NeuStar CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: NSR
by: SA Transcripts

NeuStar, Inc. (NYSE:NSR)

Q2 2011 Earnings Call

July 27, 2011 4:30 pm ET

Executives

Brandon Pugh – Senior Director, Finance and IR

Lisa Hook – President and CEO

Paul Lalljie – CFO

Analysts

Nandan Amladi – Deutsche Bank

John Bright – Avondale Partners

Daniel Meron – RBC Capital Markets

Scott Sutherland – Wedbush Securities

Dan Cummins – ThinkEquity

Saket Kalia – JP Morgan

Vincent Lin – Goldman Sachs

Jonathan Ho – William Blair

Stephen Beckert – Robert W. Baird

Operator

Please standby. Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NeuStar Second Quarter of 2011 Earnings Conference Call. The company’s release made earlier today is available from its website at www.neustar.biz

During the presentation, all participants will be in listen-only mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question-and-answer session. (Operator Instructions)

As a reminder, this call is being recorded today, Wednesday, July 27, 2011. A replay of the call will be accessible until midnight, August 3rd by dialing 877-870-5176 and entering conference ID number 5629974. International callers should dial 858-384-5517. An archive of this call will be also available on the NeuStar website at www.neustar.biz.

I would now like to turn the conference call over to Brandon Pugh, Senior Director of Finance and Investor Relations of NeuStar. Please go ahead, sir.

Brandon Pugh

Thank you and good afternoon, everyone. Welcome to our second quarter 2011 earnings call. Joining us today from NeuStar is Lisa Hook, President and Chief Executive Officer; and Paul Lalljie, our Chief Financial Officer. Our call today will begin with comments from Lisa Hook then Paul Lalljie will follow with a discussion of our financial performance, after which we will be – will open the line to questions from qualified investors and research analysts.

Before we begin, I’d like to remind everyone that today’s discussion contains forward-looking statements based on the environment as we currently see it and as such are subject to many risks and uncertainties that may cause actual results to differ materially from those anticipated.

Additional information containing these risks and uncertainties can be found in today’s press release, in our quarterly report on Form 10-Q for the quarter ended March 31, 2011 and our other current periodic reports filed with the U.S. Securities and Exchange Commission. 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 by revenue categories, headcount and additional expense detail. This information, including reconciliation to the most comparable GAAP measures, can be found under the 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 Hook

Thanks very much, Brandon. And thank you for joining us as we report our results for the second quarter 2011. I’ll start this afternoon with some perspective on the quarter and the company’s overall strategic direction, then our Chief Financial Officer, Paul Lalljie will walk you through our results in detail.

Our second quarter results which were solidly in line with our expectations reflect our sharpened focus on innovating and growing our businesses while building new revenue streams. Compared to the second quarter of 2010 revenues were up 16% overall to $147.7 million, driven primarily by the NPAC, Internet Infrastructure Services and Order Management Services. EBITDA from continuing operations increased 6% to $64.6 million, up 44% margin.

Looking at our revenues from a segment perspective, carrier services and enterprise services grew 13% and 23%, respectively. Cutting revenues a different way, NPAC Services revenue grew 14% in the quarter and represented approximately 62% of total revenue. Revenue from non-NPAC Services represented the remaining 38% of total revenue grew 19% from the second quarter of 2010.

We’re well-positioned to capitalize on opportunities to drive even stronger revenue and earnings growth in future. For each of our businesses we have rolling three-year product roadmaps, which are designed to build incremental revenues organically and as opportunities arise through acquisition.

As you saw earlier this month, we’ve closed on numbering asset acquisitions from Evolving Systems. This acquisition underscores our ongoing process to sharpen our strategic focus and to enhance our competitive position. This asset strengthens our core business while squarely within our core competency and fulfill solutions that were already on our product roadmap for internal development. We welcome the team in Denver and we are excited about the people and the capabilities we gain with this acquisition.

The Evolving Systems acquisition enhances new source ability to leverage our existing strategic assets and core competency. Directory services for addressing, policy management, authentication and analytics. This acquisition has two significant strategic benefits.

First, it increases our market share in Order Management Services, a key on-ramp to the NPAC for our carrier customers and broadens our reach with additional top tier operators. Second, it brings us a telephone number to inventory management service called NumeriTrack that allows us to offer new analytics capabilities to our carrier customers. This is a centralized system that gives operators a much needed capability to store, assign, track and manage their inventory of telephone numbers.

For example, a carrier can analyze its inventory to determine based on geography, service or customer type, when they are likely to exhaust their existing supplier numbers and to trigger an order for more. We’ve been talking to our customers about this new and enhanced capability that came with the Evolving Systems numbering assets and the response has been extremely enthusiastic.

Our combined customer base is encouraged by our ability to offer broader solution, in fact in the three weeks since closing the deal, two existing customers have placed additional orders and further opportunities have been added to the sales pipeline.

With the acquisition of the numbering assets of Evolving Systems and last year’s Followap acquisition are examples of how we are executing our disciplined strategic framework to drive shareholder value both for attractively priced bolt-on acquisitions with a clear strategic fit and near-term earnings accretion both have low execution risk.

I’m pleased to report that the integration, the numbering assets is proceeding very well. The transaction closed July 1st and since then all customer data has been migrated over to our system, all customers support has been integrated and all employees and marketer joined NeuStar have done so.

To be clear on the prospects for any future acquisitions, we will pursue acquisitions and spaces that are near adjacencies to our current businesses. As I noted, the recent acquisitions we’ve made have represented opportunities to accelerate our product roadmap by buying capabilities we would otherwise have built.

We will continue to be extremely disciplined in terms of our assessment of potential acquisitions strategic fit, execution risk and financial criteria including near-term earnings accretion. Paul will walk through the numbers in more detail but I want to note that are consistently strong free cash flow and our solid balance sheet gives us substantial flexibility both to returning cash to shareholders and continue to build incremental high margin revenue streams.

In addition, as a result of the 2009 NPAC renegotiation and a recent SEC ruling related to our debt we now have substantially greater freedom to issue debt and to determine the most appropriate structure for our balance sheet.

We will continue to repurchase shares under our current authorization and are evaluating our capital structure and capital allocation framework to ensure that we are maximizing value for shareholders. We’ll have more to say on this topic by the end of the year.

Now, let me turn it over to Paul and we’ll take your questions after that.

Paul Lalljie

Thanks, Lisa, and good afternoon, everyone. Our second quarter results demonstrate our continued focus on topline growth with strong profit margins and to put this into perspective, let me go through our results for the quarter comparing it to the second quarter of 2010.

Revenue grew 16% to $147.7 million. Reported net income increased 13% to $32.4 million, while income from continuing operations increased 3% to $33.6 million.

To add some clarity, let me point out that the second quarter of 2010 included a $1.8 million credit, the sales tax and interest expense. Excluding this adjustment reported net income would have increased 18% and income from continuing operations would have increased 7%.

Reported EPS grew 16% to $0.43, while earnings from continuing operations per diluted share increased 7% to $0.45. Earnings per diluted share would have increased 19%, excluding the impact of the $1.8 million credit.

EBITDA from continuing operations increased 6% to $64.6 million, representing a 44% margin. EBITDA from continuing operations would have increased 7%, excluding the impact of the previously mentioned $1.8 million credit.

As you’ve seen from our press release today, we have changed the presentation of our financial results to reflect our exit from the Converged Messaging Services business during the quarter. The results for this business has been classified a discontinued operations for all the periods presented. In my comments today and going forward, we will focus on results from continuing operations.

Now for a closer look at revenue. Carrier Services revenue totaled $110.8 million, a 13% year-over-year increase. This $13.1 million increase was primarily due to a $7.9 million or 9% increase in Numbering Services revenue and a $4.3 million increase in Order Management Services.

Within Numbering Services the increase is mainly driven by a $10.9 million increase and established fees on or contract to provide NPAC services. The Order Management Services growth is primarily due to higher demand from our existing customers and the addition of new customers.

Enterprise Services revenue totaled $36.8 million, a 23% year-over-year increase. This $6.9 million increase was due to a $4.5 million or 29% increase in Internet Infrastructure Services revenue and a $2.3 million or 60% increase in Registry Services. Internet Infrastructure Services revenue totaled $20.1 million and its increased was primarily driven by a growing number of services including the IP geolocation services.

Registry Services revenue totaled $16.7 million and its growth was driven by an increase in the number of common short codes and domain names under management.

Now for a review of costs for the quarter. Operating expense totaled $92.4 million, an increase of $18 million over the second quarter of 2010. The increases in cost of revenue, sales and marketing and research and development were primarily driven by overall growth in the business, requiring higher levels of support, as well as our expansion into new businesses and geographies.

In particular, expenses for the 2011 quarter included the acquired IP geolocation assets, a customer service experience center in Louisville and higher royalty expenses driven by increased common short codes revenue.

The increases in general and administrative expense were driven by additional facilities cost and advisory and pursued costs for strategic growth opportunity.

Headcount for the quarter totaled 974, compared to 967 for the March quarter and 909 for the June 2010 quarter.

Turning now to the balance sheet. Cash, cash equivalents and investments totaled $432.1 million, compared to $392.2 million as of March 31, 2011 and compared to $382.4 million as of December 31, 2010.

In the second quarter of 2011, we purchased approximately 701,000 shares for a total of $18.2 million. Capital expenditures for the second quarter totaled $11.7 million.

Accounts and unbilled receivables totaled $81.1 million at quarter end, compared to $90.9 million for the March quarter and $89.4 million as of December 31, 2010. The decrease in accounts and unbilled receivables is primarily due to the transfer of an NPAC statement of work from unbilled receivable to note receivable.

Now for a discussion of guidance. For the full year 2011 we’re expecting revenue to range between $585 and $600 million, representing a 12% to 15% growth over 2010.

EBITDA from continuing operations is expected to range between $250 and $260 million, while income from continuing operations is expected to range between $127 and $133 million. On a fully diluted basis income from continuing operations per share is expected to range between $1.68 and $1.76.

Our guidance this quarter includes approximately $5 million of revenue related to the assets acquired from Evolving Systems. This revenue will show up in our Carrier Services business segment in particular the order management line item. As we’ve discussed in our first quarter 2011 call, this purchase was value versus bill division and as such the acquired revenue replaces some Order Management Services revenue.

The other item to note is that the guidance excludes the Converged Messaging Services financials, driving the change in our guidance metrics from EBITDA, EBITDA from continuing operations.

CapEx for 2011 is expected to range between $45 and $50 million. Our annual effective tax rate is expected to be 40%. Our fully diluted weighted average shares outstanding is expected to be approximately $75.5 million for the year.

That’s some insight into our guidance, given our predictable and reliable revenue stream, primarily from our NPAC contract, the improving trends in Internet Infrastructure Services and the increasing demand for our services, we are confident about our growth prospects for 2011 and as such we are targeting the upper end of the revenue range.

To summarize, our results this quarter reflect strong topline growth and disciplined organic and inorganic investments to drive future revenues, earnings and cash flow. We are well-positioned to meet or exceed guidance this year.

Looking beyond 2011, we will continue to create shareholder value by leveraging our core competencies, driving revenue and growth and maintaining a sharp focus on operating efficiency.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from Thomas Ernst with Deutsche Bank.

Nandan Amladi – Deutsche Bank

Hi. Good afternoon. Nandan on behalf of Tom. Just wanted to follow-up on the UltraViolet launch, how is progress on that going?

Lisa Hook

So, this is Lisa. How are you?

Nandan Amladi – Deutsche Bank

Hi.

Lisa Hook

We have made the UltraViolet platform available to the industry. There are several parties currently on boarding and testing the platform itself which is ready to go. So at this point we’ve done our part and we are waiting for the studios and the retailers to arrive at agreement on what the most compelling consumer offer is. But we are expecting to see launch later this year.

Nandan Amladi – Deutsche Bank

Okay. Thank you. And on the impact business, any commentary on the update of IP fields – the optional IP fields?

Lisa Hook

We have several companies using the IP fields. We are in testing on a number of commercial services that would use this field and beyond that I would say stay tuned.

Nandan Amladi – Deutsche Bank

Okay. But is the uptick now exceeding your expectations or is it consistent with –

Lisa Hook

The uptick has increased very truly exponentially, but until we are able to announce the launch of commercial services using those fields they are still nonmaterial.

Nandan Amladi – Deutsche Bank

I see. Okay. Thank you.

Operator

And the next question comes from John Bright with Avondale Partners.

John Bright – Avondale Partners

Thank you. Good afternoon, Lisa, Paul and Brendan. First question, Lisa, update on the impact contract?

Lisa Hook

As of now we have no update on the impact contract. As you may know the FCC approved with a couple of minor changes. The industry’s consensus proposal on how to conduct the renewal process, the RFI, RFP process, there is a working group next that needs to be formulated to move through the next several sets of sets. That working group has still not been convened and till that working group is convened we will not see an RFI. So we don’t have a specific update on the timeline for you.

John Bright – Avondale Partners

Okay.

Lisa Hook

We are really remaining focused on fantastic customer service and increasing the value of the impact through the commercial launch of services around the IP fields as we get an update we will certainly give it to you, but we are feeling good about our position to date.

John Bright – Avondale Partners

Okay. My second question is in your prepared text you talked about the FCC giving you permission, I think, (inaudible) some debt. Tell us a little bit about that? And then you mentioned or alluded to a discussion regarding debt in your capital structure potentially at the end of the year. Can you talk about some of the options under consideration for the use of that debt?

Lisa Hook

I will speak to the FCC issue and give Paul a little airtime on the options.

John Bright – Avondale Partners

Okay.

Lisa Hook

Originally we have a neutrality requirement both in the company’s charter and otherwise and frankly I think that the neutrality requirement that we have gives us significant competitive differentiation not only in the impact but with respect to going into other businesses. The opportunity that they were neutral, no interested party has any investment in us that would cause us to behave in a manner that skews toward one party or another.

As part of that neutrality requirement, there is a rule that says that no TSP will earn more than 50% of our debt. That’s the original rule that’s on the books. Over the years for a variety of reasons, that are irrelevant here, the FCC staff expanded its interpretation of the rule to apply not only to TSP but TSP’s affiliates. So many companies can be construed as TSP affiliates that it became very cumbersome for us to look at going into the markets to raise debt in an unfettered fashion.

When we look at that and we look that the effect it would have on us we just decided to go back to the FCC and say, did you really mean to expand the interpretation of this rule? They took another look at it, put it out for public comments, said no, the rule was to really – they felt very comfortable with the original rule and now we're back to clarity on the issuance of debt. Of course, we are still subject to the restriction that no single TSP will earn more than 50% of our debt, but from our point of view, commercially that’s not particularly a restriction at all.

So, in today’s markets which are quite liquid that may not have imposed much of a burden on us. You know, as capital markets become more and less restrictive we simply did not want to have to deal with the extra burden of ensuring that none of our creditors were TSP affiliates. So we are extremely happy with the outcome that we got at the FCC.

John Bright – Avondale Partners

Okay.

Paul Lalljie

And John, on the capital structure question I think as part of our strategy includes inorganic growth and to be precise we will look at companies that provide us make versus buy decision as we’ve done with the Evolving Systems numbering assets as we’ve done with some of the IP geolocation assets, I think we will continue down that path.

And at the same time, I think you and I would agree that the capital structure that we have in place is probably inefficient and I think that’s part of an acquisition, as part of a more efficient capital structure rather – return to well to shareholders along with an acquisition somewhat of those things.

I think that’s because we are heading down over the next two quarters or so as we refine and holding the strategy that we have and the strategic direction in terms of product roadmap, product build out and the services that we offer.

John Bright – Avondale Partners

Paul, let me squeeze one more in. The 75.7 million share count – just for the year guidance diluted, reconcile that for me with if I have my numbers right, 75.3 in the quarter and 75 million outstanding in the second quarter are you expecting a tick up in the back half?

Paul Lalljie

I don’t think so, John. I think a lot of it has to do with the weighted average concept. One of the things that we are capturing here in the share count is the number of options that are going to be exercised towards the back half of the year that changes that. And also that is contra to the shares that we purchase in the marketplace under our share repurchase plan. The actual number of shares that are going to be included is much lower, but on a weighted average basis it is that 75 number – 75.5 million number.

John Bright – Avondale Partners

Thank you.

Paul Lalljie

So on the first quarter we had options exercised, if you will.

John Bright – Avondale Partners

Got it.

Operator

And the next question comes from Daniel Meron with RBC Capital Markets.

Daniel Meron – RBC Capital Markets

Thank you. Hi hello, Lisa, Paul and Brendan. A couple of questions, if you can, Lisa or Paul, if you can provide us with some breakdown on the actual impact of Evolving Systems on the differential and your revenue especially on the EPS guidance?

Lisa Hook

Would you repeat the first piece of it, you broke up there for a minute?

Daniel Meron – RBC Capital Markets

Oh. Yes. If you can repeat the breakdown of the impact of the acquisition of Evolving Systems’ business on your top line and especially on the earnings in your guidance?

Paul Lalljie

So it’s a $5 million revenue impact through the rest of the year on the top line and we were expecting it to be breakeven or slightly diluted on a full-year basis, so from an expense perspective if I round downwards another $5 million number and expenses too.

Daniel Meron – RBC Capital Markets

Got you. Okay. And the expenses are going to be both in cogs and also in OpEx distributed evenly or –?

Paul Lalljie

It’s going to be cogs primarily, there’s a little bit of sales and marketing, but I think it’s more – there is a little bit of sales and marketing and we are going to have some in the G&A line item for integration and things like that.

Daniel Meron – RBC Capital Markets

Okay. And full-year basis, how should we think about on a 2012 basis or on an annualized basis? Is it just running at the same rate and kind of (inaudible)?

Paul Lalljie

So when we acquired these assets they were on a $14 million, $15 million annual run rate. I’d be over committing if I give you a number now for 2012 simply because you can imagine trying to get the SOE and all the other revenue recognition issues around it. My control is going to be upset that I am mentioning that on the call but at the end of today refrac [ph] is an issue as you get (inaudible) So I am not going to commit the number for next year, but I think from a pure business perspective a number 14 and above is probably expected.

Daniel Meron – RBC Capital Markets

Okay. That’s helpful, Paul. And then just switching gears real quick before you go, can you give us a little bit more color on the dynamics in the enterprise business as far as demand, what you are hearing from enterprise customers out there and what kind of growth rate are you guys are expecting? Thank you.

Paul Lalljie

So two things. Let me just touch on one more thing under the Evolving System asset. Next year we are hoping to get the margins back up to the corporate level on that business as we can generate leverage from the two sales forces coming together and sending some of the product systems to customers. On the enterprise side of things, we are pleased with the code of assets that we acquired, the IP geolocation assets and that into our internet infrastructure portfolio is definitely growing at a good clip for us here. It totaled around $20 million this quarter.

The domain name business is also doing very well along with the common short codes business. Together those two businesses grew at about 11% on a year-over-year basis and we continue to see increases in domain names under management and in codes under management, for the short codes business. In the Internet infrastructure business I think from that business perspective, it is – we are focused on broadening our product portfolio. We are focused on adding features and functionality that our customers are looking for.

And, so product development – our operations team is very important for us in driving growth in that business and we are very focused in ensuring that we have something new to bring to the market every quarter.

Daniel Meron – RBC Capital Markets

Okay. That’s very helpful. Thank you so much. Good luck.

Lisa Hook

Thank you.

Paul Lalljie

Thank you.

Operator

And the next question comes from Scott Sutherland with Wedbush Securities.

Scott Sutherland – Wedbush Securities

Thank you and good afternoon.

Lisa Hook

Hey, Scott.

Scott Sutherland – Wedbush Securities

First of all, as required Evolving Systems has been (inaudible) down in order management, can you talk about some of the trends you’ve seen in the industry? Obviously you have seen another sequential improving, your revenue growth, are you winning more customers or is that just continued growth from increased transactions in the customers you won last year?

Lisa Hook

On the order management side, it really is both. So we’ve been assiduous at marketing this service to various companies in the cable industry as they are rolling off of Sprint. As they are being OMS provider, those deals have really been in marketing now in some cases for a year and a half to two years. So they have very long sales cycle deals that we have had an intense focus on. So that’s why you see the OMS – organic revenue is up. Those customers are now closed and we are launching them into the network.

And then as well transactions frankly with many of those customers have been stronger than we had initially thought they would be. So, in all we are very pleased with the direction of the business.

With the Evolving Systems acquisition, as you know we’ve run the impact and I know I am going to say this in very simplistic terms, but historically while we have the database itself, other companies have provided the on-ramp to getting data into the database and have provided the off-ramp for getting the data out of the database and into other systems, environments with the carriers.

We are looking at expanding our workflow solutions to be more than the provision simply off the database, but to be more involved in both the on ramp and the off ramp. Evolving Systems has been providing on-ramp services for a number of years and so they have given us a greater market share in that environment, which we think is very interesting and we are going to be going aggressively after even greater market share which will of course be a displacement still so very long term kinds of sales cycle. But we are really encouraged with the progress that we are making on OMS overall both organically and now it is an inorganic opportunity.

Scott Sutherland – Wedbush Securities

Can you give us some update or metrics on some of your other new initiatives like PathFinder? You know you are seeing common carriers getting on the Tier 2s or Tier 1s in the mobile cog initiative, how are those frac-ing?

Lisa Hook

So Pathfinder is tiny, but a real rocket ship in terms of usage. We have over a 100 companies signed up. We don’t actually look at Tier 1s, Tier 2s because a lot of the carriers internationally do not buy services directly. They go either through aggregators or through other third parties.

But the usage there is a hockey stick kind of a growth and we are very pleased with the product that we are making – progress we are making on the product. While the usage of hockey stick, the per transaction pricing is actually very low and so you won’t see it as a material component of our revenue stream this year, but we are very pleased with the progress that we are making on the product.

And then on the Intelligent Cloud initiative which we would still internally characterize and you guys have heard us use this term as a venture bet, we’ve got a number of carriers now climbed on to the platform. We’ve got brands who are the – the people who will be using the APIs to develop their services. We’ve got a couple of branches in the platform, but again, I would not put anything into our revenue expectations for that this year.

Scott Sutherland – Wedbush Securities

Great. Thank you.

Operator

And next will be Dan Cummins with ThinkEquity.

Dan Cummins – ThinkEquity

Thanks. A couple of questions. First on the registry business. The name count was up I guess 3% or so Q1 queue. I see there is some seasonality there. Can you just tell us, kind of, what kind of growth you expect to see demand wise for the registries you manage this year? And how much of your registry business at this point do you monetize based on volume?

And then I had, my first follow-up was actually about outsourced registry for next year in 2013. Thanks.

Paul Lalljie

On the names on the management total about $5.3 million at this quarter, in the first quarter was about $5.1 million in Q2 of 2010 it was $4.1 million. A significant change in year-over-year basis has to do with the launch of dot, CO that is the top-level name for Country code, Colombia.

Lisa Hook

And there we provide the backend registry services for our Partner.

Paul Lalljie

Yeah. I think that also answers the other part of your question. We run the dot US registry and from a recurring revenue subscription-based perspective the back-end, the only other back-end one that we have in this particular case are the same business model is dot co.

Lisa Hook

In terms of new TLDs with the second part of your question, as you know the I can in June in Singapore authorized new TLDs. There’s a filing period that’s opening up within the next several months, so there’s quite a bit of business development activity in the market. The opportunities are to go after TLDs directly to provide support for corporate support going after TLDs, as well as to provide backend infrastructure support for others who are seeking TLDs. We are looking at all three categories of opportunities, but to the extent that any of those arise we wouldn’t be see revenues from those until the 2014, 2015 timeframe.

Dan Cummins – ThinkEquity

Well, that’s much later than I would have thought. Okay. With respect to your budget or your strategy on M&A as it evolves, how much of it do you think could potentially be devoted to emerging markets and making NeuStar achieve it much more Global footprint in business model?

Lisa Hook

We are looking at our international strategy now. And have a keen interest and expanding internationally. As a result of our history, we are going to be extremely conservative Anglican international acquisition opportunities. They will have to be directly in our core competency. They will have to be of some level of scale so we are not going to be looking for extremely young emerging markets opportunities. And last it were for instance directly in the portability space.

Dan Cummins – ThinkEquity

Okay. I wanted to ask, I’m sorry one more thing about the variable portion of your carrier business in the U.S. the North American carriers seem to be projecting a little bit softer seasonality in the second half of the year with respect to network CapEx. And I’m curious how that sort of you expect to see those impacts in your business or not. Thanks.

Lisa Hook

At this point we don’t expect to see that impact in our business. Our businesses are primarily driven by the addition of a customer by changes inside the networks very transactionally driven. And while the carriers maybe looking at a conservative CapEx spend for the second half of this year, there’s still a lot a subscriber movement and that’s the trend that we benefit from.

Dan Cummins – ThinkEquity

Okay. Thank you very much.

Lisa Hook

Thank you.

Operator

(Operator instructions) The next question comes from Sterling Auty with JP Morgan.

Saket Kalia – JP Morgan

Hi, guys. This is Saket for Sterling. Thanks for taking my questions. Can you talk about the converged messaging exit this quarter, how that’s different from the other mobile IM, the message that you made earlier and what impact if any it is having on the full year revenue and EBITDA guidance? And I have a follow-up.

Paul Lalljie

So, Saket, it is one the same. It is a wind down process that we were involved in. Not wind down process meant a few things. Number one, we sold certain of the assets which was announced in Q1. And in winding down the rest of the services we transferred customers various back-office type things from a technical perspective or an accounting perspective we concluded the winds down in the second quarter – during the second quarter.

And as a result we had to transfer the financial associated with that business to what is called discontinued operations. From a revenue perspective it’s probably an immaterial number if I have to tell you the number, it’s around 300,000 not a material number, the revenue line item and then the rest of that you will see in this continued operations that you’ve seems so far we’ve published in the supplemental for the OpEx numbers.

In terms of the guidance that we provided topline numbers excludes that revenue and the EBITDA numbers excludes the EBITDA shortfall that would have been occurred had we kept that business. So what you would see the EBITDA guidance increasing as part of that change and the reflected in the EBITDA from continuing operations guidance that we provided.

Saket Kalia – JP Morgan

Got it. So just to clarify that last point wasn’t really material on the revenue line, but essentially it’s a lower drag on EBITDA which is part of the reason why guidance is going up, is that fair?

Paul Lalljie

Yes. And the reason why we got rid of the asset.

Saket Kalia – JP Morgan

Got it. The follow-up I had was I guess, again on EBITDA, you just finished the quarter at 44% margin but I think the full year implies about 43, how should we sort of think about margins in third quarter versus the fourth quarter?

Paul Lalljie

Well, I mean as you know, we don’t provide quarterly guidance, but as an organization we do have guiding principles when it comes to margins and expenses and you can look back at our previous guidance the way we’ve guided and where we’ve come out in the actuals when we reported results. It is our objective to continue to focus on cost savings towards the back half of this year. That’s our way of ensuring that we can fund new initiatives, we can fund growth and also maintaining the margins that we had on a continuing operations before the converged messaging business. So if you look back at last year’s continuing margin from continuing operations, that’s the kind of margins we would like to get back to, as we move forward here especially exiting this year.

Saket Kalia – JP Morgan

Got it. And I think one last one in. I think Lisa you said that non-impact business grew about 19%. How much of that was organic versus inorganic? That’s it for my side, thanks.

Paul Lalljie

From a non-impact perspective all of that is organic. I mean IP geolocation services business that contributed in the second quarter here, that’s the make versus buy decision, so if you want to exclude that I mean that can be excluded. But I think all of that is generally organic for us. There is no revenue year-to-date on the Evolving Systems assets. The back half of the year is going to have $5 million. So while I give you those numbers as for clarity purposes, I think we generally consider all of that organic.

Saket Kalia – JP Morgan

Great. Thanks.

Paul Lalljie

I appreciate it.

Operator

And the next question comes from Vincent Lin with Goldman Sachs.

Vincent Lin – Goldman Sachs

Great. Thanks. I just have one follow-up on, obviously, the infrastructure services business has pretty strong for a number of quarters now. Wondering, if you can provide some color in terms of where the string is coming from in terms of whether it is driven mostly by new customers on boarding kind of to the services for the first time or is it more driven by kind of you guys demonstrating existing customer by selling additional solutions?

Paul Lalljie

Vincent, we reported over 29% year-over-year growth in the Internet infrastructure business this quarter and specifically, we are seeing a lot of momentum in the monitoring portion of that service offering as well as the IP geolocation portion of that service offering. From a query perspective, we continue to see queries increasing on a quarter-over-quarter basis. And we are also expecting on a year-over-year basis query was rather flat, sorry I apologize for that. Queries were flat on a year-over-year basis, but we – and that is because I think in the last earnings call we spoke a little bit about the queries in the year-over-year basis.

We rationalize some of our customer base that had large crow [ph] usage and very minimal revenue contribution and payment patterns that were probably not desirable and we fixed those issues going forward. From an ongoing perspective we expect to continue to sell more and more features on the service offerings that we have. I think we have a very good platform in the geolocation platform. The monitoring and load testing service offerings that we have, they are extensible and they are scalable and the Internet infrastructure business the – the core DNS and internal and external DNS we think those have ongoing momentum that we can maintain.

Vincent Lin – Goldman Sachs

All right. That’s helpful. Thanks.

Operator

And next question comes from Jonathan Ho with William Blair.

Jonathan Ho – William Blair

Great quarter, guys. Just a couple of questions around the impact contract that you guys have right now. How far along are you in terms of meeting, I guess the last credit in terms of transferring the numbers over?

Paul Lalljie

So Jonathan, as part of our first quarter results on Form 10-Q we reported that the credits have been earned. What we did not disclose is the specific number of records that we have, but the credit has been earned already for fiscal year 2011.

Jonathan Ho – William Blair

Great. And can you talk a little bit about the competitive environment, now that Lockheed [ph] has been acquired, have you guys seen any type of a shift or are you expecting any type of a shift just given that dynamic?

Paul Lalljie

No, we – I have to tell you it has been pretty quiet from our perspective in terms of activities in the marketplace with respect to the contract. I think we are waiting on an RFI to come out and we have not noticed any significant change or any change in the competitive landscapes or noise or communications around this.

Jonathan Ho – William Blair

Got it. That’s it for me. Thank you.

Lisa Hook

Thank you.

Operator

And our last question today will come from Stephen Beckert with Robert W. Baird.

Stephen Beckert – Robert W. Baird

Hi, guys. Thanks for taking the question. I apologize if this has already been asked Paul, but it sounds like you are – looking on – it looks like taking out some leverage. I was just kind of wondering if could provide some broad parameters for what kind of debt level you would be comfortable with?

Paul Lalljie

So let me clarify that a little bit. I don’t know that we’re looking to take out leverage. We had a restriction or an interpretation of our neutrality restrictions that we got clarified at the FCC. It now allows us to raise debt like any normal company, feeling you can go out and you can syndicate that debt and that debt can be taken out by anyone in the public market, who are willing buy that debt.

In the past, individuals who purchased our debt would have had to rep that they are not a PSP or TSP affiliate if they owned more than a certain percentage of the issuance. So what we did – what we have been doing for a while and we got it clarified is to have a clarification of that ruling and now we have clear path of financing, the way any normal company would do it.

If and when we do go out to the market and raise debt, I think from our perspective, we have always been prudent, as it would be a capital structure that will optimize the balance sheet and not one that will restrict us from having flexibility going forward. So rest assured, that you will not see us with a balance sheet revenue to worry about covered ratios and things like that.

Stephen Beckert – Robert W. Baird

Got it. Thanks. And then on that same topic sort of, correct me if I am wrong, but I believe if the FCC also have some restrictions on what percentage of your equity could be owned by a TSP, has that changed in the interpretation over the TSP is – does that apply to that as well?

Paul Lalljie

No. That restriction still holds and that restriction is if someone purchases more than 4.9% of NeuStar’s equity outstanding, they have to rep [ph] that they are not a telecommunication service provider.

Stephen Beckert – Robert W. Baird

Or an affiliate?

Paul Lalljie

Or affiliate, yes.

Stephen Beckert – Robert W. Baird

Got it. Okay. Thanks.

Operator

And that does conclude the question-and-answer session now and I will turn the conference back over to Lisa Hook for any additional or closing remarks.

Lisa Hook

Thank you so much for joining our call this evening. At the half-way point of 2011, we are solidly on plan from a financial perspective. We continue to sharpen and execute against our strategic plans and we are excited about the opportunities we have if we continue to leverage our assets and capabilities. We are looking forward to reporting to you on our continuing progress. Until then, thank you.

Operator

And that does conclude today’s conference. Thank you for your participation today.

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