NeuStar Stock Price Rises On Contract Renewal Talk

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When a single client accounts for roughly half of your business, you have a vested interest in not letting that client slip away.

You also want to ensure that when it comes time to renew your contract with the client, you do so on terms that will allow you to grow your revenue and profit.

NeuStar ( NSR ) looks poised to succeed on both fronts. The company provides call routing, database infrastructure and network management services to telecom firms and other clients in North America.


Its biggest source of revenue, accounting for about half of the total, comes from a federally mandated program to provide a national database of routing information for all ported and pooled phone numbers in the U.S. and Canada.

The program is called NPAC, for National Portability Administration Center. NeuStar operates the NPAC database. It is paid by domestic carriers through North American Portability Management LLC.

NeuStar has held a monopoly on the NPAC contract since it was first signed in 1996. Its current NPAC contract runs through 2015, but is up for renewal during the first half of 2013.

Favorable Terms

Industry watchers sound confident NeuStar will win renewal of the contract, and at favorable terms. That's one reason the company's stock price has risen more than 15% over the past month and a half, touching a record high of 43.29 on Dec. 12.

"The key to the stock is the contract renewal. You will take an uncertainty and make it a certainty," said John Bright, an analyst at Avondale Partners. "I strongly believe NeuStar will renew the contract, and at terms that are favorable to the company as far as the length and amount of the contract."

RBC Capital Markets analyst Daniel Meron voiced similar sentiments in a recent research report, noting that NeuStar "seems well placed to retain the contract."

However, Meron added that "it remains to be seen if and to what extent the company may need to concede on pricing and terms."

NeuStar does have rivals for this kind of work. The two main rivals are privately held Syniverse Holdings andEricsson ( ERIC ) unit Telcordia. However, analysts say it's hard for either of those companies to compete for the NPAC contract because of the high cost of building computer systems that manage large telecom databases.

If, as expected, NeuStar wins the new contract, the benefit will go beyond merely securing its biggest single source of revenue, Bright says.

"Once they win the contract, we suspect management will consider increased share repurchases, potentially pay a dividend and look for additional acquisitions," he said.

NeuStar typically uses acquisitions to help beef up its non-NPAC business. Although the company has not made any buyouts this year, it made a couple of them last year.

In July 2011, it spent $39 million to acquire the Numbering Solutions business of Evolving Systems in a deal that added new operational support systems (OSS) solutions.

NeuStar's biggest buyout last year came in October, when it announced a $650 million purchase of TARGUSinfo. That transaction brought aboard caller ID infrastructure and data to help clients identify, verify, score and locate customers and prospects.

"(The TARGUSinfo acquisition) has performed very well for NeuStar and has helped it accelerate growth," Bright said.

He expects NeuStar to continue eyeing acquisitions that will bolster the company's core competencies and help it grow the 50% of revenue that does not come from the NPAC contract.

NeuStar breaks down its revenue between three segments: carrier services, enterprise services and information services.

The carrier services business includes its work with NPAC and other clients. The enterprise services segment provides name registry, digital marketing and Web performance services. The information services segment provides data to help clients make decisions on consumer-initiated interactions on the Web, over the phone and at the point of sale.

Business Segments

All three business segments delivered better-that-expected revenue gains during the third quarter, helping NeuStar grow the top line 38% from the prior year to $211.2 million. Revenue has grown at least 27% each of the last four quarters.

Earnings for the quarter came in at 90 cents a share, up 33% from a year earlier and well above views for 72 cents. Earnings growth has accelerated each of the last three quarters.

In a statement following NeuStar's Q3 earnings release, Chief Executive Lisa Hook said the company "continued to execute well on our priorities."

Those priorities included working toward renewal of the NPAC contract and continuing to integrate TARGUSinfo into its information services unit.

Meanwhile, NeuStar also delivered better-than-expected margins during the quarter. JPMorgan analyst Sterling Auty noted that the Q3 operating margin came in at 45.6%, above his estimate for 42.6%.

"There was slower marketing activity during Q3, and perhaps some sales-force churn that helped drive lower operating expenses in the quarter," Auty noted. "We think this is also because management prudently sets achievable bars."

NeuStar also confirmed its full-year revenue guidance of $825 million to $835 million. It raised its full-year earnings guidance to a range of $2.94 to $3.03 a share vs. prior guidance of $2.78 to $2.90 a share.



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: ERIC , NSR

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