Shares of DST Systems Inc. (DST) gained approximately 3.7% yesterday following the better-than-expected fourth-quarter 2014 results. The company’s non-GAAP earnings of $1.73 per share not only surpassed the Zacks Consensus Estimate of $1.53, but also increased 29.1% from $1.34 earned in the year-ago quarter. The year-over-year increase was mainly aided by higher revenues and higher client additions.
Quarter Details
Total revenue was $706.5 million, up 5.9% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 3.3% year over year to $516.7 million, which beat the Zacks Consensus Estimate of $500 million.
Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 2.4% year over year to $264.3 million. The upside was primarily driven by revenue growth at ALPS, Retirement Solutions and Brokerage Solutions which gained from new client conversions and favorable market conditions.
Healthcare Services operating revenues increased 12.4% year over year to $101.8 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 increased a modest 0.8% year over year to $163.3 million. Operating revenues from North America improved 0.9% mainly on the back of increased volumes from new clients which was partially offset by soft volume from existing clients. Operating revenues from the U.K. went up 0.6% year over year.
Apart from this, Investments and Other Segment operating revenues decreased 6.5% year over year.
Non-GAAP operating income increased 5.5% year over year to $93.5 million, while, as a percentage of operating revenues, it improved 40 basis points (bps) to 18.1%. DST Systems reported non-GAAP net income of $66.4 million or $1.73 per share compared with $57.0 million or $1.34 in the year-ago quarter.
Balance Sheet, Share Repurchases & Dividend
DST Systems’ balance sheet appears highly leveraged. The company exited 2014 with $151.7 million in cash and equivalents compared with $62.5 million in the previous quarter. Long-term debt (including current portion) was $552.9 million compared with $683.0 million reported at the end of 2013.
During the fourth quarter, DST Systems repurchased 1.2 million shares for $107.9 million and paid dividends of 30 cents per share. Further, the company repurchased 525,000 shares for $50 million and completed the existing share repurchase program in Jan 2015.
On Jan 28, DST Systems’ board of directors approved a new $250 million share repurchase program. Apart from this, the board announced a quarterly cash dividend of 30 cents per share payable on Mar 15 to shareholders on record as of Feb 27.
Conclusion
DST reported better-than-expected fourth-quarter results. Also, results increased on a year-over-year basis. Higher client additions, favorable market conditions and growth at ALPS, Retirement Solutions and DST Brokerage Solutions drove revenues.
Segment performances were also modest with synergies from acquired units. However, persistent decline at the company’s mutual fund registered shareowner account processing and lower software license remain the concerns.
Nonetheless, we are of the opinion that DST Systems’ business volume and massive scale of operation in Financial Services will attract customers. Moreover, steady contributions from the acquisitions should support revenue growth, in our view. Continued share buybacks and dividend payments are the other encouraging factors.
On the other hand, tough competition from International Business Machines Corporation (IBM) and Fiserv Inc. (FISV), and a high debt burden remain the headwinds.
Currently, DST Systems carries a Zacks Rank #3 (Hold). A better-ranked computer-software stock is Imperva Inc. (IMPV) sporting a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment