Neustar's (NSR) CEO Lisa Hook on Q2 2016 Results - Earnings Call Transcript

| About: NeuStar, Inc. (NSR)

Neustar, Inc. (NYSE:NSR)

Q2 2016 Earnings Conference Call

July 28, 2016 16:30 ET


Dave Angelicchio - IR

Lisa Hook - President & CEO

Paul Lalljie - SVP & CFO


Nandan Amladi - Deutsche Bank

William Power - Robert W. Baird & Company


Good day, everyone, and thank you for standing by. Welcome to Neustar's Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

For opening remarks, I would like turn the call over to Mr. Dave Angelicchio, Head of Investor Relations. Please go ahead.

Dave Angelicchio

Thank you and good afternoon to 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 Lallje, 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, July 28, 2016 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 non-GAAP reconciliations can be found under our investor relations tab on our website

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

Lisa Hook

Thank you, Dave, and thank you all for joining us this afternoon. First, I'll offer some perspective on the quarter and our momentum in the business, then I'll provide an update on the entire transition, followed by a brief discussion of our planned separation, and finally, Paul will walk you through our results with more detail and commentary. First, the quarter. Overall, we delivered strong organic revenue growth and formed three exciting new partnerships with position as to expand our security and marketing to win new clients and to capitalize on future market opportunities.

Let me turn first to highlights and information. In May, we entered into a relationship with Limelight Network to combine our industry-leading DDoS solution SiteProtect with Limelight's premier contact delivery network to provide the world's largest most-distributed DDoS mitigation network. At 10 terabytes per second, we will provide the industry guarantee during DDoS attack allowing us to mitigate the largest and most complex cyber-attack with minimal disruption.

In addition to extraordinary bandwidth, we will also be able to mitigate attacks locally with 27 in-region DDoS mitigation centers. So what does this mean for our clients? Our recent industry report by technology research firm Cobung [ph] highlights our partnership with Limelight, describing our DDoS mitigation as turbo-charged and setting its capacity to address monster attacks without interrupting client's legitimate web traffic.

Earlier in the quarter, we published our annual DDoS report, which found that more than 7 out of the 10 brands reported DDoS attacks in 2015 and more than half of those attacks reported data, financial or intellectual property theft. The DDoS attacks don't just slow down at company's websites. In many cases, they are diversions to cover even more nefarious acts. In this environment, companies must look for best-in-class DDoS protection to combat this threat. We provide that solution.

On the marketing services side, we have partnered with Experian to offer an end-to-end omni-channel data onboarding solution. This solution allows clients to convert all client consumer data to a highly accurate digital format and validate that data using our authoritative identity. In addition, marketers will have the ability to move beyond the simple onboarding of their own customer audiences to include intelligence derived from transactions such as point-of-sale and credit card purchase data. This partnership gives marketers advanced capabilities to define their best audiences and to target them efficiently across numerous media channels including mobile, display, email and TV.

In June, we also entered into a partnership with Simulmedia, a leader in enabling the automated purchasing of TV advertising. This partnership will offer marketers complete end-to-end solutions to target TV audiences and to measure advertising campaign performance. Simulmedia is looking for data match partners to help connect TV viewing data to advertising data while protecting the privacy of all parties. Neustar is the perfect partner. Simulmedia will use our client data onboarding services supported by our unique authoritative identity platform to link viewer audience data to Simulmedia's own advertiser client data. For the partnership, marketers can now target TV audiences with unprecedented matching precisions allowing Simulmedia to measure the impact of TV advertising campaign.

Turning to MarketShare, we continue to win new clients including Tier-1 and Standard Life, and we expect our momentum to accelerate as the year progresses. We now have clients who have now combined their data management platforms and MarketShare solutions and we're gaining traction of selling to existing clients. As an example, we recently expanded a long-time relationship with the carrier client by adding MarketShares capabilities to the customer segmentation services we were already providing.

With this combined solution, the carrier can measure the effectiveness of the segmentation so as the appropriate needed channels, an optimized digital marketing spend to achieve the greatest return on investment. We were able to sell in MarketShare solutions within months of closing our acquisition because our key strategic understanding of this client's needs. We attend to this and similar deals to be a blueprint for the future.

Finally, as we build out our information service and capabilities, we continue to attract outstanding people who share our enthusiasm for the opportunities we see. We recently hired Venkat Achanta to serve as the Chief Data and Analytics Officer. Venkat brings over 20 years of data science experience to us, having most recently served as the Chief Data Officer of Walmart and working previously at global data-driven companies including AIP, Capital One and Experian. At Neustar, Venkat will be responsible for extending our authoritative identity and attribution platform and finding innovative ways to create client experiences across people, places and things. She will be based in San Francisco and will report directly to me.

The addition of Venkat and other recent hires demonstrate that with our unique assets and ability to help clients connect across people, places and things, Neustar is becoming a destination for the top talents in our state. Let me take one moment here to explain to you that we're sitting in an unbelievable storm in Northern Virginia and if you're having trouble hearing, it's the sound of thunder and lightning outside our window. With that drama, let's turn now to the impact transition.

On July 1, we received the notice of nonrenewal from the NAPM. The notice of nonrenewal will have no impact on our revenue, nor this has impact along the transition we'll take. To be clear, the impact contract specified that the NAPM must provide a six-month termination notice, and the notice we received on July 1 is not a termination notice. The preliminary time line originally provided by the transition oversight manager, CWC, in January of this year laid out a transition end-date of September 30, 2017. On July 20 however, CWC stated that it will need to work with Ericsson to revise the transition projects plan to account for both delayed and fourth quarter considerations related to holidays and seasonal volumes.

CWC sets its project plan [ph] and then reviews themselves are expected to take several weeks to complete and that the current transition time line will likely by modified to find a likely end date sometime in 2018. On July 25, the SEC approved the master services agreement between the North American Portability Management LLC and Ericsson for the provision of local portability services. This week's decision is another data point in a bizarre and “Okay” process that continues to give short trips to the important issues involving critical U.S. telecommunications infrastructure. For our part, we will continue to sell our transition obligations. We will continue to live with our high quality impact services and we will continue to pursue a local outcome for litigation.

Finally, let me address the announcement in the second quarter of our attention to separate -- from my perspective as CEO, I want to make two points. First, during this process I will continue to make it a priority to achieve our 2016 objective and to ensure that everyone at Neustar remains focused on providing excellent delivery and support to our clients. And second, I believe this is a unique opportunity to create shareholder value and I'm committed to a smooth and successful execution of the separation. I look forward to updating you on our progress of this process by then.

To summarize our achievements for the quarter, we generated strong top line revenue growth while continuing to advance our information services strategy through several important new partnerships. This momentum, along with the planned separation of the company continues to position Neustar's great long-term value for our shareholders. With that, let me turn the call over to Paul.

Paul Lalljie

Thanks, Lisa, and good afternoon, everyone. I'm pleased to report another quarter of top line growth and strong cash flow generation. Revenue this quarter totaled $297.6 million, up 16% from the second quarter of last year and up 4% sequentially. This growth is fueled by another quarter of 20%+ organic growth in marketing services. For the quarter, adjusted net income increased 12% with $69.4 million while adjusted EBITDA increased 12% to $131.4 million or a margin or 44%. And we generated over $93 million of cash from operation. Our deleveraging strategy is well under way with almost $100 million of principal repayments this quarter. Overall, our team continues to deliver strong results. Information services grew 8% organically and earnings per share grew 15% on a year-over-year basis.

Now, let's take a closer look at revenue for the quarter. Marketing services revenue totaled $63.9 million, an increase of 56% over the second quarter of last year. This increase included $14.4 million of revenue from the MarketShare acquisition with net of $1.2 million on the write-down of the deferred revenue. On an organic basis, marketing services revenue grew 21% due to the strong demand for our comprehensive marketing solutions based on our authoritative identity.

Security services revenue increased 22% to $49.3 million and included $8.7 million from the acquisition of Bombora. Bombora's revenue increased $3.8 million sequentially, mainly because of the acceleration of deferred revenue related to a customer that has consolidated during the second quarter. On an organic basis, security services revenue remain flat in the second quarter of 2015 due to the absence of a channel deal recognized in the second quarter of 2015 and it did not recur in 2016.

Data services revenue increased 13% to $55.8 million and included $15.4 million of revenue from the CNS caller authentication asset. Data services revenue increased 2% organically when adjusted $49.7 million in revenue from the expiration of the common short codes contract in 2015. Our caller authentication services revenue drove the 2% increase and was partially offset by lower transaction volume in carrier provisioning services. NPAC services revenue increased 2% to $128.5 million, driven by the transition statement of work under our contract to provide local portability services.

Moving on to expenses; operating expense total $226.2 million, a 27% increase from $178.7 million in the second quarter of 2015. This $47.5 million increase was driven by $40.8 million in operating expense inclusive of depreciation and amortization associated with the acquisition completed in 2015. In addition, we incurred $6.1 million in expense for restructuring initiative, designed to improve efficiency and reported $4.2 million in cost associated with the brand separation. Specifically, the separation cost related to professional fees from our outside advisory services for legal, finance and accounting. We ended the quarter with headcounts of 2,068 compared to 2,125 at the end of 2015.

Turning to the balance sheet. Our accounts and unbilled receivable balance totaled $190.4 million versus $203.1 million at the end of the previous quarter. Our days sales outstanding was 55 days compared to 62 days at the end of the first quarter. Our accounts payable and the food expenses totaled $114.2 million and our advanced payable was 53 days compared to 55 days for the quarter ended March 31, 2016.

In the second quarter, we generated $93.1 million in cash from operations, spent $13.5 million in capital expenditures; we paid $99.9 million in debt and ended the quarter with cash of $50.7 million. We previously talked about a capital allocation strategy that calls for the rapidly levering of our balance sheet. To that end, during the second quarter, we made voluntary principal repayments of $73 million including a $25 million voluntary prepayment in April which was already discussed on our first quarter's earnings call. We expect to continue to focus on debt repayments as we go through the remainder of the year. As of June 30, 2016, our debt obligation totaled $998.9 million and our growth debt to EBITDA ratio was 2.1 times.

Now for a discussion of guidance; we are affirming our guidance provided on April 28, 2016. That calls for revenue to range from $1.220 billion, to $1.240 billion, representing growth of 16% to 18%. Information services revenue for 2016 is expected to range from $715 million to $735 million, representing growth of 32% to 35%. We expect the MarketShare acquisition to contribute at least $70 million a year, net of deferred revenue right now.

In response to the recently published SEC guidance on non-GAAP presentation, we are adding a net income metric to our guidance. Net income is expected to range from $160 million to $190 million or $2.89 per share to $3.44 per share. Adjusted EBITDA is expected to range from $555 million to $565 million or a margin of 45% to 46%. And our adjusted net income is expected to range from $278 million to $298 million or $5.03, $5.39 per share. Our guidance include the capital expenditure for this year to range from $40 million to $50 million. In addition, our effective annual tax rate is anticipated to be approximately 33% and our fully diluted weighted average shares outstanding is expected to be approximately $55 million.

To conclude, we deliver another strong quarter with marketing services generating 21% organic revenue growth. Operationally, our business continues to scale as demonstrated by our EBITDA margin of 44%. We have affirmed our 2015 guidance, announced new partnerships and levered our balance sheets for financial flexibility. We remain focused on being a premier provider of information services while positioning Neustar to create a greater shareholder value.

With that, Operator, you may now open the lines up for questions.

Question-and-Answer Session


Thank you. [Operator instructions] And we'll go to Nandan Amladi with Duestche Bank.

Nandan Amladi

Hi, good afternoon. Thanks for taking my question. Lisa, the first question for you is on the SEC document that was made available earlier this week – yesterday I think. It talks about the master services agreement being signed and also some of the conditions of the RFP having to do with national security public safety, neutrality and so on. Also, it haven't been adequately addressed I guess at the master services agreement. Are there still areas that you see as gaps from where the platform stands today and what is contemplated in the RFP?

Lisa Hook

We've just gotten the SEC document and we don't have the actual contract itself. Basically it's very difficult to say anything about what a contract looks like. A redacted version that was made available to lawyers, but without knowing the full extent of what the other parties are building, I can't really comment on their platform. We have not been notified with any formal plans for transitions. As I said in my prepared remarks, CWC has said that they plan to get with Ericsson and now develop a revised transition plan. So we don't have any visibility into a period transition plan and have no visibility into when their platform will actually be built. As you may know from the press, the SEC require them to start building again from scratch earlier this spring. That obviously takes a fair amount of time to build a platform, so we don't know when their platform will be done, we don't know what the capabilities of their platform will be and we don't know what any of our transition obligations will be. Frankly, it continues to be extremely okay and without any time's knowledge on any real and period time line.

Nandan Amladi

All right. And then another question related to the partnership with Limelight that you talked about, can you frame that in the competitive field? Akamai has a similar offering both CDN as well as DDoS that they acquired. I believe Verisign also offers a DDoS offering. Can you frame the portfolio now that you have with the Limelight partnership in the context of the others who play in the market?

Lisa Hook

Yes. When we complete the build out of this, we are focused on offering an enhanced site protect DDoS mitigation service. When we complete to build out of this globally, we will have by far the greatest bandwidth in terms of DDoS mitigation and as well more local capability than any of the other providers. Widest local capability is important. If you're going to an attack, you want to be able to cleanse your traffic as close to your home site as possible. We will have 27 locations around the world so that the scrubbing of the traffic can be done locally, which will further minimize disruptions. Both in terms of bandwidth and local scrubbing capability, we will be far and away number one.

Nandan Amladi

How big is that business today and how fast is it growing?

Paul Lalljie

Nandan, this is Paul here. The way we group that business, we group it with our DNS services today simply because a similar customer base, we can have an upsell opportunity for them and if you look at all business traditionally here, the DNS business has been a driver of growth in security services for us. It is probably ballpark just over $100 million of revenue and that business has been growing as high single digit, mid-double digit of that site. But the piece that is a faster grower of the two components of the DNS fees between [ph] services versus the DDoS business. The DDoS business has been growing extremely strong. We started out with growth that was in the 30s. That's probably growing even stronger now.

Nandan Amladi

Thank you.


Thank you. We'll take our next question from Will Power with Meredith.

William Power

Great. Thanks for taking the question. Good afternoon. I guess I was hoping maybe a start, Lisa, maybe you can come back to the announcement in June, the splitting of two independent public companies and I'm sure some of them involved very long and thoughtful process. But maybe if you can just help us again kind of understand why that structure makes sense as opposed to what presumably would have been less costly path for you to decide you need to go down segment reporting or look at the impact, is it discontinued operation et cetera?

Just high level there and I guess the second part of that is that the business that Paul is going to run is without the impact, it's going to be a fairly small business. How do you think about that as a viable public company and some of the risk concerns in terms of attracting investor attention, et cetera? Thanks.

Lisa Hook

Sure. Let me answer the easier one first. We are not able to account for the impact as discontinued business because we have no idea how long we will continue to manage the impact and GAAP requires a date certain for termination. Under GAAP rules, it is not a continued business and we can't account for it that way. If we were to do segment reporting, we would have to undergo a very significant restructuring of the way we manage the company. Segment reporting is not just giving you guys a set of numbers for information services and a set of numbers for numbering services. We have to manage the business the way we report the business.

As we've looked at restructuring to report it differently, we realized that actually, the two businesses don't have anything in common with each other strategically. They're selling into different markets, they have different growth rates, they will likely have different margin profiles et cetera, et cetera, and we determined that if we were going to go through the effort of doing restructuring to separate the businesses, to separate them entirely particularly because they're both decide they can stand on their own with the most prudent way to move forward and would create simpler stories for each group of services, more management focus for each group of services and presumably attract investors with different risk profiles into each stock.

William Power

Okay. And I guess maybe Paul, the question then, it's for you on the second one, the company with order management and a few little assets. Assuming it's without the impact, how do you think about the scale, revenue growth opportunity for that separate business?

Paul Lalljie

Will, a couple of things. Maybe if you think of that business and how we have invested as a company since 2010 to 2011 time frame, we have primarily invested in the information services portion of the business simply because when you think of our portfolio of service offering that was view of the highest return on invested capital for us. As a pure play company, you will have an opportunity to invest directly in that business. That business plays on a market that grows and a compounded annual growth rate of just on the 10%, 8%, 9% probably and it's supports billion-dollar market. Today, Neustar plays in simply the provisioning aspect of that market.

So we help our clients provision their customers. There are things like customer care aspects that we can play in. We can play in other BSS/OSS type spaces that we can play in. There are some of the newer types of spaces that this business provides an opportunity to play. We're already embedded in the network, so playing in a space such as software-defined networking and those types of things, virtualization and a call-based IP/OSS type environment becomes a lot more compatible with that business. And if it's going to have investment on management focus, then it becomes a real opportunity for that business.

Is it going to start out being a half a billion-dollar business? Absolutely not. It's more like $100 million business but when it goes off on its own starting out, but it's going to be a pure play business that will have resources and management times to focus in to grow that business. Of course it will attract different shareholder base and the shareholder base that we had that may be interested in the information services portion of the house but separating the two businesses will give each of them the opportunity for their greatest chance of success, if you will.

William Power

Okay. All right, I understood. All right, and just to come back into the business I guess, as it exist there, I guess still more than information services, looking at the security services, solutions business flatter organic growth year-over-year and you decided tough contract comp, I guess a year ago, how are you thinking about the organic growth for that business, I guess moving forward? As expectation, that re-accelerates in Q3, or do you have some other tough comps, too?

Paul Lalljie

No. We expect that to continue. We expect the growth rate to return back to normal. We expect the full year numbers to be back where we expected them to be at the beginning of the year. If you remember the first quarter, we had a significant deal with one of our customers in the first quarter of 2016 and then in the second quarter of 2015, we threw our partner where we provide DDoS mitigation service on a hybrid business. We also had a large customer that joined in that particular year. This is a market that's growing pretty quickly. DDoS attacks were increasing tenfold and we expect to continue to see strong growth in this area and look forward to probably more of an anomaly than it is the trend.

If you remember the last quarter's earnings call, we have seen eight consecutive quarters of double-digit growth and not just low double-digit, but mid-teens to high-teens in this area. So we expect that to continue as we get to the back after the year here.

William Power

Okay. All right, thank you all.


Thank you and that concludes today's question-and-answer session. I would now like to turn the call over to Ms. Lisa Hook for closing remarks.

Lisa Hook

Thanks very much. To summarize, we had another great quarter, we're a unique best-in-class solution that connects people, places and things to help our clients grow their businesses and safeguard their brand. We're confident that we'll go along our momentum's great long-term value for our shareholders and that the announced separation will only enhance our prospect. I look forward to updating on you on our progress for the year and enjoy the rest of your summer.


This concludes today’s conference call. Thank you all for your participation.

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