Will Elevated Costs Impact DST Systems' (DST) Q4 Earnings?

DST Systems Inc.DST , which recently agreed to be acquired by SS&C Technologies Holdings, Inc. SSNC , is scheduled to report fourth-quarter 2017 earnings on Jan 25. The question lingering in investors' minds is whether this tech-based information processing and servicing solutions will be able to post a positive earnings surprise in the to-be-reported quarter. Notably, DST Systems has delivered positive earnings surprises in three out of the trailing four quarters, with an average beat of 6.4%.

So, let's see how things are shaping up prior to this announcement.

What to Expect?

The Zacks Consensus Estimate for the fourth-quarter revenues is pegged at $526.9 million, which represents a whopping 41% increase from the year-ago figure of $373.7 million. However, analysts polled by Zacks project earnings to be up just 1.2%, on a year-over-year basis, to 84 cents. We note that the Zacks estimate for fourth-quarter earnings has been revised downward by a penny in the last 30 days.

We expect strength in the Financial Services segment and synergies from acquisitions to bolster DST Systems' fourth-quarter revenues but escalating operating expenses might dent the company's profitability.

DST Systems, Inc. Price and EPS Surprise

DST Systems, Inc. Price and EPS Surprise | DST Systems, Inc. Quote

Financial Service Segment to Boost Revenues

In third-quarter 2017, DST Systems' Domestic Financial Services operating revenues (excluding out-of-the-pocket reimbursements) rose 23.4% year over year and came in at $305.3 million. Benefits from businesses acquired from Boston Financial Data Services, Inc. ("BFDS") in 2017 and elevated revenues from organic growth, along with positive market movement at ALPS, positively impacted this segment.

The International Financial Services Segment revenues increased from $26.9 million reported in the year-ago quarter to $129.4 million, primarily owing to synergies from the International Financial Data Services Limited (IFDS U.K.) acquisition.

We believe Financial Services' revenues will grow in the upcoming quarters, primarily backed by significant contributions from the aforementioned acquisitions as well as the previous buyouts like Kaufman, Red Rocks Capital, ALPS, IntelliSource, Subserveo and Finix.

Strong Business Model

The company generates recurring revenues and a good percentage of its business comes from long-term contracts with customers. It has developed the fee structure on a per-account and per-transaction basis, which indicates the fixed and flexible portion of revenues with respect to each client. Financial services companies that use DST System's software to service multiple such clients generate incremental revenues with each additional client and/or transaction. The model ensures a minimum revenue level even when there are limited transactions.

Expenses to Dent Profitability

We expect escalating operating expenses to hinder DST Systems' to-be-reported quarter bottom-line results. Notably, total cost and operating expenses flared up in the third quarter, which soared 63% from the year-ago quarter to a hefty $472.1 million. This, in turn, put pressure on the company's margin. Operating margin contracted 630 basis points on a year-over-year basis to 13.8% in the quarter.

What the Zacks Model Unveils?

Our proven model does not conclusively show that DST Systems is likely to beat on earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Currently, DST Systems carries a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%. Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Some Stocks With Favorable Combination

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Facebook, Inc. FB has an Earnings ESP of +2.04% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .

Microsoft Corporation MSFT has an Earnings ESP of +0.83% and a Zacks Rank #3.

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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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