CEO Gabi Seligsohn explains what is behind the collaboration, which boosted Kornit Digital’s secondary offering last week
Published in Globes on February 16, 2017
A single word spoken by the e-commerce giant Amazon expressing confidence in Israeli company Kornit Digital (Nasdaq:KRNT) solution is enough to help the Israeli company develop one of its growth engines. Amazon.com is becoming Kornit’s biggest customer, and is teaming with the Israeli company to revolutionize the textile industry.
With the help of this boost, Kornit has ended the drought in Israeli offerings on Wall Street. The company’s offering was designed mainly to enable private equity fund Fortissimo Capital to cash in on its investment in Kornit. Fortissimo sold shares for $90.8 million. Its remaining holdings are worth $164.1 million, making a total value of over $250 million on a $16 million investment.
Kornit, which raised $33 million in the offering, now has a $564 million market cap, 71% more than its value in the company’s IPO in April 2015, incidentally the last IPO in the US capital market by an Israeli technology company. Rather symbolically, Kornit’s secondary offering is opening the Israeli technology IPO season (watch out for Checkmarx).
In order to understand what lies behind the secondary offering and how Kornit hooked up with Amazon, it is necessary to understand what Kornit does. The company develops digital printers for wearable textiles (clothing) and textiles such as curtains and bedcovers.
The global textile market has a $1.1 trillion turnover, but is growing very slowly. The printed market, the one that is relevant to Kornit, has “only” a $165 billion turnover, i.e. 15% of the total market.
Printing on textiles currently uses analogue technology in two ways: silkscreen printing, or direct to garment (DTG) in professional jargon – direct printing on the clothing item or on a piece of cloth subsequently sewn on the item at the end of the process, and wide-format printing – roll to roll (R2R).
Analogue technology was used for 97% of the 32-33 billion sq.m. of textiles printed last year; only 870 million sq.m., 2.9% of the total was produced digitally. In other words, this market is nowhere near its potential, and a 17.5% annual growth rate is projected until 2021.
It is believed that digital printing has only a 5% penetration rate of this $165 billion market, amounting to $8-10 billion. In the even more specific case of Kornit, the perishable and non-perishable equipment market for digital printing on textiles has an annual $1.7 billion turnover and an average 20% annual growth rate.
There are two main problems in the analogue process. The first is the process of preparing and coloring the cloth (for example, a shirt), which takes several hours and therefore costs more. The second is that large quantities must be printed in order to justify the time and economic investment, which means that the customer who ordered the printing (i.e. some fashion chain) is in effect gambling that there will be demand for the item. When this gamble is shown to be a losing one (people do not like the item), the customer is stuck with inventory for which there is no demand, and the money spent on it goes to waste.
Kornit therefore always says that its overriding goal is to solve the textile industry’s inventory problem. How? Digital printing on one of Kornit’s machines takes less time, because it substantially shortens the preprinting process (preparation of the shirt, heat pressure, and drying). Kornit integrates the preprinting process in the printer, and its printer can therefore print hundreds of shirts an hour. This method enables Kornit to make small printings (supply and demand), and to reduce unnecessary inventory and industrial waste.
Where does Amazon.com enter the picture? What motivates Kornit’s market is mainly four consumer trends,” explains Gabi Seligsohn, CEO of Kornit since April 2014. “The first is the growing influence of social networks on clothing consumption. The second is the need by more and more people to express themselves through their clothing. The third is the need to obtain a product as quickly as possible, and the fourth is growing environmental awareness.” Seligsohn then proceeds to quantify these trends.
“In the first trend, 74% of consumers rely on the social networks in their shopping decisions. In the second, the fashion chains want a woman to see a dress on somebody and say, ‘I want that, too,’ but the woman wants to be the only one with the dress. In the third, in the US, the Amazon Prime service (a paid service that enables subscribers to receive deliveries on short notice, T.T.) has over 55 million subscribers, after the number doubled in two years. In other words, people are willing to pay more in order to get their package from Amazon more quickly.”
Seligsohn explains that these trends are turning clothing and footwear manufacturers, such as Nike and many others, into retail chains – and that is a significant change. “They’re getting closer to the end customer, especially those that don’t have their own stores, and market their wares through clothing and footwear departments in department stores. Take Nike ID, for example, Nike’s personally fitted shoe, as an example of the second trend. For a long time, Nike treated this product line as a loss leader – a product sold at a loss for marketing purposes. When Nike discovered that it could shorten its supply chain, among other things through digital printing, this product turned into a business with a $250 million turnover.”
Kornit is focusing now on printing shirts and t-shirts. Isn’t that a limited market?
Seligsohn: “That’s true, but first of all, it’s a very large market. Secondly, we’re entering the cut and sew market. For example, we took part in Heidi Klum’s successful Project Runway fashion reality program. The competitors had to design a bathing suit in 24 hours, i.e. design, cut, sew, and dress the model in 24 hours. They used our machines, and that created a buzz, because our machine makes it possible to print on almost any kind of cloth. Thirdly, we’re entering the personally fitted home design market, such as a living room sofa with prints that you select, not the sofa manufacturer or baby and children’s rooms designer.”
Some figures: as of 2015, the retail clothing market is growing at 1% a year. The e-commerce market is growing at 15% a year, and the clothing e-commerce market at 20% a year. Amazon’s clothing e-commerce market is growing 48% a year. Clothing is the fastest growing e-commerce segment, and Amazon’s growth in this segment is double that of the online market as a whole. That explains why Amazon is giving Kornit such a boost.
How did the cooperation begin?
“Amazon began working with us in late 2015, after acquiring a company named Woot, an online retail company focusing on personalized coffee mugs, shirts, smartphone protectors, etc. in mid-2010. Kornit had two machines in this company, which the company used occasionally.
“The big change began last September, when Amazon launched Merch by Amazon – a service in which merchandise of any brand can be produced and sold. Amazon aimed it mostly at creators of YouTube content – the kind that my son watches all the time. 60,000 such content producers have already signed up for the service, and Amazon isn’t accepting new subscribers now, because it can’t handle the load. Amazon needs our machines for such content producers, so it’s in effect becoming a printing contractor that in the future will be able to provide printing solutions not only to these individual content producers, but also to large companies.”
Under the agreement between the two companies, which became public knowledge three weeks ago, Amazon will buy Avalanche machines (one of three made by Kornit), ink, and other perishable materials from Kornit for up to $150 million over a five-year period – an average of $30 million a year, while Kornit’s revenue totaled $110 million last year. This makes Amazon Kornit’s biggest customer.
Avalanche is a DTG-based machine, mainly for short printing series. Vulcan is a machine designed for medium-to-long printing series, and Allegro is a machine mainly for printing home furniture, bathing suits, and fashion accessories.
Amazon also received an option to buy up to 2.9 million Kornit shares (8% of the company’s capital, fully diluted) at $13.03 per share, an average of 30 trading days before the announcement. In other words, Amazon wants part of Kornit’s success, in which it is, of course, playing a large role. This option will mature retroactively from May 2016, when Amazon began buying equipment from Kornit, and in packets. In other words, every time Amazon buys $5 million of equipment from Kornit, it can exercise 2.9% of its option. When its total purchases reach $75 million, it can exercise 3.7% of the option each time.
“No. They didn’t ask for it, and an absence of exclusivity was important for us. Kornit has over 1,000 customers, and some of them are becoming very significant for us. We’ll work with bigger customers in the future. Kornit’s freedom of action is therefore the most important thing for us. So we told Amazon, ‘No equity without independence,’ and it agreed. It wasn’t a case of ‘No agreement without equity.’ Everything was done in a friendly way. Still, Amazon won’t be able to buy our shares in regular trading. That was important for us, so that they wouldn’t take over the company.”
What do you mean by “bigger customers”?
“Up until now, Kornit’s growth wasn’t within the super brands or leading brands. We’re not there yet, but I believe we’ll get there, because a lot of brands are trying us out – sending samples of clothing products in order to test our solution. We have over 1,000 customers, and that’s a great deal of printing power that can also serve super brands. Such brands are often wary of imitations, and a printing on demand method can help them combat imitations.
“It’s true we won’t get to all the brands, but what I find cool in Kornit’s story is that the market size is virtually limitless, so the main problem on which I spend most of my time is the best way for us to continue penetrating the market.”
Seligsohn admits that he was surprised that Amazon asked for a stake in the company’s capital, but he has an explanation for it, saying, “When company’s on Amazon’s scale develop dependence on a specific technology, they demand part of the capital, because they realize that it can help their market value. In general, Amazon is playing a much bigger game than printing shirts. The company declared in the past that it wanted to be the biggest player in the clothing e-commerce market.
“It already has six of its own brands. You and I don’t know them, but Amazon is planning to use them to compete with the major clothing companies. The opportunity being created for us from this cooperation is therefore much bigger, and I hope that it will materialize. No one is promising me that it will happen.