When a single client accounts for roughly half of your
business, you have a vested interest in not letting that client
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.
) 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
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.
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
NeuStar does have rivals for this kind of work. The two main
rivals are privately held Syniverse Holdings andEricsson (
) 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
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
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.
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
"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.