NeuStar Bounces Back Despite Reducing Margins

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TECHNOLOGY TRADER: NeuStar's New Number by Bill Alpert

Highlighted companies: NeuStar Inc. (NSR)
Summary: Database operator NeuStar Inc. (NSR) runs the telephone industry's clearinghouse for phone numbers, reassigning numbers when companies merge and due to customer requests. Since going public in June 2005, its stock price has climbed 70%. 2005 revenues were $243m, and earnings were $55m ($0.72/share). On Thursday the company announced it had agreed to a 10% cut in the fees phone companies pay it, in exchange for a 4-year contract extension through 2015. Initially shares fell 14% ($4) Friday morning, but by the close, they were down just 2%. CEO Jeff Ganek says transaction volumes will grow fast enough to compensate for the discounts. Most brokerage firm analysts agreed; some even raised its rating. Since May, some speculators have been heavily shorting the stock on the advice of analysts who see NSR's 40 P/E multiple as inflated, and speculate that the 'big companies' will initiate and win a legal battle with the NSR over how they pay for its services. They criticize Friday's announcement, noting that a firm who renegotiates its contract when it still has five years left is, "not in a very strong position."

NSR 1yr Daily Chart

Quick comment: Link to Friday's press release • SEC 8-k filing • Light Reading: Competition Didn't Cause Fee Cut • . It's fair to say that there's a divergence of opinion about what NeuStar's price cut augurs.