Kornit Digital Ltd. :KRNT-US: Earnings Analysis: Q2, 2016 By the Numbers : August 5, 2016

Kornit Digital Ltd. reports financial results for the quarter ended June 30, 2016.

We analyze the earnings along side the following peers of Kornit Digital Ltd. – ARC Document Solutions, Inc. and Quad/Graphics, Inc. Class A (ARC-US and QUAD-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 23.95 million, Net Earnings of USD -0.13 million.
  • Gross margins widened from 47.09% to 48.81% compared to the same period last year, operating (EBITDA) margins now 2.97% from 7.17%.
  • Year-on-year change in operating cash flow of -684.38% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-06-30 2015-09-30 2015-12-31 2016-03-31 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 21.27 22.2 25.5 21.84 23.95
Revenue Growth (%YOY) N/A N/A 35.13 23.99 12.63
Earnings (mil) 0.72 2.14 2.07 -0.23 -0.13
Earnings Growth (%YOY) N/A N/A 72.95 -12.44 -117.69
Net Margin (%) 3.38 9.65 8.1 -1.04 -0.53
EPS 0.02 0.07 0.07 -0.01 -0
Return on Equity (%) 5.03 8.94 8.37 -0.9 -0.5
Return on Assets (%) 3.74 7.42 6.89 -0.74 -0.41

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Market Share Versus Profits

Revenues History
Earnings History

KRNT-US‘s change in revenue this period compared to the same period last year of 12.63% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that KRNT-US is holding onto its market share. Also, for comparison purposes, revenues changed by 9.70% and earnings by 43.81% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s earnings declined year-on-year largely because of the increases in operating costs. Its operating margins (EBITDA margins) went from 7.17% to 2.97%. This decline in earnings would have been worse except for the fact that the company showed improvement in gross margins, from 47.09% to 48.81%. For comparison, gross margins were 47.95% and EBITDA margins 1.67% in the immediate last period.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

KRNT-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 258.31, compared to last year’s level of 219.97 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

KRNT-US‘s change in operating cash flow of -684.38% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 5.05% to 0.52% and (2) one-time items that contributed to a decrease in pretax margins from 4.15% to 0.45%

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

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Company Profile

Kornit Digital Ltd. engages in the development, manufacture, and marketing of industrial and commercial printing solutions for the garment, apparel, and textile industries. It offers printing solutions for apparel, polyester, sportswear, beachwear, accessories, paradigm shirt, textiles, curtains, cushions, and couches. The company was founded by Ofer Ben-Zur in 2002 and is headquartered in Rosh HaAyin, Israel.

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