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DST Systems, Inc. (NYSE:DST)

Q3 2008 Earnings Call

October 24, 2008 11:00 Am ET

Executives

Thomas A. McDonnell - President and Chief Executive Officer

Kenneth V. Hager – Vice President and Chief Executive Officer

Thomas McCullough – Chief Operating Officer

Analysts

David Koning – Robert W. Baird

James Kissane – Bank of America

Charlie Murphy - Morgan Stanley

Greg Smith - Merrill Lynch

Andrew Dunlap – [ASP]

Operator

Welcome to the DST Systems third quarter earnings release. At this time all participants are in a listen-only mode. (Operator Instructions)

At this time I will turn the conference call over to your host, President and CEO, Mr. Tom McDonnell. Please go ahead.

Thomas A. McDonnell

Good morning. Before we start, I will make a statement under the SEC procedures and rules. If in the course of our conference 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 differ. There could be a number of factors affecting future results including those set forth in DST's latest periodic report, which we filed with the SEC.

All such factors should be considered in evaluating any forward-looking statements, which we may make today. Our comments today on financial results are based on the results taking into account the items set forth in the press release under the section, Description of Non-GAAP Adjustments. A reconciliation of reported GAAP results income adjusted for certain non-GAAP items accompanies the earnings release.

Turning to our overall results, again on a non-GAAP basis, net income for the third quarter of 2008 totaled $53.2 million or $0.97 per diluted share and that compared to $61.5 million or $0.88 per diluted share for the third quarter 2007, a decrease of 13.5% in net income but an increase of 10.2% in diluted earnings per share.

On a consolidated basis, operating revenues decreased by $5.3 million or 1.3% over the third quarter of 2007 to $214.2 million. Consolidated income from operations in the third quarter of 2008 decreased by $700,000 or 9/10 of a percent to $78.9 million. Consolidated operating margin was 19% in both the third quarters of 2008 and 2007.

Financial services revenues increased by $3.3 million or 1.2% to $284.4 million. That reflected higher mutual fund shareholder processing revenues, DST Health Solutions professional services revenues increased and AWD software license fees increased. Thos items were partially offset by lower international professional services revenue and lower data processing support revenues.

The increase in mutual fund shareholder processing services is attributable to higher levels of account service principally from new client conversions since the second quarter of 2007. The increase in DST Health Solutions operating revenues for the quarter was primarily due to the recognition of about $2.5 million of previously deferred professional services revenues. The decrease in international professional services is attributable to lower software implementation services. That is the generally weak conditions we referred to before in the international investment management software market.

Software license fee revenues increased by $2 million or 20.2% to $11.9 million. That was primarily from higher AWD software license fees and to a lesser extent a small amount of investment management software fees.

Finance services income from operations increased $1.4 million or 2% from the third quarter 2007 to a level of $70 million. Increased contributions from DST Health Solutions and AWD were somewhat offset by lower contributions from international operations and lower data processing support revenues of $2.5 million which is a result of the expiration of a processing agreement that was part of the sale of Equiserve to Computer Share.

Lower international contributions are attributable to decreased demand for professional services revenues, our personal costs in connection with some staff reductions in that area and a payment on a previous acquisition. Operating margin for the segment for the third quarter 2008 was 26% as compared to 24.4% for the third quarter 2007.

Turning to output, output solutions operating revenues decreased by $7.6 million or 5.6% to $128.8 million principally from lower U.S. images produced. Images produced decreased 22.7% to $3.4 billion. That decrease in images is due to certain telecommunications clients reducing the amount of transaction information included on invoices. Therefore, less pages produced.

Items mailed increased 1.9% to $577 million. The increase in items mailed was primarily due to the conversion to the new telecom client during the fourth quarter of 2007 and higher volumes with existing clients. These however were offset by certain privacy mailings that did not occur in the third quarter of 2008. They occurred earlier in the year. So that is just relative to the quarterly comparison of the 2007 and 2008 quarters.

Output solutions operating income for the quarter totaled $7.4 million as compared to $9.5 million in the third quarter 2007. The decreases in operating revenues during the third quarter were partially offset by lease equipment cost resulting from the implementation of owned digital print and insertion technologies, lower material costs and lower compensation and benefit related costs.

Depreciation and amortization decreased $400,000 as compared to the third quarter of last year and the operating margin for the third quarter 2008 decreased to 5.7% as compared to 7% for that same quarter in 2007.

As previously announced and discussed, the company changed the measurement for occupancy costs in its output solutions segment beginning January 1, 2008. In all periods prior to 2008 have been restated to reflect that change.

Equity and earnings of unconsolidated affiliates was $9 million in the third quarter 2008 a decrease of $1.3 million from the third quarter of 2007. Several items are reflected in that change. Boston Financial, BFDS, reported approximately $3 million of lower earnings from reduced investment earnings reflecting lower interest rates on cash balances maintained by BFDS on behalf of its customers and lower operating revenue from reduced client volumes.

The $1.6 million earnings increase in IFDS primarily reflects higher revenues from increased shareholder account service, primarily in the Canadian operation.

Earnings at Argus decreased by $1.5 million through a reduction in investment earnings as a result of lower interest rates on cash balances maintained by Argus for its customers and lower processing revenue from the decrease in the number of claims processed.

The $1.6 million increase in equity and earnings of other unconsolidated affiliates is primarily the result of lower depreciation in the third quarter of 2008.

Other income was $7.7 million in the third quarter of 2008 a decrease of $7.2 million as compared to the third quarter 2007. The decrease is primarily due to lower levels of short-term investments as a portion of the July 2007 sale of Asurion. Proceeds were invested until December 2007. In addition, other income decreased during the third quarter of 2008 as compared to the third quarter 2007 from unrealized losses on marketable securities designated as trading. The effect of that particular reduction is offset because of the contra part of it is reflected in income from operations.

Higher accounts receivable securitization fees associated with higher levels of accounts receivable sold also reduced other income.

Interest expense was $1.3 million for the third quarter 2008, an increase of $2.2 million from the third quarter 2007 primarily from higher average debt balances in 2008. The income tax rate was 35% for the third quarter of 2008 compared to 34% for the third quarter 2007. The third quarter tax rate was affected by favorable international income tax items and changes in the relative proportions of domestic, international and corporate joint venture income. The company expects its tax rate to be approximately 36.4% for the full year ending December 31, 2008.

Talking a little bit about mutual fund shareholder account activity, total mutual fund accounts serviced were $121.9 million at September 30, 2008. That reflects increases of $2.1 million or 1.8% from June 30, 2008, $2.8 million or 2.4% from December 31, 2007 and $3.7 million or 3.1% from September 30, 2007.

Total registered shareholder accounts serviced totaled $112.5 million at September 30, 2008 and that is a net decrease of $1.9 million or 1.7% since June 30 of this year comprised of net declines of existing client accounts of $1.1 million, conversions to GST sub-accounting platform of $600,000 and conversions to non-DST sub-accounting platforms of $200,000.

Tax advantage account service totaled $47 million at September 30 of this year and that is a decrease of 400,000 accounts or 8/10 of a percent since June 30, 2008 and that is primarily attributable to net declines in existing client accounts.

Sub-account service totaled $9.4 million at September 30, 2008 an increase of $4 million sub-accounts since June 30 of this year and that reflects the conversion of 3.6 million new sub-accounting clients from non-DST platforms and conversions of 600,000 registered accounts from our TA2000 system. It was somewhat offset by net declines on existing client sub-accounts of 200,000.

During the quarter we received new client commitments totaling approximately 450,000 registered accounts based on current levels. In early October 2008 subsequent to the quarter the company converted approximately 2 million registered accounts. We anticipate that 650,000 new registered accounts will convert to TA2000 in 2009.

We also anticipate 700,000 current registered accounts will convert to sub-accounting platforms during the remainder of this year of which 400,000 will convert to TA2000 sub-accounting and 300,000 will convert to non-DST platforms.

The company also expects that 400,000 new sub-accounts will convert to TA2000 sub-accounting from non-DST platforms of which 100,000 will convert this year and 300,000 will convert some time in 2009 and 2010.

Kind of to summarize that, based on account services as of September 30 of this year the conversion activity I just described and without taking into account any other changes in the remainder of the year we anticipate that total accounts serviced at December 31 of this year will be approximately 123.7 million and that will break down into 113.8 million registered accounts, 9.9 million sub-accounts.

Obviously the actual number of accounts estimated to convert to and from the various DST systems as well as the timing of those events is dependent on a number of factors and those results obviously can differ.

Defined contribution participants were $3.7 million at September 30, 2008, a decrease of 800,000 or 17.8% since June 30, 2008 and a decrease of 700,000 or 15.9% compared to September 30, 2007. As previously announced an existing track client internalized its participant accounting during the third quarter of this year resulting in a loss of approximately one million participants. Participant growth of existing clients totaled 200,000 so that nets out to the net decline of 800.

During the quarter we repurchased three million shares of common stock at an aggregate cost of $175.1 million or approximately $51.14 per share. September 30, 2008 we still had 1.2 million shares remaining under the existing share repurchase authorization plan. DST had 50.3 million shares outstanding at September 30 of this year. The net effect of share repurchases and shares issued from stock repurchase exercises resulted in a decrease in shares outstanding of 3 million shares since June 30, 2008.

On the diluted share side, average diluted shares outstanding for the third quarter of this year were 55.2 million a decrease of 14.7 million or 21% from the third quarter of 2007 and a decrease of 2.8 million or 4.8% from the second quarter of this year. The decrease in diluted shares outstanding from the second quarter 2008 and the third quarter 2007 is the result of a 2.3 million and 10.6 million share reduction of average shares outstanding respectively and a 500,000 and 4.1 million share reduction in the diluted effects of convertible ventures, restricted stock and stock options respectively.

Total stock options and restricted stock equity units outstanding at September 30, 2008 were 8.5 million, a decrease of 100,000 equity units or 1.2% from June 2008 and a decrease of 700,000 equity units or 7.6% from September 30, 2007.

At this point we would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from David Koning – Robert W. Baird.

David Koning – Robert W. Baird

On your forecast for 113.8 million registered accounts by the end of this year I just want to make sure that doesn’t include any movement in the existing client base, meaning if we did have a difficult October could we see a lower number than that 113.8 at the end of the year?

Thomas McDonnell

You are correct. This is just taking the numbers, adding the two million converted and the known other conversions. It does not project because we really don’t know how to project any specific declines in the underlying client accounts. I think right now October will be soft and your guess may be as good as ours as to what the November/December markets will look like. Obviously some of the accounts are moving from equity to money markets so clearly there are accounts that are closing as people remove money from investment vehicles period. So that is pretty hard to determine but I think the assumption is correct that number will be subject to potential declines between now and year-end.

David Koning – Robert W. Baird

Secondly, when you think about financial services margins and you think about Q3 to Q4 normally Q4 is a strong margin quarter but this year given that Health Professional Services one-time item in Q3 goes away in Q4 we could see lower license revenues given some trends and in the track revenues you’ve probably got some still in Q3 that goes away. Could all of those things together make a situation where margins stay flat or even were down in Q4 in that segment?

Thomas McDonnell

I think your observation in Health Solutions is correct. There was a recognition of a one-time set of professional fees. The other thing was the $2.5 million that came out in the quarter from the last quarter of the processing agreement with Computer Share. That is out also for the fourth quarter and on an ongoing basis. I think we have to assume that when we talked in July it was clear to us given the situation with major multinational financial organizations the revenues at DST International relative to licenses were going to be negatively impacted because of the client’s situation but I think as you can see the issues of expanding on a broader basis throughout the economy I think the budgets for software and technology investments are going to be constrained for a period of time and you mentioned Argus and there was a couple of articles recently that prescription claims have been declining because of perceived reluctance particularly in the elderly community to spend money on pharmaceuticals given their view of the economy. I think all of those things could certainly have a dampening if not pressing effect over the next several months.

David Koning – Robert W. Baird

On the share count you are going to get a massive benefit now that the share price is under the converted, if converted, $49.08 price. Probably take that 3.1 million shares in dilution mode this quarter should go to zero next quarter and for the foreseeable future. That adds a lot to EPS. I’m just wondering if there is any thought based on the new accounting rules how you are looking at that going forward because we would hate to see a situation where the stock rebounded and we had to cut estimates a lot as the stock went up and the dilution came kicked in again. So maybe just a quick commentary about that.

Thomas McDonnell

Your math is correct where the stock where it is both relative to the convertibles and relative to the strike prices on options that the dilutive effect is substantially reduced. I’m not sure when you say the new accounting rules if you mean to treat it as if converted?

David Koning – Robert W. Baird

Yes.

Thomas McDonnell

Let me let Ken address that. I should have said earlier Ken Hager and Tom McCullough are joining me on the call. Ken?

Kenneth Hager

I’m not sure if we have to go to converted accounting we have to treat them as if converted whether they are in the money or not which is why we have been providing you guys if-converted numbers and that may be a more reflective level of what our earnings would be on an if-converted basis so you have some comparability there. I’m not sure I’m addressing your question because I don’t know how we would stop the dilution if our stock price goes up. I’m not sure how we would address your question.

David Koning – Robert W. Baird

Was just wondering if you were going to present it more on an if-converted method going forward but it sounds like you are going to give it both ways going forward.

Kenneth Hager

We have been giving it both ways for 3-4 years now so you would have that comparability.

Thomas McDonnell

Frankly we were of the opinion based on input from the accounting profession that the if-converted would have been required some time back so we have been representing it both ways. It may well be if that gets resolved obviously we will have to conform to those accounting standards but I think we will give you both numbers until only one is appropriate.

Operator

The next question comes from James Kissane – Bank of America.

James Kissane – Bank of America

What are your thoughts on the buyback just given the current credit market conditions out there?

Thomas McDonnell

When we complete them all you can see we don’t have a whole lot left, what would we be doing going forward, we do have reasonable availability. We have room on our AR securitization. We have room on our other credit lines, over $200 million. We are still obviously generating free cash each month so at this point we are still interested in reducing the capitalization of the company lacking any other sensible alternatives but I think like many we are obviously not quite convinced that one should be in the market at any point in time in the near future so I think that is one we’re just going to have to play by ear.

James Kissane – Bank of America

Given that comment what are your thoughts on the public equity investments and in particular State Street which has obviously exasperated your stock price performance.

Thomas McDonnell

We have no reason to believe State Street’s assessment and their situation is not accurate. We would say the market overall has got under priced, financials in particular. We are still comfortable with holding to that. That doesn’t mean given particular changes in market values on a relative basis that we might reconsider some of those positions. There is no reason at this point to suggest we have actually altered our thinking on that.

James Kissane – Bank of America

The mix in accounts today can you give us an update in terms of equity, fixed income and money markets?

Thomas McDonnell

I don’t have that right in front of me. Ken is looking at a schedule.

James Kissane – Bank of America

The 1.1 million accounts that went away from existing clients that was primarily outflows? I’m just trying to get a sense of the timing. So if I take $5,000 out of an equity account how quickly would you shut that account down for record keeping purposes?

Thomas McDonnell

There is no account that is closed until it is totally redeemed.

James Kissane – Bank of America

So the $1.1 million, if I had $5,000 in the account and I took all $5,000 out you would immediately shut that down?

Thomas McDonnell

That is closed in the month. Generally we bill for accounts that are open any period during the month so if you closed on the 28th you would be billed 1/12 of whatever the fee is for that account and then the next month it would go to zero. Does that answer the question?

James Kissane – Bank of America

So that $1.1 million that was all due to outflows and people shutting down accounts during the quarter?

Thomas McDonnell

Yes.

Kenneth Hager

If you take money market, fixed income and those type of accounts they probably comprise about 30% of the account base and the rest is equity oriented accounts.

James Kissane – Bank of America

So 70% are equity and 30% fixed income and money market.

Kenneth Hager

And kind of hybrid accounts.

Operator

The next question comes from Charlie Murphy - Morgan Stanley.

Charlie Murphy - Morgan Stanley

I was wondering if we could explore a few comments from the last question. What might be a situation versus State Street stock where you would reconsider your position? Would it be State Street dramatically out-performed the market here?

Thomas McDonnell

I think if State Street outperformed and there was a ratio relative to GST that looked attractive to do use alternative approach that is certainly something we would be looking at periodically.

Charlie Murphy - Morgan Stanley

Given what you have seen in September and October how do you evaluate the probably that U.S. mutual fund accounts can grow next year?

Thomas McDonnell

I’d like to think, we really don’t have any statistical or mathematical models one could apply to that. I think you have to look at just an awful lot of issues. How the election comes out and what will that do to certain tax policies; will that incent investment in any way; will there be retirement account changes that require subsidized or enhanced participation in 401K’s or IRAs and stuff like that. You have that whole thing. Clearly the most important thing is the public having money to invest number one and number two having the confidence level to invest it. I would think at some point the suggestion is the economy will turn at some point next year and when things get better you might anticipate some returns to growth in the second half of the year but I think the question is from what level are things going to grow from? It’s kind of like what level will the DOW recover from? Will it recover from here or will it recover from 6,500?

Right now I think you have investors severely impacted by typical things and fear and whatever and so you are seeing movement out of investment vehicles across the board and so I think we can anticipate maybe by the end of the third or fourth quarter next year some return to more of a normal situation which we have seen over several years which is mid single digit growth but I’m not sure where that growth occurs from as far as a level of a bottom when people will stop taking cash out to meet other needs in the interim. That is probably not a very effective answer for you but I think those are what I would guess we would see as reality.

I think the flip side is after 2000 we saw a lot of funds reconsider how much growth they do themselves and how much they outsource so there should be some other factors that will potentially impact the overall revenue stream but not necessarily account for it.

Charlie Murphy - Morgan Stanley

How would you describe the pipeline right now?

Thomas McDonnell

Fairly anemic. I think part of the issue is in markets like this we have seen obviously several announcements today the mutual fund industry with significant layoffs and significant adjustments in earnings expectations. I think most organizations in the short-term are going to be focused on a lot different things than considering alternative processing options. I really don’t expect much activity there. That certainly rolls over to some of the thoughts we have about DST International where the likelihood of seeing a lot of interest in software licenses until some of these firms get under better financial footing is pretty low.

Operator

The next question comes from Greg Smith - Merrill Lynch.

Greg Smith - Merrill Lynch

On the tax rate I want to make sure I understand you gave an estimate for the full-year but it implied that Q4 jumped up quite a bit to maybe 38%. Are we reading that correctly?

Kenneth Hager

I don’t think you are reading that correctly. I think the 36.4% is what you should estimate for the fourth quarter.

Greg Smith - Merrill Lynch

On the issue of account activity are you seeing things happening differently this time where as typically somebody might move money from an equity into a fixed income fund or a money market fund when you have this type of dislocation but instead do you see people just taking the money out completely? Is that a trend you are seeing?

Thomas McDonnell

That is not a trend we can actually measure. We know there has been a lot of movement from equity to money funds but there has been exits from both sides. I don’t think there is any way to determine that…the question you are asking about is are there different characteristics. I don’t think we have any way at this point to take a look at that. We might be able after in connection with having some discussions with clients and looking at what is left in the shareholder base, what types of accounts are left, are they big or small, you might get some sense of that in the first and second quarter of next year but right now it would be pretty difficult to tell. One of the things we are not quite sure of is what kind of potential movement there may be between money market funds and bank accounts given the position of higher levels of insurance. Clearly some of the actions have shored up the value of money market mutual funds but we may have a different competitive landscape next year for particularly smaller money market type accounts relative to the available bank scenarios.

Greg Smith - Merrill Lynch

Can we get an update on your longer-term views for output solutions? It feels like we are kind of just bouncing along here. The economy is obviously not helping you any but any changes in thoughts about how this business fits in long-term?

Thomas McDonnell

Actually the third quarter is usually one of the weakest quarters for output and it was particularly weak relative to last year mostly because some of the telecom companies have reduced the level of transaction information they provide on their bills. That is in the short-term not attractive but it does actually free up capacity. I think we do have some legitimate opportunities to add new business there that should have some leverage as we re-use that capacity that has been freed up because instead of printing a 10-page bill for a telecom company we might be printing a 3-page. You have a little bit of an advantage on the lower volumes on a relative basis because usually the pricing is tiered by number of pages. We visited output a couple of times recently and the new technology we talked about is running extremely well. We think it is differentiated. We have invested most of the technology investment to date on the print side. You will probably see some investment in the next couple of quarters on the inserting side to increase the capacity and speed of inserting to more closely match that of a major print operations. So actually I think we are better positioned now than we were 6-9 months ago. Unfortunately with everybody looking at expenses telecom has reduced their page count but I think most of that is behind us.

I’d like to think at this point if we bring some stuff on and have some leverage with that then used capacity so I would think over the next 2-3 quarters we will start to approach some of the expectations we have had for output.

Operator

The next question comes from Andrew Dunlap – [ASP].

Andrew Dunlap – [ASP]

I’m just trying to understand the cash flow of the company for the quarter. You spent $175 million buying back stock. Obviously the business is profitable but the debt moved around a little bit and because you have this new credit facility of $120 million yet your debt was flat or up $100 million basically for the quarter. So where did all the cash come from to buy back stock? Maybe a shorter way of asking the question is where was the free cash flow?

Thomas McDonnell

Free cash flow is generally with minor adjustments our after-tax earnings.

Andrew Dunlap – [ASP]

So that would be $60 odd million. So where did the other $110 million come from? I’m assuming the new credit facility is $120 million right? That is the real estate secured asset? Which means that the credit facility must have paid down $20 million. I don’t know what the accounts receivable facility did.

Thomas McDonnell

Digging out the cash flow for the quarter you had net income of $50 million roughly and depreciation and amortization of $43 million so there is $83 million right there.

Andrew Dunlap – [ASP]

Where is the other $90 million?

Thomas McDonnell

I don’t know if we are adding the same numbers or not.

Kenneth Hager

I don’t know that you actually exactly got it right in terms of the quarter. Our depreciation was $32 and our net income was $50. We had some other changes in working capital which generated some numbers. We probably had a little bit of proceeds from sales of investments and the net borrowings. The net change in debt would probably constitute the difference I think but we can certainly take a look at that in more detail. I don’t think we have everything here to probably answer your question. You’ll understand it better when you see the Q and the cash flows out in the Q.

Andrew Dunlap – [ASP]

Was the accounts receivable facility materially different this quarter?

Kenneth Hager

It wasn’t materially different this quarter.

Andrew Dunlap – [ASP]

So that means you continue to have with the new facility $120 million as you mentioned earlier some room on your balance sheet and I’m just curious…I have to believe you think your stock is undervalued at these prices you just don’t know if it is a good time to be buying it back given the world. What kind of balance sheet flexibility do you have here? Not only with what is available, that is obvious, but can you borrow money from DFDS and IFDS and dividend back to you, partly to you and partly to State Street? What other non-operating sources of cash are there should you find your stock irresistibly attractive?

Thomas McDonnell

We do have sources like that. We don’t have them quantified. I think we would have to say we would have to rely on current bank lines and current facilities we have in place and potentially some sale of securities if we felt they were a relative trade off with the sale for repurchase was sensible. There could be some cash movement from some of the joint ventures. We haven’t really looked at any attempts to add to our borrowing. My general sense is the banks aren’t returning a lot of calls. I’m not positive of that but I don’t think you should anticipate we would have the ability to go out and do a significant financing relative to a lower price but I do think there are some opportunities clearly within the couple hundred million range, probably not much beyond that.

Andrew Dunlap – [ASP]

The $1.2 million authorization as of September is still $1.2 million as of today?

Thomas McDonnell

I don’t normally comment on those closed quarter activities.

Andrew Dunlap – [ASP]

Let me ask the same question in a big-picture way. Through this very difficult time your net income will probably be flat to down. It has been down year-over-year but your EPS has been up because of your buybacks which is an impressive amount of buybacks. I’m just curious if you see that provided the balance sheet is there for you do you see that as the game plan through these next months and perhaps longer? In other words if your net income is flat to down but buy back as much of your stock as you can afford your EPS can actually grow through this period?

Thomas McDonnell

I think maybe breaking that into two questions. I think the general sense we have had is we have a reasonable sense of the debt we want on the balance sheet. I think you can mostly anticipate we will complete the announced buyback and most likely will consider additional within the scope of the free cash we generate over the next 12-18 months. I think the issue of will we be able to buy back sufficient to increase earnings relative to some flat or decline in earnings is really a function of what that flat is one thing but depending on what potential decline there may be based on what the state of the mutual fund industry is in 3-6-12 months. So I think you can assume there will be some continual commitment to reducing the shares outstanding. It is pretty hard to tell whether or not that can be given an order of magnitude to actually reverse any declines that will occur. At this point I couldn’t tell you at all what the mutual fund shareholder base will look like in 90 days.

Andrew Dunlap – [ASP]

I can’t remember if the second quarter call was before or after the Merrill Lynch FDS announcement. Obviously everyone is aware of it. With the sale of Merrill Lynch I don’t know what happened to FDS, it certainly hasn’t been announced, but do you see that situation as playing into your hands? After all, Bank of America is a customer of yours and is committed to cost cutting and everyone who knows your business knows you can provide the same service that Merrill Lynch did for substantially less cost, not only overall cost but also to their customers. I’m just curious how you see that playing out.

Thomas McDonnell

I think that whole area as these things settle out it is pretty clear there is going to be a lot of pressure on mutual funds for cost and performance and they are very concerned about the costs incurred by their customers and it is a two-sided coin. The Merrill Lynch business and a lot of those are dependent on their arrangements of funds to allow reimbursement for that type of accounting. I think it is something that should be seriously questioned in the industry whether financial intermediaries that are arguably supposed to be serving the interest of their clients relative to fees they are charging that could be far less to the end client and other basis that needs to be scrutinized.

As to the specific situation you mentioned we really have not seen any indication that probably these major transactions take a while to assimilate. That could well be re-evaluated but we certainly have no specific reason to believe it would be.

Kenneth Hager

Going back, I was trying to work on your question. When we look at our numbers we look at our cash flow from operations is estimated to be $95 million. We had capEx of about $55 million which leaves about $40 million there. Our debt for the quarter actually went up $130 million so that takes you to $170 million and we bought back $176 million worth of stock. So we think it kind of hangs together.

Andrew Dunlap – [ASP]

In other words $120 million of new money which came from your real estate loan was all used to buy back stock, leaving your banking line still open or accounts receivable line still open should you choose this to happen further. Is that the way to think about it?

Kenneth Hager

You could think about it that way yes.

Operator

At this time we have no additional questions in queue. Please continue.

Thomas McDonnell

We appreciate you taking the time for the call this morning and hopefully we will all have better outlooks on the next call. Thank you again.

Operator

(Operator Instructions) This does conclude our conference for today. We thank you for your participation. You may now disconnect.

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Source: DST Systems, Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript
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