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. 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. In 2009 the company announced that it would 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.
While it generates recurring revenue from its telephone numbers management, 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.
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.
Neustar is a provider of clearinghouse and directory services for the global communications and Internet industry. Its core business is allocating telephone numbers and providing network management services under seven contracts with the North American Portability Management LLC, an industry group that represents all telecommunication service providers in North America. Its customers, whether they are large telecommunications service providers such as Verizon Communications (VZ), AT&T (T), and Sprint Nextel (S) or emerging communications service providers such as Internet service providers, mobile network operators, cable television operators, and voice over Internet service providers, all have to access its clearinghouse in order to properly provide their own services to their customers. Neustar is able to maintain and renew its database contracts with its customers because of its service designs that emphasize reliability, scalability, security and neutrality.
First Quarter 2010 Results
Neustar reported an increase in revenue of 14% from the first quarter of 2009 to $129.0 million. Net income totaled $25.2 million, compared to $24.4 million from the first quarter of 2009. Earnings per diluted share of $0.33, compared to $0.32 per diluted share from the first quarter of 2009. EBITDA totaled $52.1 million, compared to $48.0 million from the first quarter of 2009.
Interoperability services consist of wireline and wireless number portability and order management services. Neustar's wireline and wireless number portability let service providers allow their users to change their telephone carrier without changing their telephone numbers. In addition, service providers use this service to change the network identification associated with their end users’ telephone numbers after a merger or consolidation. Order Management Services provides centralized clearinghouse services that permit customers, through a single interface, to exchange essential operating data with multiple CSPs in order to provision services.
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.
Cisco reported that the consumer VoIP traffic will grow at a compound annual rate of 24% through 2012. CSPs are looking to upgrading their infrastructures to provide IP-based services because the voice-over-IP (VoIP) migration is less costly for telecommunication and also able to integrate multiple services together. 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.
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.
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. 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). 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.
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.  Moreover, it is fairly well diversified because none of its customers accounted for more than 10% of its total revenue in 2007. 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.
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. 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.
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.
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