Monday, July 30, 2012

Neustar Beats 2Q12 Estimates - Raises Full-year Revenue Guidance

Neustar, Inc. (NSR), reported 2Q12 results on Thursday, July 26th, 2012. Shares of Neustar were up ~8% Friday after the company reported Q2 profit that beat estimates and raised full-year revenue guidance. Second quarter revenues increased 40% to $206.5MM. The outperformance of newly acquired Targus Information drove much of the sales growth for the quarter and carried forth support to our thesis on Targus and the benefits it offers Neustar - revenue diversification and robust revenue growth. Income from continuing operations increased 15% to $38.6MM. Income per diluted share increased 27% to $.057.Cash, cash equivalents and investments totaled $235MM, a sequential quarter-to-quarter increase of $45.4MM. During the second quarter the company repurchased approximately 742,000 shares of common stock at an average price of $33.67 per share, for a total purchase price of $25.0MM.

Neustar increased full-year guidance for revenue and net income. Revenue is now expected to range from $825 to $835MM, prior guidance was between $810 and $820MM, and net income was revised up from $178 to $190MM to $189-$197MM. Adjusted EPS was also revised up from $2.66-$2.84 to $2.78-$2.90.

Going forward we expect Neustar’s highly reoccurring revenue base to continue to drive strong financial performance. The next leg for shares of Neustar will come from a successful re-compete of the federally mandated program, called the NPAC, or National Portability Administration Center. Neustar operates the NPAC database and is paid by domestic carriers through North American Portability Management LLC. NPAC accounts for about half of Neustar's revenue. Neustar has held a monopoly on the NPAC contract since it was first signed in 1996. Neustar was founded that year to help meet the technical and operational challenges the U.S, government was facing when it mandated local number portability, which is simply the ability to transfer phone numbers from one carrier to another competing carrier. Neither of Neustar’s main competitors, privately held Syniverse Holdings and Ericsson unit Telcordia, are expected to take much interest in competing for the contract when it expires. This is due to the high cost of building computer systems to manage the large telecom databases, entrenching Neustar into the contract. The question is how much the new contract will be worth. Neustar will most likely have to charge a lower price for its services, some estimate 15% to 25%, however Neustar will look to offer enhanced feature functionality to carriers as a means of limiting revenue declines, a tactic they have been successful with in the past.

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