DST Falls Short of Expectations

DST Systems Inc. (DST - Analyst Report) reported earnings of 83 cents per share in the third quarter, missing the Zacks Consensus Estimate of 95 cents per share. 

Revenue 
Total revenues for the quarter were $551.7 million, down 1.6% from $560.4 million in the year-ago quarter. Excluding reimbursements, operating revenues came in at $395.6 million, down 4.5% from $414.2 million in the year-ago quarter. This decrease was attributable to an $8.1 million decline in Financial Services, an $8.5 million decline in Output Solutions and a $1.0 million decline in Investments & Other Income. 

The Financial Services decline resulted from lower volumes in international professional service, lower mutual fund shareowner services revenue and lower AWD software license revenues. The Output Solutions decline reflects fewer items mailed and images produced. The Investments & Other Income segment, mainly deriving revenue from rental income, declined as a result of lower rental activity. 

Operating Results
Total cost and expense for the quarter was $454.6 million, up 1.2% from $449.3 million reported in the year-ago quarter. Consolidated income from operations was $62.6 million, down 20.7% to $78.9 million in the third quarter of 2008. 

Financial Services operating income decreased $14.4 million during the quarter, attributable to an increase in deferred compensation costs of approximately $6.5 million, consolidation of losses incurred by Argus and lower revenues from mutual fund shareowner processing, international operations, DST Health Solutions and AWD. 

Output Solutions operating income decreased approximately $400,000 during the quarter, primarily due to lower operating revenues. Operating income in the Investments and Other segment decreased $1.5 million from the third quarter of 2008, principally due to a real estate impairment recorded in the reported quarter. 

Net income for the quarter was $60.9 million or $1.21 per share versus a net income of $50.2 million or 90 cents per share in the year-ago quarter. Excluding certain non-GAAP items, adjusted net income for the quarter came in at $47.2 million or 83 cents per share. This compares to an adjusted net income of $53.2 million or 95 cents per share in the year-ago quarter. 

During the quarter, total mutual fund shareowner accounts serviced increased by 1.4 million, or 1.2%, from 120.3 million accounts reported in the previous quarter. Registered accounts and subaccounts serviced by the company during the quarter were 109.7 million and 10.6 million, respectively. 

Gain on Sale of Security 
DST saw a net gain of $22.3 million on securities and other investments in the reported quarter. This consists of net realized gains from sales of available-for-sale securities of $22.5 million, partially offset by net losses on the sale of its share in private equity funds and other investments of $0.2 million. The $22.5 million of net realized gains include a $17.6 million gain from the sale of approximately 4.6 million shares of Computershare Ltd. 

Balance Sheet 
DST exited the quarter with $96.0 million in cash and $1,264.0 million in debt. During the quarter, the company repurchased $9.7 million in principal amount of the original $540.0 million 4.125% Series A senior convertible debentures. The outstanding amount of the Series A and Series B senior convertible debentures were $408.8 million and $171.3 million, respectively.

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