DST Systems' CEO Discusses Q1 2012 Results - Earnings Call Transcript

DST Systems (DST)

Q1 2012 Earnings Call

May 01, 2012 8:00 am ET

Executives

Thomas A. McDonnell - Chief Executive Officer and Director

Analysts

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

James F. Kissane - Crédit Suisse AG, Research Division

Presentation

Operator

Good morning, and welcome to the DST Systems Incorporated Q1 2012 Earnings Conference Call. [Operator Instructions] Now, I would like to turn the conference over to our host, Mr. Tom McDonnell. Please go ahead.

Thomas A. McDonnell

Good morning. I'm joined here in Kansas City by Steve Hooley, President, COO; and Ken Hager, our CFO.

But before beginning, I'd like to remind everyone that in the course of our conference call today, we will make forward-looking statements regarding DST or some of its businesses. Such statements are based on our views of today, and actual results could differ materially from forecasted results. Could be a number of factors affecting future results, including those risk factors set forth in our latest annual and quarterly reports, which we file with the SEC. All such factors should be considered in evaluating any forward-looking statements that we make. Since participants on the call have access to our detailed earnings release, we'll focus our comments on those items that we think are most significant.

As a reminder, all of our comments on our financial results refer to our non-GAAP results. A reconciliation to the most comparable GAAP measures have been provided in the first quarter earnings release.

On an adjusted non-GAAP basis, diluted earnings per share for the quarter were $1.05. That compared to $1.08 for the first quarter of 2011. Consolidated operating revenues came in at $475.9 million. That was an increase of $49.9 million or 11.7% from the 2011 period. And that reflects the inclusion of ALPS, the Lateral Group and Newkirk. This is the first full quarter of inclusion of ALPS revenues.

Consolidated operating income decreased by $8.1 million, and that was an 11.1% decline from the first quarter of 2011. We continue to make increased investments in new business development for brokerage, retirement and insurance verticals. And we also had business expansion costs incurred in the quarter for DST Output Canada, where they're expanding the plant. And those are the primary reasons for the decline from last year.

Financial Services operating revenues increased by $30.3 million. That was a 10.8% increase over the first quarter of 2011. $23.8 million of that increase was the inclusion of ALPS. We also recorded revenue increases for brokerage, retirement, healthcare and the AWD product.

Mutual fund shareowner account fees declined. That was a result of lower registered accounts being serviced. However, software license revenues were $2.6 million or 29.5% more than the first quarter of 2011, primarily from higher AWD license fees.

The Financial Services cost and expenses increased by $34.1 million or 17% over the first quarter of 2011. That reflects the inclusion of operating cost of ALPS and the other businesses acquired during '11. And also, business development and start-up costs for insurance, brokerage and retirement, those businesses, the start-up costs actually increased by $6 million to a total of $11.6 million for the quarter. Depreciation and amortization was up by $3.4 million. $2.3 million of that was attributable to the 2011 acquisitions.

Financial Services income from operations decreased by $7.2 million, or 11.5%. We had $3.1 million registered accounts that converted to sub-accounting. $1.7 million of those converted to DST's sub-accounting system, and the balance went to other platforms. We did have 300,000 accounts of organic growth and 500,000 new account conversions, so that the net reduction in registered accounts was 2.3 million. The sub-accounts processed actually increased by 2.1 million for the quarter. That included the conversion of DST's registered accounts of 1.7 million and a combination of organic growth and conversions of 400,000 accounts to our platform, and that comes to the increase of 2.1 million for the quarter.

In line with our previous projections, we expect that 8 million to 10 million registered accounts will convert to sub-accounting for 2012. We estimate approximately 30% of those accounts will convert to DST's sub-accounting platform. We think a majority of the accounts will probably convert in the first half of 2012, although we can't determine the exact timing of conversions.

Turning to defined contribution participants. They increased by 100,000 in the quarter. When you look at defined contribution plans, they need to maintain the accounts of participants who terminate their employment during a given year until the second quarter of the following year to support tax and other reporting requirements. We actually see annually a reduction of the terminated participants processed during the second quarter. We have new client conversions, however, scheduled at 1.3 million participants for late 2012 and '13. And of that total, we anticipate the conversion of 600,000 participants in the fourth quarter of this year and the remainder throughout 2013.

During the first quarter of '12, the pharmacy claims processed by Argus Health Systems increased 8.2% to 99.2 million claims. That was pretty much driven by new client conversions. Health Solutions revenues, they increased principally from software-related revenues.

Our equity in BFDS earnings was unchanged from the 2011 quarter. Their average balances for the period declined slightly to $1.2 billion from $1.3 billion last year. The interest rates that BFDS earned on those balances decreased from 16 basis points to 10 basis points, and as we continue to reiterate, that negatively impacts BFDS results.

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