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DST Systems Shares Rise on Q3 Earnings & Revenue Beat

Shares of DST Systems Inc.DST went up 5.6% on Oct 22, 2015 after the company reported better-than-expected third-quarter 2015 earnings.

The company reported non-GAAP earnings of $1.49 per share, surpassing the Zacks Consensus Estimate of $1.43. However, on a year-over-year basis, earnings per share decreased 3.2%.

DST Systems Inc. - Earnings Surprise | FindTheBest

Quarter Details

Total revenue in the third-quarter was $705 million, up 3.8% year over year. Excluding out-of-the-pocket reimbursements, consolidated operating revenues decreased 1.6% year over year to $502.6 million but surpassed the Zacks Consensus Estimate of $496 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) decreased 3.2% year over year to $260.6 million, primarily due to the sale of Global Solutions in the fourth quarter. Moreover, unfavorable foreign currency fluctuations impacted segmental revenues.

Healthcare Services operating revenues were down 1.6% on a year-over-year basis and came in at $94 million, primarily due to lower pharmacy claims.

Customer Communications (previously Output Solutions) operating revenues were up 2.6% year over year to $147.1 million. Contribution from North America remained strong due to client wins.

Apart from this, Investments and Other Segment operating revenues decreased 60.9% year over year to $0.9 million. The year-over-year decrease was primarily due to lower occupancy revenues.

Cost and expenses were up 6.2% year over year to $598.2 million, primarily due to increased investments for new business expansion. As a percentage of revenues, costs and expenses were up 868 basis points (bps) on a year-over-year basis. This in turn impacted operating results. Non-GAAP operating margin was down 186 bps on a year-over-year basis to 15.1%.

DST reported non-GAAP net income of $53.9 million or $1.49 per share compared with $61.2 million or $1.54 per share reported in the year-ago quarter.

Balance Sheet, Share Repurchases & Dividend

DST Systems' balance sheet appears highly leveraged. The company exited the quarter with $152.5 million in cash and equivalents compared with $103 million in the previous quarter. Long-term debt (including current portion) was $765.2 million compared with $498.2 million in the previous quarter.

During the third quarter, DST Systems repurchased roughly 1.6 million shares worth $175 million and paid a dividend of 30 cents per share.

Conclusion

DST reported encouraging third-quarter results, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate. However, lower client additions, unfavorable market conditions and lower-than-expected revenues from its operating segments adversely impacted the quarter's results.

Nevertheless, 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.

On the other hand, declining organic revenue growth, tough competition from International Business Machines Corporation IBM and Fiserv Inc. FISV , and a high debt burden remain concerns.

Currently, DST Systems carries a Zacks Rank #4 (Sell).

A better-ranked stock in the technology space is Juniper Networks, Inc. JNPR , sporting a Zacks Rank #1 (Strong Buy).

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FISERV INC (FISV): Free Stock Analysis Report

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JUNIPER NETWRKS (JNPR): Free Stock Analysis Report

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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 Nasdaq, Inc.


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

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