DST Systems Inc. (DST): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
DST reported better-than-expected second-quarter results which also increased on a year-over-year basis. Higher number of client additions, better customer relationships and growth at ALPS and DST Brokerage Solutions drove revenues. Segment performances were also modest with synergies from acquired units. Higher conversions into DST's sub-accounting platform were encouraging but growth in registered accounts continued to lag. 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 growth. On the other hand, decreasing organic revenue growth, tough competition from IBM and Fiserv, and a high debt burden remain the concerns. Thus, we reiterate our Neutral recommendation on DST Systems.

Overview:

Founded in 1969, DST Systems Inc. (DST) is one of the leading global providers of sophisticated information processing software and systems to the financial services industry, primarily mutual funds and investment managers. Other industries served include communications, healthcare and services. The company generates a significant portion of its revenues from the mutual fund and communications industries. The company's operations are spread throughout Australia, Brazil, Canada, Hong Kong, New Zealand, Singapore, South Africa, Thailand, the United Kingdom and the U.S., with the U.S. generating nearly 81.0% of its total operating revenue in 2012.

Operations of DST are carried out by two principal segments Financial Services and Output Solutions. In addition, DST's investments in equity securities and other financial interests, along with its real estate subsidiaries, constitute the Investments and Other segment (3.0% of 2012 total revenue).

The Financial Services segment (64.0% of total revenue in fiscal 2012) offers information processing and computer software services to mutual funds, investment managers, corporations, insurance companies, banks, brokers and financial planners. Its software systems primarily provide shareowner recordkeeping, broker subaccounting, retirement plan/ participant recordkeeping, distribution support solutions, asset gathering and servicing by ALPS, business process management, investment management software and services, healthcare administration processing solutions and services, pharmacy claims processing and document management services.

DST System encourages cross selling of the segment's wide range of products and services to its existing clients. The segment's products are adopted by various industrial sectors and hence have a broad-based customer base. Hence, cross selling increases the chance for quick product adoption.

The Financial Services Segment's five largest customers accounted for 28.4% of segment operating revenues in 2012, including 9.4% from its largest customer.

The Customer Communications (previously Output Solutions) segment (33.0% of total revenue) provides single source, integrated print and electronic statement and billing output solutions. The Customer Communications segment also provides customized statement and bill production, marketing and personalization services, postal optimization, and electronic presentment, payment and distribution solutions. The segment conducts its operations from five centers in North America and the U.K. This is among the largest First-Class mailers in the U.S. and is one of the largest users of continuous, high-speed, full-color inkjet printing systems. The segment distributes its products directly to customers or through data processing service providers in combination with other services. Products are also bundled with other offerings to customers of the Financial Services Segment.

The revenue distribution in 2012 by geography was as follows the U.S. 81.0%, the U.K. 11.0%, Canada 3.0%, Australia 3.0% and Others 2.0%.

The company's competitors for third-party shareowner accounting systems and subaccounting systems are PNC Global Investment Servicing Inc. and SunGard Data Systems Inc. Competitors in the retirement savings plan accounting and recordkeeping services are Ascensus and GreatWest. In the REIT processing services, the company competes with The Bank of New York Mellon and Phoenix American. It also faces significant competition from IBM, BEA, Lombardi, Savvion and TIBCO in the Automated Work Distributor (AWD) space.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

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