Kornit Digital Ltd. (NASDAQ:KRNT) Q3 2022 Earnings Conference Call November 9, 2022 8:30 AM ET
Company Participants
Andrew Backman – Global Head of Investor Relations
Ronen Samuel – Chief Executive Officer
Lauri Hanover – Incoming Chief Financial Officer
Amir Shaked-Mandel – Executive Vice President of Corporate Development
Conference Call Participants
Jim Suva – Citi
Jared Maymon – Berenberg
Tavy Rosner – Barclays
Brian Drab – William Blair
Chris Grenga – Needham
Chris Moore – CJS Securities
Greg Palm – Craig Hallum
Operator
Greetings and welcome to Kornit Digital’s Third Quarter 2022 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Andrew Backman, Global Head of Investor Relations for Kornit Digital. Mr. Backman, you may begin.
Andrew Backman
Thank you, operator. Good day, everyone and welcome to Kornit Digital’s third quarter 2022 earnings conference call. Joining me today are Chief Executive Officer, Ronen Samuel; Lauri Hanover, Kornit’s Incoming Chief Financial Officer; and Amir Shaked-Mandel, EVP of Corporate Development. Unfortunately, Alon Rozner, Kornit’s CFO will not be joining us today due to the passing of his sister [indiscernible]. On behalf of everyone here at Kornit, we would like to extend our condolences and support to Alon and his family.
For today’s call, Ronen will recap the results for the third quarter, discuss the current market environment, and review some of the actions we’re taking to help successfully navigate the current market dynamics. Lauri will then review the third quarter numbers and provide our fourth quarter outlook before we open it up for Q&A.
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 these events and activities, or developments that the company intends, expects, projects, believes or anticipates will 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. I encourage you to read the company’s filings with the Securities and Exchange Commission, including the company’s annual report on Form 20-F filed on March 30, 2022, which identifies specific risk factors that could 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, 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 release published today, which is posted on our website in the Investor Relations section.
At this time, I would like to now turn the call over to Ronen. Ronen?
Ronen Samuel
Thank you, Andy, and good day, everyone. I first want to echo Andy’s comments and extend our deepest sympathies and condolences from everyone here at Kornit to Alon and his family for the recent loss of his sister. We wish everyone in Alon’s family continued strength during this very difficult time.
As we reported this morning, third quarter revenues were 66.8 million, net of approximately 5.6 million of non-cash warrants impacts related to a global strategic account, exceeding the revenue guidance range we provided in August, which as a reminder assume zero impact from the fair value of issued warrants.
In the third quarter, consumable and services revenue grew nicely from the second quarter and year-over-year, due to the solid demand from our large strategic accounts as they gear up for the peak season, as well as the execution of a major fleet upgrade to Atlas MAX with a large strategic customer. We continue to receive excellent feedback for our MAX family of products from prospective customers and strategic accounts focusing on the excellent retail quality and superior total cost of ownership that these systems deliver.
Macro related headwinds such as inflation, general consumer sentiment and rising interest rates continue to impact our customers and prospects as they weight the impact on their projected pace of growth in the coming quarters. These macro pressures result in longer sales cycle, increased demand for bus financing options and an overall slowdown in new systems orders.
In Asia Pacific, we are facing the impact of a strong U.S. dollar, especially in Japan and Korea, and we continue to feel headwind in China, due to its zero COVID policy. The long-term opportunity ahead of us remain firmly intact and we continue to engage with large brands, retailers, major manufacturers, and e-commerce platforms focused on improving their operation, lowering inventory levels, and transforming the supply chain by shifting production volumes from mass offshore production to near show on demand sustainable production using Kornit’s digital solutions.
Since our inception, Kornit has demonstrated its ability to transform and revolutionize the fashion and textile industry with sustainable on-demand production solutions. We continue to hear the need for shorter runs and shift to near and onshore production models from fashion brands, retailers, and digital platforms. We see the industry gradually transitioning from analog to digital and are receiving very good interest in our Apollo, the most comprehensive digital single step solution with MAX quality and the lowest TCO targeting screen print mass production markets.
Despite the interest we’ve seen in our recent NPIs, as well as the pipeline of potential business with existing and new accounts globally, we expect systems revenue to remain challenging for the next several quarters, balanced by healthy and growing contribution from consumable and service revenues. As a reminder, consumable revenues are seasonally lower in the first half of each year, and traditionally build heading into our customer peak seasons.
We continue working closely with our global strategic accounts and their future global expansion plans and shift the delay system during this quarter. Based on recent joint planning discussions, we anticipate systems revenues from these accounts next year to start likely in the second quarter, and heading into the peak seasons.
Over the past several years, we build this business and our cost structure to be profitable at a materially higher revenue run rate. In July, we took decisive actions in our operation, including a reduction in workforce to adjust to the market environment and reduce costs.
Given our near-term view of the economics backdrop, and the impact on our business, we are taking additional steps to reduce the company cost structure, reallocating resources to emphasize areas with higher ROI, and further adjusting our go-to-market initiatives in order to return to sustainable profitable growth We are a resilient company with a proven business model, pristine balance sheet, and remain committed to our long-term vision and strategy.
Before I turn it over to Lauri, I would like to invite everyone to read our second annual impact report issued a couple of weeks ago in conjunction with our participation at the PRINTING United trade show in Las Vegas. We are very proud of our progress and our significant long-term objectives. And the report details the action we are taking as a company and reinforces our commitment to transforming fashion and textiles towards a responsible, efficient, low-waste, and eco-friendly industry.
With that, let me turn the call over to Lauri. Lauri?
Lauri Hanover
Thanks, Ronen, and good day to everyone. I’m happy to be joining you and stepping in for Alon for this earnings call. Third quarter revenues were 66.8 million, net of a 5.6 million non-cash warrant impact related to a global strategic account. We experienced solid demand for consumables from our key strategic accounts as they head into the peak season.
Service revenues grew sequentially and year-over-year, due in-part to a large North American customer who is completing the process of upgrading their entire fleet of Atlas to Atlas MAX. Lastly, system revenues rose sequentially and included delayed shipments of systems to our global strategic account.
As Ronen mentioned, sales cycles for systems in the regions are lengthening. While some customers wait for more certainty in the macro picture, others looking to buy systems are relying more heavily on financing, including extended payment terms. As such, we are currently exploring ways to assist qualified customers, obtain financing, and expand their businesses.
Moving to margins. Non-GAAP gross margin net of a 5-point warrants impact, was 35.6%, compared with 47.8% in the same period last year. The lower year-over-year gross margin was driven primarily by significantly lower system revenues on a fixed cost infrastructure, inventory write-offs for older generation systems, as well as the impact of the stronger U.S. dollar in the EMEA region.
Looking forward, we anticipate gross margins in the fourth quarter to sequentially increase driven by a higher proportion of consumables in the sales mix. Turning to expenses, total third quarter non-GAAP operating expenses were 36.7 million, down approximately 10% from 40.7 million in the second quarter. The sequential decline was due to reduced levels of marketing activities in addition to some benefit from the cost reduction and other expense management initiatives we took in the third quarter.
We currently expect operating expenses in the fourth quarter to be lower as we further realize improvements to the cost structure, offset in-part by expenses associated with the Printing United we attended in October. Non-GAAP operating loss was 13 million, net of the 5.6 million non-cash warrants impact, which was slightly better than our guidance for the quarter.
We ended the third quarter with 957 employees, a year-over-year increase of 108 and a decrease of 52 employees from the previous quarter. While the year-over-year increase mainly reflects the additions from the acquisition of Tesoma, the sequential decline reflects the reduction in force we initiated in July.
Non-GAAP net loss for the third quarter was 10.7 million or a loss of $0.21 per basic share, compared with non-GAAP net income of 11.5 million or $0.24 per diluted share in the same period last year. Our cash balance, including bank deposits and marketable securities at quarter-end was approximately 690 million with cash used in operations for the quarter of approximately 5 million.
As discussed on our last earnings call in August, our Board authorized a share repurchase program of up to 75 million, which as an Israeli-based company is subject to receipt of Israeli court approval. We have submitted our applications to the court and as a reminder, expect the court approval process to take several months.
We continue to believe that using a portion of the cash on our extremely strong balance sheet to repurchase shares is in the best interest of the company and our shareholders and that the share repurchase program will not impact our ability to execute on our growth initiatives.
Turning to fourth quarter guidance. We expect fourth quarter revenues to be between 66 million and 70 million. This outlook is consistent with what we provided on the third quarter earnings call in August. We expect to have a higher mix of consumable revenues, compared to the third quarter, which is typical for our business in the fourth quarter, due to our customers’ annual peak season.
We anticipate operating margins in the fourth quarter to be in the minus 6% to minus 10% range. I want to remind everyone that all guidance provided today assumes zero impact from the fair value of issued warrants to our global strategic account.
And with that, let me turn it back to Ronen.
Ronen Samuel
Thank you, Lauri. Now is the time to open the call for Q&A. Operator, please open the call.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Jim Suva with Citi. Please go ahead.
Jim Suva
Thank you very much. You mentioned that you’re taking some additional actions to reduce some costs. Can you help us understand about, kind of where those actions are? Because I believe now this is the second round this quarter or not this quarter, this year. So, if it’s the second round this year, we’re just kind of wondering and I guess the concern will be, how this affects your strategy of go to market, if anything or maybe it’s in some areas that we don’t see from the external people like myself? Thank you.
Ronen Samuel
Yes, Jim, thank you for your questions. Kornit business was built and the model that we built moving forward was built on higher revenue run rate. As we see right now, ending Q3 and seeing Q4 and projecting the next year, we need to adjust our cost structure. We did adjustment as you mentioned in July, some of it was reduction in workforce. The reduction that we are going to do right now is in specific projects that we are prioritizing them in a lower priority versus other projects.
So, first of all, we reprioritizing projects and we are putting the emphasis on projects that we have higher return on investment and those projects that will bring return on investment also in 2023. We are going to go also into some workforce reduction, but I’m expecting it to be lower than what we have done in July. On top of that, there is a massive focus on gross margin.
There’s a lot of initiatives there to reduce cost on the [indiscernible] materials, both on the hardware on supplies, on services, on spare parts that will contribute moving forward to our gross margin and it will impact the profitability of the companies. So, those are the main areas that we are focusing in terms of the OpEx. We are prioritizing things within project, within R&D.
We are prioritizing activities within marketing and sales and we are putting a lot of emphasis not to hurt the long-term projection of the company and the long-term strategy of the company. We believe in the long-term strategy of the company. We believe that this company will continue to be back into growth, into profitable growth.
Our responsibility right now is to focus and navigate the short terms and bringing the company as fast as possible to a profitable growth in order to accelerate the growth moving forward based on our strategy.
Jim Suva
Great. Thank you so much for the details. It’s greatly appreciated.
Andrew Backman
Thanks, Jim. Operator, next question please.
Operator
Your next question comes from Jared Maymon with Berenberg. Please go ahead.
Jared Maymon
Hey, good morning, guys. Thanks for taking the question. First of all, really sorry to hear the news on Alon. Alon, if you listen to the replay, please know that our thoughts and condolences are with you and your family. For Ronen, Lauri, and even Andy, just two questions. First one, could you give us an update on the adoption from brand customers for the Atlas, Presto, and Apollo? And then little bit more specifically on that Top 5 fashion brand. Is that customer going to be purchasing at, kind of high volumes or is it more one-offs for a specific product or single facility?
Ronen Samuel
Yes. So, regarding the brands, so first of all, I’m very encouraged with the progress we see on the engagement with the brands and the adoption of the brands of the Kornit technology and the adoption of the brands of KornitX. We see a lot of progress in many level of brands. And when I’m saying brands, I’m meaning top brands, retails, e-commerce, and also entertainment commerce that we believe that there is a massive potential to go with them.
We see some of them adopting our technology, the Atlas and the Presto. The main reason adopting our technology is because of the quality. With the MAX technology, we delivered different level of quality. Actually, we standardized now the quality in the market into the MAX technology, which received very, very well by the brands, by sensitive quality brands. And this give us a big edge and we bought the MAX technology not only to the Atlas body to the Presto, and later-on, we are bringing it also to the Apollo.
We are starting to get excellent feedback, both from brands and fulfillers regarding the Apollo and the potential to help them to move into onshore sustainable on-demand production. What we see from brands is that their interest is to move from offshore mass production into near shore and onshore on-demand production in a sustainable way while enabling endless capabilities. And by that, they have to use digital technology, they have to use Kornit because we are the only technology that’s bringing the level of quality that they are looking for.
So, as I mentioned, I’m very happy with the focus that we are seeing right now with the engagement with the brands.
Jared Maymon
Got it. Thanks Ronen. And then just as a follow-up, can – I guess kind of on the Apollo, can you guys give us an update on just the MPI timeline in general and then more specifically on the active load automation in the Apollo? I guess when do these release and then how much do you expect the, kind of initial splash with customers to be versus the original expectations?
Ronen Samuel
Yes. So, we’re getting, as I mentioned, excellent feedback both from our key customers, strategic customers, new prospects that are interested in the Apollo and also the brands and retailers. We actually demonstrated in the closed room a few weeks back in PRINTING United in Las Vegas to tens of customers, prospective customers, the Apollo and the overall feedback was incredible.
They are super, super excited about the productivity. The total cost of ownership, the automation that this machine requires only one operator to run 400 impression per hour. And of course, the quality, the MAX quality, which differentiate Kornit from all the rest. We already signed few better customers. Actually, I can tell you we have a line of customers that would like to be part of the better and would like to be part of [Technical Difficulty] introduction of the systems.
So, we are very, very happy with this engagement. Some of our key customers, strategic customers are building the future plans, based on the Apollo. So, we are now constructing already their future site based on their Apollo, so we are very encouraged not only going, selling the Apollo to existing customer for the enablement market of one-off, but we see a massive opportunity to sell these systems to the replacement market, replacing the screen market and for the first time, Kornit is bringing a quality that is better than the screen and with all the trends of moving onshore production, initial production, and shorter runs, Apollo is the perfect fit to replace screen for shorter runs in very high quality and in sustainable way.
So, we are very encouraged. Next year will be in terms of timeline, we are going to launch it around [indiscernible] timeframe. [Indiscernible] in June in Milan is a big show. We are going to introduce it there and launched the products. Next year, we are planning to sell and install dozens of those systems, but the scaling up of those systems will be in 2024 and we have big plans on 2024 with this system.
Jared Maymon
Thanks, Ronen. That’s all from me.
Andrew Backman
Thanks, Jared. Operator, next question please.
Operator
Our next question comes from Tavy Rosner with Barclays. Please go ahead.
Tavy Rosner
Hi, good afternoon. Thanks for taking my questions. I have two questions for Ronen, please. I guess, I wanted to get a sense of the level of demand you’re seeing across different end markets. So, you mentioned, your strategy customers [indiscernible] very, very sharply compared to that quarter and you talked about the strong pipeline with them. So, I guess I would want to focus with the other segments, but the e-commerce, the [indiscernible], what’s the pushback right now?
Is it really around timing of demand? And I guess my second one at the same time since it’s related. So, you’re talking about cost optimization. And every time I hear that cost optimization, I kind of worry that perhaps your last opportunity is about top line growth than we were before. And I guess, is that concern [warranted] [ph] by anything or I’m just being overly pessimistic right now? I guess when do you see these inflection point in terms of revenue growth or it’s just too [indiscernible] to talk about?
Ronen Samuel
Yes, Tavy, I’ll try to answer your question. I’m not sure I fully understand, it was difficult to hear exactly the question. So, first of all, I would say that the encouraging news that we start to see, we see a nice growth on the supplies on the ink side. And I always said that this is the most important numbers that we need to track is the growth or indicators that we need to track is the growth of the supplies.
As you remember, in Q1 and Q2, we were very worried because we saw some decline in some key customers and across the globe on the supply. And we were talking about overcapacity. What we start to see right now that with our key customers across the globe, we start to see growth on the inside, on the supplies.
In EMEA, we see very, very nice growth. In Asia, we see also nice growth. And in America, in our key customer, we see growth, including strong growth from our global strategic customer. So, this is excellent indicator. Of course, it’s too early to celebrate. We need to wait for the peak season. Peak season is just in front of us. And if the peak season will be strong as we started and I can tell you the initial indication are very, very nice from ordering of [ink] [ph], then we believe that it will open the market a bit more for investment in new equipment next year.
Right now, what we see is that the ink is growing, services is growing very nicely and the slowdown that we are facing is mainly on new system sales. And this is mainly due to the macroeconomics that customers are standing and waiting to see how the macroeconomic will evolve the interest rate, the inflation. We are helping customer with financing, but it’s very difficult today to get attractive financing from the banks.
So, many customers we see them are waiting. We believe that system sales will be challenged in the next few quarters because the macroeconomics as we see is going to be challenging in the first half of the year. However, longer-term, we believe that it will go back to normality and hopefully customers will start buying back systems as they used to do in the past.
What we expect in terms of next year, we see Q1 as [indiscernible] in terms of supplies business. As you know, we have seasonality. Q1 is the lowest one. We also expect that the systems level of Q1 will be very similar or a bit lower than what we expect in Q4. And regarding our global customer, we expect that they will start ordering new systems starting Q2. So, we will start slow next year, but we will start seeing the growth into Q2 and definitely H2 should be much stronger, both from supply services, but also from new products that we’re introducing will start influencing H2 of next year.
Tavy Rosner
Thank you, Ronen.
Andrew Backman
Thanks, Tavy. Operator, next question.
Operator
The next question comes from Brian Drab with William Blair. Please go ahead.
Brian Drab
Hi. Thanks for taking the questions. You talked about some good upgrade activity during the quarter. I know in the past talked about potential to upgrade somewhere around 75% of the existing Atlas fleet to Atlas MAX. Where are you now in terms of somewhere between 0% and 75%? And also what do you see in terms of upgrade activity going forward fourth quarter and into 2023?
Ronen Samuel
Great questions. I will not be able to provide you exactly the numbers, but I’ll give you the kind of the [indiscernible] that we are getting. First of all, we started a bit slow on the upgrades. As you remember, in Q1, we changed the configuration of the upgrades due to cost reductions that we were doing and we wanted to reduce the time of the update, but right now, we have a very, very nice space for update. This quarter, one of our key customer upgraded the entire fleet of Atlas’, a [few tens] [ph] of addresses into Atlas MAX.
After extensive test, they saw the increase in productivity of this upgrade and the increase of quality, of course, of the MAX quality and they are very, very pleased with that. We already have a few other key customers order for next year. We’ve done the testing and we are planning to do the [upgrade] [ph] starting from Q1 and some additional strategic customers that we are planning to start upgrading next year.
So, overall, the feedback are very, very positive and customers see the benefit of the cost, the benefit of the production, the productivity, and the benefit of the quality. What we are going to see will continue to see the growth on the service revenue, due to these upgrades into next year starting from Q1 onwards. We believe that we will be able to be in position to update the 75% of the installed base somewhere in the mid of 2024.
Brian Drab
Got it. Thanks. And then separately, you have active load automation upgrade that I guess will be ready in the first part of 2023? And is that opportunity significant and what are you hearing from customers in terms of interest in purchasing that upgrade?
Ronen Samuel
This is an interesting point because we have actually two type of kit, which we call [MSS] [ph] and the automation. We are very much focusing right now on the MSS, which enable customer actually with one pilot to run different types of application, different types of sizes of government. It’s very, very efficient solution and we see a lot of interest from customers are coming here to look at the MSS and testing it to install it in the entire fleet.
The intention is to release this MSS by end of Q1. So, we will start to see contribution in Q2 this year, next year. For the MSS, we believe that a vast majority of our customer will upgrade the system with the MSS. As for the automation, it’s still too early. This stage, we are evaluating again the solution. We are looking into cost reduction on the solution. We are working also on bringing the uptime of this solution to a different level.
We’re leveraging this solution already in the Apollo. The Apollo system will come with this automation from the first day. So, there is a big, big benefit as for taking this automation into the Atlases. We are still evaluating it and I don’t have an exact day when we will go to the market with this solution.
Brian Drab
Okay. Thank you.
Andrew Backman
Great. Thanks Brian. Operator, next question please?
Operator
The next question comes from Jim Ricchiuti with Needham. Please go ahead.
Chris Grenga
Hi, good morning. This is actually Chris Grenga on for Jim. Thanks for taking the questions. On gross margins, you had cited a few items that had contributed to the headwind there. How did those components contribute? What were the relative contributions of those components to the margin compression and could you expand on the nature of the inventory charge?
Ronen Samuel
Yes. So, regarding the gross margin, there were a few impacts to the gross margin when we compare it year-over-year. We’re trying to analyze it deeply and to get into all the details. First of all, it’s a volume. It’s a volume play and it’s a fixed cost. Once what we see the drop in gross margin is mainly related to systems. Actually, the in-gross margin looks good, and the service gross margin looks good. The issue is system and it relates the volume to fixed cost of volume. Of course, we are looking how we can reduce the fixed cost moving forward.
The other point is the impact of the currency, mainly in Europe, the strong dollar if you compare year-over-year, the impact of the strong dollar is something like 2.2% negative contribution to the gross margin. And of course, [Technical Difficulty] effect to the gross margin like bill of materials that went up versus last year, due to supply chain and other issues that we were facing during the COVID period.
There was another one-timer impact of write-offs. We write-off this quarter, few old systems that we are not planning to sell them, and potentially we expect similar write-off as well in Q4, we’re still evaluating the impact of it. So, those are the main impact on the gross margin. We expect in Q4 gross margin to be in a better place versus Q3, mainly due to the mix of supplies, strong supplies of Q4. And also, from a total mix, [indiscernible] system and supplies, we expect gross margin to be stronger.
We have very high focus on improving gross margin moving forward. And as you know, our long-term gross margin plan is above the 50% and getting closer to the 55%.
Chris Grenga
Got it. Very helpful. Thank you. One more if I may. You had mentioned potentially helping certain customers with financing. What could that look like? Could that potentially take the form of a lease or some, sort of charge based on usage? If you could just discuss that? Thank you.
Ronen Samuel
Yes. So, we are looking different model. I cannot get into the details here. I can tell you what we see in the market. Yes. Many customers are going back to their banks and they find it difficult to financing, to get financing. We see more and more customers that are requiring better payment terms, longer-term payment terms. In some cases, with strong customers, we are facilitating it. With some other cases, we are trying to help them to find financing outside.
Lauri, who joined us as the new CFO putting a lot of focus on this area. And we believe that in the next few weeks, we will have few interesting programs and solution in this space, which we will address to the market.
Chris Grenga
Got it. Thank you very much.
Andrew Backman
Thank you. Operator next question? Thanks, Chris.
Operator
The next question comes from Chris Moore with CJS Securities. Please go ahead.
Chris Moore
Right. Yes, maybe just a question on the expense tightening. I’m just trying to figure where does KornitX development fit in terms of some of these further costs? Has that impacted at all?
Ronen Samuel
Great question on KornitX. I was looking forward to getting a question on KornitX. Guys, KornitX is critical for our strategy for our future. We’re engaging with hundreds of brands, marketplaces, creator, influencers, they all love the idea of KornitX. This is what they are dreaming for. And right now, we are focusing very much to establish KornitX and the establishment of KornitX is building the GFN, the global fulfillment network all around the world, stabilizing the platform itself, and working with few major demand generator to scale their business like the [indiscernible] of the world, like the [indiscernible] and few others, big ones to scale it and to make it successful.
2023 will be the year, but we’ll take those few projects into a different level, and we believe that from that point, we will be able to scale this business to a totally different level. Right now, KornitX generates few millions of dollars still not meaningful enough, but we need to differentiate between the direct contribution of KornitX as a software. We generate few millions of dollars to the indirect revenue that it generates to Kornit by selling more systems, ink, and services.
I can tell you that there are many engagement with customers, fulfillers, and brands that decided to use Kornit and to buy Kornit system due to KornitX and they see a major potential and a major growth opportunity for them. We see today customers, fulfillers that’s using our system, and we are directing, routing jobs to them, enjoying from this business and going the business and investing more in Kornit systems and ink.
So, overall, we are very, very optimistic about the future of Kornit. This is part of our strategy. We will continue to invest. However, we are directing some of the budget with specific projects next year. We would like to be very, very focused next year to be successful there and then to scale it further.
Chris Moore
Perfect. I’ll leave it there. Thanks.
Andrew Backman
Thanks, Chris. Operator, we have time for one more question please.
Operator
Our last question comes from Mr. Greg Palm with Craig Hallum. Please go ahead.
Greg Palm
Yes, thanks for squeezing me in here. Just going back to Ronen, your comments last quarter around your global strategic, I think you mentioned shipping additional systems in Q4 and in Q1 in recognizing those systems I think in early 2023, it sounds like maybe that timeline has shifted a little bit. So, can you confirm that and I guess, interesting terms of visibility levels, has something worsened or maybe you just have more confidence around the exact timing of that given what you said today?
Ronen Samuel
Yes. So, first of all, I can say that again that the relationship with our global strategic account is very strategic and great relationship, very open. We just met them a few weeks back and we’re sitting on the plan for 2023 and even beyond that. They are very, very close in testing our future products and the business is going very, very nicely. So, we are working with them on the expansion plan.
As you saw in Q3, we delivered the systems that were delayed from Q2 and we mentioned that we will deliver them all in Q3 or in Q4, we deliver all of them in Q3. Current expectation that the next delivery of systems will be end of Q2 into Q3. So, we believe that we will start seeing revenue in Q2, Q3, and Q4 on new system from this account next year versus last year that it was mainly in Q1.
Greg Palm
Okay. That’s helpful. And outside of that, I’m just wondering if you can maybe just talk about your visibility levels? And if you had to rank some of these external factors being cost of financing, being macro pressures related to an underlying business versus just uncertainty, but what do you think, sort of ranks highest in the culprit of lengthening sales cycles, order push-outs, etcetera?
Ronen Samuel
In the capital equipment, when you say [indiscernible] capital, the 0.5 million and 1 million interest rate has a big impact. And we see the impact of the interest, the uncertainty, and the way we went through, you know what our customer were experiencing a year ago in the COVID, the boom of the e-commerce and then the normalization after the COVID make them a bit hesitant to understand how the end of the year will shape up.
So, it’s really, really important now to look at the peak season to see that the peak season is strong and this definitely will drive customers to continue to invest in additional systems. Of course, we are working to open new market segments, putting a lot of focus in the direct-to-fabric, the replacement markets, that [probably] [ph] all of those are new markets that we believe will contribute in 2023 and of course beyond that. So, I think it’s overall sentiment of uncertainty of instability and interest rate that they’re holding customer and they’re waiting for the peak season to see how it will shape up.
Greg Palm
Okay, fair enough. Best of luck going forward. Thanks.
Ronen Samuel
Thank you very much.
Andrew Backman
Thanks, Greg.
Operator
Mr. Backman, as we have no further questions, I’m going to be turning the call back over to you.
Andrew Backman
Great. Thank you, operator, and thank you all for joining us today. As always, should you have any additional follow-up questions, please feel free to reach out to me directly. Thank you all and have a great day. Operator, could you please close the call.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may all now disconnect.
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