DST Systems Inc. ( DST - Analyst Report ) posted third quarter 2011 adjusted earnings per share (EPS) of 90 cents, lagging the Zacks Consensus Estimate of 99 cents.

Revenue

Total revenue in the third quarter was $591.4 million, down 4.3% from $567.2 million in the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenue increased 7.4% year over year to $433.1 million.

Financial Services operating revenues decreased 1.5% year over year, primarily due to lower shareowner processing revenues, which were partially compensated by higher DST Global Solutions professional services revenues.

Output Solutions operating revenues increased 26.7%, reflecting the positive impact of Innovative Output Solutions Limited's acquisition of dsicmm Group Limited in the month of July 2010. This apart, DST's acquisition of Newkirk Products, Inc. in May 2011 and IOS's acquisition of Lateral Group Limited in August 2011, also contributed to the growth in operating revenue.

This apart, Investments and Other Segment operating revenues decreased 2.1% year over year to $14.3 million, primarily as a result of lower rental activities.

Operating Results

Total cost and expenses increased 8.1% from the year-earlier period to $496.5 million. Market declines resulted in reduced deferred compensation costs of $9.1 million. Absent deferred compensation, costs and expenses increased $10.3 million in the reported quarter.

Consolidated operating income was $61.2 million, down 17.7% from $74.4 million in the year-ago quarter.

Financial Services operating income decreased 7.4% from the year-ago period to $61.1 million. Output Solutions operating income increased to $1.9 million, or by 90.0% due to increases in the North America operations, somewhat offset by decreases in the United Kingdom operations.

Net income attributable to DST shareholders in the quarter was $35.3 million or 76 cents per share compared with $54.3 million or $1.16 per share in the year-ago quarter. Excluding the one-time items, adjusted net income in the quarter came in at 90 cents per share compared with $1.03 per share in the year-ago quarter.

Balance Sheet

DST Systems’ balance sheet appears highly leveraged. The company exited the quarter with $90.0 million in cash and equivalents, down from $91.0 million reported in the previous quarter, and debt of $1.27 billion, up from $1.16 billion reported in the previous quarter.

Share Repurchases & Dividend

The company repurchased 2.4 million shares for $107.0 million or approximately $45.15 per share. This apart, an additional 130,000 shares were repurchased in late September 2011, which settled in early October 2011 for $5.9 million or $45.45 per share. The company currently has approximately 50,000 shares remaining under its existing share repurchase authorization.

Conclusion

DST Systems is one of the leading global providers of sophisticated information processing software and products to the financial services industry, primarily mutual funds. The company has supplemented internal growth with strategic acquisitions.

The company’s bottom line missed our expectations. Moreover, total revenue suffered due to decline across all the company’s business segments. Management also anticipates that a few clients may leave DST’s platform in the upcoming quarters.

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 contribution from dsicmm to provide continued support to Output Solutions’ revenue growth.

We expect the acquisitions to be accretive in the upcoming quarters. The similar lines of businesses will make it easy for DST Systems to speed up integration.

On the other hand, tough competition from Broadridge Financials Solutions Inc. ( BR - Snapshot Report ) , Advent Software Inc. ( ADVS - Snapshot Report ) and a high debt burden remain concerns.

Currently, DST Systems has a Zacks #3 Rank, implying a short-term Hold recommendation.