Neustar Dials In Steady Growth Thanks To Phone Contract


Neustar ( NSR ) has the kind of business model a lot of firms might envy.

The company provides call routing, database infrastructure and network management services to telecom and other clients in North America.

It has a steady source of income, thanks to a federally mandated program, called the NPAC, or National Portability Administration Center, to provide a national database of routing information for all ported and pooled phone numbers in the U.S. and Canada.

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.

"It's about as certain a payment as you can receive," said John Bright, an analyst at Avondale Partners.

Neustar has held a monopoly on the NPAC contract since it was first signed in 1996. That was the year Neustar was founded to help meet technical and operational challenges that arose when the U.S. government mandated local number portability.

Contract Expiration

Neither of Neustar's main rivals, privately held Syniverse Holdings and Ericsson unit Telcordia, is expected to threaten its NPAC monopoly when the current contract expires. That's partly because of the high cost of building computer systems that manage large telecom databases, analysts say.

The lack of competition and steady income stream have helped protect Neustar from the kinds of cyclical and economic head winds that plague most other businesses.

"Because of the visibility of the NPAC contract, Neustar is one of our favorite defensive names," JPMorgan analyst Sterling Auty noted following Neustar's first-quarter earnings report.

The current NPAC contract is due to expire in June 2015. The Federal Communications Commission is overseeing the bidding process for new contracts, which will likely be awarded next year.

Analysts expect Neustar to keep the business, and Neustar officials have made plain their desire to do so.

"It is our intention and my highest priority to ensure that Neustar is again selected to be the NPAC administrator for the period to begin in July 2015," Chief Executive Lisa Hook said on a Q1 conference call with analysts.

"Our stewardship of the NPAC has been a steady and reliable constant over a period that has seen remarkable change," she said.

The question is how much the new contract will be worth. Neustar will probably have to charge lower prices for its services, watchers say. The question is how much lower. Some estimates have ranged from 15% to 25%, though Neustar might be able to soften the blow through more and better services.

"A renewal of Neustar's core NPAC contract would likely include an initial hit to revenues," analyst Bright said. "However, we believe Neustar will look to offer enhanced feature functionality to carriers as a means of limiting revenue declines."

Caller ID Acquisition

To help prepare for the potential hit to its NPAC revenue, Neustar last fall acquired Targus Information in a $560 million cash deal.

Targus manages a database primarily of caller IDs for small telcos. It also sells call location products and sales-lead verification services. The new unit beat most projections during Neustar's first quarter, analyst Auty noted.

"Results for the acquired company were slightly better than expected, " he said. "Normalizing for the usual acquired amortization, we estimate that the acquisition was solidly accretive in its first quarter under the Neustar banner."

On her first-quarter conference call, CEO Hook said Neustar "continues to be excited" about the Targus buyout.

"We have made tremendous progress in the integration of certain back-office functions, such as accounts payable and accounts receivable, and we are ahead of schedule," she added.

Neustar has grown earnings in double digits in eight of the last nine quarters. The company has run off five straight quarters of accelerated revenue growth.

Earnings Report

It posted first-quarter earnings of 64 cents a share. That was up from 50 cents the prior year and in line with estimates. Revenue rose 37% to just less than $200 million, topping views.

The company breaks down its revenue between carrier services, enterprise services and information services.

The first category includes its NPAC contract. Services in the enterprise segment include name registry, digital marketing and Web performance.

The information services segment provides data designed to help customers make informed decisions on consumer-initiated interactions on the Web, over the phone and at the point of sale.

Carrier services contributed 62% of revenue during the first quarter. Enterprise services contributed 20% and information services 18%.

The carrier services business drove the better-than-expected Q1 revenue results, Auty noted. "The upside was largely driven by higher revenues from NPAC."

Analysts polled by Thomson Reuters expect Neustar to post second-quarter earnings of 68 cents a share, up 58% from the previous year. Full-year profit is seen rising 28% this year and 13% in 2013. Neustar's stock price trades near 33.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: NSR

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