DST Systems Inc.
(
DST
) posted fourth-quarter 2012 adjusted earnings per share (EPS) of
$1.19, which surpassed the Zacks Consensus Estimate of $1.01. The
results were 11.2% higher than the prior-year quarter.
Revenues
Total revenue in the fourth quarter was $658.6 million, up 5.6%
from $623.4 million in the year-ago quarter. Excluding
out-of-the-pocket reimbursements, consolidated operating revenue
increased 6.5% year over year to $487.0 million, which was above
the Zacks Consensus Estimate of $472.0 million.
Financial Services
operating revenues (excluding out-of-the-pocket reimbursements)
increased 8.3% year over year, primarily owing to broad-based
improvements in the brokerage, global solutions, healthcare and
AWD operating units as well as significant contribution from the
ALPS acquisition (in Jul 2011). However, the results were
partially offset by lower mutual fund shareowner processing
revenues and retirement revenues.
During the quarter, total mutual fund shareowner accounts
serviced decreased 1.5% sequentially to 88.1 million. Registered
accounts and sub-accounts serviced by the company during the
quarter were 75.7 million and 12.4 million, respectively.
The decline was mainly due to conversion of roughly 1.4 million
registered accounts to DST's competitor platform and 0.4 million
accounts to its own sub-accounting platform. However, the
interesting point is that the decline in total mutual fund
shareowner accounts moderated from the 8.0% decline recorded in
the preceding quarter.
DST Systems announced to have won a new subaccounting client with
approximately 300,000 subaccounts. Also, the company confirmed
conversion of 100,000 subaccounts from a new client announced
earlier.
Customer Communications
(previously Output Solutions) operating revenues increased 2.7%
year over year. Contribution from North America was strong, which
was offset by weak contribution from UK. 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 2013, resulting in revenue
growth.
This apart,
Investments and Other
Segment operating revenues increased 28.1% year over year to $4.1
million, primarily as a result of increased rental activities.
Operating Results
Total cost and expenses increased 16.3% from the year-earlier
period to $659.4 million. Consolidated operating loss was $0.8
million compared with operating income of $56.3 million in the
year-ago quarter. Margin deceleration was due to weak performance
by Customer Communications segment, partially offset by
improvements in Financial Services and Investment and Other
segments.
Financial Services operating income increased 9.8% from the
year-ago period to $56.2 million. However, operating margin came
below the year-ago level due to lower mutual fund processing
revenues and higher conversion and business expansion costs for
the retirement and brokerage business units. Customer
Communications operating loss was $58.0 million compared with
operating income of $4.9 million in the year-ago quarter.
Net income attributable to DST shareholders in the quarter was
$37.9 million or 82 cents per share, down from $39.2 million or
88 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) and
equity earnings. Excluding the one-time items included in
operating income and non-operating income, adjusted net income in
the quarter came in at $1.19 per share, up from $1.07 in the
year-ago quarter.
Balance Sheet
DST Systems' balance sheet appears highly leveraged. The company
exited the quarter with $88.0 million in cash and equivalents,
down from $103.0 million reported in the previous quarter, and
debt of $1.01 billion, down from $1.10 billion reported in the
previous quarter. Growing cash balance and declining debt
reflects an improving net cash situation.
Share Repurchases & Dividend
During the fourth quarter, DST Systems bought back 1,250,000
common stock for a value of $73.7 million. Also, the company paid
a semi-annual dividend of 40 cents a share.
On Jan 30, 2013, DST's board authorized a $250 million share
repurchase plan, replacing the previous plan under which 750,000
shares were still remaining.
DST Systems also announced that it will start paying dividends
quarterly at a rate of 30 cents a share.
Guidance
For the first quarter of 2013, DST expects its existing clients
to convert 5.1 million subaccounts to DST's subaccounting
platform, an increase of 1.3 million from the previous
projection. The company also expects 5.4 million new subaccounts
to convert from non-DST subaccounting platforms by the end of the
first quarter.
DST Systems signed a new mutual fund registered account client in
Jan 2013, which is expected to add approximately 100,000 new
accounts during the upcoming quarter.
For 2013, DST currently estimates total conversions of registered
accounts to subaccounts to approximate 5-6 million, of which
approximately 30% will convert to DST's subaccounting platform.
Conclusion
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 Estimates on both the
top and bottom lines. However, year-over-year improvement in
total revenue was not very encouraging due to 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 growth.
On the other hand, tough competition from
Broadridge Financials Solutions Inc.
(
BR
),
Advent Software Inc.
(
ADVS
),
Fiserv Inc.
(
FISV
), and a high debt burden remain concerns.
Currently, DST Systems has a Zacks Rank #2 (Buy).
ADVENT SOFTWARE (ADVS): Free Stock Analysis
Report
BROADRIDGE FINL (BR): Free Stock Analysis
Report
DST SYSTEMS (DST): Free Stock Analysis Report
FISERV INC (FISV): Free Stock Analysis Report
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