[Management View]
Kornit Digital is accelerating its shift to the All-Inclusive Click (AIC) recurring revenue model, which is expected to impact short-term revenue but enhance long-term profitability. The company is focusing on geographic expansion, particularly in Asia, and is seeing early success in the decorated footwear market.

[Outlook]
For Q4 2025, revenue is projected between $56 million and $60 million, with an adjusted EBITDA margin of 7%-10%. The company anticipates low single-digit revenue growth and substantial EBITDA margin expansion in 2026, driven by the recurring revenue mix.

[Financial Performance]
Year-over-year, operating cash flow decreased from $13.6 million to $4.3 million, and cash flow less CapEx dropped from $3.1 million to $800,000. The shift to the AIC model is expected to improve long-term predictability and profitability.

[Q&A Highlights]
Question 1: Could you break out systems and consumables demand, and how did this quarter differ from expectations?
Answer: Service grew due to upgrades, and product expansion was seen in ink and AIC. More systems are being shipped on the AIC model, contributing to future growth.

Question 2: Can you elaborate on the gross margin impacts and future expectations?
Answer: Headwinds from U.S. tariffs affected margins, but targeted price increases are expected to offset these impacts. Gross margin expansion is anticipated in Q4 and into 2023.

Question 3: What gives you confidence in 2026 growth despite low single-digit guidance?
Answer: The transition to recurring revenue provides more visibility. ARR from the AIC model is expected to grow, supporting EBITDA expansion.

Question 4: Why is the growth outlook for 2026 only low single digits despite a strong ARR?
Answer: The shift to recurring revenue defers short-term revenue recognition but builds a stronger long-term foundation. The focus is on sustainable, profitable growth.

Question 5: How will the geographic revenue mix change in the next few years?
Answer: North America will remain the largest region, but growth is expected in Asia, particularly in the footwear and screen markets.

Question 6: What are your thoughts on free cash flow in 2026 and 2027?
Answer: Free cash flow is expected to be negative due to AIC investments, but operating cash flow should remain positive.

Question 7: What has changed in the revenue outlook for the second half of the year?
Answer: The shift from CapEx to AIC deals impacts short-term revenue, but ink revenue is expected to grow.

Question 8: How sustainable is the upgrade activity for service revenue?
Answer: Most upgrades were completed in 2024, but new upgrades are planned for 2026, which will contribute to service revenue.

Question 9: What is the demand outlook for footwear and textile markets?
Answer: The footwear market is a significant opportunity, with over 1 million pairs printed. The textile market is seeing traction with new customers and strategic agreements.

Question 10: What are the drivers of OpEx improvement, and what are future opportunities?
Answer: Resource allocation and efficiency improvements have reduced OpEx. The focus will remain on aligning costs with revenue growth.

[Sentiment Analysis]
Analysts showed interest in the transition to the AIC model and geographic expansion. Management was confident in the long-term benefits of these strategies, despite short-term revenue impacts.

[Quarterly Comparison]
| Metric | Q3 2025 | Q3 2024 |
|-------------------------|---------------|---------------|
| Operating Cash Flow | $4.3 million | $13.6 million |
| Cash Flow Less CapEx | $800,000 | $3.1 million |
| Revenue Guidance (Q4) | $56M-$60M | N/A |
| Adjusted EBITDA Margin | 7%-10% | N/A |

[Risks and Concerns]
- Negative free cash flow due to AIC investments.
- Gross margin headwinds from U.S. tariffs.
- Year-over-year revenue decline expected in Q4 due to the transition to recurring revenue models.

[Final Takeaway]
Kornit Digital is undergoing a strategic transformation towards a recurring revenue model, which is expected to enhance long-term profitability despite short-term revenue impacts. The company is focusing on geographic expansion, particularly in Asia, and is seeing early success in the decorated footwear market. Management remains confident in the long-term benefits of these strategies, with a focus on sustainable and profitable growth.