NeuStar's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.16.14 | About: NeuStar, Inc. (NSR)

NeuStar, Inc. (NYSE:NSR)

Q1 2014 Earnings Conference Call

April 16, 2014 16:30 PM ET

Executives

Dave Angelicchio – Head of Investor Relations

Lisa A. Hook – President and Chief Executive Officer

Paul S. Lalljie – Senior Vice President and Chief Financial Officer

Analysts

John F. Bright – Avondale Partners LLC

Sterling Auty – JPMorgan Securities LLC

Nandan G. Amladi – Deutsche Bank Securities, Inc.

Jonathan F. Ho – William Blair & Co. LLC

Will V. Power – Robert W. Baird & Co., Inc.

Matthew V. Roswell – RBC Capital Markets LLC

Joseph Stein – Wells Fargo Securities LLC

Operator

Good afternoon, everyone. Thank you for standing by. Welcome to the Neustar First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. After the prepared remarks, we’ll conduct a question-and-answer session. As a reminder, this conference is being recorded. For opening remarks, I will turn the call over to Mr. Dave Angelicchio, Head of Investor Relations. Please begin, sir.

David Angelicchio

Thank you and good afternoon everyone. Welcome to today’s conference call. Joining us today from Neustar are Lisa Hook, President and Chief Executive Officer; and Paul Lalljie, our Chief Financial Officer. Our call today will begin with comments from Lisa Hook and Paul Lalljie followed by Q&A.

Before we begin, I’d like to remind everyone that today’s discussion contains forward-looking statements based on information as of today April 16, 2014, and as such, is subject to many risks and uncertainties that may cause actual results to differ materially from those anticipated. Additional information concerning these risks and uncertainties can be found in our earnings release and our filings with the U.S. Securities and Exchange Commission, including our last annual report on Form 10-K and subsequent periodic and current reports. We assume no obligation to update any forward-looking statements.

As you listen to today’s call, we will discuss certain non-GAAP financial measures and supplemental key performance metrics. These supplemental materials and our non-GAAP reconciliations can be found under our Investor Relations tab on our website, www.neustar.biz.

With that, I’m pleased to introduce Neustar’s President and Chief Executive Officer, Lisa Hook. Lisa?

Lisa A. Hook

Thanks Dave, and thank you all for joining us this afternoon as we report our results for the first quarter. As you know, I usually begin by providing perspective on the quarter and our progress toward our annual goals before commenting on strategy. Today I intend to reverse this order. First, I’ll provide an update on the NPAC selection process; second, I will comment on our success in becoming a leading provider of real-time information services and analytics; and finally, I’ll turn to some highlights on our performance this quarter.

First, let’s address current status of the NPAC renewal process because I know this is top of mind for all of you. On March 27, the North American Numbering Council, or NANC, announced that it will follow the report to the SEC on the LNPA vendor selection process. This is just another step in what has become a long and delayed field process. The latest information available from the SEC is a letter dated April 11, sent by SEC Chairman, Wheeler in response to inquiries from Congressman Frank Wolf.

In this letter the Chairman said, and I quote, “the LNPA selection is important as you know and I am committed to a competitive fair entrance process. The commission is awaiting a recommendation from the North American Numbering Council on the LNPA selection procurement as well as an assessment of this selection process and we will carefully review that submission”. We concur with the Chairman that a careful review of this submission is absolutely essential.

The SEC has a responsibility to the American people to ensure that the vendor selection process is procedurally fair, and the competition within the telecommunications industry, from which consumers have so benefited over the past 17 years, is not now harmed by an outcome that favors large carriers over small carriers, subverting the very purpose of the 1996 Telecommunications Act regarding competition.

We will continue to make our voice heard as the process continues, not only because we have an obligation to our shareholders but also because as the stewards of Local Number Portability since its inception, we have a duty to inform regarding potential injury to carriers, to public safety and law enforcement and to consumers. We’ve participated in the LNPA vendor selection process, confident that an objective appraisal of our qualifications to continue managing the NPAC and the value of our proposal should place us in a strong position for renewal of the contract.

We continue to advocate that an additional round of bidding is necessary to evaluate objective with qualified vendors and to ensure that the NPAC contracts will be awarded to the vendors that offers the best value proposition to the industry and to American consumers.

Our focus is on continuing to offer superior service to the NPAC. We are at the same time also focused on NeuStar’s future as growth company. Since I became CEO we’ve been executing a strategy for growth, both on becoming a premier information services and analytics company. The focus of this strategy is a healthy diversification in the faster growing analytics services. We’re seeing this now as the NPAC business is becoming a smaller component of our overall revenue and our growth is driven by new initiatives.

In January we told you that our information in analytics businesses accounted for more than half of our revenue in 2013. These services are growing far faster than NPAC revenue.

Let me remind you how we got to this decision. In 2011 we developed a strategic plan to exploit our skills in managing authoritative data in real-time, moving those skills into the analytics space. We developed a multiyear execution plan focused on both operating growth and active balance sheet management.

As we told you in July 2011, we decided to use our strong free cash flow and sold balance sheet to return cash to shareholders and to build incremental high margin revenue streams. We’ve done what we said we were going to do. We’ve balanced $940 million of acquisitions with $790 million of buybacks. Our acquisitions have allowed us to manage actively our product portfolio in the analytics space, while at the same time divesting non strategic efforts.

I’m pleased to say that the services now comprise majority of our revenue, have grown 35% over the past three years. Marketing analytics market that we serve is estimated to grow double-digits annually. Our Marketing Services grew 21% this quarter and 18% in 2013. We are well positioned in this space with real-time offerings that enabled our plans to understand buying propensity of consumers at the point of interaction, augment with our media intelligence platform. These services help optimize advertising spend and increase conversion rates.

The cloud-based securities market is forecasted to grow double-digits as well. Our Security Services grew 11% this quarter, accelerating from 10% in 2013. We have state-of-the-art infrastructure with one-of-a-kind architecture that gives us the competitive advantage in this market.

We provide on-demand cloud-based protection with real-time alerting and detection capabilities, all backed by our seasoned professionals to manage our Security Operations Centers. These services help our client stay one step ahead of increasingly sophisticated cyber attack.

Finally, turning to our results for the quarter; revenue was up 6% to $229.9 million and adjusted net income per share was $0.84, an increase of 5% versus last year. Additionally, this past quarter we advanced our position in key markets. One significant initiative was the launch of PlatformOne, which adds a compelling dimension to our Marketing Services.

This platform creates a single interface integrating real-time customer and media insights with the tools to activate more tailored and personalized campaigns. This allows our clients to customize media spending plans, efficiently reach target audiences and improve performance and engagement across devices and channels. PlatformOne combines authoritative customer information with media insights, enabling marketers to drive increased reach and sales. It’s basically an easy button to help marketers quantify the value of their media expense both offline and online.

Also, during the quarter we’ve broadened our Securities Services business with the acquisition of.CO Internet, adding to our already impressive lineup of domain names. Since it’s global launch in 2010names under management for.CO Internet have grown to more than 1.6 million in over 200 countries and territories worldwide. We intend to grow this brand moving forward. This acquisition is a natural success and we expect another seamless transition. As we had previously had a partnership with.CO Internet to provide registry services and infrastructure support and have a long history of working with our new team.

Looking ahead, registry services will continue to be a growth area for us as we’ve been selected to provide services up to 350 new top level domains as a result of ICANN’s ongoing global domain name expansion. As you can see from activity this quarter, our focus is on a continued rapid growth, both organic and inorganic of our information and analytic services. At the same time, we will continue to compete vigorously to be chosen as the LNPA to the next NPAC contract. We know that we offer the best value for all of the stakeholders to rely on a fully functioning and reliable NPAC.

With that, let me turn the call over to Paul.

Paul S. Lalljie

Thanks Lisa and good afternoon everyone. In the first quarter, we generated revenue of $229.9 million, a 23% adjusted net income margin and $0.84 of adjusted net income per share. We acquired that field which expands our registry business and we continue to grow revenue for our primary revenue stream that is services outside of the NPAC contract. In particular, we’re pleased with the revenue growth in our marketing services and our security services.

Now for a closer look at revenue for the quarter. Revenue totaled $229.9 million, a $13.5 million increase over last year. In particular, Marketing Services revenue totaled $32.9 million, an increase of 21% driven by strong demand for our workflow solutions.

Security Services revenue grew 11% to $30.1 million due to the growth in DDoS protection services. And our Data Services revenue totaled $48.1 million, a 5% decrease, reflecting reductions in our caller ID and Common Short Codes revenue. Excluding this decline, Data Services revenue grew 13%. NPAC Services revenue totaled $118.8 million, an increase of 6% due to higher established fees under our contracts to provide NPAC services.

Moving on to expense. Consolidated operating expense totaled $174.6 million, an increase of 20% over the first quarter of 2013. A key driver across all of our expense categories is stock-based compensation, which increased $2.8 million due to employee performance based equity grants. In addition, the increases in cost of revenue was primarily driven by business expansion, in particular our platform addition and marketing analytics and overall investments in new services.

The increase in sales and marketing and G&A, included a $6.2 million spend to support the NPAC selection process while our R&D costs were lower reflecting the reduction in personnel and personnel-related expenses.

Adjusted net income for the quarter totaled $52.4 million or $0.84 per diluted share. Adjusted net income per share increased 5% year-over-year, driven mainly by benefits from 2013 share repurchase program and was partially offset by the increased spending I mentioned a short while ago. Headcount for the quarter totaled 1,553, certainly lower than the December quarter primarily due to the reduction in workforce related to restructuring.

Now turning to the balance sheet, we ended the quarter with cash of $386.5 million which included a $175 million drop from our revolving line of credit, revolving credit facility to pay for the.CO acquisition.

During the quarter, we spent $41.9 million to buyback 1.2 million shares at an average price of $34.85. We currently have $158 million remaining under the existing share repurchase program which we expect to complete by the end of the year. Additionally, capital expenditures for the quarter totaled $11.6 million and we expect the quarterly run rate to increase over the next few quarters as we build out facilities and improve our infrastructure.

Our total debt obligations at the end of the quarter totaled $793.8 million compared to $620.6 million as of December 31, 2013. This increase was attributable for the $175 million drawn from our revolving line of credit that we used to complete the acquisition of.CO which we closed on Monday. Our total debt-to-adjusted EBITDA ratio is 1.9 times. Our accounts and unbilled receivable balance totaled $166 million versus $163.6 million at the end of previous quarter. Our day sales outstanding was 62 days compared to 60 days in the December quarter. Accounts payable and accrued expenses totaled $76.6 million and our days payable outstanding was 41 days compared to 50 days in the December quarter.

Now for a discussion of guidance. Our first quarter results and the leading indicators such as sales performance, sales pipeline and our differentiated services give us confidence in the guidance we provided on January 29. Today we are affirming that guidance which calls for revenue to range from $945 million to $970 million. From a profitability perspective, adjusted net income is expected to range from $233 million to $243 million.

As I mentioned previously, we’d had been spending and will continue to spend in support of the NPAC vendor selection. Not withstanding this spend, we fully intend to achieve our adjusted net income guidance for 2014. Our adjusted net income for diluted share is expected to range from $3.64 to $3.80 and does not reflect future share repurchases. Our fully diluted weighted average shares outstanding are expected to be approximately $63.5 million. This estimate does not contemplate future share repurchases.

So in closing, our first quarter results reflect continued progress in our strategic goals and as you will see from the data we are now an information services companies. For example, our marketing services revenue grew 18% in 2013 to $126.2 million and that growth accelerated in the first quarter of 2014 to 21%. Our workflow solutions are a true differentiator in a market that is expected to grow double-digits. Our security services revenue grew 10% last year and 11% in the first quarter of this year in a market that is also expected to grow double-digits.

Essentially, we are positioned to go across the Board including services outside of the NPAC. In fact we expect our information services revenue stream to grow from $466 million in 2013 at a double-digit growth rate. We remain committed to achieving our long-term objectives and we have poised to capitalize on the fast growing markets with differentiated assets on the Fortune 500 customer base, while competing vigorously for the NPAC contract.

With that operator, we’ll open the line for the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from John Bright with Avondale Partners.

John F. Bright – Avondale Partners LLC

Thank you. Good afternoon, Lisa, Paul, I guess, Lisa first, other than the comments you made regarding the contract and Frank Wolf – the letter to Frank Wolf from the SEC the Chairman, are there any other new disclosures that we need to know about?

Lisa A. Hook

Yes, the only thing that we saw that was again filed in a docket was the letter from Wheeler to Congress indicating that as of the 11, they had not received anything from the Nancy and then the May 6 date.

John F. Bright – Avondale Partners LLC

So at this point and is it your expectation this is going to be an SEC, I guess, commissioner decision on a) whether or not to have another round or accept additional bids or b) to go ahead and make a decision?

Lisa A. Hook

Yes. We have said and then filed urging as you know for another round of bids and that this should be dealt with through public notice and comment at the commissioner levels office and at the staff level.

John F. Bright – Avondale Partners LLC

Let me move to a different question then. And this is I guess was on a lot of investors mind. With the impact contract decision outstanding, our investors I think have focused on the profitability of your non-impact business, I think Paul, you gave us some numbers in your prepared text calendar 2013, roughly $450 million with a double-digit growth rate on the non-impact business. So maybe you can characterize the profitability of that business on an EBITDA as well as maybe on an operating basis today and what you expect it might look like, what it could look like in calendar 2016?

Paul S. Lalljie

Yes. So let me first start out by making it clear that we do not have segments within our business. We operate as a one segment unit. Here is a disclosure that we have consistently made over the years. We only enter into businesses. When me look at review a business case or investments, when we look at new opportunities, we evaluate each of our businesses on their ability to achieve 35% to 40% EBITDA margins.

What I can tell you is that $456 million of all revenues outside of the impact in 2013, we believe as a management team, given the assets we have, given the markets that we play in with double-digit growth rates, given the growth that we are seeing today, given the customer base that we have, we believe that those businesses can grow at double-digit rate and achieve revenue of around $650 million by the time we get to the end of 2016, outside of the impact. We also believe that those businesses come with margins between 35% and 40% margins.

John F. Bright – Avondale Partners LLC

Okay. Now, let me able to ask to Paul, in your I guess 2012 10-K, you’ve broke down some segment profitability and I think you associated a disproportionate amount of it in – on the growth side with the carrier services. What has changed from that point or why was that number the right number?

Paul S. Lalljie

So a few things. Those numbers are the right numbers. However in the segment disclosure in the 2012 annual report I think it would be described as segment contribution, and then it would have indirect unallocated cost. If you look at the cost in NeuStar’s business we have functional back office meaning they are horizontal. So we have over 60% between 55% and 65% in any given calendar year of cost that are unallocated. If you look back at those income statement. Because carrier service was the foundation or the start of NeuStar. They had a little bit more direct cost if you will.

I maybe more specific here, when we acquired TARGUSinfo for example, we still had some of the TARGUSinfo costs that sell into back office and very little that sell directly to the NIS business.

In the Carrier Service area, we had more cost attributable to that piece of it, and then we had the unallocated portion. So if you look at the P&L you will see we had cost of revenue almost $100 million that was unallocated. In sales and marketing about $23 million, $24 million unallocated. So basically we had over $250 million of unallocated cost in 2012.

So to some extend given that large amount of unallocated cost, the segment contribution of carrier services does not represent a profit margin. It represents a margin after direct cost have been taken out of it. And given that we have a functional back office, all of the shared cost infrastructure, data center, facilities, none of those things are allocated to that margin. So it’s not a reflection of true profitability.

John F. Bright – Avondale Partners LLC

So if I take the assumption, if I make it the black swan of that assumption that you lose the contract, are they intangible, are they intangible and tangible assets that list our owns that you could monetize?

Paul S. Lalljie

I’m not sure, I’m following the line of question there, John.

John F. Bright – Avondale Partners LLC

Associated with the contracts, so do you have servers and maybe people and software that they are associated with that that could be monetizing someway?

Paul S. Lalljie

Absolutely I mean, so we do have a shared infrastructure and that infrastructure can operate, I mean in any of our businesses, and we fully intend to maximize all of our resources in any situation. Given – look at the end of the day John we have made it abundantly clear that we are the logical choice that provide the service. We have been doing it with excellent for 17 plus years. And we fully expect that we will continue to do this into the future.

John F. Bright – Avondale Partners LLC

Two final quick ones, one, does NeuStar’s impact business depend up on data from you gained from the impact?

Lisa A. Hook

No, you may recall that years ago the NAPM introduced the new churn of kind of NeuStar as a user. So we use one small component of data under our license that will be available to a third party. It’s not material to the business, we would imagine, if it’s were to truncation that the same third party user capability would exist, if it didn’t – it really wouldn’t matter but there is not a data cross over.

John F. Bright – Avondale Partners LLC

Last question, the rates of the quarter shocker, the caller ID and the common carrier short notes seem to be down in the quarter, Paul what’s going on there?

Paul S. Lalljie

So that’s conclusive with what we talked about on the full year 2013 results, when we provided guidance we had step-down in two of our 60 contracts for caller name, and we are just seeing the impact of that, that is a step-down that will impact 2014 of course, we hope to make up some of that as we win new businesses in the caller ID business.

Fortunately for us we have our head of sales who runs that group right now and he is promising that he can make some of this in New Year.

John F. Bright – Avondale Partners LLC

Thank you.

Operator

Thank you. And we go next to Sterling Auty.

Sterling Auty – JPMorgan Securities LLC

Yes, thanks hi guys. I apologize if I’m off on this, I’m on the road, so I don’t have the benefit of my full model in front of me. But it does seem like the non-impact business grew less than 10% probably because of Common Short Codes and caller ID. If that’s the case why should we think that that business is a sustainable double-digit grower in the future?

Paul S. Lalljie

So a couple of things, if we break it up by the segments marketing services, marketing services grew 21%, security services 11%, data services without that caller ID decline is a 13% grower.

Lisa A. Hook

And if I could just interrupt, also was being accelerating growth not decelerating growth?

Paul S. Lalljie

Correct, correct so and each one of those if you look at the full year numbers from last year they have accelerated from the fourth quarter and they have accelerated from the full year.

Sterling Auty – JPMorgan Securities LLC

Sorry, go ahead.

Lisa A. Hook

Go ahead.

Sterling Auty – JPMorgan Securities LLC

I was going to say, so in that data services, is that where the impact contract is, are you saying that 13% is outside of the impact just data services without caller ID and without Common Short Code?

Paul S. Lalljie

Correct, correct. And Dave, what’s the non-impact if you take the non-impact growth without the decline, is that 15%?

Dave Angelicchio

15%.

Paul S. Lalljie

That’s 15%, Sterling.

Sterling Auty – JPMorgan Securities LLC

And what component in there is driving back growth within that data services?

Paul S. Lalljie

There are few things that we have in data service that’s driving that. We have some of the order management, which we are calling the carrier provisioning services in that category. We have the international LNP, we have some of the traditional numbering stuff that you had before things like PathFinder. Some of this smaller services that you would have traditionally modeled as traditional growers and carrier services.

Sterling Auty – JPMorgan Securities LLC

And then one follow-up question. Let’s assume that whatever decision is made do not get instituted by the end of the existing NPAC contract, which I don’t think many of us believe is the case. What is in the existing contracts in terms of the spillover, just automatically have a one year rollover, in other words how, if once you surpass the deadline do you get an automatic kind of renewal amounts for months, a year, just so we could think about what additional cash flow from the existing contract might roll in.

Lisa A. Hook

So it depends on who – people get noticed to each other, people say, this is what we want. We continue to get paid basically under the existing contracts as long as we offer services. Then in addition we would have to negotiate transition services above and on top of that, so they would need to be a lot of discussion between us and the industry to understand how long we will continue to provide services, and then on top of that, what additional transition services we will provide.

Sterling Auty – JPMorgan Securities LLC

Okay, thank you guys.

Lisa A. Hook

It’s a player’s delight.

Operator

Thank you. We go next to Nandan Amladi with Deutsche Bank.

Nandan G. Amladi – Deutsche Bank Securities, Inc.

Hi, good afternoon, and thanks for taking my question. So, Lisa, you mentioned that you are trying to get another round of bidding, encourage the industry to do that. What are some of the things that you might ask them to address if they were to be in debate in another round?

Lisa A. Hook

Well. Yes, we think particularly based on the fact that now 300 carriers are both directly into their associations have expressed concern around transition planning that another round needs to be had to address what would a transition look like? How much would it cost, and what would the risk be? What is the services that we are offering versus the service that the other competitor intends to offer?

We’re concerned if they are not apples-to-apples, but perhaps apples-to-crabapples. It needs to address, this has been going on so long now and it’s been so delayed. But now the SEC is talking about transitioning to all IP networks and whereas the carriers are trying to affect the transition to IP networks within the next two years, but does it really make sense to transition to a new impact that would be less capable rather than transitioning directly to IP.

So we think that there are apples-to-apples comparisons that need to be done. The transition needs to be priced out and understood with respect to each carrier in the industry not just some carriers in the industry. And then the policy question is around whether the United States wants to retard its transition to IP and move backward or do we want to move directly to an IP environment.

Nandan G. Amladi – Deutsche Bank Securities, Inc.

Thank you. And a quick follow-up if I might for Paul on the buybacks, earlier you did a significant buyback and got $158 million I think left remainder of the year. The stock has clearly pulled back pretty hard relative to your average price on the last round in the first quarter. How should we think about the rest of the year?

Paul S. Lalljie

Well, we have 150 years left. It’s a price sensitive model depending on levels that a stock price we will buy more. Of course, this is done through 10b5-1 plan, so it has limitations on not buying it in the early parts of the day, not buying in the late hours of the day, and also it’s impacted by the average daily volumes.

So I can assure you that we will continue to be in the market buying back stock and at lower levels we buy more and higher levels we buy more. I really can’t be much more specific than that in terms of the amount that would be repurchased.

Nandan G. Amladi – Deutsche Bank Securities, Inc.

Okay. Thank you.

Paul S. Lalljie

Appreciate it.

Operator

Thank you. We go next to Jonathan Ho with William Blair. Please go ahead.

Jonathan F. Ho – William Blair & Co. LLC

Good afternoon. Can you guys provide a little bit more detail regarding some of the restructuring initiatives that you put into place and maybe how much you expect to save from those efforts over the course of the year?

Paul S. Lalljie

There are a couple of things, this is not meant to be an efficiency initiative. We took about $5 million out of it and move it from the P&L into restructuring charge for the first quarter. We do expect a little bit more in the second quarter. And this all has to do with the realignment and making sure that we have the appropriate skill set to match the objectives of the organization as we move forward.

So in some of these positions we will be replacing and in some of these positions we are making sure we have the right skill sets and the right functional job.

Jonathan F. Ho – William Blair & Co. LLC

Got it. And then in terms of your analytics business, can you talk a little bit about where you are seeing the most success today. What sort of supporting that the high growth rate and what’s causing some of the acceleration that you’re seeing?

Lisa A. Hook

We’re seeing it fortunately across the Board. So as we said in our prepared remarks, in Marketing Services and in Security Services, Paul just spoke to the growth rates in Data Services also being very healthy. Going back to Marketing Services, we are growing currently faster than the market is growing, because we’ve been able to put together a full workflow solution for the marketing department.

So what do I mean by that, budget is shifting from the CIO to the CMO. CMO’s are trying to be more data driven in their decision making than they have been historically. And yet from a CMO’s point of view their primary job is how I get more customers, how do I sell more to existing customers, and how do I keep customers from leaving me, right, they’re not the IT department.

So today you’ve CMO who are trying to make IP decisions, how do I buy a variety of different tools to permit me to acquire customers some order of existing customers and keep them from turning. They don’t want to be in the business of putting their IP together. So if you can create an environment, a single environment that the CMO can use to identify their existing customers, to segment them, to find more people who look like their best customers, to reach them cost-effectively, to manage their media spend in the middle of a campaign and then to tie sales offline and online back-to-back spend, all in one environment. That’s a really powerful tool, and that’s certainly announced with the launch of PlatformOne and we’re seeing a lot of excitement in the market around that.

On the Security side, denial of service attacks unfortunately for all of us continue to increase exponentially. So our site protect services are becoming more critical and financial services and online retail et cetera, et cetera, that’s becoming part of the whole set of brand protection services that we’ve got in the market and we’ll be spending more time on in future quarters.

But I’d say again, we’re really seeing both rates increase across the board. We would like to think that that’s partly as a result of us reorganizing into a functional organization, having now a world-class and highly focused sales group in the market really embedded in the customer base, a pretty dramatic increase in the quality of our product management skills. So a lot of the internal efforts that were put into place last year were, we would like to think have come to fruition over the past quarter and will continue to bear fruit.

Jonathan F. Ho – William Blair & Co. LLC

Great. Thank you.

Operator

We go next to Will Power with Robert Baird.

Will V. Power – Robert W. Baird & Co., Inc.

Good afternoon. I have a couple of additional questions. I guess, just coming back to the Nancy report at the end of March, do we actually know for certain if there’s a recommendation included in that or I mean, it seems like that’s the assumption or could that actually be a report on any number of subjects, any other color on that front?

Lisa A. Hook

We don’t know. There are – as you know there are a lot of rumors in the market. It has not been made public within the report. They were to address obviously as Wheeler said in his letter, they were to address the LNPA selection – the procurement itself, as well as an assessment of the selection process, but we do not know, because it’s not been made public by what is in the report.

Will V. Power – Robert W. Baird & Co., Inc.

Okay. And just any sense for your confidence that we actually get a decision of some sort or an update on May 6?

Lisa A. Hook

I only can tell you is that the date that they’ve put out there.

Will V. Power – Robert W. Baird & Co., Inc.

Okay. And then I guess, Paul, and maybe I missed this, on the 2014 guidance reaffirmed, but you also have the acquisition in there of.CO is that included in the guidance?

Paul S. Lalljie

Yes. We’ll update guidance on the second quarter. The.CO acquisition was closed two days ago. So because of the subscription based assets, subscription based business if you recall you would take a – let’s say it’s a three-year subscription for the three-year cash in the balance sheet and amortized pieces of it. When you acquire companies like that you lose deferred revenue and purchase price accounting.

So let’s assume this company has an excess of $20 million of annual revenue. We will only record anyway around $8 million. We’re still going to add purchase price allocation process, but we’ll update it fully and also we’ve made a disposition of one of our smaller international OMS contracts.

So that’s about a $4 million, so net-net we will make the adjustment for the additional $4 million when we get to next quarter or whatever that number is as we do to purchase price allocation.

Will V. Power – Robert W. Baird & Co., Inc.

Okay, yes, that makes sense and it’s helpful. And then I guess just final question from me, the Security Services business, can you just touch on what the real key drivers in the quarter were for the growth, I mean is that DDoS or is it across the Board, any further color there?

Paul S. Lalljie

It’s primarily our DDoS Protection Services. And also in data services we have our domain names and specifically our.biz,.us,.co, our portion of it before we acquired it, that portion of it. So we saw strong growth in DDoS Protection Services there.

Will V. Power – Robert W. Baird & Co., Inc.

Okay. Thank you.

Paul S. Lalljie

My questions are more specific than we said.

Operator

We’ll go next to Matthew Roswell with RBC Capital Markets.

Matthew V. Roswell – RBC Capital Markets LLC

Yes, just some quick follow-up questions. I think you mentioned NPAC also spending was about $6 million in the quarter, do I have that number right, and should we think about that, is that real run rate going forward until we hear something?

Paul S. Lalljie

Well, $6.2 million is the number. I don’t know that while counting that as a run rate as we go forward, I mean, if there isn’t May 6 decision, we may have some spend that we have to do on contract negotiations if it’s May 6 type decision or if it takes longer than we may need to spend more. So it’s hard for me to tell not knowing when the final date is, but we will definitely break that out in each of our communications and I believe give you transparency into what that is.

Matthew V. Roswell – RBC Capital Markets LLC

And then switching to the buyback, is there anything that would preclude you from buying back stock either immediately before or immediately after a decision on the impact contracts?

Paul S. Lalljie

So essentially we have a problematic 10b5-1 plan in place right now under 10b-18 rules, so we can buyback irrespective of what the company is going through or whether we have material on public information and things like that. So the current – currently we have $158 million left on that program, and that program can buyback irrespective of what’s going on. What we may not be able to do is put a new program in place immediately after or something like that. But we – that is something that we’re very focused on.

As you know, we are committed to returning cash to shareholders and we will continue to evaluate those things and the opportune time we will take advantage of putting plans in place or make decisions in capital allocation.

Matthew V. Roswell – RBC Capital Markets LLC

Okay. And just a final one if I may, how should we think about the tax rate for the full year?

Paul S. Lalljie

Tax rate is roughly around 36%, this quarter is 35.9% and full year 2013, it was in the fourth quarter of 2013 it was probably around 34% but that was a little bit of an anomaly. So 36% is a good working assumption.

Matthew V. Roswell – RBC Capital Markets LLC

Okay, thank you, very much.

Paul S. Lalljie

I appreciate it.

Operator

Thank you. Our final question will come from Joe Stein with Wells Fargo.

Joseph Stein – Wells Fargo Securities LLC

Hi, thanks for taking the question. Just for the sake of entertaining the downside scenario with the NPAC contract. Could you give us an idea what leverage level you’d be comfortable operating at?

Paul S. Lalljie

So from an organization perspective, we have not set leverage levels or target levels or anything like that. Maybe about a year ago we’ve said that we generally like around 2.5 turns, I don’t know that we both Lisa and I have the comfort level to go much above that type of stuff. But it’s all situation based right, remember we have – today we generate close to $300 million of – $275 million to $300 million of free cash flow, and we will be in that type of cap generation mode, I would say at least mid 2015.

So we do have time to react, I think we need to delever it during that period of time or depending on how fast the non-impact businesses grow. I do think we are in good shape given the numbers that we have in the books currently.

Joseph Stein – Wells Fargo Securities LLC

Great, thank you.

Paul S. Lalljie

Appreciate it.

Operator

That concludes today’s question-and-answer session. I will now turn the call over to Ms. Lisa Hook for closing remarks.

Lisa A. Hook

Thank you all so much for joining us on today’s call. As we said we are focused on our future as a growth company and we’ll continue to compete vigorously to be chosen as the LNPA for the next NPAC contract. Looking forward to updating you all on our progress as we go along, thank you.

Operator

Ladies and gentlemen this does conclude today’s conference. We thank you for your participation.

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NeuStar (NSR):Q1 EPS of $0.84 misses by $0.05. Revenue of $229.9M (+6.2% Y/Y) in-line.