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Lender Processing Services Inc. reported fourth-quarter 2011 adjusted earnings per share of 72 cents, which surpassed the Zacks Consensus Estimate of 57 cents as well as its own guidance range of 57 cents to 59 cents. However, the earnings per share fell sharply from the year-ago level of 92 cents. In full-fiscal 2011 also, adjusted earnings fell to $2.68 from $3.50 in 2010.

On a GAAP basis, loss per share was 25 cents, down from the earnings of 78 cents recorded in the year-earlier quarter. The drop in default volume and origination activity along with higher regulatory and legal expenses continued to hurt Lender Processing’s earnings. In full-fiscal 2011, reported earnings were $1.13 versus $3.23 recorded in the comparable period prior year.

The declining trend was also noticed in the company’s total revenue, which decreased 13.7% year over year to $533.8 million. In full-fiscal 2011, total revenue reduced 12.1% to $2,090.1 million.

Operating income in the quarter plunged significantly year over year to $4.9 million mainly due to the rise in selling, general and administrative expenses.

Technology, Data and Analytics Segment (TD&A)

Fourth-quarter revenues for the TD&A segment were $192.1 million, up 4.7% year over year; thanks to the increased contribution from Mortgage Processing as well as Other Technology, Data and Analytics division. Mortgage Processing revenue grew 5.8% to $106.1 million primarily on increased professional services revenue, while Other Technology, Data and Analytics revenue increased 3.5% to $86.0 million as a result of several Desktop implementations completed in 2011.

Adjusted operating income for the segment was $65.5 million, up 3.0% year over year. The upside can be credited to higher contributions from Mortgage Processing.

Loan Transaction Services (LTS)

Fourth-quarter revenues for the LTS segment declined 21.4% year over year to $343.0 million. The downfall in the segment’s revenues can be traced back to revenue decreases of 15.6% from Loan Facilitation Services and 25.7% from Default Services.

The performance by Default Services 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 $156.4 million and $186.6 million, respectively.

Overall adjusted operating income for the segment declined 30.5% year over year to $75.6 million mainly due to lower operating leverage resulting from reduced volumes.

Financial Position

At quarter end, cash balance of the company was $77.4 million while outstanding debt was $1.1 billion.

Outlook

For the first quarter of 2012, management expects adjusted earnings per share within 50 cents to 55 cents. Management expects revenues to remain in the range of $470 million to $490 million.

Our Take

Although Lender Processing outdid the consensus, it lagged year over year. Its origination and default businesses continued to remain challenging. Hence, we expect tough quarters ahead in terms of origination volumes. While 2012 looks to be another challenging year, management remains focused on expanding market share, leverage strong cash flow  and position itself to capitalize on market recovery once it rebounds.

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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