DST Systems Inc. (DST) posted third-quarter 2014 non-GAAP earnings of $1.54 per share, beating the Zacks Consensus Estimate of $1.29. On a year-over-year basis, earnings per share improved 27.3% aided by higher revenues and higher client additions.
Quarter Details
Total revenue in the third-quarter was $679.5 million, up 4.3% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 6.3% year over year to $510.5 million, which beat the Zacks Consensus Estimate of $491 million.
Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 7.3% year over year to $254.4 million, primarily driven by revenue growth at ALPS and Brokerage Solutions. Moreover, revenues from ALPS and DST Brokerage Solutions were positively aided by new client conversions and favorable market conditions.
Healthcare Services operating revenues increased 18.3% year over year to $95.5 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 1.3% year over year to $156.7 million. Contribution from North America remained weak due to client loss.
Apart from this, Investments and Other Segment operating revenues increased 8.3% year over year to $3.9 million. The year-over-year increase was primarily due to higher occupancy revenues and lower depreciation expense.
Cost and expenses were up 6% from the year-ago quarter to $563.3 million, primarily due to increased investments for new business expansion. This resulted in the contraction of operating margin (down 11 bps on a year-over-year basis to 16.9%). However, as a percentage of revenues, costs and expenses were down 32 basis points (bps) on a year-over-year basis.
DST reported non-GAAP net income of $61.2 million or $1.54 per share compared with $52.8 million or $1.21 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 $87.5 million in cash and equivalents compared with $83.3 million reported in the previous quarter. Long-term debt (including current portion) was $612.1 million compared with $671.7 million reported in the previous quarter.
During the third quarter, DST Systems repurchased 1 million shares worth $92.1 million and paid dividends of 30 cents per share.
Conclusion
DST reported better-than-expected third quarter results. Also, the quarter’s results increased on a year-over-year basis. Higher number of client additions, favorable market conditions 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 acquisitions to support revenue growth. Continued share buybacks and dividend payments are the other encouraging factors
On the other hand, decreasing 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 #3 (Hold).
A better-ranked stock worth considering in the technology sector is SunEdison, Inc. (SUNE), which carries a Zacks Rank #1 (Strong Buy).
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