NeuStar, Inc. Q3 2009 Earnings Call Transcript

 |  About: NeuStar, Inc. (NSR)
by: SA Transcripts


Welcome to the NeuStar, Inc. third quarter Investors’ Conference Call. The Company’s release made earlier today is available from its website at During the presentation all participants will be in a listen-only mode. Afterwards, securities, analysts and institutional portfolio managers, will be invited to participate in a Question and Answer session. (Operator instruction) As a reminder this call is being recorded, Tuesday 27 October 2009. A replay of the call will be accessible until midnight 3 November by dialing 888-203-1112 and entering conference ID 7740020, International callers should dial 719-457-0820. An archive of this call will also be available on the NeuStar website at

I would now like turn to conference over to Brandon M. Pugh, Senior Director for Finance in Investor Relations of NeuStar, Inc. Please go ahead sir.

Brandon M. Pugh

Welcome to our third quarter 2009 earnings call. Joining us today from NeuStar, Inc. are Jeffrey E. Ganek, Chairman and Chief Executive Officer and Paul S. Lalljie our Chief Financial Officer. Our call today will begin with comments from Jeffrey E. Ganek. Then Paul Lalljie will follow with the discussion of our financial performance, after which we will open the line to questions from qualified investors and research analysts.

Before we begin, I would 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 deviation 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 31 December 2008 and its other subsequent and current periodic report filed with the US Securities and Exchange Commission. NeuStar, Inc. assumed no obligation to update any forward-looking statements.

As you listen to today’s call we will discuss certain non-GAAP financial measures. We encourage you to have our press release in front of you, which can be found at our Investors Relations website and includes our financial result, metrics, and commentary for the quarter and the reconciliation of certain non-GAAP measures with the most directly comfortable GAAP measures. You will find additional disclosures regarding non-GAAP measures under the Investor Relations tab on our website including reconciliation of these measures with the most directly comparable GAAP measures.

With that, I am pleased to introduce NeuStars, Inc.’s Chairman and Chief Executive Officer Jeffrey Ganek.

Jeffrey E. Ganek

Welcome to today’s conference call. We are pleased with our results for the third quarter. This year market conditions were challenging and uncertain. Nonetheless, with our strong position and business model, we produced solid financial results that met and in some cases exceeded ambitious goals. Concurrently we are focused on building a solid foundation for growth in the future when the economy improves.

Let me provide an overview of our results for the third quarter. Consolidated revenue totaled a $117 million, resulting in an EBITDA margin of 43% and a net income margin of 21%. Our performance shows NeuStar’s ability to sustain solid profits and high cash generations are also growing the top-line sequentially. This is an important point to note, we managed spending efficiently, while still producing revenue growth in each of the last two successive quarters.

Let me comment on our revenue performance and the associated market demands we are seeing. Overall, customer demand has continued to show positive signs as indicated by growth in LNP transaction volume this quarter. Demand for LNP services continues to grow. The primary source of the growth was the increasing utilization of our impact services by network operators to better optimize their networks. And part services served these requirements quicker, cheaper and better than any alternatives. Revenues from these LNP services which account for about 60% of our overall total revenues is contractually defined and provides us with a predictable, compounded annual growth rate of 10% through 2015.

Most recently we also saw good growth in our non-LNP businesses and specifically from NeuStar Ultra Services. Our customers rely on our Ultra Services to meet their needs for reliable DNS services and enhanced IP network performance, improved security and provide for better scale efficiencies.

In the first quarter of this year market demands for NeuStar’s Ultra services were slow. We saw some signs of stabilizing demands in the second quarter. During the third quarter we continued to add customers, existing customers upgraded to higher rate plans and internet traffic continued to increase. As a result we are happy to report that in the third quarter Ultra’s revenues were 22% year-over-year. In addition, we believe the metrics of growth for NeuStar’s Ultra services indicate a good trajectory for the remainder of the year.

Next let me comment on our profitability and cash generation. Our profits are both sustainable and steady. We have a predictable revenue team augmented by a growing subscription base service and scalable infrastructure that supports growth. Our cost structure and business model provides the operating leverage and flexibility to spend strategically, enabling us to meet our ambitious profit goals, even as we grow. Strategic cost management, lower hours for the business, contributes to our profitability.

For example, in the third quarter, we continued to restructuring of our NGM business segment, aligning our resources for slower growth in the mobile IM market. The result is a more cost-effective NGM organization, keeping us on task to meet our stated objective of being EBITDA neutral during the fourth quarter of 2009. In NGM and other areas of the business, we continued to drive cost efficiencies. Good example includes relocation of some of our operations to more cost-effective geographies, where we have access to skilled labor pools. These initiatives will help to lower our ongoing operating cost while we maintain high customer service.

Now I would like to talk about how we are positioning the business for growth in the future. We continue to see and believe that internet protocol or IP as an emerging and complex technology in the telecom and internet industries. We believe that in the future IP world, the networks’ need for services provided by our reliable hub will be even greater, than they are in the existing voice world.

NeuStar has attracted neutral provider of a central infrastructure routing services, will enable the industry to meet its emerging needs for IP functionality. We already have unmatched capabilities in IP infrastructure, our first-comer position enables us to advantageously seek leadership of the emerging market.

As you know, the NeuStar directory plays a primarily role in routing all telephone calls in North America. All telecoms service providers interface with and depend on the directory. So their technical, operating and cost-advantages to addressing emerging IP challenges by leveraging on NeuStar’s existing strengths.

For example, earlier this year, the network operators, determined to include IP routing information in the NeuStar LNP directory. As of today, functions for three IP applications, voice, SMS, text and MMS have been implemented and are operational. Early test and demonstrations of the directory’s new IP capabilities are today being run by the leading-edge network operators.

Demand for IP directory services are in early embryonic stages. Volumes of IP transactions in the NeuStar directory will be modest until the market matures and grows. However, we believe that by making the IP capabilities available early to all of our customers via interfaces they already rely upon, we will therefore be in key position to serve those customers in the future when larger IP requirements emerge.

Our IP position also continues to grow in Ultra Services. As I discussed earlier the volume for revenues grew here in the third quarter and this year’s uncertain market, we strengthen Ultra Service, sales and distribution capabilities. Our enterprise and internet service provider customers now depend upon us for IP traffic management security and monitoring services. We are well-positioned, capitalizing on increased demands as we continued to strengthen Ultra Services capabilities.

Now let me take just a minute to discuss our strategy for use of cash. Our current cash position is strong and we expect to continue producing cash. Managing our balance sheet and evaluating use of cash strategies remain priorities. There will be opportunities to reinvest into the Company for future top line growth and we have demonstrated with share buybacks in the past, our concern for shareholder value. We continue to see uncertainty in the financial markets so we have not decided to do any further stocks buyback and issue dividends at this time. We will continue to monitor the market and exercise careful judgment as we evaluate future use of cash.

Let me summarize, our third quarter results prompted us to refine our revenue guidance and increased our EBITDA margin guidance. During 2009, we produced sequential revenue growth primarily driven by our non-LNP services. We believe NeuStar’s third quarter growth demonstrates that near-term revenues growth prospects are tangible and predictable. In the long-term we expect long-term revenue growth to continue in our existing services that have established positions and demonstrated performance.

Also in the future, we will look in our developing IP capabilities for additional incremental revenue growth. Profitability and cash flow remained our key areas of focus today and our scalable business model provides ample room for investment and spending flexibility so that we can grow the business profitably.

With that, Paul Lalljie our Chief Financial Officer will review the financials and the business from his perspective.

Paul S. Lalljie

Revenue for the third quarter totaled $117.2 million with net income of $24.5 million and EBITDA of $50 million. Cash, cash equivalent and short-term investments totaled $303.2 million at the end of the quarter. These results demonstrate our continued focus on delivering strong profits and cash flows while positioning the business for growth. Let me discuss some of the details behind the numbers starting with revenues.

As we have pointed out previously our contracts to provide telephone number portability services in the US are now 60 contracts which called for lower revenues in 2009 versus 2008. We believe that this innovative change to our revenue model done in January 2009 and benefits us in the uncertain market conditions we are in and more importantly it positions us for further innovation, particularly in the services we offer.

So for third quarter, our revenue from these contracts totaled $71.3 million and revenues from our non-LNP services totaled $45.9 million, growth of approximately 9% year-over-year. Consequently, consolidated revenue for the quarter decreased $6.6 million or 5% from the third quarter of 2008.

And now for a closer look at revenue by category. Addressing revenue totaled $32.1 million, down $300,000 or 1% from the third quarter of 2008, driven by a decrease of $2.8 million in LNP revenue. This decline was primarily offset by an increase of $2.5 million from Ultra services, as we continued to sign up new customers and upgrade the services of our existing customers.

Interoperability revenue totaled $13.9 million down $2.3 million or 14% from the third quarter of 2008, driven by a decrease of $900,000 in LNP revenues and a decrease of $700,000 from our NGM services. Infrastructure revenues totaled $71.1 million down $4 million or 5% from the third quarter of last year; this was driven by a $6.5 million decrease in LNP revenues. Additionally, revenue from our NGM business segment which is captured in our interoperability and infrastructure revenue categories totaled $3 million compared $3.6 million for the third quarter of 2008.

In summary, the modest decline in total revenue for the quarter was driven primarily by our amended LNP contracts with continued growth from our non-LNP revenues, particularly Ultra Services and Domain Name Registry Services. As we gauge the business for the future our key performance indicators are positive and provide solid momentum. We continued to observe strong demand for our LNP services and as Jeff mentioned we are working closely with our customers to develop innovative services, particularly in the area of internet protocol.

]For the non-LNP services that have provided revenue growth this year, we continue to see favorable traction, sales cycles are improving, customers churns are reaching normal levels and bookings are beginning to increase.

Now for our discussion of expenses. Operating expenses for the quarter totaled $76.8 million, a decrease of 2% from $78.6 million for the third quarter of 2008. This decrease include a $2.7 million restructuring charges for our NGM business segment for which there was no corresponding charge in the third quarter of 2008. The decrease also reflects improvements in business processes in our clearing house business segment, particularly in operations resulting in efficiencies and reduced ongoing cost.

Now for discussion of cost by category. Overall we saw cost reductions in each of the expense categories except sales and marketing. Cost of revenue in R&D reduced primarily as a result of the NGM restructuring. Sales and marketing increased to $20.4 million from $17.9 million in the third quarter of 2008, reflecting our increased focus on building out a sales force with breadth and reach, specifically through broader sales channel and improved brand identity.

G&A for the quarter decreased $13.5 million from $15.4 million in the third quarter of last year, primarily driven by reduced personnel and personnel-related expenses. This reduction was primarily due to a $1.7 million decrease in stock-based compensation, principally related to our 2007 performance vested restricted stock units. And of note operating expenses excluding depreciation and amortization in our NGM business segment totaled $5.5 million compared to $11.8 million in the third quarter of 2008. This decrease reflects the extended restructuring of this business.

Now for a view of selected balance sheet items beginning with cash. Cash, cash equivalent and short-term investments totaled $303.2 million, as of 30 September, compared to $267.5 million as of 30 June and $161.7 million as of 31 December 2008. Capital expenditures for the third quarter totaled $7.2 million and accounts receivable at the end of the quarter totaled $64.3 million compared to $63.9 million for the June quarter and $72.6 million as of 31 December 2008.

Before I move on to our guidance discussion, let me provide some metrics that our investors and analysts may find useful. For the third quarter, stock-based compensation totaled $1.9 million net of a $2.2 million reduction related to performance-vested restricted stock unit granted in 2007. US Common Short Codes under management at the end of the quarter totaled approximately 3,000 a decrease from approximately 3,200 in the third quarter of 2008. Domain names under management totaled approximately $4.1 million, an increase from the approximately $3.8 million in the third quarter of 2008.

Now let me move on to a discussion of our guidance for the year. Given our year-to-date financial results, the improving trend on our Ultra Services business and our customers increasing demand for our services, we have refined our revenue guidance and increased our EBITDA margin guidance. Specifically, full year 2009 revenue is expected to exceed $475 million and EBITDA margin is expected to exceed 42%. This compares to the previous guidance provided on 28 January which calls for revenue to range from $460 million to $490 million and EBITDA margin to exceed 40%.

In addition, capital expenditure for the year is expected to range between $25 million and $35 million. Our effective annual tax rate is anticipated to be approximately 40%. And our fully-diluted weighted average shares outstanding are expected to be approximately $76 million for the year. We have followed through on our intent-to-manage the business for strong profit.

Given the economic uncertainty earlier this year, we delivered on our profit goals because of the cautious spending plan. We see long term revenue opportunity, we have spent and we anticipate spending in the short-term to capitalize on those opportunities. Said differently we may invest in the business for future growth as opportunities arise and this may results in increase expenditures in one fiscal period for incremental revenue in another. Our guidance for 2009 contemplates such investments.

So to conclude, we have successfully executed in the first three quarters of 2009, especially given the economic recess we have all experienced. Our performance speaks to our focus on cost management and generating strong cash flows while investing in innovations. We are positioned to take advantage of the recovering economy, settings us up for a long-term earnings-per-share growth, and increasing shareholder values.

That concludes our formal remarks. Operator you may now open the call for questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Daniel Meron with RBC Capital Markets.

Daniel Meron - RBC Capital Markets

Congrats to ongoing execution. Can you provide us with more color and the dynamics in the Ultra business and also in a Common Short Codes and Domain Names? If you can just spend a minute there on how are the prospects shaping up into year ending to 2010. Thank you.

Paul S. Lalljie

In the Ultra Services business in the third quarter, we generated revenue of approximately $13.7 million. That represented roughly around 22% on a year-over-year basis. Incremental revenue was approximately $2.5 million. On a sequential basis, that resulted in a 6% sequential growth. Now, let us keep in mind that the customers that we serve in the Ultra Services business are somewhat customer-based that is correlated with the economy and that is correlated with the market place that is somewhat reduced.

What we have seen in the first half of the year were more to the lengthening of the sales cycle, a lot of deals are going to higher level sign offs within the organization. In the third quarter, I think we have seen somewhat of a reversal of that trend. We have seen the pipelines, the funnels, the sales funnels increasing. We have seen the renewal rates and customer churn levels stabilizing in that business. Today, we have over 3,000 customers in the Ultra Services business.

On the Common Short Code business, we still to continue to see somewhat of a correlation with the economy. It is not rebounding as quickly as the Ultra Services business has been rebounding in the third quarter. We still see somewhat of a lagging there as advertising spend and mobile marketing spend has been somewhat slower to adapt to the recovering of the economy.

Jeff, is there anything else you would like to add to that?

Jeffrey E. Ganek

Sure. A couple of high level points to consider. First of all, after some moderated growth earlier in the year, we saw a resurgent plus 20% growth in Ultra this past quarter. Let us put that in the perspective of the overall economy. We believe that we have maintained and perhaps, improved our competitive position that while slower growth earlier in the year gave cause for concern. We think we are stronger relative to alternatives than we were a year ago.

In the Common Short Code business, our customers there are in the media and advertising business while we have seen results better than might have been expected. We think there are still some difficulties in the economy that we are facing. We think when the economy turns around; we are likely to see improved growth in Common Short Codes.

Daniel Meron - RBC Capital Markets

Just a follow up, can you provide us with a little bit more insights on the dynamics in 2010? What kind of growth rates should we expect of the non-number portability related businesses, in your view?

Jeffrey E. Ganek

So, we have not provided any guidance on 2010. We are in the process right now of doing our budgets and plans for next year. Let me be frank, we saw muted growth in the first half of this year. We have seen better performance in the third quarter. We are hopeful that, that kind of market dynamism will continue on to next year.


Our next question comes from Phil Winslow from Credit Suisse.

Phil Winslow - Credit Suisse First Boston

Just a question about the fourth quarter here vis-à-vis I am looking at your applied guidance for the quarter, with the full year, seems like you are implying that these results step up quarter-to-quarter, I wondering if you can give us a little bit of visibility into how are you thinking about that build up for Q4?

Paul S. Lalljie

So, there are a couple of things. Over the past couple of quarters, one of the things we have been doing is investing in new services, particularly, in the area of our internet infrastructure group or what we refer to as Ultra Services in this revenue area. We expect to see an uptick in revenue in this service area during the fourth quarter as we continue to sell new services to augment the bundled offering that we have. Not just external DNS Service, not just the DNS Advantage Service that we have but more along the lines of business analytics and intelligence around data for internet trafficking and for routing data associated with domain name traffic. So, that is one area in particular.

In relation to that, we have the functionality upgrades and the changes. So our number portability database that we do as part of the local number portability contracts, we refer to those as SOWs or Statement of Work. We expect to see some revenue coming in that area also in the fourth quarter. Those are more functionality upgrades and revenues that are associated with particular development effort that we have in the pipeline and [internet lines] in the fourth quarter.


Our next question comes from Tom Ernst of Deutsche Bank,

Unidentified Analyst for Thomas Ernst – Deutsche Bank

Last quarter, you have talked about investing and distribution channels and your new planning effort; it does [funnel] a bit. Can you provide us more details on what progress you have made both graphically and specifically on the structure of channels?

Jeffrey E. Ganek

Sure. Good question. To the public, perhaps the most graphic evidence is in the change of our logo of our Company colors. So, all of our signs and all of our stationary are changed. That is merely cosmetic. The reason we invested in that is our logo was 10 years old when we designed the original one. We wore the telephone number, local number portability Company, NeuStar is far more than that already today.

We are very, very active in IP markets. Merely 40% of our revenues come from sources other than the impact. Our aspirations are for the very fast growth outside of our existing phase business. It was time for a new graphic logo. And it was time to make sure that our customers that our fast growing employee base understood the full scope of our existing operations and the ambitions. We took care of that and it has been very effective.

At the same time, we have particularly in the Ultra Business, strengthened our sales and customer support organizations. We have formalized and strengthened our processes to manage sales delivery and customer support. We have seen very positive results as we monitor the sales process from lead generation all the way through final closing and delivery of services. We think that, that is going to be the basis for growth. We are going to have the distribution capability needed to serve a larger number of customers with a broader product line in the future when prosperity picks up in the market place.

Representative for Thomas Ernst – Deutsche Bank

Just a quick follow up, if I might. For NGM, what are your expectations? I know you have talked about being EBITDA- neutral for this year. Are you continuing to invest in that business too? So that when the economy does recover, you can bounce back.

Jeffrey E. Ganek

Here is where we are with NGM. We have managed that business so we are EBITDA-neutral in this quarter. With that level of constrained spending, we have 37 large mobile service operators around the world to depend upon us for their mobile instant messaging service.

We have the platform, the technical product capability, that our customers believe is the best in the marketplace. We have not lost any of our customers to competitors with the leaders worldwide in infrastructure that mobile operators depend upon for this innovative IP application.

That fact is, especially, with the global recession, market demand for these kinds of services has grown slower than we and most analysts have expected. If and when, there is a pickup in market demand for these services, we have got the best product with the broadest worldwide footprint.

We are being cautious in projecting growth. We want to see action in the marketplace before we start to invest. And quite frankly, we are in a good position to do that. We do not need to spend to get past anybody. We are the leaders.

Before we leave this topic, I think Paul has something to add here.

Paul S. Lalljie

Jeff, I just wanted to be lucidly clear on this that we are expected to be EBITDA-crossover in the fourth quarter, not neutral for the quarter itself. We are going to exit the year at an EBITDA breakeven state and we expect to be EBIDTA breakeven as we move forward.


Our next question comes from Sterling Auty with JP Morgan.

Sterling Auty - JP Morgan

Let us go back to the guidance for the fourth quarter. So if your DNS was $13.7 million in the third quarter, even if you are back to really good sequential growth, let us say in the double digit that you show. So, looking at the step up, it still seems like a real big step. Statements of Work in the past, I think has contributed a couple million here and there. Is there enough just in that to get you to the new guidance level? Or can you also talk about the embedded credits in terms of the new contract if the industry actually going to earn all of the credits or some of the fourth quarter guidance? Actually some of those credits not being earned and that is part of the revenue result that you expect.

Paul S. Lalljie

So there are few components here to discuss earnings. The first component is the Ultra Services Group that has a new service line that will contribute to revenue growth in the fourth quarter, signed customer contracts that will deliver revenue that was not present in the first, second and third quarters. Then, there is the Statement of Work that has to do with A-core business and local number portability business. That is two.

Then, in addition to that, we have growth in some of our non-LNP services such as customer converged-addressing services and Mobile IP in particular. When you put those things together, you get to a run rate that is significantly higher than we were in the third and the second quarters.

Sterling Auty - JP Morgan

Okay. So the credits will all be earned for the year then.

Paul S. Lalljie

We expect the credits to be fully earned for fiscal year 2009.

Sterling Auty - JP Morgan

The follow up question is, when you talk about the increased spending in one quarter to spur the future. I know you are not giving 2010 guidance but are you also kind of setting the expectations as you look at, you got the contract that gives you such good visibility and top line. Are you still talking about maybe increased investment as you move into the new year to fuel some of the new businesses that perhaps you bring on especially as it relates to, perhaps, potential new fields that the industry might want besides the three data fields that are currently in the impact?

Paul S. Lalljie

Sterling, I think you hit the nail in the head there. I mean, we are targeting investing innovative services in areas such as IP, such as new services that our customer wants. In particular, this refers to both the fourth quarter and as we exit the fourth quarter. One of the things that we have mentioned all along is our investments in sales and marketing. We have to turn around and have sales being generated more from inbound sales versus all outbound sales. We have lead generation. We also are required to do development and do product development, product marketing, to have new services in the marketplace so that we can augment revenue.

That statement or that comment that we are making around spending in one quarter for revenue in future quarters has more to do with long term nature, the way we think about managing margin, the way our thought process is channeled with respect to margins and managing the business for growth.

Our primary focus is to grow our revenue.

Jeffrey E. Ganek

We can do that by investing in the business, by investing in new services, by investing in future revenue as we go out.


Our next question comes from Shaul Eyal with Oppenheimer and Company.

Shaul Eyal - Oppenheimer and Company

I am a little late for the call, so the question might have been asked already. I just kind of want to hear your view as you guys know, just a few weeks back; ICANN and the Department of Commerce in a way terminated their long ongoing project, long ongoing agreement. How many of you guys, who are so kind of ultra DNS, trying to step in to this kind of agreement in a way? Did you see things that are positive from your end?

Jeffrey E. Ganek

You know what; we have prospered under the ICANN administration. We worked very well with franchises we have from ICANN as well as registry franchises we have from the United States Department of Commerce. We are supporter of ICANN and overall we believe that ICANN is doing a good job in overseeing the governments of the naming of processes and structures for the internet. There have been and currently are controversies and challenges. ICANN does not have an easy job managing internet issues on a global basis.

But in general, we think that our registry franchises are secure, that our technology and operating records reflect high qualities of reliability and security. As a result, the ICANN community as well as other government agencies within the internet world will continue to rely upon new startup player or central role.

We think that there is a natural evolution going on in the internet governance. It is not surprising to see the change in the US government role. And we look forward to working with the evolved ICANN.


Our next question comes from Tom Kucera with Avondale Partners,

Tom Kucera for John Bright - Avondale Partners LLC

First Paul, just a bookkeeping question, did you give the revenue numbers for Common Short Codes and Domain Names?

Paul S. Lalljie

No. We did not. Revenue for Common Short Codes is approximately $7.3 million and for Domain Names that is approximately $6.1 million.

Tom Kucera for John Bright - Avondale Partners LLC

Jeff, I have a question about uses of cash. You mentioned sources of uncertainty in terms of approaching a buyback or dividend. I am just wondering, given the stability of your business model, over $300 million in cash on a balance sheet now. What I guess really the sources of uncertainty you are concerned about? Or otherwise what would it take for you to look more seriously to buyback?

Jeffrey E. Ganek

Well, first of all, there has been a material improvements and conditions in the financial markets overall. I certainly hope that those conditions extend into 2010 and beyond. I am not certain of that. We continue to watch the financial markets. We believe there is some future uncertainty on the financial market side. On the other hand, there are and will be opportunities for new store to invest in the existing business especially in the face of uncertain financial market conditions. We want to make sure that we are in the position to take advantage of investment opportunities as they emerge.

Having said all that, the best word I can apply to our considerations of uses of cash is prudence. We do not have any specific investment that we are currently far along in deciding to make. Then, we are watching our opportunities very, very carefully applying the best judgment possible. The most important criteria to how we spend the cash are improvement in shareholder value.


Our next question comes from Katherine Egbert of Jefferies

Katherine Egbert – Jefferies & Co.

I am wondering how you are doing an actual transaction counts. In the end of 2010, I think there is possibility that it would actually see some up side to revenue based from those transactions. Is that valid?

Paul S. Lalljie

Probably not, Katherine, I think for the first and the third quarter, we did about 99.2 million transactions which is roughly around 4%. Generally, we do not expect to be above the upper band or the ceiling that would generate incremental revenue. So, it is not that we anticipate, we expect this trend to continue somewhere between 99 and 100 for the rest of the year. We do not expect to be above that band.

Katherine Egbert – Jefferies & Co.

How about next year?

Paul S. Lalljie

We are still working through that process with our customers in terms of what their expectations are and what our expectations are.

Katherine Egbert – Jefferies & Co.

One thing I trying to get at is the iPhone is open to other carriers beside AT&T. You could see a lot of porting. Have you guys considered that?

Jeffrey E. Ganek

We certainly could and that is one example. The fact that transactions have the impact, Katherine, can continue to grow quickly. There are all sorts of reasons why transaction volumes are continuing to grow as IP applications as demonstrated by the iPhone emerge and proliferate, there is more and more transactions that come our way.

We have not provided any guidance for 2010. We are in the middle of our budget planning process right now and we will be back to you and the market in relatively short amount of time with our view of the future.


Our next question comes from Jonathan Ho with William Blair.

Jonathan Ho –William Blair and Company, LLC

Can you guys talk maybe about whether you saw strength in any particular geography and offer a little bit of additional color on sort of the competitive position improving in that business?

Jeffrey E. Ganek

So, the majority of sales in that business are in North America. We continue to see lots of growth there but there is no particular strength or weakness in any region. At the same time, while working off in a smaller base, we grew in Asia and in Europe. We expect that there will be opportunities for further growth across all Ultra markets worldwide.

Competitively, Ultra serves a set of customer needs that really have little or no precedent and they are not embedded standard solutions to customers’ requirements for IP traffic management for IP traffic monitoring, for IP traffic security of the kind provided by our Ultra offerings especially in the recessionary time of the last 12 months. We have not seen emergence of competitive alternatives to our offerings. In fact, what we have seen is constraints on customers’ spending in house and an increased look on the part of CIOs and customers for outsourced transaction volume-based priced services that provide basic infrastructure required.

It turns out that our in the cloud traffic management security and monitoring capabilities fit the business model that enterprises prefer in difficult economic times. We think we are further ahead of the competition now than we were a year ago.

Jonathan Ho –William Blair and Company, LLC

Just as a follow up, in terms of some the OpEx savings that you guys are seeing from restructuring and reduction in costs. I mean, I know you guys relocated a facility to Kentucky, I believe. Have we seen the full benefit of that? Or shall we expect sort of further savings in the fourth quarter?

Brandon M. Pugh

There are a couple of things. The restructuring of the NGM business, we said in the 8-K that we published that it is going to be roughly around $5.5 million to $6 million. In the third quarter, we have recorded $2.7 million of that $5.5 million to $6 million, we expect to record some more direct to business in the fourth quarter. As we exit the year, the Kentucky relocation is going to be a little bit of an increase in cost as we try to have the dual location in the fourth quarter as we build out and start to do our relocation there.

So, I do not expect anything from the Kentucky stuff in the fourth quarter. But as we get in to the back half of next year, the second half of next year and we get that facility up and running, we expect to realize some efficiencies out of that and savings on an ongoing basis.


Our next question comes from Scott Sutherland with Wedbush Securities.

Scott Sutherland - Wedbush Morgan Securities Inc.

I have a couple of questions here. First of all, that is your guidance. Is there anything that is one time in nature or maybe temporary in nature that will not be recurring in the next year? Do you think this momentum continues into next year?

Brandon M. Pugh

Yes. I mean the Statement of Work is generally one-time in nature, Scott. We have probably had less than one Statement of Work in any of the last three years. Meaning, it overlapped across years. This year we have one that ended early in the year. We have one that is going to be, that struggling the fourth quarter and a little bit into the third quarter.

So, I would say that the Statement of Works is definitely something that is not crossed over. Some of the Ultra Services revenue that we recognized in the fourth quarter that has to do with new service offering are somewhat one-time in nature because there, as we roll out new services, we tend to as we would do in any of our services, have set up fees and one-time fees that, depending on the life of the contract, you could have most of it in the fourth quarter.

Scott Sutherland - Wedbush Morgan Securities Inc.

Okay. In any credit reversals would be additional up side to that guidance. Could you give us an update on the telephone number, how is that progressing?

Brandon M. Pugh

Scott, the count on the telephone numbers in our directory is probably a little more sophisticated for my simple mind to explain. It is a not a number that we have and it is a yearend test that we will do and will advice you of that then. I would agree that, that will be an upside to the numbers that we have projected today. You know, set differently, we have our forecast for revenue that we use to build our guidance and to produce our guidance that has scaled into the 475 without the revenue credit if you will.

Scott Sutherland - Wedbush Morgan Securities Inc.

Okay. Since I am gone last year, I just a couple of more questions hopefully rounded out. Can you give us the operating income or operating loss in the NGM unit? Or maybe any update on the Pathfinder Service?

Brandon M. Pugh

So, I will be able to deal with NGM question and Jeff will comment on the Pathfinder Service. EBITDA without the restructuring is about $2.6 million and that is a loss. If you take the restructuring charge into consideration, it is a 5.5 number.

Scott Sutherland - Wedbush Morgan Securities Inc.

What was the depreciations and amortization in that segment? D&A in that segment?

Brandon M. Pugh

It is about $1.9 million.

Jeffrey E. Ganek

The Pathfinder Service is, as we have discussed before, up and operating on a global basis. We have an increasing number of customer contracts. The number of those contracts exceeds the plan that we have set for this year. I think most exciting is that we are seeing customers working with us to develop new and very exciting applications to be run on the platform. Perhaps, the most exciting is our Port of Call Service which delivers on a global basis routing capabilities that effectively do number portability worldwide.

This is an embryonic service; it is up and operating today with few customers. And we continue to be guarded and conservative in projections of revenues from Pathfinder. We think it is the only service of its kind out there. We think we have an early start in attracting the necessary critical mass community of network operators worldwide. We know we have got strong technology and a growing, growing menu of applications that rival would have driven growth on our platforms in North America on the Impact and on the Registry and Ultra platforms as well.

We think this is going to merge as a global IP platform. Look for substantial results in the future.


There are no further questions, sir.

Jeffrey E. Ganek

Great. I appreciate everybody calling in and taking some time to listen to the results we have had here at NeuStar. Third quarter was a strong one for us. We delivered sequential revenue growth and very strong profit and cash generation. At the same time, even while generating profit, we have been able to invest in product and in operations that will be the foundation for growth into the future.

We are happy in our position and optimistic with our prospects. With that, everyone, please have a good evening.


Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may now disconnect.

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