Sign in

You're signed outSign in or to get full access.

DI

DSS, INC. (DSS)·Q4 2017 Earnings Summary

Executive Summary

  • Q4 2017 revenue rose 1% year over year to $5.83M, with printed products up 7% to a record $5.47M, while technology sales fell 45% to $0.36M; net income was $0.15M ($0.01 EPS), turning positive versus Q3’s loss and Q4 2016’s $0.00 EPS .
  • Adjusted EBITDA was $0.59M, down 11% YoY, driven by higher cost of goods sold; however, Q4 marked the seventh straight quarter of positive EBITDA, and full-year Adjusted EBITDA increased to $1.4M (+32% YoY) .
  • Management highlighted AuthentiGuard commercialization with “more than 150 million” marks printed in 2017 and a global rollout across North America, South America, Europe, and Asia; DSS opened a Hong Kong office to accelerate Asia-Pacific expansion .
  • A February 2018 8-K disclosed a non-payment default on a limited-recourse patent-backed obligation; DSS expects a non-cash gain on extinguishment of ~$3.2M upon transfer of patents, improving working capital in the resolution period .

What Went Well and What Went Wrong

What Went Well

  • Printed products delivered the largest quarterly sales in company history in Q4, up 7% YoY to $5.47M, recovering from Q3 timing slippage; CFO: “highest quarterly… in our history” .
  • AuthentiGuard commercialization advanced materially: “printed AuthentiGuard mark on more than 150 million” labels/packaging in 2017; expanded multi-region printing capability (NA, SA, Europe, Asia) and a proof-of-concept in India .
  • Operating discipline: Q4 costs and expenses decreased 1% YoY; professional fees -48% in Q4 due to a negotiated legal cost settlement (~$219k), aiding profitability .

What Went Wrong

  • Technology sales were a headwind in Q4 (-45% YoY to $0.36M), reflecting lower reported usage and lapping a prior-year setup revenue; adjusted EBITDA declined 11% YoY due to higher COGS .
  • Q3 showed softness: revenue -16% YoY to $4.20M and net loss of $0.28M, reflecting printed product seasonality and a prior-year $150k one-time tech license benefit absent this year .
  • Capital structure overhang: short-term debt ~$3.65M at year-end tied to a limited-recourse patent financing matured in Feb-2018, requiring resolution (albeit non-cash) to clean up the balance sheet .

Financial Results

Consolidated Performance (GAAP and Non-GAAP)

MetricQ2 2017Q3 2017Q4 2017
Revenue ($USD Millions)$3.86 $4.20 $5.83
Net Income ($USD Millions)$(0.27) $(0.28) $0.15
Diluted EPS ($USD)$(0.02) $(0.02) $0.01
Operating Income (EBIT) ($USD Millions)$(0.17) $(0.17) $0.20
Adjusted EBITDA ($USD Millions, non-GAAP)$0.24 $0.19 $0.59
Cost of Goods Sold, excl. D&A ($USD Millions)$2.19 $2.40 $3.63
Gross Profit ($USD Millions)$1.67 $1.80 $2.20
Gross Margin (%)43.2% 42.8% 37.8%
Adjusted EBITDA Margin (%)6.2% 4.6% 10.1%

Notes: Gross profit/margins are computed from reported revenue and COGS (exclusive of D&A) with cited sources; Adjusted EBITDA margin is computed from company-reported Adjusted EBITDA and revenue .

Segment Revenue

Segment Revenue ($USD Millions)Q2 2017Q3 2017Q4 2017
Printed Products$3.38 $3.77 $5.47
Technology Sales, Services & Licensing$0.48 $0.43 $0.36
Total Revenue$3.86 $4.20 $5.83

Balance Sheet KPIs

KPIQ2 2017Q3 2017Q4 2017
Cash and Equivalents ($USD Millions)$4.07 $4.22 $4.19
Current Assets ($USD Millions)$8.17 $8.58 $8.38
Current Liabilities ($USD Millions)$10.08 $10.04 $9.40
Short-term Debt ($USD Millions)$3.55 $3.61 $3.65
Working Capital ($USD Millions)$(1.91) $(1.46) $(1.02)

Additional Operational KPIs (Qualitative/Volume)

KPIDescription
AuthentiGuard Adoption“More than 150 million” marks printed across global supply chains in 2017 .
Legal Cost Settlement~$219k reduction in approved legal costs recognized in Q4, reducing professional fees .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY/Q1 2018None providedNone providedMaintained: No formal guidance
Margins (Gross/Adj. EBITDA)FY/Q1 2018None providedNone providedMaintained: No formal guidance
OpExFY/Q1 2018None providedOngoing cost control; add resources for AuthentiGuard in 2018 (qualitative) Qualitative only
Debt/Balance Sheet2018 Resolution PeriodN/AExpect ~$3.2M non-cash gain on extinguishment upon patent transfer New disclosure

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 2017)Current Period (Q4 2017)Trend
AuthentiGuard commercializationStrong tech sales growth; pipeline expanding; first large implementation driving results >150M marks printed; global printer capability (NA/SA/EU/Asia); proof-of-concept in India Accelerating deployment and scale
Printed Products performanceQ3 seasonality/timing pushed orders to Q4; strong customer relationships Record quarterly sales in Q4; recovery from Q3 Rebound/strength
Asia expansionBuilding Hong Kong presence; ramp expected with long lead times Hong Kong office opened; veteran leader hired; active opportunity development Execution underway
Cost discipline/legal expensesOpEx reductions through 2017; adjusted EBITDA improving Legal cost settlement (~$219k) cut professional fees; continued expense control Continued efficiency
Capital structure/debtShort-term limited-recourse debt ~$3.6M (settle via patent transfer) Feb-2018 default; sole remedy is patent transfer; expect ~$3.2M gain Balance sheet clean-up expected
Technology roadmapN/ABlockchain in R&D; natural fit with AuthentiGuard mobile app Early-stage exploration
IP MonetizationLED patent actions initiated; multi-year timeline Continued progress; litigation upside acknowledged Long-dated optionality

Management Commentary

  • CEO on AuthentiGuard progress: “the customers’ printed AuthentiGuard mark on more than 150 million times… beginning to make an impact on the global counterfeiting problems… printers… in North America, South America, Europe and Asia” .
  • CFO on Q4 drivers: “net income 147,000… strength in our printing products group… improving margin of technology sales… favorable impact of the legal cost settlement” .
  • CEO on competitive positioning: “we have increasingly seen… our product is better than our competition… requires significant expertise… we will see the benefits of this in 2018” .
  • CFO on balance sheet and debt remedy: “short-term debt amount of $3,646,000… default… sole remedy… transfer of certain patents… expected… net gain… approximately $3.2 million” .

Q&A Highlights

  • Asia expansion: DSS opened Hong Kong office led by Vincent Lum; team engaged in India proof-of-concept; pipeline building, but revenue timing uncertain and longer-lead .
  • Blockchain: In R&D; management sees a “natural fit” with AuthentiGuard; no specific product yet .
  • Tone: Chairman emphasized financial stability with cash and “continued positive EBITDA” enabling strategic choices without cash burn .

Estimates Context

  • Wall Street consensus (S&P Global): Consensus revenue and EPS estimates for Q4 2017 were unavailable due to data access limits during this session; comparisons to estimates cannot be provided at this time [GetEstimates error].
  • Implication: Absent consensus, focus centers on DSS’s YoY improvement in EPS to $0.01 and QoQ recovery in revenue and operating income; any future estimate revisions may reflect the reported Q4 printed products strength and clarity on the 2018 non-cash gain from debt resolution .

Key Takeaways for Investors

  • Printed products drove a decisive Q4 rebound with record sales, turning DSS profitable for the quarter; watch sustainability of this mix and COGS pressure which compressed gross margin vs Q3 .
  • AuthentiGuard is scaling globally and remains the strategic growth engine; near-term catalysts include additional customer on-boarding and expanded usage within the flagship customer’s supply chain .
  • The limited-recourse patent financing resolution is a de-risking event: expected ~$3.2M non-cash gain should strengthen equity and working capital in the resolution period .
  • Operating discipline remains evident (legal cost settlement, lower professional fees), supporting consistent positive Adjusted EBITDA through variability in top-line .
  • Technology sales consistency is a watch item (Q4 decline); management expects growth as AuthentiGuard usage expands and additional customers come online .
  • Asia-Pacific expansion (Hong Kong office) is strategic but long-cycle; monitor early revenue contribution and proof-of-concept conversion .
  • Optionality from IP monetization (LED patent actions) exists but remains multi-year; not a near-term driver .