DST Systems Q2 2007 Earnings Call Transcript

Jul.19.07 | About: DST Systems (DST)
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DST Systems Inc. (NYSE:DST)

Q2 2007 Earnings Call

July 19, 2007 11:00 am ET

Executives

Tom McDonnell - President and CEO

Tom McCullough - COO and EVP

Ken Hager - CFO, VP and Treasurer

Analysts

Charlie Murphy - Morgan Stanley

Jim Kissane - Bear Stearns

Pat Burton - Citigroup

Greg Smith - Merrill Lynch

Tien-Tsin Huang - J.P. Morgan

Dave Koning - Robert W. Baird

Richard Close - Jefferies & Company

Tien-Tsin Huang - J.P. Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Second Quarter Earnings Release Conference Call. At this time all participants 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 conference is being record.

I would now like to turn the conference over to our host, President and CEO, Mr. Tom McDonnell, please go ahead.

Tom McDonnell

Good morning, I am joined here in Kansas city this morning by Tom McCullough and Ken Hager. 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.

There could be a number of factors affecting future results, including those set forth in DST's latest periodic report, which we file with the SEC. All such factors should be considered in evaluating any forward-looking statements which we may make today.

Turning to an overview of the second quarter results, again our discussion and comments today on financial results are based on the results excluding those items that we set forth in the release, under the section description of non-GAAP adjustments. A reconciliation of the reported GAAP results to the income adjusted for the non-GAAP items is accompanying the earnings release that you are seeing.

Net income for the second quarter of 2007 totaled $58.7 million or $0.81 per diluted share versus $51.6 million or $0.70 per diluted share for the second quarter of 2006 that represented an increase of 13.8% in net income and 15.7% in diluted EPS.

Consolidated operating revenues increased by $36.7 million or 9.6% over second quarter of 2006 to $417.2 million. Financial services revenues increased by $35 million or 14.3% from the inclusion of $22.9 million of ASI revenues, and increases in mutual fund shareowner account serviced, AWD software license fees and international professional services revenues.

Software license revenues increased by $200,000 over the second quarter of 2006. License fee revenues account for only a small percentage of financial service operating revenues, but they can significantly impact earnings in the period that they are recognized. Output Solutions operating revenues increased by $3 million or 2.3% to a $135.8 million. Output Solution recognized higher U.S. processing volumes and increased international revenues. Items mailed increased 3.6% to 647.2 million, and images produced increased by 14.7% to 4.3 billion.

Consolidated income from operations in the second quarter of 2007 increased by $9.2 million, or 13.2% to $79 million. Consolidated operating margin was 18.9% in the second quarter of 2007 versus 18.3% in 2006 that generally reflects the higher level of Output Solutions' earnings.

Financial Services income from operations increased by $4 million or 6% over the second quarter of 2006 to $70.4 million. Higher AWD software license fee revenues and the elimination of DST Health Solutions intangible asset amortization, contributed to that increase in operating income.

Additional personnel cost associated with new business growth adversely affected operating income. And the operating margin declined from 27.1% to 25.1% when you compare to the second quarter of 2006. In large part that was due to the inclusion of the ASI results consolidated in the Health Solutions, which were impacted by intangible amortization at the ASI level and therefore did not contribute to operating income at the same level as other Financial Services businesses.

Output Solutions operating income for the quarter increased by $4.9 million to $5.6 million. The increase reflected, increased revenues and lower material and equipment cost related to the implementation of new proprietary printing and inserting technologies.

Equity and earnings of unconsolidated affiliates increased by $4.2 million from the second quarter of 2006 to $22.5 million and that’s from higher earnings at Asurion, BFDS and IFDS partially offset by a lower earnings at Argus.

Asurion's earnings increased from higher revenues and operational cost improvements. Higher BFDS earnings were the result of increased shareowner processing volumes. The earnings increase at IFDS primarily reflects higher levels of account serviced in the UK and Canada, and an overall improvement in operations.

Earnings at Argus declined from an impairment charge taken to reduce the level of capitalized internally developed software.

Overall DST’s pre-tax earnings were reduced by $2.5 million in the quarter as a result of the impairment charges at Argus and a realty joint venture. A bad debt reserve at Asurion as well as cost incurred in completing the Asurion transaction and a change in accounting at IFDS, so that $2.5 million is a pre-tax number at the DST level.

On July 3 2007, Asurion completed its previously announced transaction whereby certain private equity firms acquired a significant stake in Asurion.

DST received pre-tax proceeds of $980 million and receivables of approximately $45 million, which are expected to be collected within the next year.

DST's ownership percentage in Asurion is now 6%, and we will no longer record equity in Asurion effective with the closing. DST will account for its investment in Asurion on a cost basis.

DST used pre-tax proceeds from this transaction to pay down $575 million of debt and other related financing facilities. The rest of the proceeds which were mostly used to satisfy DST's estimated income tax obligation resulting from the transaction are held in short-term investments.

Related to the overall debt level during the second quarter DST established an accounts receivables securitization facility, and from a balance sheet standpoint that reduced both the level of receivables and also the levels of debt. Order magnitude of that securitization is $200 million.

Income tax rate for 2007 second quarter was 34.6%. That compared 33.7% for the 2007 first quarter and 34.2% for the 2006 second quarter.

The increase in rate results primarily from changes in the relative percentages of domestic and international income. If you excluded the effects of discreet period items, DST currently expects its tax rate for 2007 to be 35%.

US mutual fund open shareowner accounts process totaled 110.2 million as of June 30 2007, that's a net increase of 2 million or 1.8% since March 31, 2007, and an increase of 4.4 million or 4.2% since December 31, 2006. Of that increase 100,000 accounts were converted, that was for previously announced clients.

Underneath the overall shareowner level tax advantage, retirement and educational savings account service totaled 42.1 million at June 30, 2007, and that was an increase to 700,000 or 1.7% since March 31, 2007, and an increase of 1.6 million or 4% since year-end 2006.

Previously announced new mutual fund client conversions of approximately 7.6 million accounts are scheduled for the third quarter of 2007.

During the second quarter of 2007, the company received new client commitments for approximately 300,000 remote mutual fund shareowner accounts, and approximately 6.8 million remote mutual fund sub-accounts, which are scheduled for the conversion during the first and third quarters of 2008 respectively.

In addition, during the second quarter of 2007, DST entered into a definitive agreement to acquire a company that provides mutual fund shareholder sub-accounting service on a whole service basis to broker/dealers.

The transaction which is expected to close in the third quarter of 2007 has anticipated to increase sub-accounts process by approximately 250,000 accounts.

Revenues for sub-accounting services are generally based on a number of sub-account service. Sub-accounting is structured in a way that there is a level of service provider directly by the broker/dealer and therefore the per account revenue is generally substantially less than what DST derives from traditional remote processing services and when I say substantially less, usually less than half of the revenue that would otherwise be derived.

During the quarter DST repurchased 2.25 million shares of its common stock at an aggregate cost of $177.5 million or $78.90 a share. At June 30th 2007, approximately 5.6 million shares remained available under the existing share repurchased authorization.

We had 63.4 million shares outstanding at June 30th 2007 that includes 2.5 million shares of unvested restricted stock. The net effect of share repurchases and shares issued from a stock option exercises resulted in a decreases in shares outstanding of 1.8 million shares or 2.8% for the quarter.

Average diluted shares outstanding for the second quarter 2007 were 71.8 million shares, that’s the decrease of 1.2 million shares or 1.6% from the second quarter of 2006, but substantially unchanged from the first quarter 2007. The decrease in actual shares outstanding for the quarter was offset by an aggregate 1.5 million share increase in the dilutive effect of our convertible debentures, outstanding stock options and restricted stock and those that generally resulted from higher average DST share prices. If you take all of those together, the total diluted affect of those items were 10.2 million shares for the quarter.

Total stock options and restricted stock, classified equity units, outstanding at June 30th, 2007 were 9.8 million; that’s a decrease of 900,000 equity units or 8.4% from the March 31st 2007 levels.

At this point we would, operator, like to open the call for questions please.

Question-and-Answer Session

Operator

Ladies and Gentleman question may only be asked from qualified investment professionals. (Operator Instructions) And our first question comes from Charlie Murphy with Morgan Stanley.

Charlie Murphy - Morgan Stanley

Thanks very much. Tom and Ken could you tell us how much debt is on the balance sheet following the debt pay down? What the average pre-tax cost of this debt is and what your plans are for capital structure in the future?

Tom McDonnell

Well, the average rate of the debt and facilities we paid down was 5.8%. Let Ken discuss the amount of debt that's there at the moment. The debt that we will discuss is basically exclusive of the two convertible issues which would be the other debt components that we have. As far as capital structure going forward, as we've mentioned, we still have an outstanding share repurchase urge generally been our practice to continue repurchasing shares unless we have alternative more attractive opportunities. Right now, I think you would anticipate that we still continue to see share repurchases at least through the end of the year on an ongoing basis. So Ken do you want to respond at the debt level?

Ken Hager

Outside of the 840 million of convertible debentures, there is about $60 million of debt that’s left on the balance sheet.

Tom McDonnell

That of course given the facilities and given the recent receded proceeds as we target we don't intent to have a debt-free balance sheet, so that debt will increase over the coming quarter, as we continue a share repurchase program.

Charlie Murphy - Morgan Stanley

Okay, thanks very much.

Operator

Thank you. And our next question is from Jim Kissane.

Jim Kissane - Bear Stearns

Thanks. Tom and Ken just following up on that. Can you just explain the rationale then penning down the debt in the quarter?

Tom McDonnell

Well, I mean we had proceeds come in and we didn't want to try to deploy that amount of proceeds in a short-term repurchase, we tend to buy shares on a more consistent ongoing basis Jim, and so basically rather than put it in short-term investments, obviously there is probably 100 and 150 basis points delta between those short-term available investments and the flexible debt we had on our balance sheet, so that's why it was initially employed and we will use those facilities as we consume cash and share repurchases.

Jim Kissane - Bear Stearns

Okay, great thanks. And some more color on the size of the subaccount market, it seems like a new push for you?

Tom McDonnell

Well, it's not necessarily a new push, subaccount market developed a number of years ago and it really is a situation where broker/dealer firms provide services in fact directly to our mutual fund clients, but they need a underlying mutual fund recordkeeping system or for lack of a better description on a strip down accounting component that interfaces directly with there brokerage system. Its been a market that has a degree of significance and you can see it in PFPCs reported numbers, because they generally refer to a significant amount of subaccounts I don’t know that we can exactly quantify the market for you its at least 50 million, I would think.

And truly a function of winding with our clients in particular to provide that subaccounting to their broken/dealer distributors. And it’s a market that is extremely competitive and it does not have the levels of revenue of the traditional markets, but again it has a much different cost characteristic because of the interface with the brokerage with broker/dealer systems on the other hand. So currently, prior to the announcements that we made here, we would have about 1.5 million subaccounts on our system.

There's a substantial increase to add and with the acquisition that we discussed that’s really a distribution acquisition and a business one. The company we’re acquiring will be using our subaccounting system as their technology to offer the service, because there are number of broker/dealers who prefer to have a third-party intermediary that we’re supporting as we described the acquisition of full service aspects of subaccounting. So we think with that acquisition, we’ll have the full range of subaccounting services available.

We also think particularly relative to our client base that since our subaccounting systems are derivative of our base underlying systems, where the accounting accuracy is substantially greater and the frictional costs of reconciliation between the broker positions and the underlying fund positions are substantially reduced. So we think it is a more attractive offering in some of the competitive side, I think we are in the opinion of getting reasonably serious about going out to the subaccounting market in an aggressive fashion.

Jim Kissane - Bear Stearns

Okay, just a follow-up on that little more color or insight on the economics, you said less than half, is it about half or? And then the margins given that you're not providing?

Tom McDonnell

Well, all of them are functions of size of the client and the others. Most of the arrangements have volume discounts and so forth, so I can't quantify it anymore to say less than half, I mean, it could balance around in a range there.

Jim Kissane - Bear Stearns

Okay. And then last one, the P&L drag from the real estate joint venture on a go forward basis?

Tom McDonnell

(Inaudible)

Jim Kissane - Bear Stearns

Yes.

Tom McDonnell

That came on as on-lease. It is a real estate type investment, so its cash flows are positive but its GAAP affects probably $3 million a year negative, 250,000 months something like that.

Jim Kissane - Bear Stearns

Thanks, Tom.

Operator

Our next question comes from Pat Burton with Citigroup.

Pat Burton - Citigroup

Hi. Good morning. Tom, to follow up, you outlined that revenues have been less than half, but again in terms of the costs, I assume there is not a lot a cost to put these accounts on your existing TA2000 System?

Tom McDonnell

Well, they are not really on the TA2000 System and its full range. So, I mean, I think that you would expect that even though the revenues are less the delivery costs are as a percentage of revenue similar to the delivery cost of the regular accounts.

Pat Burton - Citigroup

Okay.

Tom McDonnell

I mean, I am not sure. I guess, what I am saying is basically even though the revenue is less it doesn't run on the full blown version of TA2000.

Pat Burton - Citigroup

Okay.

Tom McDonnell

So we would expect over time with reasonable volume of subaccounting margins to be acceptable in that area.

Pat Burton - Citigroup

Okay. And you wouldn't expect large conversion of cost like you would on some of these big mutual fund accounts additions?

Tom McDonnell

No ways conversion costs is associated with them, because it depends on how you go about it. I mean, you get sort of a new client that's just introducing subaccounting and that has one set of cost characteristics. If you are carving them out of an existing subaccounting relationship they have this same kind of conversion costs on a relative basis if you would have, on a remote client the difference you don't have some of the training and other support of processing and because of the interface is more directly with the broker system.

Pat Burton - Citigroup

Okay. And then one last question, a follow-up how things are again for outlining the software sales impact. Did anything change in the investment management software area or was that just a function of timing and closing sales?

Tom McDonnell

Well, I think it's just timing and closing. You know, when you look at the international market, we deal in the several geographies, U.K., Australia, Asia, by and large you tend to see in some of those markets larger numbers of smaller transactions. I am sorry in the non-U.K. markets and in the U.K. and US and Continental Europe, you see larger transactions. So some of the larger transactions are really driven by relationships developed with large multi-national managers, and some of them take an awfully long time to conclude. So, I think that it's fair to say that usually there is a legitimate number of prospects for the investment management system. It is a highly unpredictable, as to when you actually reach closer whether from a contractual or revenue recognition standpoint.

Pat Burton - Citigroup

Thank you.

Operator

Our next question comes from Greg Smith with Merrill Lynch.

Greg Smith - Merrill Lynch

Yeah. Hi, guys. Can you talk about output? Have you grown through that customer loss that you highlighted previously does that now run through the numbers?

Tom McDonnell

Yes.

Greg Smith - Merrill Lynch

Okay.

Tom McDonnell

When we say growing through it, I mean we recognized the termination fee a quarter or so ago. I guess, or last quarter may be and this quarter really has no impact of any substance from that client. I think there was a little run-off revenue from them, if they didn't get completely converted. But I think you would as to that client loss, I'd say that, it will be fair to say that the current numbers are reasonably normalized.

Greg Smith - Merrill Lynch

Okay. And then, what's your latest feeling on achieving the 10% sort of operating margin target you've been looking for an output. How are you feeling these days about that?

Tom McDonnell

Well, we think it's ultimately achievable. I think we need some more revenue growth to get there and it's again, this kind of a quarter-by-quarter thing and I think you've seen some improvement. We'll see continued improvement throughout this year and pick up a couple of more percentage points and then hopefully go into '08. We'll have a much clearer picture of if we can attain roughly 10% level that we hope towards and expect.

Greg Smith - Merrill Lynch

Okay. And what was the rational for putting in the receivables of securitization facility?

Tom McDonnell

More efficient and cost effective financing.

Greg Smith - Merrill Lynch

Yeah, okay. And then is there a certain, I know this question comes up often but as such, you said your mostly likely to level back-up buyback stock. Any level of debt or debt ratios where you would define as an optimal capital structure?

Tom McDonnell

Well, we probably against, we would have thought that, let me say the pre-transaction levels that we had reached before the Asurion transaction. We thought pretty comfortable with those and felt that was a fairly efficient capital structures. So, I think you probably over the next six, nine months see us get back to that level.

Greg Smith - Merrill Lynch

Okay, great. That's very helpful. And then one last one, DST Vision, Fidelity I believe signed on. How significant is Vision, can you just a little bit about it, the contribution of financial results and the opportunity there?

Tom McCullough

This is Tom McCullough. Vision is a key product for our third party distributed fund group. We probably have 200,000 ID’s on Vision of which probably 80,000 are active independent broker/dealers that use Vision to access account information on DST. And not just DST clients, but as you mention Fidelity, Franklin Templeton will also be on Vision and Putnam on Vision. So, it’s a very significant product for our client base.

Tom McDonnell

We don’t break out distribution or we don’t break out the revenue or the contribution however.

Greg Smith - Merrill Lynch

It will be raising numbers because of Fidelity or is it not all that significant?

Tom McDonnell

It’s not, in the overall scheme of things not significant, we will have to adjust projections.

Greg Smith - Merrill Lynch

Okay, that’s helpful. Thanks a lot, guys.

Operator

And our next question comes from the Dave Koning with Baird.

Dave Koning - Robert W. Baird & Co

Yeah hi, thanks guys. On the financial services margins, this second quarter row now were, they’ve been down a couple of 100 basis points year-over-year and I know most of that is just related to some of the implementation costs and I am wondering as we look out may be Q4 and on after Putnam comes down, can we expect to get back that 200 basis points as some of those implementation costs go away.

Ken Hager

Part of that operating margins when you look at the Health Solutions component which is integrated in the financial services and that's sort of a two way street there, the change in accounting earlier in the year as to the original Health Solutions business we in fact, were required to no longer amortize some intangibles. When we acquired ASI and merged it into Health Solutions. The ASI revenues come in still are subject to some level of intangible amortization that we have pointed out here and to the extent that that overall level on Health Solutions revenue with ASI components still picks up that intangible amortization.

It will impact those revenues; sort of impact the margins, sort of on a pro rata basis. I mean it’s obviously our intention to try and recover those couple of hundred basis points but part of it will be a function of that particular aspect of that intangible amortization and they are included in ASI revenues.

Dave Koning - Robert W. Baird

Okay great, and then secondly on the cash flow, it look like you paid down quite a bit a debt this quarter at the same time as you repurchased close to 200 million worth of stock and it just seems like your cash flow was so much greater than your earnings this quarter, I’m just wondering, what kind of drill that?

Tom McDonnell

Let Ken respond to it.

Ken Hager

Dave, I think that’s where the AR securitization is coming into play because the effect of the AR securitization removed $200 million of debt from our balance sheet and $200 million of receivables, so when you look at the debt number at the end of June, its lower by $200 million because there was $200 million under the AR Securitization facility, and corresponding reduction that was to receivable, and I think that’s why it’s looks like we generated more cash in the quarter than we really didn't.

Dave Koning - Robert W. Baird

That makes a lot of sense and appreciated. So final question, your affiliate income, you mentioned that 2.5 million drag across the some of the affiliates line items. I am wondering if you can isolate that just to the ongoing pieces of IFDS and I think Argus what were the two other than Asurion, I am wondering if you can just isolate to those two what the drag was.

Tom McDonnell

You mean out of the $2.5 million? I can't write off and --

Ken Hager

They were none, there was an excess of $1 million, individually and the hardest one is really more of a onetime write off of capitalize in term of they develop software. So that won’t reoccur.

Dave Koning - Robert W. Baird

Alright, great thank you.

Operator

And our next question comes from Murali Gopal with KBW

Murali Gopal - KBW

Thank you and good morning. Just a couple of quick questions, the conversion of the 7 million accounts that’s 7 million plus accounts that happens this quarter. Is that something where we would see the revenue impact, for the full quarter or is that the half the quarter. How should we think about -- when?

Tom McDonnell

You should think about probably for about half the quarter because revenue basically starts sort on date of conversion, it’s not like there is any retroactive revenue recognize from and so I would say probably of mid- quarter conventions reasonable at this point.

Murali Gopal - KBW

Okay and in terms of the operating revenues growth in the financial services segment. Can you provide some color on, what was the growth for the AFI and health Plan Solutions and what was kind of the growth if you strip out those two for Financial Services, I’m just trying to get a feel for, if the ASI and Health Plan are faster growing than the rest of the Financial Services segment.

Tom McDonnell

At this point, they are not, in fact probably given the consolidation of the two companies there are revenues through last couple of course been more or less flat. The primary increases in the Financial Services side are related to growth and shareholder account service and probably just, and again the account service have shown stronger growth this year from the last couple of quarters and really last quarter of '06, and we've seen for sometime how durable that is, we are not yet sure. But year-to-date we have seen a reasonable amount of growth there compared certainly to the last few years.

Dave Koning - Robert W. Baird

Right. And that's going to be my next question. In terms of just the U.S. mutual fund shareholder account growth. In the last couple of quarter you've seen a nice mid-single digit organic growth. How much of that do you think is the function of this strong equity markets? Or if there is something else that's going on which is contributing to the growth?

Tom McDonnell

We ask our mutual fund clients that from time-to-time whether they see drive in the growth. I mean, I think one is clearly, [despite] three things, when it's all said and done its certainly the attraction of the equity markets on a relative return basis and not only the U.S. markets but worldwide as a significant number of U.S. funds really are international funds.

I think that there continues to be a broader acceptance of some of the tax preference plans for retirement and college education, well, that's IRA plans or the 529. So I think that certainly has an aspect of sort of the growth.

And the third one is little more or less tangible in some respects, but I think in our opinion it's really in the last year and half that’s sort of investor confidence generally has kind of returned, our people are saying, I really should be participating in an investment plan that includes a broader range of equity and also utilization of other products that mutual fund industry has, where people diversify and keep their portfolios, liquid money funds and so forth, so I think after kind of the 2000 framework where a lot of people really sit back. We've always intended that the mutual fund customers are alittle bit longer term in nature and they don't go away with a short-term downturn and they don't come back immediately with the short-term upturn. So I think that you've seen a broader level of investor confidence. So we'd like to think that will continue going forward.

Dave Koning - Robert W. Baird

Okay. And just lastly, the sale of the office building. Can you just give us a little bit more color on, is that a building that used to be leased out or in what circumstances [forced to] sale and then are there other buildings that maybe under horizon that you may contemplate to sale. Just to kind of frame it a little bit better?

Tom McDonnell

Well, color wise I think they were generally buff brick, but there were a couple of buildings in our real-estate portfolio in Sacramento that had a substantial portion of it was leased to outside tenants and we didn't see them as a critical to our ongoing operations.

And, as we periodically review any of our assets, cap rates in California were particularly attractive, so we took the opportunity to adjust the holdings out there. We continue to look at all of the properties. We don't have anything else that I would suggest to you is eminent by any stretch but again U.S. market conditions change, when opportunities present themselves we look at them.

Dave Koning - Robert W. Baird

Okay. Thank you very much.

Operator

And our next question comes from Tien-Tsin Huang with J.P. Morgan

Tien-Tsin Huang - J.P. Morgan

Thanks. just couple of questions on the acquisition of the full-service web accounting firm. Can you give us some sense on the annual revenues there and the acquisition price of it?

Tom McDonnell

Well, we don't disclose the acquisition price in that and we can't, and under our agreement with the sellers. It's a small firm currently we believe they are well positioned and there are not too many people providing full-service in this area. So, in those respects either as to acquisition price for current revenues, it's not very material at all. It's our hope and the reason that we went in this direction is that we can build a real presence in that full-service aspect particularly with what we think to be a very well established and talented group of individuals in that their product offering enhanced by our sub-accounting system.

Tien-Tsin Huang - J.P. Morgan

All right and I just want to clarify on that comment. Should we not think of this as a platform purchase stand or is it really going to be running it as if who is trying to better assess, we should expect from -- ?

Tom McDonnell

It's not a platform purchase involving technology. What it is, it's a business that's established itself as credible. They are actually using a different platform and they will be converting to ours. So I mean in effect they will be building their business around their professional confidence to deliver a full-service support for this using our technology.

Tien-Tsin Huang - J.P. Morgan

Okay. We should not think about relatively high incremental margin, thus, once you complete the conversion?

Tom McDonnell

Well, I think I am not sure where we project margins at this point, when we’ve looked at the business on the full-service side, we can bring a couple of hundred thousands, 250,000 accounts over, but we think it will be a very legitimate business consistent with our other margins in the full-service area, but I have to tell you, they still have little bit of a presence, but their level is still somewhat of a start up and I am not sure that we even anticipate positive contributions until you know a few quarters down the road.

Tien-Tsin Huang - J.P. Morgan

Okay. Got you, and then just a quick one on output, maybe you can just comment on the pipeline there and specifically I am interested in notice and access. I think you put out a press release on your interest in that opportunity maybe you can just give us a little bit more detail on that?

Tom McDonnell

I am sorry, a press release on what?

Tien-Tsin Huang - J.P. Morgan

On the opportunity around notice and access, which is a change in the way I guess proxies are going to be distributed. Are you going forward with that? I think in the press released by DST, you expressed your interest in going after that business?

Tom McDonnell

Yeah, that would probably be more related to an electronic offering with print on demand because as we understand it, we are going to see a substantial alteration in the way proxy information can be communicated. So, we think that's a legitimate opportunity, I think it's fairly earlier on to really even size that opportunity. I think lot of companies that would be potential clients are trying to figure out how they or what their position or policy will be to not sending the paper documents unless specifically requested by individual shareowners and exactly how those are through delivered electronic format. But we think we're reasonably positioned to participate in that. But it will be very hard to size it at this point. I mean that’s the business you are talking about?

Tien-Tsin Huang - J.P. Morgan

Yes sir, it is helpful. Thank you

Operator

We have a follow-up question from Greg Smith with Merrill Lynch.

Greg Smith - Merrill Lynch

Yes thanks. Guys, out of your D&A how much is just amortization of intangibles?

Tom McCullough

Greg, at this point in time there are not a lot of intangibles anymore that are being amortized.

Tom McDonnell

Greg, he is trying to get to what level of ASI's are. Which will be the bulk of the remaining intangibles with our practice because of, at the Asurion and Health Solutions, we had a fairly substantial amount, we haven't broken it out for ASI, but we can take a look and see what overall level of it is and I don’t have a particular problem of disclosing that.

Greg Smith - Merrill Lynch

Yeah, what I am getting at is just, many companies report sort of a cash EPS number now with your CapEx lower than your D&A just trying to calculate sort of a cash EPS number taking out the depreciation and adding back amortization essentially?

Ken Hager

Greg, I mean, I don't have the breakdown between the intangible amortization and depreciation for ASI, but on a combined basis for the quarter it was about $2.5 million.

Greg Smith - Merrill Lynch

Okay. And then in IFDS, you mentioned the accounting change impacting things. Is that an ongoing things or were just going to be add essentially a lower run rate, or is that a onetime charge in the quarter?

Tom McDonnell

It’s onetime.

Greg Smith - Merrill Lynch

Okay. And then, just a last question on, looking at your interest expense, if you sort of impute the expense on the converts and than the remaining debt, it still looks like there is some additional interest expense in there; is there anything else hitting interest expense besides the debt you paid down and the converts? Is there something I am missing here?

Ken Hager

The only thing I think it might be interest on capitalized leases but other than that I can't think of anything.

Greg Smith - Merrill Lynch

Yeah. Could that be a couple million a quarter?

Ken Hager

I am sorry, Greg.

Tom McDonnell

We won't know that could be a couple of million a quarter.

Greg Smith - Merrill Lynch

Could it be as higher as couple million a quarter, that would explain the difference?

Ken Hager

Perhaps, so let me take a look at that and get back to you.

Greg Smith - Merrill Lynch

Okay. That's it for me. Thanks. Thanks a lot.

Operator

Then the next question comes from Richard Close with Jefferies & Company.

Richard Close - Jefferies & Company

Yes. I just wanted to circle back with your comment and talking about the health services area and mentioned and it was flat year-over-year. Could you give us some additional details in terms of how you see that market and may be what that is flat year-over-year?

Tom McDonnell

I don't think, I said it was flat year-over-year, I said I think sort of flat over the last couple of quarters because it really don't get a legitimate year-to-year comparison from the standpoint of picked up ASI in that time period. Basically I think pretty successfully put the two companies together on an operating basis, their function and their revenues really threefold, its either license revenues which are software licenses, ASP or we would generally refer to at the mutual fund side as remote processing where they provide access to their system to clients to utilize it but running out of our data center and then the what they refer to as BPO, or we generally would refer to as full-service. Its really just in the last couple of quarters and we've got the two companies solidly together repositioned the sales organization and part of our strategies are to convert or to address license clients to try and convert them to one of the two processing modes, either remote or full-service and also to integrate and distribute our AWD product, integrate more effectively with Argus to combine product offerings and to provide to that customer base expanded opportunity or print mail facility.

So, really all of that has is kind of just come together in the last 90 days. We have kind of completed the acquisition program we had as far as combining the two organizations, rationalizing facilities and so forth, so I think going forward, we feel we can be a legitimate competitor in that marketplace but its going to be pretty key to see whether or not there's enough depth in new license and or new client opportunities but also particularly in conversion of some of the existing client base to a different type of client.

Richard Close - Jefferies & Company

Would you characterize the ASI acquisition so far as meeting your expectations internally?

Tom McDonnell

Yes.

Richard Close - Jefferies & Company

Okay, thank you very much.

Operator

And there are no further questions, please continue.

Tom McDonnell

Well, there are no further questions, I want to thank everybody for joining us today and we look forward to talking after third quarter.

Operator

Ladies and gentlemen that concludes our conference for today. A reply will be available starting at 1:30 PM through July 26 midnight. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 878953. International participants may dial 320-365-3844. Those numbers once again are 1-800-475-6701 and 320-365-3844 with the access code 878953.

That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive. You may now disconnect.

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