DST Systems Inc.
) posted third quarter 2012 adjusted earnings per share (EPS) of
96 cents, surpassing the Zacks Consensus Estimate of 93 cents.
The results were 6.7% higher than 90 cents recorded in the
Total revenue in the third quarter was $632.0 million, up 6.9%
from $591.4 million in the year-ago quarter. Excluding
out-of-the-pocket reimbursements, consolidated operating revenue
increased 7.1% year over year to $464.0 million, which was below
the Zacks Consensus Estimate of $472.0 million.
operating revenues (excluding out-of-the-pocket reimbursements)
increased 10.2% year over year, primarily owing to broad-based
improvements in the brokerage, retirement, healthcare and AWD
operating units as well as significant contribution from the ALPS
acquisition (in July 2011). However, the results were partially
offset by lower mutual fund shareowner processing revenues.
operating revenues increased 1.5% year over year. Contribution
from North America was strong, which was offset by weak
contribution from the U.K. During the quarter, there were new
client commitments from North America. DST Systems expects full
conversion activities related to these new clients to be
completed in the first quarter of 2013, resulting in revenue
Investments and Other Segment
operating revenues increased 19.4% year over year to $3.7
million, primarily as a result of increased rental
During the quarter, total mutual fund shareowner accounts
serviced decreased by 8.0% sequentially to 89.4 million.
Registered accounts and sub-accounts serviced by the company
during the quarter were 80.2 million and 17.0 million,
The decline was mainly due to conversion of roughly 6.1
registered accounts to DST's competitor platform.
Total cost and expenses increased 10.3% from the year-earlier
period to $584.9 million. Consolidated operating income was $47.1
million, down 23.0% from $61.2 million in the year-ago quarter.
Margin deceleration was due to weak performances by Financial
Services and Investment and Other segments, partially offset by
improvement in Output Solutions segment.
Financial Services operating income decreased 12.8% from the
year-ago period to $52.0 million. The decrease was due to higher
costs pertaining to the ALPS acquisition, new business
development and compensation. Output Solutions operating income
was $10.6 million, significantly up from $1.9 million in the
year-ago quarter. The improvement was attributable to lower costs
from facility consolidations and improvements in operations.
Net income attributable to DST shareholders in the quarter was
$85.9 million or $1.87 per share compared with $35.3 million or
76 cents per share in the year-ago quarter. Despite a lackluster
operating performance, the improvement in net income was
attributable to higher non-operating income (sale of assets).
Excluding the one-time items included in operating income and
non-operating income, adjusted net income in the quarter came in
at 96 cents per share, up from 90 cents in the year-ago
DST Systems' balance sheet appears highly leveraged. The
company exited the quarter with $103.0 million in cash and
equivalents, up from $93.0 million reported in the previous
quarter, and debt of $1.10 billion, down from $1.21 billion
reported in the previous quarter. Growing cash balance and
declining debt reflects an improving net cash situation.
Share Repurchases & Dividend
No share buyback was made during the quarter. But 100,000
shares were issued under share-based compensation plans, due to
which the company currently has approximately 45.2 million shares
remaining under its existing share repurchase authorization.
DST will pay a dividend of 40 cents a share in November.
For fiscal 2012, the company forecasts 2-3 million conversions
of registered accounts to subaccounts and a total loss of 9
million to 10 million accounts. But the company expects roughly
25.0% of these accounts to convert to DST's subaccounting
For 2013, DST expects total conversions to subaccounts to
approximate 5-6 million, of which approximately 30% will convert
to DST's subaccounting platform.
DST signed a contract with a new subaccounting client with
approximately 3.9 million subaccounts. The conversion of the
subaccounts to DST's platform is expected to be completed in the
second quarter of 2013, impacting revenue growth.
DST Systems is one of the leading global providers of
sophisticated information processing software and products to the
financial services industry, primarily mutual funds. The company
has supplemented internal growth with strategic acquisitions.
The company surpassed the Zacks Consensus Estimate on the
bottom line, but missed the top-line projection. Total revenue
improved on modest performances across the segments.
We remain encouraged by DST's exposure in the insurance
vertical. Currently, the company has tie-ups with more than 20 of
the top 25 insurance companies in America, which is expected to
drive decent revenue growth.
However, we are still of the opinion that, DST Systems'
business volume and massive scale of operation in Financial
Services will attract new customers. Moreover, we expect steady
contributions from the recent acquisitions to support revenue
On the other hand, tough competition from
Broadridge Financials Solutions Inc.
Advent Software Inc.
) and a high debt burden remain concerns.
Currently, DST Systems has a Zacks #2 Rank, implying a
short-term "Buy" rating.
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DST SYSTEMS (DST): Free Stock Analysis Report
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