DST Systems, Inc. (DST)

Q2 2010 Earnings Call Transcript

July 28, 2010 11:00 am ET

Executives

Tom McDonnell – CEO

Steve Hooley – President and COO

Ken Hager – CFO

Analysts

James Kissane – Bank of America/Merrill Lynch

David Koning – Baird

Greg Smith – Duncan Williams

Presentation

Operator

Ladies and gentlemen, thank four standing by. Welcome to the DST second quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) This conference is being recorded. I would now like to turn the conference over to DST CEO, Tom McDonnell. Please go ahead.

Tom McDonnell

Thank you and good morning. From the company, I'm joined this morning by Steve Hooley, our President and COO and Ken Hager, our Chief Financial Officer. Prior to our discussion, I need to refer to the following. If in the course of our conference call today, we make forward-looking statements with respect to DST and its businesses, such statements would be based on our views as of today and actual results could 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 may make. All participates on the call have access to our detailed earnings release, so we're going to focus our comments on those items that we believe that are most significant at this point in time.

For the quarter, GAAP reported diluted earnings per share were $2. On an adjusted non-GAAP basis, diluted EPS was $1.23 per share. That was an increase of $0.33 or 36.7% over the second quarter of 2009.

We had a number of significant non-GAAP items and let me enumerate those for you. We had a contract termination payment at output solutions. Its pretax impact in absolute dollars was $58.4 million and its impact on diluted EPS was $0.76 a share.

For the quarter, we had net gains on securities, gross amount of $3.3 million. The diluted positive impact on EPS was $0.04 so that the two combined as a positive $0.80. And then we had some termination benefit expenses associated with the output termination of approximately $2.8 million and that was a negative $0.04.

So the net positive impact of those items accounts for $0.76 of the $0.77 difference between GAAP and non-GAAP EPS. Turning to the operating revenues for the quarter, excluding the contract termination payment, they were $402.6 million. It was a slight decrease of $1.9 million or half a percent over 2009.

The operating income on the non-GAAP basis increased by $18.2 million over the second quarter of 2009, primarily reflecting lower cost achieved in the financial services area, the equity in earning of unconsolidated affiliates decreased by $700,000 over the second quarter of '09.

Our GAAP -- our non-GAAP income tax rate was down for the quarter reflecting the improved results of international operations. In that area, we had previous valuation allowances that had been provided.

So our quarterly income tax rate will vary, of course, on the level of earnings from international operations going forward but we currently estimate the rate will be approximately 38% in the third quarter and 35% in the fourth quarter of 2010.

The diluted shares outstanding for the quarter were lower than the second quarter of 2009, reflecting share repurchases made in the quarter. The only significant share repurchases in the second quarter of 2010 were repurchases made with proceeds from the net after tax amounts generated from stock option exercises.

During the quarter, the registered account base of our existing mutual fund clients grew by 200,000 accounts and $1.2 million accounts were converted during the quarter. The tax advantage segment of the account base totaled 47 million accounts at June 30, 2010. That's approximately 43.8% of all registered accounts.

Turning to subaccounts serviced, that number increased by 2.5 million during the quarter. That resulted from the conversion of 1.6 million new subaccounts from other platforms, 500,000 accounts converted from RTA 2000 platform and 400,000 accounts representing the organic growth of the subaccounting customer base.

Currently, we estimate that 7.2 million registered accounts will convert to subaccounting platforms over the remainder of this year. Of that, 500,000 should convert to our DST subaccounting platform.

The current projections we're using are somewhat lower than the first quarter estimates. But we think that that lower occurring estimate reflects a slipping to some of the expected conversions from register to subaccounting into the first quarter of 2011.

As a result of mergers between clients, two existing subaccounting clients will actually be converting to non-DST platforms for a total of 4.9 million accounts. That, we think, will convert off in the third quarter of 2010 and an additional 600,000 will convert sometime in 2011, probably to the first part of the year.

Turning to BFDS and IFDS, DST’s equity and earnings in those two joint ventures increased by $2.8 million to $9.9 million for the second quarter of 2010. These increased earnings were driven by account growth across all business units.

BFDS, however, continues to be impacted by the low interest rate environment with an average rate of 20 basis points for the second quarter 2010 compared to 16 basis points for the second quarter 2009. At BFDS, the average balances increased to $910 million for that quarter of 2010 compared to $770 million for the same quarter last year.

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