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DST Systems Inc. (DST - Analyst Report) posted fourth-quarter 2013 non-GAAP earnings of $1.34 per share beating the Zacks Consensus Estimate of $1.28. On a year-over-year basis, earnings per share improved 12.6%.

Revenues

Revenues in the fourth quarter were $667.3 million, up 2.7% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 1.3% year over year to $500.1 million, which beat the Zacks Consensus Estimate of $496.0 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 2.8% year over year to $258.0 million, primarily driven by revenue growth at ALPS. Moreover, revenues from DST Brokerage Solutions and BlueDoor partially offset the lower revenues from license and professional service at DST Global Solutions.

Healthcare Services operating revenues grew 15.1% year over year to $90.6 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 declined a modest 2.6% year over year to $162.0 million. Contribution from North America and the U.K. remained weak due to client loss.

Apart from this, Investments and Other Segment operating revenues decreased 2.8% year over year to $13.9 million due to lower rental income.

Operating Results

Cost and expenses were up 0.4% from the year-ago quarter to $411.5 million. Moreover, as a percentage of revenues, costs and expenses were down 191 basis points (bps) on a year-over-year basis. This resulted in an expansion in operating margin of the same magnitude.

DST reported net income (non-GAAP) of $57.0 million or $1.34 per share compared to $55.00 million or $1.19 per share reported in the year-ago quarter.

Balance Sheet

DST Systems’ balance sheet appears highly leveraged. The company exited the quarter with $62.5 million in cash and equivalents, down from $129.9 million reported in the previous quarter, and debt (including current portion) of $683 million, down from $833.4 billion reported in the previous quarter.

Share Repurchases & Dividend

During the fourth quarter, DST Systems repurchased shares worth $70.8 million and paid dividends of 30 cents per share. Management also authorized a $250 million share buyback plan.

Conclusion

DST’s fourth quarter was decent with both the top- and bottom lines increasing on a year-over-year basis. Segment performances were 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 recent acquisitions to support revenue growth.

On the other hand, decreasing organic revenue growth, tough competition from Broadridge Financials Solutions Inc. (BR - Snapshot Report), Advent Software Inc. (ADVS - Snapshot Report) and Fiserv Inc. (FISV - Analyst Report), and a high debt burden remain concerns. However, continuous share buybacks and dividend payments are enough to boost shareholders’ confidence.

Currently, DST Systems carries a Zacks Rank #3 (Hold).

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