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DST Systems Inc. (DST - Analyst Report) posted first quarter 2013 adjusted earnings per share (EPS) of 99 cents, missing the Zacks Consensus Estimate of $1.06. The results were 5.7% lower than the prior-year quarter.

Revenues

Total revenue in the first quarter was $682.4 million, up 4.5% from $653.2 million in the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 4.1% year over year to $495.2 million, which was above the Zacks Consensus Estimate of $475.0 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 2.9% year over year, primarily owing to broad-based improvements in the AWD operating units as well as significant contribution from the ALPS acquisition (in Jul 2011). However, the results were partially offset by lower mutual fund shareowner processing revenues and AWD revenues.

During the quarter, total mutual fund shareowner accounts serviced increased 7.8% sequentially to 95.0 million. Registered accounts and sub-accounts serviced by the company during the quarter were 75.0 million and 20.0 million, respectively.

Registered accounts dropped marginally while sub-accounts witnessed growth due to new client conversion of roughly 5.7 million accounts and migration of 0.7 million accounts from registered accounts to DST’s sub-accounting platform.

Customer Communications (previously Output Solutions) operating revenues increased 6.0% year over year. Contribution from North America was strong, which was offset by weak contribution from the U.K. Decreased contribution from U.K. was mainly due to lower images produced and foreign currency exchange rate movements.

This apart, Investments and Other Segment operating revenues increased 14.7% year over year to $3.9 million, primarily as a result of increased rental activities.

Operating Results

Total cost and expenses increased 2.5% from the year-earlier period to $607.8 million. Consolidated operating income was $74.6 million, up 24.1% year over year. Operating margin was 10.9%, up from 9.2% in the year-ago quarter. Margin expansion was led by strong operational performances by the three segments.

Financial Services operating income increased 4.6% from the year-ago period to $54.5 million. But operating margin came below the year-ago level due to lower mutual fund processing revenues and higher conversion and business expansion costs for the retirement and brokerage business units. Customer Communications operating income was $19.2 million compared with $7.2 million in the year-ago quarter.

Net income attributable to DST shareholders in the quarter was $93.2 million or $2.04 per share, up from $55.3 million or $1.22 per share in the year-ago quarter. Excluding the one-time items included in operating income and non-operating income, adjusted earnings in the quarter came in at 99 cents per share, down from $1.05 in the year-ago quarter.

Balance Sheet

DST Systems’ balance sheet appears highly leveraged. The company exited the quarter with $120.8 million in cash and equivalents, up from $88.3 million reported in the previous quarter, and debt of $1.04 billion, slightly up from $1.01 billion reported in the previous quarter.

Share Repurchases & Dividend

During the first quarter, DST Systems bought back 758,000 common stock for a value of $52.5 million. Also, the company paid a quarterly dividend of 30 cents a share.

Guidance

For 2013, DST currently estimates total conversions of registered accounts to subaccounts to approximate 5-6 million, of which around 25.0% will convert to DST's subaccounting platform.

Conclusion

DST’s first quarter was a mixed bag, with the top line beating the Zacks Consensus Estimate but the bottom line missing the same. Earnings per share were lower than the year-ago level too. Segment performances were modest with synergies from acquired units. Higher conversions into DST’s subaccounting platform were encouraging but growth in registered accounts continued to lag.

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 contributions from the recent acquisitions to support revenue growth.

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

Currently, DST Systems has a Zacks Rank #4 (Sell).

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