DST Systems Inc.DST ended 2016 on a strong note, reporting splendid fourth quarter results. The company's top and bottom line results not only surpassed the respective Zacks Consensus Estimate but also improved year over year.
The company posted non-GAAP earnings (excluding discontinued operations and one-time items) of $1.66 per share, which surpassed the Zacks Consensus Estimate of $1.51. DST Systems' non-GAAP earnings also registered a year-over-year increase of 18.6%, mainly driven by higher revenues, effective cost management and lower share count.
Shares of DST Systems gained 2.6% yesterday.
DST Systems, Inc. Price, Consensus and EPS Surprise
Total revenue in the fourth quarter came in at $398.8 million, up 4.1% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 3.1% year over year to $373.7 million, which was way ahead of the Zacks Consensus Estimate of $366 million.
Financial Services operating revenues (excluding out-of-the-pocket reimbursements) remained almost flat year over year at $272.7 million. Benefits from businesses acquired during 2016 and increased revenues from professional services were largely offset by extension of certain long-term contracts with lower pricing and a fall in mutual fund registered shareowner account processing revenues.
Healthcare Services operating revenues were up 13.7% on a year-over-year basis and came in at $111.9 million, primarily due to expansion in high-value services for medical and pharmacy businesses, new medical claims and organic growth.
Non-GAAP cost and expenses were up 1.2% from the year-ago quarter to $315.6 million. However, as a percentage of revenues, costs and expenses were down 230 basis points (bps) on a year-over-year basis to 79.1% due to better cost management.
Non-GAAP operating income increased 16.7% year over year and came in at $83.2 million. Operating margin was also up 230 bps on a year-over-year basis to 20.9%. The increase in operating income was primarily driven by cost-cutting measures within the Financial Services segment.
DST reported non-GAAP net income of $53.9 million compared with $48.9 million reported in the year-ago quarter.
The company's balance sheet as of Dec 31, 2016 looked very impressive as it has managed to lower its long-term debt and increased available cash and cash equivalents during the quarter by generating funds through the sale of the North American Customer Communications (NACC) business.
The company exited 2016 with $195.5 million in cash and equivalents compared with $79.5 million at the end of 2015. Long-term debt (including current portion) was $508.2 million compared with $562.1 million as of Dec 31, 2015.
During the fourth quarter, DST Systems repurchased roughly 0.675 million shares worth $75 million. Furthermore, since the beginning of Jan 2017, the company has repurchased $47 million worth of its common stock. It now has $103.0 million remaining under the existing $300 million share repurchase plan announced in Jun 2016.
Important Developments of 2016
On Jul 1, 2016, DST Systems announced the completion of the sale of the NACC business to Broadridge Financial Solutions Inc. (BR) for a cash consideration of $410 million. The company recorded an estimated $340.1 million pretax gain on the transaction during the last reported quarter.
DST Systems' NACC was the largest transactional printer in North America. The unit offers customers communication services including print and digital communication solutions, content management, postal optimization and fulfillment.
DST Systems reported splendid fourth-quarter results, wherein earnings and revenues both surpassed the Zacks Consensus Estimate. Moreover, both revenues and earnings grew year over year.
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 acquisitions to support revenue growth. Continued share buybacks and dividend payments are the other encouraging factors.
However, persistent decline in registered accounts, ongoing consolidation in the U.S. financial services market and stiff competition from International Business Machines Corporation IBM and Fiserv Inc. FISV may put its fundamentals under pressure. Moreover, a high debt burden still remains a major concern for the company.
Notably, the stock price has underperformed the Zacks categorized Computer-Software industry over the past one year. While the industry gained 24.4%, the stock gained only 12.3%.
A better-ranked stock worth considering in the Computer-Software industry is Check Point Software CHKP , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
Check Point Software has surpassed the Zacks Consensus Estimate thrice while matching the same once in the trailing four quarters with an average positive surprise of 6.02%. The expected long-term EPS growth rate for the stock is 10%.
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