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NeuStar (NYSE:NSR)

Q2 2012 Earnings Call

July 26, 2012 4:30 pm ET

Executives

David Angelicchio

Lisa A. Hook - Chief Executive Officer, President, Director and Member of Neutrality Committee

Paul S. Lalljie - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

John F. Bright - Avondale Partners, LLC, Research Division

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

Scott P. Sutherland - Wedbush Securities Inc., Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Saket Kalia - JP Morgan Chase & Co, Research Division

Daniel Meron - RBC Capital Markets, LLC, Research Division

Jonathan Ho - William Blair & Company L.L.C., Research Division

Operator

Good afternoon. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the NeuStar Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Dave.

David Angelicchio

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

Before we begin, I'd like to remind everyone that today's discussion contains forward-looking statements based on the information as of today, July 26, 2012, and as such, is subject to many risks and uncertainties that may cause actual results to differ materially from those anticipated. Additional information concerning these risks and uncertainties can be found in our earnings releases and our filings with the U.S. Securities and Exchange Commission, including our last annual report on Form 10-K. We assume no obligation to update any forward-looking statements.

As you listen to today's call, we will discuss certain non-GAAP financial measures and supplemental key performance metrics by revenue categories, headcount and additional expense detail. This information, including reconciliations to the most comparable GAAP measures, can be found in today's earnings release and under our Investor Relations tab on our website, www.neustar.biz.

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

Lisa A. Hook

And thank you, Mr. Dave. Let me start by reminding you all that we have 4 key priorities this year. We are hitting our financial targets, of course, positioning to win a renewal of the NPAC contract, integrating TARGUSinfo and transforming our culture. First, let me offer some perspective on our strong performance in the quarter, then Paul will walk you through our results with more detail and texture.

Second quarter results exceeded our expectations and demonstrate how well we are executing on our strategy. With respect to continuing operations, revenue increased 40% year-over-year to $206.5 million, and adjusted net income increased 33% to $51.2 million while adjusted earnings per share increased 47% to $0.75.

In the second quarter, we continue to deliver on the top line. Segment highlights include Carrier Services delivering 14% year-over-year growth, largely driven by NPAC revenue, Enterprise Services, also delivering 14% year-over-year growth with contributions from all service offerings including our return to double-digit growth in Internet Infrastructure Services, and Information Services contributing $38 million in the second quarter, representing 6% sequential revenue growth. We're particularly pleased with the strong momentum in new bookings in Information Services, which will support revenue and earnings growth in the business throughout the remainder of 2012 and beyond.

For our business as a whole, we continue to generate the healthy margins that our investors have come to expect, and we continue to return capital to our shareholders through $25 million of stock repurchases. With regard to our next priority, we are well-positioned to retain the NPAC contract when the current term expires 3 years from now; that is, at the end of June 2015. We participated in the RFI that was issued by the NAPM LLC in late 2011. We expect the RFP to be issued late in the third or early in the fourth quarter of this year with the contracts being awarded in 2013.

The NPAC is a vital component of our national and telecommunications infrastructure. Thus, it is critical to the communication service providers who are our customers, to consumers and to the American public more generally. First, to address communication service providers. Over the past 15 years, we have provided our customers with extraordinary service as the technology landscape and market requirements have evolved. In 2011, we achieved 100% compliance on over 2,200 individual service-level metrics that measure our performance and reliability while concurrently implementing the most substantial upgrade ever to our infrastructure.

In 2011, our customers rated us 3.8 out of 4 for customer satisfaction, offering further proof of our unparalleled customer focus and ability. Today, we process over 1.2 million transactions for our customers every single day. To do this, we engage in over 20 million interactions with thousands of service providers in realtime, and we must ensure that this information is received correctly and simultaneously at every single customer endpoint. All of these interactions occur within a complex hardware and software infrastructure that employs thousands of business rules. The combinatorial scenario that these rules in infrastructure must handle are immense. We math geeks think 1,000 factorial requiring an array of experts with extensive knowledge of the system itself and the number of portability in general. Using this same complex infrastructure, we make it easy and cost-effective for carriers to introduce new technologies and devices and to rationalize their networks and infrastructure.

Finally, given the number of competitors who rely on this critical infrastructure and the sensitive nature of the competitive data that allows it to function, the industry requires a neutral, trusted and reliable third-party provider. Neutrality is a key differentiator. We serve each service provider in a fair and consistent manner, irrespective of brand, size and/or market position. Neutrality is built into our corporate charter, which prohibits any affiliation with any communications service provider. It is also built into our board structure, our hiring practices, our employee training; in short, our corporate DNA.

Now let me talk about the benefits we provide to consumers. The number of portability allows consumers to choose the services they want at competitive prices. Studies show that in the absence of portability, almost half of all consumers would not change carriers even for better pricing or improved service. The NPAC does enable consumer choice, which, in turn, drives competition across the sector.

Consumers have taken advantage of number portability hundreds of millions of times since NeuStar began this service. The NPAC also plays a critical role in quickly restoring service to consumers when disaster strikes, as it did during 9/11 and Hurricane Katrina. Service providers dynamically reroute calls from switches that are underwater or destroyed to functioning switches in a matter of minutes, preserving consumers' ability to contact their loved ones in crisis.

Finally, we also support critical public policy goals. Our economy is served by competitive communications marketplace. Our consumers are free to choose among many providers. Our NPAC Service makes that possible. In addition, the NPAC enables carriers to provide critical services from important communities such as telephone relay service for the hard of hearing.

And with the spectacular growth in the communications industry, we at NeuStar have saved the American public literally trillions of dollars by efficiently managing the nation's telephone number supply and extending the life of the 10-digit telephone number by decades. We have an irreplaceable store of institutional knowledge. We're neutral at our very core, and we've proven our ability both to innovate constantly and to perform effectively. We expect to retain this contract based on the strength of our record and on our vision for the future.

Our next priority is the integration targets info, now Information Services. This effort is proceeding well. The back-office integration is now complete, and SOX compliance is on track to be complete by year end. We have also developed a pattern of collaboration company-wide to cross sell and create new service opportunities.

For instance, as I mentioned last quarter, by combining our Order Management Services with Information Services offerings, we are now helping service providers to offer their customers the ability to list themselves in both traditional and online directories in new ways. This effort converts former cost centers into profit centers for our service provider customers and creates significant new revenue potential for NeuStar.

Similarly, we have been able to combine TARGUSinfo analytics with our global mobile telephone directory and with our telephone inventory management services. These combinations enhance customer acquisition and retention from mobile operators and enable more efficient marketing to mobile devices.

The bottom line here, integration is going well. We have good bookings philosophy. We are both cross-selling and creating new services, which will drive future revenue and earnings. Thus, the growth of our second core business is well underway.

In closing, we are on track to achieve all 4 2012 objectives. We are transforming our culture. We are successful integrating TARGUSinfo. We are well- positioned to retain the NPAC contract, and we're hitting our numbers.

With that, let me turn to Paul to provide you with more detail on the second quarter. Paul?

Paul S. Lalljie

Thanks, Lisa, and good afternoon, everyone. Our results this quarter were highlighted by solid performance across all metrics. Results for the quarter. Revenue for the quarter totaled $206.5 million, a 40% increase from $147.7 million in the second quarter of 2011. This increase excludes the addition of $38 million of revenue from our Information Services revenue.

Excluding this Information Services revenue, total revenue grew 14%. Adjusted net income from continuing operations, which I'll refer to as adjusted net income, grew 33% from the second quarter of last year to $51.2 million, and adjusted income per diluted share increased 47% to $0.75.

During the quarter, we delivered on our financial objectives primarily through higher sales. We made solid progress in the integration of TARGUSinfo, and we continue to return capital to shareholders.

Now for a closer look at revenue for the quarter. Carrier Services revenue totaled $126.3 million, a 14% increase from $110.8 million in the second quarter of 2011. This increase was primarily due to an $11 million increase in NPAC Services revenue and a $2.1 million increase in Order Management Services revenue.

Enterprise Services revenue totaled $42.1 million, a 14% increase from $36.8 million in 2011. This increase was due to growth in the number of domain names and Common Short Codes on the management, as well as greater demand for our DNS solutions.

Information Services revenue totaled $38 million, representing sequential growth of 6% and pro forma year-over-year growth of 2%. Excluding approximately $3.9 million of onetime revenue in the second quarter of 2011. The sequential growth was driven by strength in Verification & Analytics, which grew 19% and by growth in Local Search & Licensed Data, which grew 10%.

Turning to costs for the quarter. Operating expense totaled $138.1 million, a 49% increase from $92.4 million in the second quarter of 2011. This increase was primarily driven by the addition of $37.1 million in operating expense from the company's recent acquisitions, that is, TARGUSinfo and the numbering assets from evolving systems. The remainder of the increase was driven by growth in the business. In particular, personnel and personnel-related expense increased $3.4 million due to increased headcounts in the areas of sales and marketing, technology and operations.

In addition, general facilities cost increased $2.1 million. Excluding the $37.1 million of operating expenses related to acquisitions, the year-over-year increase was 9%. Headcount for the quarter totaled 1,532 compared to 1,489 for the March quarter and 1,488 for the 2011 December quarter.

And now for a discussion of adjusted net income. Adjusted net income for the quarter totaled $51.2 million, including a $2.2 million discrete income tax benefit associated with the utilization of foreign tax credits. In arriving at adjusted income for the quarter, we excluded the following expense items: $7 million in stock-based compensation expense and $12.6 million in expense for the amortization of acquired intangibles. These adjustments were reduced by $7 million for the impact of income taxes.

Turning now to the balance sheet. Despite spend on share repurchases and capital expenditures, our net cash increased by $46 million from the March quarter. We ended the quarter with cash, cash equivalents and investments of $235 million compared to $188.7 million at the end of the first quarter and $135.3 million as of December 31, 2011.

During the quarter, we spent $25 million to repurchase 742 million shares -- 742,000 shares, sorry, at an average price of $33.67 per share, further reducing our common shares outstanding by 1%. In addition, we spent $14.8 million on capital expenditures. Our total debt obligations as of June 30, 2012, totaled $591.3 million compared to $594.6 million as of December 31, 2011. Our total debt to adjusted EBITDA ratio is 1.8x.

Our accounts and unbilled receivables totaled $135.6 million versus $127.5 million at the end of the previous quarter. Our days sales outstanding was 58 days in the second quarter compared to 59 days in the March quarter. Accounts payable and accrued expenses totaled $64.7 million, and our days payable outstanding was 21 days, compared to 27 days in the March quarter.

Before turning to guidance, let me provide an update on our TARGUSinfo acquisition, now our Information Services business segment. It's been 8 months since we acquired TARGUSinfo, and we have made significant progress on the integration. Our teams are working as one, and our back-office operations are integrated. We are on track to be Sarbanes-Oxley compliant by 12/31, and all of this means that we have better insights into the business, its sales pipeline, its sales operations, its people and its platforms. This is extremely helpful as we foster collaboration on top line synergies for future opportunities.

To bring this all together, after managing the sales efforts for 8 months and combining this experience with the sales performance year-to-date, we now have greater visibility into the Information Services performance in future trending. Based on our experience to date, we are expecting the Information Services business to deliver 2012 revenue in the $155 million to $165 million range. This equates to growth of between 6% and 13% when adjusted for 2011 onetime revenue. This represents Year 1 of operations, and we have indicated on previous calls that we anticipate revenue synergies to commence in the back half of 2013. And we are highly confident that we can generate growth rates that compares favorably to the historic growth rates of approximately 10%.

Please note that we do not intend to provide these types of projections for any of our segments going forward. Since Information Services is new, we thought it would be helpful to provide some insight into our expectations for the segment and how it fits into our overall guidance.

And now for a discussion of our overall guidance. Given sales and the out performance in the first half of 2012, we are raising our guidance for the year. Specifically, we are raising our revenue guidance to a range of $825 million to $835 million compared to our previous guidance of $810 million to $830 million. We are raising our adjusted income guidance to a range of $189 million to $197 million versus our previous range of $178 million to $190 million. And we are increasing our range for adjusted income per diluted share to $2.78 to $2.90 versus our prior outlook of $2.66 to $2.84.

To summarize, our results this quarter reflect strong revenue and adjusted income growth. On a sequential basis, revenue grew 3% while adjusted income grew 17%. Our team is focused on continuing to build on this positive momentum.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from John Bright with Avondale Partners.

John F. Bright - Avondale Partners, LLC, Research Division

Lisa, Paul and Dave, the 2 highlights you mentioned in the quarter, Information Services, and you also mentioned Order Management Services. What are the drivers in this economic environment of those 2 highlights?

Lisa A. Hook

So I think what I meant to highlight was the combination of the Order Management Service capability with certain attributes of Information Services to provide a new service. In prior calls, I've said to you all that it takes some amount of time to think up a new service than to test it with customers to get it into the market so that we are not-- and still believe that we are not likely to see material revenues from new services until 2014. On the other hand, what I was trying to point out is that the collaboration among and between the teams is going incredibly well, and so they've already started to come up with really interesting new services that provide revenue value to our customers, not just cost savings, and that we're seeing good traction with those services. I didn't mean to call out either of Order Management Services or Information Services as highlights separately.

John F. Bright - Avondale Partners, LLC, Research Division

Well, let's talk about Information Services for a second, Lisa. One, what I was trying to get at is what are the drivers of the success, the type of new services you're offering and more importantly, in this economic environment, why are they not sensitive or sensitive in this economic environment?

Lisa A. Hook

Again, I think where we're able to develop new services that create revenue for our customers where revenues didn't exist before, particularly in this economic environment, people jump on that type of thing, right? So cost saving is always interesting, and obviously, we look for ways to save cost for our customers by automating their processes, by helping them do things more efficiently. But where we're able to bring a new revenue opportunity, in fact, frankly, people pay more attention and are very interested in executing against those opportunities more quickly.

Paul S. Lalljie

And, John, if I may add, some of these services allow our customers to have better insight into their customers, customers that are likely to churn, customers that are likely to leave in a certain fashion. And to some extent, those types of services in this marketplace, we find that customers are willing to pay for that and to provide more of those services.

Lisa A. Hook

Right.

John F. Bright - Avondale Partners, LLC, Research Division

Last couple of quarters I've given -- I've asked you, Lisa, what have you learned about the acquisition? You've got it under your belt now for a couple of quarters. It sounds like visibility is something that you picked up. What makes this particular business have more visibility in the future?

Lisa A. Hook

I think, obviously, we're still learning about the business, like everybody did a huge amount of due diligence prior to acquiring TARGUSinfo, but you really never know a group of people until you've worked with them. We feel as if we have a lot to learn, but I have to say I continue to, every day, be more and more impressed by the quality of the team, how much we're learning from the team. We acquired TARGUSinfo, frankly, to help us take all of the data that NeuStar legacy had been creating over the years and to turn that data into value for our customers. And really, I couldn't be more pleased at the insights the NIS people have, the sort of unbelievable competitive spirit, their really creative thoughts and go-to-market and just the willingness to collaborate is phenomenal. And I, like many of us on the call, have been the victim of a number of deals, and I have to say, in my experience, I haven't seen anything like this. So it's just a really good team.

John F. Bright - Avondale Partners, LLC, Research Division

Paul, final question for you. Regarding Order Management Services, did perform very well this quarter. There is concern that Carrier CapEx is either flat or might-- maybe not grow as much as people are anticipating. A, do Order Management Services correlate to that? And then B, what kind of visibility do you have in that business?

Paul S. Lalljie

So let me start with the B, probably. The business model is subscription-based for our hosted OMS and then licensed model for the license OMS as we described it. The thing with us in this business here, a lot of what we do happens to be on the back office to make them more efficient, to allow them to work smoothly. And again, it goes back to helping them either save -- helping our customers save money or garner more insight into their customers and their customer activities. We tend not to see the correlation with our customers' CapEx, if you will.

Operator

Your next question comes from the line of Will Power with Robert Baird.

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

Yes, a couple of questions. Lisa, I want to make sure I have right the comments you raised on the impact RFP process, I guess you're expecting RFP in Q3 or Q4? Any, I guess, further granular update on when and how and what not there?

Lisa A. Hook

Late in Q3. So in the September time frame or early Q4. There's not a specific date that's been announced.

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then I had a question on the earnings guidance. On the earnings front I'm just doing a quick math on this, I hope I've done it right, it suggests we're focused at the midpoint of the new earnings guidance, which suggest slightly lower earnings in Q3 and Q4 than what you have in Q2. I think and I guess I'm just wondering are there higher cost that we should be thinking about, maybe some seasonality in the second half of the year or is it just a measure of conservatism and any thoughts around that would be helpful.

Paul S. Lalljie

Measure of conservatism, how would you say that? No, Will, I think if you take the midpoint on that range, you'd come up with probably $2.84 on the adjusted net income bar there. In the second quarter, we had $2.2 million of foreign tax credits, the benefit of foreign tax credits. So for us, we don't expect that to happen again in the second half of the year. That's $2-point-something million. I think we expect the margins on the back half of the year to go up maybe by 0.5 point versus the first half of the year, but nothing major.

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

Okay. That's helpful, and then my last question as I look at the general offer business in a different structure, any comments there around the economic environment plus or minus, I guess, similar to one of the previous questions on what you might be seeing on the Information Services side.

Lisa A. Hook

So as we said in Internet infrastructure, particularly, that's returned to double-digit growth from mid-single digits in the first quarter. We have looked at whether that correlates to IT spending and have not found any real correlation that's particularly reliable. Queries are up there. The business is going well. I wish I could give you kind of a more granular view, but I can't. The rest of this business is-- Registry continues apace. A couple of years ago, we saw a little bit of a downturn at the beginning of the recession, but that seems to have bounced back. Common Short Codes continue. So they're relatively immune.

Operator

Your next question comes from the line of Scott Sutherland with Wedbush Securities.

Scott P. Sutherland - Wedbush Securities Inc., Research Division

So similar to last question you touched on, the macro environment some might be saying it's getting more difficult, but you guys had good results and guidance. On the domain names, you guys are seeing accelerated growth and like you said in 2008, you saw some pressure there. What's different now? Is it .co and what's the impact of the new TLDs that you guys might see.

Lisa A. Hook

So .co had a pop of growth last year when it was introduced, and now it's a more normalized growth rate. Again, what we saw a little bit of a lower growth rate when the recession started. It's-- domain names have continued to grow. So we're not really seeing any economic effects from the macroeconomic environment. On the new gTLDs, Paul's going to correct me if I'm wrong, I believe that we have won the right to provide back-end services to 358 of the gTLDs. So more than any other back-end service provider in the market, but honestly, revenues from those gTLDs will not kick in until 2014.

Scott P. Sutherland - Wedbush Securities Inc., Research Division

Okay, since you're giving me some longer-term view of how the targets integration works, as with your SOX compliance, are you seeing any cost and as you get to revenue growth from these cross-selling in 2013? Are you seeing any ability to expand the margins as those 2 things occur?

Paul S. Lalljie

I mean, a few things. In the early stages as we spend on sales and marketing and things like that to bring new services to the marketplace, put in place processes around getting vital signs in the business and generally to be SOX compliant, controls around the sales process, things like that. We're going to see near-term pressure on the margins. We plan to make that up in the rest of the business, but as we go out in the future, I mean, we think we can maintain the adjusted net income numbers 23%, 22% type numbers.

Scott P. Sutherland - Wedbush Securities Inc., Research Division

Okay, and then lastly, can you describe what the bump up in the IP services was, and maybe any little update in the emerging UltraViolet services?

Lisa A. Hook

So IP services is a collection of young services, multimedia interconnect services, I believe Pathfinder, Intelligent Cloud, et cetera, et cetera. It's a very small line item, and it's going to be somewhat choppy as one may grow quickly, one might not, et cetera, et cetera. I wouldn't look at this quarter as indicative of any trend. So it's going to be small and a bit volatile on those ventures. In terms of UltraViolet, we are currently doing some SOW work for the industry to improve the Registry service, to improve the back end for an even better consumer experience. As you know, Wal-Mart launched-- they've got several million accounts now. I don't think that they have -- I guess it just, I'm sorry, crossed the 4 million household mark in terms of accounts using UltraViolet. It's still early days. So I can't tell you much more than that.

Operator

Your next question comes from the line of Julio Quinteros with Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Maybe just to start real quickly with just some mechanics...

Lisa A. Hook

Julio, we can't hear you.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Sorry about that. Just to start real quickly on the mechanics of the margin side. Can Paul, maybe just real quickly -- can you just go through the commentary you made about margins expectations going forward for -- I'm sorry, for the rest of 2012 and then longer term as well?

Paul S. Lalljie

So I think for the first half of the year, I think we generally saw margins adjusted, net income margins for the first half of the year was roughly around 22%, 22.5% type numbers. The second half of the year, if you take the midpoint of that, I think you'll find that the second half of the year is closer to the 23% number. I think the questions around it was-- mainly around the dollar magnitude on guidance for the back half of the year, and that was the -- I think we changed the guidance $189 million to $197 million on adjusted net income for the year. In the first half of the year, we had $2.2 million of tax credits in our numbers. So if you take that and just ask extrapolate, one can assume that at the midpoint, there is a little bit of the compression done at the back half of the year. It's close enough. And if you take the $2.5 million out, it will definitely increasing by 0.5 point at the back half of the year.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay, got it, and then maybe just the ongoing tax, does it change your tax rate, for the onetime tax credit?

Paul S. Lalljie

It does not change the next 2 periods tax rate. Of course, on an overall blended basis, the annual rate will be lower.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Okay, okay, got it. And then maybe just coming back to some of the questions. I think what people seem to be focused on is the sustainability of this growth case that you guys are now showing. Obviously, part of this is learning on our front as you get used to the Information Services business in some of the other segments that we're a little bit more familiar with. Is there any way to sort of frame a little bit more, at least maybe on-- what would you consider to be sort of discretionary work versus nondiscretionary. Is there some percentages or maybe even by line of business where are you can sort of point to potential discretionary work versus ongoing recurring?

Paul S. Lalljie

Well, this is Paul here, Julio. I mean in our Information Services business, I mean, I think it's all recurring revenue. As a private organization, they had some onetime events that created revenue in 2011, and that was what caused the anomaly in the year-over-year comparison, hence, the mention of that onetime revenue. But if you look at our business as a whole, we typically don't have anything material that comes in as onetime revenue. We tend to have about $6 million a year on statement of works, and we have averaged around that $6 million number for a very long time now. This year, we're probably running at a rate that suggests it's going to be lower than that $6 million. But on a revenue base of $825 million, I can't think of anything else that is-- most of our business is at a fixed fee subscription based with minimums. We do have a little bit of license -- software license- type revenue in Order Management. But other than that, everything is recurring.

Lisa A. Hook

The reason we like these businesses, and the reason we like TARGUSinfo, is it has the same business model. Recurring subscription revenues under contract that are basically 3 to 5 years long in industries that we understand extremely well. So to Paul's point, around the edges, there may be 1 or 2 kind of, for instance, Common Short Codes. Those are not 3- to 5-year contracts, they're 3-month contracts, to 6-month contracts to a year. But the business that we've run the business for so long that we understand how renewals work, when they work, have dialogues with our customers. That's all -- it's all pretty visible.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Got it, and Paul, one last one. End of period share count, please.

Paul S. Lalljie

End of period share count was 67 -- 68 million, I'm sorry.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Not weighted average but in the period, correct?

Paul S. Lalljie

For the absolute number?

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Yes.

Lisa A. Hook

The absolute ending period number.

Paul S. Lalljie

I don't think I know that from the top of my head. I'll mention it before the call is done.

Operator

Your next question comes from the line of Sterling Auty with JPMorgan.

Saket Kalia - JP Morgan Chase & Co, Research Division

It's Saket here for Sterling. Most of my questions have been answered, but just had 2 quick ones on a couple of the non-NPAC businesses. So first, on Registry Services. Looks like you had a nice uptick quarter-over-quarter but Common Short Codes and domain names under management weren't up as much probably 1% sequentially. Was there anything else in that business that's struggling in the nice growth there?

Lisa A. Hook

Well, as we've said, if you're talking about in that business with respect to Enterprise Services, Internet Infrastructure Services was back up to double-digit growth. We were doing, as I mentioned earlier, a statement of work for the media guys around UltraViolet. That's been driving some nice growth, and will continue to do so for the year.

Saket Kalia - JP Morgan Chase & Co, Research Division

Okay, and is that statement of work isn't included in the Registry business. So I was thinking about the Registry business specifically in terms of -- I think they were up 17% year-over-year?

Lisa A. Hook

Yes. That does roll up under the Registry business because it is a registry.

Saket Kalia - JP Morgan Chase & Co, Research Division

Oh, there we go. Okay. The next question is on order management. Should we think about any seasonality in that business as we enter the second half? And Paul, you mentioned that part of that is subscription in part is license. Would you be able to provide a rough break out of how much is subscription?

Lisa A. Hook

So while Paul is looking at that issue, let me answer on seasonality. Order management is driven by our customers acquiring subscribers, right? So it's sort of as a cable company acquires a new voice customer, we need to process that voice customer. So that's basically how it works. So you could look at kind of the increase of customers to nontraditional RBOC-like carriers as driving that business. So not particularly seasonal. It may be that people do not sign up for new phone service from a cable company during Christmas week. So it's not sufficiently seasonal for us to pay attention to it. We have our license [indiscernible].

Paul S. Lalljie

It's probably around 75-25 in terms of percentage. So hosted is about 75%

Saket Kalia - JP Morgan Chase & Co, Research Division

Hosted, 75%. Okay, great.

Operator

Your next question comes from the line of Daniel Meron from RBC Capital.

Daniel Meron - RBC Capital Markets, LLC, Research Division

A couple of questions. First of all, now that -- Paul, I think you mentioned that TARGUSinfo was under your belt by now more like 8 months, it seems like the integration is coming well, and it is proving itself. How do you think about additional moves? Are you looking to just continuing to creating adds or are you looking for additional M&A in adjacent markets, lowering the bps, how should we think about it in the near term?

Paul S. Lalljie

Yes. So Daniel, one of the things I like about the way Lisa organizes her script, she focuses on the 4 priorities that we've established for ourselves in the year with a focus on the NPAC, we're going to focus on integrating TARGUSinfo, we're going to hit our numbers and we're focusing on the culture in the organization. Those are our priorities that we try to hit during the year and for us, at this point in time, integrating TARGUS is key for us. From a M&A perspective, I would put it under the broad category of capital allocation. We're not beating the bushes looking for companies to buy at this point in time. I think we have enough priorities to take care of our time. At the end of the day, M&A can be opportunistic on that thing. So I'm not saying if something shows up in our doorstep, we're going to ignore it. But the bottom line is we're very focused on integrating TARGUS successfully and generating top line synergies, and we're making solid progress in that regard, and we have not been beating the bushes on acquisition.

Daniel Meron - RBC Capital Markets, LLC, Research Division

Okay. That's very helpful, and just another thought. I think so far, NeuStar has established a pretty good track record in establishing databases, running them, it's across multiple areas, be it the NPAC, be it your DNS business, be it UltraViolet. Are there any other areas that you guys can apply these skills longer term, and I'm not talking about next 6 months necessarily, but longer term? Are there any opportunities like that, that you think you could expand into other verticals, other segments that can come up that you're looking at? Or is it something that just happens as several industries come together or some regulations, and then you guys go after that? Is that something that you can even initiate as you see industries that may need those, kind of like, registries or clearinghouses?

Lisa A. Hook

So I think that the skill sets of the company are replicable, frankly, across any industry and that there are a multitude of opportunities to expand into other industries in the same way. At the moment, however, we're focused a bit closer to home. We want to really lock and load on the integration of TARGUSinfo and NeuStar and expand the services and the strategic value of the services that we offer to the customers that we have today. We have over 8,000 customers. So we don't actually need to expand dramatically the number of customers we have. What we need to focus on is taking the combined assets of the company and solving more and more strategic issues for the customers that we already haven't helped.

Daniel Meron - RBC Capital Markets, LLC, Research Division

Okay. Okay, that makes sense. And, Lisa, I think when you guys acquired TARGUSinfo or right after you join -- you assumed the CEO role, you guys were talking about increasing, maybe, the visibility, I'm not sure it's the right word, but just the recognition that NeuStar gets from the industry and towards increasing the cross-sell and upsell opportunities down the line. Where do think you guys are in that process? Do you guys think that you're really starting to see those fruits or are we still in the very beginning of that?

Lisa A. Hook

So you might see in-- on our OpEx that we're spending a bit more on sales and marketing than we had previously as a percentage of revenue. That specifically is targeted towards brands marketing initially in the Washington, D.C. environment where we have several stakeholders, both with respect to the NPAC, as well as with respect to our .us contract and other. We had been historically a complete unknown in our hometown environment, and so we set out to build a level of brand awareness. Some folks now think they can't get away from our campaign, which is the technology behind the technology. And we're also expanding that with a slightly different cycling into the community of buyers, broadly speaking, that we serve, which are CMO, Chief Marketing Officers, Chief Information Officers, Chief Security Officers and Chief Technology Officer. So we have a very specific 3-year goal to develop a level of unaided brand awareness within our target buying groups and over time to build unaided preference. And I think, again, that fits us not only with our existing customers at more strategic points in their organizations, but as well with in-bound demand.

Daniel Meron - RBC Capital Markets, LLC, Research Division

Okay, and then just a follow-up on that. How just how much of extra cost? Is it even meaningful in the overall scheme of things? Then related to that, as you look into other businesses you have some of them are successful, some of this -- so where are you guys at that process of weeding out some successful projects?

Lisa A. Hook

So we are in a constant process of weeding out or turning down or discontinuing the sale of services that have, frankly, passed their sell buy date or have proven not to be valued by the market. So that's kind of an ongoing call to herd that we will just do in perpetuity. Any company we'll manage should be doing that in terms of the spending on brand marketing, I am thinking it's a couple of million. Is that correct, Paul?

Paul S. Lalljie

Well, I mean, generally, as a percentage of revenue, our sales and marketing dollars went up about a 1% sequentially and about 2% over the last 2 quarters. It's not all brand awareness. The brand awareness is probably a couple of hundred thousand closer to 1 million than it is to 2 million. So somewhere in between there, and of course, there's a blend. I mean brand awareness comes with a little bit of brand identity, a little bit of programs, I'll bring programs and things like on that. So it's a collection of activities, generally, in the line of brand awareness.

Operator

Your next question comes from the line of Jonathan Ho with William Blair.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Just starting out with the Enterprise Services side. You guys talked about Internet Infrastructure going back to a double-digit rate. Would you expect that to sustain for the rest of the year or was this sort of a onetime activity in terms of that move back-up?

Paul S. Lalljie

Yes, Jonathan, you've seen this business for a while now following us. The growth rates there we expect it to be double digits. So we do expect the Internet Infrastructure business to continue at this rate for the rest of the year. We would argue the first quarter was probably a little bit of an anomaly, and we were always expecting it to get back to these levels.

Jonathan Ho - William Blair & Company L.L.C., Research Division

Got it. And just in terms of the new services that you guys are trialing at this point, can you maybe talk to us about what stage you're potentially at? Are you still sort of defining customer requirements or framing solutions or is there actually something that's in trial right now that you're kind of testing out with customers?

Lisa A. Hook

So with respect to the combination of order management and some Information Services assets to provide service providers with the new type of directory listings, we've got a sales pipeline on that service today. So we're kind of beyond the definition of already defined and built, and we're out in the market selling it and getting a nice reception. Obviously, I may have mentioned, I think, in the previous call that we had a couple of dozens different services of various types and sizes on the board. The rest of them are all in a variety of stages of defining development, prototyping and pricing.

Operator

And there are no further questions at this time. Lisa, do you have any closing remarks?

Lisa A. Hook

Yes, thank you. Thanks for joining us today. We've had a great quarter. Earnings up 33%, TARGUSinfo integration on track, NPAC renewal on track and a terrific team on board. We're entering the second half of the year on a really strong trajectory, and we look forward to speaking with you after next quarter. Take care.

Operator

Thank you for participating. You may disconnect at this time.

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Source: NeuStar Management Discusses Q2 2012 Results - Earnings Call Transcript
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