DST reported better-than-expected third-quarter results. Also, the
quarter's results increased on a year-over-year basis. Higher
number of client additions, favorable market conditions 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.
Nonetheless, decreasing organic revenue growth, tough competition
from International Business Machines Corporation and Fiserv Inc.,
and a high debt burden remain concerns. Thus, we reiterate our
Neutral recommendation on DST Systems.
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
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
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)
DST Systems Inc. (DST): Read the Full Research
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