DST Systems (DST) Q4 Earnings & Revenues Beat Estimates

DST Systems Inc. DST reported impressive fourth-quarter 2017 results, beating expectations on both counts.

The company’s non-GAAP earnings from continuing operations of $1.11 per share beat the Zacks Consensus Estimate of 84 cents. It also registered a year-over-year increase of 33.7%.

Quarter Details

Total revenues in the fourth quarter came in at $593.9 million, up 48.9% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 47.9% year over year to $552.7 million, exceeding the Zacks Consensus Estimate of $527 million. The year-over-year increase was primarily due to the acquisition of the remaining portion of Boston Financial Data Services ("BFDS") and International Financial Data Services U.K. ("IFDS U.K."), which generated $179.7 million of additional operating revenues during the quarter.

In first-quarter 2017, DST changed its reportable segment structure, which splits the previously reported Financial Services segment, into two new segments — Domestic Financial Services and International Financial Services. The Healthcare Services segment remains unchanged.

Domestic Financial Services operating revenues (excluding out-of-the-pocket reimbursements) rose 27.3% year over year and came in at $315.9 million. This segment was positively impacted by ALPS that received a reimbursement of an insurance claim that was wrongly generated in the year-ago quarter due to a processing error. Additionally, BFDS revenues boosted the performance of the segment. Management noted that during the quarter, the company signed a new contract spanning 7 years with one of its most prominent customers and also entered into a 10-year contract with a new client for providing retirement servicing and mutual fund related solutions.

Non-GAAP operating income of the segment increased 4% from the year-ago quarter. However, operating margin contracted 400 basis points (bps) from fourth-quarter 2016 to 17.9%. Though additional revenues from the BFDS acquisition were beneficial, operating expenses surged due to increased costs for supporting the company’s information technology transformation, other infrastructure needs and higher non-cash stock-based compensation.

International Financial Services Segment increased from $28.5 million in the year-ago quarter to $145.1 million, primarily owing to the acquisition of the remaining portions of IFDS U.K. However, management is a bit worried about the news of two of its major clients leaving the platform by 2018 end.

The additional revenues from the buyout led to the $20 million year-over-year increase in non-GAAP operating income. However, the investments related to the clients of the company’s wealth management platform slightly offset the increase. Non-GAAP operating margin for this segment increased 330 bps from the year-ago quarter to 16.3%.

Healthcare Services operating revenues were down 5.9% on a year-over-year basis and came in at $105.3 million, primarily due to client migrations and lower consulting and professional services revenues, pertaining to healthcare regulations related uncertainties. Nevertheless, management is optimistic about the renewal of a contract with the second largest client of this segment till Dec 31, 2020.

Non-GAAP operating income for the segment increased 0.4% from the year-ago quarter, primarily driven by organic growth and increase in high-value services. Non-GAAP operating margin increased 150 bps to reach 23.9% in the quarter.

Consolidated non-GAAP operating income increased 26.8% year over year and came in at $105.5 million. However, operating margin was down from 22.3% reported in the year-ago quarter to 19.1%.

DST Systems reported non-GAAP net income of $67.5 million compared with $53.9 million reported in the year-ago quarter.

The company exited the quarter with $80.5 million in cash and equivalents compared with $140.7 million in the previous quarter. Long-term debt (including current portion) was $537.1 million compared with $644.8 million in the previous quarter.

During the fourth quarter, DST Systems repurchased roughly 1.3 million shares worth $75 million. The company has $150 million shares remaining under the current share repurchase program.

Full Year 2017 Figures

For full year 2017, the company reported operating revenues of $1.9 billion that witnessed an increase of 35.2% from the previous year. Non-GAAP operating income rose 12.8% from the previous year and reached $321.5 million.

Earnings increased 17.1% year over year to $3.36 per share.

Announcement of Acquisition

On Jan 11, 2018, the company announced that it has entered into an agreement to be acquired by SS&C Technology Holdings in an all-cash deal that will value the company at around $5.4 billion. The acquisition, which is subject to approval by shareholders, regulatory authorities’ clearance and other closing conditions, is anticipated to close by the third quarter of 2018.

Our Take

DST Systems reported stellar fourth-quarter results backed by the acquisition of the remaining portions of BFDS and IFDS U.K.

We believe that the Financial Services segment of the company will boost the company’s top line going forward. The renewal of contracts is also a positive.

However, regular migration of clients from the company’s platform is a major concern.

Zacks Rank and Stocks to Consider

DST Systems has a Zacks Rank #4 (Sell).

Some of the better-ranked stocks in the broader technology sector are Micron Technology, Inc. MU, The Trade Desk Inc. TTD and Lam Research Corporation LRCX, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term EPS growth rate for Micron, The Trade Desk and Lam Research is projected to be of 10%, 25% and 14.9%, respectively.

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