pleased with our continued success as we look to drive long-term shareholders' value. I want to thank all of our employees for their hard work and dedication through this exciting time for Kornit. I look forward for speaking with all of you on our second-quarter call.

Thank you very much.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Tom Cook -- Investor Relations

Ronen Samuel -- Chief Executive Officer

Guy Avidan -- Chief Financial Officer

Jim Suva -- Citi -- Analyst

Tavy Rosner -- Barclays -- Analyst

Brian Drab -- William Blair and Company -- Analyst

Jim Ricchiuti -- Needham and Company -- Analyst

Chris Moore -- CJS Securities -- Analyst

Patrick Ho -- Stifel Financial Corp -- Analyst

Danny Eggerichs -- Craig-Hallum Capital Group -- Analyst

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