Executives
Thomas A. McDonnell - President and Chief Executive Officer
Kenneth V. Hager - Chief Financial Officer, Vice President and Treasurer
Analysts
David Koning - Robert W. Baird & Co., Inc
James Kissane - Banc of America-Merrill Lynch
Murali Gopal - Keefe, Bruyette & Woods
DST Systems, Inc. (DST) Q4 2008 Earning Call January 29, 2009 11:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the DST Systems' Fourth Quarter Earnings Release Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this call is being recorded.
I will now like to turn the conference over to our host, President and CEO, Tom McDonnell. Mr. McDonnell, please go ahead.
Thomas A. McDonnell
Thank you and good morning. Before proceeding, I would like to 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. It could be a number of factor 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.
Also, our comments today on operating results are based on the results taking into account the items set forth in the press release under the section and title Description of Non-GAAP Adjustments. A reconciliation of reported GAAP results to income adjusted for certain non-GAAP items accompanies that earnings release.
On that basis, net income for the fourth quarter of 2008 totaled $51.6 million, that's $1.04 per diluted share, compared to $67.7 million or $0.98 per diluted share for the fourth quarter of 2007. That's a decrease of 23.8% in net income, but an increase of 6.1% in diluted earnings per share.
Consolidated operating revenues decreased $28.6 million or 6.6% from the fourth quarter of 2007, to a level of $403.9 million. Consolidated income from operations in the fourth quarter of 2008 decreased $100,000 or one-tenth of a percent to $99 million. Consolidated operating margin for the fourth quarter of 2008 increased to 24.5%, as compared to 22.9% for the fourth quarter of 2007.
In the financial services area, operating revenues decreased by $20.8 million or 7% to $277 million, as compared to the fourth quarter of 2007. We recorded lower levels of international software license and professional services revenues, data processing support revenues, mutual fund shareowner processing service revenues and AWD professional service fees, while DST Health Solutions recorded higher professional services fees.
The decrease in international professional services and software license revenues is attributable to foreign currency exchange effects from the U.S. dollars strengthening against the British pound, and also from lower software solutions implementation and consulting services.
Data processing support revenues decreased by approximately $2.5 million due to the expiration of a contract in June of 2008. The decrease of mutual fund shareowner processing service revenues is a result of lower level of registered account service and the loss of approximately 1 million track participants during the third quarter of 2008. These items were partially off set by higher levels of sub-account service.
The increase in DST Health Solutions professional services revenue for the quarter was primarily due to new client additions and higher activities from existing their clients.
Software license fee revenues decreased $4.5 million or 24.7% to $13.7 million that resulted from lower investment management and AWD software license fees.
Financial services income from operations increased $1.4 million or 1.6% from the fourth quarter of 2007, to a level of $90.1 million.
Increased earnings from DST Health Solutions, certain operating cost improvements were both offset partially by lower earnings from international operations, mutual fund shareowner processing, AWD and lower data processing support revenues. We also recorded reductions in deferred compensation liabilities of approximately $5.7 million, the effect of which is offset as an expense in other income.
Reported operating margin for the fourth quarter of 2008 was 32.5%, as compared to 29.8% for the fourth quarter of 2007. However, adjusting for the impact of the changes in deferred competition liabilities, our operating margins were essentially unchanged.
Our Output Solutions operating revenues decreased by $8.1 million or 6.1% to a $125.6 million, principally from lower images produced in the U.S. Those images produced decreased 23.1% to $3 billion. The decrease in images is primarily due to certain telecommunications clients who are pressing transaction data on their invoices. Actual items mailed decreased two-tenths of percent to $561.7 million.
Output Solutions operating income for the quarter decreased by $400,000 from the private... from the prior year quarter, to a level of $8.1 million. Decreases in operating revenues were mostly offset by lower costs and expenses and lowering depreciation and amortization expense.
Excluding reimbursable operating cost, costs and then expenses decreased by $6.5 million or 5.7% to $107.5 million. And that reflected lower equipment costs, lower material costs that resulted from the reduced number of images produced.
Depreciation and amortization decreased by $1.2 million, as compared to the fourth quarter of 2007. That reflects the company's use of accelerated depreciation methods and the impact of changes in foreign currency exchange rates. Those items, again, partially offset by increased depreciation from equipment related to new postal processing offerings. This all resulted in operating margins for the fourth quarter of 2008 at 6.4%, unchanged from the fourth quarter of 2007.
Equity and earnings of unconsolidated affiliates was $5.4 million in the fourth quarter of 2008. That's a decrease of $4.5 million from the fourth quarter of 2007, primarily reflecting a decline in BFDS earnings.
DST's equity and BFDS earnings decreased by $6.1 million, primarily from lower investment earnings on cash balances maintained by BFDS on behalf of its customers and lower operating revenue from reduced client volumes.
In addition, BFDS's fourth quarter 2008 was negatively impacted by approximately $800,000 of cost associated with the reduction in staffing levels.
The $600,000 earnings increase at IFDS reflects higher revenues from increased shareowner account service, operating cost improvement and lower income taxes.
Earnings at Argus increased by $1.4 million, reflecting the operating cost improvements, somewhat offset by lower investment earnings on cash balances maintained by Argus for its customers.
Other income net reflects an expense of $1.8 million in the fourth quarter of 2008, that's a decrease of $10.4 million, as compared to the fourth quarter of 2007. The decrease is primarily due to the $5.7 million increase in unrealized losses on marketable security designated as trading. The effect that we discussed is offset in financial services as a decrease in cost and expenses.
Lower interest income in 2008 and higher accounts receivable securitization fees are also reflected.
Interest expense was $15.1 million for the fourth quarter of 2008, that's an increase of $4 million from the fourth quarter of 2007. That resulted primarily from higher average debt balances in 2008, offset to some degree by lower average interest rates.
Share repurchase activity during 2008, pretty much was the primary factor in the higher average debt balances.
The income tax rate was 41% for the fourth quarter of 2008, compared to 36.4% for the fourth quarter of 2007. The fourth quarter tax rate was negatively impacted from the establishment of evaluation allowance against international deferred tax assets and changes in relative proportions of domestic, international and corporate joint venture income.
The company expects its tax rate to be approximately 36.5% in 2009, including the expected negative impacts and affects from continuing to provide an international deferred tax valuation allowance.
The mutual fund area. Total mutual fund shareowner account serviced were 120.1 million at December 31, 2008. That was a decrease of 1.8 million accounts or 1.5% from September 30, 2008. But it was an increase of 1 million accounts or eight-tenths of a percent from December 31, 2007.
The registered shareowner account service totaled a 111.2 million at December 31, 2008. And that was a net decrease of 1.3 million or 1.2% at September 30, 2008. That was comprised of net declines in existing client accounts of 3 million, conversions to DST's subaccounting platform of 200,000 accounts and conversions to non-DST subaccounting platforms of 100,000 accounts. The net amount then reflects a conversion of new shareowner accounts of 2 million accounts.
Tax advantage account service totaled 45.8 million at December 31, 2008. Again, there is a decrease there of 1.2 million accounts or 2.6% since September 30th of 2008. That's really attributable declines in the existing client account base.
Subaccount service totaled 8.9 million at December 31, 2008 and that's a decrease of 500,000 subaccount since September 30th of 2008. And that reflects net declines in existing client subaccounts of 800,000, partially offset by conversions of 200,000 registered accounts from TA2000, and conversions of new subaccounts of 100,000 from non-DST platforms.
Currently DST anticipates that 1.1 million new registered accounts will convert to TA2000 in 2009. And of that number, 450,000 represent new client commitments received in the fourth quarter of 2008.
The company's subaccounting clients have indicated they plan to convert 1.2 million new subaccounts to our TA2000 subaccounting platform from non-DST platforms during 2009. But the company expects 2.8 million registered accounts will convert to subaccounting platforms in '09, of which 1.2 million will convert to the TA2000 platform.
In summary, based on account serviced at December 31, 2008 and the conversion activity just described without taking into account any other changes that might occur, total account service till December 31, 2009 are estimated to be 120.8 million, which will be comprised of 109.5 million registered accounts and 11.3 million subaccounts.
The actual number of accounts estimated to convert tuning from various DST Systems as well as the timing of those events is depended on a number of factors that could differ from those used in our estimates.
Defined contribution participants were 3.7 million at December 31, 2008 substantially unchanged from September 30, 2008. But a decrease of 1.1 million or 22.9% from December 31, 2007. As previously discussed, in existing track client internalized its participant accounting during the third quarter of 2008, resulting in the loss of approximately a million participants.
During the quarter, DST repurchased 681,938 shares of its common stock at an aggregate cost of $32.6 million or 47.80 per share. And for the whole year during the year of 2008, we repurchased 11,317,190 shares at an aggregate cost of 724.3 million. As of December 31, 2008, DST had approximately 550,000 shares remaining under its existing share repurchase authorization.
Turning to outstanding shares. We had 49.7 million shares outstanding at December 31, 2008. That number includes 2.6 million unvested restricted shares.
On November 14, 2008, approximately 85,000 shares were issued as a partial consideration in the acquisition of BlueDoor Technologies Limited. The net effect of the share repurchases, shares issued from stock option exercises and shares issued for the BlueDoor acquisition during the fourth quarter of 2008 resulted in a decrease in shares outstanding of 600,000 since the quarter end on September 30, 2008.
Average diluted shares outstanding for the fourth quarter of 2008 were 49.4 million shares. That's a decrease of 20 million shares or 28.8% from the fourth quarter of 2007, and a decrease of 5.8 million shares or 10.5% from the third quarter of 2008.
As a result of DST's average share price during the fourth quarter of 2008 being below $49.08 per share, there was no dilutive impact from the senior convertible debentures in that in the fourth quarter of 2008.
The aggregate dilutive effect of restricted stock, outstanding stock options and convertible debentures increased by approximately 3.6 million shares in the third quarter of 2008 and decreased by approximately 8.3 million shares from the fourth quarter of 2007 respectively, primarily reflecting the decrease in DST's average share price.
Total stock options and restricted stock equity units outstanding at December 31, 2008 were 8.5 million. That was unchanged from September 30, 2008, and also a decrease of 100,000 equity units or approximately 1.2% from December 31, 2007.
DST recorded 20.4 million of net losses on securities and other investments in the fourth quarter of 2008, which is comprised of net realized gains from sales, available for sales securities of 20.5 million, other than temporary impairments on available for sales securities of 27.4 million and net unrealized losses on other investments of 13.5 million.
Included in the 20.5 million of net realized gains is a 25.4 million gain from the sale of approximately 730,000 shares of State Street Corporation. Company continues to own 10.6 million share of State Street.
The unrealized losses recorded on available for sale, securities and other investments are associated with other than temporary declines in securities share prices of available for sale securities and lower cost or market valuation adjustments of other investments. The net loss is included in non-GAAP adjustments.
DST recorded a $10.8 million gain during the fourth quarter of 2008, associated with the repurchase of $128.5 million of our $840 million of senior convertible debentures. Those purchases were made at a discount to carrying value. This gain, again, has been included in the non-GAAP adjustments.
With that, operator, we'd like to open up the call to the participants for questions.
Question-and-Answer Session
Operator
Surely. [Operator instructions]. And we'll go now to the line of David Koning with Robert W. Baird. Please go ahead.
David Koning - Robert W. Baird & Co., Inc
Yeah, hey guys. Just wanted to dig a little bit into the discussion around end of '09 accounts. And certainly you are not forecasting any organic movements within the account base. But, when we do look at that 120.8 number that you'd end '09 with, is it fair to assume that, based on what you've seen so far in January and if we do have the market continue to be choppy that that number could be below that to a certain extent?
Thomas McDonnell
Well, I think that's not an unrealistic assumption. Obviously, I think we all are watching some pretty volatile markets and certainly lot of pressure out there overall economically. And you know, one other things I am not sure that's reflected are that we've seen any visible evidence of others that as people get there, year end statements for one case and stuff like that whether there will be any exits.
Also, we normally have some pickup at the first quarter from a new 401(k) participants, but certainly I think if you correlate the current unemployment numbers, with sort of lack of new jobs and then you look at all the layoffs in various companies, it will reflect probably result most likely in certain number of 401(k) cash-ins as people leave their company and many choose to do that.
I think that's certainly going to have some at least downward pressure on the number of accounts. There is no way at this point, David that kind of accurately project that. Because we really haven't seen enough experience with it. I mean I would assume that we'll know quite a bit by the end of first quarter.
And, of course, the other thing they we're usually see by the end of the first quarter is kind of what the level of new IRA and another tax deferred accounts amounts to. At this point, I guess I would have to tell you it would be overly optimistic about that either. But we felt some fairly conservative assumptions into our projections including some best guesses on our part of those. But I can't tell you exact percentages. But we certainly have not been optimistic in the projections. But having said that, I don't there is any reason not to at least consider that those numbers may not materialize.
David Koning - Robert W. Baird & Co., Inc
Okay, great. And, well I guess following up a little bit on that. You have the 3 million organic account, registered account declines in Q4. Did it feel like just based on what you saw then or seeing now that that was may be some of the worst fear? Or did it feel like Q1 based on the activity you are seeing feels just as bad that has everybody saw their year end statements? Some people did close accounts et cetera.
Thomas McDonnell
Well, so far we haven't seen that carryover into the first quarter. But I don't know if the first 28 days of the month are representative. Just don't know what people's decision timeframes are. And when they... what they look at it. And I think there might be little paralysis out there that even if people are cashing in their accounts, they may be presuming that the market will improve. So, I think part of it could well... if you had a 1000-1500 more rally in the down, I'm not sure you wouldn't see some increase redemption activity. It's just very hard to predict those consumer reactions or churn reactions.
But I think the mad answer is so far we have not seen a continuation of that level of pressuring into the first quarter.
David Koning - Robert W. Baird & Co., Inc
Okay, thanks. And then, the margin of financial services even excluding the 5.7 million invested, we are still 30% or so, very strong considering license revenues were we and revenues were down. I'm wondering if there is anything else in there that's somewhat unsustainable?
Thomas McDonnell
Well, like most organizations we've taken a lot of actions relative to containing overall costs and number of actions along those lines. And I think we've done well with that. But, I think I am not sure that there is cost side at this point. Cost side I think is obviously sustainable meaning we can control. The key impact on margins will be or rather not the revenues hold up.
So, I mean I think the margin risk is, because the cost actions that we've taken we believe are prudent and viable that maybe not be a whole lot of that left. So, if we can see revenue pressure I think you'll have to assume there will be some margin pressure. But everything else been equal. I would think that margin is sustainable assuming you don't get the serious erosion in revenues.
David Koning - Robert W. Baird & Co., Inc
And one last quick one. There were something in the 10-Q recently I just want to follow-up about. The 2.6 million unvested restricted shares that I believe aren't in the share account right now. In Q1, '09 are we going to just see an immediate 2.6 million additions to the share account?
Thomas McDonnell
Well, if we go back I mean it depend on which share account we're giving you. It's in the $49.4, correct Ken?
Kenneth Hager
David, what you're referring to I think is the fact that beginning next year the unvested restricted stock has to be treated. It's going to go in the calculation of the diluted shares outstanding. All 2.6 million shares are going calculation diluted shares outstanding.
David Koning - Robert W. Baird & Co., Inc
Are any unit right now?
Kenneth Hager
No. Only 1.9 is right now.
David Koning - Robert W. Baird & Co., Inc
Okay, great. Thank you.
Thomas McDonnell
When you say organic, 1.9 or the 2.6?
Kenneth Hager
1.9 is 2.6 is in the calculation now beginning next year all 2.6 will be.
Thomas McDonnell
We say next year you're talking about.
Kenneth Hager - Chief Financial Officer, Vice President and Treasurer
I'm sorry beginning 2009. Accounts are shown in the past sometimes.
David Koning - Robert W. Baird & Co., Inc
Great, thank you.
Operator
Alright, thank you. We'll now go for the line of James Kissane with Banc of America-Merrill Lynch. Please go ahead.
James Kissane - Banc of America-Merrill Lynch
Hey Tom and Ken. I think last week, State Street were saying that they are seeing pretty strong demand for I guess back office and middle office outsourcing from quote very large fun complexes? Are you seeing that as well?
Thomas McDonnell
No.
James Kissane - Banc of America-Merrill Lynch
No?
Thomas McDonnell
Well, I mean when you look at the back office and middle office, that's the investment accounting side of the house. And when you look at our book of business, Jim it's pretty much outsource we wrote already. What we hope to see but haven't seen as rapidly yet is consideration by remote clients as driven out some of the functions that they have traditionally performed, that they preferred to transfer those over to us or to BFDS.
We did see some of that activity early to mid-last year, but we would anticipate given the economics out there that there will a revival of that. But we couldn't point any specific aspect. And, the other thing that sort of the two-edge sword on State Street that if they see middle office, back office outsourcing that's good. But to the extent people outsource versus buy and investment management software, that's put more pressure on the lack of revenues that we've already experienced from a new software sales at DSTi.
James Kissane - Banc of America-Merrill Lynch
Got you. And you sold some State Street stock in the quarter. And you're stocks obviously a lot lower than where you are buying at last year. Is it safe to assume based on where your stock is today that you see better relative value in DST than STT?
Thomas McDonnell
Well, unfortunately if you went back over extended periods, there is always been a reasonably close correlation between State Street's price and ours. And generally, we are trading at 35, they might be trading around 40. And we like that relative valuation then because we always had the leverage of using some sales to adjusted the DST with, I hope to be temporary situation in State Street's case that ratio or that relationship is altered. I think what you can expect is that we will continue to manage the balance sheet and lack of better terms equity equivalents, which are pricing more activity on the bond side and the stock side.
James Kissane - Banc of America-Merrill Lynch
Okay.
Thomas McDonnell
No, I mean I like everybody and though we need to have conservative view to questions, so everybody has conservative view. We have conservative view to our balance sheet. And so, I think when you get into the long-term debt and shareowner equity side of the equation, I think you'll see more activity in the long-term debt side.
James Kissane - Banc of America-Merrill Lynch
Okay. And can you talk or maybe discuss some of the detail and dynamics and the economics around subaccounting. How much do the funds typically pay the brokerage firms on a per account basis and maybe how do they compare with what DST charges?
Thomas McDonnell
Well, I think that the firms pay pretty much of the equivalent of a full service process in-charge; it would be pay say to BFDS and in some cases actually higher. So, that's what they pay to the brokerage firm. And, of course, we get a data processing fee for managing that which is somewhat less than our regular full service... our regular remote processing fee because if there is some less content in supporting the brokerage side and supporting direct remote clients.
So that the math audit is not necessarily problematic from margins in percentage firms but it is problematic from absolute earnings based on lower revenue units, either that might transfer out of the BFDS or that would go from what's currently a remote client to a subaccounting clients. So, then if you... we don't breakout exact numbers, but highest revenue units full service next high is a remote and then the lowest is subaccounting. So, even with consistent margins, you produce less income in the subaccounting side.
James Kissane - Banc of America-Merrill Lynch
I guess you don't lose another 2 million or so registered accounts from your existing book to subaccounting this year?
Thomas McDonnell
Yeah, that's let me go back to. I'm sorry ken, that's 2.8.
James Kissane - Banc of America-Merrill Lynch
And what's driving that? Is that just a continuation of what you were seeing last year or --
Thomas McDonnell
It's a certain fund groups of contracting with or accepting sort of the demands of the brokerage community to put some of those accounts on the broke (ph) use certain will go out to Merrill Lynch exit. I guess they are still there.
James Kissane - Banc of America-Merrill Lynch
So you expect that, will that kind of continue beyond '09 or --
Thomas McDonnell
Well, I mean I think it will continue if you look back over last 4 or 5 years, if there has been quite a wide range of activity year-by-year, last year was one of the more active we've seen and this year seems may be in the same general range a little bit. I think I got to continue but it's hard to say Jim at what rate and also think that some of just the other market pressures and so forth may retire that activity a little bit. Because we even questions from a shareowner standpoint, are you really happy with your thing going on to the books of the brokerage room that may require TARP and another firms as opposed to be it on direct registered account of the mutual fund.
James Kissane - Banc of America-Merrill Lynch
Okay. That's on current Q of estimate dynamic. I mean, who's calling the shots here? Is the fund complex or the brokerage?
Thomas McDonnell
Brokerage.
Kenneth Hager - Chief Financial Officer, Vice President and Treasurer
Brokerage.
James Kissane - Banc of America-Merrill Lynch
Okay. And just one last question, I guess the $5.7 million in the financial services that deferred comp and then the offset and the other income, what's the accounting around that?
Thomas McDonnell
It's basically the, we have... our most of it drives from deferred amounts out of the bonus plan because when we calculate bonuses, a substantial portion of its deferred from multiple years before the employees entitle to receive it.
In the period that it's deferred they are given a range of investment options if they can select. So they select it. And we fund those investment options so that we neutralize the income effect of it. So what really the real accounting side of it is, it's... in the net, it's neutral. But the one item that's the obligation to the individual shows up in the operating side, either as a gain or loss depending on what happened; well not as a gain or loss, a greater or lower liability based on the underlying performance of their investments. But then it's picked up on the other investment side because, if we had reduce liability on the one, that's offset by the performance of the investments in other income.
So it basically, unfortunately, its total neutral item. It just happens to show up in two different footprints on the P&L. And therefore it's... that's why we referenced the margin improvement net of that because it really is a little bit unrelated actually to the operating cost. But that's just the way the accounting is. I think I have explained well.
James Kissane - Banc of America-Merrill Lynch
Yes, that's correct.
Thomas McDonnell
So that said, come across okay?
James Kissane - Banc of America-Merrill Lynch
That was perfect. Thank you.
Operator
Alright, thank you. We'll go now to the line of Murali Gopal with KBW. Please go ahead.
Murali Gopal - Keefe, Bruyette & Woods
Good morning, and thanks for taking the call. Couple of quick questions. I know you don't disclose the per account fee that you charge for full service versus subaccounting, but is there any way you can give us some kind of a ballpark multiple in terms of how many subaccounting accounts you would need to make up for every full service account?
Thomas McDonnell
Well, there might be, but I wouldn't want to do it on the fly on this call, because I don't want to distort any of the deals. But, and we'd have think whether or not we want to put that out because that's reasonably sensitive information relative to competition and everything else.
So, but as I had indicated, the hierarchy of revenues is highest on full service than remote and then subaccounting. So, the subaccounting as I indicated while may have reasonable margins, the lower revenue units that produces less absolute earnings. But I just wouldn't be comfortable breaking that out. I think, we policy wise would have to think whether we really want to go into that in any greater detail.
Murali Gopal - Keefe, Bruyette & Woods
Okay, fair enough. And then the operating margin in the financial service segment, I know you didn't mention that you've taken some actions to containing costs. Could you talk a little bit in terms of your... if internally you're targeting some number and what everything in the run rate or you're going to see more kind of saves coming in next year and also generally in terms of what kind of cost, you have some kind of leverage in terms of raining in and what exactly these cost saves are coming from?
Thomas McDonnell
Well, I mean, certainly we have... when you have slower growth, you have less CapEx to deal with and to the extent that we have less contemporary CapEx because of our policy of using accelerated depreciation for major technology assets of both at output and DST to the extend that capital expenditures are delayed, you do pickup the advantage on the depreciation curve.
We obviously have been very careful about personnel additions. And again with the slower growth, there is less requirement there. But even at that we've been much more aggressive in restraining the overall level of staff in the organization.
Those really are the two primary variables, I mean the facilities and everything else, they are pretty much in place for multiple years. There is not too much one can do there. It's really all pretty much CapEx and staff related. And I think as you can see from the numbers, obviously, we reduced sufficient cost to maintain the margins. But as I said earlier, I think there is a limit to cost actions that can be taken at some point and the margin retention is going to be very much a factor if we're able to retain reasonable revenue levels.
Murali Gopal - Keefe, Bruyette & Woods
Right, right. And then the next question I have, it's partly a little bit more conceptual. BFDS, I do see that they did have interest income decline, given lower cash balances, client cash balance. I'm just trying to understand, is that the way the BFDS and the way the cash is held in BFDS, is it different from the way DST or do you also have client cash balances and you earn interest if so, can you just give us some, talk a little bit about that?
Thomas McDonnell
Well, I think when you look at the cash balances; they are really primary joint ventures which are BFDS and Argus. And traditionally, in the mutual fund industry, pricing reflects the balances that are generated by the activity.
So there is always been that element. And it has over a period of time and reasonably consistent, but in any periods like after 2000 and certainly the last year, where there is huge shifts in the short-term interest rate, it has a particularly significant impact. So traditionally, in both of those businesses, vendor supply services are generally priced to include an anticipation of the level of balances.
Murali Gopal - Keefe, Bruyette & Woods
Right.
Thomas McDonnell
At DST, we have and that's primarily a result of full service shareholder accounting not remote. So DST has minimal exposure for its own book because we have a relatively modest amount of full service accounts as compared to BFDS as 30 some odd million. So, that that impact is pretty much kind of contained within BFDS and Argus.
Murali Gopal - Keefe, Bruyette & Woods
Right. What would be the comparable full service account with DST?
Thomas McDonnell
As compared to the 36?
Murali Gopal - Keefe, Bruyette & Woods
Right. 36 million or so if that --
Thomas McDonnell
About 8 million.
Murali Gopal - Keefe, Bruyette & Woods
8 million. Okay, fair enough. And, one last question I have.
Thomas McDonnell
And then some of our relationships go back long enough that they don't miss or include the balance component by the way.
Murali Gopal - Keefe, Bruyette & Woods
Okay, okay. And in terms of available for sale investments securities portfolio, could you talk a little bit in terms of what securities are there and what were the securities that were other than temporary impaired in the quarter?
Thomas McDonnell
Well, we don't disclose the securities portfolio. But the largest segments of it are our Stage-3 computer share out of Australia and Euronet. Those are not impaired because of our low cost basis in those.
Murali Gopal - Keefe, Bruyette & Woods
Right, right. I was asking more the other AFS securities you have.
Thomas McDonnell
A lot of those, you just look at as a... you probably see about the same mix you would in any probably growth in somewhat income related mutual fund. So that's why you see the overall portfolio declines of 30% or something not inconsistent with the overall market. But, as you are aware it is because of the accounting rules on that rather, even though we might believe that some of the securities actually have very good prospects we do have to mark them to market. But we don't disclose the detail of that portfolio.
Murali Gopal - Keefe, Bruyette & Woods
Right. But is there any business or regulatory need or requirement that you need to hold the securities or is it just pure investment purposes?
Thomas McDonnell
Just investment purposes.
Murali Gopal - Keefe, Bruyette & Woods
Okay. And I am sorry, if I may ask one --
Thomas McDonnell
Well, that's generally investment purposes, although in the captive insurance company there are certain securities that are required to be held by reinsurance relationships that we have. But those are primarily government of non-volatile securities. But in those portfolios are beyond the portion that's required in that portfolio, beyond the portion that's required to be held in Best Buy securities, you would also have some OTTI effect.
Murali Gopal - Keefe, Bruyette & Woods
Okay. And then very quickly, the last question I had, obviously, you did pay down debt. You sold some Stage-3 stock. The prices obviously lower than what it's been I guess like you were saying and the way I look at it, it's probably economic analysis. You are looking at the discount at which the debt has been trading versus the stock and you probably made the decision. But can you also talk a little bit in terms of how much in terms of the debt covenants and where they are and how much of that was kind of debt figured into your decision making?
Thomas McDonnell
No, I mean we don't have any covenant issues if that's the question. The debt the way it's structured, the convertible debt had a portion that had a option last August to be put back to the company of car. But back then the stock was at a price that the convertible value was above that. That particular and can't be put again for 4.5 years the $540 million piece part of which was retired through purchases is putable in August 2010.
The company has a revolving credit agreement in an off-balance sheet AR securitization, where managing the balance sheet to minimize any risk to refinancing until, when we say why don't we factor in. I mean I think what we're factoring is our ability to maintain a reasonably structured balance sheet relative to debt and equity because we don't think that a company is one that should run without any debt leverage. But we're very cautious of what the credit markets have looked like and we're driving, been overly conservative, if not overly we're certainly been conservative is to how we manage that balance sheet aspect. That's why I said earlier that on that side of the balance sheet you would expect us to do more with adjusting the debt levels and you would seen repurchases.
Murali Gopal - Keefe, Bruyette & Woods
Right. And the reason I asked it was I was little surprise because in last quarter you did have an incremental debt of about $120 million or so. And then this quarter... so I was just wondering the philosophy in terms of... you took additional debt just last quarter and so that's where I was going from.
Thomas McDonnell
We arranged a little bit and there is some real estate financing and so forth and we did increase a little bit, partly with some of the repurchases of bonds and so forth. But, I think the debt levels that you see out there in the aggregate, we're still comfortable if that's an appropriate level of leverage.
I think you might see the mix of how that leverage is constructed relative to what we might do with any repurchases of bonds or so forth, kind of maybe change a little bit over the next several quarters. But the overall order magnitude, you would not expect to change very much.
Murali Gopal - Keefe, Bruyette & Woods
Okay. That's very helpful. Thanks.
Operator
Alright, thank you. And our follow-up question comes from the line of Andrew Gauntlet (ph) with ASB. Please go ahead.
Unidentified Analyst
Good morning. I feel like most of my questions you touched on it is with you, others if you don't mind, can you give a little color on account losses in terms of money market bonds, bond funds and equity?
Thomas McDonnell
Actually we don't have those numbers in front of us, but as best we could, I mean, from eyeballing I don't see any particular difference between where they are. I mean we had some equity funds go to money market, but where people, some of that happened earlier in the year as people got nervous and then as accounts closed, it's been pretty much pro rata across and it's not highly concentrated in any one area.
And by the way I mean losses in bond and income funds have been as in some cases as dramatic as in equity. So I mean normally they sort of perceptions of individuals will have as to where they want their money may not be as relevant in this type of the market that we've seen for the last six, nine months as it used to be. So and that may be why it's kind of not necessarily pronounced in any one area.
Unidentified Analyst
Okay. Does the mix of those funds in your portfolio of accounts affects profitability all that much?
Thomas McDonnell
Not all that much. I mean there is... you tend to have in certain money funds they have very high transaction activity. You tend to have higher revenue based on either absolute pricing per account or in some cases, some transaction elements. But by and large there is no significant difference in type of mix we see.
Unidentified Analyst
Okay. And then I was impressed that you bought your converge. And if I do maths, it looks like you bought it back in kind of 10% discount to par. And I'm curious, first of all you have to virtually don't trade all that much. And I am curious how you are able to do that and why chose the tranche of those converts that are the furbished out in terms of the profitability and maturity, and I mean not to be cash payers as well?
Thomas McDonnell
Well, I think it was lot had to do with just the relative pricing and what was available. And you're right. They don't trade all that much. But as I think a lot of the supply came from hedge fund portfolios that it had probably used converts on acquisition in connection with some other derivative activities. And I think that call on lot of hedge funds for cash in the fourth quarter was pretty intense. And I think stuff they had that was and their portfolio closes to money good or shortest maturities or whatever is what become available. It wasn't necessarily totally a conscious list go out, find one or the other. But it was what people were calling us with actually.
Unidentified Analyst
Okay. And if you continued to buyback to converts I guess you usually talk about this mid-quarter, but you continued to find converts that you can buyback?
Thomas McDonnell
I haven't seen much activity recently. And as to the answer, I think as I have alluded to, I think you would see us if available more likely to be buying in the debt side than the equity side.
Unidentified Analyst
I see. And is the 10% discount roughly correct that I am calculating?
Thomas McDonnell
Yeah, you are pretty closer.
Unidentified Analyst
Right. And then, I was curious why you took a loss on the $4.9 million that in the 20.4 you given a nice breakdown, but did you also allude to a loss, a realized loss. Why did you chose to take a loss? Because you felt the securities were not what you thought there were because you had gains that you could use to offset it for cash needs?
Thomas McDonnell
The latter. We hadn't gains and I think everybody that follows the company's work, we are had a very large gain in '07. So in some cases where we can substitute a securities some of our securities as you would see in any portfolio you can either a) or b) and there is draw practical purposes as the same equivalent from our outlook. So by taking some losses of generated little additional cash from the tax side.
Unidentified Analyst
I understand. And the accounts receivable outstanding, in terms of the facility that you use, how much is that at the end of the quarter or the at end of the year I guess?
Thomas McDonnell
It's a 130 million.
Unidentified Analyst
So, up about 10 million q-over-q, is that right?
Thomas McDonnell
No, it's up 30 million q-over-q.
Unidentified Analyst
Up 30 million. Okay, thank you. And then I have just one other big, big question. Maybe it's too early to tell, but the consolidation amongst the brokers, particularly of non-DST customers such as Merrill and Citi, or Smith Barney is best as I know. Is that change, and into the hands of DST customers I might add, is that change at all the opportunities available such that, an outsourcing way of some sort can happen in effect change, the growth profile of your company? I mean, how do you see all this turmoil consolidation changing the opportunity sets for DST going forward, as best as you can tell today?
Thomas McDonnell
Well, I think we'd have a lot of clients; we've had very long and constructive relationships with. So, your observation that were books of business move to existing clients, I think our opportunity relative to those are substantially enhanced. I don't know that I'd say it's going to be away and I don't know if there is anyway to predict timing because when you start putting very large organizations together, there is a lot of other issues they have to deal with. I am not sure that repositioning and how they are doing the shareholder accounting is in the top five. I think it will eventually be evaluated.
And I think our long-term relationships with clients will be positive there. But even there, when you are particular, when you putting large books together, I means it's usually the client will even with long-term relationship with a vendor, they will test water just for pricing if nothing else.
So I think I would say that there is a likelihood. There will be some opportunities that will present themselves. We'd like to think we will be well positioned to address those, but I would also say I actually think the focus on those types of things will be little bit further down the role until they rationalize the size of the sales organizations and the whole lot of other things that's going to be a sort of much more highly leverage for the combinations and the particular consolidation of accounting. So, yes we think it's probably a positive timing I think will be pushed out little.
Unidentified Analyst
But you don't see any risk of in-sourcing?
Thomas McDonnell
Well, I think in-sourcing is probably almost out everybody's vocabulary at the moment. But having said that you never know what can happen. But I think that particularly with a lot of the consolidations, I mean part of rationale behind those as firms really focusing on the things they well and that's not always keeping track of shareholders.
Unidentified Analyst
Right. And what about on the hedge fund side, because one thing that's make sure you it is seeing is a lot of hedge funds who formerly didn't have the transparency. And tended to use systems that were not as modern as yours and State Streets. Enquiring as to how to make that business more transparent, is that something that can trickle down into DST? And, of course, that's happening in Bank 0f New York and J.P Morgan as well. I'm curious is that is something to think about that might change the opportunities stand for DST?
Thomas McDonnell
Unlikely, DST as we think of DST and its mutual fund stuff, because hedge funds we really, don't operate hedge funds software and hedge funds generally have a very small number of shareholder accounts and are generally accretive of these partnerships. So that really is a business that State Street, Northern Bank of New York, Mel and people like that are in. And Citigroup is in there because of the license fees, where we may see some activity because we actually have some software DST International that is relevant to some forms of hedge fund processing that I would tell you we haven't seen particular uptick there. But I think you just generally assume that as far as hedge fund activity, is this not a business of DST's actively engaged in.
Unidentified Analyst
Understood. Thanks for comments and color.
Thomas McDonnell
Thank you.
Operator
Alright, thank you. And we have no further questions in queue. Please continue.
Thomas McDonnell
Well, as there are no further questions we're going to thank you for participating today. And I think operator, you have a couple announcements to make relative to the availability of replays and so forth.
Operator
Yes, sir. Ladies and gentlemen, today's conference will be available today beginning at 12 PM. You may access the AT&T replay system by dialing 1800-475-6701 and entering access code 978102 or 1320-365-3844 with that same access code 978102. Those numbers again are 1800-475-6701 or 1320-365-3844 with access code 978102. The availability will through the 12th of February at midnight. We thank you for using the AT&T Executive Teleconference service. You may now disconnect.
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