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Napat Jatusripitak

NSR AT A GLANCE

P/E ► 56.7 VERY HIGH EV/EBITDA ► 13.8 AVG ROA ► 8.1% AVG ROE ► 6.9% AVG Debt to Equity ► 0.278 LOW Current Ratio ► 3.62 HIGH Interest Coverage Ratio ► 6.73 AVG

 

 

 

 

 

 

Neustar (NYSE: NSR) is an incumbent clearinghouse and directory services provider that is contracted by the Federal Communications Commissions and the North American Numbering Council as the sole telephone number administrator to manage all telephone area codes and numbers and enable routing of telephone calls among all of the communications service providers (CSP) in the United States and Canada.^[1] The company mainly generates revenues from per-transaction fees as it manages over 700,000 transactions a day to enable the routing of more than 2 billion telephone calls, powers the resolution for more than 16 million global internet domains, and supports more than 10 billion SS7 (Signaling System number 7) network signaling messages per day.^[2] However, on January 28th, 2009, the company has announced that it will change its pricing model for its telephone number portability contracts from transaction-based fees to annual fixed fee structure. Despite the company's view that this transition would ultimately increase predictability of revenue growth and reduce costs, this new pricing model casted doubts among analysts and investors, causing its share to plunge 16.9%, the lowest since it began trading in June 2005.^[3][4]

While it generates recurring revenue from its telephone numbers management, since 2006, the company has seen the proliferation of the use of wireless networks and businesses' increasing reliance on the internet and thus has been extending its services into high potential markets such as domain name services (DNS) and mobile instant messaging services (MIM) by integrating acquired businesses with its own clearinghouse services. Despite of its success in the newly integrated DNS services with $18.4 million increase in 2007 revenue, the performance of its next-generation messaging services (NGM) has not met the expectation and the company had to reduce its 2008 revenue forecast from its NGM segment. ^[5][6] Although the 2008 financial crisis and the economic downturn seemed to have little effects on Neustar due to the CSPs' steady reliance on its core telecommunication services, the company has announced that the adverse economic conditions, if prolonged, might negatively affect the number of transactions in its databases and the growth of its new services. .^[7]

Company Overview

Neustar's Financial Performance 2005-2007^[9]

Neustar's 2007 Revenue by Region^[10]

In April 2006, Neustar's $61.8 million acquisition of UltraDNS Corporation enhanced its domain name services and internet protocol technology, optimizing customer's overall network as well as providing protection against disruptions from Distributed Denial of Services (DDOS) attacks that try to flood a server to prevent customers or users from accessing that server.^[11] Its customers include large Web-based companies such as Amazon.com, Forbes.com, and Buyonlinenow.com.^[12]

In November 2006, its $139 million acquisition of Followap Inc., a leading next-generation communication service provider, not only gave the company a strong international customer base but also prepared itself to support its customers's need to upgrade from the sms-based service to the new messaging culture, the IP-based service or the Mobile Instant Messaging (MIM).^[13] The company says that this market will be increasingly important to Neustar as the industry migrates to MIM services.

Revenue in fiscal 2007 increased 28.9 % from $332.96 million to $429.17 million; net earnings in 2007 rose 24.95% from $73.90 million to $92.34 million; the number of transactions rose 36%, from 234.4 million for 2006 to 318.5 million for 2007.^[14][15] The increase in revenue reflects the higher service providers' demand for Neustar's clearinghouse services due to the trend of upgrading network technology to meet the technological advancement.Because its business model generates revenue from contracts, transaction and subscription fees from already existing services, Neustar's revenue cost in 2007 only increased by 10.27% from 2006.^[16] Although Neustar's revenue mostly comes from the domestic market, its mobile instant messaging services and registry gateways in the international market have great potential to grow.^[17]

Company's Services

Addressing (26% of total revenue)

• North American Numbering Plan Administration (NANP) for telecommunication service providers. As an authorized administer, Neustar neutrally allocates and assigns telephone numbers across North America for telecommunication service providers. It provides this service under fixed-fee annual and cost-plus contracts with the Federal Communications Commission.
  

  

  Neustar's Revenue by Segment from year 2005-2007^[18]
• Number Pooling is an allocation of pooled blocks of unassigned telephone numbers as well as reallocation of pooled blocks of telephone numbers. Neustar is paid with a per-transaction fee.
• Registrar of Internet Domain Name Services (DNS) such as .biz , .us domains, registry gateway services for China's .cn and Taiwan's .tw. In addition, Neustar also provides UltraDNS, a suit of services that enhances customer's website's overall traffic management, stability, security and reliability.^[19] This service is becoming more demanded as more businesses begin to use web-based payment transactions.
• The U.S. Common Short Code, a many-to-one text messages basis that is often used by consumer brand companies for marketing efforts such as ringtone services and counting votes for television programs.
  

  

  Neustar's 2007 Services Segmentation^[20]

In 2007, revenue from this subdivision increased 5.72% mostly due to the expanded range of DNS services as a result of the company's acquisition of UltraDNS Corporation in April 2006.^[21] The increase in revenue from DNS services and U.S. Common Short Codes were $26.2 million but were offset by a decrease in revenue of $19.5 million under the company's telephone number portability services contracts due to a carrier's return to normal network expansion activities from unusually high levels in 2006.^[22]

Interoperability (14% of total revenue)

Interoperability services consist of wireline and wireless number portability and order management services. Neustar's wireline and wireless number portability let service providers to let their users change their telephone carrier without chaining their telephone numbers. In 2007, revenue from this subdivision increased $4.0 million or 9.26% due to increasing competition among communication service providers (CSP) that increased movements of end users from one CSP to another and carrier consolidation.^[23]

Infrastructure and other (60% of total revenue)

Neustar's infrastructure services consist primarily of network management and connection services. Under long term contracts with the North American Portability Management, LLC, the company generates revenue from management services, connection fees and system enhancements and intra-carrier mobile instant messaging services. In 2007, revenue from infrastructure and other services increased $57.7 million or 49.26% due to a large increase in customers' demand for Neustar's network management services to implement their new technologies and to upgrade wireless technology in order to follow the trends in this fast changing industry.^[24] In the third quarter of 2008, Neustar said that the growth of its year-on-year revenue was primarily driven by this service segment due to an increases in infrastructure transactions under its contracts to provide telephone number portability services in the United States. ^[25]

Trends and Forces

The proliferation of IP-based networks will expand Neustar's customer base

Cisco reported in 2008 that the consumer VoIP traffic will grow at a compound annual rate of 24% through 2012.^[26] CSPs are looking to upgrading their infrastructures to provide ip-based services because the VoIP migration is less costly for telecommunication and also able to integrate multiple services together.^[27] For example, "Triple Play" service package is the use of VoIP that includes hi-speed internet, television, and telephone over a single broadband connection. Nevertheless, IP-based networks have a major flaw that their quality can be prone to congestion and their ability to cope with the increasing traffic would rely on the capacity of bandwidth. This migration towards ip-based networks will benefit Neustar in a number of ways: its NGM services, infrastructure segment, and interoperability segment.

• Next Generation Messaging (NGM) Since the beginning of the wide-spread of ip-based networks, Neustar has been putting efforts into driving its NGM services in the international market after it acquired Followap Inc. in 2006. Neustar's NGM services provide mobile carriers a mobile instant messaging (MIM) platform bandwidth in which Neustar would collect fees based on the number of subscribers and additional payment based on activities and usage of the bandwidth. While Neustar's penetration in the MIM market abroad is still little, the company says MIM services has high potential to grow because of its advantages over the SMS services. Similar to desktop instant messaging or chat services offered by MSN and AOL, MIM services offer greater multi-media content, give users a more "chat-like" experience, and lift off the 160-character limit from text-messaging services. While NGM's performance in 2007 has not met expectations, with only $8.11 million in revenue due to delayed deployment of MIM systems, NGM's performance as of the third quarter in 2008 seemed more promising.^[28] Revenue in the third quarter with three more months to go was already $10.82 million. This revenue growth reflects more customers and partnerships Neustar has gained during the year 2008. As of January 2009, Neustar covers about 350 million NGM subscribers.^[29]

• Migration towards IP-based networks will drive CSPs to upgrade their infrastructure, increasing Neustar's infrastructure revenue Upgrading to new technological platform has been a complex and slow process, but CSPs are showing signs of commitment to this process. In 2007, Neustar said that the primary driving force for the $85 million increase in infrastructure revenue, which accounts for 60% of total revenue, was from the migration to new technologies.^[30]

• Revenue growth from interoperability segment and number portability administration center The implementation of the newly introduced IP-based networks has enabled CSP, especially mobile carriers, to aggressively compete with each other by offering ip-based rich-content services and applications for their subscribers. As competitions among mobile carriers increase, mobile subscribers are more likely to switch their carrier more often, giving Neustar an opportunity to generate more revenue from the interoperability services segment. ^[31]

Increasing companies' reliance on the internet will drive greater demand for domain name services and security

As the internet becomes increasingly essential to companies, whether for their informative homepage, their internet-based payment system or their online order management, companies are seeking for system enhancements to improve reliability, scalability, cost-effectiveness and securities for their servers. Neustar's fiscal 2007 revenue from DNS services alone increased $18.4 million primarily because of this increase in companies' reliance on the internet and greater demand for server's security.^[32]

China's large population, fast-growing economy and its growth in internet penetration will drive greater demand for Neustar's .cn gateway registrations

As of 2007, China has the world's largest population of over 1.33 billion, and it is one of the world's fastest growing economies. It is also the fourth largest economy in the world with its GDP approximately $3,280,053 millions of dollar.^[33][34] In addition, by the end of 2006, China has become the second largest number of internet users in the world with approximately 137 million users (23.4% increase from previous year). According to VeriSign, as of the first quarter of 2008, across all of Generic Top Level Domain Names and Country Code Top Level Domain Names (ccTLDs), .cn is the third highest base that grew 199% from 2007 with over 25 million registrations behind .com and .de (Germany).^[35] These statistics reflect an unprecedented opportunity for e-commerce in China and Neustar's .cn base will grow as more e-commerce go to China.

Neustar's immunity to 2008 Financial Crisis and Global Economic Downturn

With its contracts with the North American Portability Management LLC renewed in 2006 to continue through June 2015, Neustar is considerably more immune to the crisis than most other businesses because the majority of its revenue is generated recurrently under long-term contracts and subscriptions.^{[36] [37]} Moreover, it is fairly well diversified because none of its customers accounted for more than 10% of its total revenue in 2007.^[38] While its core-businesses are quite insensitive to the recession, Neustar's total revenue can still be adversely affected if it cannot generate revenue from new services in high potential DNS and NGM markets that it has been investing in or renew contracts that has been giving it a monopoly power as a sole provider of NPAC services.^[39]

Neustar benefits from consolidation trends of large mobile carriers in the short run

Large-scale acquisitions by U.S. mobile carriers such as Verizon Wireless, AT&T Corporation, and Sprint-Nextel have benefited Neustar's interoperability segment because Neustar generates revenue in its interoperability whenever there are movements of subscribers' telephone numbers and information to another carrier.^[40] However, Neustar also faces a trade-off in the long run because there will be a less number of mobile carriers as a result of consolidations, meaning that there will be less switches between mobile carriers.

Competition

While Neustar is not directly competing with any company because of its natural monopoly position, its wide range of services and its increasing presence in the international market attract competitors from various kinds of markets.

• Telcordia Technologies, Inc., the leading provider of software and services for IP, wireline, wireless, and cable networks, primarily competes with Neustar as a provider of directory management services. It offers telecommunications companies services that help them manage and optimize their existing networks. In addition, Telcordia competes against Neustar for the North American Numbering Plan (NANP) contracts that have been giving Neustar its natural monopoly position. On June 13, 2007, Telcordia filed a petition with the FCC requesting an order to require North American Portability Management LLC to conduct a new bidding process to restore competition in the selection process due to the non-competitive extension of Neustar's role as the sole administrator of NPAC with the FCC.^[46] While Telcordia's petition is still pending as of Febuary 2008, Neustar has said that if this petition is successful, Neustar may lose one or more of its contracts.^[47]

• Verisign, Inc is the leading provider of telecommunication infrastructure services that enhance transaction security and network performance. VeriSign competes with Neustar in order management services and DNS services. VeriSign is the largest provider of top-level domain name services. It manages the largest top-level domain: the .com domain. As of the first quarter of 2008, VeriSign's domain name registrations from .com and .net, totaled 84.4 million, a 22% growth from 2007.^[48]

• Syniverse competes with Neustar in both Neustar's existing segments and new segments. Syniverse offers services that are similar to Neustar's such as SS7 services, Next-Generation Wi-Fi services, mobile data services and number porting services.

• Akamai Technologies, a provider of speed enhancement services for companies to move their servers close to their customer to optimize download time, competes with Neustar mainly in web-enhancement services or DNS services segment.

• F5 Networks, competes with Neustar in the DNS segment. It provides traffic management hardwares that work similarly to Neustar's UltraDNS services.

References

1. ↑ Neustar At a Glance Page
2. ↑ Neustar Homepage
3. ↑ Neustar News Releases:NeuStar Announces Amendment of Its Telephone Number Portability Contracts
4. ↑ Yahoo Finance Neustar
5. ↑ Neustar (NSR) News Releases, 2008 First Quarter Report
6. ↑ Neustar (NSR) 10-K 2007, Item 7, Revenue, pg. 38
7. ↑ Neustar (NSR) 10-Q Third Quarter Report, 2007, Part II, Item 1.A, Risk Factors pg.36
8. ↑ Neustar (NSR) 10-K 2007, Item 7, pg.29
9. ↑ Neustar (NSR) 10-K 2007, Item 6, pg. 27
10. ↑ Neustar (NSR) 10-K 2007, Segment Information, pg. 84
11. ↑ Neustar (NSR) 10-K 2007, Item 7, pg. 35
12. ↑ Neustar UltraDNS Customer Page
13. ↑ Neustar (NSR) 10-K 2007, Item 7, pg. 36
14. ↑ Neustar (NSR) 10-K 2007, Item 6, pg. 27
15. ↑ Neustar (NSR) News Releases, 2007 Fourth Quarter and Full Year Report
16. ↑ Neustar (NSR) 10-K 2007, Item 6, pg. 27
17. ↑ Neustar (NSR) 10-K 2007, Segment Information, pg. 85
18. ↑ Neustar (NSR) 10-K 2007, Consolidated Statement of Operations, pg. 50
19. ↑ UltraDNS Technology Page
20. ↑ Neustar (NSR) 10-K 2007, Consolidated Statement of Operations, pg. 50
21. ↑ Neustar (NSR) 10-K 2007, Item 7, Revenue, pg. 38
22. ↑ Neustar (NSR) 10-K 2007, Item 7, Revenue, pg. 38
23. ↑ Neustar (NSR) 10-K 2007, Item 7, Revenue, pg. 38
24. ↑ Neustar (NSR) 10-K 2007, Item 7, Consolidated Results of Operations, pg. 37
25. ↑ Neustar (NSR) News Releases, 2008 Third Quarter Report
26. ↑ Cisco Visual Networking Index Forecasts and Methods 2007-2012
27. ↑ Federal Communications Commision VoIP FAQs
28. ↑ forbes.com
29. ↑ Neustar NGM Overview Page
30. ↑ Neustar (NSR) 10-K 2007, Item 7, Consolidated Results of Operations, pg. 37
31. ↑ Neustar (NSR) 10-K 2007, Item 7, Current Trends Affecting Our Results of Operations, pg. 36
32. ↑ Neustar (NSR) 10-K 2007, Item 7, Revenue, pg. 38
33. ↑ World Bank GDP statistics
34. ↑ CIA factbook
35. ↑ VeriSign Statistics
36. ↑ Neustar Q3 2008 Earnings Call
37. ↑ Networkworld.com
38. ↑ Neustar (NSR) 10-K 2007, Item 1, Customers, pg. 6
39. ↑ Neustar (NSR) 10-Q Third Quarter Report, 2007, Part II, Item 1.A, Risk Factors pg.36
40. ↑ Carriers Roundup:AT&T, Verizon, Sprint, T-Mobile
41. ↑ Yahoo Finance Telcordia
42. ↑ VeriSign (VRSN) 10-K, 2007, Consolidated Statements of Operations, pg.107
43. ↑ Syniverse (SVR) 10-K, 2007, Consolidated Statements of Income, pg.69
44. ↑ Akamai (AKAM) 10-K, 2007, Consolidated Statements of Operations, pg.45
45. ↑ F5 Networks Inc. (FFIV) 10-K, 2007, Consolidated Income Statement, pg.43
46. ↑ Telcordia Number Portability Page
47. ↑ Neustar (NSR) 10-K 2007, Item 1, Contracts, pg.8
48. ↑ VeriSign Statistics