Nov 10, 2020
Operator
Greetings, and welcome to Kornit Digital's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.
I would now like to turn the conference over to your host, Kelsey Turcotte of The Blueshirt Group. Thank you.
You may proceed.
Kelsey Turcotte
Thank you, operator. Good afternoon, everyone and welcome to Kornit Digital's third quarter 2020 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 quarterly report on form 6-K, filed at August 11, 2020, which identifies specific risk factors that may cause actual results or events to differ materially. Any forward-looking statements are made of this call here for 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 numbers non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings release published today, which is posted on the company's Investor Relations site.
Before I turn the call over to Ronen Samuel, Kornit's Chief Executive Officer and Guy Avidan Kornit's Chief Financial Officer, I would like to invite you to a virtual fireside chat next Tuesday, August 18 at 10:30 A.M. Eastern Time to further discuss Kornit's acquisition of Custom Gateway and the related market opportunity.
This is an RSVP only event. For further information please go to the Investor section of Kornit's website.
I'll now turn the call over to Ronen Samuel, Kornit's Chief Executive Officer and Guy Avidan Kornit's Chief Financial Officer. At this time I'll now turn the call over to Ronen.
Ronen?
Ronen Samuel
Thank you, Kelsey. Good evening and thank you for joining us on this afternoon earning call.
I'm pleased to share with you that we significantly exceeded our expectation for the third quarter, and we are improving our outlook for the second half of the year. Total revenue grew 21% year-over-year to 57.4 million net of 2.2 million in warrants related to a global strategic account and we delivered exceptional sequential growth of 53% reflecting the sharp growth in ecommerce and on demand production.
Top line results were driven by a strong demand for industrial systems in North America and EMEA, an extraordinary quarter for consumable and services across all regions. On the services side, I'm proud of the work our teams have done to bring this important business to sustainable profitability, a quarter ahead of plan, while maintaining focus on customer excellence.
Now that we have reached this important milestone, we expect services margin to improve as we continue to scale the business. Bottom line, we delivered a strong operating margin for the quarter, and we expect to over achieve our operating profit objectives for 2020.
Our industry is at inflection point, and we are focused on leading the transformation of the industry into on demand sustainable production. Globally, we are partnering with our customers to deliver incremental demand for systems, ink and services as we enter the holiday season.
In the Americas, we are engaged in large scale expansion projects with key customers like Stakes, Printful, TSC and others. One of these interesting projects is a unique partnership for integrated on demand fulfillment of Delta Apparel and Hot Topics, the iconic retailer, both fueled by Kornit solutions.
This revolutionary collaboration allows a seamless consumer experience of on demand digitally printed apparel with reduced shipping costs to the end consumer. It also enables on demand store level replenishment and immediate out of stock fulfillment.
In EMEA, customers and partners are fully reengaged and we are experiencing a resurgence, like what happened in the Americas in mid to late April. Our recent investment in scaling out direct UK operation is eluding immediate results and significant pipeline buildup.
In APAC, we see encouraging signs of industry recovery, and we continue to scale the local sales and support infrastructure required to deliver on global expansion projects with strategic customers. As part of our continued focus on this important region, we are excited to welcome a Tokyo based seasoned executive, Ilan Elad to lead Asia Pacific and scale our operation in this region.
From a product perspective, it was a record shipment quarter for Atlas system. This unprecedented success, give us a huge confidence to accelerate R&D effort and go-to-market planning for the next generation of application that this platform will support.
We expect Atlas to be the foundation for continued growth in the years to come. Our Vulcan Plus also continues to have considerable traction with customer investing in fleets to produce large volumes of midsized ones.
On the DTF side, we are seeing phenomenal momentum fueled by the accelerated transition of the fashion industry to on demand sustainable textile manufacturing. Customers realize the huge benefits of this business model in the fashion and home decor markets and are telling us that Kornit offer the best end-to-end pigment-based retail quality solution to support this model.
In the third quarter, we closed an important deal with Creazioni Digitali, a leading Italian digital fulfillment partner to some of the largest fashion brands in the world, including Versace. The single step sustainable process of the Presto, alongside the lethal quality and sustainability.
perfectly match both Creazioni and the brands are looking for. Important wins like this at the heart of the fashion industry makes us confident in our own ongoing ability to disrupt this large market with our unique technology and we are already witnessing massive growth in our DTF supplies.
Executing with our global strategic account remains very strong, and our teams are working around the clock to deliver on the various projects we have in place. The impact of our acquisition of Custom Gateway is exceeding expectations and we are pleased with the progress of our integration.
Expansion of our Cloud Software Workflow solutions is at the heart of our strategy. And with Custom Gateway, we offer a unique proposition to the market that handles all steps of data driven efficient on demand production.
Since announcement, our teams globally have generated over 80 new opportunities and we have already received multiple orders. Exciting conversations with major brands and fulfillers that looking to partner with Kornit to transform the supply chain and are now looking to adopt our Cloud Workflow platform to enable and streamline the entire on demand production process.
Our decision to continue to invest the business during the pandemic is paying big dividends. And I'm very pleased that we are in position to increase the outlook we provided for the second half of the year from low double-digit year-over-year revenue growth to 25% year-over-year growth.
Looking forward, we see very strong momentum and we are entering into 2021 with very strong backlog. Before I turn the call over to Guy, I would like to welcome our new shareholders and thank them for the trust in our teams.
These are exciting times for Kornit and for the entire textile industry. And we are extremely confident to execute on the massive opportunity ahead of us.
Now, I will turn the call over to Guy for a closer look to our number and guidance.
Guy Avidan
Thanks, Ronen and good evening everyone. We are very pleased with our strong third quarter results and our outlook for the final quarter of 2020.
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 items.
Stock based compensation expenses, which totaled $2.7 million, total amortization expenses related to the acquisition of intangible assets in the amount of $396,000, including expenses related to the acquisition of Custom Gateway in the amount of 315,000, 648,000 acquisition cost related to Custom Gateway, and non-cash deferred tax expenses in the amount of $121,000. Adjustments related to COVID-19 pandemic this quarter were $74,000.
We do not expect additional COVID related expenses. As the company has significant operating lease liability in foreign currency, we incur foreign exchange gain or losses from the revaluation of these liabilities.
These gains and losses may vary from period to period and do not reflect the true financial performance of the company. This quarter foreign exchange gains associated with ASC 842 were $110,000.
A full reconciliation of our results on a GAAP to non-GAAP basis is available in our earnings press release issued earlier today and on the investor section of our website. Third quarter revenue net of 2.2 million net cash warrants impact were 57.4 million, an increase of 21.4% compared to the prior year period, and an increase of 53.3% sequentially.
From a year-over-year perspective, we continue to see very healthy demand from our customers serving online market in the US for our product and services and significant revenues from our global strategic customer outside of the US. Services revenue for the third quarter was 8.1 million net of 165,000 warrants impact, accounting for 14.1% of total revenues an increase of 103.7% compared to the prior year period and increase of 45.3% sequentially.
Beginning this quarter Custom Gateway revenue and cost of goods are included in services. Net of Custom Gateway and excluding the warrants impact services generated high single digit margin compared to a 44% loss in the prior year period.
The amount attributed to the non-cash impact of warrants in the third quarter was 2.2 million or 3.6% of revenues, compared to 2.4 million or 4.9% of revenues in the third quarter of 2019 and 842,000 or 2.2% of revenues sequentially. As Ronen mentioned, it was a strong quarter in the Americas, with 59% of total revenues coming from that region, 33% from the Europe, Middle East and Africa and 8% from the Asia Pacific region.
In the third quarter, we had three customers that each contributed more than 10% of total revenue. Our top 10 customers accounted for 58.3% of our total revenue compared to 56.3% in the prior year period.
Moving to profitability, non-GAAP gross margin in the quarter net of warrants impact was 48.1% compared to 47.7% in the prior year period, and 44.1% sequentially. As previewed during our second quarter earnings call, we're back to our pre-COVID gross margin level of 50% excluding the impact of warrants.
On a GAAP basis gross margin in the quarter was 47.1% compared to 47% in the prior year period and 42.2% sequentially. Moving to our OpEx items, I'll discuss these items on a non-GAAP basis, which exclude non-operating charges previously mentioned and highlighted in our GAAP to non-GAAP reconciliation included in today's press release.
The textile industry is experiencing an evolution that we have predicted for some time and has been further accelerated by our customers need to transition from analogue printing to digital. Not only has this created a tailwind in our system sales, but also significantly boosted ink and consumable consumption.
This evolution has been further accelerated by COVID and represents significant market opportunity for Kornit. As Ronen mentioned, we continue to invest in the business to accelerate growth.
Each of the following line items reflect headcount investment to build the infrastructure necessary to support the growth opportunities ahead of us. We ended the quarter with 657 employees a year-over-year increase of 142 employees, and a sequential increase of 83 predominantly due to 53 new employees joining us from Custom Gateway.
Looking forward to the fourth quarter and the beginning of 2021, we're planning to net increase headcount organically by approximately 20 employees per quarter, predominantly customer facing and technology functions to strengthen our leading position in the market and merge our workflow solution. Adjusted research and development was 13.8% of sales, or 7.9 million compared to 11.2% of sales or 5.3 million in the prior year period.
Additional R&D cost is attributed to headcount addition and use of materials. Sales and marketing expenses in the quarter were 7.8 million or 13.5% of sales, compared to 7.1 million or 15.1% in the prior year period.
The relative decline in sales and marketing expenses this quarter is mainly attributed to the absence of trade shows and reduced travel expenses. General and administrative expenses in the third quarter were 5.1 million, or 9.6% of sales compared to 4 million or 8.5% in the third quarter of 2019.
The growth in G&A cost is attributed mainly to additional headcount cost and increase in D&O insurance cost. Non-GAAP net profit for the third quarter was 7.7 million or $0.18 per share on a fully diluted basis net of $0.05 warranty impact.
Net GAAP profit was 3.9 million or $0.09 per share on a fully diluted basis compared with net income of 4.7 million or $0.11 income per share for the prior year period. Our non-GAAP financial income this quarter was 1.7 million as a result of accrued interest on our cash investments.
Our GAAP financial income this quarter was 1.6 million. Turning to adjusted EBITDA, for the third quarter 2020 adjusted EBITDA was 9.4 million compared to adjusted EBITDA of 13.1 million for the prior year period.
Net cash provided by operating activities was 20.4 million this quarter, mainly due to a 7.8 million increase in deferred revenues and advance from customers, a 10.4 million increase in payable and net profit of 3.9 million offset by 8.5 million increase in trade receivables and 4.3 million increase in inventory compared to break even in operating activities in the prior year period and 9.2 million net cash used in the previous quarter. We expect the deferred revenues balance to convert revenues over the coming three quarters.
Cash balances including bank deposit and marketable securities at quarter end were 405 million compared to 237 million as of June 30, 2020. This increase in cash balances was primarily driven by 163 million in net proceed from our last offering in September this year, and cash generated in operating activities of 20.4 million as previously discussed, mainly offset by used in the acquisition of Custom Gateway.
In addition to the primary offering, Amazon sold 1.7 million shares converted on a cashless basis from 2.2 million warrants for net proceeds of 92 million. Turning to our view on the fourth quarter, we expect revenues to be in the range of 60 million to 64 million and non-GAAP operating income to be in the range of 13% of revenues to 16% of revenues.
As has been our practice in the past these numbers assume no impact of the fair value of issued warrants in the third quarter of 2020. I'll now transfer the call back to Ronen.
Ronen Samuel
Thank you, Guy. With that we are ready to take any question from the audience.
Operator
Thank you. At this time, we will be conducting a question-and-answer session.
Our first question comes from line of Tavi Rosner with Barclays. Please shoot your question.
Peter Zdebski
Hi, this is Peter on for Tavi. Thanks for taking my question.
You mentioned the strong backlog entering 2021. Could you comment on the risk to that on account of the emerging COVID-19 trends and then if I could have a follow up, just wanted to ask about the drivers of the services expansion if you could give a little more color on that and whether that's related to some of the renewed traction on DTF side at all?
Ronen Samuel
Yeah, so thanks for the questions. I'll start and Guy maybe if you want to add on top of me later on.
So the COVID is definitely a tailwind to our industry. The industry is in inflection point.
We discussed it. What we can see that the ecommerce is booming.
There's a clear move into ecommerce. The focus within the 2020 for 66% of the parallel will be purchased through the ecommerce and while the ecommerce is booming and growing the own demand manufacturing is really fueling and it's fueling the growth of our customers.
And we see the demand growing dramatically for our customer. We saw it already from May to end of April.
Our customers are in peak season and now they're entering to the peak of the peak and ordering systems. We have big projects that we are involved with across the world, both with strategic accounts, both with brands, marketplaces.
Some of those projects are being implemented these days, some of them will be implemented early 2021. So this is the reason why we are saying we're entering with a strong backlog into 2021.
We have a very strong visibility for the first half and we are very positive about the entirety of 2021. Guy, any -
Guy Avidan
I guess the services question, so we're talking about breakeven in services in the fourth quarter 2020. We achieved this goal earlier than expected.
The initiatives we were discussing in the last few quarters for example, all the industrial machine will go with a service contract are now yielding dividend.
Peter Zdebski
Thank you both for the color. Congrats on the quarter.
Guy Avidan
Thanks Peter.
Operator
Our next question comes from line of Jim Suva with Citi. Please shoot your question.
Jim Suva
Thank you very much, and congratulations on great results and such during a challenging time. My question is on your prepared comments.
You mentioned something about COVID cost. I believe you said we're going down or de minimis at this point.
Can you talk just a little bit about COVID overall, is this still slowing down some deliveries like the logistics for customers to receive and install your equipment or get engineering slash architectural, electricity permits as installing these big devices a lot of times aren't simply plug and play if you can talk to us about those logistics if those are behind us were still causing a headwind? Thanks.
Ronen Samuel
No, actually, we don't see any headwinds in terms of logistics due to the COVID, actually the opposite. We see a huge demand and pressure to installers as soon as possible to get the equipment and the supplies and the services to be ready for the peak season.
As I mentioned before the COVID is a very strong tailwind. We don't have any limitation in terms of production, logistic, shipments and installation.
So the only limitation, of course, is about travelling. Luckily, we have our own team, both in the US and Europe, in Asia that can install and ramp up our customers and they're ready to implement all the demands needed.
Jim Suva
Create and then funding for small or midsized businesses. Is the funding a bit of a challenge if you're a small midsized business, giving those challenges may be a little more associated with Coronavirus or are they past those headwinds to where they could place more orders with you or they're at the point now returning back to normalcy?
Guy Avidan
Yeah, it looks like almost back to normal. In the first, second quarter, we thought there's going to be more credit crunch.
But most of our customers have the ability to finance themselves. In some cases based on specific business case, we extended the extend credit terms, but it looks like for credit the market is back.
Jim Suva
Okay and my last question, just logistics was shipping since there's less airplanes and ships going around the world? Are you having any logistical challenges of getting supplies or components or anything or is that also well behind us also?
Guy Avidan
No, clearly, no, we don't have any limitation on that.
Jim Suva
Thank you and congratulations to you and your team. And thank you for the details.
Guy Avidan
Thank you very much.
Ronen Samuel
Thanks Jim.
Operator
Our next question comes from the line of Brian Drab with William Blair. Please shoot your question.
Brian Drab
Hey, thanks for taking my questions. The first one, just can you give us at this point any clear idea what some of the new products might be for next year and what you're thinking about and how those might expand the addressable market further?
Ronen Samuel
So we cannot get into too much detail. Next year is going to be an exciting year, both in the DTG and the DTF we are going to extend our portfolio in both - two categories.
The focus will be both on opening new applications, applications that we never - the customer never printed before. So enabling new applications, but also getting into adjacent markets as well as improving the productivities of our solution, the automation, the ease of use.
So there are many, many aspects that we are looking into it and that we're planning to deliver on them on top of, of course, win quality. Workflow is a big emphasize.
Moving forward, you will see new products coming on the workflow side next year.
Brian Drab
Okay, got it, thank you. And you mentioned DTF, how significant is DTF in terms of the revenue mix?
How significant was it in the third quarter?
Ronen Samuel
So DTF is still a small part of our business, but is a fast-growing segment within our business. When we're looking into our outlook into Q4 is that we foresee a strong growth within this segment.
It still will be a small portion. We are not providing indication, what is the size of the DTF out of the overall business.
Within the DTF very interesting to see the strong growth on the supplies and it's really strong growth of the install base in terms of the use of consumable.
Brian Drab
Got it and then can I just ask quickly, do you still think the service gross margin can get to approximately the 20% range over the longer term? And if so, like, over what period do you think it takes to get there?
Thanks.
Ronen Samuel
Again, we didn't - we're not ready to give indication what are we aiming. We said though, we move to a profitable service one quarter ahead of time, it's sustainable.
We will continue to see profitability, we are going to improve the profitability, but currently we are not going to give any guidance about what are we aiming for.
Brian Drab
Okay, sorry. I've been covering the company too long and I had heard that at one point, but I think those before time Ronen.
Thanks.
Ronen Samuel
Okay. Thank you.
Bye.
Operator
Our next question comes from line of James Ricchiuti with Needham & Company. Please shoot your question?
James Ricchiuti
Hi, hopefully you can hear me. Okay.
The question I have is - yeah, I thought I heard you say that you had three customers that were 10% or more of revenues in the quarter? Did I hear that correctly?
Ronen Samuel
Yeah, correct.
James Ricchiuti
That is memory serves me correctly, I don't recall there being a time where you had three 10% percent customers, is this the first time that's happened?
Guy Avidan
It's the first time we have three direct customers that exceed 10%.
James Ricchiuti
And is there any color that you can provide us on the other two customers? I mean, I think in the past, you've had one or two surface, but is there any color on the type of customer you can give?
Ronen Samuel
Again, we cannot get into the name of the customer. Those are big projects that we alluded into them a quarter ago, two quarters ago that we are working on.
Those are our top customers across the world or actually two of them across the world, one of them in North America, but we cannot add more color on top of that.
James Ricchiuti
Ronen, if we think about the traction that you're making in the market, you're obviously - you're raising your guidance and expectations for the second half. And I'm wondering and maybe you alluded to this before, I joined the call a couple of minutes late, but is the traction with some of these larger customers helping to drive some of the faster stronger growth that you're anticipating in the second half.
And generally what sounds like a fairly strong outlook into the first half of next year.
Ronen Samuel
Yeah, definitely part of the goals that we see is with our existing strategic accounts, not only with our global strategic account, but with other strategic accounts that additional strategic accounts that we had before. But what we see recently, new midsized accounts are becoming very material for Kornit on big projects.
We are entering to some very interesting project with brands and marketplaces that are very, very interesting. And then the Presto is almost a new segment for us that we are entering mostly net new customers, but each one of them, we see them growing very far on multiple installation.
James Ricchiuti
Okay, last question if I may, just you guys have had great success in a couple of geographic regions. And if I look at Asia Pacific, it's been a smaller part of your revenues for some time.
And yet would you think that that would be a big opportunity. And I'm wondering how we should think about that?
You've announced that at some additions to your management team there. What should we be thinking about in terms of the APAC region for you guys?
Ronen Samuel
So we believe that Asia Pacific is going to be a big revenue growth - a big pillar within Kornit's future business. We need to understand that currently, in the last, I would say one year or a bit less than one year, Asia Pacific is totally closed.
Actually, you cannot travel from country to country within Asia Pacific, and only now they're starting to reopen. And our focus, as we mentioned in previous calls is mainly around China, Japan, Australia, and Korea.
We see very interesting move both in China and Japan, some very strategic play there with brands, with marketplaces, with fulfillers and also Australia we're starting to see very nice and constant business coming from Australia.
James Ricchiuti
Got it. Thanks very much, congratulations.
Ronen Samuel
Thank you very much.
Operator
Our next question comes on line of Patrick Ho with Stifel. Please shoot your question.
Patrick Ho
Thank you very much, and congrats on the nice quarter and outlook. Ronen, I apologize, I joined a little bit late.
So you may have addressed this. But if not, I was just wondering, with a strong outlook for the December quarter and as you look at 2021 as a whole, how has your visibility, I guess, improved probably over the last three months.
And as we go into December quarter, in terms of say the first quarter, or the second quarter of '21. And I'm not looking for a quantitative, but qualitatively, how do you see visibility, the ability to add on more orders and continue to build backlog as we get into 2021?
Ronen Samuel
I would say that we've never been in situation that has of today that we have a very, very clear visibility to the entire H1. So we know how H1 will look like.
We are very confident about H1. We are engaged in big projects across the world.
Some of them are in the middle of the implementations. So we have full confidence about H1.
The team is already engaged about building the H2, which we are starting to have line of sight as well. So we feel comfortable about - confident about 2021.
Patrick Ho
Great and I see on your presentation, you talk about several of the products like the Atlas and the Vulcan Plus and the traction there. Can you detail the customer - the types of customers particularly for the Atlas, are you seeing that broad base across both brands as well as fulfillers in terms of the adoption of the Atlas?
Ronen Samuel
Yeah, so the Atlas we see adoption both with fulfillers that are playing in their own demand market in the ecommerce, some of them directly to consumers, some of them directly with businesses, B2B and B2C. We are entering into traditional screen printers.
They understand that they have to move to do on demand and they're buying digital and choosing Kornit. In terms of the brands, there are two types in general of brands, the brands that are getting into vertical, they're planning to go fully vertical, meaning producing and using digital technology to print, to embellishment by themselves and they're adopting the Atlas's, but we see also many brands connecting to our installed base across the world and fulfilling for them, which really boost demand and raise the volume for installed base.
Patrick Ho
Great and final question for me, maybe for Guy in terms of OpEx, really strong OpEx management given the environment that's out there today. Obviously, some of - you're benefiting today because of fewer trade shows and things of that nature.
As we look at 2021 and as the environment, hopefully normalizes somewhat, how do you look at OpEx and I guess the potential ramp that we may see there as more trade shows begin to return?
Guy Avidan
So again, we're not guiding for 2021 yet, but just to remind you and the other guys on the call, when COVID started Q1, we actually said we're going to double down on R&D, and we're going to increase investment in R&D and technology. And you can see it throughout the first, second and third quarter and we expect to continue that trend.
So OpEx wise, we will continue to invest in R&D. Assuming trade show will return to normal next year, we might see some increase in sales and marketing expenses, obviously travel will return to normality in January 1, we will see that as well.
But our assumption is that it will not return that fast. We are shifting marketing budget from physical events, tradeshows, et cetera, to digital marketing today.
And we will probably maintain and even increase this investment.
Patrick Ho
Great, thank you again.
Guy Avidan
Thank you.
Ronen Samuel
Thank you.
Operator
Our next question comes from Chris Moore with CJS Securities. Please shoot your question.
Chris Moore
Hey, good afternoon. Yeah, maybe just a couple questions on Custom Gateway.
So just wanted to - is the integration fully complete at this point in time and maybe just talk a little bit about the impact that you've seen already there? And is there still much more to do to really fully leverage those capabilities?
Ronen Samuel
Yeah, the integration, of course is in the middle of it. Yeah, we are not fully integrated.
But the team is working very closely together. The synergy is immense.
The value propositions that we are getting - bringing to the market is super important. It's in the heart of our strategy at Kornit.
And we are getting great feedback from customers. We engage with new business, due to the workflow solutions that we have now.
As I mentioned on the call we have right now, more than 80 new opportunities for both selling the - of course, the software, the Custom Gateway solution and Kornit systems solutions to those opportunities. And opportunities are both with brands and fulfillers.
So it's really opened for us a huge opportunity in the market. The vision of Kornit of connecting the brands into the fulfillers, it's really about the platform and - the workflow platform and the Custom Gateway enable Kornit to really connect the brands to do on demand manufacturing wherever they want through the fulfillment network of Kornit installed base.
Chris Moore
Got it. Very helpful, thanks.
Last one for me, just in terms of thoughts on M&A activity moving forward. Obviously, very busy with what's going on here, is that something that you're spending much time on at this stage?
Ronen Samuel
Yes, we have dedicated a team that looking at the M&A activities and opportunities. We are looking in two main areas.
One is again, a workflow software solution. We identified a few very interesting opportunities that we are looking into them.
And the other one is more about technology, extending technology solutions, if it's on systems and adjacent market getting to new markets. So we're exploring that as well.
Yeah, we have some very interesting opportunity in front of us.
Chris Moore
Appreciate it, guys. Thank you.
Ronen Samuel
Thank you.
Operator
Our final question comes online of Greg Palm with Craig Hallum. Please shoot your question.
Greg Palm
Yeah. Thanks for taking the questions and congrats on the quarter as well.
I'm curious how much of the current strength in demand is driven by new customers, expansionary efforts versus maybe replacement or upgrades? And I'm curious how you view the upgrade opportunities as you shift more customers to outlets?
I mean do you view that as a meaningful driver for next year or not necessarily?
Ronen Samuel
Excellent question, in terms of the upgrades, so the upgrades to the HD we almost completed. We still have few customers that didn't upgrade and we intend to, hopefully to upgrade them very soon, but this one we almost completed.
We expect next year to see some new upgrade opportunities once we announce on the new portfolio and the new solution. This will be - those updates will be available for H2 next year.
So we expect a massive growth on upgrade opportunity in the second half of the year. In terms of net new to existing, it's very interesting question and really different from I would say region-to-region and between segment-to-segment.
In the DPF mostly, net new. And as I mentioned, we see massive growth coming from the DTF market.
In the DTG, so in North America, this quarter, it was around the 50-50 between the net new to existing customers. So while existing customer is going very fast, we have we have many, many new opportunities the market and we're getting too many new market segments.
It's similar in Europe and in Asia is mostly net new opportunities.
Greg Palm
Okay, interesting. And I guess based on what you've seen in October, first part of November, any commentary on how this holiday season might be similar or different than in past years?
I'm specifically wondering about consumable consumptions, so curious kind of what sorts of end demand trends you're seeing? Are you expecting a similar mix of consumables versus systems in this Q4 or will it skew more towards the system's just based on all the activity going on?
Ronen Samuel
First of all it's going to be a very strong peak season, yeah. Our customers are already fully engaged and they're getting more systems.
So they're going to be very, very busy. One thing that we're hearing from customers that they believe that this peak season will not end by end of December, they all talking about that the peak season will extend to January, February because they will not be able to deliver on time because of the huge demand and the backlog of orders that they have.
So this is kind of a unique situation that we didn't see before. In terms of the mix for Q4 between supplies to system, it's a very good question.
I would say it won't be very much different from the previous year. Guy, I do you want to relate to that?
Guy Avidan
No, I think it's got to be like Q4 last year. Obviously, in terms of mix Q4 normally is more - in consumables is heavy and we think it's going to be the same this year.
Greg Palm
Okay, I guess if I exclude the warrant impact for Q3, it appears that you did a 14.5% operating margin with revenue well above Q3 levels expected for Q4 and you're I guess, implying better mix because of more consumables. Why aren't you seeing higher flow through in terms of the guide for non-GAAP operating income?
Guy Avidan
So again, we said it before, obviously on the long run we're taking action and we expect higher gross margin and the longer term, obviously higher operating and net profit. But we also said that we're seeing a lot of opportunities ahead of us and we're investing in OpEx, meaning customer facing and technology.
And this is why we're not increasing operating margin that much.
Greg Palm
Okay, so more of a function of just continued investments.
Guy Avidan
Right.
Greg Palm
Okay, good. All right, I'll leave it there.
Thanks. And best of luck going forward.
Guy Avidan
Thanks Greg.
Ronen Samuel
Thank you, any additional questions.
Operator
No questions at this time.
Ronen Samuel
Okay, so I would like to thank everyone for joining this afternoon call. We are very pleased with our third quarter results and our ability to increase our second half 2020 year-over-year low teen revenues to 25% growth.
The textile industry is clearly at an inflection point in its transition to digital sustainable on demand manufacturing. And we have never been in better position to execute against this opportunity.
Looking ahead, we expect a strong close to 2020 and carry a great deal of momentum and strong pipeline into 2021. I would like to end by thanking our team, our employees across the world for their hard work commitment and passion for our customers.
Thank you very much.
Operator
This concludes today's teleconference. You may now disconnect your lines at this time.
Thank you for your participation and have a wonderful day.