DST Began Its Fiscal 2013 on a Steady Note


DST Systems  reported first-quarter results that were in line with expectations. DST’s first-quarter revenue totaled $495 million, up 4.1% compared with the year-ago period. The company’s growth during the quarter was largely driven by the Customer Communications segment, which benefited from higher volume due to delivery of year-end statements and tax forms. Revenue from Customer Communications totaled $173 million, an increase of 6% from the prior-year period.

This segment witnessed notable improvements in both the number of images produced as well as the packages mailed during the quarter. Benefiting from the inherent operating leverage, Customer Communications reported strong improvement in operating margins. This segment’s operating margin came in at 11.1% versus 5.2% in the first quarter of fiscal 2012. DST’s Financial Services revenue was $318 million, up 3% year over year. Higher revenues from health care, brokerage, and ALPS solutions were partially offset by lower revenues from the mutual fund registered shareowner account processing business.

This segment also suffered because of lower license sales during the quarter. License sales tend to be lumpy; hence, we aren’t that concerned about its decline. The company continues to face headwinds in shareowner account processing from the shift toward subaccounting, but we expect the pace of revenue to decline to moderate in the coming quarters. Financial Services’ adjusted operating margin came in at 16.2%, down 150 basis points compared with the prior-year period. Margin compression was due to a mix of decline in mutual fund processing and license revenues and higher investments to strengthen retirement and brokerage business units.

As a part of its recent efforts to monetize its noncore assets, DST sold marketable securities (including some of its stake in State Street) for $88.4 million during the quarter. Additionally, the company received $11.7 million from its investments in private equity funds. Management commented that the proceeds would be used to lower the company’s debt burden and return capital to shareholders through dividends and stock repurchases.


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