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DST Systems Inc. (DST - Analyst Report) posted second-quarter 2014 non-GAAP earnings of $1.20 per share, beating the Zacks Consensus Estimate of $1.18. On a year-over-year basis, earnings per share improved 15.4% aided by higher revenues and higher client additions.

 


Quarter Details

Total revenue in the second-quarter was $679.5 million, up 3.4% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 5.0% year over year to $509.6 million, which beat the Zacks Consensus Estimate of $492.0 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 6.8% year over year to $254.6 million, primarily driven by revenue growth at ALPS and DST BlueDoor Solutions. Moreover, revenues from ALPS and DST BlueDoor Solutions were positively aided by new client conversions and better customer relationships. Notably, revenues from DST Brokerage Solutions also increased attributable to growth from existing clients.

Healthcare Services operating revenues grew 13.3% year over year to $92.9 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 1.5% year over year to $158.3 million. Contribution from North America remained weak due to client loss.

Apart from this, Investments and Other Segment operating revenues decreased 2.6% year over year to $3.8 million.

Cost and expenses were up 4.5% from the year-ago quarter to $576.1 million, primarily due to increased investments for new business expansion. This resulted in the contraction of operating margin (down 50 bps on a year-over-year basis to 14.8%). However, as a percentage of revenues, costs and expenses were down 60 basis points (bps) on a year-over-year basis.

DST reported non-GAAP net income of $49.5 million or $1.20 per share compared with $46.3 million or $1.04 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 $83.3 million in cash and equivalents compared with $140.0 million reported in the previous quarter, and debt (including current portion) of $671.7 million, up from $669.3 million reported in the previous quarter.

During the second quarter, DST Systems repurchased 2.4 million shares worth $200.0 million and paid dividends of 30 cents per share.

Conclusion

DST reported better-than-expected second-quarter results. Moreover, the quarter’s results increased on a year-over-year basis. Higher number of client additions, better customer relationships 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 recent 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 - Analyst Report) and Fiserv Inc. (FISV - Analyst Report), 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 NVIDIA Corporation (NVDA - Analyst Report), which sports a Zacks Rank #1 (Strong Buy).
 

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