DST Systems Inc. (DST) posted decent first quarter 2011 earnings per share (EPS) of $ 1.08, beating the Zacks Consensus Estimate of $ 1.05.
The quarter’s EPS excludes a contract termination gain net of related expenses, termination benefit expenses related to a reduction in the workforce, net gain on securities and other investments as well as net gain on the disposal of securities.
Revenue
Total revenue in the first quarter was $ 591.7 million, up 4.4% from $ 566.7 million in the year-ago quarter. Excluding reimbursements, consolidated operating revenue came in at $ 429.5 million, up 4.9% from $ 409.4 million in the year-ago quarter.
The quarter’s revenue handily beat the Zacks Consensus Estimate of $ 419.0 million. The improvement may be attributed to a 9.3% year-over-year increase in Output Solutions revenue, partially offset by decreases of 0.4% and 0.7% in Financial Services and Investments and Other revenues, respectively.
Excluding reimbursements of $ 10.6 million, Financial Services operating revenues increased 0.3% year over year to $ 284.3 million. The upside was attributable to higher revenues from DST Global Solutions and DST Health Solutions. However, the results were partially offset by lower AWD operating revenues.
Excluding reimbursements of $ 152.5 million, revenues from Output Solutions increased 14.8% year over year to $ 146.3 million. Higher contribution from dsicmm Group Limited (acquired in July 2010) was partially offset by lower U.S. operating revenues due to client loss and lower volumes.
Excluding reimbursements of $ 0.6 million, Investments & Other operating revenues dropped 4.1% year over year to $ 14.1 million.
During the quarter, total mutual fund shareowner accounts serviced increased by 900,000, or 0.8% sequentially to 112.8 million. Registered accounts and sub-accounts serviced by the company during the quarter were 97.4 million and 15.4 million, respectively.
Operating Results
Total cost and expenses in the quarter increased 5.2% from the year-earlier period to $ 459.3 million. A 12.1% year-over-year increase in costs related to Output Solutions, mainly due to the integration of dsicmm’s business, was responsible for the increase in total costs and expenses. However, cost and expenses in the Financial Services segment decreased marginally.
Consolidated operating income was $ 69.3 million, up 1.5% from $ 68.3 million in the year-ago quarter.
Financial Services operating income increased 14.7% from the year-ago period to $ 63.1 million. Output Solutions operating income plunged 54.9% from the year-ago quarter to $ 5.5 million, due to lower U.S. volumes. Investments and Other operating income decreased 13.3% year over year to $ 2.6 million, due to lower operating revenues.
Reported net income in the quarter was $ 53.4 million or $ 1.14 per share compared to $ 76.9 million or $ 1.58 per share in the year-ago quarter. Excluding the above-mentioned one-time items, adjusted net income in the quarter came in at $ 50.7 million or $ 1.08 per share compared to $ 53.8 million or $ 1.11 per share in the year-ago quarter.
Balance Sheet
DST Systems’ balance sheet appears highly leveraged. The company exited the quarter with $ 147.0 million in cash and equivalents, up from $ 140.0 million reported in the previous quarter, and debt of $ 1.14 billion, up from $ 1.21 billion reported in the previous quarter. Total capex stood at $ 13.0 million.
Share Repurchases & Dividend
In the recently concluded quarter, 327,000 shares were repurchased by DST Systems for an amount of $ 16.4 million, or approximately $ 50.15 per share. As of March 31, DST Systems had 673,000 shares remaining under the current repurchase authorization plan.
On April 8, 2011, DST Systems paid a cash dividend of 35 cents per share, representing an increase of 5 cents or 16.7% from the prior dividend. The aggregate amount of the dividend was approximately $ 16.2 million.
Our Take
DST Systems is one of the leading global providers of sophisticated information processing software and products to the financial services industry, primarily mutual funds. The company has supplemented internal growth with strategic acquisitions.
We remain encouraged by the top and bottom-line performances in the quarter, both of which surpassed the Zacks Consensus Estimates. We believe that DST Systems’ leadership and scale in Financial Services will attract new customers based on the increasing popularity of mutual funds. Moreover, we expect the steady contribution from dsicmm to provide continuous support to Output Solutions’ revenue growth.
On the other hand, tough competition from Advent Software Inc. (ADVS) and a high debt burden remain concerns.
Currently, DST Systems has a Zacks #2 Rank, implying a short-term Hold recommendation.
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