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Lender Processing a Nickel Ahead

FCN

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Lender Processing Services Inc. reported third-quarter 2011 adjusted earnings per share of 59 cents, which surpassed the Zacks Consensus Estimate of 54 cents as well as its own guidance range of 53 cents to 55 cents. However, the earnings per share fell sharply from the year-ago level of 89 cents.

On a GAAP basis, earnings per share were 48 cents, down from 85 cents recorded in the year-earlier quarter. The drop in default volume and origination activity along with higher regulatory and legal expenses hurt Lender Processing’s third quarter earnings.

The declining trend was also noticed in the company’s total revenue, which decreased 13.8% year over year to $532.1 million but exceeded the Zacks Consensus Estimate of $511.0 million. Operating income in the quarter plunged 38.1% year over year to $89.8 million.

Technology, Data and Analytics Segment (TD&A)

Third-quarter revenues for the TD&A segment were $193.7 million, up 3.1% year over year; thanks to the increased contribution from Mortgage Processing division.

Adjusted operating income for the segment was $62.6 million, down 8.2% year over year. The downside was primarily due to lesser contributions from other software and services offerings partially offset by higher contributions from Data & Analytics.

Loan Transaction Services (LTS)

Third-quarter revenues for the LTS segment declined 21.1% year over year to $431.1 million. The downfall in the segment’s revenues can be traced back to deceases of 14.7% in revenues from Loan Facilitation Services and 25.0% in revenues from Default Services.

The performance by the Default Services segment was hit by continued delays in the initiation of foreclosure proceedings in the industry. In the reported quarter, Loan Facilitation and Default Services recorded revenues of $141.1 million and $199.1 million, respectively.

Overall adjusted operating income for the segment declined mainly due to lower contributions from Default Services, and to a lesser extent, from Loan Facilitation Services.

Financial Position

At quarter end, cash balance of the company was $84.0 million while outstanding debt was $1.2 billion.

Outlook

For the fourth quarter of 2011, management expects adjusted earnings per share within 57 cents to 59 cents. Management expects revenues to remain in the range of $510 million to $520 million.

Our Take

Lender Processing expects market conditions in its origination and default businesses as well as the broader economy to remain challenging. Hence, we expect tough quarters based on the drastic decline in origination volumes. Management expects 2011 industry origination volumes to be down more than 30% year over year. However, to mitigate this negative impact, the company intends to drive margins through cost reduction initiatives.

Lender Processing, which competes with FTI Consulting Inc. (FCN - Analyst Report), currently retains the Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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