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DST Systems (DST) Misses on Q2 Earnings, Revenues Beat

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DST Systems Inc.  posted second-quarter 2017 non-GAAP earnings (excluding amortization of intangible assets, restructuring charges and one-time items) of 76 cents per share, which missed the Zacks Consensus Estimate by a couple of cents. However, the company’s non-GAAP earnings registered a year-over-year increase of 7%, primarily driven by higher revenues, effective cost management and lower share count.

Shares of the company declined more than 9%,yesterday, following the dismal bottom-line performance.

Notably, the stock price underperformed the industry in the past one year. While the industry gained 27.7%, the stock yielded a negative return of 11.6%.

Quarter Details

Total revenue in the second quarter came in at $656.2 million, up 68% from the year-ago quarter. Excluding out-of-the-pocket reimbursements, consolidated operating revenues increased 68.3% year over year to $629.4 million, ahead of the Zacks Consensus Estimate of $541 million.

According to Steve Hooley, Chairman, CEO and President of DST, ""Our second quarter results demonstrate execution on our organic growth initiatives and reflect the value potential of our acquisitions of Boston Financial Data Services, Inc. ("BFDS") and International Financial Data Services Limited ("IFDS U.K.").”

In first-quarter 2017, DST changed its reportable segment structure, which splits the previously reported Financial Services segment, into two new segments, Domestic Financial Services and International Financial Services. The Healthcare Services segment remains unchanged.

Domestic Financial Services operating revenues (excluding out-of-the-pocket reimbursements) rose 22.9% year over year and came in at $312 million. Benefits from businesses acquired from BFDS in 2017 and increased revenues from organic growth along with positive market movement at ALPS positively impacted the segment.

International Financial Services Segment increased from $31.2 million reported in the year-ago quarter to $231.1 million, primarily due to synergies from IFDS U.K acquisition.

Healthcare Services operating revenues were down 2.6% on a year-over-year basis and came in at $101.3 million, primarily due client migrations, reductions in membership and decline in healthcare technology spending resulting from changes in government policy.

Total cost and expenses soared 63.9% from the year-ago quarter to $525.2 million. Also, as a percentage of revenues, costs and expenses were up 230 basis points (bps) on a year-over-year basis to 83.4%.

Non-GAAP operating income increased 11% year over year and came in at $76.5 million, primarily due to the acquisition of BFDS in 2017. Operating margin was however down 620 bps on a year-over-year basis to 12.2%, primarily due to higher operating expenses as a percentage of revenues.

DST Systems reported non-GAAP net income of $47.3 million compared with $47.6 million reported in the year-ago quarter.

The company exited the quarter with $139.1 million in cash and equivalents compared with $260.4 million in the previous quarter. Long-term debt (including current portion) was $645.4 million compared with $730.7 million in the previous quarter.

During the second quarter, DST Systems repurchased roughly 1.2 million shares worth $75 million which exhausted the previous $300 million share-repurchase plan. Furthermore, in May 2017, the company authorised a new $300 million share repurchase program.

Additionally, the Board declared a quarterly cash dividend of 18 cents per share (an increase of 3% quarter-over-quarter).

Important Developments of 2017

DST Systems announced the completion of the acquisition of State Street's ownership interest in both Boston Financial Data Services, Inc. and International Financial Data Services Limited. According to Steve Hooley, Chairman and CEO of DST, “We are confident that the single-operator model for these businesses will allow us to significantly enhance our clients' experience and improve the execution of our long-term growth strategy."

Our Take

DST Systems reported mixed second-quarter results, wherein earnings missed the Zacks Consensus Estimate but revenues surpassed the same. However, both revenues and earnings grew year over year.

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 acquisitions to support revenue growth. Continued share buybacks and dividend payments are the other encouraging factors.

However, persistent decline in registered accounts, ongoing consolidation in the U.S. financial services market and stiff competition from International Business Machines Corporation (IBM - Free Report) and Fiserv Inc. (FISV - Free Report) might put its fundamentals under pressure. Moreover, a high debt burden remains a major concern.

Currently, DST Systems carries a Zacks Rank #2 (Buy). Another top-ranked stock worth considering in the broader technology industry is Applied Optoelectronics, Inc. (AAOI - Free Report) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics has an expected long-term EPS growth rate of 18.75%.

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