NeuStar Inc. Q3 2007 Earnings Call Transcript

| About: NeuStar, Inc. (NSR)

NeuStar Inc. (NYSE:NSR)

Q3 2007 Earnings Call

November 1, 2007, 8:00 AM ET


Brandon Pugh - Director of Finance, IR

Jeffrey E. Ganek - Chairman of the Board, CEO

Jeffrey Babka - CFO, Sr. VP


Kim - Goldman Sachs

Sterling Auty - JP Morgan

John Bright - Avondale Partners

Julie Santoriello - Morgan Stanley


Ladies and gentlemen, thank you for standing by. Welcome to the NeuStar conference call discussing third quarter 2007 results. Our release made earlier today is available from our website at During the presentation, all participants will be in a listen-only mode. Afterwards, securities analysts and institutional portfolio managers will be invited to participate in a question and answer session. [Operator Instructions].

As a reminder, this call is being recorded, Thursday, November 1, 2007. A replay of the call will be accessible until midnight, November 8th by dialing 888-203-1112 and entering conference ID number 5469618. International callers should dial 719-457-0820. An archive of this call will also be available on the NeuStar website at

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

Brandon Pugh – Director of Finance, Investor Relations

Thank you and good morning, everyone. Welcome to our third quarter 2007 earnings call. Joining us today from NeuStar Jeff Ganek, Chairman and Chief Executive Officer, and Jeff Babka, Senior Vice President and Chief Financial Officer. Our call today will begin with comments from Jeff Ganek, then Jeff Babka will follow with a discussion of our financial performance, after which we will open the line to questions from qualified investors and research analysts.

Statements by NeuStar executives during this presentation, including information that constitutes forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements about NeuStar's expectations, beliefs, and business results in the future. We cannot assure you that our expectations will be achieved, or that any deviations will not be material.

Forward-looking statements are subject to many assumptions, risks and uncertainties that may cause future results to differ materially from those anticipated, including the risks and other factors listed in NeuStar's filings with the Securities and Exchange Commission, including, without limitation, NeuStar's annual report on Form 10-K for the year ended December 31, 2006 and other subsequent and current periodic reports. All forward-looking statements are based on information available to NeuStar as of today's date. NeuStar undertakes no obligation to update any of the forward-looking statements, including as a result of any new information, future events, change expectations or otherwise. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results, metrics and commentary for the quarter and for the full-year 2006, as well as a reconciliation of certain non-GAAP measures with the most directly comparable GAAP measures.

With that, I'm pleased to announce NeuStar's new chairman and CEO, Jeff Ganek. Jeff?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Thanks, Brandon. Welcome to our third quarter earnings call. You'll hear today about another successful quarter. These results were in our press release issued earlier today. Our performance demonstrates strong growth and profitability. We're updating our previous 2007 revenue projections and increasing our 2007 guidance for profitability and transactions. Jeff Babka, NeuStar's CFO, will provide details of our quarterly results and full-year guidance in a few minutes, then we'll take and answer your questions.

Let me begin with a summary of third-quarter highlights. First, our base business continued to grow, reflecting strong market demand for existing services. Second, we made material progress in establishing the foundation for long-term future growth in our Ultra Internet Infrastructure Services and in our next generation messaging mobile instant messaging services. And third, even while investing in these two emerging businesses, our strong profitability and cash flow continued. Specifically, revenue for the third quarter rose to a $110.8 million, driving an increase in net income margin to 23%. This quarter transactions under our local number portability contracts in the United States totaled 83.2 million, an increase of 40% from the same quarter a year ago and a 12% increase from the second quarter of this year.

For more than five years now, or 22 successive quarters, we've grown transactions as customers continue to utilize our core services and find new uses for our unique offerings. The value that NeuStar brings to its customers lies in our ability of notifying all networks of fundamental routing modifications that result from the numerous changes made in the individual networks of the vast array of operators across the country. In today's diverse set of networks, there are thousands of independently operated competing networks that must interoperate with each other. Our customers, the network operators, count on NeuStar to provide this interoperability in a seamless manner without delay and without bias.

Most networks today are highly dynamic from a technology perspective, with change being the only constant. Call volumes continue to increase, architectures are modified, and phone services are constantly enhanced and improved. All of this requires instantaneous and precise rerouting of traffic. NeuStar's directory is heavily relied upon by the industry to notify other networks as to where to route calls. Our services provide the least-cost, most-effective means for networks to be updated.

Network operators have to manage a multitude of operating challenges, such as changes in technology, optimizing network traffic, and recovering from a disaster. Since NeuStar's infrastructure and service is already implemented across all networks in North America, our services can be readily accessed by operators to cost effectively address these challenges. Customers use our transaction-based services for a variety of reasons, which can be seen in our historical metrics. Depending upon where communication service providers are in their life cycles, a given quarter may have different drivers of NeuStar growth. Over the years, we've seen that change is both necessary and abundant, and with NeuStar at the core of all data traffic, complexity can be made simple. As we've stated in the past, market demand for NeuStar services continues to grow. Each quarter, more and more telephone numbers get populated into the number portability database, increasing the opportunities for additional transactions in the future.

In the third quarter, results were further enhanced by the solid performance from growth in two platforms other than local number portability; that is Ultra Internet Infrastructure Services and mobile data services, specifically Common Short Codes. Let me first tell you about Ultra. In the third quarter, a significant portion of our growth came from NeuStar offerings that manage traffic on the internet. When we acquired Ultra in 2006, our aim was to bring to the internet reliable infrastructure services, analogous to what we deliver to the telecommunications network operators. We believed Ultra would become a strong growth engine for the NeuStar business, by providing intelligent internet solutions to eCommerce providers. Since that time, the Ultra Services team has driven growth fueled by the explosive growth of eCommerce. Today, 13 of the top 17 eCommerce sites in the world use NeuStar's Ultra Services to manage their internet traffic.

NeuStar's Ultra Services now has approximately 3,000 customers, a 115 of which were added in the third quarter. In addition, another 142 contracts were signed in the third quarter, with existing customers either upgrading or utilizing additional new services. We now expect annual revenue from our Ultra business to grow by more than 60% over its full-year 2006 total, making it a key growth component for NeuStar. In the third quarter alone, queries to its directory increased to over 520 billion, that's billion with a B, which is a 78% growth year over, growth year-over-year. With the holiday buying season rapidly approaching, we're looking for a strong finish to 2007 for Ultra, putting us on a great trajectory of recurring revenue growth in 2008. Ultra, in combination with NeuStar's organically-grown internet registry business, now is a leading provider of essential directory services to the internet. It's as essential to large portions of the fast-growing IP world as our core services are to the voice world in North America. Our success with Ultra demonstrates we have the customers, services, technologies, and operations that are the foundations upon which we'll sustain long-term growth.

Second source of growth for NeuStar outside of our core local number portability business has been in the market for infrastructure essential to mobile data services, specifically in the third quarter, the number of common short codes in the United States grew to nearly 2,700. That's a 34% growth from the same quarter last year, and up 7% sequentially. Uses of common short codes continue to expand as demand grows for mobile data. Examples of application driving the use of short codes include items such as voting on the MVP of a sporting event and a consumer product company's promotion of a new product. Marketers are getting more creative with new ideas for campaigns that rely upon common short codes and NeuStar is in an excellent position to facilitate their growing needs with the directory that we manage. Common Short Codes enable what is today one of the largest streams of new advanced data and content services in the mobile market. NeuStar's role here demonstrates that we already are essential to the kinds of services that will drive large future growth in the communications market.

We see large emerging need for infrastructure services that support new, fast-growing mobile services. That's why we acquired Followap [ph] 11 months ago. Since that time, NeuStar's next generation messaging unit, or NGM, has become by almost all measures the leading provider of infrastructure that mobile operators rely on to deliver mobile instant messaging. That's important because mobile instant messaging is emerging as the first IP-based service to be used by the mass market of billions of wireless handsets worldwide. With our strong customer base and installed platform, we're positioned to capture growth when mobile instant messaging proliferates, and we're advantageously positioned to deliver the essential infrastructure services required by other IP-based services that will emerge in the marketplace. No one provides more of these services or has more customers than NeuStar.

In 2007, GAAP revenues from NGM have grown slower than we projected a year ago. Jeff Babka will review the numbers in a few minutes. The fact is that the market for IP-based services to wireless handsets is still in its early stages. We got to this opportunity a bit early. At the same time, the market and our operating strengthens have matured and strengthened faster than expected. As a result, we're now in a strong position to grow in the future, as the market for IP-based services to mobile handset grows in 2008 and beyond. Let me cite specifics.

More than 30 of the largest mobile network operators around the world have selected NeuStar as the provider of infrastructure to support their mobile instant messaging offerings. These mobile operators cumulatively serve more than 300 million wireless handsets. Our customer base has grown by almost 80% over the past year. In addition to the strong customer base of mobile operators in Europe, we added two large Asian operators as customers. No other infrastructure provider has a customer base and community of end users anywhere near that large.

Introductions of marketing of new mobile instant messaging service by our large existing base of customers has happened slower than we projected. However, the signs in the market indicate that demand for the service is real and building. First, in particular country markets where the service has been introduced, end-user take rates have far exceeded expectations. Examples include 3 Hutchinson in the UK and Voda in Portugal.

Second, there are signs that mobile network operators and internet service providers, or ISPs, are racing to offer mobile instant messaging to the 400 million existing users of the ISP's instant messaging services. As a result, NeuStar has seen a surge in demand, exceeding projections for NeuStar services that deliver ISP's IM services to mobile handsets. Our ISP-focused mobile messaging gateway, or MMG, service has been launched in a number of operators, but some recent launches have taken place with four operators in the Vodafone group; Spain, Netherlands, Portugal and in France.

Third, our customers, the mobile network operators, have well-defined plans to introduce new mobile instant messaging services. They are working closely with us to ready the infrastructure for the volumes that are expected. Overall we see that market demand for mobile instant messaging is emerging. In total, our quantity of instant messaging end users has doubled each quarter from 300,000 in the first quarter of this year to 600,000 in the second quarter. Today the total is over 1.3 million subscribers. Demand for NeuStar's infrastructure services will follow directly, and since our leading position in the market has strengthened, we see in NGM, the foundation for future growth.

Before Jeff Babka takes over, let me highlight for you some recent developments for NeuStar in the market. On September 25th, we announced the award of the local number portability contract in Brazil to NeuStar and ClearTech, our Brazilian local partner. NeuStar's revenues from the initial phase of this initiative won't be large. The win does put NeuStar in a key role, providing essential infrastructure services in a very large market. In mobile alone, Brazil has more than 100 million telephone numbers and that number is growing 10% annually. This win positions NeuStar for the future, when the demand for directory services in Brazil and the region overall will mature and grow.

In August, we announced that NeuStar was again selected by the FCC to maintain our role as the number pooling administrator, a privilege we have enjoyed since its inception in 2001. This is a demonstration of the trust the industry and the FCC have in NeuStar. And last week, the United States Department of Commerce announced that NeuStar was selected to continue as the provider of the registry for the dot U.S. internet domain. This solidifies our role providing essential directory services in the IP world. As the need for IP directory services grow larger and more complex, the market and the regulators continue to turn to NeuStar for reliable services. Each of these victories came in the face of tough competition, and we're proud of our teams who worked diligently on them.

So this morning, I've talked about growth. Increasingly, we see long-term growth prospects in our newly emerging businesses outside of the core local number portability business. We now have businesses that are essential to emerging markets, like mobile data services and internet eCommerce traffic. In the long term we expect a majority of our revenues will come from IP-based mobile and non-U.S. markets. While building the foundations for long-term growth, we've produced strong profitability and cash flow. We manage the business every day to produce strong profitability that few growth companies match. We've built and we manage our operations to deliver efficiency and operating leverage. Profitability is our touchstone. We aim to continue to produce over the long-term margins comparable to this quarter's.

Jeff Babka, our CFO, will now provide an overview of our financial performance for this quarter. Jeff?

Jeffrey Babka – Chief Financial Officer, Senior Vice President

Thank you, Jeff, and good morning, everyone. I'm pleased, again, to have the opportunity to present a strong financial quarter for NeuStar and an update to our guidance for the full year of 2007. Here are the highlights of the third quarter. NeuStar's total revenue for the third quarter was a $110.8 million, a 34% increase from the third quarter of last year. Net income for the quarter totaled $25.7 million, representing a 23% net income margin and $0.32 per share on a diluted basis. Net income was up $8.6 million from the third quarter of last year. Non-GAAP adjusted net income was $30.4 million compared to $20.1 million in the third quarter of 2006, representing $0.38 per diluted share for this quarter compared to $0.26 in the comparable quarter last year. Cash, cash equivalents and short-term investments ended the quarter at $146.1 million, an increase of over $35 million from the beginning of the quarter.

Transactions on our contracts to provide local number portability services in the United States totaled $83.2 million, up 40% from the third quarter of last year, and $7 million higher than our guidance provided on August 2, 2007. NGM revenue totaled $1.8 million, coming in at the low end of the guidance we provided on August 2, 2007, with billings totaled $3.3 million. With respect to revenue, addressing revenue totaled $28 million, down $200,000, or 1% in the same quarter last year. Ultra Services revenue in the quarter amounted to $7.7 million, followed by U.S. Common Short Code, which increased $1.9 million to $6.2 million. Offsetting these increases was a $5.7 million decrease from addressing transactions under our contracts to provide telephone number portability services in the U.S.

Interoperability revenue totaled $15.2 million, up $1.6 million, or 12% from the same quarter last year. This increase was driven by expansion of our wireless number portability services in Canada. In addition, interoperability from our NGM business segment was $600,000, for which there was no corresponding revenue in the third quarter of 2006.

Infrastructure revenue amounted to $67.1 million, up $26.8 million, or 66% from the third quarter of last year. This quarter, infrastructure continued to be the fastest-growing revenue category, driven by SS7 vendor changes, implementation of new technologies, the addition of record details to support internal programs, and other network management activities. As Jeff mentioned earlier, this growth is indicative of the value the industry attains from using NeuStar's clearing house service to manage their network. So to summarize, our growth in revenue this quarter came from our legacy telephone number portability business, our recently-acquired Ultra Services business and our internally-developed Common Short Code business.

Turning now to costs and expenses, I will compare the current quarter to the previous quarter, which we believe provides better insight into our cost trends. In the third quarter, operating expense totaled $68.9 million, essentially flat on a sequential basis, but up 26% from a year ago, as we continued to invest in the early stage acquisitions that came on board in April and November last year. Looking at cost and expense by functional category, cost of revenue totaled $24.1 million, up $800,000 from the second quarter of 2007, despite a quarter-over-quarter revenue increase of $11.1 million. Sales and marketing expense totaled $16.3 million in the third quarter, down $1.3 million from the second quarter of 2007. Research and development expense totaled $6 million, down $800,000 from the second quarter 2007. And general and administrative expense totaled $13 million, an increase of $1.7 million from the second quarter.

Included in the costs and expenses for the third quarter was $4.1 million of pretax non-cash stock-based compensation expense recognized in accordance with FASB statement 123(NYSE:R). In the quarter, this expense was allocated as follows: Cost of revenue, $500,000; sales and marketing, $1.4 million; research and development, $500,000; and general and administrative, $1.7 million. Depreciation and amortization totaled $9.5 million in the third quarter, up $100,000 from the second. Of this amount, amortization of intangibles related to the application of purchase accounting for acquisitions totaled $3.7 million, $1.9 million of which is attributable to our Followap acquisition, now referred to as NGM.

Let me now turn to margin improvement. In the third quarter, despite the decreased pricing on our impact contracts that were implemented at the start of 2007 and the increased operating expenses resulting from our two acquisitions in 2006, we have managed to return to our 2006 margin levels of 38% operating margin and net income margins ranging in the 22% to 23% range.

A few brief comments relative to our balance sheet and capital expenditures. Accounts receivable were $71.9 million, an increase of $12.1 million from the start of the quarter, due primarily to revenue increases in the third quarter. Deferred revenue increased by $1.1 million to $50.4 million from the start of the quarter, due primarily to billings related to our subscription-related business, and capital expenditures were $6.9 million in the quarter, primarily reflecting investments in our infrastructure.

With respect to our NGM revenue forecast, as we have stated in the past, our GAAP revenue projections are based on numerous variables, including carrier launch plans, the addressable market of client-enabled handsets, projected subscriber penetration rates, and in the case of ISP launches, the size of the ISP user base in the addressable market. Despite our strong operational performance that Jeff previously mentioned, there have been some changes in operator launch schedules, which impacted the timing of achieving targeted penetration rates and attaining our GAAP revenue forecast for 2007. Previously, we projected 2007 NGM revenue to range between $10 million and $13 million. At this time, we now project between $8 million and $10 million. In addition, we project having between $5 million and $7 million of deferred revenue on the NGM balance sheet at the end of the year, in accordance with current revenue recognition rules.

With respect to NGM revenue for 2008, since the acquisition in November of 2006 we have commented that the customer and product-specific assumptions in our forecasting model supported a $50 million revenue projection for 2008. As with our 2007 forecast, the assumptions supporting 2008 have also changed. In particular, we now see a recognition on the part of mobile operators that the quickest way to get initial uptake of the mobile IM service is via the established ISPs, such as Yahoo! and MSN, rather than through their own community, which is what both the mobile operators and NeuStar had previously assumed. Fortunately, NGM has a product offering targeted at ISP implementations and thus we have been able to quickly respond to meet the changing market requirements. After adjusting our revenue model for these changes and underlying assumptions, we believe that $50 million in NGM revenue remains possible in 2008. However, recognizing the business risks involved in an emerging market such as mobile instant messaging, we are taking this opportunity to lower our revenue projection for NGM in 2008 to range between $35 million and $40 million. Our confidence in the long-term NGM market opportunity and business remain strong, as we see a significantly increasing proportion of our NGM revenues coming from recurring active user base revenue streams.

That completes our third quarter financial review. And now we'll move on to our outlook for the remainder of the year. With the positive trends in our clearing house business and the first nine months of 2007 now behind us, NeuStar updates its prior revenue, profitability and transaction guidance provided on August 2, 2007. As such, we now expect full year revenue forecast to be in the low end of our previous guidance range of between $428 million and $438 million. In spite of the temporary revenue shortfalls at NGM that I previously mentioned, we expect that growth in impact in Ultra Services to more than, will more than compensate. We are reaffirming the full-year revenue, while indicating it is likely to be in the low end of the range because occasionally in previous quarters, transactions that were not included in our forecast at the start of the quarter were ultimately attained, resulting in a positive variance from guidance. In recognition of this possibility, we decided to leave the current range, but guide to the low end of it.

We are increasing our full-year net income guidance to now range between $88 million and $90 million, or between $1.11 and $1.13 per diluted share, based on an estimated 79.5 million diluted shares outstanding. This incorporates our estimate for pretax non-cash stock based compensation expense recorded in accordance with FASB statement number 123(R) of $17 million as compared with $11.9 million in 2006.

Full year non-GAAP adjusted net income is also increased and now expected to range between $108 million and $110 million, or between $1.36 and $1.39 per diluted share. Transactions under our contracts to provide telephone number portability services in the United States are projected to exceed $313 million for the full-year 2007, as compared to our prior guidance of $300 million and the 2006 total of $234 million. This would result in the fourth quarter transactions again increasing to the very high level we attained in the third quarter.

To close, we believe our third quarter performance from a revenue growth, profit and cash perspective was very solid and we are pleased with our operational progress and market success. We'd also like to take this opportunity to thank and congratulate our NeuStar team throughout the world who contributed to these accomplishments. That concludes our formal remarks. Operator, you may now open the line to questions.

Question and Answer


Thank you ladies gentlemen. [Operator instructions]

And we'll take our first question from Liz Grausam with Goldman Sachs. Please go ahead.

Kim – Goldman Sachs

Hi. This is Kim for Liz. Just wondering, on the transaction growth this quarter, it was 83.2, which was a little higher than we had expected, was there a new field that got activated or what was the contribution from the new fields that got activated two quarters ago?

Jeffrey Babka – Chief Financial Officer, Senior Vice President

Yes, when we, this is Jeff Babka. Actually it wasn't related to a new field or anything that was new added in the quarter and it primarily was in the area of the network management, network optimization transactions. In the first quarter and second quarter this year, we had some pent-up demand on that optional data field and that drove the transactions in that quarter. We're combining now the whole changes in the fields, as well as the network optimization, so you're looking at roughly about 20% of total revenue coming from the combination of these alternate fields and the network management, network optimization and grooming-type transactions.

Kim – Goldman Sachs

I see. And just a question on the sales and marketing. It was quite a little bit lower than it has been in the previous quarters. Is this going to be a trend going forward, do you think?

Jeffrey Babka – Chief Financial Officer, Senior Vice President

I don't, no, it's not a trend. In fact, we are looking right now to increase our sales and marketing expense, particularly in the area of Ultra Services. We believe there's a tremendous opportunity out there to, and essentially increase our market coverage by adding sales people. So, quite honestly I would have preferred to see a little higher sales and marketing expense that quarter, or in the third quarter. That gives us, it will set us up well for continued growth in Ultra Services in 2008. No, I wouldn't suspect you'd see that staying down that level. As I said, we'd like to increase that going forward.

Kim – Goldman Sachs

Okay, thank you.


And we'll take our next question from Sterling Auty with JPMorgan. Please go ahead.

Sterling Auty – JP Morgan

Yes, thanks. One question, one follow up. Question for Jeff Ganek. In terms of the Followap business as you head into 2008, you talked about a couple of items, but what gives you the confidence that even the ramp that you now are forecasting is truly achievable? Is it from actual carrier marketing plans? What is it that you're seeing in the market to give you the confidence?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Very, very good question, one that we pay great attention to here. I just spent two weeks in Europe with our European and Asian customers, and we reviewed each of their marketing and service introduction programs. I come away more confident today with the specific plans that specific mobile network operators have to introduce, to support, and to market this service during 2008, and it's just that simple and that tangible. Individual carriers sat with me and said, here are our marketing programs. These are the television advertisements. One of the carriers said to me, Jeff, we are going to paint the TV screens in our country with these ads over a period of ten weeks, and there are additional ancillary promotional advertisements and communication plans associated with that. I heard that not once, not twice, but I heard that generically across our large and increasing set of customers.

Number two, in those country markets where mobile instant messaging has been introduced, we have seen some startling responses from end-user subscribers. Now, this an embryonic market. This is a market that in a sense is unprecedented. This is one where the future is not charted. However, to the extent that more mobile operators than we expected have come to NeuStar, signed contract, paid money and committed to buying our services, to the extent that we have considerably more end-user subscribers covered by our existing platforms, and considering that in those select markets, where mobile operators have introduced the service and they've gotten greater take rates than were anticipated, NeuStar stands ready with platforms that work, that operate with handsets, that serve the end users and make the service accessible, and we are working closely, cooperatively with the community of mobile operators in the world to, A, deliver an innovative, feature-rich, easy-to-use, easy-to-migrate-to inexpensive service that our carriers tell us will be one of the two or three new large revenue opportunities for mobile operators around the world.

Sterling Auty – JP Morgan

Okay. And then the follow-up question would be, you talked about the strength in transactions in the current quarter and since the change, the mix changed quarter to quarter, is there any insight on what you think is going to be the key items for transactions in the fourth quarter and maybe heading into 2008?

Jeffrey Babka – Chief Financial Officer, Senior Vice President

Yes, Sterling, it really is a lot of the same thing. We're seeing right now, you've got VOIP, you've got vendor changes which happen quite frequently in this, tech migration, network optimization. It's the same basic blocking and tackling-type transactions that we've seen here now over the last couple of quarters and we're seeing them again. Going into next year, we think it's pretty similar. It's a very complex market. We're seeing the technology changes that we're talking about. Obviously we keep our eye on what big players in the wireless industry are doing and their plans to change out the new technologies, and as you look going forward for that, that certainly would be a wind in our sails as we get out into late 2008 as, as some of these changes are made.

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Sterling, a perspective on the NeuStar hub service is that we keep hearing from our customers go like this. Within the networks of each of our telecommunication service providers, there is a huge amount of fundamental change, change that causes shifts in the routing of traffic to any given telephone number. Well, it turns out that most telephone calls originate on one network and terminate on another. So when any individual telephone network makes a change in the technology and the architecture and the routing paths of traffic within its own network, it is incumbent, it is essential that that network operator communicate that change to the thousands of other network operators who must interoperate. As long as change keeps the individual networks in flux, industry will increasingly rely upon the NeuStar directory, to universally make available essential operating data that enables calls and communications to go from any one network to any other.

Sterling Auty – JP Morgan

All right, thank you.


And we'll take our next question from John Bright with Avondale Partners. Please go ahead.

John Bright – Avondale Partners

Thank you, good morning. First question for Jeff Ganek. Jeff, we've taken down the outlook slightly for NGM. Would you give us your first thought on transaction growth expectations for FY08?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Sure, John. It is early for us to offer specific guidance for 2008. Look, let's be clear. We have seen steady growth for more than 5 years in the local number portability directory. We believe that there are considerable, there's a considerable inventory of new applications for future uses that have not yet been activated for the impact. We believe those future uses over the long term are going to generate considerable, considerable growth. I don't want to count on that growth happening on a steady rate at the same levels of growth that we've had in the past. That's not to say we're not driving there. It's not to say that the customers aren't driving there. It's just that Jeff Babka and I are prudent, conservative managers of a great base business that has performed very well. We believe that fundamental key to NeuStar's continued growth in the future are new directory hub businesses beyond and in addition to the local number portability platform.

In 2008 and beyond, the key to our growth is going to be the take-up in the marketplace of mobile instant messaging and other services that depend upon NeuStar platforms, and what we are aiming to do is become as essential to IP traffic worldwide as we are to voice traffic in North America. We believe also that the 60% growth that we've seen this year in Ultra Services over the prior year demonstrates tangible evidence that there is need in the eCommerce community, in the users of the internet, for advanced traffic management and support capabilities that NeuStar is in an advantageous position to deliver. We believe that, in addition to the growth of mobile instant messaging and IP service platforms for mobile operators worldwide, we will generate considerable growth in 2008 and in the future for those other internet infrastructure services. It's not to say that we're not pushing real hard for local number portability. It's that while we do that, we are going to depend increasingly on other platforms.

John Bright – Avondale Partners

Follow-up question, then, for Jeff Babka. Two-fold, Jeff. One, I saw a deferred tax asset, l Looked like it ticked up in the quarter. Be interested in what that was about. Then if you have the domain names for the quarter?

Jeffrey Babka – Chief Financial Officer, Senior Vice President

Yes, John. On the deferred tax asset, that's primarily, it related to the net operating losses from NGM and Ultra DNS that are estimated to be utilized in the, over the next 12 months. And as you can see, there was also a decrease in the longer term, or long-term deferred tax assets, so those kind of go hand in hand, but it's really the flow-through over the next 12 months. Also, your second question on domain names, basically three, 3.3 thousand, or 3,300, which basically represents 27% growth, or 20% growth from last year.

John Bright – Avondale Partners

Thank you.


And we'll take our next question from Phil Cusick with Bear, Stearns. Please go ahead.

Richard Choe - Bear, Stearns & Co. Inc.

Hi, this is Richard Choe for Phil. Just wanted to ask about the, with strong free cash flow generation and your cash balance at $146 million now and growing nicely over the past few quarters, what level do you feel you need to keep cash on hand for any strategic purposes you might have, and your current thoughts on a potential stock buyback?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

What a great problem to have. We've got too much cash and we're generating lots more of it. This is a very important strategy and management issue here. We, not only, we continue to expect, we continue to aspire to generate lots more cash, so this challenge is only going to get bigger. Jeff Babka and I have spent a great deal of time and effort with the NeuStar board assessing our alternatives here. We have not decided with the board to do a buyback or changing the capital structure at this point.

However, in cooperation with the board, Jeff Babka is working with our financial market advisors to explore opportunities and alternatives that we could pursue that would perhaps increase our debt from it's very, very low levels today, and perhaps do buybacks of equity. That won't happen this year. We've not yet committed to doing it next year, but it is on the top of the list of what we're considering with the board and we will continue to look at this because there's lots of reasons to do it. There are opportunities to lower our cost of capital. There's opportunities to consolidate the value of equity ownership, lots of reasons to do this. We're not ignoring them, and in fact, that may well be a path that's logical for the business to pursue next year.

Richard Choe - Bear, Stearns & Co. Inc.

Great, and I guess just to follow up a little bit. You’re saying it's more of a 2008 potential event, and then can you comment on maybe the M&A front, what's the environment looking like these days and is it something that you would focus on more next year than this year, if at all?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Well, we have done a few acquisitions over the past. We have done them in very calculated studied ways. We have not bought extraneous businesses in different technologies and markets divorced from what we do. Where we have a strategic view that there is a requirement in the marketplace for a directory service that we can deliver better than anybody in the world, a directory service with substantial future growth opportunities, we're aimed at that opportunity. We're going to put as many of our resources as is reasonable, prudent and productive there to get that future growth and profitability stream flowing to NeuStar.

Only after we make those strategic choices do we start looking at acquisitions, and acquisitions therefore are not so much strategic steps off of our path, but rather, are make buy decisions. We've decided to get into a new market and we say, gee, we can do this more efficiently, more effectively by buying somebody who has already started down the road. That's why we've done the acquisitions we've done.

We continue to look at many, many opportunities in the marketplace. We do not have any specific commitment or plan to make an acquisition in the immediate future, but we're looking at things every day. Given changes in the debt markets, the price that you have to pay for many of the acquisitions we consider have become much more reasonable over the last few months. The range of alternatives look different, but we are just as prudent and careful today as we've been over the last year. I'm sorry that's more, not more definitive for you. The real answer is we have an aggressive strategy. We have a well focused strategy. Mergers and acquisitions have been and will continue to be an important tool in that strategy and you'll probably hear something from us about it in the future.

Richard Choe - Bear, Stearns & Co. Inc.

Great, thank you.


And we'll take our next question from Julie Santoriello with Morgan Stanley. Please go ahead.

Julie Santoriello – Morgan Stanley

Thanks, good morning. A question on 2008. I understand you're not giving specific guidance here, but if we look at the $10 million to $15 million shortfall in expected NGM revenues in 2008, what parts of the business do you think might step up to fill that gap and help keep you at that 25% long-term growth target that you've set?

Jeffrey Babka – Chief Financial Officer, Senior Vice President

Julie, as Jeff mentioned earlier, we are really anticipating a strong year from Ultra in 2008, and in fact, we're still, I don't consider $35 million to $40 million revenue on NGM to be small growth. That's over and above $8 million to $10 million this year, so that's pretty significant growth on top of that. We've got new services in IP, new directory services. I think Common Short Code still has the possibility to grow in excess of 25%. And as we look forward across the whole business, when we give our guidance for next year, it'll be a balanced view and I suspect you'll see growth across all the major areas and we'll let you know what that overall growth percentage will be when we report back in February.

Julie Santoriello – Morgan Stanley

Okay, thanks. And what about this, this change in NGM? Is it because dynamic toward, I guess, more activity flowing through ISPs rather than mobile operators. Does that have specific implications for the business model for NeuStar?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Sure, Julie. It's a great question. Last year when we first got into this business, there was a sense among many of our customers who had signed up for service that they were going to offer their own brand of service. When you flipped open your handset, you saw the mobile operator's brand name and it said mobile operator's instant messaging service. Well, it turns out that putting together, defining, implementing a marketing plan to create a new product under that brand is a big undertaking. The mobile operators have said, isn't there an easier path, and what's the easier path? Well, today around the world there are 400 million individual end users who are already doing instant messaging. They're doing this over the IM services provided by ISPs, like MSN, and they're doing it largely from desk tops. There's 400 million of them.

Well, there are somewhere between 1.7 billion and 2 billion handset users around the world that regularly SMS text. The future of instant messaging is not on the desktop. The future of instant messaging is on the handset. And today, the mobile operators and the ISPs are racing to give end-users handset owners access to the ISP's instant messaging service from the handset. The ISPs can already support the service, the ISPs already have the customers, and the mobile operators say, gee, if we just allow existing users of existing services to use our handsets to get the service, isn't that an easy way to build up a critical mass of handset users who are doing IMing on a mobile basis.

So it turns out that NeuStar has a product, NGM's got a product called MMG that, in fact, facilitates the interoperability of the instant message service provided by ISPs with mobile operators. The mobile operators have rushed to NeuStar. We've seen a greater demand for the MMG product than we had anticipated and we're seeing that the mobile operators are focusing their marketing introductions around the MMG-provided service supported by the ISPs.

Each of the mobile operators have told me just over the last couple of weeks that they believe once there is a critical mass of end users who are deploying their handsets to use mobile instant messaging, that the mobile operators believe that they will expand the number of ISP's IM you can access over their handset and that the mobile operators see an important role for themselves in providing interoperability between the different instant messaging services. And it is that interoperability that allows you to use a handset, create an IM on an ISP's IM system and send it to an address on the IM network of a different ISP, and have the end user look at it on a second or third mobile operator's handset. It's got to go through lots of gates. What NeuStar does is make that interoperability work.

What our customers told me about in Europe over the last two weeks is let us deploy today the infrastructure, the gateways, the messaging, processing capability, that, A, enables us to handle the rush of traffic we're going to get from the existing customers, and number two, let us deliver to the handset the advanced features that our customers want with instant messaging, and then let's be sure we can handle multiple ISPs and interoperability across all those systems.

So this is a brand-new market. There is not a chart of the path, and the important thing here is that there are more mobile operators who have deployed the system than we expected and their marketing programs are very, very ambitious. We expect to ride the wave of the market. We are nothing if not responsive to activity that's driven by end-user demand.

Julie Santoriello – Morgan Stanley

Okay, so, that's very helpful explanation, thank you. Is it just basically then also that the revenue opportunity to NeuStar is just smaller at this point where you're just deploying the MMG products and then once this evolves into really driving full interoperability among the ISPs and the mobile operators, that will be the much larger opportunity to NeuStar?

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

So among the reasons I spent the last two weeks in Europe is I was worried about whether the market opportunity had evaporated or whether it had just shifted to the right. The time I personally spent with our, with the 27 different mobile operators I met with told me that, because of the infrastructure deployments, because of their specific marketing budgets and marketing programs, in fact, what has happened, the path to introductions of the service has just been different than what they had anticipated a year ago.

A year ago they had not looked at the ISP customer base as the first stepping stone down the path towards broad introduction of the service, and the implications for NeuStar revenues are that our revenues were slower in 2007 than anticipated, but it is apparent that there's very real demand out in the marketplace. I expect that we're going to see a fast ramp on these services in 2008 and beyond.

Julie Santoriello – Morgan Stanley

Okay. Thank you very much.


Thank you. That concludes the question-and-answer session. At this time, I'll turn the call back over to Mr. Ganek. Please go ahead.

Jeffrey E. Ganek – Chairman of the Board, Chief Executive Officer

Thanks very much for joining our third quarter earnings call. Let me just highlight what I think were the, were the key results of the quarter. First of all, we produced great results, demand for our services continue, and we continue to be a trusted, reliable provider there. Number two, we are clearly on a strategic path to develop new platforms for future growth, different from, separate from our local number portability core business. Spent a lot of time talking about mobile instant messaging and Ultra Services. We believe that at some point in the future, more than half of our revenues will come from those other alternative platforms. We continue to invest and develop those opportunities. Number three, while we've been making those investments, we have managed to produce strong profitability and cash flow. We believe that that's the touchstone of NeuStar. We will continue to manage the operating leverage in our existing business to produce those same kinds of margin results. With that, thank you very much for joining us today. Have a great day.


Thank you. That concludes today's conference. We appreciate your participation. You may now disconnect.

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