Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

NeuStar, Inc. (NYSE:NSR)

Q1 FY08 Earnings Call

May 7, 2008, 05:00 PM

Executives

Brandon Pugh - Director of Finance, IR

Jeffrey E. Ganek - Chairman of the Board and CEO

Jeffrey A. Babka - Sr. VP and CFO

Analysts

Philip Winslow - Credit Suisse

Sterling Auty - JPMorgan

William Power - Robert W. Baird

John Bright - Avondale Partners

Herb Weiss - American Technology Research

Elizabeth Grausam - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the NeuStar Conference Call discussing first quarter 2008 results. The company's release made earlier today is available from its website at www.neustar.biz. Again, that's 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, May the 7, 2008. A replay of the call will be accessible until the midnight, May 14th by dialing 888-203-1112 and entering conference ID number 2435914. International callers should dial 719-457-0820. An archive of this call will also be available on the NeuStar website at www.neustar.biz.

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

Brandon Pugh - Director of Finance, Investor Relations

Thank you and good afternoon everyone. Welcome to our first quarter 2008 earnings call. Joining us today from NeuStar are Jeff Ganek, Chairman and Chief Executive Officer; and Jeff Babka, Senior Vice President and Chief Financial Officer. Our call today will begin with comments from Jeff Ganek, then Jeff Babka will follow up 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, believes, 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 and they cause future results to differ material 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 31st, 2007 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, changed 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 as well as the reconciliation of certain non-GAAP measures with the most directly comparable GAAP measures.

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

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Thanks, Brandon. Welcome to our first quarter earnings call. I am eased to speak with you this afternoon to discuss NeuStar's quarterly performance and full year outlook. Jeff Babka, NeuStar's CFO will provide details of our quarterly results and full year guidance.

Let me begin with the summary of our first quarter highlights. First quarter revenue totaled $117.4 million at an increase of 20% from the $97.4 million in the first quarter of 2007. Transactions under our contracts to provide telephone number portability service in United States grew 22% from the first quarter of 2007, which was $3 million or 4% above of our previous guidance provided in February.

Net loss for the quarter totaled $4.5 million. Absent the impairment charge of $29 million, net income would have been $24.6 million. Also during the first quarter, we initiated a stock buyback program and executed on $103.8 million of the target at $125 million to $150 million that we announced back in February of this year.

Overall, our performance and results in the quarter were very positive. It demonstrates that NeuStar is in the fast growing markets, that we have strong positions with competitive advantages and that our business model has operating leverage that enables simultaneous growth and cost management. However, as you saw in our press release issued earlier today, market events in March and April delayed growth in the mobile instant messaging market. As a result, we've reduced revenue guidance for our NGM unit. And accordingly, we recorded a goodwill impairment charge of $29 million on the NGM business that we acquired in November, 2006 for $139 million. The current future business prospects for this business are of major interest to investors. So, I will address these issues right up front, and Jeff Babka will discuss the financial impact later in the call.

Importantly, mobile IM, mobile instant messaging is an early stage embryonic market that's growing. We are confident that it will grow in the future to ultimately become very large. However, the timing of growth in the market is slower than projected. The simple fact is that our customers, the mobile service operators haven't launched marketed mobile instant messaging services as quickly as it had initially anticipated. Their introduction of the service has been delayed by a few very specific recent events. During March and April, large players in the market that is the mobile operators and the Internet service providers or ISPs; they were all pre-occupied by working out their relative roles that they'll play in the mobile IM market.

As they neared the large scale introduction of the service, the importance of the role, each would play became of concern. Negotiations during the last eight weeks about their relative roles delayed their introduction of the service. Here is the issue: as this large projected market takes form, who'll be the lead provider of the new service and how will the various players cooperate. Today, worldwide instant messaging is provided principally by ISPs, the Internet service providers, and it's delivered to more than 400 million users or largely at desktop computers. The challenge and the opportunity of mobile IM is to make it available to the more than 2 billion, billion with the B, wireless handsets, whose users already use SMS text services generating more than $60 billion with the B of annual revenue to the mobile operators.

IM, instant messaging is the next generation of messaging that offers great advantages over SMS text. So, the future of IM is large and it is on the wireless handset. The stakes here are enormous given the great potentials of the market. Over the last month as the mobile operators and the ISPs have been working to define their roles, the launch in marketing a mobile instant messaging service has been delayed. But progress has been made. Certain of our major customers have reached agreements with each other, enabling them to refocus on launch and marketing of the service. We now project a delayed ramp-up of subscribers and service volumes.

NGM revenues in 2008 are now forecast to approximate $20 million. That's deep growth from 2007. These revenues will come largely from existing NeuStar customers and existing products and services. We continue to believe that overtime, mobile IM will be a large revenue driver. We'll speak more about NGM during questions and answers later in this hour. So, I'll move on now to other areas of the NeuStar business, which in the first quarter performed admirably. These businesses, which represent the bulk of the company, are strongly growing and producing profits and cash flow in line with our expectations.

Our business is solid; macro trends in the market are and will drive demand for our services. And numbering will impact services growth will continue this year and beyond as the network operators rely on us to manage market trends like the Internet protocol, IP revolution. NeuStar's Ultra Services will maintain a steep trajectory as growth in e-commerce and complex web services for an increased demand for Internet infrastructure services. Common Short Codes will grow with the emergence of mobile advertising and mobile marketing. Registry services will grow with a demand for domain space on the Internet increases. Even in NGM, growth over 2007 will be at a high rate. Overall, NeuStar is in markets that are growing and or will be large. And in each of those markets, we have got a strong competitive position as a global leader.

Let me talk about some of these growth engines in more detail. First numbering; the impact has grown in transactions every year since its inception in 1996, and we are committed to our goal of attaining at least a 10% annual growth rate over the next four years. The growth is predicated on continued change in the communications industry. Our customers... all the network operators depend on our services to manage change from broad market trends that are driving change in the industry. Examples of the trends include: first, transition of network and services to the Internet Protocol Technology; second, and this is very timely today, the introduction of new technologies such as WiMAX and LTE or 4G; third, third is the additional spectrum usage that will bring new service provider entrance to the wireless and IP markets. New applications and features will increase the complexity of voice and data services that depend upon NeuStar's directory services.

Also, new voice communications service providers especially VoIP providers firm, Internet service providers, or trends that will drive demand for NeuStar. And of course, increasingly challenging network management jobs that require architecture and leading optimization on the part of all the networks is fundamental to why NeuStar usage has continued and will continue to grow. We believe that the largest driver of future growth is and will be the shift to Internet protocol or IP. IP has already created considerable growth for us in the future. It will drive more demand in many ways. Since the IP world has greater need for trusted directory services than does our existing voice environment.

With our unmatched customer relations technology and physical infrastructure, NeuStar is well positioned as the trusted provider of directory services that voice and Internet traffic depend upon. We look forward to serving the demands of the emerging IP world. The continued high growth of our numbering impact feeds on itself has more and more telephone numbers get populated into our dynamic core rooting database. As a total aggregate quantity of telephone numbers increases, so does our propensity for increased transactions in the future. Once the telephone number has rooting attribute changed once and it's placed in the database, it's more likely to incur additional transactions overtime.

Another key growth engine at NeuStar is our suite of Ultra Services. Other than the impact, Ultra was the largest revenue growth driver from the comparable quarter in 2007. Ultra maintained its 2007 momentum with strong first quarter continuing to exceed expectations. At e-commerce spending complex web services and Internet traffic in general flourished the demand for Ultra Services increases across all industry vertical markets both in our core markets such as e-commerce and entertainment along with developing markets such as software as a service and social networking. Across these different segments, customers will rely on NeuStar to manage the quality, safety, and reliability of mission critical Internet traffic.

The first quarter alone, Ultra recorded over 175 new customer wins for its services, including NGM and Blinks [ph]. They also upgraded over 190 existing customers including the likes of Linkedin, StubHub, and the Carlyle Group. Through our acquisition of Webmetrics in January, a leading provider of web and network performance testing, monitoring, and measurement services, Ultra is attracting new customers of broadening our portfolio suite of Internet infrastructure services.

Two other contributors to our growth in revenues were our Common Short Code Service and our domain name registry service. The quantity of Common Short Codes under management grew over 2,800. It is a 26% growth from the same quarter last year. This is fueled by strong renewal rates and increases in incremental new code sales. Brand managers and advertisers are adding mobile to the marketing mix as well as integrating it into their traditional marketing channels. In Common Short Codes, NeuStar is producing real growing revenues from services that are essential to approving segment of the market from mobile, marketing, and advertising. In the future, NeuStar expects the growth of this market to drive new large opportunities for NeuStar's directory services.

Domain names have a similar growth problem. Domain names under management have grown to approximately $3.7 million, which is a 24% growth from the same quarter last year. To summarize, today we are a global company with revenues and growth potential in fast growing large and diverse markets. In these markets existing and new, we are a global leader with strong competitive position. Our business model has operating leverage that enables growth and profitability. We continue to produce strong financial results overalland to build the foundation for a sustained growth profitability and cash flow for our shareholders.

We standby our long-term growth target of 20% revenue growth. We are working aggressively to compensate for the shortfall from 2008 guidance that the NGM issue has caused. Internally, on an operating basis, we are aiming to meet and exceed our announced revenue targets. In addition, we are managing cost and efficiencies diligently as reflected in our strong net income performance, not including the non-cash impairment charge. We remain confident of and committed to the profit targets we announced today.

Before I turn it over to Jeff Babka, NeuStar's CFO, I'd like to talk about the transition of my friend and colleague Mark Foster. For the last 12-years, Mark's contributions to the industry and to the company have been well recognized. From our beginning as a small startup organization, he led the development of a highly skilled and potent organization, which is now in place driving the technology of new products of the company. We understand Mark's need to spend more time with his family. We appreciate his continued commitment to the company as a senior adviser. I believe his contributions will continue to be valuable and I look forward to continuing a very productive relationship.

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

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

Thank you, Jeff, and good afternoon everyone. As Jeff has already discussed, we had a strong first quarter versus our guidance on revenue, and would have exceeded our guidance on profitability measures if not for having to record the non-cash good will impairment charge relative to NGM. Our reduced forecast in NGM caused by the issues, which drove the impairment charge, has also impact our guidance for the year, which I will discuss later in my comments. I'll also discuss the financial impact of the NGM situation on the company in detail.

The highlights of the first quarter include the following. NeuStar's total revenue in the quarter was $117.4 million, a 20% increase from the first quarter of last year. EBITDA for the quarter totaled $21.1 million versus $38.4 million in the first quarter of last year. Without the impairment charge, first quarter EBITDA would have been 50.2 million. EBITDA margin came in at the 18%, absent the impairment charge, first quarter EBITDA margin would have been 42.7% compared to 39.4% in the first quarter of 2007 and our February guidance for the quarter of 37%.

Net loss for the quarter totaled $4.5 million or $0.06 per share versus net income of 18 million or $0.23 per share in the first quarter of 2007. Without the impairment charge, net income would have been $24.6 million or $0.31 per share. Transactions on our contracts to provide telephone number affordability services in the United States totaled $87 million, up 22% from the first quarter of last year and $3 million higher than our guidance provided in February. NGM revenue totaled $3.9 million, up 500,000 in the first quarter of last year, but down from $4.2 million in the previous quarter.

I'd like to point out that in the fourth quarter of 2007, approximately 1.1 million of NGM revenue resulted from accumulative catch-up of previously billed but unrecognized revenue. Cash, cash equivalents and short-term investments ended the quarter at $86.5 million down from $198.7 million at the start of the year. This decrease resulted primarily from using $103.8 million of our cash to purchase NeuStar shares in accordance with the share repurchase plan announced on February 19. We concluded $125 million of repurchases in early April. In addition, at the end of the quarter, we had $39.4 million of cash in long-term investments.

With respect to revenue, our revenue growth for this quarter was driven primarily by four key areas. Telephone number portability services primarily in infrastructure, increased demand for Ultra Services, continued demand for U.S. Common Short Codes and increased utilization of our next generation messaging services. Addressing revenue in the quarter totaled $30.2 million, up $3.2 million or 12% from the same quarter last year. Ultra Services revenue in the quarter amounted to $9.7 million, an increase of $2.7 million, followed by domain name services, which increased by $1.6 million and U.S. Common Short Codes, which increased $1.4 million.

Offsetting these increases was a $2.6 million reduction in revenue from pooling transactions due to slower growth in the number new entrants in the market place in 2008 than into the same quarter of 2007. Interoperability revenue totaled $16.4 million, up $1.5 million or 10% from the same quarter last year. This increase was driven primarily from our NGM business, which totaled $2.1 million, an increase of $1.9 million from the first quarter of 2007. Infrastructure revenue amounted to $70.8 million, up $15.3 million or 28% from the first quarter of last year. Infrastructure was the largest growing revenue category this quarter driven predominantly by network optimization activities, vendor changes, and the implementation of new technologies such as VoIP. In addition, NGM infrastructure services contributed $1.4 million to this growth.

Now, with respect to our impact contract revenue, I'd like to highlight the fact that revenue this quarter included the impact of the change andper transaction pricing for the company's contracts to provide telephone number portability services in the United States. Throughout 2007, the pricing was based on a fixed per transaction price of $0.91. Starting in 2008, the per-transaction pricing is based on an annualized volume table established for the September, 2006 amendments to these contracts that we previously announced. For the first quarter of this year, that per transaction rate was approximately $0.88. The $0.03 per transaction rate reduction resulted in a revenue reduction of approximately $2.6 million for the first quarter.

Now, turning to costs and expense, I will compare the current quarter to the previous quarter. In the first quarter, operating expense totaled $106.4 million, an increase of 32.1 million on a sequential basis. Looking at cost and expense by functional category, the goodwill impairment charge, previously mentioned amounted to 29 million in the first quarter for which there was no corresponding charge in the previous quarter. Cost of revenue, sales and marketing in R&D, were all essentially flat with the fourth quarter of 2007. General and administrative expense totaled $16.5 million, an increase of $2.9 million from the fourth quarter 2007.

Depreciation and amortization totaled $10.1 million in the first quarter, up 300,000 from the fourth quarter. Of this amount, amortization of intangibles related to the application of purchase accounting for acquisitions totaled $3.8 million, 1.8 million of which is attributable to our follow-up acquisition, which we now refer to as NGM.

Now for some brief comments relative to our balance sheet and capital expenditures; cash generation remains healthy with cash provided from operations in the quarter, amounting to $54.1 million. Our accounts receivable were $62.7 million, a decrease of $13.9 million from the start of the quarter. Deferred revenue decreased by $400,000 to $49.9 million from the start of the quarter, and finally capital expenditures totaled $6.7 million for the quarter, primarily reflecting investments in our systems infrastructure. Before a discussion of our outlook to year, I'd like to comment specifically on the financial impact of NGM on our results and guidance.

The events, which transpired towards end of the first quarter and into April that Jeff described, resulted and are having to adjust our revenue forecast for NGM. As a result, even though we typically perform our goodwill impairment testing annually as of October 1st, the events that occurred late in the first quarter caused us to have to perform in interim impairment analysis. This analysis led us to conclude that the NGM related goodwill resulting of our purchase of follow up in November 2006 was $29 million less than its carrying value on our books.

Accordingly, we recorded a non-cash charge for that amount in our first quarter results. This charge is not deductible for tax purposes. The non-cash impairment charge resulted in a loss in the first quarter arising what would have been a very high margin, high bottom line quarter for NeuStar. In addition, it will affect our projected level of EBITDA and net income for the year. The charge being taken as a result of lowering our NGM revenue forecast is by no means indicative of our lack of confidence in the business. Mobile IP is an important component of our future growth strategy and NGM has established a very strong market position, which we expect to produce growth for NeuStar as the mobile instant messaging market develops and grows.

Moving on to our guidance for 2008, to summarize; total revenue is now projected to range between $500 million to $515 million, representing growth between 17% and 20%. This new range reflects the reduction of guidance relative to NGM, down to approximately $20 million for the year, versus our previous guidance of between $35 million and $40 million. EBITDA is projected to exceed $107 million and net income is projected to exceed $70 million reflecting the impact of the NGM goodwill impairment charge on our February guidance, which was $206 million an EBITDA and $103 million in net income.

Net income guidance also incorporates reduced income for the year, caused by the use of our cash and share repurchases. On a per share basis, EBITDA is projected at $2.27 per share and net income is projected at $0.90 per share. With respect to the impact, we reaffirm our previous guidance for transactions to exceed $350 million for the year. In addition for the second quarter, we expect impact transactions to exceed $83 million. At $83 million transactions, the per-transactions pricing in the second quarter and the year-to-date period will approximate $0.88.

In closing, we have reduced our total company revenue guidance by a $15 million range that tops out at our previous guidance of $515 million. However, it's still early in the year, and we believe that incremental revenue from our existing and new service offerings may enable us to exceed the projected revenue range. Our NeuStar team is incented to drive revenue in excess of $515 million and maximize profitability. Hence we will look for opportunity at least to cultivate new revenue opportunities while continuing to manage expenses prudently. From a cash perspective, the NeuStar business will deliver results that meet or exceed that which we projected in our previous guidance.

Let me reiterate what Jeff said earlier. Our business is sound and growing and positioned well in every market we have chosen to enter. Even at the low end of our guidance range on revenue for 2008, we will have grown the business over 17% from 2007 and are positioned to continue to produce margins on an absolute and per share basis that are very strong.

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

Question And Answer

Operator

Thank you. [Operator Instructions]. And the first question is from Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse

Hi guys, just a couple of housekeeping items; Jeff I was wondering if you can give us a breakdown of stock-based comps by expense line item, and then also I didn't catch up with the number of subscribers for NGM at the end of the quarter.

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

Sure. First of all, Phil, on the stock based compensation, the total for the quarter was 4.4 million, and that breakout cost of revenue 400,000, sales and marketing 900,000, R&D 600,000 and the balance in G&A. Now your question relative to NGM subscribers is going to take a little bit of an explanation. In the past, we've reported I believe the number at the end of year was 1.5 million users. Now that was somewhat of a hybrid. It was a combination of logged in users at some of our carriers and registered users at other. Obviously for us the best number for to go with would be the logged in user, because essentially that's what we are paid for. So, we've been able to go back in time now and get logged in users from all of our carriers. That number basically started the year, around 360 million. Actually, year goes about 360,000 users and a year from now or right now was roughly 900,000 and that grew 100,000 from the end of the year. So from this point forward, we are going to be looking at this logged in user. We now have consistency across all of our carriers and will move to that. And I can get... we have it by quarter if you want to track it. I don't those number right in front me here, but I can get that you.

Philip Winslow - Credit Suisse

And then just couple of items; one, just looking at your guidance for transactions for next quarter, it would imply another down sequential quarter as far as the number of transactions. Q1 was sort of the first time we've seen, transactions actually declined sequentially. And it looks like you are calling for another sequential decline. What is going on the impact side? It's just a reversion back down to north of 10% growth this year and then should we think about it single digit after that or what exactly is happening in those first half here?

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

Well, when you look at it, Phil, we gave guidance for the first quarter, which tort [ph] out to be about $83 million to $84 million. And we use the same process. We've always used for that. And we came in at $87 million. Now as we've discussed in the past, we believe our process in and itself and history would prove this is conservative. Things have a tendency to happen in the quarter that we at the start of the quarter don't necessarily see, but they are likely to be surprising us on the high side.

We saw some of that in the first quarter and that's what drove the incremental transactions over and above of our guidance. Looking at the second quarter, process works exactly the same. We go through a very disciplined process on it, and we come up with $83 million. I would hope that will again see some additional things that happen in the quarter that would drive that to higher than $83 million, but we are not going to commit to that at this point in time. We are going to with what our process tells us and that's $83 million transactions.

Now in respect to your question on future growth, we still believe that 10% number is good for the year kind of as our floor for transaction. If you look back in time, we've never transactions up at the end of the first quarter from a guidance perspective. This is too much that can happen from the first quarter on to that when the reminder part of the year will be continuing to take a look at that for future quarters. But as we look at future years and our investor and analyst day back in February, we felt strong and Mark Foster as is the key proponent of this in the presentation, 10% transaction growth growing into the future. There is a lot of things that need to happen in the industry change related that to drive that, but at this stage of the game, we believe that that's still a good number looking forward and if we ever see the point, where we think that's going to need to come down, we would let you know that.

Philip Winslow - Credit Suisse

Great, thanks guys.

Operator

And we will go next to Sterling Auty with JPMorgan.

Sterling Auty - JPMorgan

Yes, thanks guys. Jeff, first a point of clarification; can you repeat again what the total NGM and revenue in the quarter was because when you talked about the breakout between interoperability and infrastructure, I must have missed something, because I couldn't connect the dots?

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

Okay, total for the quarter was $3.8 million, I'm sorry.

Sterling Auty - JPMorgan

Okay, because I thought you said $2.1 million interoperability $1.4 million in infrastructure.

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

No, I think the infrastructure was a... no, infrastructure was $1.4 million of the growth. So, it was growth over last year. When I mentioned the $1.4 million, I was referring to the growth quarter-over-quarter.

Sterling Auty - JPMorgan

Okay.

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

Okay?

Sterling Auty - JPMorgan

Okay. And then back to your transaction commentary; was there anything that you saw in the quarter, where maybe on the calendar on the schedule from carriers or transactions that maybe would have fallen into the June quarter that got accelerated into the March quarter, sokind of a full forward in transactions?

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

We looked at that, Sterling, and quite honestly I didn't see anything specifically that was pulled forward, and I will say that there were things that showed up in the quarter that weren't in our... what we thought would be closed in the quarter pipeline at the start of the quarter. So, whether or not that was an actual pull forward or will have a quarter-over-quarter impact, it's really hard for us to say. When you're talking, $3 million to $4 million transactions you really can't discern at that precisely.

Sterling Auty - JPMorgan

And last question is on the follow-up that you had several reductions and expectations around the revenues sense the time of the acquisition. You mentioned that this was existing... customers' existing products, but what point do you kind of kitchen sink this thing? In other words, what's going to give you the visibility into the $20 million?

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

Well, Sterling, I got to tell you I am certainly able to believe that we have kitchen sink this line at this point in time. And we have built this up base taking a looking at every component of revenue from our existing carriers. What's coming out of deferred, what's coming out of contractual minimums and what a reasonable to moderate growth rate would be at these individual carriers. And building this thing and providing the guidance, I mean this is a second time, we lowered it for this year. We are not looking forward to an opportunity having to lower it again. And so we have built what we think is a set of numbers that the team is not only going to meet, they are going to beat it. Could something happen? Yes, it could happen, but everything that we see right now, points to the fact that we'll be able to attain that level. We have certainly higher visibility now, because we've got almost 30 careers launched, a lot of the revenues are after the launch are coming out of deferred and all those contracts and most of the contracts have contractual minimums.

Sterling Auty - JPMorgan

All right, thank you.

Operator

Our next question comes from Will Power with Robert Baird

William Power - Robert W. Baird

Great, thanks for taking the question. Yes, just on the next-generation messaging business, you referenced some of the challenges coming from the conflict between the carriers and ISPs. I guess I am curious just from a point reference, what are you seeing in some of the larger developing markets, where there is not much of an ISP or less of an ISP presence. I mean can you point to greater take rates in some of those markets? I'd just be kind of curious as to what you are seeing on that front. Thanks.

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Sure enough. The fact is that there are markets, where the service has been introduced and has been widely successful, very high penetration rates. This has happened in Turkey, I think it's the world's leader in this; it's happened in Portugal; it's happened elsewhere in Western Europe. The fact is today there are 400 million IM users served by the Internet service providers and it is in the interest of the Internet service providers to give their customers access to the service over wireless handset. So, the ISPs are pushing very hard on the mobile operators to make that happen.

At the same time, the mobile operators are certain that this is going to be a very popular component of their suite of mobile messaging services, including IM and SMS text. And the mobile operators want to play big role. They don't want to have only a single ISP service available on their customer's handsets. So, there has been considerable negotiation back and forth between the mobile operators and the ISPs as to what the branding ought to be, which brands are available on which handsets, and to what to degree is their interoperability, to what extent can you originate in IM on a particular ISP account from a particular mobile handset and deliver it to a different ISP account on a different carriers handset.

Not all of that was worked out last year. Considerable progress was made this year and our mobile operators or customers tell us that the reason they find contracts with us, the reason that they paid us, committed to pay us for our services, there are 34 of them. It's because that they believe that the 2 billion SMS texters around the world are going to want to use instant messaging. They are anxious to include this service in their offerings, because in Turkey, because in Portugal, because the carrier 3 in the UK has had such a big response from its customers. They definitely see empirical results in the marketplace, where end users have taken up this service. And it is... those kinds of empirical hard results why we believe $20 million is the target we are going to drive to and produce.

William Power - Robert W. Baird

Okay. And then one additional question; I know you are still targeting long-term revenue growth, 20%. So, as I look at 2009 and beyond how important are acquisitions to that, or do you think you can achieve that organically?

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Well, so we think that our strategy, which is really well honed defined here, which we have explained to investors in a number of case is going to get us 20% and above. As part of that strategy, we believe that the greatest challenge is growing as fast as the markets, where we currently are positioned. And it turns out that in the markets, where we are, we are the world leader in most of them, and we are facing an explosion of unprecedented by network operators for directory hub services. Our task is to deliver new expanded scope of directory services to those customers to meet the needs that are growing very, very quickly. We have developed most of the products that we offer. We have developed them internally, organically.

There have been opportunities we've seen in the marketplace, where there were small technology companies, who had developed a world class product offering that we could take advantage of, essentially on a make-by decision. Where there is an acquisition target whose existing proven technology and product fits right on our product road map, where we can economically buy that company to get their technology, deploy their product on favorable economic terms, on favorable timelines. We won't hesitate as we have in the past to do acquisitions.

We are not here building a conglomerate, we are not here doing financial engineering to buy new companies. We are here buying important new directory services on our product roadmap and we have done this very successfully. The example... the best example is Ultra, which has turned into one of the supporting pillars in the NeuStar foundation; recently our acquisition of Webmetrics, the Internet service monitoring company. I hope to do more of these acquisitions but again only where it fits into the roadmap and only where we can do it on a prudent basis.

William Power - Robert W. Baird

Okay, thank you.

Operator

And we'll go next to John Bright with Avondale Partners.

John Bright - Avondale Partners

Thank you. Good afternoon. Jeff, first I missed the revenue on UltraDNS for the quarter.

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

I believe it was $9 million and change... $9.7 million.

John Bright - Avondale Partners

$9.7 million, terrific. Jeffrey, can you talk to us about the events of March and April that took place regarding NGM and then give us a flavor of the status today of the service offerings? If we were in the countries, what we would see if we were interested in buying the service?

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Sure. John, the issue is how is instant messaging going to be branded on the handset, is it branded as the ISP service, is it branded as the mobile operator service. And it's a question of what measure of interoperability there is among all those service providers and how many of those different service providers are available on a given handset. So, our customers were moving along to introduce the service and suddenly found themselves sitting with the ISPs and debating those particular questions. Those debates are so fundamental and the potential of the market is so great that all the parties focused on the negotiations and said we have got to structure this industry before it gets too far down the road, because this is going to be big.

What they decide it John is that certain of our operators reached agreement with certain ISPs, so that in fact there will be multiple ISP provided instant messaging services available on single mobile operator's handset. And that agreement is paving the way for the mobile operator and the ISP to cooperatively launch introduce, and actively promote the service to their end users. And I'm sorry if I'm being a bit elusive here John, but NeuStar is an infrastructure company. We are in this business, because we think there is going to be a huge demand for instant messaging services, and we are determined to be the platform that all the instant messaging providers rely upon to get their service to mobile operators and what there is a lot of money at stake. There is going to be some differences of opinion as to how the market commercially is ultimately structured. We are happy to work with all of our existing service providers as they resolve market structure, because one way or another market demand is going to require that instant messaging be available and when it is, there is going to be large volumes and those large volumes are going to run over NeuStar platform.

John Bright - Avondale Partners

Last question with two parts; why... or talk about the drivers that are going to accelerate impact transactions in Q3 and Q4. And as a part of that, talk about whether or not given today's news WiMAX deployment by Sprint might or might not be a transaction and then if Sprint was purchased by T-Mobile, how comparable would that be to telephone and Cingular for transactions?

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

John, I believe that you are citing examples of what has driven growth and impact transaction for the 11, 12 years. That is changes in technology, changes in mergers and acquisitions and competitive structure and the entry of new service providers have all driven the network operators to rely upon NeuStar to a greater extent than they have in the past. So, as an example, the announcement this week by Sprint, ClearWire, Time Warner, Comcast, Bright House, Google, my gosh, Google, and Intel suddenly you have got a brand new service provider offering a whole range of differentiated communication services over a brand new technology. That service provider is going to require a large inventory of new telephone numbers all across the country, so that they can give phone numbers to their customers wherever they live. Similarly that service provider is going to generate customer churn from other carriers, number portability, again transactions to NeuStar. Look, let me not include forecast for the new WiMAX JV, because that's not going to hit in the second quarter of 2008. I would bet the ranch on that. But boy, if people think that we have seen the last surprise in communication that we think that there is no change left in technology, no change left in competitive structure, I think that is just wrong. I think all the examples that you cited, John, will continue to drive our existing and our new customers to rely even more on the impact in the future as they have in the past. That's the kind of thing they get growth going in 2007; that's the kind of thing that drove growth in the first quarter and we continue to work with customers every day to help and manage these challenges.

John Bright - Avondale Partners

Thank you.

Operator

We'll take our next question from Herb Weiss with American Technology Research.

Herb Weiss - American Technology Research

Hello, thanks for taking my question. Can you talk a little bit about 3G wireless as a driver of the transactions as carriers are building up the network infrastructure? Could you provide a little color on the timing that when you expect to see those transactions?

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

So, in general of the impact of 3G and it s follow on 4G is as I have just described. It means that there is a change in the switch that serves the telephone number. It means that there is a change in the transport architecture that requires changes in the rooting information to get a communication to any individual telephone number. And invariably these new technologies create new marketing and market penetration programs on the part of the carrier so they need more telephone numbers to get their end users. This is an example of what's been driving our growth over the last few years and the first quarter of this year. There is lots of new technology investment and deployment going on within the fast growing wireless industry. We believe that the phenomenon you just described is already contributing volume and will for the remainder of this year and into the future.

Herb Weiss - American Technology Research

Okay, great. And if I heard is correctly, so 3G spending in the U.S. was on the positive side for transactions in Q1, this did help further to drive the transactions?

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

It is certainly one of the factors that drives wireless operators to use the impact.

Unidentified Analyst

Okay, thanks.

Operator

And we'll go next to Liz Grausam with Goldman Sachs.

Elizabeth Grausam - Goldman Sachs

Great, I just want to touch back on the next generation messaging and your comments around what's occurring March-April, and you said the word fundamental, Jeff, in terms of the negotiations that are going on. It just seems that you'll be negotiating around very basic ecosystem economics between both the carriers and the ISPs. Sort to say this evolution of IM being evolved in wireless is still at very early stages that the economics or the relationships haven't really been flush out, and I know you talked at the analysts meeting that another gating factor that that it's really taking off is how that's integrated into the handset, and how available it is directly on the handsets. So, can you give us little of... I guess timing expectations of how the carriers... how far advanced you really think their strategies are in IM, because it seems to indicate they maybe in earlier stage as we may have thought before.

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Sure. So, you know what, I think one way to look at the March-April negotiations that went on to the basic structuring of the marketplace. That shows a material important large step in the evolution of this brand new embryonic market. Because problems like branding, interoperability, and cooperation among the providers, problems like that don't get solved early in the process. These are not academically resolvable issues. They only get resolved, when there is money on the table, when there a pie to be divided up. And you know what, NeuStar has built the technology, the carriers have looked at all the sources of technology in the infrastructure on the handset around the world, and they said, NeuStar, you are the best, and as a result we're the leader worldwide.

We have made the technology available and the operators say, Great, we have already signed the contract, we are already on the hook to pay. Now, let's turn this into a service that delivers value to our end users, and as they left the starting gate, they said Oops! We've got a deal with the ISPs, we've got a deal with these market structure issues, tough, tough negotiations. But they don't face tough negotiation until you have to. So, I am optimistic that we got to this, we've got to this situation and there was enough economic marketing drive on the part of the players to fight through to an agreement that clears the way for introduction of the service.

Our service is up and operating today and clearly as it scales, there will always be challenges, but the service is up and operating today. We are delivering it at 3 in the UK, in Italy, in Turkey. Russia is a great market for us. We've got 34 mobile operators around the world, where our service is deployed and operated.

Elizabeth Grausam - Goldman Sachs

And in terms of the handset manufacturers and they spoke a bit about embedding the software actually in the handset in order to increase the usage. Is that the next stage of evolution as the carriers go back, have initial launches of the IM and then begin to negotiate a better user interface as directly on the handset? How do you see the handset manufacturers actually working within this supply chain in ecosystem of the IM market?

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Clearly, as this becomes a popular service, the operators are going to require of the OEMs that the clients be embedded as they roll off the assembly line and are available for retail distribution. In the meantime, we are seeing growth in end users as a result of downloading the existing clients. And you know what, as the operators introduce launch and promote the service, it creates an ecosystem behind end user take rates that makes the clients available in a more easy way. And I think you are exactly right in characterizing mobile instant messaging as an embryonic market.

There is absolutely no question about its early stage. What's significant about the last quarter is that there is 35 operators, who have bought and deployed our infrastructure that they are putting enough effort into this. So, they are working out arrangements with ISPs, because they see that a substantial portion of the 2 billion handset operators, who generates $60 billion of revenues are going to use this service.

Elizabeth Grausam - Goldman Sachs

Great, thank you.

Operator

And that concludes the question-and-answer session today. At this time Mr. Ganek, I will turn the conference back over to you for any additional or closing remarks

Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer

Sure. Thanks everybody for joining us for an hour. If I can summarize what we've got here, we produced financial results, revenue and related financial performance that exceeded our guidance for the first quarter. We had very strong performance in all of our businesses. We were disappointed by the delay not the loss, not the diminution, but the delay in mobile instant messaging market. We took a non-cash charge, which is consistent with market developments in there. We remain very, very optimistic about achieving our now announced financial objectives and for the future of NeuStar beyond 2008.

Thanks very much.

Operator

This does conclude today's presentation. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NeuStar, Inc. Q1 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts