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Rating:Three Things to Know from DST's Earnings Not Rated 0.0 Email Routing List Email & Route  Print Print
Monday, April 29, 2013

Three Things to Know from DST's Earnings

Reported by Tommy Fernandez

It was a good quarter for DST Systems, with chief executive Stephen Hooley and his team enjoying growth thanks, in part, to conversions.

First the basics. If you peruse the SeekingAlpha and the company earnings information, you'd note that the company reported a net income of $93.2 million during the first quarter of 2013, compared to $55.3 million in the same period a year ago.

There are at least three strong themes to be garnered from the company earnings and the analyst call transcript.

POINT 1: FX Was Not So Good
POINT 2: Financial Services Are Mixed
POINT 3: Sub-Accounting Opportunities Are Good

Now to drill down on these points: POINT 1: FX Was Not So Good
Foreign currencies was a thorn in DST's side this year. Hooley was blunt about the impact foreign change had on the bottom line.

As we stated in the release, our first quarter 2013 diluted EPS results were negatively impacted by $6.6 million of unrealized losses in foreign currency exchange rates related to intercompany loans and $2.4 million of lower dividend income. And combined, these reduced 2013 diluted EPS by $0.13.

POINT 2: Financial Services Are Mixed Holley had this to say about the firm's financial services business.

Our Financial Services revenues and operating margins were adversely affected by the decline in mutual fund processing revenues and the timing of software license revenues, as well as conversion and business expansion costs across the segment. And we continue to expect little to no organic growth in our registered account business during 2013. However, we do believe there'll be organic account growth and it will take place in the broker-dealer sector, which is consistent with our continued focus and investment in our brokerage solutions business.

POINT 3: Sub-Accounting Opportunities Are Pretty Good
Hooley had this to say on the subject of sub accounting and account conversions.

In our retirement business, we successfully converted 1.1 million participants from previously announced new clients. And in addition, we received a $6 million payment from a partial termination of a retirement business client. We treated this payment as a non-GAAP adjustment to our first quarter results. And basically, what happened here is we have a client that was converting to our platform and, during the conversion process, our client sold their retirement business and the acquirer has decided not to move a block of participants. And again, this resulted in the payment to DST.

The company continues to expect between 5 million and 6 million registered accounts to convert to subaccounts during 2013, and we expect 25% of these accounts to convert to DST's subaccounting platform. Our total mutual fund shareowner accounts increased $6.9 million to $95 million during the first quarter, which reflected slightly positive organic growth coupled with the conversions that I've just mentioned.

As we mentioned last quarter, we have seen some movement in the -- of 529 accounts to be subaccounted. And we also discussed at the time that we've got a broker-dealer that's approached us about IRA accounts and looking at potential to subaccount IRA accounts. To date, we've not had any IRA accounts that have moved. But again, clearly, the broker-dealers are looking at it. And there's still the component of a trustee and the involvement of a trustee. And we believe, and believe that the marketplace believes that, that will require consent of the IRA holders. So I think not really much of an update versus what I gave you last quarter. And again, we did see some 529 accounts get subaccounted. And it's a portion of the 5 million to 6 million in total that we're talking about this year. A portion, a percentage of it is 529 accounts.

Well, I actually think the majority of it is -- the actual number of accounts out there that can be subaccounted is coming down. And so I think it's just the natural trend. If you kind of look at in 2011, we had 14 million accounts in total. In 2012, we had 9.2 million. And this year, we're talking about 5 million to 6 million. And so I think you're just seeing the natural decline in the total number of accounts that are eligible to be subaccounted.

Read more in the SeekingAlpha and the company earnings information

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