Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Brandon Pugh – IR

Paul Lalljie – Interim CFO

Jeff Ganek – CEO

Analysts

Katherine Egbert – Jefferies & Company

Tom Ernst – Deutsche Bank

John Bright – Avondale Partners

William Power – Robert W. Baird

Philip Winslow – Credit Suisse

Jonathan Ho – William Blair

NeuStar, Inc. (NSR) Q4 2008 Earnings Call February 10, 2009 5:30 PM ET

Operator

Welcome to the NeuStar conference call discussing fourth quarter and year end 2008 earnings call. The company's release made earlier today is available from its website at www.neustar.biz. (Operator Instructions). I would now like to turn the conference call over Mr. Brandon Pugh, Director of Finance, and Investor Relations at NeuStar; please go ahead, sir.

Brandon Pugh

Good afternoon everyone. Welcome to our fourth quarter 2008 earnings call. Joining us today from NeuStar are Jeff Ganek, Chairman and Chief Executive Office and Paul Lalljie, our Interim Chief Financial Officer .

Our call today will begin with comments from Jeff Ganek . Then Paul Lalljie will follow with a discussion of our financial performance after which we will open the line to questions from qualified investors and research analysts.

Before we begin, I’d like to remind everyone that some of the information discussed on this call including our projections regarding revenue and EBITDA for the coming year contain forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in the statements and we cannot assure you that our expectations will be achieved or that any deviations will not be material.

Additional information concerning these risks and uncertainties can be found in the company’s Annual Report on Form 10-K for the year ended December 31, 2007, and other subsequent and current periodic reports filed with the US Securities and Exchange Commission. NeuStar assumes no obligation to update any forward-looking statements.

As you listen to today's call we encourage you to have our press release in front of you, that can be found on our Investor Relations website. This document includes our financial results, metrics, and commentary for the quarter, as well as the reconciliation of certain non-GAAP measures with the most directly comparable GAAP measures.

With that I'm pleased to introduce NeuStar's Chairman and Chief Executive Officer, Jeff Ganek.

Jeff Ganek

Thanks Brandon, welcome to today's conference call. I am please to speak with you this afternoon about NeuStar’s fourth quarter performance and 2009 outlook.

The current recession is the first we faced since becoming a public company. I can report to you that we've taken action to ensure that we prosper through the recession and that we are positioned for strong growth in the future when the economy turns around.

For the immediate turn we have made visibility and certainty of a revenues key priorities along with prudent spending. Our focus is on strong profitability and cash flow well we grow as fast as market conditions allow. For the longer-term we are positioning NeuStar for growth in the markets turn up, that is, we are strengthening our existing unmanaged customer relationships, we are strengthening our essential high-quality reliable services and we are laying the foundation for new innovative services that will be essential to future IP networks.

Let me first discuss our high-level results for the fourth quarter and for the full year 2008. Paul Lalljie, NeuStar’s interim CFO will provide you with further details after my prepared remarks.

Revenue for the full year 2008 grew 14% demonstrating solid growth in a volatile market environment. Under our contracts to provide telephone number portability services in the United States transactions grew 17% from 2007. This growth in transaction volumes gives evidence of the strong demand for our services.

With the revenue growth we managed strong profitability absence of fiscal year 2008 impairment charges related to NGM, net income for 2008 grew 17%, and we continue to generate large amounts of cash. This performance is evidence of the strength of our business and focused management. Over all our performance and results in 2008 demonstrate that NeuStar operates in growing markets where we have strong footholds with competitive advantages increasingly in the area of the IP.

Our business has operating leverage that allows for both growth as allowed by market conditions and cost management. Let me expand on that, two weeks ago we announced changes to the contracts under which we provide telephone number portability in the United States. This amendment changed our impact pricing from a transaction-based model to an annual fixed fee with annual escalators.

The fixed fee provides contractually guaranteed revenues that will grow at a compounded annual rate of 10% through 2015. We now have improved visibility into and predictability for a significant portion of our business. The amendments also strengthens our prospects for additional growth from new innovative services. It provides incentives for the industry to gain further utility from NPAC through use of the first IP fields to be included in NPAC.

It also incents the industry to put additional telephone numbers into the database with a IP capabilities and a larger population of telephone numbers, NeuStar has unmatched capabilities that will be key to serving emerging market requirements for trusted reliable provider of directory services IP will depend upon.

Those capabilities build on our existing strengths, that is the NPAC is today the hub infrastructure that all US operators connect to for essential data, so we already have the largest community of users. The new amendment incents the industry to expand its use of the existing NeuStar infrastructure by adopting the first of many IP fields in the near term.

As our customers utilize the first three IP fields it will be operationally and economically beneficial and easy to develop additional IP fields in the NPAC. As a result NeuStar will have opportunities for future revenue growth beyond the fixed fee amendment. The future of communications is in IP technology. Outside of the NPAC NeuStar is already a leading IT directory provider for Internet traffic via our trusted globally deployed DNS infrastructure.

In 2008 our ultra services and registry services had very attractive growth rates over 2007 of 43% and 24% respectively. This growth demonstrates market demand and our ability to serve it. Customers across an array of industries including e-commerce and social networking depend on us for reliable management of their IP traffic. This is a market with high growth potential.

Additionally the Pathfinder platform is emerging as another leg of the IP future. Pathfinder provides essential routing and related information across the world's voice and IP networks. Our partner in Pathfinder is the GSM Association which represents nearly 800 mobile operators serving more than 3 billion handsets. Pathfinder is positioned to attract the largest community of networks worldwide that will require IP directory services.

So we have increased visibility for basic business revenues, we have strengthened our position for growth in future IP markets. Concurrently we have adjusted our NGM, or next generation messaging operation so that it conforms to the constraints of the global economy in 2009 and to our position in the market.

We will get NGM to positive EBITDA as soon as possible. Our plan is to get it done no later than the end of this year. Let me explain our position here, growth in market demand for the innovative NGM services has come slower than we expected. In response we have taken steps to reposition be NGM business to meet the demands of the sizable mobile data market as well as drastic action to put spending in line with our 2009 opportunities.

As a result prospects for immediate growth are dampened and we've taken an impairment charge. In December of last year we've reorganized the NGM segment to deliver significant cost savings this year with streamlined operations, NGM will focus on its unmatched customer base of existing large mobile operators across Europe and Asia. We will maintain and strengthen those relationships by delivering existing and promised products with quality, reliability, and responsiveness.

In the future when market demand reemerges we will be positioned as a global leader in serving customers needs for infrastructure essential to IP services such as mobile instant messaging. But for now we will be very prudent in spending here until demand is tangible. Now let me discuss our cash position, strength of our business has produced strong cash flows. We have virtually no debt. In 2008 we demonstrated our commitment to shareholder value with a sizable share buyback program.

Continue to consider opportunities to deploy cash in the interest of shareholder value. But current economic and credit market conditions present great uncertainty. Therefore we have decided not to do an additional share buyback at this time. We will reconsider the financial markets and our position later in 2009 to determine the best use of our cash.

To close NeuStar’s 2008 results showed growth and strong profitability. Today NeuStar is what a high growth tech company should look like in a recession. With strengthened revenue growth visibility we are focused on profits and cash managing costs with discipline, and we are building strength a new IP capabilities that will be key to material additional growth in the future. Today is notable for us here at NeuStar. Jeff Babka, our CFO for the last four years is leaving. His contributions to NeuStar have been great. Perhaps his greatest contribution has been the development of Paul Lalljie. With all Paul has learned in his 10 years at NeuStar he is now ably serving as our interim CFO. We are fortunate to have Paul continue without interruption, the competence and effectiveness that Jeff brought to us.

Jeff has my admiration, my thanks and all of our wishes for the best of luck. I will now have the call over to Paul for his comments.

Paul Lalljie

Thanks Jeff and good afternoon everyone. I am pleased to be with you to wrap up discussions on what was a strong year. As Jeff pointed out revenue for the year grew 14%, earnings before impairment charges grew 17% on a one dollar basis, and 21% on a per share basis. We generated more than $167 million of cash from operations demonstrating our high operating leverage. All in all a good year in a deteriorating market environment.

In essence we ended the year with a strong foundation for moving through the uncertainty facing not only our industry but virtually all companies in the coming periods. Capping off to finish 2008 was the January amendment of our NPAC contracts which adds the benefits of revenue certainty through fixed fee pricing. It is a good time to have visibility and certainty with respect to so significant a portion of our revenues.

Let me move to some specifics, first in the income statement followed by the balance sheet and some elaboration on the guidance we provided on January 28. Now for a look at the income statement and starting with revenue, revenue for the fourth quarter totaled $127 million, a 5% increase from the fourth quarter of 2007. In particular, addressing revenue for the quarter totaled $36 million up $8 million or 30% from the fourth quarter of 2007.

The largest components of this growth was delivered by NeuStar ultra services which increased by $3.4 million due to the expanded range of DNS services we provide. Revenue from national pooling transactions increased $2.9 million and common short codes increased $1.1 million. Inter operability revenue totaled $50 million down to $3 million or 19% from the fourth quarter of 2007. This decrease was due primarily to a reduction in number of transactions under our contracts to provide telephone number portability services in the US and Canada.

Infrastructure revenue amounted to $77 million up $1 million or 2% from the fourth quarter of last year. This growth was from increased NPAC transactions driven by network management activities. Summarizing our fourth quarter results, our overall revenue growth was driven primarily by increase revenue from NeuStar ultra services, and revenue from national pooling transactions. Importantly we believe that the 5% growth we were able to achieve in the fourth quarter was substantial given the very strong comparable quarter we had in 2007 where revenue grew 32% over the prior year quarter.

Now for a discussion of revenue on a full year basis, total revenue for 2008 was $489 million, up 14% from 2007 primarily driven by infrastructure transactions from the NPAC. This accounted for $36 million of this increase as well as increased revenue from ultra services, common short codes and NGM services. Our total annual revenue grew 14% and this is significant particularly given our shortfall in the NGM business segment.

Now moving on to expenses, global OpEx for the quarter totaled $165 million. Included in this amount is a non-cash $65 million goodwill impairment charge and a non-cash $18 million charge for the impairment of long-lived assets both of which relates to our NGM business. Absent these to non-cash charges total OpEx for the quarter would have totaled $74 million or a decrease of 1% over the fourth quarter of 2007 and a decrease of 6% when compared to the third quarter of 2008.

In addition OpEx for the quarter included a $1.7 million restructuring charge relating to our NGM business. This charge was described in our SEC filings of December 8 of last year. Overall the company continued to reduce costs and increase efficiencies in the fourth quarter. As a result experienced high operating leverage. Absent a non-cash impairment charges fourth quarter net income would have been $32 million or $0.43 per diluted share representing a 25% net income margin.

This compares to a net income of $30 million or $0.37 per diluted share for the comparable quarter in 2007 representing net income margin of 24%. On a full year basis OpEx total $420 million compared to $280 million in 2007. This increase includes the two non-cash goodwill impairment charges, $29 million in the first quarter of 2008 and $65 million in the fourth quarter plus an $18 million in non-cash charge for the impairment of long-lived assets.

Absent these three non-cash impairment charges, total OpEx for 2008 what have been $310 million. This would have resulted in a net income of $108 million or $1.42 per diluted share representing growth of 17% over 2007 net income or a 21% increase over net income per diluted share for 2007.

I will now move on to a discussion on selected balance sheet items beginning with cash, cash, cash equivalents and short-term investments end of the year at $162 million. In addition we had $31 million in long-term investments and with no debt we move into 2009 in a strong an enviable financial position. As of December 31 our accounts receivable balance was $73 million and deferred revenue totaled $44 million.

For the year we generated approximately $167 million in cash from operations, spent $25 million in CapEx and repurchased $125 million of NeuStar stock. Now let's we discuss our guidance for the year which we provided on January 20, 2009, that is for revenue to range between $460 million and $490 million and for EBITDA margin of at least 40% on a full year basis. Our amended NPAC contracts announced on January 20 provide NeuStar with a reliable certain recovering revenue stream of what currently amounts to more than 60% of our business.

Gross prospects for non-NPAC revenues are also strong. Today our pipeline and leading indicators are strong, that is we have not seen a reduction in our days to close sales, in usage, in churn, or an increase in bad debt. However conditions in the market and the economy are uncertain at best. Prudent management requires that we have a plan in case market conditions worsen. In recognition that market conditions could severely constrain our growth from non-NPAC services, the low end of the revenue range represents revenue from non-NPAC services in 2009 but is flat as compared to 2008.

We are confident that we can produce EBITDA margins of at least 40% even if market conditions worsen. We will manage costs to reach the EBITDA target or any level within the revenue range on a full year basis. And while we are not giving quarterly guidance let me point out that EBITDA margin for the first quarter of 2009 is expected to be lower than 40% because of the impact of the amended contracts on the sequential revenue.

For some additional assumptions that a number of our investors may find useful, CapEx for 2009 is expected to range between $25 million and $35 million, our effective annual tax rate is anticipated to be 40%. Fully diluted weighted average outstanding shares is expected to be 77 million for the year. In conclusion we are pleased with our financial performance in 2008. We have continued to increase operating leverage and as a result have generated strong cash flows, with our amended contracts a strong leadership team and a reorganized business we are confident that we can achieve the guidance we provided on January 20, 2009.

That concludes our formal remarks, we are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Katherine Egbert – Jefferies & Company

Katherine Egbert – Jefferies & Company

I just want to clarify on the guidance, did you say you are going to be on the lower end of your previous revenue range for 2009?

Jeff Ganek

No, I was adding some color as to be EBITDA margins. We were going to do 40%, we are promising 40%, at least 40% EBITDA even if revenue comes in at the low end of the range and at the low end of the range we are saying that the non-NPAC services would remain flat, growth year-over-year would be flat.

Katherine Egbert – Jefferies & Company

So you are reiterating the 460 to the 490?

Paul Lalljie

Yes.

Operator

Your next question comes from the line of Tom Ernst – Deutsche Bank

Tom Ernst – Deutsche Bank

On your emerging segments, on the number portability side how is your pipeline for international projects?

Jeff Ganek

We as you know are the local portability provider in Taiwan as well as Brazil, there is activity in various countries around the world where they may choose and establish a local number portability provider, for example in the UK and India we are monitoring those situations. As I have said on these calls in the past we believe that national local number portability franchise is but one way and not the only way, maybe not even the best way to extend our services across national borders and worldwide. In fact our pathfinder platform and franchise with the GSM association may be a more potent strategy towards worldwide expansion.

But to directly respond to your question we are monitoring local number portability franchise opportunities, none of those is imminent.

Tom Ernst – Deutsche Bank

On the DNS side where are you seeing the major initiatives and is the macro environment actually helping or hurting?

Jeff Ganek

Our DNS business, the registry business, grew at a good rate last year. There is talk within the [Ican] community of introduction of new Internet domains. We are active in those considerations and if [Ican] gets around to deploying or establishing new domains we expect to be a prominent player. Perhaps more important is the growth we are seeing in our ultra-business where we are providing DNS and related services to enterprises worldwide. That business grew at a very a very fast rate last year but we see that there is continued unmet demand on the part of e-commerce and complex Web services providers, for traffic management, for load balancing, for security and as a result our revenues grew 40% in 2008 over the prior year.

We have a brand-new management team who has organized our sales distribution channels. We believe that providing Internet infrastructure services to users of the Internet is a material growth opportunity for us, one where our position provides competitive advantages that are unmatched in the marketplace.

Operator

Your next question comes from the line of John Bright – Avondale Partners

John Bright – Avondale Partners

On the ultra, any sense and feel thus far into the first quarter on how that business is performing and what impact you are seeing from the recession on ultras business.

Jeff Ganek

That's a good question because all of our businesses, that's the one where we are monitoring customer activity on a day-to-day basis, monitoring it because we have never run this business through a recession before. Everybody should be concerned about a fast-growing revenue stream like this in today's economic situation. Remarkably not only did the ultra team produce remarkable 40% growth in 2008, but current activity in that business appears to be on track with what we saw last year.

We don't see a lengthening of length of time it takes to close a sale, we are seeing growth in new customers and we are seeing existing customers upgrade their services. Again I couldn't be happier with the results that we've got, on the other hand it would be foolish to blindly presume that the market is going to sustain that kind of support for the rest of this year. But we are doing everything we can to get as much growth fair as possible.

John Bright – Avondale Partners

On the operating expense side both R&D and G&A seemed to be down sequentially a meaningful amount, any comments there on what's taking place, where is your headcount at this juncture and any concern on particularly not investing on the R&D side.

Paul Lalljie

On the R&D portion of the business as we've announced in December 8 we did some restructuring to our NGN business that was a reduction primarily in R&D, the first tranche of it if you will. Headcount at the end of the year, we exited the year at 966 on a headcount basis and both G&A and R&D are expected to trend downwards as we get into 2009. Additionally in 2009 there was a little bit of reduction in stock-based compensation due to the intrinsic valuation of our stock. So generally R&D and G&A are expected to go down. We are continuing to focus on R&D but a very not in the NGM business only in the clearinghouse business.

John Bright – Avondale Partners

Could you provide some metrics associated with the non-transaction business, how many common short codes, domain names, NGM subscribers, along those lines and maybe the revenue associated with those.

Jeff Ganek

Let me start from common short codes we have generally around 3000, domain names just under 4 million and NGM subscribers approximately 400 million in total.

John Bright – Avondale Partners

The 400 million subscribers is that the customer base?

Jeff Ganek

Yes.

Operator

Your next question comes from the line of William Power – Robert W. Baird

William Power – Robert W. Baird

Around the next generation messaging business did you give us the revenue number for that?

Paul Lalljie

Now I did not, for the fourth quarter it was $3.9 million and our full-year basis it was just around the $15 million approximately $15 million.

William Power – Robert W. Baird

It sounds good that the plan to try to get the EBITDA positive, can you give us a sense sort of put that into context may be where you exited the year, with the Q4 EBITDA loss would have been and then as you move through 2009, is the expectation on the revenue side given the dampening economic impact of that business will be kind of flattish on the top line.

Paul Lalljie

One of the things that we are doing there is first of all restructuring the business for the 37 customers that we have to date. We do have 37 customers, we are providing services for them and we are managing the business on a cost basis to provide that to the 37 customers. More importantly the plan we are working towards is to have the same 37 customers and come to break even or crossover break-even before we exit the year 2009, so it does not require, it's a plan that does not require us to go out and sign additional customers to get to break even.

On an operating loss basis for Q4 we are approximately $11 million.

Operator

Your next question comes from the line of Philip Winslow – Credit Suisse

Philip Winslow – Credit Suisse

Given the new contracts can you discuss your longer-term goals for operating margins beyond 2009?

Jeff Ganek

We believe, not we believe the new NPAC contract has contractually guaranteed fixed fee revenues that grow 10% compounded annually from 2009 to the end of the term in 2015. In addition we expect there will be incremental revenue growth from new advanced IP and other fields that will be added to the NPAC over these next six years. We will have an opportunity to charge incrementally to our customers beyond the fixed fee.

And with that level of guaranteed and expected revenue growth we are confident of our ability to maintain margins comparable to our current levels, we have not provided guidance or even targets beyond this year but our general aspiration is to produce similar kinds of margins into the future.

Operator

Your next question comes from the line of Jonathan Ho – William Blair

Jonathan Ho – William Blair

With regard to transactions growth can you give us a little bit of color on the spread between the different segments and what the drivers were this quarter relative to that performance.

Paul Lalljie

In the fourth quarter we had approximately 100 million transactions spread across the addressing interoperability and infrastructure category. In the addressing category we had transactions generated from what we call pooling transactions and the spread there was approximately one third with probably 50% of the remainder going to the infrastructure category.

Jonathan Ho – William Blair

Can you give us some color on widespread may have changed versus the prior quarter, was there anything unusual or one-time, how should we think about the is an impact.

Paul Lalljie

Generally the spread between these three categories are driven by the types of activities that our customers are doing at that particular time. Generally the national pooling transactions or the pooling transactions are driven when there are new entrants in the marketplace, when they are new members joining the telephonic business and requiring an inventory of telephone numbers. Recently we have seen end in the past that the infrastructure transactions where carriers use our services to manage their networks and to make changes within their networks being the predominant use if you will with competitive pooling which goes into the interoperability category being relatively steady and stable.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Jeff Ganek

I want to thank everybody for joining us today and as I said before here is the message we'd like to deliver today, our 2008 results showed growth and strong profitability. We are want a high growth tech company should look like in a recession. We have increased visibility into future revenues, we are managing costs very tightly and we are accelerating the pace of our advancement into the next generation of IP technology and we are doing that in the context of a strong profitable and cash-generating plan.

With that let me one more time thank Jeff Babka for all he has done and to congratulate Paul Lalljie on the big shoes he is filling here in the great job he has done so far. Everybody have a good evening, thanks for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NeuStar, Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts