Nov 8, 2017
Executives
Thomas Cook - ICR Gabi Seligsohn - Chief Executive Officer Guy Avidan - Chief Financial Officer
Analysts
Ken Wong - Citigroup Bobby Burleson - Cannacord Brian Drab - William Blair John Michael - Stifel Joseph Wolf - Barclays Jim Ricchiuti - Needham & Company Greg Palm - Craig-Hallum Capital Group
Operator
Good day, everyone, and welcome to the Kornit Digital Ltd. Third Quarter 2017 Earnings Conference Call.
As a reminder, today's conference call is being recorded. After prepared remarks, we will provide instructions for the Q&A session.
At this time, I'd like to turn the conference over to Tom Cook of ICR. Please go ahead, sir.
Thomas Cook
Thank you, Shala. Good afternoon, everyone, and welcome to Kornit Digital's third quarter 2017 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 of 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 inaccurate 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 30, 2017, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made as of this date hereof, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future event or otherwise, 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 press release published today, which is posted on the Company's Investor Relations site.
On the call today, we have Gabi Seligsohn, Kornit's Chief Executive Officer; and Guy Avidan, Kornit's Chief Financial Officer. And at this time, I'd like to now turn the call over to Gabi.
Please go ahead.
Gabi Seligsohn
Thank you, Tom, and hello, everyone, and welcome to our third quarter of 2017 earnings conference call. I’d like to begin by apologizing and stating our press release cross the wire at a 11:41 PM today as a result of a failure that NASDAQ global wire has had over the last several hours.
We apologize for the inconvenience and we’re certain that hopefully people have had a chance to take a look, but sorry for this being very short just before the call. Let me begin with the call.
Since today’s call comes with – comes a month after our pre-announcement at September 26, I will spend less than usual to review the main events of the third quarter which we already discussed and focus my commentary on market updates and refer to our expectations for the remainder of the year. Guy will then walk you through the full financial details for the third quarter as well as state our guidance for the fourth quarter of 2017.
Third quarter non-GAAP revenues and operating margin came in a little above the high end of our pre-announced guidance. Revenues were $28.6 million versus a guidance range of $27 million to $28.5 million, and operating margin was 6.1% versus a guidance range of 3% to 5%.
Gross margin during the quarter was relatively high and came in at 52.3%, as a result of a higher mix of inks and consumables given the pre-announced system shipment delay to our larger customer. Specifically worth noting in this context of elevated gross margins is our services business which for the first time reached an almost breakeven results.
This achievement of services is a direct result of our successful efforts to increase revenues from contracts and upgrades while containing costs and levels similar to those with which we exited last year. Our most notable event since our last call was our attendance at SGIA in New Orleans, which is the largest screen and digital printing show in the US.
We demonstrated the Vulcan, Allegro and Avalanche systems. We also showcased a fully automated workflow from design through order and actual print, combing a DTG printer with software developed by our partner Custom Gateway.
I would like to share a few key takeaways from that event. First it was clear that screen printers are primed and ready to really start using digital printers.
The number of small and large screen printers who came to our booth was impressive and unlike in the past, with screen users would usually coming seeking a solution for printing one-offs, this time the discussion was also about medium, the long runs. This is particularly encouraging for a higher throughput systems like Vulcan and Avalanche.
Screen printers widely shared with us the customer that are asking them to decorate garment batches of 100 to 500 units with greater frequency and are seeking a cost effective solution which isn’t viable with screen printing. Retaining customers is important for these shops and when customers asked them to both manufacture thousands of units as well as hundreds, they will take on both job tiles, even if doing so with screen may not be as profitable as they would like it to be.
It seems that the cost of print achieved when using the Vulcan is too attractive to ignore and for those customers who want to start by using the Avalanche R Series which is about half the price of the Vulcan, there is an excellent cost model when running batches of six to eight dozen garments of a particular design. Also in meeting with existing customers at the show, we learned that several are already serving major retail names such as Costco, Kohl's, Dick’s Sporting Goods, Target, Sam’s, Wal-Mart and others for their brick and mortar stores, supplying them with batches of a few hundred garments each.
We expect this trend to continue and have an innovative roadmap to support constant reduction and cost per print which will help solidify our entry into the screen market. We also had an important product launch at SGIA as we introduced our first ever pigment based neon solution using pink and yellow neon colors.
These two additional colors expand application usage for our customers and very nicely extend our overall color gamut. I am happy to report the print quality, fabric hand feel and color vividness in general blew people away versus other pigment base solutions that were demonstrated at the show and displayed dull color than marginal hand feel.
Despite showing a multi step in line process of pre-treatment printing and curing, competitors at the show have to admit to a need to still separately wash and steam treat a fabric, while Allegro once again proved to be the only through end-to-end pigment based printer. Complementing the Allegro was a software package developed by our partner assist, which enables creation of a 3D model of a patterned outfit which is then translated to a 2D file which optimizes fabric use of discrete cut pieces and marks out cutting locations for an automated cutting machine.
This workflow caught a lot of interest by designers looking to produce limited quantities of discrete designs. During our second quarter conference call, I mentioned several changes we are making to our US operation in order to expand and strengthen our footprint in our largest market.
I am happy to report that the project is progressing well and we have hired several strong leaders for sales, marketing and operations. We’ve also added several sales people to team and as part of our effort, to split North America into three regions, so as to more closely serve existing and future customers.
Given the positive dynamic we see in the North American market, coupled with a strong team which is developing in the region and the order pipeline that we’re seeing, we feel confident that 2018 will be a year of significant growth in that region. Furthermore, there are several drivers which should lead to significant growth across all our markets in coming years.
First, the trend towards proximity declaration is expanding as people realize the benefits of moving to short-term production when serving same and next eight delivery markets. This is particularly important when considering the huge variety of SKUs that websites need to show versus physical stores.
A recent survey conducted by Boston Retail Partners shows that more than 50% of retailers now offer same day deliver versus only 16% in 2016 with DRP mentioning competition from Amazon as the key reason for this change. Two-thirds of the companies surveys were over a $1 billion in revenue, so clearly this trend is meaningful.
Our strategic goal is to increasingly plug into this market through our large network of existing and future customers. We believe we have a solid strategy and an excellent product offerings for screen printers, who are looking to either add digital capacity or replace some of their existing screen capacity.
Interest for the Allegro roll-to-roll printer in the US market is growing. The markets with specialty cognizant was expanding rapidly and is market for customized home decoration.
Furthermore, we plan to roll out several new products in 2018 for both our roll-to-roll and DTG product lines. These products will offer novel proprietary processes which are disruptive and unique in nature.
New products will include both inconsistences. Though we are cognizant of the limited growth we will show this year, given the weak second half caused by the previously disclosed facility delay, we remain confident in our ability to return to significant growth in 2018.
I will now turn the call over to Guy for closer look at the numbers and fourth quarter guidance. Guy?
Guy Avidan
Thanks, Gabi, 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 third quarter non-GAAP pro forma results reflect adjustment for the following non-cash items. Stock-based compensation expenses which totaled $1.2 million, depreciation and amortization expenses relating to acquisition of intangible assets in previous years in the amount of 291,000.
Taxes and income related to non-GAAP adjustment in the amount of 137,000 and 246,000 for restructuring expenses in the U.S. Revenue adjustment reflecting the warrant issued to Amazon and vested this quarter in the amount of $149,000.
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 investor section of our website. Third quarter non-GAAP revenue decreased by 7.5% to $28.6 million versus $30.9 million in the prior year and decreased by 4.7% versus the prior quarter.
Revenues came a bit higher than our previous revenue guidance discussed in our conference call dated September 26, 2017. Low revenue versus the prior year and previous quarter was mainly driven by postponement of material purchase order from the major customers.
At the same time, we saw significant improvement in our business in Europe and Asia-Pacific region compared to the previous years. By geography, 61% of our sales were from the Americas, 26% from Europe, the Middle East and Africa, and 13% from the Asia-Pacific regions.
As in previous quarters, the Americas remain our largest territory. However, we have seen weakness in these data compared to the third quarter in the previous year due to the significant delay mentioned above.
And Gabi previously stated, in the previous quarter we started a process that include changes in our personnel, headquarter location and go-to-market. Given the pace of implementation, we expect to see positive impact from the near term.
Moving to customer concentration. Our main U.S.
distributor contributed 29.2% of our overall revenues compared to 25.9% in the prior-year. Our top 10 customers accounted for 66% of our overall revenue compared to 71% in the third quarter of 2016.
Moving to profitability, non-GAAP gross margin in the quarter increased to 52.3% versus 49.1% in the prior quarter and 49.2% in the prior-year. On a GAAP basis, gross margins were 51.3% versus 46% in the prior quarter and 44.1% in the prior-year period.
GAAP and non-GAAP gross margin this quarter was higher than gross margin in the previous quarter and in the previous years due to favorable product mix that include a higher revenue proportion of ink and consumable relative to overall revenue, as well as an increase in service revenues which brought this business close to a breakeven points. Moving to our OpEx guidance.
I'll discuss these items on a non-GAAP basis which exclude non-operating charges previously mentioned and highlights in our GAAP to non-GAAP reconciliations including in today's press release. Adjusted research and development was 19.5% of sales or $5.6 million compared to 14.2% of sales or $4.4 million in the prior-year.
The year-over-year increase in R&D expenses reflect an increase in headcount and increase in materials for future assisting underdevelopment. Sales and marketing in the quarter were $4.8 million or 16.7% of sales compared to $4.6 million or 14.8% in the prior-year.
Higher sales and marketing expenses were the results of increase in headcount. General and administrative expenses in the third quarter were $2.9 million or 10.1% of sales compared to $2.4 million or 7.8% in 2016.
Higher G&A in the quarter results predominantly from headcount additions. Headcount as of September 30 was 411 employees, an addition of 13 employees compared to the previous quarter.
Non-GAAP net income for the third quarter was $1.7 million or $0.05 per diluted share, a decrease of $1.8 million versus the year ago quarter. GAAP net loss was $0.1 million or $0.00 per share on a diluted basis compared with net income of $0.4 million or $0.01 per share for the year ago quarter.
Vested warrants reduced net profit by $0.1 million, an increase number of fully diluted shares by 117,000. Our financial income this quarter was 205,000 as a result of currency exchange rate changes and accrued interest of our cash investment offset by bank expenses.
Cash balances including long-term marketable securities at quarter end were $86.5 million compared to $56.7 million as of September 30, 2016. Net cash used in operating activities was $5.9 million for the first nine months compared to $4.3 million net cash used in the first nine months of 2016.
The decrease in cash from operation was mainly a result of an increase in inventory and account receivables. We expect revenues in the fourth quarter to be in the range of $29 million to $32 million.
We expect non-GAAP operating income to be in the range of 5% of revenues to 9% of revenues. I'll now transfer the call to Gabi.
Gabi Seligsohn
Thank you, Guy. And with that operator, we’ll be happy to take questions.
Operator
[Operator Instructions] Our first question comes from Ken Wong with Citigroup. Your line is open.
Ken Wong
Hey Gabi, hey Guy. So, looking at Q3 you guys obviously came in at high end, Q4 looks like you guys are going to be a little better than most of us expected.
Did you guys see a pickup in a specific area of the business that we should be aware of anything that’s highlighting there?
Gabi Seligsohn
No, I think our expectations were very similar, right now are very similar to what we saw at the end of September. We did walk out of a SGIA with a fair amount of pretty good lead.
We do expect to recognize Vulcan revenues in the fourth quarter as well, actually multiple system, so the range that we provided 29 to 32 is around what we were expecting. Ken, you’re bringing in a lot of background noise, I’m not sure that you’re aware of that.
So, that’s my feedback on where we are for the fourth quarter. In general, as we said the range of 29 to 32 is within what we had expected, but again SGIA generally was a pretty good show, the fact that we have a very good sales towards building up in the US at the confidence to our feeling about the ability to execute on our plans.
And also rolling into next year, having in place I think a stronger team is going to be very helpful as well. In Asia and Europe continue to be as we had expected before.
Ken Wong
Got it. And then maybe if I could follow-up on just a question on the roll of the role market and the competition there, it looks like on one hand you applied [inaudible] this quarter and then you also have HP touching on possibly entering the [inaudible] fabric market.
Any comments on your end on what you’re hearing some from the industry?
Gabi Seligsohn
Yeah, I think it’s important that investors realize that the field of roll-to-roll is very, very diverse. If any one of us walk the floor of any of these trade shows, you will see a variety of different types of printers, different types of processes, etcetera.
So, I think first and foremost, it’s very difficult to generalize about the roll-to-roll market. What we have chosen to do and has worked quite well so far is to utilize pigment inks in order to be able to cater for a variety of different fabrics.
And as I mentioned the fact that it’s truly an end-to-end process, provides extra flexibility for the type of customers that we’re approaching. Regarding the mention by HP in their investor day of the fact that they’re planning to start entering the textile market, what I heard in the call and otherwise in their investor day and otherwise was some talk about starting with [inaudible] signage and later on trying to get into other types of textiles.
But I will say, our focus – product focus is strong, this is a very, very I would say a fragment market, we’ve competed throughout our existence with larger companies. And we’re also planning a major new product launch next year that we’re not going to discuss yet, but which is going to expand our position in the roll-to-roll market, something which is highly differentiated and disruptive in nature, and stalls for significant issue in the industry.
So, we’re quite positive on our chances with roll-to-roll going forward and our opportunity there. And yes, there are competitors, but I think as I said a fragment enough market that there is a good opportunity for us to continue to grow that business.
Ken Wong
All right, thanks a lot guys.
Gabi Seligsohn
Thanks.
Operator
We will take our next question from Bobby Burleson with Cannacord. Your line is open.
Bobby Burleson
Yeah, thanks for taking my questions. Hi Gabi, hi Guy.
Guy Avidan
Hi.
Gabi Seligsohn
Hi there.
Bobby Burleson
So, just curious, we talked about the delay of your major customer build out here that affected the second half. So I’m wondering kind of, if orders are still coming in obviously for that customer, how the industry is kind of planning to cope with that order overflow, are there fulfillment houses that are [inaudible] fulfillment houses that maybe looking to add additional machines in order to address that order overflow, is there an opportunity there for some unit volumes for you guys?
Gabi Seligsohn
Yeah, so first of all, obviously for obvious reasons we’re not allowed to discuss exactly what’s going on specifically with the customer just to reiterate for everyone, we created the delay in revenues is protracted permitting issues. We’re working very closely with the customer in the initial facility that we put together last year, that’s working very well and running at very, very high volume.
As far as capacity moving around, without referring specifically to the customer maybe because again I want to protect their confidentiality, I will make a general statement about what’s going on in the DTG market. The number of players that we now cater is quite significant.
They have developed several fulfillment houses that do a very good job and printed a very high quality. And what I think happens as a result of maybe capacity not existing in one place, and again without referring specifically to this customer is that that intern provides opportunity for some of the other players.
I think the way that it demonstrates itself is through the ink volume and how the – the season is going, the holiday season is our highest of the year. And so from a capacity utilization standpoint, customers are running at very, very high utilization.
But I can’t say anything specific about orders moving out of one customer to another. I will say that this market has become dynamic enough that orders do tend to move between Kornit customers.
We have become a real golden standard for industrial printing in the market and we do see that the requirement is front on a Kornit and many times capacity does tend to shift, and the competition many times is around the issue of turnaround time, quality and price.
Bobby Burleson
Yeah, that’s very helpful. And there is just one follow-up if I may.
You have some momentum in Allegro this year, I’m wondering if you can update us on your goal of kind of doubling those units [inaudible] you were entering the year. And then are there any issues that we should think about in terms of transitioning to the new machine, does that cannibalize maybe any sales with the existing Allegro, what’s the overlap kind of that you guys have to manage there in terms of, maybe customers waiting to see what they come out with?
Gabi Seligsohn
Yeah, so we’re progressing well with the objectives that we set to try to double the number of customer sites this year. A report in the February call what we actually achieved but we are progressing quite well, not sure yet whether we’ll hit the exact number but I do see quite a bit of activity also in the fourth quarter on the Allegro front.
To clarify the new product that will come out next year is a different process altogether, it will expand our addressable market in the roll-to-roll market. It is not planned to be from a process standpoint anything like the existing Allegro, so I don’t think the cannibalization on the contrariety, I see an expansion of our footprint in that market and us being able to cater for a wider part of that market which as I said earlier on is very fragment and have the lot of opportunities in it.
So once again Kornit will continue to focus on differentiated processes which are proprietary in nature, meaning once again we will provide an end-to-end solution which include the process that we develop with consumables that we develop because of the fact that we want to be able alter something that’s truly unique, but to make very clear without stating exactly what this process is, this is a different process from Allegro and I have high expectations from it coming out sometime next year.
Bobby Burleson
Thanks, Gabi.
Gabi Seligsohn
Operator
We’ll move to our next question from Brian Drab with William Blair. Your line is open.
Brian Drab
Yeah, hi Gabi, hi Guy.
Gabi Seligsohn
Hi.
Brian Drab
Have you said anything specific today about the facility delay on the second customer site and whether the permits they’re progressing toward getting the permits?
Gabi Seligsohn
No, we haven’t said anything and we cannot comment on that specifically on the issue permitting, obviously that’s not in our control. So we won’t be really be able to comment beyond what we had provided earlier on.
And just to reiterate, what we did say on the last call when we were at specifically about when do we expect to shift these systems, we said that that shipment could take some time, we didn’t give a specific date but we said that we believe that that should happen before the end of the first half of the year, stating that it could be the situation that they do not want to increase capacity in the first quarter simply because that’s seasonally the lowest quarter for the entire industry. But nothing to add beyond that at this point.
Brian Drab
Okay. And I’m not sure, but I think that we said on this call last time that November was the kind of timeframe where you were hoping to see the permits come through.
Is that correct? And there is just no further comment as to whether that it’s going to happen in November?
Gabi Seligsohn
Yeah, no further comment. I did see that several individuals in the analysts communities did go and tried to get some feedback from the government authorities, so that could be a place but I – we cannot comment specifically on this frame.
Brian Drab
All right. Can you – maybe looking into 2018, can you talk about some of the new products and maybe try to rank order them for us just roughly how we should think about the impact of some of these, you’ve talked about the new roll-to-roll machine, maybe you could talk about polyester and where you are with the introduction of that, and remind us how significant that opportunity can be and just kind of rank order all the – there is so many opportunities it sounds like for 2018.
That’ll be helpful, thanks.
Gabi Seligsohn
Yeah. Well, I’ll try to do my best but I will not quantify things and try to be a little bit vague for competitive reasons but still try to give some color.
So, as I said, what we’re planning on doing is shipping a prerelease early availability unit to do dark polyester before the end of the year. We’re hoping to still be able to achieve that I believe that we should be able to, and then there will be a qualification process which should some time.
I can’t say yet when we’re going to release that product simply because I want to see the progress in the early availability site before we do that. So, but this objective of shipping before the end of the year is still something that we’re targeting, so that’s on one front.
In general on the DTG front, next year we plan in light of what I said earlier on in my prepared commentary about the screen printing market, we plan to significantly increase our focus on the screen printing market because we’ve reached the state and to that end, our roadmap will increase that ability to achieve very, very advantageous cost of print numbers. There will be consumable capabilities that we will add next year that will allow us to further go down that path and do so with the combination of large customers seeking Vulcan versus ones that maybe a little bit smaller seeking Avalanche capabilities that was a new type of consumables that will allow us to be aggressive in the pursuit of the screen printing market.
Because of the trends that I mentioned earlier on and with some of our customers already serving brick and mortar players as well as obviously websites, we do see this opportunity of runs that are in the hundreds is really materializing and we think that we really have a very good solution for that. I mentioned on one of our previous calls that when providing an alternative for screen printing, especially for ongoing shipments of existing products that have certain patterns and certain color behaviors which are screened, we will also offer customers a useful way in order to match between previous screen printed jobs with digital printed job, so that’s going to be part of our effort as well because we know it’s going to impact rate and capability of penetration.
Then the next thing is going to be as I said a new roll-to-roll product, we’re not going to say exactly what it is right now and the timing we haven’t announced yet, and maybe we’ll do that into beginning of the year, we’ll see whether we announce what the timing of that is going to be, but this is going to be as I said a different product that expands our roll-to-roll offering. So, there is going to be a platform capabilities and additions, there is going to be consumables, there is going to be software as well as more upgrade capabilities that we’re planning on offering next year.
I think that and itself is going to help us demonstrate another significant growth here next year, but return to significant growth next year, as well as the strengthen presence in the field with Asia-Pacific and Europe running quite well and expected to continue to drive in the US revamp effort which I’m very, very positive about and now that I see that it’s playing itself out the way it is. So, that’s a broad summary I can provide at this point Brian.
Brian Drab
Yeah, that’s a great list, I kind of ran out on the page here. Thank you, I’ll pass it along.
Gabi Seligsohn
Okay, thank you.
Operator
[Operator Instructions] Our next question comes from Patrick Newton with Stifel. Your line is open.
John Michael
Hey guys, this is John Michael on for Patrick Newton. So, looking at Vulcan, do you have any more visibility on the timing of the Vulcan orders that you’ve mentioned before that pushed out of 2017?
And then also, did you recognize any Vulcan sales in the quarter and did you receive any new customer orders?
Gabi Seligsohn
So we’re expecting to recognize a few systems this quarter. We did not recognize Vulcan revenues last quarter, so I’m not in the third quarter where we’re expecting to recognize multiple units in the fourth quarter.
Regarding 2018, there is a few opportunities we’re working on right now, I can’t provide more color at this point as to timing and the expensive of it, but there is multiple opportunities we’re working on right now both in the US and in Europe with Vulcan. Next year in general should be a growth year for Vulcan, I will say that, but won’t go into more detail on that product.
John Michael
And then for those systems that you’ve recognized already, can you remind us of how long it takes for a Vulcan system to ramp up to full ink productivity and just what could ink revenues be for a Vulcan system installed today be for 2018?
Gabi Seligsohn
Yeah. So, the ramp up is very much a function of the customer’s knowledge of digital printing.
In the mix we’ve got some customers that are new to digital printing and others that have been doing it and simply wanted to move capacity from medium and let’s say medium to large size runs to Vulcan, so those would ramp up faster than those that are new to the area. In general, we have said in the past that in consumption on an annualized basis of a Vulcan for an entire year once it’s ready to go can reach around $120,000 to $150,000 of in consumption per year.
As far as how long it takes, it’s really a function of how a specific customer operates, but we’re seeing that because of the fact that in the second half of the year, system reliability has improved significantly. Ink performance is much better than it was before, reaching very good printing results.
Throughput is meeting the number that we had stepped for it, but I’m optimistic that the length of the process won’t be too long. In some cases it takes customers two to three months to start really ramping up and other cases they can hit the ground running pretty quickly, so it really is a matter of specific customer characteristics.
John Michael
Got it. And last question for us on the uptick in inventory.
Is it fair to characterize as mostly Avalanche and with your systems, do you do any customization by customer or could you sell pretty much all of this inventory to any of your customers?
Guy Avidan
So you’re pretty much correct, it’s pretty much Avalanche but it’s all off the shelf there are no unique products, so we can sell any Avalanche to all customers.
John Michael
Got it. Thank you.
Guy Avidan
Thank you.
Operator
We’ll move to our next question from Joseph Wolf with Barclays. Your line is open.
Joseph Wolf
Thank you. Can you guys hear me?
Gabi Seligsohn
Yes, we can Joseph.
Joseph Wolf
I’ve had some phone trouble. Sorry, I jumped on late, so I may be asking something that you covered, but I just wanted to go through, you talked about this – the machine for the black polyester.
So could you just – is that a machine that your current customers would use at a new customer base, is that an add-on to try it out? How does that fit into the, if the customer is adding or do you expect to – is it a new customer base that’s going to be looking at this when you guys think about it?
Gabi Seligsohn
Our existing customer base is very much looking for a solution for dark polyester for many, many years. Some of our customers are using our existing ink even to do dark polyester and they do various things in order to avoid dye migrations and things of that nature.
But what we’re doing with this development right now is we want to do at a sequence and a speed which is conducive to the speed that we’re used to running at. So, the customers that are relevant for this our existing customers as well as new customers, the system that we will use because of the fact that this is a different ink set, we expect customers to dedicate systems to polyester and not move from ink type to another on a regular basis.
So, as a result of it, once it’s out there, we expect it to come obviously not just as an opportunity to increase ink sales, but actually to come with system sales. Also because of the fact that the curing profile of fabric will be different more than likely customers will dedicate specific dryers to this process as well because it’s going to run at a different setting than normal.
Joseph Wolf
Okay, that’s helpful. Just – the overall permitting and I know a little bit where you’re restricted and what you can say but is the permitting issue that’s going on with your customer, teaching many lessons about permitting other areas, is the region just very difficult and is it transferrable in terms of how you have to approach new installations in the US and in another geographies.
And then I don’t know if you commented on this in the prepared remarks, but if you can talk about that customers European expansion plans and whether they’ve been impacted at all by what’s going on in the US?
Gabi Seligsohn
So, we haven’t run into these kind of permitting issues in the past. Obviously any event that we have with any customer is something that we learn from, so I think it would be on a case-by-case basis depending on the relevant state laws in a given state.
So, just like anything you will learn and we learn from this process but we’ve not heard from other customers that they have any difficulties associated with permitting. Regarding the large customers activities outside the US, obviously I cannot comment whatsoever on that unfortunately.
Joseph Wolf
Okay, thank you.
Gabi Seligsohn
Thank you.
Operator
We will take our next question from Jim Ricchiuti with Needham & Company. Your line is open.
Jim Ricchiuti
Hi. You may have answered some of these questions, I joined a little late, but did you say if you had any 10% customers in the quarter other than your distributors?
Guy Avidan
No, just the distributor this quarter.
Jim Ricchiuti
Okay.
Gabi Seligsohn
And we said that the largest had accounted for 67% of revenues versus 71% in the comparable quarter last year.
Jim Ricchiuti
Got it. And can you give us an update Gabi on where you stand with the service business and your goal toward improving profitability in that business?
Gabi Seligsohn
Yeah, I did mention in my prepared commentary that I was very happy to say that this quarter, and the third quarter meaning, we really just scratch breakeven for the first time. So we’re really getting there, I’m very excited about that.
It also contributed to the gross margin somewhat because of the mix that included obviously relatively high consumables as well as services. So services is becoming a real business for us, improvements evidenced both on the signing of service contract as well as upgrades which is an important piece of this.
And so we’re just scratching the breakeven. We may see in the future that we isolate a little bit around that number, meaning, I do expect that some time in the next few quarters to actually reach profitability but there could be certain quarters in which we’re either breakeven or below very much depending on seasonality, just by way of example, usually in the fourth quarter because everyone is going gangbusters to run their existing systems, you wouldn’t usually see customers upgrading systems in the fourth quarter, just as an example.
Usually they would do that with a preparation process. So I’m happy to say we’re already hovering around that point of breakeven [Technical Difficulty].
Okay?
Jim Ricchiuti
Yeah, you broke up a little bit at the end but I think I got the gist of it. Did you provide any update on the availability of some of the new ink technology that you showed both at the FIT event and then at the recent trade show?
Gabi Seligsohn
So at the trade show, we showed the new neon colors on the Allegro, those are being tested by a customer right now. We expect them to be released right after this short testing that’s being done.
So, I expect the release to happen early 2018 of the neon color to the general market. Regarding other types of inks and applications that we showed at the FIT event, we did not provide timeline for that, but some of those things will be rolling out next year, meaning in 2018 and that will include a new system with the new process that we’re talking about in general terms that we’ll expand our offering into roll-to-roll.
So no specific dates yet, but some of this is rolling out in 2018 Jim.
Jim Ricchiuti
Okay, and last question from me is, recognizing the permitting delays and the uncertainty around that, I understand that’s difficult to pinpoint when you might see orders pick up again on that customer, but can you talk a little bit about some of the other larger customers who have been purchased multiple units. Do you see any opportunities for multiunit sales over the next one to two quarters?
Gabi Seligsohn
Well, I’ll say only one that made them sales public, so I can talk about them which is Fernatix that presented at the FIT event and spoke about deployment on a global basis of both the Avalanche and the Vulcan system. It’s a lot of privacy to other customers I won’t say.
Obviously we have multiple large customers, each of them is at a different state of deployment of equivalent, some of which we do expect will take multiple system orders next year, we’re very confident of that happening, but specifically I can only say that reiterate what the Fernatix president had mentioned that they’re standing and planning to extend the use of digital technology with us which makes a very excited with them becoming a global customer with activities of some of it through the acquisition they made of the majestic business in the UK, in Japan and other regions as well.
Jim Ricchiuti
Okay, thanks a lot.
Gabi Seligsohn
Thank you.
Operator
[Operator Instructions] Our next question comes from Greg Palm with Craig-Hallum Capital Group. Your line is open.
Greg Palm
Hey Gabi, hey Guy.
Gabi Seligsohn
Hi Greg.
Greg Palm
I was hoping you could maybe expand on the Q4 guidance a bit, I guess what are the puts and takes on getting to the low versus the high end. And I’m just curious, I mean what’s your overall visibility like in light of some of these push outs that have occurred in the Vulcan and just want to get your sort of your overall confidence level and be able to recognize I think you said a few systems, a few Vulcan systems here in Q4?
Gabi Seligsohn
Yeah, so the general comment I’ll make is obviously when they give guidance we stand behind it, and the 29 to 32 that we provided today is something we feel comfortable with, otherwise it wouldn’t be there. Obviously last quarter was an exceptional situation where we had the significant customer delay that we spoke about and we did mention that the extent of Vulcan revenues in the second half won’t be as much as we had hoped it to be but still as I mentioned earlier on there will be multiple Vulcan systems recognized during the fourth quarter.
So, just to say, that range of 29 to 32 is built a variety of different sources of revenue systems, inks and consumables and services. We take a lot of time to analyze each of those when we prepare our guidance, looking at our various regions, looking at various customer types, be it key customer’s strategic accounts and regional accounts, and through a very thorough process we analyze that and determine what our guidance will be.
Greg Palm
Okay, fair enough. Gabi, I know you don’t typically give guidance more than quarter out, but you’ve mentioned a couple of times in the call and it’s in the press release that that you expect significant growth in 2018.
I mean could you expand on that at all, I mean would you be disappointed, I think historically you’ve drown the business 30% top line, I mean would you be disappointed if it didn’t grow that sort of stated historical rate next year?
Gabi Seligsohn
Well, you know for a fact that we don’t provide annual guidance, so I won’t make any specific statements. I do mean significant growth, when I say significant growth but I won’t, go as far as saying what I’d be disappointed or not.
I tried to itemize in today’s call what would be the source of driving revenue growth, I think that the extensive product offering that we have, the expansion into the existing markets with new products, new capabilities to be able to go after the screen markets which we’ve mostly been an add-on and now starting to actually replace screen equipment, also provide with quite a bit of a confidence. Now that we see what kind of cost and trend levels we could we can reach, we see the transition in the market, going to [inaudible] with.
So all these things together when we say significant growth that’s as much as we’d be able to give, but I can’t say anything specifically about the year simply because we don’t provide annual guidance. Clearly this year it’s ending because of the weaker second half on a low point of growth year-over-year that’s clean to us and next year we’re talking about significant growth, so definitely more than we grew this year I’ll say that but that’s the obvious, I wouldn’t say significant if it was just that.
Greg Palm
Okay. I guess just last one for me, there is been a few questions already asked about the Allegro and overall roll-to-roll market but I’m just curious to kind of get your thoughts on the overall opportunity there, I mean specifically when we think about the non-apparel part of the textile market, I mean I guess what are you seeing just in terms of overall adoption, can you help us give us some sort of evidence that to help us kind of gauge the market size and growth rate from an industry perspective?
Gabi Seligsohn
Well, the interesting thing about the Allegro is that it touches many types of markets. And I’d say that outside of apparel, the most notable direction is custom home declaration , by now we have multiple customers in multiple regions and then are going after the custom home declaration market.
So some of them they’ve been into existing of [inaudible] market but they look at this as an expansion into the new market. Others have already been in this market and see this as a way to make themselves more user-friendly.
So, the customer experience moves from just choosing from a catalog something that’s already been designed, but being able to choose a huge variety of different designs on an existing sofa that’s basically covered with different types of fabric that can be decided upon in the very last minute. And as far as the size of its market, home declaration in itself in general is, one report that I read about home declaration that’s a very big market, but that’s about a $600 million but includes obviously the sofas themselves and not just the fabric.
And what we’re looking at is basically the transition of customers in the direction of being able to choose from variety of different designs. Some of our customers are already offering a user experience where you can actually play around with the design of the room and the colors of the room and then look at what different types of designs, how they would fit a certain color [inaudible] types of room.
So, I think that what’s happening is that the customer experience is changing, this is also moving to become a much more advance type of market. So the market is big and we don’t see - we don’t see any limitation on market size.
What we’re busy doing is showing customers the usefulness of the Allegro and how useful it is when wanting to move from one fabric type of to another allowing them to stake only white fabrics of various types, be it canvas, [inaudible] acrylic, vinyl or whatever, only stock white and then at the very last minute, from this particular design, that’s a game charger for many of these players. So that’s, maybe a little bit outside the apparel market.
Greg Palm
Yeah, sounds like an interesting opportunity. All right, thanks for the color.
Gabi Seligsohn
Thanks a lot Greg. Bye-bye.
Operator
And there are no additional phone questions. I will now turn the call over to Gabi Seligsohn for additional remarks or closing remarks.
Gabi Seligsohn
Thank you, operator. I want to everyone for being on today’s call.
Once again apologize for the technicality which resulted from a misfortunate event on NASDAQ site, and see you all next quarter.
Operator
That concludes today's conference call. Thank you for your participation.
You may now disconnect.