DST Systems Inc.
) posted second quarter 2012 adjusted earnings per share (EPS) of
77 cents, significantly missing the Zacks Consensus Estimate of 97
cents. The results were 26.7% lower than $1.05 recorded in the
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Total revenue in the second quarter was $632.8 million, up 8.7%
from $582.2 million in the year-ago quarter. Excluding
out-of-the-pocket reimbursements, consolidated operating revenue
increased 9.8% year over year to $465.5 million, which was just
above the Zacks Consensus Estimate of $465.0 million.
Financial Services operating revenues (excluding out-of-the-pocket
reimbursements) increased 9.4% 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
Output Solutions operating revenues increased 10.0%, reflecting
favorable contributions from Newkirk Products, Inc. (acquired in
May 2011) and Lateral Group Limited (acquired in August 2011).
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 second half of 2012,
resulting in revenue growth.
This apart, Investments and Other Segment operating revenues
increased 10.2% year over year to $15.5 million, primarily as a
result of increased rental activities.
During the quarter, total mutual fund shareowner accounts serviced
decreased by 2.3% sequentially to 97.2 million. Registered accounts
and sub-accounts serviced by the company during the quarter were
80.2 million and 17.0 million, respectively. The rate of decline
was far worse than the 0.2% fall in the previous quarter.
The decline was mainly due to conversion of roughly 800,000
registered accounts to
Bank of New York Mellon Corp.
Total cost and expenses increased 14.3% from the year-earlier
period to $581.9 million. Consolidated operating income was $50.9
million, down 30.6% from $69.3 million in the year-ago quarter.
Margin deceleration was due to weak performances across the board.
Financial Services operating income decreased 23.8% from the
year-ago period to $48.8 million. The decrease was due to higher
costs pertaining to the ALPS acquisition, new business development
and compensation. Output Solutions operating income was $4.6
million, down 48.3% from the year-ago quarter. The decline was
attributable to higher costs due to Canadian plant expansion and
new client start-up expenses, partially offset by increases in the
North America operations.
Net income attributable to DST shareholders in the quarter was
$144.9 million or $3.17 per share compared with $55.2 million or
$1.17 per share in the year-ago quarter. Despite a lackluster
operating performance, the improvement in net income was
attributable to higher non-operating income, partially offset by a
higher tax rate. Excluding the one-time items included in operating
income and non-operating income, adjusted net income in the quarter
came in at 79 cents per share, down from $1.05 in the year-ago
DST Systems' balance sheet appears highly leveraged. The company
exited the quarter with $93.0 million in cash and equivalents, up
from $52.0 million reported in the previous quarter, and debt of
$1.21 billion, down from $1.36 billion reported in the previous
quarter. Growing cash balance and declining debt reflects an
improving net cash situation.
No share buyback was made during the quarter. But 200,000 shares
were issued under share-based compensation plans, due to which the
company currently has approximately 45.1 million shares remaining
under its existing share repurchase authorization.
DST Systems expects another 5.8 million subaccounts to convert to
Bank of New York platform during third quarter 2012. The company
also forecasts 8-10 million conversions of registered accounts to
subaccounts in 2012. But the company expects roughly 30.0% of these
accounts to convert to DST's subaccounting platform.
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 missed the Zacks Consensus Estimates on the bottom
line, but just managed to beat the top-line projection. Total
revenue improved on strong 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
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 Lateral and New Kirk to provide continued support to Output
Solutions' revenue growth.
We expect the acquisitions to be accretive in the upcoming
quarters. The similar lines of businesses will make it easy for DST
Systems to speed-up integration.
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 #3 Rank, implying a short-term