DST Systems Beats on Q1 Earnings - Analyst Blog

DST Systems Inc. DST posted first-quarter 2014 non-GAAP earnings of $1.12 per share beating the Zacks Consensus Estimate of $1.08. On a year-over-year basis, earnings per share improved 13.1% aided by higher revenues and higher client additions.

Revenues

Revenues in the first quarter were $683.8 million, up a marginal 0.2% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 2.0% year over year to $505.2 million, which beat the Zacks Consensus Estimate of $502.0 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 2.7% year over year to $244.3 million, primarily driven by revenue growth at ALPS and DST Brokerage Solutions. Moreover, revenues from ALPS and DST Brokerage Solutions were positively aided by new client conversions and better customer relationships.

Healthcare Services operating revenues grew 15.0% year over year to $92.0 million. The improvement was mainly due to higher pharmacy claims and increase in Medicare and Medicaid members, expansion of existing clients and new pharmacy discount card services.

Customer Communications (previously Output Solutions) operating revenues declined a modest 4.5% year over year to $165.4 million. Contribution from North America remained weak due to client loss. Moreover, adverse foreign currency impacts from the Canadian business also affected the segment.

Apart from this, Investments and Other Segment operating revenues decreased 12.5% year over year to $3.5 million.

Operating Results

Cost and expenses were up 1.6% from the year-ago quarter to $583.7 million, primarily due to increased investments for new business expansion. However, as a percentage of revenues, costs and expenses were down 49 basis points (bps) on a year-over-year basis. This resulted in an expansion in operating margin of the same magnitude.

DST reported net income (non-GAAP) of $47.5 million or $1.12 per share compared with $45.00 million or 99 cents reported in the year-ago quarter.

Balance Sheet

DST Systems' balance sheet appears highly leveraged. The company exited the quarter with $140.0 million in cash and equivalents, up from $62.5 million reported in the previous quarter, and debt (including current portion) of $669.3 million, down from $683 million reported in the previous quarter.

Share Repurchases & Dividend

During the first quarter, DST Systems did not repurchase any shares but paid dividends of 30 cents per share.

Conclusion

DST reported better-than-expected first quarter results with both the top and bottom lines surpassing the Zacks Consensus Estimate. Moreover, the quarter's results increased on a year-over-year basis. Higher number of client additions, better customer relationships and growth at ALPS and DST Brokerage Solutions drove revenues.

Segment performances were also modest with synergies from acquired units. Higher conversions into DST's sub-accounting platform were encouraging but growth in registered accounts continued to lag.

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, decreasing organic revenue growth, tough competition from Broadridge Financials Solutions Inc. BR, Advent Software Inc. ADVS and Fiserv Inc. FISV, and a high debt burden remain concerns. However, continuous share buybacks and dividend payments are enough to boost shareholder confidence.

Currently, DST Systems carries a Zacks Rank #3 (Hold).