May 9, 2018
Executives
Tom Cook - ICR Gabi Seligsohn - Chief Executive Officer Guy Avidan - Chief Financial Officer
Analysts
Joseph Wolf - Barclays Brian Drab - William Blair Chris Moore - CJS Securities Jim Ricchiuti - Needham & Company Gregory Palm - Craig-Hallum Capital Group
Operator
Good day everyone and welcome to the Kornit Digital First Quarter 2018 Earnings Conference Call. As a reminder, today's conference is being recorded.
After the prepared remarks we will provide instructions to conduct our question-and-answer session. At this time, I would like to turn the conference over to Tom Cook.
Please go ahead sir.
Tom Cook
Thank you, Katherine. Good afternoon, everyone, and welcome to Kornit Digital's first quarter 2018 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 our 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 20, 2018, which identifies specific risk factors that may 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, whether as a result of new information, future events 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. At this time, I would like to now turn the call over to Gabi.
Please go ahead.
Gabi Seligsohn
Thank you, Tom, and hello, everyone, and welcome to our first quarter of 2018 earnings conference call. During today's call, I will review aspects of our performance, then provide an update on market conditions and the business environment we are experiencing.
Guy will then walk you through the full financial details for the first quarter as well as state our guidance for the second quarter. As today’s press release shows Kornit is off to a great start to the year.
We are very happy to report results which are above the high end of our guidance range, for both revenues and operating margins. Our first quarter was impacted by several discreet events including a delay of a major customer facility that we have discussed for the past few quarters.
We are pleased that we were able to more than offset this headwind through growth with other customers, which was bolstered by successful launch of the Avalanche HD series. This year, the announcement of our breakthrough product, the Avalanche HD series led to great momentum.
We literally hit the ground running with this new platform, which was first demonstrated at the ISS Trade Show in mid-January. The reason this launch was so successful is that the Avalanche HD6, redefines a competitive nets of digital versus screen printing by drastically reducing cost per print and by providing high definition image quality and an improved hand feel.
As we noted last quarter, our systems have not demonstrated the ability to perform two-color print jobs on more than 200 units, at a cost which is better than screen printing and six and eight color jobs, with 450 to 500 prints and it costs lower than screen. Both existing as well as new digital printers see this as an opportunity to redefine their cost structure and become more competitive.
Screen printers view this product as a way to provide the cost effective and simplistic solution for the demand they are seeing for shorter production runs. As reported in our April 3rd press release, multiple Kornit customers recently completed their evaluation of the new system generation confirming the cost per print savings and print quality improvements.
As a result, we received orders from several customers for the new systems, as well as upgrades of existing Avalanches announcing to over $5 million which strongly impacted our first quarter revenues. I’m happy to report that this momentum has continued into the second quarter as evidenced by orders in excess of $10 million received in the last few days.
These orders include large system and upgrade orders that we have been working on for some time. So we would not expect this trend to continue at this stage, but we do see a vast incremental upgrade opportunity given that our global install based comprises of a three digital number of systems that are suitable for upgrading.
Next week, we will be presenting at FESPA in Berlin, which is our largest annual trade show. In light of the success of the Avalanche HD launch, we have decided to rollout an HD6 version of the Storm platform as well.
Next week at FESPA, we will showcase this product for the first time. We expect to move to general availability during the fourth quarter.
The Storm platform has been our most successful in the European and Asian market, which are characterize by a large number of small and mid-size businesses and we would like to make the benefits of the HD6 technology available to both existing and new customers in these regions. Kornit’s exhibit at the show will be designed around two focus themes.
In the direct-to-garment pricing area, Kornit will demonstrate how the Company’s HD technology expand digital printing’s competitiveness against screen printing both in terms of cost per print and in terms of print quality. The key solutions in this area will be Kornit Avalanche HD6 and the Kornit Storm HD6.
Both systems will be driven by the ColorGATE textile production server and will be connected to a web-to-print ordering workflow. In the direct-to-fabric section of the booth, the Company will show an end-to-end production workflow in a micro factory setup.
The presented solution will be based on the Kornit Allegro single set printing system equipped with Neon ink. The setup will be complemented by a Zone digital cutting system and at selling stage producing finished pieces from the full cured fabric coming off the Allegro printer.
The 3D visualization and cat stage will be handled by a partner company called Assist and their video product. This setup will take customers all the way from 3D file preparations of finished product in a matter of minutes.
Being able to demonstrate two full production lines combined with advanced software and workflow solutions underpins the uniqueness of our product offering and the maturity level it has reached. All our developments are geared towards making digital textile printing more competitive, profitable and straightforward.
As mentioned, we have seen strong demand for the Avalanche HD since its announcement. High demand has primarily come from the U.S.
market where we are seeing a real ramp up in production volumes. Some of the customers ordering these systems thus far are ones which deploy both screen printing and digital printing system for their business.
In some cases these customers outsource their screen printer jobs and obviously see their profitability impacted by doing so. It is clear to us that by HD6 capacity, they are enabling themselves to bring many previously screen printer jobs in-house utilizing an inherently lean digital production set up that we offer.
One of the drivers for growth in demand is the penetration we are seeing into the promotional goods market. According to the 2017 report by the Promotional Product Association PPAI, the promotional goods market amounted to $21 billion in 2016 with online sales representing about 20%.
45% of this $21 billion market is represented by three categories, wearable, textiles and bags all of which are addressable by Kornit. Since this market is inherently cost sensitive, the introduction of the HD technology now allows us to more effectively compete and provide an alternative to screen printing.
Promotional products serve a variety of purposes. One key attributes is that they are relied upon in order to create a direct relationship between the consumer and the brand.
One of the areas we believe our digital printing solutions will provide benefits for this need is richness of design without the need to commit to large quantities. Another interesting avenue will be an ability of target customers to customize branded products.
Here we are not talking about complete freedom of design which could jeopardize brand identity, but rather an ability to pick from predefined high-quality designs, which on the one hand provide uniqueness, but on the other hand speak a particular brand’s language. Such in depth market analysis in recent months is helping us uncover many potential new customers.
We believe our product infrastructure for DTG is able to cater for various business models such as licensing, event driven, brand identity creation, personal identity and as mentioned, promotional product. Looking forward, we expect 2018 to play out as a significant growth year for the Company.
This outlook is driven by the delivery of HD systems and upgrade orders and the positive momentum we have in the market for these products. The resumption of the large customer program beginning in the second quarter.
The Launch of the Storm HD6 which was announced today and will become generally available in the fourth quarter. We also expect and enjoy margin expansion emanating from a few drivers continued growth of our services business driven by a large number of system upgrades.
Moving from a significantly negative gross margin profile to a positive one will have a positive impact on overall gross margin. Ramp up of our DTG business primarily in the high productivity sector, which comes with higher average selling prices and margin and tempering of new employee hiring, slowing down the pace of OpEx growth.
Longer term, we believe our technology is at a pivotal moment as we have now achieved critical costs per print metrics to be a viable alternative to screen printing at medium size runs. As we continue to achieve incremental improvements in quality feed and costs, we are very well positioned to meaningfully expand our addressable markets.
Now, I will turn the call over to Guy for a closer look at the numbers. 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 first quarter non-GAAP pro forma results reflect adjustment for the following items. Stock-based compensation expenses reached 1.2 million, amortization expenses related to acquisition of intangible assets in previous years in the amount of 292,000, taxes on income related to non-GAAP adjustment in the amount of minus 88,000 and 148,000 from restructuring expenses in the U.S.
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 Investors section of our website. First quarter non-GAAP revenue net of the 42,000 warrant impact increased 14.8% to $31.1 million versus $37.1 million in the prior year and increased 3.9% versus the prior quarter, as a result of successful launch of the Avalanche HD both in new system as well as upgrade and also regional growth in North America.
Services revenue for the first quarter was $4.4 million, accounting for 14% of total revenue and increased up 76.5% than the prior year and 16.9% from the prior quarter. The amount attributed to the non-cash impact of warrants in the first quarter was $42,000 or 0.3% of revenue, $393,000 or 1.3% of revenue in the previous quarter and $938,000 or 3.4% of revenue in the first quarter of 2017.
The decrease in warrants impact provided a tailwind to our growth this quarter versus the prior year and the prior quarter. The warrants impact added 370 and 130 basis points respectively.
By geography 54% of our sales were from the Americas, 27% from Europe, Middle East and Africa and 9% from Asia-Pacific region. Moving to customer concentration, our main U.S.
distributor contributed 19.1% of our overall revenue compared to 12% in the prior year, and a major customer contributed 11.4% of our overall revenue in the first quarter compared to 1% in the previous year. Our top 10 customers accounted for 58% of our overall revenue compared to 60% in the prior year.
Moving to profitability, non-GAAP gross margins in the quarter increased to 50% from 44.5% in the prior year period and 48.9% in the fourth quarter of 2017. Higher margins this quarter versus the year ago quarter were the result of more favorable revenue mix, as well as improved margin from services.
On a GAAP basis, gross margins were 49.5% versus 43.9% in the prior year period and 48.3% in the fourth quarter of 2017. Moving to our OpEx guidance.
I will discuss these items on a non-GAAP basis which exclude non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliations including in today’s press release. Adjusted research and development was 16.4% of sales or $4 million compared to 17.3% of sales or $4.6 million in the prior year.
The increase in R&D expenses [indiscernible] reflect an increase in headcount and materials. Sales and marketing expenses in the quarter were $5.4 million or 17.6% of sales compared to $34.9 million or 18.3% in the prior year.
Higher sales and marketing expenses were the results of expenses trade show activities in the first quarter and expenditure and marketing group in the U.S. General and administrative expenses in the first quarter were $3.4 million or 10.8% of sales compared to $2.4 million or 8.8% in 2017.
Higher G&A in the quarter resulted predominantly from headcount addition. Headcount, as of March 31, was 412 employees two employees less than the previous quarter.
In last few quarters, we have moderated our personnel growth and as we have mentioned in previous calls, we expect the pace of OpEx growth to be less than the pace of revenue growth in 2018. We expect this to drive some operating leverage compared to the prior year.
Non-GAAP net income for the first quarter was $2.1 million or $0.06 per diluted share, an increase of $2.6 million versus the year ago quarter. GAAP net income was $560,000 or $0.02 per share on a diluted basis compared with net loss of $1.7 million or $0.05 loss per share for the year ago quarter.
Our financial income this quarter was $533,000 predominantly as a result of accrued interest of our cash investments. Cash balances including long-term marketable securities at quarter end were $98.2 million compared to $97.5 million as of March 31, 2017.
Net cash provide us an operating activities was $1.8 million this quarter, compared to $12 million net cash provided in the prior quarter, the net cash provided in operating activities of $2.5 million in the year ago quarter. Cash provided on operating activities was mainly a result of profit net of depreciation and amortization.
Decrease in inventory was offset by decrease in trade payables. Turning to our guidance for the second quarter of 2018.
We expect revenues to be in the range of $33.5 million to $37 million and non-GAAP operating income to be in the range of 8% of revenue to 12% of revenues. These numbers assume no impact of fair value of issued warrants in the first quarter of 2018.
As a reminder, the calculation of warrant per value is based on combined effect of definition of future revenue from [indiscernible] future spot relativity as well as other variables is currently are not predictable and some of which has no correlations with our business. As of today we are not able to predict the variables with [indiscernible] for guidance for 2000.
I will now transfer the call to Gabi.
Gabi Seligsohn
Thank you Guy and with that operator, we would be happy to take any questions.
Operator
[Operator Instructions] We will hear first from Joseph Wolf with Barclays.
Joseph Wolf
Thank you. Just a question related to the guidance, is the range of the guidance you mentioned in the prepared remarks, that a large customer is coming back on.
Is the range of guidance dependent upon the pace of that or is it more general sort of range of opportunities that and the $10 million of new orders for the HD product that you received so far in the second quarter is that all going to be booked in 2Q.
Guy Avidan
First of all when we provide a range of guidance it’s through combination of the business that we see, and our expectation is we feel very comfortable with the guidance, obviously I will not provide specific customers information, but we are at a point where we feel comfortable providing this guidance regarding the orders we see from our large customer, or you ask - what did you ask, you asked about what has already been booked. What was the second question?
Joseph Wolf
I guess the 10 million that you said is already booked on the HD, that's all 2Q that will all be booked in 2Q?
Guy Avidan
That’s a combination of mostly 2Q, but not only 2Q.
Joseph Wolf
And just with the large customers turning on, is there a pacing issue or is it just now a demand issue and is it coming on slowly for any reason or is there is just business as usual?
Guy Avidan
I don't think it's coming are slowly, I think the customers is doing extremely well and they have as I said, the only thing I’m able to say is that the activity has been reinitiated, I wouldn’t say that there's any issue now standing in the way of the continued ramp-up if that’s what you are alluding to. Customers doing very well and proceeding at a very fast pace.
Joseph Wolf
Okay and then just I guess another question on the gross margin, the range there is that a mix question, if you have a similar mix for this quarter, do margin still go up or I guess the variance in the operating margin how much of that depends on gross margin mix and how much of that is kind of where you end up on OpEx?
Gabi Seligsohn
It’s actually both, we did better than let’s say some of you guys expected both in gross margin as well as lowering our OpEx, but both actually contributed to the operating profit.
Joseph Wolf
And is that the story for the second quarter as well, like you mentioned having a potential for outlaying leverage are we seeing some of that already give the headcount stability or is the [indiscernible] investment going to - is that holding down OpEx right now?
Gabi Seligsohn
No we think and again we said we expect leverage compared to the previous year and yes we expect the growth in revenue to be more than the growth in OpEx, you will see improvement in operating profit in the second quarter.
Joseph Wolf
Alright. Great.
Thank you.
Operator
Thank you. Our next question will come from Bobby Burleson with Canaccord.
Bobby Burleson
Hi congratulation on a strong Q1. So, curious in terms of large customer or program ramping here in Q2 strong exceed demand for Avalanche here in the first half, what the impact might be on seasonality as we start thinking about what the peak quarterly revenue run rate might be this year, the shape of the second half versus the first, wonder if there's any impact there on the seasonality?
Gabi Seligsohn
It’s a little bit too early to state what the second half is going to look like, obviously we provided today guidance for the second quarter we already have improving visibility into what the plan is for the third quarter. So I believe that as the year progresses also revenue increase will take place but I’m not yet in a position to tell you exactly what Q3 or Q4 is going to look like.
I think that the guidance in the second quarter obviously we feel is good guidance it shows that business is progressing well, and we see as I said that this year is going to be a significant growth year for us. So it’s a little bit too early to state how it’s going to play itself for the rest of the year.
General statement is strong year, ramp up continuing, I don’t see it slowing down, anytime soon is what I’m able to say at this point.
Bobby Burleson
Okay great. And then you described this end-to-end digital workflow, and I’m wondering how close something like that to being implemented in its entirety by customers, is that the something that’s already happening or is that something you envision for 2019, what is like the timeframe of that becoming a meaningful way that customers start implementing your technology?
Gabi Seligsohn
So, in the direct-to-garment, its already working that way. In the direct-to-garment area customers have a lighter print capability that goes all the way from order and customization as such the way that they work through directly to the system which prints and then everything is automated, so that already exists in production.
The micro factory approach that I me for roll-to-roll will become our direct-to-fabric is what people are calling it. It’s something that some customers are starting to actually test, it includes as I mentioned a 3D setup of if you can envision let’s say address, a 3D setup of a manikin with exact sizes where you can pay with the patterns in a very automated and useful and intuitive manner.
That translates to a two dimensional file that actually print in a way that optimizes, the use of the fabric. So let’s say if you have address, you cut it into cut pieces from that 3D image that was rendered that transferred into a 2D optimizes the use of fabric then it goes to and automated zoomed cutter.
So no physical contact with that and then at a very end of that is [indiscernible] sitting and actually selling it. So we will show that, that is already been tested by some customers, it’s something that are a lot of people are talking about recently.
And what we are saying about our offering unlike other players in the industry is that, because of the fact that our process is truly an end-to-end process, that does not require any separate treatment of the fabric before or after. It’s truly and end-to-end process from white fabric all the way to something that is going sown into let’s say a pillow, a dress or whatever you want versus other players that maybe are trying to setup a setup like this.
But if you ask them, they will admit that separate treatment for this fabric is necessary before and after. So this is becoming a reality and an exciting one for us as well.
Bobby Burleson
And just quickly on HD, you have got, some of those out there obviously now. And I’m wondering what are the early indications, how much material they consume, or how much ink they consume versus the prior generation of machines, if there is metric kind of in terms of ASP per year?
What is does that run rate look like, is it different?
Gabi Seligsohn
Well, average selling price has not change. We have been applying to same…
Bobby Burleson
Sorry, I was relating the consumption of ink to the ASP, that’s all.
Gabi Seligsohn
Sure. I understand.
So consumption of ink goes down by 30% to 40% in a very consistent matter. so that actually out there, it’s not just evidence, it’s working in production.
In fact, it all adds up to numbers that are phenomenal for some of these numbers, because they are able to take job that they couldn’t take before. I was just watching a video clip that will soon be out of a customer of ours in the UK, that actually even did a 1,000 print jobs at across that was lower than doing it with a screen printer that he was using as a third-party.
So when I talk about how exciting this is and the order traction we are getting. Truly, this is something completely different from what they have before.
The economics are changing for them. And again, the other thing that’s important for us, it’s a print quality if you remember in the last earnings call, I spoke about the fact that we can now do screen like prints with large - area, what we call solid areas.
The hand feel is much improved, because we are using ink in many applications. And again if you go online, you are going to see some customers testimonial shortly on this.
In many applications they have move from having to apply 2 layers of white under bed to a single layer of white, because we have improved what is called the L value or the intensity of the white , if I could call it that. So all these benefits are realized and from a cost standpoint 30% to 40% reduction is very, very meaningful and what we are starting to see obviously with many of these customers is they are running more jobs with the systems than they did before which is what we have predictive would happen.
Bobby Burleson
Okay. Thank you.
Operator
Our next question comes from Brian Drab with William Blair.
Brian Drab
Hey, thanks for taking the questions. You have had a nice sequential ramps form third quarter of 2017 to 4Q to 1Q, now you are guiding for a sequential increase to 2Q.
Gabi when you say you don't see it slowing down anytime soon. Can you just clarify - think about that sequentially or you are just saying growth year-over-year meaning can we expect you to ramp from 2Q to 3Q and 3Q to 4Q this year.
Gabi Seligsohn
Well I think what we are seeing right now is again, and I purposely did not want to allude specifically to the quarters 3Q, 4Q second half, etcetera. what I was saying is that the momentum is continuing, we are seeing the momentum continues.
So I believe momentum is going to continue beyond the third quarter is what I'm alluding to. I don't want to make specific statements about sequential and year-over-year et cetera, but again, my overlying statement is that this is a significant growth year for the Company.
I will have to allow you to speculate on what that means, I’m not able to - at this point it's too early for me to state clearly whether this is sequential growth or that year-over-year growth. In general have strong growth years for the Company and started on the right foot, the guidance for the second quarter when I say I don’t see the momentum slowing down anytime soon is because we are seeing the momentum is continuing.
That should role obviously beyond the second quarter, but I don't want to say now and try to quantify third and fourth quarter.
Brian Drab
Okay that’s fair thanks. And is there any reason why gross margin would be below the 50% that you reported in the first quarter as we move through the year.
Guy Avidan
No specific reason the gross margins will go down, the only unknown as we always mentioned is the warrant impact that if you look at the real business, the same momentum that Gabi mentioned it should impact positively on gross margin as well.
Gabi Seligsohn
And just to add to that as I mentioned in my prepared commentary, the upgrade opportunity is very fast and its progressing quite nicely. This is a significant endeavor for us as a company because we have a very large installed base as relevant systems just to remind everyone, systems that are relevant for upgrade, Avalanche 1000, the Avalanche Hexa and then the Avalanche 1000R and Avalanche Hexa R.
So there is quite a big install base their which will benefit service revenues. If you remember when we spoke post about reaching a breakeven level and hopefully even growing into profitability, we spoke about business volume mattering a lot and having a wide enough reaching product offering for the service.
So this year is a good year for that and that suppose to have positive impact on blended gross margin as well.
Brian Drab
Okay, is it fair to think about it has in terms of gross margin that you have a little bit of headwind gross margin as you your shipping more systems that are using slightly using less ink, but that's offset by service and upgrades ramping in that margin improving.
Gabi Seligsohn
You need to realize that we are transitioning to the HD very quickly at the same time, Kornit has installed base of thousands of systems in the field right and the consumption by those systems it’s still it will before to the transition as far as the impact on the overall revenues ink revenues will be gradual and what I believe is going to happen is that of course, as we say 30% to 40% less ink consumption, but at the same time, we believe more jobs that are being run through the system right. So I don't expect to see a decline in ink revenues as a result of this transition this year and I think that again because of the fact that there is a big installed based using different type of ink on the one hand, the fact that gradually you will see this ramping up but at the same time you are going to see more capacity, those changes should blend together and that provides a headwind on the gross margin side.
Brian Drab
And just a last one on that non-GAAP OpEx is 13.9 million in the first quarter, is below your guidance for the 15 million plus or minus the 500k, I’m wondering what we should expect for OpEx for the quarter going forward should it continue to be slightly below that 15 million level for the balance of the year?
Guy Avidan
In my view, previous calls, where Gabi said plus minus 15 through the year, so we will not change in the statement.
Gabi Seligsohn
0.5 billion plus/minus on the 15 yes. So, it could trend up to those levels.
We are going to keep ourselves within that range is what Guy is saying, there is still high range that’s going to happen this year, as we said its going to be at a slower pace, but the pace of hiring impacts that, obviously. And what is important for us because this is a big ramp up here is to have the right people in the right places at the right time, so to be able to support the customers profitably et cetera, so there will be some and it could be more impactful in one quarter versus another, but we are very comfortable with that statement, still gives us the range that we need, soft rate, so that comment still stands if that’s what you are asking.
Brian Drab
Okay, that’s helpful. Thank you.
Gabi Seligsohn
Thank you very much.
Operator
Our next question will come from Chris Moore with CJS Securities.
Chris Moore
Just maybe to stay with the gross margins and services for a second, so services slightly negative gross margin this quarter was 14% revenue versus little more than 9% year-over-year, in terms of getting to that crossover point, the services need to be continue to grow north of 5 million to 6 million, just trying to understand if there’re some efficiencies that’s gained or kind of how to look at that service growth and getting to that crossover?
Gabi Seligsohn
Yes, service as an organization and as I have always said is a part of the company that has a certain fixed costs which is primarily associated with headcount and the surrounding infrastructure and so, it is the case that obviously adding revenue is the most important aspect there in order to reach the break even and go beyond that point. We are trending around the breakeven point where we could -- some quarters go a little bit about break even, some quarters go a little bit below breakeven right, these levels of $4.5 million, $5 million, there is some lumpiness, there is lumpiness associated with service revenues because there will be quarters in which there is more upgrades than others.
For instance we all know the peak season for our customers, generally in third and fourth quarter, and so you could see certain quarters in which there is less upgrades than other quarters. So you will see some lumpiness with service revenues, that could impact profitability but it’s trending around the breakeven point is very positive for us to remind everyone we started at very negative number, we started at 50%, 60%, and 70% negative gross margin as we have reported.
And so the scale of this business has really has the most important impact here and also at the same time very important for us is to price what it is that we do service wise at a very reasonable level, because we respect a lot the fact customers when it comes to services, want to spend a fair amount of money in that more than that. So I would say, we should stay around the breakeven level, but once we grow consistently above the 5 million et cetera on a quarterly basis, then we should consistently be in a profitable area.
Chris Moore
Got it. Alright, appreciate it.
Operator
Our next question will come from Jim Ricchiuti with Needham & Company.
James Ricchiuti
I apologize. Don’t you call late?
So these questions may have been asked. And if so we can always discuss it offline, but I was wondering, if you talked at all about where you are with respect to a new roll-to-roll product?
Gabi Seligsohn
No, we didn’t talk about that. No commentary about that.
At FESPA which is next week, we are going to show the Allegro system, but surrounded by variety of workflow solutions that go around it as well as neon colors, so no new product announcement as of yet.
James Ricchiuti
Okay. And Gabi with respect to the large customers, the 10 largest customers that you alluded to in the deck.
Have you talked all about the penetration you seen for the new HD products within your 10 largest customers or just in general among your large customers?
Gabi Seligsohn
We didn’t, but I’m happy to provide a little bit more color. The reason, the launch was so successful in the first quarter.
Because we went and work with our largest account that we knew hit the ground running, that we knew understood the benefit and can take advantage of a very, very quickly. And one of the things that amaze me and this is my opportunity to thanks our employees, because the focus was huge.
Just imagine, you announce the product in mid-January and you are able to shift demonstrate and also receive orders and recognize very, very quickly no matter of weeks, because the benefit was so pronounced. So we started with the 10 largest accounts, everyone is very, very much into this, each of them in a different stage I would say.
And the nice thing is also that it’s new accounts that are very interested and engaged in this is well. So we tapped into the largest account is a space where we knew the benefit is.
But now this is continuing and the nice thing is that the demand is very strong for this product, because to an extent a customer, there is not take advantage of this technology, it’s kind of disadvantage from a cost standpoint. And so it kind of the question of any proprietary of our system, I need to start doing this, because I need to continue to be competitive.
And what we are trying to do is to make that is available as possible through these upgrades and other things that we do or they want to order more capacity, they do. The other thing I mentioned is that there is a ramp up going on in the U.S., which was very happy about.
So we are seeing real, I would say a real change in the pace of activity and I would say even in the seasonally lowest quarter, which is the first quarter.
James Ricchiuti
Okay. Thanks very much.
Operator
[Operator Instructions] Our next question comes from Greg Palm with Craig-Hallum Capital Group.
Gregory Palm
I guess just first on the resumption of your large scale customer program that you talked about. I know previously you had talked about completion of those.
I guess we were calling them touchup systems, but the incremental systems that got delayed last year and the expectation was that would be completed in Q2. So knowing the guidance and the commentary is that still your expectation or is there some potential that some of those are getting pushed to the second half now.
Gabi Seligsohn
The things that we generally talked about is revenues, we try not to talk about the pace in which capacity is increased that our customers size and so what we have said before and actually transpired as we said it would, was that we would expect to see that business coming back before the end of the first half and that is exactly the case.
Gregory Palm
Okay but I think there was I guess talk of 8 million or so, incremental system, you call them touchup orders. I just want to confirm whether any of those hit in Q1.
How much of that is Q2 and whether some of that is sort of fallen through the rest of the year, I don’t know if you can comment directly on that or not.
Gabi Seligsohn
Directly I cannot, but I can say that there weren't any in the first quarter.
Gregory Palm
Okay so fair enough. 15 million of HD orders so far which is fantastic.
Can you give us any sense of how the mix that compares to sort of new systems first existing upgrades and you know, I know you talked about adoption from key accounts there. But curious if you're seeing traction with new customers for HD maybe ones that were previously has it, but now make a little bit more sense given the decrease in cost per print.
Gabi Seligsohn
It’s happening in both, so both upgrades as well new systems, obviously an upgrade per unit is much cheaper than a new system shift that well above $400,000 per unit, and an upgrade their low price range between $80, 000 and $100,000. So we are seeing happening, both additional capacity with HD because customers are looking at the ROI that they have and the capacity they want to bring online and it makes a lot of sense and at the same time they look at their existing fleet.
The other thing that we are doing very effectively that makes this really happy you might be aware that we really the only Company that is supplying six colored white, so the Hexa what we call HD6 is the direction that many of the customers are going, because they see the richness of color and variety and their ability to do Pantone color matching that we spoke about is very significant. So we are also seeing what we call cross upgrades meaning people that have an Avalanche 1000 or Avalanche 1000R moving to HD6, so they move from four color plus wide to a six color plus wide that makes us very happy because again as I said we are the only company that provide that kind of solution and I believe it provides for the long-term very good customer stickiness for us because this is a unique approach that no one else is taking in the DTG market.
Gregory Palm
It’s great to hear and then I guess just lastly, as it relates to the OpEx, I’m just trying to figure out if there's a change of thinking there I know last quarter you give some pretty specific guidance on a quarterly basis of how we should be thinking about that in this quarter, if there some of talk of tempering of headcount gross. I just want to make sure there been a change in thinking around, OpEx at all in terms of specific areas where your targeting the tempering of growth rates or maybe not necessarily?
Gabi Seligsohn
As I said earlier on, we are still hiring, but at a slower pace than we did before, there is still positions that we are hiring for R&D, in sales and marketing, G&A we are pretty much done, but there’re additions, so the pace of hiring is a combination of the pace in which we want to grow our optics obviously we are always looking very cautiously and carefully, but also making sure that we get the right talent sometimes takes longer. So as I mentioned, I got the question from Brian earlier about the 15 million plus or minus 0.5 million, that still stands even though we finished at 13.8 million, so we keep that freedom to ourselves to be able to spend that much, when we think that it’s necessary, that still puts us in a very comfortable point as far as improved margins are concerned.
Gregory Palm
Understood. Thanks and Good luck
Gabi Seligsohn
Thank you.
Guy Avidan
Thanks Greg.
Operator
And I will now turn the call back over to Gabi for any additional or closing remarks.
Gabi Seligsohn
Thank you, operator, thank you everyone for joining the call. I invite those investors that are able to come to see us at Berlin, please come by, there is a lot of interesting new products to see there and we will talk to you the next quarter.
Thank you.
Operator
Thank you. And again ladies and gentlemen, that does conclude today’s conference, thank you all for your participation.
You may now disconnect.