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DST Systems (NYSE:DST)

Q2 2014 Earnings Call

July 24, 2014 8:30 am ET

Executives

Stephen C. Hooley - Chief Executive Officer, President, Director and Member of Proxy Committee

Gregg William Givens - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Treasurer and Member of Proxy Committee

Analysts

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Ryan Davis - Crédit Suisse AG, Research Division

Michael Landau - Evercore Partners Inc., Research Division

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

David Ridley-Lane - BofA Merrill Lynch, Research Division

Operator

Good morning, and welcome to the DST Systems' Second Quarter 2014 Earnings Conference Call. [Operator Instructions]

In the course of this conference call today, forward-looking statements may be made regarding DST and its businesses. Such statements are based on the company's views as of today, and actual results could differ materially from the forward-looking statements. There are a number of factors that could affect the company's future results, including those risk factors set forth in DST's latest annual and quarterly reports filed with the SEC. All such factors should be considered in evaluating any forward-looking statements that may be made.

Now I'd like to turn the conference over to our host, Mr. Steve Hooley, President and Chief Executive Officer of DST. Please go ahead.

Stephen C. Hooley

Great. Thank you very much. Well, good morning, and thank you for joining DST Systems' second quarter 2014 earnings call. Joining me today is our Chief Financial Officer, Gregg Givens. I'm going to start by going through some of the highlights for the quarter, and then we'll turn the call over to Gregg for additional detail on our financial results.

Our results for this quarter reflect the progress we continue to make against our strategic objectives. Consolidated net income for the quarter was $137.8 million or $3.34 per diluted share, which is an increase of 76% from $78.5 million last year. On a non-GAAP basis, consolidated net income was $49.5 million or $1.20 per diluted share, as compared to $46.3 million or $1.04 per diluted share for the second quarter of 2013.

Our continued focus on operating execution has led to meaningful improvements in key performance metrics across all of our business segments. We have been implementing several initiatives to convert new business to streamline costs and deliver new solutions throughout our organization, and the positive effect of those efforts is starting to take shape. While our investments have had an impact on our expenses and our operating margins, our strong fundamentals have nonetheless allowed us to maintain steady sustainable growth and our long-term outlook is positive.

In our Financial Services segment, strong organic growth from new and existing clients drove a 7.2% increase in revenues year-over-year to $267 million. ALPS, our asset distribution and fund arm, experienced favorable market appreciation and asset growth; while BlueDoor, our wealth management and retirement platform business, achieved higher professional services fees for the implementation and configuration of new clients.

We continue to invest in operating efficiency, converting new clients, new capabilities and functionality, as well as enhancements to our regulatory, compliance and security programs to support higher revenues and maintain our position as a trusted partner to our clients.

In our core record-keeping business, subaccounting conversions have occurred at a slightly slower pace than our previous guidance. And as a result, we now expect to see between 3 million and 4 million conversions for the full year. As you will recall, we have previously projected 4 million to 5 million subaccounting conversions during 2014.

We had total mutual fund shareowner accounts of 98.5 million at the end of the second quarter this year, of which 70.9 million were registered shareowner accounts and the remaining 27.6 million were subaccounts. As expected, we incurred a slight decline in defined contribution participant accounts during the quarter, as a result of the annual purge that occurs each year after the April income tax reporting deadline.

Moving on to our health services -- Healthcare Services segment. We once again saw a double-digit growth in operating revenues, which were up by 13.3% over the second quarter of last year. Pharmacy volume claims rose by 9% and medical claim volumes also increased due to increased participation in Medicare, Medicaid and healthcare exchanges.

The Affordable Care Act has been a net positive for DST, and we expect the changing healthcare landscape will further benefit our business as demand expands for healthcare solutions and services. We remain pleased with the overall performance of our healthcare business.

Healthcare Services margins were negatively impacted by $5.7 million of incremental expense during the quarter, associated with potential obligations for errors in the processing of certain pharmacy claims. And while its negative impact on the quarter, we recognize that with the high volume of transaction processing and complicated regulatory environment that we're operating in, these issues do arise from time to time, and we continue to take steps to improve our procedures to reduce the risk that similar errors will arise in the future.

In both Healthcare and Financial Services, we incurred costs in the quarter to convert committed revenues. These investments are allowing us to expand our client base and capture greater market share.

Our Customer Communications segment continues to build momentum. Thanks in part to the initiatives we have in place to streamline costs and increase client signings and conversions. While revenues were down slightly compared to the second quarter of 2013, operating income grew in both North America and the United Kingdom, primarily due to lower operating costs. Operating margins in this segment grew by more than 250 basis points. As previously announced, we continue to feel the impact of prior client losses during the quarter, which were partially offset by client wins in our U.K. business. We are pleased with the progress that has been made in the Customer Communications segment and look forward to making additional headway during the second half of the year.

Our operating joint ventures continue to be a strategic avenue, which allow us to reach new markets and clients and expand our footprint globally. We continue to invest in new solutions for the market, particularly in the wealth management space in Europe. We're excited about some of the new revenue prospects that we are developing and the continued growth opportunities that they present for our business.

With respect to our nonoperating assets, we monetized approximately $118.5 million in investments this quarter, including $103.6 million from the sale of our remaining investment in a private company. As always, we intend to maintain our prudent approach to asset dispositions and monetizations going forward and will take advantage of additional opportunities to strategically divest our nonoperating assets.

During the quarter, we successfully completed a secondary offering of $450 million of DST Systems' common stock and subsequently repurchased $200 million of stock, which allowed us to significantly reduce the position of an individual 22% shareowner to below 5%. The $450 million of shares were redistributed into the market largely to institutional shareowners. In addition to these repurchases, we also maintained our quarterly cash dividend of $0.30 per share.

Our strong balance sheet, manageable debt levels and solid operating cash flow have allowed us to consistently return value to our shareholders, and we are confident in our ability to maintain this track record. We continue to maintain a debt leverage ratio that provides ample flexibility to fund all aspects of our strategy, which will allow us to be nimble and capitalize on the right opportunities for accretive growth as they become available.

With that, I'd now like to turn the call over to Gregg for a detailed discussion of our second quarter financial results.

Gregg William Givens

Thanks, Steve. On a GAAP basis this quarter, we reported consolidated net income of $137.8 million or $3.34 per diluted share, which is a significant increase over the second quarter of 2013, when we reported $78.5 million in net income or $1.77 of earnings per share. Two of the larger items causing the increase in earnings is an after-tax gain of approximately $65 million, recognized upon the sale of our remaining investment in a private company; and an $18.1 million gain relating to the block repurchase of our common stock during the quarter. The latter share repurchase gain resulted from a change in the DST stock price between the date when the share repurchase price became fixed and the settlement date.

On an adjusted basis, our non-GAAP earnings per share this quarter were $1.20, as compared to $1.04 in the second quarter of 2013. The remainder of my comments will refer to our non-GAAP results.

Consolidated operating revenues for the quarter rose year-over-year to $509.6 million, an increase of 5.1% or $24.5 million. Adjusted consolidated operating income increased by 1.6% to $75.6 million, which was driven by both higher operating revenues in our Financial Services and Healthcare Services segments and positive operating leverage in our Customer Communications segment. These gains were partially offset by increased costs to support the higher revenues, as well as higher costs associated with new business initiatives and higher costs to support our regulatory, compliance and security programs. Additionally, during the second quarter 2014, the company recorded a $5.7 million charge associated with the errors identified in the processing of certain pharmacy claim transactions.

Consolidated operating margins for the quarter were 14.8%, which is a decrease from the 15.3% that we had in the second quarter of 2013. Excluding the $5.7 million processing error charge, consolidated operating margins would have been 16% for second quarter 2014. Let me now provide a breakdown of the results of each of our operating segments.

Our Financial Services segment operating revenues increased by $17.9 million or 7.2%. This was driven by increased revenues at ALPS, DST BlueDoor and DST Brokerage. The Financial Services segment also had $3 million of higher software license revenue, primarily from finalizing an international business process solutions license during the second quarter of 2014. These revenue increases were partially offset by declines in our mutual fund registered shareholder account processing revenues, which are primarily a result of subaccounting conversions.

Financial Services segment income from operations increased $1.6 million, or 3%, to $55 million during the second quarter of 2014. We had higher operating costs to support our revenue growth, as well as higher costs associated with new business initiatives, and increased costs to enhance our regulatory, compliance and security programs.

Excluding the effects of deferred compensation cost, the Financial Services' operating margin was 20.9% in the second quarter, which is a decrease from the 22.1% operating margin in the second quarter of 2013. We believe the increased costs incurred to further enhance and improve our systems and service offerings are the primary driver for the reduced operating margins.

Our Healthcare Services segment reported a year-over-year increase in operating revenues of $10.9 million, or 13.3%, to $92.9 million. The increase in revenues was driven by both increased medical claims transaction volumes and increased pharmacy claims processing volumes. The increased volumes were from both existing clients, as well as transactions for new clients. Additionally, the second quarter revenues reflect year-over-year increases in discount card services and other ancillary services.

Despite the positive Healthcare Services revenue increases during the quarter, overall income from operations decreased by $4.7 million to $6.7 million. The decrease is primarily due to the $5.7 million expense associated with the estimated processing error liability. For the quarter, the Healthcare Services segment had an operating margin of 7.2%, as compared to 13.9% in the second quarter of 2013. Absent the $5.7 million expense previously referenced, the segment would have had 13.3% operating margin for the quarter.

In our Customer Communications segment, our operating revenues decreased year-over-year by $2.2 million. Notwithstanding the modest decrease in operating revenues, the segment's operating income increased by $3.9 million.

In North America, our operating income increased $2.2 million, primarily from reduced costs, and in the United Kingdom, our operating income increased $1.7 million from increased revenues, partially offset by higher operating cost. The second quarter operating margin for North America was 9.4% in 2014, as compared to 7.1% in 2013. In the U.K., our operating margin was 3.6% in 2014, which is an increase from the 2/10 of a percent we had in 2013.

Overall equity and earnings of unconsolidated affiliates were $3.9 million in the second quarter, which is up slightly from the prior year quarter. BFDS equity and earnings declined slightly to $1.2 million from lower levels of accounts serviced. IFDS equity and earnings decreased approximately $500,000 from the same quarter last year, primarily due to higher operating costs and higher platform development and migration cost been incurred for a previously announced wealth management client. Offsetting the declines at BFDS and IFDS were improved performance by certain real estate and other joint ventures.

Our income tax rate for the second quarter was 35%, as compared to 37.6% for the same quarter last year. The decline in the quarterly tax rate results primarily from a higher mix of international earnings as compared to domestic earnings and higher foreign tax credits in 2014. We continue to believe that our full year effective tax rate will approximate 37%.

Turning to our share count. Average diluted shares outstanding for the quarter were 41.2 million, a reduction of 7.4% year-over-year as a result of share repurchases throughout the second half of 2013 and the $200 million block repurchase of 2.4 million shares during the second quarter of 2014. We ended the second quarter with $83.3 million of cash and $671 million of debt.

I'll now turn the call back to Steve for concluding remarks.

Stephen C. Hooley

Great. Well, thank you, Gregg. And before I turn the call over for questions, I want to briefly emphasize my enthusiasm about the path ahead for DST. We're executing well against all pillars of our strategy, which includes the retention and growth of our client base, the seamless integration of our solutions throughout an expanding global footprint and the prudent allocation of capital to strengthen our business and deliver shareholder value. I'm pleased with the first half of the year and believe we are very well positioned for the future.

And with that, operator, I'll go ahead and turn the call over to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Peter Heckmann of Avondale.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Listen, I just had a few follow-ups. On the $5.7 million onetime cost due to processing errors at Healthcare, can you talk about the thought process about not adding that back to non-GAAP? I guess, certainly, I view it as a onetime cost, but are there other considerations there?

Stephen C. Hooley

Yes, I think, Pete, look, it is part of the operation. And I think what's unique about this is the size. We're in high-volume complex transaction processing businesses. And from time to time, we do have these processing errors that run through the financials of the businesses. So quite honestly, we think it's, from a shareholder perspective, the right way to reflect the expense. And again, we're not happy about the loss. We're very happy about the performance of the business, but we do view it as part of the operations of the company.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. Fair enough, fair enough. And then on the Customer Communications side, can you talk about those conversions, the new customer conversions, how those are going and when we should expect to see those ramp into the numbers?

Gregg William Givens

Yes. I think we reported last quarter, Pete, and we're going to -- we remain -- we should start to see those conversions in the fourth quarter of this year. So the full impact -- we should see some impact in the fourth quarter, although it will be fairly minimal. Full impact should be in 2015 and -- there's always the potential. These are large conversions. There's always the potential if they could slide a month. And when you get into the fourth quarter, if it moves a month, it will move into '15, right? Because both our customer and we don't want to be going through a major conversion across the end of the year. So we still appear to be on track to have those conversions happen in the fourth quarter and again, we'll see the impact of it in 2015.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay, okay. And then how do you view the kind of compromise proposal on the table as it regards money markets? And do you anticipate much impact on DST, given that the current form of the rule suggests that there be a prime funds or institutional funds?

Stephen C. Hooley

Yes, Pete, so obviously, extremely interesting to many of our customers, right, that have large money market positions. We obviously watch it with great interest, again, because our customers are big players in that market. What's interesting is the money market fund is largely institutional, right? And so it's not -- it doesn't represent for us a lot of accounts. And so, again, very important to our customers from an AUM perspective. But as it relates to numbers of accounts on our TA2000 platform, the number of accounts in our money market funds is relatively low. So we were -- we've been involved with our customers and we've been involved with the regulators to talk just about some of the proposals and the operating implications of those. But as it relates to our business, I don't think there will be a big impact.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

All right, that's what I thought. I appreciate it. Just one more question, and I'll get back in the queue, for Gregg. I'm sorry if I missed it, but did you give shares outstanding at the end of the period?

Gregg William Givens

Yes, so let me get that number for you. It's 39.7 million shares outstanding, as of the end of June 30.

Peter J. Heckmann - Avondale Partners, LLC, Research Division

Okay. And that's basic, correct?

Gregg William Givens

That's basic. That's true outstanding.

Operator

Your next question comes from line of George Mihalos of Crédit Suisse.

Ryan Davis - Crédit Suisse AG, Research Division

This is Ryan filling in for George here. The first question, can you give us some color on the year-over-year margin decline in Financial Services? Given the strength in ALPS and lower deconversions, I figured that would improve year-over-year. And were investments more weighted to 2Q? And following up on that, how should we think about margins in the back half of '14 versus the back half of '13?

Stephen C. Hooley

Yes. So Ryan, I think there was 3 questions in there. I missed the second one, but the first one was around margins in the Financial Services sector. And look, the margins are going to move generally around the numbers that we're at. We have been investing in, as we talked about, in our converting customers, developing new capabilities for the marketplace. And as both Gregg and I mentioned, regulatory compliance and security, which is becoming, I should say, is becoming, it has been a big factor in both the Healthcare and the Financial Services sector and continues. And so the decline in margins, look, I view it as relatively modest and it is about the investment spending that's going on. I missed the second part of the question. The third part of the question was our view of margins for the rest of the year. As you know, Ryan, we really don't give guidance, but I would expect, again, that the margin that we're at today, we could be slightly above, could be slightly below, but I think it's a pretty good target for us in that sector of our business. Did I miss -- did I miss something in the middle there?

Ryan Davis - Crédit Suisse AG, Research Division

Yes. Just thinking about the investments you talked about, are they more weighted towards second quarter? Is it kind of it's like a barbell throughout the year?

Stephen C. Hooley

No, I don't think it's weighted in any particular quarter. Some of it, Ryan, will be episodic. Obviously, when we're converting a customer, we have additional expense. Some of that expense remains when the customer is converted to service it. Some of these expenses are going to be built into our operating base, right? When you think about compliance changes, regulatory changes, you think about security of our customer data, we're just going to see a flat-out increase in our expenses. And again, that's part of the environments that we're operating -- operate in, and that's just the reality. So I don't view these expenses as barbelled or episodic or confined to the second quarter.

Ryan Davis - Crédit Suisse AG, Research Division

Okay, that's helpful. And one final question here. That $103.6 million sale -- I'm sorry, if I missed this on the call, was that related to a cell phone insurance company, the remaining stake in that?

Gregg William Givens

Yes, so Ryan, we really don't comment on the names or the businesses that we're selling up. But I can tell you this, it was one position and it was completely the remaining portion of our position in that company.

Operator

Your next question comes from the line of David Togut of Evercore.

Michael Landau - Evercore Partners Inc., Research Division

This is Mike Landau in for David Togut. Just wondering if we could get a sustainable growth rate or what you think the sustainable growth rate would be for the pharmacy claims process over the next 12 to 18 months?

Stephen C. Hooley

Yes, Mike, we don't give guidance on that. We're very pleased with the results of last quarter and certainly, on a year-over-year basis. But that's not something that we project.

Michael Landau - Evercore Partners Inc., Research Division

Okay. Sure. And then just to follow up on the question about the healthcare charges. Just wondering if we should expect the charges in future quarters? Or is this really just affecting 2Q '14?

Stephen C. Hooley

This particular expense is affecting 2Q '14. And again, we have processing errors from time to time. That's the nature of the business that we're in. This one was certainly larger than most that we experienced.

Operator

Our next question comes from the line of Dave Koning of Baird.

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

A couple of things. I guess, the first one being in the core Financial Services business, this was the strongest growth you've had in a long time at 7%. And when we kind of dissect that business, about half of the revenue historically has come from the registered accounts side of it, and now you said it was down. That means the other half has to be growing in the mid-teens to kind of blend to that 7% growth. And I'm just wondering -- I mean, it seems like we have to be ballpark -- in the ballpark of being right on that. But is that somewhat unsustainable? Or is there actually some drivers behind that half? It seems like subaccounting is going well. ALPS is growing well. Maybe international, license was good. That can kind of handle that type of going forward.

Stephen C. Hooley

Yes, look, we're very pleased with the top line growth in the Financial Services segment. As you know, we've been investing in the -- all those things you just mentioned. We've been investing in our subaccounting business. We've been investing in our retirement business. We've been investing in ALPS. And we've been doing that to position ourselves for growth. So there's a couple of things happening there, right? One is the subaccounting has slowed down, okay? So the year-over-year comparisons are -- we didn't have as many conversions last year. Last year, we had 5.2 million subaccounts. We just, today, let you know that we are actually adjusting down our expectation for 2014. We had been projecting 4 million to 5 million accounts. We're now looking at 3 million to 4 million accounts. And so the year-over-year comparisons have gotten a little bit easier, so there wasn't quite as much ground to make up as there was, say, on a '12 to '13 comparison. And some of these other businesses that we've been positioning for growth are starting to look -- to deliver. So again, we're very pleased with the second quarter growth and clearly, it's our target to have that continue. But I don't -- really don't want to comment on where we expect it to go in the second half.

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

Okay. And should we think of some of that as being hard to sustain? Like, I mean, license growth is lumpy and that helped a little bit and ALPS has been benefiting from year-over-year. The market's been extremely good, and we probably don't want expect year-over-year growth in the stock market to be, I don't know if it was 20% in Q2, year-over-year or whatever. But I mean, are there some components that you just would expect that you just can't keep quite up the pace?

Stephen C. Hooley

Yes, Dave, so you've touched on 2 really interesting topics, right? One is the license growth, and we've talked about this. When we get a license -- and particularly the BPS license that Gregg referenced was a great win for that team. Nice piece of business with a customer that we're going to have a great long-term relationship with. But when those come through in the quarter, not only do the flow to the top line, but the majority of that flows through to the bottom line. So it really helps from an income from operations perspective. The other thing that you're right on is our ALPS business. They continue to do a great job out there. But we are now more impacted by market action, right? We've got over $14 billion in assets under management. And to your point, we've had a nice tailwind with the market and to the extent that slowed down, that would certainly impact the revenue growth rate at ALPS and for the company.

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

Yes, okay. That all made sense. Now the previous question on long-term growth and the pharma claims, I know you don't want to answer that, but was there anything in -- well in Q2, the pharmacy claims, I thought you mentioned last quarter, was going to start being impacted in Q2 by 1 of the 2 client losses. And so it was a little surprising that growth remained kind of right around that 10% level that it's been in a while. So I guess I'm just wondering, did Q2 get impacted quite a bit by that 1 client loss?

Stephen C. Hooley

So we had 1 customer that left at the end of the year. And then we have another one that is going to -- when are they converting off, Gregg?

Gregg William Givens

It will be throughout 2015.

Stephen C. Hooley

Okay. So throughout 2015. So there was some impact of the customer that left. Again, we've had strong claim experience, right? And again, I think what I'd tell you, Dave, is I think it goes to how well our customers are doing in attracting new customers to their business, right? So we've got great customers in this space. They continue to do well and that tends to drive volume through our system. I also mentioned that we have benefited from the Affordable Care Act, given our strong position in Medicare, Medicaid and the healthcare exchanges and so again that's been a positive factor for us. So we were pleased with the quarter.

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

Is -- I guess, a couple of things on that. Do you have kind of an underlying growth x the client loss? What kind of normalized growth it has been for the last couple of quarters?

Stephen C. Hooley

I don't have that number. Yes, that's not something that I have.

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

Okay. And sort of a correlate to that, is there going to be a quarter, say, in the next 3, 4, 5 quarters, where you're going to hit like a really tough comp because of the ACA? Or is it something that's just gradually building and there's really no 1 quarter or anything where you're going to see kind of a stabilization of growth?

Stephen C. Hooley

Well, I think the business -- fourth quarter is typically a more difficult quarter on an annualized basis. But from a comp perspective, I expect that it will be in line. So I don't think we should see, on a comp basis, any real lumpiness.

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

Okay. And then just my last one. Just because you bought so many shares in the quarter, and I know it's partial quarter benefit this quarter, just maybe, did you have some sort of sense of what Q3 would be like? It seems to me like it should be just slightly under 40 million for your diluted share count, kind of average for Q3?

Gregg William Givens

This is Gregg. You're pretty much right on it. I mean, so we bought back that 2.4 million shares that came in directionally in the middle of May. So we should get the full benefit of that 2.4 million on the quarterly basis in the third quarter. So we had about 1.2 million of the benefit in the second quarter.

Operator

Your next question comes from the line of David Ridley-Lane of Bank of America Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Can you size the growth investments that you did in the Financial Services segment? Is it kind of single-digit million or something perhaps maybe a little bit larger?

Gregg William Givens

Yes, David, we don't actually disclose the size of the investments. I mean, we're -- I break the investments out in 3 ways, right? One is kind of the ongoing investment that we have in keeping our systems contemporary, in meeting regulatory changes, in meeting compliance changes. We then have expenses that are associated very specifically with either a new functionality or a new business, right, that we're introducing to the marketplace or customers that we're converting. And then the third kind of area would be in the infrastructure area. As you know, we run big data centers. And again, are constantly investing in the infrastructure of the company to make sure that we're in position to handle our customers' growth. So -- but we don't disclose the numbers that we make -- that we invest there.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Okay. Can we maybe -- just as you're waiting for the new customer wins in the Customer Communications segment, as you start to onboard those, can you continue to keep the cost relatively flat to -- they've been trending down. I'm just wondering when you start to onboard the relatively large new customer wins again in the fourth quarter of this year or into '15, how fixed are your costs around that onboarding process?

Stephen C. Hooley

Yes, David, actually -- first of all, I want to tell you that I think the management team across the company, but particularly in Customer Communications, has done a great job of managing their expenses. And actually the expense to convert that big customer is happening right now. I mean, we've been working on this, really, since the beginning of the year. And so these conversions have a long buildup. And so I am confident that we can maintain the cost level that we're at through the end of the year and bring on this big new customer. So I'd say the cost gains that we've achieved are sustainable.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Great. And then just the -- since you mentioned in the release the ancillary services that you have in the Healthcare segment, is this an area of growth for you going forward, the discount card and et cetera?

Stephen C. Hooley

Yes, it is. And I think about it, we refer to them as ancillary services. That's probably not the best definition. I mean, look, we're trying to build a solution to take to the healthcare marketplace. And so discount cards is just another example of something that we do that's part of the overall health solutions package that we deliver to our customers in the marketplace. And so, yes, we do expect that there will be growth there, and those are all areas of focus for us.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Got it. And one last one for me. When do you start to finish up on the IFDS investments for the private wealth management product?

Stephen C. Hooley

Yes. That's got a long burn. These are big projects with big customers, and so these will run out through 2016. So we've got significant expense going on now. It will actually ratchet up in 2015 and through at least the first half, maybe first 3 quarters of 2016. And we'll start to see some pretty demonstrable revenue at that time. But it is -- the expenses is building and will continue for a pretty significant period of time. That said, I think if you look at what's happening there, we're going to be very well positioned in a new line of business with some very significant customers of ours. So it's actually -- we're actually pretty excited about it.

Operator

At this time, there are no further questions. I will now return the call to Steve Hooley for any additional or closing remarks.

Stephen C. Hooley

Great. Well, thank you, all, very much for your time. We look forward to speaking with you again next quarter. Thank you, operator.

Operator

Thank you for participating in today's DST Systems Second Quarter 2014 Earnings Conference Call. This call will be available for replay beginning at 11:30 a.m. Eastern Time today through 11:59 p.m. Eastern Time on August 1, 2014. The conference ID number for the replay is 66381305. The number to dial for the replay is 1 (855) 859-2056 or (404) 537-3406. That concludes today's conference call. You may now disconnect.

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