DST Systems (DST) Q3 Earnings Top; Falls On Revenue Miss

DST Systems Inc. (NYSE:DST) recently reported strong bottom-line results for third-quarter 2016. The company posted non-GAAP earnings (excluding discontinued operations and one-time items) of $1.53 per share, which surpassed the Zacks Consensus Estimate of $1.48.

DST Systems’ non-GAAP earnings also registered a year-over-year increase of 15%, mainly driven by higher revenues and lower share count.

Despite robust bottom-line results, shares of DST Systems plunged nearly 13% yesterday as its revenues fell short of the Zacks Consensus Estimate.

Quarter Details

Total revenue in the third quarter came in at $386.7 million, up 4.1% from the year-ago quarter. However, excluding out-of-the-pocket reimbursements, consolidated operating revenues increased just 3.4% year over year to $365.5 million, lower than the Zacks Consensus Estimate of $384 million.

Financial Services operating revenues (excluding out-of-the-pocket reimbursements) increased 0.9% year over year to $270.2 million, primarily due to businesses acquired during 2015 and 2016, and incremental revenues generated due to conversion of 10 million subaccounts associated with the previously announced new client contract. These benefits were partially offset by a fall in mutual fund registered shareowner account processing revenues and unfavourable foreign currency exchange rates.

Healthcare Services operating revenues were up 12.9% on a year-over-year basis and came in at $106.1 million, primarily due to expansion in high-value services for medical and pharmacy businesses, new medical claims and organic growth.

Cost and expenses were up 0.8% from the year-ago quarter to $312.4 million. However, as a percentage of revenues, costs and expenses were down 260 basis points (bps) on a year-over-year basis due to better cost management.

Non-GAAP operating income increased 20.9% year over year and came in at $78.2 million. Operating margin was also up 260 bps on a year-over-year basis to 18.4%. The increase in operating income was primarily driven by cost-cutting measures within the Financial Services segment.

DST reported non-GAAP net income of $50.7 million compared with $48.0 million reported in the year-ago quarter.

The company’s balance sheet as of Sep 30, 2016 looked very impressive as it has managed to lower its long-term debt and available cash and cash equivalents during the quarter by generating funds through the sale of North American Customer Communications (NACC) business.

The company exited the quarter with $180.9 million in cash and equivalents compared with $72.7 million in the previous quarter. Long-term debt (including current portion) was $428.7 million compared with $712.2 million in the previous quarter.

During the third quarter, DST Systems repurchased roughly 0.63 million shares worth $75 million. Furthermore, since the beginning of October, the company has repurchased $45 million worth of its common stock, resulting in $180.0 million remaining under the existing $300 million share repurchase plan announced in Jun 2016.

Recent Development

On Jul 1, 2016, DST Systems announced the completion of the sale of the NACC business to Broadridge Financial Solutions Inc. (NYSE:BR) for a cash consideration of $410 million. The company has recorded an estimated $340.1 million pretax gain on the transaction during the last reported quarter.

DST Systems’ NACC was the largest transactional printer in North America. The unit offers customers communication services including print and digital communication solutions, content management, postal optimization and fulfillment.

Conclusion

DST Systems reported mixed third-quarter results, wherein earnings surpassed the Zacks Consensus Estimate but revenues missed 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.

On the other hand, decreasing organic revenue growth, tough competition from International Business Machines Corporation (NYSE:IBM) and Fiserv Inc (NASDAQ:FISV)., and a high debt burden remain concerns.

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

A better-ranked stock worth considering in the Computer-Software industry is Infoblox Inc. (NYSE:BLOX) which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Infoblox has surpassed the Zacks Consensus Estimate thrice while missing the same once in the trailing four quarters and has an average positive surprise of 69.1%. The long-term EPS growth rate of 18% is also higher than the industry average of 14.9%.

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