DST Systems Inc. (DST) posted second quarter 2013 adjusted earnings per share (EPS) of $1.04, beating the Zacks Consensus Estimate by a penny. The results were 35.1% higher than the prior-year quarter.
Total revenue in the second quarter was $657.1 million, up 3.8% from $632.8 million in the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 4.2% year over year to $485.1 million, which was above the Zacks Consensus Estimate of $471.0 million.
Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 3.8% year over year, primarily owing to broad-based improvements in the DST Brokerage Solutions, ALPS (acquired in Jul 2011) and DST Retirement Solutions operating units. However, the results were partially offset by lower mutual fund shareowner processing revenues.
During the quarter, total mutual fund shareowner accounts serviced increased 0.7% sequentially to 95.7 million. Registered accounts and sub-accounts serviced by the company during the quarter were 73.3 million and 22.4 million, respectively.
Registered accounts dropped marginally while sub-accounts witnessed growth due to the migration of 0.4 million accounts from registered accounts to DST’s sub-accounting platform and 0.1 million migration from non-DST platform.
Healthcare Services (the new segment was formed by separating DST Healthcare unit from the Financial Services segment) operating revenues grew 8.2% year over year to $82.0 million. The improvement was mainly due to higher pharmacy claims and increase in Medicare and Medicaid members, network fees and new pharmacy discount card services.
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 the U.K. Decreased contribution from U.K. was mainly due to lower images produced and foreign currency exchange rate movements.
This apart, Investments and Other Segment operating revenues increased 8.3% year over year to $3.9 million.
Total cost and expenses were $584.4 million, roughly flat with $581.9 million in the year ago period. Consolidated operating income was $72.7 million, up 42.8% year over year. Operating margin was 11.1%, up from 8.0% in the year-ago quarter. Margin expansion was led by strong operational performances across the segments.
Net income attributable to DST shareholders in the quarter was $78.5 million or $1.76 per share, down from $144.9 million or $3.17 per share in the year-ago quarter. Excluding the one-time items included in operating income and non-operating income, adjusted earnings in the quarter came in at $1.04 per share, up from 77 cents in the year-ago quarter.
DST Systems’ balance sheet appears highly leveraged. The company exited the quarter with $177.9 million in cash and equivalents, up from $120.8 million reported in the previous quarter, and debt of $951.6 million, down from $1.04 billion reported in the previous quarter.
Share Repurchases & Dividend
During the second quarter, DST Systems bought back 908,000 common stock for a value of $62.7 million. Also, the company paid a quarterly dividend of 30 cents a share.
DST’s second quarter was decent with both the top and bottom lines beating the Zacks Consensus Estimate. Segment performances were modest with synergies from acquired units. Higher conversions into DST’s subaccounting 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. But continuous share buybacks and dividend payments are enough to boost shareholder confidence.
Currently, DST Systems has a Zacks Rank #2 (Buy).
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