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Executives

Brandon Pugh - Director of Finance and IR

Jeffrey E. Ganek - Chairman and CEO

Jeffrey A. Babka - Sr. VP and CFO

Analysts

Julie Santoriello - Morgan Stanley

Philip Winslow - Credit Suisse

Phil Cusick - Bear Stearns

Elizabeth Grausam - Goldman Sachs

Sterling Auty - J.P. Morgan

John Bright - Avondale Partners

NeuStar Inc. (NSR) Q4 FY07 Earnings Call February 6, 2008 8:00 AM ET

Operator

Good day ladies and gentlemen, and thank you for standing by and welcome to NeuStar Conference Call discussing Fourth Quarter 2007 Results. The company's release made earlier today is available from it's website at www.neustar.biz. 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, Wednesday, February 06, 2008. A replay of the call will be accessible until midnight, February 13th by dialing 888-203-1112 and entering conference ID number 6328943. International callers should dial 719-457-0820. An archive of this call will be available on the NeuStar website at www.neustar.biz.

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 and Investor Relations

Thank you and good morning, everyone. Welcome to our fourth quarter 2007 and full year 2007 earnings call. Joining us today from NeuStar, Jeff Ganek, Chairman and CEO; 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 include 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 of 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 2007, as well as the reconciliation of certain non-GAAP measures with the most directly comparable GAAP measures.

With that, I'm pleased to introduce NeuStar's Chairman and CEO, Jeff Ganek. Jeff?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

Thanks, Brandon. Welcome to today's conference call and our discussion of NeuStar's performance and prospects. It's my pleasure to speak with you about another successful quarter but in a new and expanded context. Since our IPO we've been a company that has met or exceeded all of our financial targets for growth and profitability primarily as the local number portability company in North America. Today in addition to this core business we enter 2008 as a Global Directory Services business positioned for sustained profitability not just in 2008 but through 2011 as the trusted provider of Interoperability Services for tomorrows complex worldwide IP networks to expand voice, IP, and mobile.

Just as when we went public, we are confident in the long-term growth prospects we will present to you today, because we can identify real tangible, macro trends in a marketplace that we believe will drive demand for our services and make us just as essential in these diverse global IP networks as we are to the North American voice traffic today.

In support of that assertion today I would like to highlight 3 points; first, NeuStar's financial performance in the fourth quarter was exceptionally strong capping positive results for the full year of 2007. Second, prospects for growth are strong. While growth rates may moderate compared to the extraordinary growth of past years we see very strong growth continuing in 2008 and importantly beyond in 2009, 2010, and 2011. Third, our 2007 results demonstrate the consistency of NeuStar's profitability notwithstanding current uncertainty about the overall economy and changing rates of growth, I am highly confident for ability to meet targets for profitability of at least 40% EBITDA margin in each year through 2011.

Now, let me discuss each point. First, recent financial results. Let's start with highlights of our results, Jeff Babka will provide you with further details, but let me point out that we had a phenomenal fourth quarter and another year of exceptional growth. Versus last year we grew revenue 32% for the fourth quarter and 29% for the year. Our growth for both periods was driven by increased transactions under our contract to provide Telephone Number Portability Services in the United States which grew 44% over the prior year and 36% for the year.

Fourth quarter represented the largest number of transaction we have ever processed in any quarter reflecting our continued focus on customer demand and innovation. This growth in transaction volume demonstrates strong demand for our services from numerous sources including customers optimizing their networks, consolidating their networks after a merger, and upgrading to next generation technologies such as internet protocol or IP.

In addition, as many enterprises increasingly rely on the internet as a key enabling technology for their businesses, NeuStar Ultra Services experienced 125 new customer wins and upgrades from existing customers. 2007 our platform answered more than 1.9 trillion, trillion with the T queries directed at the more than 60 million individual records we manage on behalf of our enterprise, e-commerce, and top level internet domain customers.

Another contributor to our growth in revenues was our Common Short Codes Service. NeuStar reduced churn, boosted renewal rates, and saw a strong 48% year-over-year revenue growth. Overall, along with this growth our profitability performance exceeded our 2007 targets. These strong results added $140 million in cash to our balance sheet at year-end.

On the subject of cash we continue to believe that our $200 million cash balance and the additional cash flows projected for 2008 provide operational, financial, and strategic flexibility in the current economic environment. We will invest in the business and consider acquiring other businesses to drive top line growth and near term accretion. With our Board we continue to consider the best alternatives and options for our cash including a potential share buyback. All in all we had an extraordinary year financially and operationally.

My second point for today centers on our long-term growth strategy. In 2007 we built the foundation to continue our growth into the future. It's on that foundation that we provided revenue growth targets through 2011 of more than 20% a year.

In 2008 we confidently see NeuStar as a global company with revenues and growth from different geographies and markets and these revenues and growth are achievable based on a series of fundamental changes that are shaping the communications markets for the next 15 years and in turn driving demand for NeuStar Services.

We see growth continuing in 2008 and future years because our customers depend on our Numbering Services to manage a steady stream of new technologies, new applications, new services, and new players. Let me cite a few trends that underscore this point. The first is the IP revolution, the changeover from all voice switches and transport technologies in the large networks has began. Over the next year virtually all switches and related facilities will be replaced by soft switches and IP systems, driving alteration of most of the industry's signaling systems and fundamentally reshaping consumer enterprise and service provider networks. To manage the massive changes in network technologies and architectures our customers will rely on NeuStar's Numbering Services to change the routing of their traffic. We are already seeing the impact with IP driving almost 10% of our numbering volumes. We expect this IP revolution to drive large increases in demand for NeuStar services in each of the next 3 years.

Another fundamental change in the market key to our future growth is explosive growth in wireless and importantly fast growth in the menu of services available on wireless handsets. According to industry sources U.S. Wireless Data revenue is expected to nearly triple to over $70 billion by 2011. NeuStar's customers will rely on our directory to manage the changes that enable these new wireless applications.

Our third trend is the proliferation of new service providers and networks, for example, social networks increasingly will require telephone numbers as a key identifier for their members and are seeking to enable those members to interconnect. The social networks are approaching a billion users in size and demand for NeuStar Services, could increase in proportion to the size and scope of these and other new networks.

So, growth in IP, wireless, and new social networks will drive increased demand for Numbering Services over the next years on top of continued demand for current applications of NeuStar directory, that is woven into our customers operating fabric. We have also identified trends that would drive increased demand for Internet Infrastructural Services such as our Ultra Services based on the global growth of the Internet. Consider the potential, internet penetration in North America is above 70% of the population, but it's only 43% in Europe and averages 20% for the world as a whole, that lead a lot of room to grow. According to an industry study, global IP traffic is expected to quintuple by 2011 over 2006. The addressable eCommerce market is growing rapidly, surpassing $300 billion by 2010 according to industry sources.

NeuStar has a clear history to capitalizing on this growth. We already have an unsurpassed, globally deployed infrastructure at the heart of the internet that connects to all the networks and enables Interoperability across them all. In all we direct the routing for nearly a quarter of all traffic on the world's internet, providing additional Directory Services that are essential to more than 3000 eCommerce and large internet users.

Ultra Services revenue growth up nearly 49% year-over-year demonstrates that we are advantageously positioned to meet the demand for complex monitoring, security, and load balancing services as eCommerce and web services proliferate. Along side this demand for numbering in Ultra Services we see NGM, Next Generation Messaging as a growth business.

First NGM addresses a large existing market while the market for wireless instant messaging is embryonic and growing rapidly. SMS text messaging already serves more than 1.5 billion mobile handset users and it generated more than $60 billion in revenues last year.

Now, mobile instant messaging is emerging as the less expensive Next Generation Messaging service and NeuStar NGM is already installed and operating as the world's leading provider of a platform that mobile operators depend on to deliver. NeuStar is the choice of more than 30 operators serving more than 300 million handsets including Vodafone, Telecom Italia, VimpleCom, and SFR. If only a small portion of handset users who regularly use SMS start using mobile IM, NeuStar NGM will exceed our business plan targets.

Moreover, we believe the first mover position of NeuStar's Mobile IM platform will advantage us in providing essentials for to mobile operators as they introduce additional IP services to their customers in the future. Mobile IM and NeuStar's role are steps on the path to the IP-based communications of the 21st century.

Really each of these NeuStar businesses Numbering, Ultra, and NGM will grow for very similar reasons. First, in the increasingly IP communications market there is a growing need for services that enable network operators to share essential data in order to interoperate. That is across the growing number of independent rival risk networks that use a growing array of different technologies and delivering an expanding menu of varied Voice, Data and Video services, the network operators must have a reliable source of information that enables communications to originate on any one network and terminate on another.

Second, NeuStar success to-date is a demonstration that networks already rely on its trusted Directory Services to manage complexity and interoperate with each other in the North American voice market across the Internet and in mobile services. The size and scope of NeuStar's existing directories and the extent of the networks who use them are unmatched and each is growing. Experience shows that once our network customers rely on us for one service it will be easy for them to use a second and a third.

So I talked about two of the three key points for today. First, strong financial results in 2007, second positive growth prospects for 2008 and future years. Now let me address the third point, notwithstanding today's uncertain economic conditions, I am highly confident NeuStar will reach it's targets for profitability. That is EBITDA of greater than 40% of revenue. Why? Because NeuStar has long-term contracts, sustainable franchisees, and scaleable business model that's designed to sustain profitability.

Pricing is secure because most of our services are provided under long-term contracts and sustainable franchisees. Volumes are reliable because our services are essential and because our position is sticky. Remember that the great bulk of our revenues come from services that are priced on a full transaction or volume basis. As volumes have increased, we have been able to manage operations and technologies to yield efficiencies, economies, and most important flexibility. Our basic infrastructure will support growth in volumes, relatively modest new investments will significantly expand the scale and scope of services that can be delivered, and if there are changes in market demand our spending can be managed at the margin to produce profitability.

We have delivered strong profit performance in 2007, while investing in new growth platforms including Ultra sales force and NGM. So, we continue to grow in the base business, we continue to invest in new businesses with great future growth potential and we continue to build businesses with high margin business models and to manage spending very tightly in line with revenues and profit targets. Those are the three points for today. Strong 2007 performance, high confidence in our growth targets for 2008, '09, '10 and 2011 based on tangible trends driving demand in three diverse markets, and high confidence in sustainable profitability that is EBITDA greater than 40% of revenue based on our scalable flexible business model.

Adding to my confidence that NeuStar will succeed is that Lisa Hook has joined us as President and Chief Operating Officer. Lisa is the ideal President for NeuStar. She is the leader we need to manage and drive growth. At AOL and Time Warner she built businesses in the fast growing markets for advanced IP based services. She knows the wireless and desktop markets and with strong experience in competitive telecommunications, she knows the customers who rely on our Numbering services. We expect great contributions from Lisa as we grow this business in line with our long-term targets.

Now I'd like to introduce Jeff Babka, NeuStar's CFO, who will review the numbers in more detail and provide guidance for future NeuStar performance, Jeff.

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Thank you, Jeff and good morning everyone. As you have seen in our press release our results show solid financial results for both the fourth quarter and full year 2007. While our strong finish for 2007 was largely driven by the impact we also incurred that our new revenue streams are beginning to get good traction for 2008 and beyond.

I will review these points more fully after discussing our fourth quarter and full year results. The highlights of the fourth quarter include the following; NeuStar's total revenue for the fourth quarter was $121.3 million, a 32% increase from the fourth quarter last year. Net income for the quarter totaled $29.5 million representing a 24% net income margin and $0.37 per share on a diluted basis.

Net income increased by $11 million from the fourth quarter of last year or 59%. Cash, cash equivalents, and short-term investments ended the quarter at $198.7 million an increase of over $52.7 million from the beginning of the quarter and $140 million from the beginning of the year.

Transactions on our contracts to provide Telephone Number Portability Services in the United States totaled $89.7 million up 44% from the fourth quarter of last year and $5.8 million higher than our guidance provided on November 1, 2007. NGM revenue totaled $4.2 million up from $1.8 million in the third quarter with over $1.5 million active users in the fourth quarter.

With respect to revenue for the quarter, addressing revenue totaled $27.5 million down $900,000 or 3% from the same quarter last year. Ultra Services revenue in the quarter amounted to $8.3 million an increase of $2.2 million followed by U.S. Common Short Codes which increased $1.2 million. Offsetting these increases was a $4.8 million decrease from addressing transactions under our contracts to provide Telephone Number Portability Services in the U.S. This decrease resulted from lower pooling transaction as a result of slower growth in a number of new entrants in the marketplace than experienced in 2006.

Interoperability revenue totaled $18.5 million, up $3 million or 19% from the same quarter last year. This increase was driven by $1 million increase for Canadian portability service. In addition, interoperability revenue from our NGM business segment was $2.3 million for which there was no corresponding revenue in the fourth quarter of last year.

Infrastructure revenue amounted to $75.3 million, up $27.1 million, or 56% from the fourth quarter of last year. Infrastructure was again the fastest growing revenue category this quarter, driven primarily by consolidation activities, vendor changes, implementation of new technologies, and other network management activities. This growth underscores the value that telecom industry receives from NeuStar's clearing-house service to manage their complex network.

So to summarize, while our growth this quarter was largely driven by our core Telephone Number Portability Services, we also saw increasing contributions from our acquisitions of 2006 and Common Short Codes.

Turning now to costs and expenses, I will compare the current quarter to the previous quarter. In the fourth quarter, operating expense totaled $74.3 million, an 8% increase on a sequential basis, and up 23% from a year ago, as we continue to invest heavily in the early stage acquisitions that came on board in April and November of 2006.

Looking at cost and expense by functional category, cost of revenue totaled $24.5 million, up only $400,000 from the third quarter of 2007, despite a quarter-over-quarter revenue increase of $10.5 million. Sales and marketing expense totaled $18.2 million in the fourth quarter up $1.9 million from the third quarter of 2007. Research and development expense totaled $8.1 million, up $2.1 million from the third quarter of 2007 and general and administrative expense totaled $13.6 million an increase of $600,000 from the third quarter.

Depreciation and amortization totaled $9.8 million in the fourth quarter up $300,000 from the third quarter. Of this amount, amortization of intangibles related to the application of purchase accounting for acquisitions totaled $3.6 million, $1.9 million of which is attributable to our Followap acquisition which we now refer to as NGM.

Taking a brief look at the full year 2007 results. Revenue totaled $429.2 million up 29% from 2006 and within the guidance that we provided for the year. Net income for the year totaled $92.3 million, well in excess of the original guidance provided for the year as well as the updated guidance we provided on November 1st.

To summarize revenue performance for the year, growth in NPAC transactions exceeded our original expectations due to increased infrastructure transactions driven by vendor change, industry consolidation, and other network management. This increase more than offset shortfalls from our original expectations at NGM. In looking at growth in 2007 over 2006, NPAC revenue grew 22% to $289.8 million. Ultra Services revenue grew 49% to $30.4 million, Common Short Code revenue grew 48% to $23.9 million, and NGM revenue grew 31% to $8.1 million.

NPAC transactions ended the year at $318.5 million for growth of 36% over 2006, significantly up from our original guidance for the year of $290 million and our November 1st guidance at an excess of $313 million. Operating margin for the year totaled 35% of revenue, cost and expense increases for the year were focused primarily in support of our future growth from Ultra Services and NGM, as we grew our sales and marketing capabilities and developed new service offerings to meet market demand.

To put things under perspective, despite implementing the new NPAC pricing which reduced per transaction prices by approximately 10% and passed $30 million in cost savings to the industry, as well as continuing to invest in our new growth businesses. We are able to hold our margins essentially flat with 2006, indicative of effective cost management for our business as well as it's scalability.

For the year, earnings totaled $1.17 per share up 23% from 2006. A few brief comments relative to our balance sheet and capital expenditures. Our accounts receivable were $77 million, an increase of $4.9 million from the start of the quarter. Deferred revenue increased by $100,000 to $50.3 million from the start of the quarter. And capital expenditures totaled $27.3 million for the year primarily reflecting investments in our infrastructure.

Before we turn to 2008 outlook, I would like to take a moment to recap where we have come from since we went public in 2005. And in 2005, with our business heavily dependent on NPAC revenue, we targeted 25% revenue growth with operating margins of 34% to 36% range. Over the past three years we delivered revenue growth of 47%, 37%, and 29% respectively at a CAGR of 38%, with profit margins in each year exceeding our expectations. Over that period we generated over $350 million in cash and invested more than $200 million of it to acquire two business that are exceptionally well positioned in high growth markets.

Today we have more than 200 million in cash and no debt providing us financial strength and flexibility to respond to additional opportunities to invest in our business. For the 2006 acquisitions we have transformed NeuStar to lead changes in the market and advance our strategy to be the essential provider of services facilitating the interoperability of all networks, whether traditional voice, IP, or enterprise. In each of these high potential markets, NeuStar holds a leading role that puts us in a strong position for future revenue growth.

Moving onto our outlook. This year we begin to see meaningful revenue from multiple sources. Today we announced targets for our financial performance for the next four years of at least 20% consolidated revenue growth per year and EBITDA margins in excess of 40%. Consistent with these long-term targets we are making the following projections for 2008. Full year revenue will exceed $515 million representing growth of over 20% over 2007, which includes NGM revenue to range between $35 million and $40 million consistent with prior guidance.

Full year EBITDA will exceed $206 million representing EBITDA margin in excess of 40%. Net income will exceed $103 million representing net income margin in excess of 20%. And NPAC transactions will grow in excess of 10% in 2008 over 2007 and in excess of 18% in the first quarter over the same period last year.

Let me put the 10% NPAC transaction growth into a larger context. First and foremost 10% growth in NPAC transactions in combination with our other services is sufficient to drive revenue growth of 20%. That is the benefit of having diversified our sources of revenue with other high growth platforms. Second as we have historically done, we've used conservative assumptions based on current applications and uses by our customers. However as Jeff discussed earlier on the call there are growth opportunities that could drive incremental transactions as has occurred in the past.

Also I would like to provide some context on our EBITDA margins. In 2007 we delivered EBITDA of 44% yet in our guidance today we project 2008 EBITDA margins in excess of 40%. As we have done in the past included in our guidance and projection is a substantial allocation in our 2008 plans for the funding of future growth opportunities. As I said this is consistent with past practice and within a given year we may in fact choose not to spend it. We take a conservative approach to setting our guidance on profitability.

Getting back to other components of our guidance in the past NeuStar has only provided current quarter guidance on the number of NPAC transactions and NGM revenues. However since our current revenue projections call for a decrease from the fourth quarter of 2007, for this quarter only we will provide revenue and profitability guidance for the current quarter.

In future quarters we'll be updating our full year guidance only. Accordingly we project first quarter revenue to exceed a $112 million, up 15% from the same quarter of last year but down 8% from the fourth quarter of 2007. This decrease is based on two factors; per transaction price on our NPAC contracts of approximately $0.89 in the first quarter versus $0.91 in 2007 and lower transaction volume in the first quarter.

We project net income margin for the first quarter to exceed 17% and EBITDA margin to exceed 37%. We have scheduled our inaugural analyst conference for Wednesday, February 20, 2008 to be held at the New York Stock Exchange. At this session, key members of the NeuStar Executive Team will present a detailed review of the market opportunities for each of our service offerings and how we intend to cultivate them and achieve the guidance projections we have made today. We hope that as many of you as possible to be able to participate either in person or via our webcast of the event. Because of the Stock Exchange strict access regulations you must notify Brandon Pugh of your interest in attending. The Exchange will not permit access to anyone who shows up who has not registered with us in advance. Further details will be provided when you contact Brandon Pugh.

In closing we believe our fourth quarter performance from a revenue growth, profit, and cash perspective was very good and we are pleased with our operational progress and market success. We would also like to take this opportunity to congratulate our NeuStar team throughout the world who contributed to these 2007 accomplishments.

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

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. And your first question today comes from Julie Santoriello with Morgan Stanley.

Julie Santoriello - Morgan Stanley

Thank you. Good morning. I am very pleased to see the 20% growth outlook. To sustain that kind of growth over the next four years is definitely impressive and shows your confidence in the business.

I am having a little bit trouble understanding the 10% growth in transactions volume for 2008. I know you have spent some time on this Jeff, but just want to understand if it's a pretty big decline in the growth rate obviously from 2007. And we think back to last year when you renegotiated the contract with the industry and gave pricing incentives, it seems as though at the time part of the reason for giving those pricing incentives was expectations for higher transaction volume, potentially very high transaction volume. So can you help us understand if there is a change in what you are seeing between then and now? And then perhaps if you could just highlight the non-recurring portion so that maybe going away in '08 versus '07?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

Sure, Julie. That's an excellent question. First of all, this year as we have in the past we are conservative in giving guidance on revenues. Last year we have talked about 25% growth, we came in at 29% and that is directly in line with our behavior since we have been public for most of the last 2.5 to 3 years. Second of all, we're conservative so what is being conservative mean. Here is process why which we provide guidance. We sit down with our customer relations sales people and we look at their pipeline. Pipeline is their list of projects that they have engaged with specific large network operator customers, we are under those customers who are going to use our services. When we add up the numbers, NeuStar is highly, highly confident of delivering more than 10% growth in transactions during the year 2008.

The fact is we have an internal business plan that drives at numbers or greater than 10% and in fact even the 10% growth on top of the very large growth in 2007 represents continuing strong demand on the part of our customers or Numbering impact transactions. And their demand is driven by their need to do network management, to change out old technology to new technology, to alter the network architectures to adjust their signaling systems, to manage disaster recoveries and otherwise change the routing of traffic over their existing switch and transport capital facilities in order to better manage their operations and cost.

Now having said this we believe that there are fundamental forces changing the shape of the communications market, in particular the IP revolution, the explosion in wireless data services, and the fast growth of new service providers, new networks like the social networks. Each one of those fundamental macro market forces will in the future especially beyond 2008 drive large customer demand for NeuStar services. I expect as they hit that there will be a resurgence in growth and demand for NeuStar.

Julie Santoriello - Morgan Stanley

Thanks, that's helpful. If I can just get one quick follow-up. Aside from the core drivers of transactions volume that you just highlighted for us what might be one or two events or opportunities out there that can be the larger contributions to transaction, what can drive big upside beyond 10%?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Yes, Julie, it's 1Jeff Babka. Obviously you have seen a lot of announcements taking place recently over wireless carrier's plans in regards to their network and as you know there has been a 180 degree turns in some of them over the past 6 or 7 months. Not to say specifically that any of those were, were not in our forecast but obviously if these decisions get made sooner rather than later that's going to drive or creates a possibility of driving increased transactions over and above the 10% this year.

The good news is if it doesn't happen this year it's going to happen in the future. So we will have wind in our sails going into 2009 and 2010 with this possibilities. That certainly is one technology change out in the industry but as we have said earlier if you want to look at the kind of the counter recessionary view, even if the investment isn't made that's what drives carriers to utilize these services to kind of make do with what they have with the additional fields that are out there that we put in place with possibility of using it for network optimization, migration, or maybe doing some additional tracking of prepaids or wireless. So, lot of things are out there that could do it. As Jeff mentioned our process inherently is conservative the way we go about it and there are certainly things that could happen. As they did in 2007, I'll remind you we started the year with looking for about 290 million transactions and came up with 318.5 million. And I think our track record from the date of when we went public says that there are things that are going happen that if we are going to surprise it's going to be on the high-end, that's the way we play the ball down in the middle of the fairway that's the way we are going to continue doing it.

Julie Santoriello - Morgan Stanley

Okay, thank you very much.

Operator

Our next question is from Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

Hi, guys. I had just a couple of questions. First Jeff just the stock-based compensation during the quarter I didn't catch what that was in the press release, I was wondering if you give us breakdown by segment? And then when you do look at your '08 guidance what are you including in your EPS for stock-based comp and separately amortization of intangibles?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Yeah, in the stock-based comp Phil, fourth quarter $3.7 million, full year $15.3 million, 2008 roughly $22 million for the year and on the amortization of intangibles about $19 million in total for the year.

Philip Winslow - Credit Suisse

Okay.

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Okay.

Philip Winslow - Credit Suisse

Great, and then I guess guys when you do look at the Followap business you had, I think you have mentioned 1.5 million active subscription, what's your goal as far as over the next couple of quarters of ramping it up to and when you do think about cost actually sort of year-end exit rate here I guess for '08?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Yes, right now we are sitting at roughly 0.5% to 0.75% penetration of the current carriers we have and their active subscribers. On that basis so you have been looking at roughly 330 million to 350 million active subscribers. If they hit the guidance level we would have to get roughly 3% to 4% of penetration rate of that probably getting it up to around 18 million subscribers. Now that sounds a lot but you know the fact of the matter is this year was the year of launch for several carriers and that we are seeing nice traction there. In the plans that we built for this year, the revenue coming in is really contingent upon subscriber growth at each of the 31 carriers we have under contract and the others that we are likely to sign up later this year. Very significant ramp but as we sit right now and we look at our models based on the assumptions we have doable and that's what we have incorporated in the guidance.

Philip Winslow - Credit Suisse

So about 1.5, that did like 18?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Yes, that's right.

Philip Winslow - Credit Suisse

Great, and then also just sort of the first quarter that I can remember saying sort of a substantial down tick in transactions. I mean is there anything with that seasonally that we are expecting here or just some anything macro that's impacting the carriers that is causing a bit of a pause in the first half or is anything specifically by line item just sort of a greater pause and addressing transactions or maybe just to push out some of the infrastructure transactions.

Jeffrey E. Ganek - Chairman and Chief Executive Officer

So what's happening, and we use words like pause and slow down, we are talking about growing 10% in transaction volumes on 3 years of tremendous growth. The fact is our customers are continuing to use our existing services in greater volumes then they have before for the full canopy of applications that are described to you many times in the past.

So here is what I think explains the change in the growth rate from past years to this year. Our growth over the last 10 years has been driven by customers identifying brand new reasons for using the NPAC transaction to redefine their our network, to better manage their traffic, to manage disasters, etcetera, etcetera, etcetera. I believe that the current macro forces in the industry like the IP revolution, the explosion in wireless data services, the growth of social network, in fact are evolving very quickly. The impact of those new requirements for NeuStar's directory services have not hit our sales pipeline in great magnitude yet and I fully expect their coming. We are in discussions with our customers planning how they are going to rely on us to alter their networks to confront the fundamentally changed market conditions that those changes are going to cause. I believe that there is likely to be an up tick in growth in the future, but Jeff Babka and I, you have been listening to us for a long time. Until we see the whites of their eyes, until we've got specific customer projects listed in our sales people pipeline report, we don't include it in guidance.

Philip Winslow - Credit Suisse

I guess and just one final question on an UltraDNS. Can you give us your expectation especially with the Webmetrics acquisitions what that can add to numbers in '08?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

Yeah, here is what I think is the Ultra story. The Ultra story is from -- this is just a little company that we bought less than 2 years ago and those people have done a remarkable job over the last two years. Last year they grew almost 50%, 49% and that's based on an evolving but very small base of products of sales people, of infrastructure. We have got 13 of the 15 largest eCommerce providers coming to us because they've got billions of dollars of revenues dependent from their web traffic and the web is just unreliable, there is no place for the largest eCommerce providers to go in order to get reliable responsive monitoring of web performance, load balancing of traffic, and other clients of reliability management capabilities.

It turns out, that NeuStar and Ultra because we currently have our physical platforms in the heart of the internet worldwide we can provide services that are very, very difficult to get elsewhere. The 50% growth rate last year is a demonstration of that, we bought Webmetrics because here was a great little company who has built a great product that had already been brought by large eCommerce provider and would be used by them to provide critical service support to their large internet traffic volume we think we can take their product put it into the sales distribution channel that Ultra has built here and sell that product into our existing customer base. We believe that with a broader menu of infrastructure services for the internet that sales force can present to the marketplace the best customer support network reliability service that exists in the marketplace. We think that this is going to be a very, very large market and we think no one is bigger at it than we are. We think this can be a centerpiece of the company as we move into the new IP market of the next five years.

Philip Winslow - Credit Suisse

Great. Thanks guys.

Operator

Our next question comes from Phil Cusick with Bear Stearns.

Phil Cusick - Bear Stearns

Hi guys, thanks for taking my question, I wonder if we can start by talking about the buyback or the potential for buyback you've got $200 million nearly cash on the books and we've been talking about this for about 6 or 7 months now and it seems like you've made some progress on talking about it but we still see nothing. What it's going to take is it a board comfort issue, is it a structure issue or there really something that you got this cash allocated to in your head that we are not going to see buying back stock. Thanks.

Jeffrey E. Ganek - Chairman and Chief Executive Officer

Good question, Phil and we have been talking about it for a long time. As Jeff and I have just said, we have got $200 million cash in the bank, we have got lots of cash that is going to generated this year, we have got no debt on the balance sheet. As in past years we will this year invest further in the business, as in past year's we will look for daily well priced strategic acquisitions we can do especially where those acquisitions can be accretive in a very short time.

However, here is what we and the Board currently find, is there is great turmoil and uncertain conditions in the financial markets and that's doing a couple of things that's making us look very hard at our financing option, at the relative values of these very attractive acquisition opportunities. And third, you know what, the overall level of the stock market is a bit uncertain right now. We are in daily consideration of what to do with this cash. We think it is an important and strategic decision that management and the Board has to make and we intend to manage that cash advantage that we have in a way to drive to shareholder value. And while we have decided not to do a share buyback today, this is under careful daily consideration and should considerations in the market change, we will act promptly and decisively.

Phil Cusick - Bear Stearns

Okay, if I could follow-up on Phil's question. The last two year margins went down from 4Q, Q1 about 300 basis points. This year you are projecting something in the range of 600 to 800 basis points, I would say on EBITDA margins, why is the dramatic shift is there if the incremental revenue coming in at the lower margin, do you expect to invest more money in the first quarter and going forward, what should we would be thinking about that?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Well Phil, it's pretty basic. I mean, we did give you the revenue guidance for the year with revenue going down from 112, I am sorry, 121 to 112. Cost essentially is flat, with the exception of maybe some stock-based compensation going up. If you run the math that way I think you will see that takes the margin out as revenue continues to grow for the remainder for the year, cost fundamentally flat with a little bit of an increase, revenue growing considerably on top of that which enables us to get the margins backup over 40% on a quarterly basis towards the end of the year and in excess of 40% of course for the full year.

Phil Cusick - Bear Stearns

Great, thanks guys.

Operator

We will take our next question from Liz Grausam with Goldman Sachs.

Elizabeth Grausam - Goldman Sachs

Great, thanks. First on the NPAC transaction growth in 2008, can you share with us expectation of how much that growth is driven by kind of core contracts predating 2007, and how much is driven by acceptance to some of those new fields that you have negotiated in the new contract?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Yeah, Liz. First of all, all of the revenue coming off of that are for the same contract. There are seven contracts, they have been the same ones we've had that have been successfully renegotiated on three occasions. As Jeff mentioned earlier when we give our guidance for the year we are assuming that there are no new fields, no changes anything like that over and above that could drive it higher.

There certainly is a possibility that could happen this year, if it does we think there that 10% growth could find itself to be conservative. In addition there are new applications which could come out of the existing fields. We talked last year about the optional data field which now gives carriers the opportunity to use it for specific reasons that they may have that maybe another carrier doesn't have and there certainly is a possibility that more could come from that. So, there are possibilities out there. Again I point to last year where we started the year looking for about 290 and ended up in excess of 318 its hopefully we'll see some additional new applications or new fields this year.

Elizabeth Grausam - Goldman Sachs

We as outsiders try to asses inflection point in the growth, this is clearly moving of course 30% growth to 10% should we be tracking carrier CapEx and wireless CapEx really a good metric to look at in terms of carriers, you kind of intended use to change that network equipment or what do you think are some of the key metrics in the telecom market that we should be tracking to understand the inflection points for your business?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

So Liz, let me tell a war story with respect to your theory about tracking us against capital spending plans. Way back at the start we got a fast revenue kick in the late 90s when the competitive local exchange carriers exploded and lots of end users switched carriers and took their same telephone numbers with them. That was virtually all of the transaction volume in the late 90s and it was good business for us. Then of course came the bust in 2001-2002 and as many of the competitive local exchange carriers downsized, as many of them went out of business, it turned out that lots of their end user customers switched back to the incumbent local exchange carriers and took their telephone numbers with them. We ended up having huge growth in those bust years because change in the communications market whether it was positive growth change or reallocation based upon a correction in the marketplace, change in the marketplace drives our customers to use more NeuStar services.

And as a matter of fact, we see growth in the impact coming in 2008 from all of our existing customers for the same transactions that they have -- the same applications they have used us for in the past. What our customers are telling us when we visit them is that they see over the next three year old fundamental changes in their existing capital infrastructure that are driven by the IP revolution, that are driven by the explosion in data services to wireless handsets, and are driven by the emergence of the new networks, the social networks and the other ISP kinds of services. And they are saying my gosh! we are going to have to change the way we do business as a result of changes in the marketplace.

It is those fundamental changes out in the marketplace that we are going to drive, that our customers tell us that are going to drive increased growth in demand for our services. I don't think that there is a single traditional metric like ILEC capital spending that accurately predicts growth for NeuStar services.

Elizabeth Grausam - Goldman Sachs

Great, thanks. And then just a question on the relative profitability levels of your different business units. Certainly we have good bit of growth coming from your Next Generation Messaging platform expected at least in your initial guidance for 2008, versus the NPAC growth which is decelerating some resulting in your margin compression year-over-year, you are still obviously high margin levels overall. Could you help us understand the profitability in our Next Generation Messaging, how it compares to your core business, where you may see some inflection point in that over the course of the year?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Sure Liz, first of all if you look at NGM we will cross or likely to cross the EBITDA threshold to positive EBITDA by the third quarter and be positive for the year. And what we like about that business with it's scalability, we see that business ultimately getting to levels of profitability that are comparable with the overall business. So, in the EBITDA range in the low to mid 40s. A very scalable business, lot of operating leverage there, and we are at this stage when we think about it, we have got 31 customer relationships already started. So, we don't have to sell the 31 customers we have got right now, we got to find some new ones. And we are continuing to do that.

So we really like the profit profile of that business as you look out into 2009-2010. Relative to within the clearing out and as we mentioned we don't track profitability down at the individual sub service group level within clearing house. We run the clearing house on a worldwide basis as a common unit. However let me say this if you look at the Ultra business we are still investing in that this year, we've said that in the past. We are investing in our sales force both domestically and internationally. So for the year if you were to try to track an EBITDA for it and do an allocation of the service it would be positive on an EBITDA basis for the year.

Again with that one we see that scaling up in 2009 and 2010 as we increase that sales footprint, recognize that with Ultra that's a recurring revenue model, okay and so we start the year with a lot of customers, over 3000 customers under contract and we don't lose a lot of customers as Ben Petro like to say unless they go out of business. So we are doing am very good job in customer satisfaction there. Again margin profile will improve over the next couple of years as you get looking at 2009. We see it getting to kind of a stabilized state there. I am not sure that ultimately gets up to our overall level of profitability on EBITDA but certainly its going to get close to it.

Elizabeth Grausam - Goldman Sachs

Great, that was really helpful thanks.

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Sure.

Operator

We'll go next to Sterling Auty with J.P. Morgan.

Sterling Auty - J.P. Morgan

Thanks, hi guys. So as you did your bottoms up analysis for the 10% transaction growth, how much impact do you think like Sprint reiterating their support for the IDEN network for a couple of more years have? As well as how did you think about the different sources of transactions. I know its arbitrage to kind of at 13% interoperability versus infrastructure, but can you give us some sense, do you think its just going to be a fall off in the growth rate in infrastructure or is there a potential deceleration further in the other two segments as well?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

Sterling, we do our guidance very conservatively, so there is not a lot of theoretical analytic work that goes into this. We looked at the hard defined projects on our sales guys pipeline. And you know what, just because the project is on the pipeline like the IDEN transition doesn't mean it's a 100% certain to occur. So before we give guidance we make sure we got a pipeline that is probability adjusted. So the total pipeline in fact adds up to considerably more than the guidance we offer. It means that if IDEN consolidation happens, it fits into our plan and if it doesn't happen we got lots of other projects that are going to make up the gap.

So my first point is, it is we are highly confident of delivering more than 10% growth, and in fact if all of the chips fall the right way, growth could be considerably higher than 10%. As to whether it's addressing interoperability or infrastructure, this is still a young growing businesses. We have not seen historical cyclical trends in customer demand that tell us in a tough economic year they are going to use more addressing and less infrastructure or vice versa. We continue to deliver services that meet the needs in those particular application areas of the customer. We have seen continued fast growth in infrastructure in the past. But, however, and let me end on this point we already are getting about 10% of our total demand from the IP revolution, which is only and it's very, very earliest phases and the IP revolution effects addressing, interoperability, and infrastructure that hits all three of them to manage change in different directions. I think that the macro forces that are driving higher growth in demand for NeuStar services in the future are going to hit all three of the addressing and interoperability infrastructure categories.

Sterling Auty - J.P. Morgan

Okay, and then my follow-up is, as we think about the trend in revenue through 2008, I think we all get that there is pretty steep ramp for follow-up as you bring on new subscribers but starting with the first quarter guidance, to get to 515, can you just describe for us what other things should be ramping pretty aggressively through the year to get to that full year number besides follow-up?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Sure, Sterling. Well first of all, if you kind of run out the transactions for the first quarter and then extrapolate it out to the end of the year, we will see transaction growth in the second and third and fourth quarters over where the guidance that we gave for the first year on the NPAC. So you are going to see a new growth trend hopefully starting as opposed to the 24 growth of course that we had prior to this first one. So that will get back on track. Ultra will continue to grow. We are looking for significant growth in 2008, coming off of Ultra, they are on a strong track record there and we are building out the sales force to be able to continue that growth. And then you throw NGM on top of it. Common Short Codes, we think there is growth left there. We haven't factored in a tremendous amount for next year because as you know we are in the act of selling in a Short Code. We do this on behalf of the industry. But we are seeing some nice new applications including the voting for the Super Bowl MVP this past week and U.S. and New York have probably appreciated that. So I think all three of those are growth engines for us and you will see the ramp up through 2002 each quarter in 2008.

Sterling Auty - J.P. Morgan

And last question is how many actual phone numbers are now in the database versus what was there last year?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

It's roughly 300 million.

Sterling Auty - J.P. Morgan

Okay, great. Thank you.

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Okay.

Operator

And ladies and gentlemen, our final question today will come from John Bright with Avondale Partners.

John Bright - Avondale Partners

Thank you, good morning. Jeff Babka, on infrastructure, how much was non-NPAC related in the most recent quarter and what were the drivers of that growth that was not NPAC related in infrastructure?

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

Not NPAC related in infrastructure, roughly 5% of the total and when we have things like connection fees that are on there and also a small percentage relative to NGM. So, if you back out I think I said 2.3 in my script comments. We are in the interoperability category if you back that out from the 4.1 for the quarter it gets your number for NGM.

John Bright - Avondale Partners

Alright and then my follow-up question is for Jeffrey, Jeffrey you are becoming more dependent on your customers effort to drop adoption particularly where NGM is concerned. Our Common Short Code is not something that you can drive either, why does that give you great confidence to start talking out years at this juncture when you are really becoming more dependent on those customers?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

So as a matter of fact, even our basic NPAC Services are responsive to derive demand. Nobody needs our services unless they are turning around and selling other services to end users. We have been in this business for 11 years. But let me get specific for NGM our platform has been acquired, we have signed up more than 30 carriers who serve cumulatively more than 300 million handsets and just a small percentage penetration of those existing customers will beat the business plan we have got for that business. And we have spent the last year delivering every operational objective we have, we have delivered product, we have delivered more capability than was in the plan a year ago.

In 2007, we captured more mobile operators than we anticipated at the start of the year and as a result we have been able to nurture to establish close operating relationships with our mobile network operator customers. And so doing we are working with them to prepare for the promotion and the marketing of the service to end users which they have scheduled for 2008. Based upon our understanding of our customers and what they are doing with our installed deployed connected platform, we have on a conservative basis issued multiyear plans because our customers have convinced us that we are key to their strategic marketing. On the Ultra basis, we had 50% revenue growth there. Our product works, our product is meeting market demands, our sales force is selling our limited product offering. We believe that by expanding our product line and building upon that sales force we can continue to make that grow.

Common Short Codes, we think that's a great franchise. I happen to love watching football games and seeing those five and six digit codes up there. We are not in our plan depending upon large scale growth there, though if you get me late at night and really ask me which of our services do I love, do I think should be worth 100's of millions of dollars in annual revenue, I think Common Short Codes would make the world a better place. But you are right, that's one where we're not in a position of selling the end user product. So we have been conservative in a degree to which we have included it in our revenue forecast.

Jeffrey A. Babka - Senior Vice President and Chief Financial Officer

And let me add one thing to that John, I mean, if you think of the news of the growth engines we have talked about, Ultra, NGM, and for that matter Common Short Codes, all of these are recurring revenue businesses. Okay, all of these are customers or applications that are very sticky, all of these certainly in some cases are reliant upon things like end user adoption of mobile instant messaging but once you start up doing it, the likelihood of you continuing in the following months is pretty strong. So what that tells us is that we are supplementing a very predictable transaction business with a very stable once we get some traction recurring revenue business and that's what gives us the confidence to throw these longer-term targets out there.

John Bright - Avondale Partners

Okay, and if I may just one quick one more, social networks meeting phone numbers were mentioned in the prepared remarks, what are you seeing that made you include that in the prepared remarks that let you know that's actually driving some transactions?

Jeffrey E. Ganek - Chairman and Chief Executive Officer

Well it's not yet driving lots of transaction. This a fundamental development to marketplace that gives us confidence in talking about growth in future years, and frankly it comes down to the fact that my college student son spends a couple of hours a day on Facebook and he would rather instant message and communicate with his friends via Facebook than via other networks. And it turns out that we are today in discussions with many of the new social and other kinds of evolving networks whereby they as primary communications vehicles for communities, see themselves as delivering a large, a greater scope of communication services in the future. And in fact, in order to do that they know they need the kind of routing and traffic management capabilities that NeuStar offers.

John Bright - Avondale Partners

Thank you.

Jeffrey E. Ganek - Chairman and Chief Executive Officer

And so, let me close here, thanks very much for spending the time to listen to our story, which you heard is management talk about NeuStar as a business that has a powerful, a growing, a sustainable, and profitable core business, that's going to grow not just in 2008, but into the future based upon fundamental forces in the marketplace. In addition, this company has added to it's portfolio new growth platforms that after a year or two of investment and development are poised to contribute significant growth to NeuStar in 2008. We look forward to being a larger, more profitable company. And we appreciate you all spending time with us this morning. Thanks very much.

Operator

Ladies and gentlemen, thank you so much for your participation. This does conclude today's conference, and you may now disconnect your phone lines.

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Source: NeuStar, Inc. Q4 2007 Earnings Call Transcript
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