By Zacks Equity Research

 

Lender Processing Services (LPS) last week reported second-quarter 2012 adjusted earnings per share of 76 cents, which comfortably surpassed the Zacks consensus estimate of 60 cents per share. Earnings per share spiked 36% from the year-ago level.

 

On a GAAP basis, loss per share was 45 cents, down from the earnings of 25 cents recorded in the year-earlier quarter. An increase to the legal and regulatory reserve hurt Lender Processing's GAAP earnings.

 

The company's total revenue increased 6.7% year over year to $533.2 million, edging past the Zacks Consensus Estimate of $511.0 million.

 

Operating income in the quarter increased 34.4% year over year to $121.7 million mainly.

 

Technology, data and analytics Segment

Second-quarter revenue for the TD&A segment were $186.1 million, up 9.1% year-over-year, thanks to the growth in servicing technology from higher recurring revenue and data access fees. The growth was also attributable to higher refinancing volumes in origination technology as well as to the completion of a year of new customer implementations in default technology initiated in 2011.  

 

Adjusted operating income for the segment was $57.9 million, up 3.2% year-over-year. The upside can be credited to higher contributions from servicing and default technology offset somewhat by lower profit from data and analytics.

 

Transaction services segment

Second-quarter revenue for the transaction segment grew 5.1% year-over-year to $347.4 million. The upside in the segment's revenue can be traced back to revenue increases of a substantial 42.4% from origination services revenue partially marred by 12.5% decline from Default Services.

 

The performance in default services was hit by lower transaction volumes while the performance in origination services was buoyed by higher refinance origination volumes. In the reported quarter, origination services and default services recorded revenue of $150.7 million and $196.6 million, respectively.

 

Overall, adjusted operating income for the segment inflated 41.6% year over year to $76.0 million mainly due to higher operating leverage as well as higher origination volumes.

 

Liquidity and outlook

At quarter end, cash balance of the company was $138.5 million while long-term debt, net of current portion was $1.1 billion.

 

For the third quarter of 2012, management expects adjusted earnings per share within 68 cents to 72 cents. Management expects revenue to remain in the range of $500 million-$520 million.

 

Our Take

We remain impressed with the growth trajectory on which Lender Processing has embarked. The company outdid the consensus in the second quarter on the back of improved revenue. Its origination business is marching ahead. While 2012 looks to be another challenging year, management remains focused on expanding market share, leverage strong cash flow  and position itself to capitalize on market recovery once it rebounds. However, its default services revenue continues to pose a challenge for it.

 

Lender Processing, which competes with FTI Consulting (FCN), currently carries a Zacks #2 Rank, which translates into a short-term "buy" rating. We are maintaining our long-term "neutral" recommendation on the stock.

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