DST Systems Q3 2007 Earnings Call Transcript

DST Systems, Inc. (DST)

Q3 2007 Earnings Call

October 23, 2007 11:00 am ET

Executives

Tom McDonnell - President and CEO

Ken Hager - CFO

Analysts

James Kissane - Bear Stearns

Charles Murphy - Morgan Stanley

Greg Smith - Merrill Lynch

Pat Burton - Citigroup

Dave Koning - Robert Baird

Murali Gopal - KBW

Tien-Tsin Huang - J.P. Morgan

Ken Carbase - Bear Stearns

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter DST Systems Third Quarter Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions).

I would now like to turn the conference over to Mr. Tom McDonnell, please go ahead sir.

Tom McDonnell

Good morning and thanks for joining us. On the call today in Kansas City, I am joined by Tom McCullough, our COO and Ken Hager, our CFO. 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.

As we discuss the quarter we are going to deal primarily with the non-GAAP approach which we think is more relevant. So, initially we should talk about a significant transaction in the quarter which is the Asurion sale. As previously reported during the quarter, DST sold a significant portion of it's ownership in the Asurion Corporation. That transaction resulted in us recording a $996.3 million pre-tax gain and $617 million of net income which translates $8.82 per diluted share. A portion of the $980 million of proceeds from the sale was used to pay down debt. The remainder of the proceeds was invested in cash and in short-term investments which will be used in the fourth quarter of 2007 to satisfy the tax obligations associated with the sale.

Affective with the closing DST no longer records equity in the earnings of Asurion, there's our ownership percentages being reduced to approximately 6%. So the remainder of our discussion comments today on the financial results are based on the results excluding those items set forth in the release under the section 'description of non-GAAP adjustments'. Reconciliation of reported GAAP results to income adjusted for certain non-GAAP items has accompanied the earnings release and you may refer to that.

Taking a look at the third quarter overall. Net income for the third quarter totaled $61.5 million that’s $0.88 per diluted share and that compares to $50.1 million or $0.70 per diluted share for the third quarter of 2006. That represents an increase of 22.8% in net income and 25.7% in diluted earnings per share.

Consolidated operating revenues increased by $45.8 million or 12.3% over the third quarter of 2006 to $419.5 million. Consolidated income from operations in the third quarter of 2007 increased $8.4 million or 11.8% to $79.6 million and consolidated operating margin was 19% as essentially unchanged from third quarter of 2006.

Financial Services revenues increased by $40.5 million or 16.8% that represented the inclusion of ASI revenues and higher Mutual Fund shareowner processing revenues.

Higher investment management license fee revenues were offset by lower Health Solutions and lower AWD license revenues. That resulted in an overall license fee revenue decline of $700,000 over the third quarter of 2006.

As we always comment, license fee revenues represent only a small percentage of the Financial Services operating revenues, but they can significantly impact earnings in the period that they are recognized.

Financial Services income from operations increased $1.5 million or 2.2% over the third quarter of 2006 to $68.6 million. The revenue increases were partially offset by higher personnel cost to support the growth and mutual fund shareowner processing, increased professional service revenues at DST international, and certain management restructuring cost at the same organization.

Operating margin declined from 27.9% in the third quarter of 2006 to 24.4% and in large parts that’s due to the inclusion of ASI results and higher international professional services revenues, both of which contributed to operating income at lower margins than the rest of the business.

Output Solutions operating revenues increased $5 million or 3.8% to $136.4 million. Items mailed increased 2.6% to $653.5 million, and images produced increased by 7.3% to $4.4 billion. The revenue for image declined approximately 4.2% compared to the third quarter of 2006, and that’s pretty much as a result of higher relative volume increases from large clients with lower unit pricing.

Output Solutions operating income for the quarter increased to $6.8 million to $7.6 million overall. And that’s increased revenues and operating cost efficiencies that are derived from the implementation of new proprietary printing and inserting equipment.

Third quarter 2000 results also include operating revenues from certain annual and in fact one time mailings and approximately $1.2 million of cost reductions due to some vendor rebates that occurred in the third quarter. And in fact, these items resulted in third quarter income that’s not really representative of run rate income, so that it shouldn't be anticipated on the going forward basis and we are also contemplating that the increased depreciation charges in the fourth quarter reflect continued equipment investments at the Output division.

Equity in earnings of unconsolidated affiliates decreased by $100,000 from the third quarter of 2006 to $10.3 million. There were higher earnings at BFDS, IFDS and Argus, but they were offset by the absence of any equity in earning from Asurion and higher book losses at unconsolidated real estate ventures.

BFDS increased earnings over the result of higher mutual fund shareowner servicing revenues, that have about an increase in earnings at IFDS primarily reflects improvement in operations as appose to revenue growth.

Earnings at Argus increased from higher levels of pharmacy claims processed and the decrease in equity and earnings in the other category is primarily the result of $1.5 million of additional depreciation recorded by one of our real estate joint ventures.

Turning to the other income category, other income was $14.9 million in the third quarter of 2007, that's an increase of $6 million as compared to the third quarter of 2006. It's primarily due to higher dividend and the interest income earned from the investments that are portion to the cash proceeds from the sale of Asurion. Those proceeds will be used in the fourth quarter to fund the company's income tax obligations resulting from the sale. So that portion of the earnings is temporary.

Interest expense was $11.6 million for the third quarter of 2007, that's a decrease of $2.4 million from the third quarter of 2006. It's primarily from lower average debt balances outstanding, again representing the use of Asurion proceeds to reduce current levels of debts.

On income taxes, the effective income tax rate for the 2007 third quarter was 34%, that’s compared to 34.5% for the 2006 third quarter. Now, the decrease is primarily the result of the adoption of FIN 48. DST currently expects its tax rate of the remainder of 2007 to be 34%. However, that excludes the impact of the Asurion transaction from the effective tax rate, this would be in effect of on-going tax rate assessment.

In the Mutual Fund area, U.S. Mutual Fund open shareowner accounts process totaled $118.2 million on September 30, 2007. That’s a net increase of 8 million accounts or 7.3%, since June 30 of this year. The net increase during the quarter included approximately 7.6 million accounts from previously announced client conversions and approximately 200,000 sub-accounts from DST’s previously announced acquisition of (TAS), that is a company that provides mutual fund shareowner sub-accounting services on a full-service basis to the broker/dealer community.

Tax advantaged, retirement and educational savings accounts serviced totaled $45.9 million at the end of the quarter, and that’s an increase of 3.8 million or 9% since June 30, of this year. That increase is almost entirely due to the client conversions in the quarter.

Since June 30, 2007, the company received new client commitments from clients with approximately 130,000 mutual funds shareowner accounts, and 300,000 mutual fund sub-accounts, and those conversions are scheduled first quarter of 2008.

In the aggregate the company currently has total new client commitments for approximately 430 mutual fund shareholder accounts and approximately 7.1 million mutual fund sub-accounts that’s based on the current levels of those accounts at their current location. Mutual fund shareowner accounts were expected to convert in the first half of 2008 and the sub-accounts come in at various dates throughout next year.

During the quarter we repurchased 2,625,000 shares of our common stock at an aggregate cost of $205.9 million or $78.44 a share. At the end of the quarter, September 30, 2007, approximately 3 million shares remained under the existing share repurchase authorization.

DST had 61.5 million shares outstanding at September 30, 2007, and that includes 2.6 million unvested restricted shares. The net effect of share repurchases and shares issued from stock option exercises resulted in a decrease in shares outstanding of 1.9 million shares or 3% of outstanding for the quarter.

The average diluted shares outstanding for the third quarter 2007 were 69.9 million, a decrease of 2.1 million shares or 2.9% from the third quarter of 2006, and a decrease of 1.9 million shares or 2.6% from the second quarter of 2007. At the end of the quarter again September 30, 2007 the dilutive effect of the convertible debentures was 6.5 million shares. The dilutive effect of outstanding stock option was 2.1 million shares and of restricted stock was 1.4 million shares for an aggregate dilution effect of 10 million shares. The aggregate dilutive effect increased 4.3 million shares from the prior year quarter that's a result of the increase in DST's average stock price.

Total stock options and restricted stock of equity units if you prefer outstanding at September 30, 2007 were 9.2 million and that's a decrease of 600,000 equity units or 6.1% from June 30, 2007.

So, operator at this point we would open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of James Kissane with Bear Stearns. Please go ahead sir.

James Kissane - Bear Stearns

Tom, when was the large conversion completed this quarter?

Tom McDonnell

Middle of August.

James Kissane - Bear Stearns

Was that pretty much on schedule?

Tom McDonnell

It was somewhat behind our initial projections but so it really was in for basically a half of the quarter, Jim.

James Kissane - Bear Stearns

Okay. I mean the Financial Services margins were little bit like relative to our expectations. So I am just trying to get a sense of maybe you can rank the factors that held back the Financial Services margins?

Tom McDonnell

Well, certainly, we would have anticipated, I mean, again, that these very, very large conversions need to be timed carefully around scheduling of both parties at DST and then our customer. And we also try to schedule them around dates where we have some elasticity of available days. So, it certainly, it was half a quarters revenue from the client conversion was not included, that would definitely have impacted the margins. And I think it's quite fair to say, that out of pocket expenses for travel and so forth in connection with the conversion were higher than we probably would have originally anticipated.

Having said that, I would anticipate a question, the overall operating cost of the company won’t change much because most of the costs to support the new clients were in place couple of quarters before the revenue occurred. And those people are now being redeployed to other activities. But on the revenue it be will there for full fourth quarter and the out of pocket cost should be substantially below. Although we’ve announced that we have this large sub-accounting conversions, so a lot of people will move over to that and there will sort of application and cost there. So, I think what you can basically attribute it to or some higher than anticipated out of pocket cost and month and a half less of revenue.

James Kissane - Bear Stearns

Okay. And kind of related to this, can you since healthcare is included in the financial business, can you provide a little insight into the healthcare margins?

Tom McDonnell

Well, we don’t break those out. Healthcare as we mentioned tough, both healthcare and AWD, we haven’t seen as much license activity there, but we continue and relative to both to integrate AWD into Health Solutions product. Our strategy overtime is to move particularly the Health Solutions business to more recurring revenue models anyway Jim.

James Kissane - Bear Stearns

Yeah.

Tom McDonnell

So, I mean in the short-term I think licenses occur nor it’s going to be a function of the pre-existing sales strategies and certain existing market conditions, but we’d like to see that move to models more similar to the underlying mutual fund business.

James Kissane - Bear Stearns

Okay, and just one last one. In the release you have talked about the executive restructuring can you provide a little more background on that, and was that in the Financial Services?

Tom McDonnell

Well it was really at the international operations and our Executive Director over there retired and we changed some people around and there was some cost associated with that, in fact there's some unusual cost that occurred in the U.K. around retirement investing of stock options and have to do with the accrual of national health premiums which I am not going to bore you with, but the way they are accounted for it would be unusual by our standards.

James Kissane - Bear Stearns

Okay, great. Thanks Tom.

Operator

Our next question comes from the line of Charles Murphy with Morgan Stanley. Please go ahead sir.

Charles Murphy - Morgan Stanley

Thanks. Tom and Ken, could you talk about what level of debt you would like to get to maybe by the end of this year and could you describe your share repurchase appetite?

Ken Hager

Well we haven’t specifically targeted debt. I mean, I think we’ve discussed overtime that we think the company should be appropriately leveraged. I think at this point the debt is going to be more a function of how active we are in the share repurchase side, and generally we look at when we should be repurchasing shares not just as the application of capital, but what the relative return on that is and where we look at it is the pre-tax return on the investment and at current prices that return in not terribly different than paying down debts. So, at this moment we probably would be more inclined due have a little less debt and a little slower repurchase.

Charles Murphy - Morgan Stanley

Okay. And as a quick follow-up could you tell us what basic shares outstanding are at September 30, 2007 and then is it possible to isolate how much the executive restructuring cost in DSTi were in the quarter?

Tom McDonnell

Going to the first question, which shares did you want?

Charles Murphy - Morgan Stanley

Either basic or diluted, either one?

Tom McDonnell

At the end of the quarter, I think maybe Ken is looking over there but I think it was at 69.6.

Ken Hager

We stated. Charlie in the press release we stated that at September 30, we had 61.5 million shares outstanding including 2.6 million unvested restricted shares. So if you back off the unvested restricted shares the actual shares outstanding were 58,900,000.

Charles Murphy - Morgan Stanley

Great.

Tom McDonnell

And then as to the restructuring cost we don't break those out separately.

Charles Murphy - Morgan Stanley

Okay. Thanks very much.

Operator

Our next question comes from the line of Greg Smith with Merrill Lynch. Please go ahead sir.

Greg Smith - Merrill Lynch

Hi guys, just back to issue of the margin in Financial Services, is there any way to quantify any of these impacts or give us kind of what a normalized margin may look at, because we can't just look at a year ago because you didn't have the health business in first two quarter any additional sort of granularity you can provide there?

Tom McDonnell

Well probably not to the level of specificity which we would like, but the inclusion of the healthcare revenues will bring the overall financial services margins down somewhat because that business operates currently below what we think it will be long-term. So, I think, if you are referring to like the 27.7 last year and the 24.4 this year, best guess I can give you it would be somewhere in between. But, that’s again, I am not – I don’t have in mind what the license sales and so forth for Health Solutions might have been in the third quarter of last year versus this year. So, there could some movement in that expectation based on what we are actually comparing to.

Greg Smith - Merrill Lynch

Okay. And then looking at your account growth, just specifically the organic growth that existing accounts, looks like it slowed a quite a bit in the third quarter, which was surprising, seem like you had a lot of momentum in the first two quarters of the year. Any color you can provide around that?

Tom McDonnell

Actually I don’t have the numbers in front of me. But, the actual organic growth was probably somewhat stronger. We did have in the quarter some accounts that clients purged accounts, so they have been keeping on for other purposes, it might have had a zero balance accounts and so forth. And I think that understated the actual new account growth. But we were talking about that this morning because we said that looks a little bit more anemic and what the top line numbers would show. I guess that that number was understated by 50% or 60% by virtue of those account purges.

Greg Smith - Merrill Lynch

Okay. That makes perfect sense. So maybe you know, in reality we did not see an impact. And those purges are of essentially have zero revenue type, is that correct?

Tom McDonnell

Not in all cases. Some cases the clients keep an account around for a period of time, in case somebody wants to reopen it or not, they periodically reevaluate what they keep on the books, so some of them have, some of them don’t it just depends on the client relationship.

Greg Smith - Merrill Lynch

Okay, great. That’s very helpful. And then just lastly on the output side, it seems like we continue to see some nice improvements. There was some one time items that we realized may go away, but just how are you feeling overall about that business and sort of the ability to reach your kind of the goal you have thrown out there of 10% operating margins?

Tom McDonnell

No, I think that’s still the direction we’re headed and I think as you point out we had in the quarter there was an annual mailing which by the way some of those annual mailings recurred, there are a lot of them around the privacy notifications that clients have to do. So, even though it won’t occur in the fourth quarter, I think that particular mailing is contracted for a few years so it will show up in future third quarter most likely.

The arrangements with vendors have periodic true ups which we mentioned in there and that also just happened in the third quarter. It could have easily slipped into the fourth, so that’s sort of an unpredictable and also but if you back those out, there is still a noticeable improvement in the output operation and as I mentioned we still have some depreciation that will be kicking in the fourth quarter because as we have discussed I think a number of times, we use accelerated depreciation for books as well as tax, so we tend to front-end a lot of depreciation.

So you will see a little of bit in the fourth quarter and I hope this isn’t too long an answer, but overall I think the trends are fairly positive, we have seen very good results in the actual cost of production from the new equipment that took a few quarters to settle in. Having said that we are, that’s primarily in the printing side and we are starting to address some new technologies on the inserting side, but I think we are well positioned I think, that we are seeing the kinds of improvements that we anticipated. So, I think there is a point where we should be able to get to that margin target and it's going to be overnight still probably several quarters out but I think we’re going in the right direction.

Greg Smith - Merrill Lynch

Okay great. I appreciate it.

Operator

Next question comes from the line of Pat Burton with Citigroup. Please go ahead.

Pat Burton - Citigroup

Hi and congratulations guys on the whole Asurion/lock\line in the history there of the value you created for DST shareholders and closing that transaction. My question actually Tom relates to the long-term prospects for healthcare. I know you’re not going to give us the margins but could you just give us the steps in the timeline maybe over the next two to three years as to how you will improve the margins in that given it for a lot lower than the core business. Thanks.

Tom McDonnell

Well first the healthcare business has the way I look at it four elements to it we had the Health Solutions business that we had prior to the ASI acquisition and bringing those two together I think we have done a very-very good job of integration as far as what the sort of replicative cost to the extent there were some have been addressed and so forth. However, the combined companies have a number of processing platforms and those are operated either on a full service BPO basis or remote ASP or in some cases license clients and there will be a period of I would say couple of years where there would be some rationalization in the number of platforms that we operate which should in effect improve the overall efficiency in the organization but most importantly we ‘re trying to move the model more to a BPO and Remote Processing business, which will produce the recurring revenues. So, I think what we will see is that if you look at these businesses a significant portion of profitability on an annual basis comes from licensed revenues. And if you normalize that the underlying business which is the profitability comes from BPO and ASP, is the business that we see growing. So I think you’ll see sort of say 18/24 month period sort of a transformation from licensed revenues to more recurring and processing revenues.

Now, having said that, there will be a transformation, that doesn’t mean that you won’t see some license sales, because certain segments of the market tend to prefer to license. But, once we get the business more positioned as a BPO and an ASP, we should be able to start to move the overall margins on a recurring and predictable basis towards what we see in the Mutual Fund side of the business. Although, the Mutual Fund side obviously, benefits from pretty significant scale, so I mean, it won’t necessarily, the gap between Health Solutions or Healthcare processing and Mutual Funds will close, but I am not sure the lever will completely converge in the short-term.

Pat Burton - Citigroup

Okay. But the revenue growth in healthcare longer-term should probably be higher?

Tom McDonnell

It should be. Yes.

Pat Burton - Citigroup

Okay. And then one last question. Has anything changed in the AWD market or is that just kind of hit or miss by quarter in terms of timing of the license fees?

Tom McDonnell

At the moment it's sort of hit or miss by quarter and the timing of the license fees. Also we haven’t from the AWD standpoint, we’re kind of repositioning which segments of the market we should really be in. We were very strong and of course Mutual Funds, Financial Services, General Insurance in particular. We think we have excellent option in the healthcare side, a lot of that’s had to do with the integration into the Health Solutions product line, we think the best aspect of the business that will grow. But I think in the short-term it’s mostly timing of licenses.

Pat Burton - Citigroup

Thank you. And congratulations again on the whole monetization of what was once lock\line. Thanks.

Tom McDonnell

Thank you.

Operator

Our next question comes from the line of Dave Koning with Robert Baird. Please go ahead.

Dave Koning - Robert Baird

Hi guys. Just a few modeling questions. First of all, in terms of the cash that you are holding right after the tax payments, the $379 million. Do you know the timing during Q4 roughly just so we can think of how interest income during the quarter should be?

Ken Hager

Dave that will be paid roughly at December 15.

Dave Koning - Robert Baird

Okay, great. And secondly, in terms of the affiliate other line that the $1.5 million in depreciation that you mentioned, is that recurring or was that a one time Q3 event?

Ken Hager

That’s really more of a one time Q3 amount that will be some incremental piece of it, but not at that level.

Dave Koning - Robert Baird

Okay. In the tax rate 34% it sounds like not just for the end of '07 but also going into '08 that should what we think about?

Tom McDonnell

I think that’s reasonable, but it’s so probably a little, that’s a reasonable number but we will update that next quarter as we finalize our 2008 numbers.

Dave Koning - Robert Baird

And then finally, just in terms of the accounting method that you kind of talked about a little bit in the press release, the convert right now I think the average rate of the two pieces is something like 3.9%. Are you going to give an adjusted EPS going forward based on higher interest rate or are you going to still use the method that you present now in the press release?

Tom McDonnell

You are referring to the potential new accounting pronouncement?

Dave Koning - Robert Baird

Yeah.

Tom McDonnell

We’re still trying to evaluate exactly how that’s going to impact us. It will result in higher interest expense for us. We don’t exactly know the exact level at this point in time, and we are not sure exactly how long we will have to amortize that. Once we get those -- better understood, we will provide that level of detail in our press release. Like we do now from providing in converted accounting.

Dave Koning - Robert Baird

Good, in the key message in your press though is nothing has changed that all like economically, it's just more of how they want you to present it.

Tom McDonnell

That is correct.

Dave Koning - Robert Baird

Great, thank you.

Operator

Our next question comes from the line of Murali Gopal with KBW. Please go ahead

Murali Gopal - KBW

Thank you. My question relates to ASI. You had ASI for couple of quarters and I am just trying to understand AIS. What is the experience been at the performance of AIS, met or exceeded your expectations when you did the acquisition and also in terms of the sales effort. Has that been fully ramped up or are you still ramping up your sales effort there.

Tom McDonnell

I think we never really publicized any particular expectations, but I would tell you internally we feel that the two companies of Health Solutions and ASI have come together very effectively, so I would say that internally it is meeting our expectations. When we say ramp up the sales effort, we don't have in place the sales organization that we believe is appropriate for the add-in or out in the market. So, I think that we got the assets in place for sales, but again it's difficult to predict the timing of new sales coming on. But we have got the sales organization where we want it.

Murali Gopal - KBW

Okay and could you, is there anyway you could quantify what you think is the organic growth potential in this business, longer term?

Tom McDonnell

I could not quantify that for you today. I think we are still trying to evaluate, what is the success rate going to be in moving the business from what's traditionally throughout the industry, not only ourselves but competitors, so the business it's been more heavily oriented to licensing to a business that’s much more recurring revenue side, that’s anything that I would say day which is speculative.

Murali Gopal - KBW

Okay. And lastly, the accelerated depreciation did you expect in the Output Solutions, is Q4 is that going to be the first quarter that we are going to see a ramp up associated with all of the new technology and insertion that spending that happened or just part of it already in the run rate in Q3?

Tom McDonnell

What has been ramping up, I don’t have the quarter-by-quarter numbers. But you will see an additional step up in Q4.

Murali Gopal - KBW

Okay. Thank you.

Operator

And our last question comes from the line of Tien-Tsin Huang with J.P. Morgan. Please go ahead.

Tien-Tsin Huang - J.P. Morgan

Thanks. Question on the Financial Services margins as well. Historically, in the last couple of years at least the fourth quarter has been the highest margin quarter drawing about looks like 300 basis points to 500 basis points sequentially. At a higher level should this pattern continue in the fourth quarter?

Tom McDonnell

Well, in the fourth quarter usually we see some year-end effect of license sales. And right now, while there is sales activity, we don’t know when some of those transactions will close. My guess right now is that you’ll see softer international licenses, may see some up tick in AWD. And we don’t have a good sense at this point there isn't any particular licenses of significance that will occur in Health Solutions. So, I think that to an extent there is at least a couple of hundred or maybe more of the basis point differential that you are referring to really is represented by when software sales come in. So, I would anticipate you right now, I would say you won’t that step up in the fourth quarter.

Tien-Tsin Huang - J.P. Morgan

That 200 basis point is associated with software.

Tom McDonnell

Well, that’s not exactly it will be my guess, but you are not going to see the same positive up tick that you see in last June. Now having said that, some of these proposals that are out if they mature more rapidly it could occur but right now it looks unlikely.

Tien-Tsin Huang - J.P. Morgan

Okay, that’s helpful. Has the overall demand environment changed for a software license sales in general among your client prospects, you stated the buying market here?

Tom McDonnell

I think in Financial Services given the help of the markets and the profitability of managers we are seeing maybe more interest in the investment management side, but I think it’s going to take a couple of quarter to mature. But also we are seeing more, maybe more complex proposals because many of our clients are looking at should they be requiring a software on a different basis than an upfront, front inline license should it be structured differently or in some cases should it be supported by processing services.

AWD side isn’t since it covers many, many more industries it’s a little harder to predict the economics of those industries whether it’s healthcare, say versus Financial Services so it’s not as easy to generalize that’s there sort of positive momentum in that area. But again, the buying patterns here do not appear to have changed and then just to reiterate at the Health Solution side, we are trying to change some of those buying patterns or so. So it will take a little while to see how that sorts out.

Tien-Tsin Huang - J.P. Morgan

Okay, got you. If I could sneak in just one more, can the D&A and the Financial Services segment look like they have picked up again. What’s the outlook for D&A in that segment going forward with depreciation?

Ken Hager

In the fourth quarter we always had increases in fixed assets for year-end, the equipment to handle year-end processing. So, you will see somewhat of a pickup, although we are probably a little bit muted this quarter than perhaps some prior year quarters.

Tien-Tsin Huang - J.P. Morgan

Very good thanks for the detail.

Operator

And pardon me we have one more question and this question comes from the line of (Ken Carbase) with Bear Stearns. Please go ahead sir.

Ken Carbase - Bear Stearns

Final question on the account conversion. Is it fair to assume that you had half a quarter of revenues for the full quarter of cost?

Tom McDonnell

Yeah yes.

Ken Carbase - Bear Stearns

So, essentially that half a quarter revenue that you missed is we could think about that as pure profit.

Tom McDonnell

Mostly yes.

Ken Carbase - Bear Stearns

Okay. That’s it. Thank you.

Operator

And that concludes the question.

Tom McDonnell

Well, thank you for joining us today and we’ll be notifying you of the next month or so of the date for the call in January. Thanks again.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for using the AT&T executive teleconference service. Ladies and gentlemen this call will also be available for replay. The call will be available by dialing the following number of 1-800-475-6701 and using the access code of 887012. Once again if you wish to listen to the replay of this call dial 1-800-475-6701 and using the access code of 887012.

That does conclude our conference for today. Thank you for using the AT&T executive teleconference service. You may now disconnect.

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