Published in Globes on August 18, 2015
Kornit Digital (Nasdaq: KRNT) CEO Gabi Seligsohn has a rather simple, rapid, and accessible way of figuring out how effective his company’s solution is, the need for it, and whether it is catching on. He simply looks at his 16 year-old son, Itamar, who orders his t-shirts on the Internet, and gets them delivered within a few days.
“My son is very connected to the Internet, and like quite a few kids his age, he loves wearing special t-shirts,” Seligsohn says. There is no doubt that teenagers like Seligsohn Jr. dictate the latest trends, but it is rather unusual to find a CEO whose company is so in tune with the consumer preferences of his children.
In fact, what Kornit Digital does corresponds almost exactly to consumer preferences, even though a matter-of-fact description of its business – developing machines for digital printing on textiles – does not sound as sexy, colorful, or hip as the applications of Waze, GetTaxi, or the 888 casino website.
That may be the reason why Kornit Digital’s offices in Rosh HaAyin give the impression of entering the sewing room of some inspired fashion designer: on the one side, a female display mannequin in a colorful bathing suit; on the other side, two male mannequins dressed in t-shirts for sports – and in the middle, a shelf with more t-shirt samples bearing unusual prints. The only thing missing is a changing room for the customers.
Kornit Digital is one of the more recent Israeli companies to hold an IPO on the US capital market. It became a public company last April, and Seligsohn, former CEO of Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI), one of the most successful Israeli companies on Nasdaq, was just finishing his first year in his job when his company held its IPO. “I had a nine-month break between Nova Measuring and Kornit Digital,” says Seligsohn, who led Nova Measuring with outstanding success for seven years. “Then Yuval (Kornit Digital chairman Yuval Cohen, T.T.) made me an offer I couldn’t refuse.”
Kornit has been around for 13 years, but you could say that the company is still in its infancy. “To a large extent, it’s still a startup,” Seligsohn says, his eyes sparkling like a man who has been handed a company with a vision of nothing less than “revolutionizing the supply chain of the textile industry.”
What exactly does Kornit Digital do, and how does Seligsohn plan to make his revolution? The company is developing machines for digital printing on wearable textiles and textiles like curtains and bed covers. The textile market totals $1 trillion annually, and is growing very slowly, but the printing market, the relevant market for Kornit Digital, has a turnover of “only” $165 billion.
Printing on textiles is currently analog, using one of two ways: silk screen printing, or in professional jargon, direct to garment (DTG), either directly on the item or on a piece of cloth sown on another piece of cloth after the end of the process; or wide format printing (in professional jargon, roll to roll (R2R)).
End of the outlet?
Printing on textiles is still mostly analog. Of 33 billion sq.m. of textiles printed this year, 98% is analog, and only 2%, 780 million sq.m. of printed textiles, is done digitally. In other words, the market has not even begun to touch its potential.
There are two main problems with analog printing. One is that the process of preparing the cloth (such a shirt) and the color takes several hours, and is therefore more expensive. The second is that in order to justify the time and investment, large quantities must be printed, which means that the customer who ordered the printing (say, a fashion chain) is gambling on the demand for the item. If the gamble goes wrong (the public does not like the item), the customer is stuck with his inventory, and inventory without demand is money down the drain.
“This is the problem that Kornit Digital is trying to help solve: inventory management,” Seligsohn says. “The proof of its existence is the frequent end-of-the-year sales and the many outlet stores. A leading fashion brand does not like operating outlet stores, but it doesn’t always have a choice; it has to get rid of inventory. As soon as a wearable item meets the shelf, its price starts falling, and the profit margin on it drops accordingly.”
In addition to inventory management, Kornit Digital also deals with supply and demand and the environment. According to Seligsohn, “Demand means that each one of us wants to dress differently, to express himself through his shirt or his pants. Supply has difficulty dealing with a trend in demand like this, because analog printing means large-scale printing, without personalization. It also affects the environment, because textile factories generate 20% of the world’s industrially polluted water.”
Personalization can be epitomized through the example of Seligsohn Jr. There are more than a few websites that enable the user to design his own special t-shirt. One popular such website is Teespring, through which 12 million shirts have already been ordered, and which is a platform for beginning fashion designers. “A shirt like this costs my son $25, and I know that it costs only $3 to produce, so the website and those selling designs through it make an enormous profit,” Seligsohn notes. “The websites’ business model is a work of genius. There are fashion designers who have already made hundreds of thousands of dollars a year from it.”
Seligsohn adds that Teespring is not a gimmick. “It’s a company that is growing 40% per month, not per year. Over one million t-shirts are ordered through the website every month.” He says that these websites are differentiated through their supply times, and here is where Kornit Digital comes in.
“Analog printing cannot provide a solution for an individual like my son, or for small groups of customers, such as school classes or sports groups, both because of the small number of printings needed and because of the time that passes between making the order and delivery of the item to the party making the order – 21 weeks, almost half a year from the start of item’s design until it reaches the shelf. This is a big gamble, because in the fashion industry, an item can become irrelevant quite quickly, and then a fashion chain, such as Zara, can miss an entire season. Zara has therefore begun operating according to the fast fashion model, which means reducing supply time from 21 to four weeks, and producing smaller quantities, thereby pushing us to enter the store at least 10 times a year, not four, in order to check out what’s new,” Seligsohn explains.
Hundreds of shirts an hour
A study shows that under the fast fashion model, only 15% of the merchandise goes to end-of-the-season sales, compared with 60% under the traditional model. “There is almost no inventory. Write-offs of inventory takes 4-5% off the gross profit, and that’s a lot,” Seligsohn declares.
How do Kornit Digital’s digital printers provide a solution for the trends in supply, demand, and the environment described above? First of all, digital printing on Kornit Digital’s machine takes less time, because it shortens the pre-printing process (preliminary handling of the shirt, heat pressure, and drying) from 8-10 minutes to much less. “Kornit Digital integrated the pre-printing process within the machine, and so hundreds of shirts can be printed on its printer within an hour,” Seligsohn says. This method enables Kornit Digital to do printing on a smaller scale (supply and demand), and to reduce industrial waste.
Kornit Digital’s customers can be divided into four groups: small volume printing providers; printing subcontractors; websites like Teespring, which prefer having their own production website (in order to improve their profit margins), rather than working with subcontractors; and, of course, leading fashion brands like Billabong, Givenchy, and others. “Websites like Teespring are much more critical for our growth, because with them, the transition from analog to digital is much clearer and logical. For the fashion giants, on the other hand, the transition is much slower, and we therefore work in all sorts of partnerships with them,” Seligsohn explains.
What about the company’s business model? “A Gilette (shaving razors and razor blades) model,” Seligsohn says. Kornit Digital sells printers for $70,000-400,000, together with supplies for them (ink in various colors), software for designing the required printing, and even regular service.
Kornit Digital has competitors, but its technological advantages are fairly unique, which is one of the reasons why one of the analytical studies of the company after its IPO defined it as first pure plan, in other words, the first in its textiles digital printing niche. Its main competitors are Aeoon Technologies, Brother International, and Seiko Epson.
Something odd about Kornit Digital’s IPO
The US capital market has at least one unwritten law: when a company has a hard time marketing its shares in its IPO, and has to go public at a lower share price than it expected, the share will either stay put or rise slightly during its first day of trading. When the IPO takes place at a higher than expected share price, the share either stays put or rises significantly. When the company gets the share price it expected, the share usually treads water during its first day of trading.
A case in which a company share price in its IPO is significantly lower than expected, and then erases the gap between the two prices in the first day of trading in the share, is quite exceptional, even slightly illogical, as if some guiding hand wanted to ensure an immediate return for the investment institutions that took part in the company’s IPO. That is what happened in the case of Kornit Digital (without a guiding hand). The company sought to carry out its IPO at $14 a share, settled for $10 a share, and the share price jumped straight to $14 on its first day of trading. Including the green shoe option, Kornit Digital raised $81.7 million in its IPO.
Furthermore, the company share price maintained its level, and its current price is $13.64, after hitting a peak of $16.64, meaning that at first glance, the market saw the share as worth $14, not $10.
This is not to say that it would have been better had Kornit Digital held its IPO at $14 a share, in other words, had left less cash “on the table,” but the speed at which share wiped out the gap raises questions about what happened behind the scenes in the IPO. “The feedback we got during the entire roadshow was positive,” Seligsohn says somewhat evasively. “The underwriters built the orders book, and that’s the price that was set. I don’t believe in conspiracy theories. The job of an investment bank is to take care of its clients, not the company.”
Seligsohn on controlling shareholder Fortissimo Capital: “We’re still friends. It’s really enjoyable working with them”
Kornit Digital’s story is also the story of Fortissimo Capital, Yuval Cohen’s private equity fund. Fortissimo, which has quite a long track record, acquired control of Kornit Digital in the summer of 2011 for only $16 million, mainly by buying the shares of Moshe Nur, known for his involvement in more than a few printing companies. As far as is known, Nur and Ofer Ben Zur, who founded Kornit Digital and was the technological mind behind the company, did not exactly see eye to eye, and the disputes between them were solved by the entry of Fortissimo into Kornit Digital and the exit of Nur. Ben Zur is president and CTO of Kornit Digital, while Cohen is the company’s chairman. “Ben Zur, who was CEO of Kornit Digital before I arrived, led the company to impressive achievements,” Seligsohn compliments his predecessor, saying “He realized that the company needed a new CEO who would take it further.”
As it usually does, Fortissimo began bringing order into the chaos that was Kornit Digital, out of a desire to turn it from a niche company into a major one, while also making it more sexy for the capital markets, just as it did in the case of SodaStream International Ltd. (Nasdaq: SODA).
In retrospect, it worked. A $16 million holding became a $205 million one, 13 times as much money on paper within four years. “I met Yuval and Fortissimo already in 2006, when I was appointed CEO of Nova Measuring, “Seligsohn remembers. “Fortissimo was negotiating for an investment in Nova at the time, but I thought the offer wasn’t good enough. Nevertheless, Yuval and I stayed friends, and now it’s a great pleasure working with people from Fortissimo.” The IPO left Fortissimo with 50.5% of the company’s capital.
Globes: “In contrast to Nova Measuring, you’ve got owners keeping track of you at Kornit Digital. A private equity fund usually has a short investment span for a public company having a long-term vision.”
Seligsohn: “True, it’s different, but I believe that the fund will make a great effort to help us, and I also regard the fact that it did not sell shares in the IPO as a vote of confidence. I’m very focused on achievement, and I have expertise in looking at the long term, which fits in fine with Fortissimo’s outlook. We complement each other.”