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DST Systems, Inc. Earnings Call Transcript

DST Systems, Inc. Earnings Call Transcript

DST Systems, Inc. (DST)

Q1 2010 Earnings Call

April 22, 2010 10:00 am


Thomas McDonnell - CEO

Steve Hooley - President and COO

Kenneth Hager - CFO


James Kissane - Bank of America/Merrill Lynch

David Koning - Baird

Andrew Gundlach - ASP

Vlad Steinberg - Realm Partners

Peggy Corcillo - Iridian Asset Management



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Ladies and gentlemen, we'd like to thank you for standing by and welcome to the DST first quarter earnings teleconference call. At this time, all participants are in a listen-only mode. Later, we'll conduct the question-and-answer-session and instructions will be given at that time. If you should require any assistance throughout the day's call, please depress the star followed by the zero and one of us will be with you immediately. As a reminder, today's conference call will be recorded.

I will now like to turn the conference over to your CEO, Mr. Tom McDonnell. Please go ahead, sir.

Tom McDonnell

Good morning.  I'm joined here in Kansas City by Steve Hooley, President and COO; and Ken Hager, CFO. If in the course of our call today we make forward-looking statements respecting DST and its businesses, such statements would be based on our views as of today and actual results could of course differ.

There could be a number of factors affecting future results including those set forth in the latest periodic report we filed with the SEC. All such factors should be considered in evaluating any forward-looking statements that we might make.

I got to approach the discussion today somewhat differently.  The press release out since yesterday with an extreme amount of detailed information.  We're going to try to focus on some of the key areas that we think are most relevant, for we being Steve Hooley and myself. And then get the questions as promptly as we can.

Looking at the quarter on the GAAP basis, reported diluted earnings per share were $1.58. That's an increase of $0.11 or $0.075 over the first quarter of 2009. However, when we look at it on the basis where we think is appropriate, on a non-GAAP basis, the diluted of earnings per share were $1.11 per share. That's an increase of $0.28 or 33.7% over the first quarter of 2009.

Some of the major significant non-GAAP items that are included. First, over net gains on securities that had a pre-tax impact of $38.2 million and translating that to diluted earnings per share, it was $0.48 per share. Included in that $38.2 million gains was a $28.8 million gain on this sale of 4.8 million shares of computer [share].

In connection with the reduction in force that we addressed, there are some termination benefit expenses. Again, an aggregate pre-tax was $11.8 million and that had a -$0.15 per share impact on diluted EPS. And, we did receive an unanticipated distribution from one of our private equity holdings that had a pre-tax impact of $8.3 million and roughly $0.15 of share on an EPS basis.

The operating revenues for the quarter were $409.4 million. That's an increase of $13.8 million or 3.5% over 2009. However, that increase does include the consolidation of Argus' revenues. If you look at the operating income on a non-GAAP basis, it increased by $5.7 million over the first quarter of 2009. That was primarily from lower cost of output.

The equity in earnings of unconsolidated affiliates increased by $2.6 million over the first quarter of '09. That's pretty much driven by higher results of International Financial Data Services. Our non-GAAP income tax rate was slightly lower and a diluted shares outstanding decrease reflecting the share purchases.

Steve Hooley is going to cover some of the activity in the mutual fund side of the business with the registered and sub-accounting. Steve, would you like to talk a little about that?

Steve Hooley

Sure. Thanks, Tom.

On the topic of organic growth during the quarter, the account base of our existing client grew by 1.3 million accounts or 1.1%. Three-hundred thousand of this growth was derived from tax-advantaged accounts. Tax-advantaged accounts totaled 46.6 million accounts at March 31, 2010, representing approximately 43.6% of registered accounts.

Between April 1st and April 15th, our account base increased by 700,000 accounts of which a 100,000 accounts were tax-advantaged accounts. Net client conversions represented 400,000 accounts in growth and existing client account was 300,000.

On the topic of sub-accounting, we currently estimate that 8.9 million registered accounts will convert to sub-accounting platforms over the remainder of 2010 of which 800,000 should convert to DST's sub-accounting platform. Our current estimate of conversion is somewhat higher than our view as of year-end of 2009. This estimate changed due to consolidations in the broker-dealer industry.

While our overall share owner account base will be affected by the level of sub-accounting activity, we also expect that we will continue to see account growths from existing clients that will offset to some extent the conversions.

In addition of mutual fund that share on our recordkeeping, we also provide 401(k) retirement recordkeeping services on both an ASP and a full service basis. Today, we service 4.3 million participants on our retirement platform.

We are in a process of converting 500,000 additional participants from a previously announced client acquisition. We believe the retirement industry will be a source of growth for us in the future. Our distribution support tools, Vision and FAN Mail, are products used by independent financial advisers to handle fund transactions and provide reporting to their clients on all positions. We are expanding our Vision product to provide additional function and features to the IFAs. Today, Vision is used by 120,000 financial advisers.

And in the joint ventures, International Financial Data Services and Boston Financial Data Services, equity in earnings increased to $8.3 million from $6.1 million in the first quarter of 2009. Increased earnings were driven by account growth in the U.K. Boston Financial continues to be impacted by the low interest rate environment with an average of 13 basis points for the first quarter of 2010 versus 23 basis points for the first quarter of 2009, while average balance is increased to $980 million from $840 million for the same period in 2009.

Tom McDonnell

Thanks, Steve. Turning to Output, as we discuss and release we've been in discussions with large a Telcom customer whose indicated their intention to perform their [primary working] house. The client represents approximately 6.6% of 2009 Output Solutions' of operating revenues. This is a client who is basically satisfied with the services that due to the changes in their other business - wireless, wire-line type movements - they ended up with a sufficient internal equipment and labor capacity to process these volumes that had been previously outsourced to the DST Output.

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