DST Delivers a Modest 4Q

DST Systems Inc. (DST - Analyst Report) posted fourth quarter 2011 adjusted earnings per share (EPS) of 91 cents, lagging the Zacks Consensus Estimate of 96 cents.

Revenue

Total revenue in the fourth quarter was $623.4 million, up 7.4% from $580.7 million in the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenue increased 7.6% year over year to $457.3 million, which was above the Zacks Consensus Estimate of $431.0 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 1.2% year over year, primarily owing to higher DST Global Solutions professional services revenues and significant contribution from the ALPS acquisition, partially offset by lower shareowner processing revenues and DST HealthCare revenues.

Output Solutions operating revenues increased 20.4%, reflecting the positive impact of Innovative Output Solutions Ltd.'s acquisition of dsicmm Group Limited in 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 increased 2.9% year over year to $14.2 million, primarily as a result of higher rental activities.

Operating Results

Total cost and expenses increased 8.4% from the year-earlier period to $565.0 million. Consolidated operating income was $58.4 million, down 2.0% from $59.6 million in the year-ago quarter.

Financial Services operating income decreased 24.9% from the year-ago period to $53.3 million. The decrease was due to lower mutual fund shareowner processing revenues, higher costs due to new business development and compensation. However, this was partially offset by lower employee healthcare and retirement benefit costs. Output Solutions operating income was $1.9 million, as against operating loss of $0.8 million in the year-ago quarter. The improvement was attributable to increases in the North America operations and lower employee healthcare and retirement benefit costs.

Net income attributable to DST shareholders in the quarter was $41.8 million or 94 cents per share compared with $93.3 million or $2.00 per share in the year-ago quarter. Excluding the one-time items, adjusted net income in the quarter came in at 91 cents per share compared with 85 cents in the year-ago quarter.

Balance Sheet

DST Systems’ balance sheet appears highly leveraged. The company exited the quarter with $41.0 million in cash and equivalents, significantly down from $90.0 million reported in the previous quarter, and debt of $1.38 billion, up from $1.27 billion reported in the previous quarter.

Share Repurchases & Dividend

The company repurchased 130,000 shares for $5.9 million or approximately $45.45 per share. DST's Board of Directors increased its share repurchase authorization by 2.0 million shares. The authorization will expire on December 31, 2013. The company currently has approximately 2,050,000 shares remaining under its existing share repurchase authorization.

During the quarter, DST paid a cash dividend of 35 cents per share.

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. However, total revenue improved on strong performances across the segments.

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.