NeuStar, Inc. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: NeuStar, Inc. (NSR)

NeuStar Inc. (NYSE:NSR)

Q2 FY08 Earnings Call

August 5, 2008, 5:00 PM ET

Executives

Brandon Pugh - Director of Finance and IR

Jeffrey E. Ganek - Chairman of the Board and CEO

Lisa A. Hook - President and COO

Jeffrey A. Babka - Sr. VP and CFO

Analysts

Sterling Auty - J.P. Morgan

John Bright - Avondale Partners

Rob Sanderson - American Technology Research

William Power - Robert W. Baird & Company

Nandan Amladi - Deutsche Bank Securities

Katherine Egbert - Jefferies & Company

Scott Sutherland - Wedbush Morgan Securities

Operator

Please stand by. Ladies and gentlemen, thank you for standing by. Welcome to the NeuStar Conference Call discussing Second Quarter 2008 Earnings Results. The company's release, made earlier today is available from it's website at www.neustar.biz. During the presentation, all participants will be in a listen-only mode. Afterwards, securities, analysts and institutional portfolio managers will be invited to participate in the question and answer session. [Operator Instructions]. As a reminder, this call is being recorded, Tuesday, August 5, 2008. A replay of the call will be accessible until midnight 12th by dialing 888-203-112 and entering the conference ID 3797849. International callers should dial 719-457-0820 and the archives of this call will also be available from 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 and Investor Relations

Thank you and good afternoon everyone. Welcome to our second quarter 2008 earnings call. Joining us today from NeuStar are Jeff Ganek, Chaiman and Chief Executive Officer; Jeff Babka, Senior Vice President and Chief Financial Officer; and Lisa Hook, President and Chief Operating Officer.

Our call today will begin with comments from Jeff Ganek. Then Lisa Hook will give us an update on the operations. Then Jeff Babka will follow-up with a discussion of our financial performance, after which we will open the line for 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 that may 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 31, 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, as well as the supplemental presentation we posted to our Investor Relations website. These two documents include our financial results, metrics and commentary four 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 second quarter earnings call. I'm pleased to report to you another quarter strong results. And I'm pleased to welcome Lisa Hook, our President and Chief Operating Officer who'll join Jeff Babka and me on our earnings call today. Lisa will focus her comment on a few of the operational initiatives she's been working on throughout the business to sustain our revenue growth, profitability and cash flow. My opening comments will be brief and focused on a summary of our financial operational performance, along with some recent management changes.

So let me began. Financial performance in the second quarter continued to be very strong, both versus the first quarter and versus last year on a revenue of a $120.2 million, we produced EBITDA margins of 42%, net income margin of 19% and the earnings per diluted share $0.31. In the second quarter several of our service offerings contribute to revenues growth, the most notable coming from our contracts to provide telephone number portability services in the U.S. were the transactions amounted to $89.8 million. This represents an increase of 15.4 million transactions or 21% over the second quarter of last year. $2.8 million or 3% higher than the first quarter of 2008 and $6.8 million higher than the guidance we provided on May 7th.

I would like to now focus my comments on a few aspect of our business that produced important parts of that performance. Generally speaking, trends in the markets that NeuStar serves are positively impacting our business, and thus far, macroeconomic conditions are not having an appreciable adverse impact on the majority of NeuStar service offerings.

Let me start with the core of our NeuStar business numbering portability services or as we sometimes call it the impact business. The strong growth in impact transaction volumes that we reported has been driven by trends in the market in spite of overall economic weakness. That is in the face of economic uncertainties; our customers continue to rely upon our services. For instance, the Wireless industry continues to use increasing volumes of our services as they manage to change in their business from growth in new applications for subscribers. Examples of the new applications include; data services on mobile devices and wireless broadband cards for laptops.

In other instances, growth for NueStar services has been strong with change in turmoil in the industry of rent [ph]. Here is an example. We see that legacy of wireline access lines are decreasing. However, demand for new store services has been driven by concurrent trends showing that end users are moving to wireless and Voice over IP or VoIP. Demand for our service is also driven by the cable TV MSOs or multiple system operators, which continue making competitive inroads with their bundle services including fixed and mobile offerings.

And wireline carrier is facing tough competition in difficult economic times are offering new access programs that are driving tracking requirements within the carriers system. The wireline operators can use the NueStar directory to do the tracking. These trends have contributed to our biding first and second quarter transaction guidance numbers and increasing our transaction guidance for the full year. Change in the networks even change in weak economic times generates demand, for NeuStar impact services. Second contributor to our growth this quarter was Ultra Services where demand has grown with usage of the internet. Even in a tough economy demand for Ultra Services has grown with increases in market requirements for quality and reliability on the internet, here's why; first overall online consumer buying is increasing, second social networking is exploding, third new websites are being introduced and fourth of course the rising price gasoline is driving more commerce to the internet. In this fast moving environment network operators look Neustar for DNS or Domain Name Services, infrastructure services that both improve the efficiency of their end user customer's internet experience and add a layer of security against malicious attacks of service.

In the second quarter alone Ultra Services recorded over 200 new customer wins including pulling [ph] in business school Revlon [ph] and Moody's Investor Services. In addition demands have continued to grow from our existing customers in social networking, gaming, dating and general internet applications as their internet traffic grows. For the second quarter over 250 existing Ultra customers upgraded their service to a higher monthly recurring plan. In the second quarter we also saw revenue growth driven by fast market growth of mobile marketing services, proliferation of text messaging in all demographic groups continued and favorably impacted demand for our mobile messaging service offerings. Prime example is our common short code service, which enables one of the fastest growing revenue streams in the mobile marketing space. We directly support brands and enterprises including Fortune 1000 entrepreneurial companies, marketing managers and advertiser's alike, rating mobile to the marketing mix, integrating it into their traditional marketing channels. Demand for these services coming from a variety of sectors; retail, entertainment, government and even non profit, all driving growth in common short codes.

Every time I turn around, I see a new and unique use for a common short code. Few months ago it was rooting for the NBA star of the game, today it's expanded to include applications like making a $5 donation to a cause promoted by an entertainer on her concert tour. Airlines use common short codes to enable their customers to sign up for frequent flier clubs. As a result of new uses for common short codes and strong renewal rates the quantity of common short codes under management has grown to over 3100 in the second quarter, a 28% growth from the same quarter last year and 10% sequentially. NeuStar understands how mobile registries and enabling services can connect brands and enterprises to their audiences with relevant content and experiences. As such we expect the growth of this market to continue to drive new large opportunities in our services even in a tough economy.

Let me turn now to NGM, where we generated $3.3 million in revenue in the second quarter. The embryonic market for NGM services that is IP based mobile IP, mobile instant messaging services to the handset; this embryonic market has not developed as early as expected. However, signs in the market continue to indicate that the market will grow to be large; Lisa Hook and Jeff Babka will talk more about our initiatives here. We remained committed to the opportunity for mobile instant messaging and the NGM business. We believe it will be a strong contributor to our future growth and profitability. So before I turn the microphone over to Lisa, I'd like to leave you with the following; we are often asked why it is we are so bullish about the businesses we are in and the markets we serve. The answer is simple; NeuStar uniquely serves the unprecedented need the industry has for directory services. Their needs are driven by disruptive changes in the market. There is a growing diversity in complexity in 21st century networks that create an interoperability challenge. Over 5 billion end points over 10,000 independent networks, hundreds of technologies and a long list of voice content, video and transaction services. Nuestar services provide the nerve center to enable traffic and features to be managed across all these networks across all that complexity. We've been successful in the past because of our established infrastructure, a track record of innovation our D&A of being trusted, reliable and competitively neutral for the last customer base under long term franchise contracts. We'll continue to grow in the future because powerful market trends will drive growth in demand in large markets where NeuStar has a strong market position competitive advantages and demonstrated ability to deliver valuable innovation. We have the financial strength and managerial expertise to execute effectively to meet the market demands.

That ends my prepared remarks Lisa, I will hand the microphone over to you.

Lisa A. Hook - President and Chief Operating Officer

Thanks Jeff and good afternoon everyone. I'm pleased to have the opportunity to speak with you today. Having been on the job for a little over six months I wanted to take this time to share with you some of the key programs I am working on to help NeuStar attain our business objectives and financial targets. I joined NeuStar in early January of this year to help grow the business from a multi-hundred million company in annual revenues to a billion dollar company, while maintaining our historically strong margins and our quality cash generation. We have a very formidable set of service offerings, which we believe can form the foundation for annual revenue growth in excess of our targets. Doing so will take institutionalizing process management and operating excellence in our service offerings. To grow these multiple service offerings as we desire requires us to scale process, support systems, reporting, people accountability and compensation in new scalable ways and that is where I've been spending my time.

First as Jeff mentioned our numbering portability services business continues to grow, while this requires maintaining the high service delivery levels that we have come to expect out of our operations team over the past few years. The business itself is mature with burned-in quality control process. So from an operations perspective I have had only to assure that our team is clearly focused on meeting their objectives, which as you can see by their results and their forecast for the year is clearly being done. In addition I will discuss in a few minutes, we've begun to extend our core operating skill set to numbering across our other businesses, to improve service quality and operating leverage on the business as a whole.

Turning to also Ultra DNS, since we acquired that unit in April of 2006 we've enjoyed significant growth in customers and in revenue, with that growth has come the traditional growing pains and strains. I have focused a considerable amount of my time on Ultra, the team, the sales and the operating structures and processes and quality improvement. First we're strengthening back office processes and operations. Second we're integrating our recent acquisition of Webmetrics purchased in Q1 of this year, and finally we've put in place the leadership team that will drive Ultra to continued large scale growth. We've asked our core operating team to assume responsibility for development, operations and customer support for this group. In addition we now have a very detailed revenue operating plan that I will be working with our newly appointed service group head, to execute. Internet infrastructure presents a tremendous growth opportunity for the company, one I believe we are now poised to cultivate.

Lastly, I've spent a lot of my time at NGM, our messaging group. Similar to the internet infrastructure group, NGM has grown rapidly in customers and delivery requirements. The revenue opportunities for mobile instant messaging and mobile IP is great. And with 36 operators under contract, we are in the best position of any of our competitors to cultivate this opportunity. As of Ultra, it will take effective process management and operational excellence to produce the service platforms that mobile network operators have confidence in to deliver quality service levels to their end users. That has been our primary focus with NGM. I have been totally engaged with our sales team in the U.K. and our products and development team in Hypha [ph] to assure that we all clearly understand the committed deliverables to our 36 existing customers and that we are in a position to meet their expectations and our revenue and profitability objectives when large numbers end users start using this service.

As with the Internet infrastructure group, we are placing the NGM development and operations team under our core operating group. To extend our 12 year tradition of highly reliable, cost effective service delivery into the mobile arena. Our new SVP of Operations and his team of NueStar veterans will assure that we meet our customer deliverables at the most efficient cost. To enable matching contribution form NGM as soon as it is reasonably profitable.

To conclude, I don't plan on making an appearance on every earnings call, I'll leave that to Jeff and JB and make an occasional guest appearance. However, I asked to be on this call as a six month check-in, to assure that I am focused on delivering the basic, blocking and tackling necessary to meet our targets for growth and profitability.

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

Thank you Lisa. This is Jeff Babka and good afternoon everyone. As both Jeff and Lisa have indicated, we are pleased with our second quarter results, which we summarized in our press release this afternoon. Let's start with some of the highlights. Total revenue of a $120.2 million was 21% increase from the second quarter of last year. EBITDA at $50.3 million, versus $40.8 million in the second quarter of last year. Net income of $22.9 million representing a 19% net income margin and $0.31 per share on a diluted basis.

Net income was up $3.7 million from the second quarter of last year. Transactions on our contracts to provide telephone number portability services in the United States totaled $89.8 million, up 20% from the second quarter of last year. And $6.8 million higher than the initial guidance we provided in February.

Revenue from Ultra Services totaled 10.8 million, an increase of 45% from the second quarter of last year and up 11% from the first quarter. Revenue from Common Short Codes totaled 7.3 million, an increase of 28% from the second quarter of last year and up 8% from the first quarter. NGM revenue totaled $3.3 million, up from $1.5 million in the second quarter of last year, but down from $3.9 million in the first quarter.

Our revenue growth this quarter was driven primarily by three key areas: telephone number portability services, primarily in infrastructure; demand for Ultra Services and increase in demand for U.S. Common Short Codes. Addressing revenue totaled $32.3 million, up $5.4 million or 20% from the same quarter last year. Ultra Services, Common Short Codes and Registry Services contributed to this increase.

Interoperability revenue totaled $16.6 million, up $3.5 million or 27% from the same quarter last year. Of this increase, $1.9 million was attributable to NGM. Infrastructural revenue amounted to $71.4 million, up $11.6 million or 19% from the second quarter of last year. In dollar magnitude, 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.

Turning now to cost and expenses. In the second quarter, operating expense totaled $80.2 million, a decrease of $26.2 million on a sequential basis, which reflects the $29 million impairment charge that we've incurred in the first quarter of this year. Excluding the impairment charge, operating expense would have increased by $2.9 million on a sequential basis. Looking at cost and expense by functional category. Cost of revenue totaled $26.8 million, an increase of $2.3 million from the first quarter. Sales and marketing expense totaled $22.2 million in the second quarter, up $1.5 million from the first quarter, and research and development expense totaled $7.8 million, which is generally in line with the first quarter, and general administrative expense totaled $15.2 million, a decrease of $1.3 million from the first quarter.

Depreciation and amortization totaled $10.3 million in the second quarter, up $200,000 from the first quarter. Of this amount, amortization of intangibles related to the application of the purchase accounting for acquisitions totaled $3.7 million, $1.8 million of which was attributable to our Followap acquisition, which we now refer to as NGM. Also in the second quarter, we recorded a $1.3 million charge in other expenses relative to the decrease in market value of auction rate securities. We had approximately $38 million in such securities remaining and based on discussions with our bankers, we believe that we'll be able to liquidate the remainder at full value.

Now for some brief comments relative to our balance sheet and capital expenditures. Cash, cash equivalents and short term investments ended the quarter at $72.2 million, a decrease of $14.3 million from the beginning of the quarter. In addition of note, we also had $38.4 million of cash in long term investments. There were two large disbursements that reduced our cash balance in the second quarter. First, is $21.1 million of share repurchases in accordance with our share repurchase plan announced on February 19th.

And second, a $23.2 million charge for our quarterly tax payment. Cash generation remains healthy with cash provided from operations in the quarter amounting to $10.6 million. Our accounts receivable balance is at $70 million, an increase of $6.5 million from the start of the quarter resulting primarily from increases in revenue. Deferred revenue decreased by $2.1 million to $47.8 million from the start of the quarter and capital expenditures totaled $9.9 million for the second quarter, primarily reflecting... reflect investments in our systems infrastructure.

Before discussing our guidance projection for 2008, I would like to comment briefly about the financial impact of NGM on the NueStar business. In the second quarter, we generated $3.3 million in revenue and incurred $14.9 million in costs and expenses which includes depreciation and amortization. Clearly, we didn't go into 2008, anticipating the NGM would be diluting second quarter earnings by more than $10 million. We do, however, expect NGM revenue to grow as subscriber growth is realized at existing carriers and as new carriers are launched, but for the remainder of the year, NGM will be a margin drain on NeuStar. The operational and organizational changes that Lisa mentioned will enable us to keep our cost and expense level to the minimum necessary to meet our customer deliverables.

Moving on to our guidance, based on our year-to-date performance, and prospects for continued revenue growth in our business, we are reaffirming our prior revenue and profit guidance provided on May 7th 2008. We are also updating our transaction guidance for the full year. As such, we expect total annual revenue to range between $500 million and $515 million representing growth of between 17% and 20% over 2007. This range reflects our previous NGM revenue guidance of approximately $20 million for the fully year.

EBITDA is projected to exceed a $177 million and net income is projected to exceed $70 million reflecting the impact of the $29 million NGM goodwill impairment charge taken in the first quarter this year. On a per share basis EBITDA is projected at $2.30 per share and net income is projected at $0.91 per share. Transactions under our contracts to provide telephone number portability services in United States are projected to exceed 360 million transactions for the full year 2008, 10 million transactions higher than our prior guidance. This will reflect year-over-year growth of at least 13%. At 360 million transactions, the pro transaction pricing for the year would average approximately $0.87 and transactions in the second half of 2008 would come in at $183.2 million. That would represent an average of $91.6 million transactions per quarter in the second half of the year, up from the average of $88.4 million per quarter in the first half of 2008.

In closing, we feel that our second quarter results placed us in the strong position financially and operationally for 2008. As Jeff commented earlier despite the generally weakened overall economy, industry trends appear to be working in our favor and revenue growth, profitability and cash generation are all on good trajectories. We will continue to make improvements to unlock value for our shareholders. That concludes our formal remarks, operator you may now open the call for questions.

Question And Answer

Operator

Thank you. [Operator Instructions] We'll take our first question today from Sterling Auty of J.P. Morgan

Sterling Auty - J.P. Morgan

In the strength and the transaction side you've mentioned some areas but can you talk in a little bit more granularity as to what you saw in the quarter and what parts of that strength might be sustainable in for the back-half of the year?

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

Sure Sterling, there are hundreds of different applications that drive our customers to generate impact transactions. To that we saw a particular note this past quarter is first awful lot of network grooming going on that is, changes in network architecture where our customers are changing our technology in the phase of fast seemed volumes of traffic, they use our system to change the routing of traffic across their existing switching transport infrastructure. The second factor is related and that is the growing proliferation of IP in the networks, so this is not even so much retail level advantage kind of voice over IP, but it is the change out of transport switching traffic management capabilities from old voice technology to next generation IP. As those changes are made in the network, they need to change the way any message gets from point of origination to point of termination. Those are the two biggest factors we saw but again, they are among the 100 that are driving carriers to use our impact transaction machine.

Sterling Auty - J.P. Morgan

Okay and then Jeff Babka, maybe you talked about the $91.6 million average transaction in the back half of the year, maybe you can connect the dots between what Jeff Ganek just said and is that sustainable, and how should we think about kind of the seasonal pattern of the transactions in the back half of the year?

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

Well you know, we haven't seen a tremendous amount of seasonality effect in our business, other than the first quarter this year where we had a little bit of dip from the fourth quarter. We were we've seen a steady rise over the last couple of quarters. We were a little conservative in our estimate for the second quarter. We thought we were going to come in at about $83 million; we came in at $89 million so considerably over for the quarter. We're seeing that growth in the second-half of the year as I mentioned the average would be up from the first-half of the year. Our forecasting methodology really hasn't changed. We're looking at the trends of those transactions for the things like the competitive porting. We're seeing some nice increases coming in the pooling area and as Jeff said we're looking at... again changes in network elements that whether it would be driven by a network grooming transaction or a decision to track something in an optional data field which has been a key driver also for us. Forecast looks good for the second-half of the year that's why we took the transaction guidance up to 360 from 350.

Sterling Auty - J.P. Morgan

Alright, I'll go back in the queue. Thanks, guys.

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

Okay.

Operator

Next we'll hear from John Bright with Avondale Partners.

John Bright - Avondale Partners

Thank you. Good afternoon. Jeff Ganek, the mobile IM business has been a thorn in your side now since you picked it up. What first of all, are we still looking at $20 million in revenue expectations for that for 2008, and then secondly, what should we be looking for as signs of success, in this business in the NGM business, looking forward?

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

Okay, John, critical piece of the business is that we think is key to the future growth and development of the business. First, as for the $20 million and let me give the headlines and my colleagues here may have something to add. $20 million is our operating plan based upon our existing customer contracts, with existing customers, existing products, and on our sales pipeline with high likelihood of sales closing. We believe that we are driving our organization to meet and beat that $20 million number. That's the way we're running the business right now, that's the way NeuStar NGM looks in the marketplace. What happened is that, end user take rates, of mobile instant messaging, that is the number of the billions of handsets worldwide currently using mobile instant messaging has grown at a slower rate than we anticipated. However, here's what we see, we've seen a continuing parade of two tier one and large mobile operators coming to NeuStar, additional carriers are signing on to use us as the infrastructure they depend upon to deploy and operate, to deliver mobile instant messaging to the handsets. Number two; we continue to see specific markets in specific countries where mobile instant messaging as a service has been introduced, promoted and marketed by the mobile operator. In those situations the end user take rate is far in excess of what is required for us to hit our ambitious target. The point of inflection in this embryonic, innovative consumer product marketplace has not yet been seen. It is our sense, based upon what our mobile operator customer's tell us, based upon what industry analysts tell us is that this is going to be a very popular service among the billions of handsets worldwide who currently already regularly send and receive slower less functional SMS text messaging. What's the mile post that we'll see to know that this marketplace has in fact hit a inflection point that will drive usage and NeuStar NGM revenues it's when end-user take rates for mobile instant messaging service start to grow.

John Bright - Avondale Partners

Alright, and for my follow-up question I am going to shift over to the transaction business; we've had a period of time now to look at Verizon and Alltel, how would you characterize the potential from that acquisition or merger for NueStar one and then two associated with that, has the visibility into that business stayed the same gotten cloudier or clearer?

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

John let me start with that and Jeff and Lisa can chime in. As we look at any mergers particularly those in the wireless industry, we have seen very rich transactions coming out of previous merger activities in the wireless and mobile industry. We have not seen anything specifically coming through yet on the Verizon acquisition here, but we believe that we will see them coming in the future and they will take place, they will start-up and start ramping up and then we will see them over a relatively extended period of time. It could be something as simple as change out of an SS7 network provider, it builds to be an upgrading of the technology and in rationalization of the network. Again, this is not something that we see that as moving the numbers appreciably this year for us, but it continues to be one of the things that we look forward to be a driver of transactions as we are looking forward into 2009 now.

Now if you are talking about the Horizon for 2009, industry consolidation will continue to be a driver as will technology migration, as will potentially new fields coming in the impact. We have yet to kind of go into our budgeting process for next year, but these are all basically drivers that we see historically and they are likely to see driving the number in next year.

John Bright - Avondale Partners

And to the visibility question?

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

Well, John visibility in our business certainly current out is very good. As you get further and further out you're looking more at what's on the planning horizon. What are the engineers of the various carriers starting to think about. Really the visibility hasn't changed all that in 2000... or this year as it had in the past. We're kind of looking at things the same way. I think the issue is that the numbers are just a lot larger. I mean, if you look at what our business was when we went public in 2005, we're looking at couple of 100 million transactions a year, now we are well over 315 to 360. So that's kind of the visibility story and it really hasn't changed all that much.

John Bright - Avondale Partners

And this one is not necessarily a question more so. It's just a information. Could you give us the domain names Common Short Codes and NGM subscribers?

Unidentified Company Representative

Yes, sure. By the way, I will point out that is... those are all posted on the supplemental information on our website, but I'd have been more than happy to have mention here, domain names under management 3.8 million Common Short Codes under management, $3.13 million. Was there another one or --

Lisa A. Hook - President and Chief Operating Officer

No,

Unidentified Company Representative

As example [ph]

Lisa A. Hook - President and Chief Operating Officer

3,000.

Unidentified Company Representative

I am sorry. 3... 3,000 not 3 million, sorry.

John Bright - Avondale Partners

Thank you.

Operator

Next, we will hear from Rob Sanderson, American Technology Research.

Rob Sanderson - American Technology Research

Good afternoon gentlemen. Back to NGM revenue, clearly in the early stages, it's very lumpy business, down take in the last two quarters for you. Can you describe the composition of the revenue recognized this quarter? I mean, how much is now being driven by recurring subscriptions on those 975,000 subscribers, versus what's being recognized over versus the deployment milestones you may be achieving?

Unidentified Company Representative

Hey, Rob. A couple of things. First of all, if you look at revenue on NGM it comes basically in three flavors. You've got what's coming out of deferred for the setup and implementation fees. You've also got, the professional services type revenues as well as then the monthly recurring revenue. Now we have not provided a breakdown of this by the three components, but the lumpy components of these are the revenue coming from the amortization or the bleed up of the deferred revenue and the professional services. And then the first quarter there was a pretty high professional services component. If you actually take a look at the monthly recurring revenue, it was actually up over the first quarter, but again it's going to be lumpy, and recognize this is early stage. We've got a lot of new customer launches, we've got some things where customer deliverables maybe held up looking for a certificate of acceptance, things of that nature and that's going to drive some lumpiness in the early stages.

As these subscribers grow and as the revenue coming out of the monthly recurring

becomes a bigger percentage, that revenue stream will be a lot more predictable because the trend type revenues are likely to just start building upon itself as subscribers grow. So at this stage again, we're not given the breakdown, but we can recognize there are all those three components and as you look at what is going to take to make the target for this year, it's going to take really increases in all three of those and as Jeff has mentioned, we've got plans in place for the current customers that would drive that. It's a matter of execution as well as subscriber growth coming from this point.

Rob Sanderson - American Technology Research

So I think to that Jeff.

Operator

Next, we'll hear from Will Power, Robert W. Baird & Company.

William Power - Robert W. Baird & Company

Great, thanks for taking the question. Good afternoon. I guess a couple of questions maybe tied together. Lisa in her remarks had alluded to some of the OpEx savings opportunities, as you consolidated some of the... I guess, back office development where both for Ultra and NGM and I guess I'm trying to perhaps better understand what aggregate OpEx savings might look like, if there is any way to better quantify that? And then secondly, I mean what's the risk, are there any disruptions to the sales cycle, I guess on either of those businesses part of restructuring there? Thanks.

Lisa A. Hook - President and Chief Operating Officer

I can talk qualitatively on both of this and then hand it over to JB for the numbers. One of the things as a newcomer that's most tremendous about this company is the true strength of the core operating in customer support team. We have a very high customer satisfaction in the numbering business, as well as carrier grade service delivery. The newer acquisitions are in a very fast growing market, staffed by people who are terrific at creating products and taking them into the market. As with all young businesses, they are less strong on the back end service delivering customer support side. There is a logical conclusion to extend our core operating team across all of our businesses. Primarily with a goal of ensuring NueStar quality service delivery and customer support with a secondary focus on OpEx savings. You've seen the initial savings, however, come out in our EBITDA improvements over the last couple of quarters and I would say that there is more to come here, but let me turn it over to Jeff to speak more specifically.

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

Yes, when you are looking at the various areas, I mean as Lisa mentioned, when we look at consolidating the operations; you are talking about things like consolidating call centers and development teams and the operations support. And so there it's a matter of kind of rationalizing as we consolidate, and then we do have some growing businesses here. So, we will continue to be adding resources to the business, the question is getting the right resources in the right functions, and particularly, if you take a look at the growth we had in our sales organization, what, growing Ultra, let's say from 14 to 85 salespeople, you're going to have some salespeople that was out, that just don't make the grade. And we're going to need to wash those out of the business and hire some new ones. So it really is kind of rationalizing across the margin targets that we've given for the year. Still will enable us to continue to invest in the business, in the net areas necessary, and we're confident in the margin targets that we've... that we've established.

Lisa A. Hook - President and Chief Operating Officer

And then if I could answer the second part of your question with respect to disruption of selling processes in light of these organizational changes. The changes have been on the back end in product development, operations and customer support, less sale on the front-end. So the sales teams are continuing uninterrupted, and are simply seeing more velocity in terms of service delivery from the greater emphasis on operating process.

William Power - Robert W. Baird & Company

Okay. Thank you.

Operator

Moving on to Nandan Amladi with Deutsche Bank.

Nandan Amladi - Deutsche Bank Securities

Hi, good evening. Thanks for taking my question. On the topic of UltraDNS, have there been some recent management changes with Ben Petro and so on. Can you characterize the formulation of the team as it now stands, going forward into this new model?

Lisa A. Hook - President and Chief Operating Officer

Yes. Ben Petro, as you know, did leave. He was a tremendous startup CEO, and really drove the company's sales quite strongly over the past couple of years. We've been fortunate to get a new SVP in who has a background in scaling businesses, from $20 million to $500 million in revenues, all enterprise sales background, high consultative selling and capability. So we're quite excited to have somebody now to board this position. On revenue side at the next level, as you know a scaling GM is quite different from the startup of GM and the combination of the new leadership on the revenue side as well as a true focus on operational excellence, we think will drive the company pretty significantly forward.

Nandan Amladi - Deutsche Bank Securities

Okay, thanks. Kind of related question then, if the NGM business or rather the UltraDNS business continues to be the driver for this year. Can you provide some color on what targets you might have set for that business?

Unidentified Company Representative

We have not provided specific targets at the NGM level recognize that last... I am sorry the Ultra level, recognize that last year the growth was over 50%. We see that as being a part of the business that can certainly grow in excess of the overall company growth level. It's significant for this year and we've done an acquisition earlier on this year, we are into the process of integrating that adding some additional services to the portfolio but no specific external targets given for that. Growth for this year is tracking pretty much with our expectations and it would be a solid year growth for the year.

Nandan Amladi - Deutsche Bank Securities

Okay, thank you, that's all for me.

Operator

Next we'll hear from Katherine Egbert, Jefferies & Company.

Katherine Egbert - Jefferies & Company

Hi, I have a couple of questions, the first is, I think when you gave the transaction guidance, it cost for about 4% transaction growth in the second half versus the first half and that seems sort of anemic [ph] compared to what its been in the last few years. Can you talk about why that 4% is so low?

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

Well, yeah, partially because of the fact that the fourth quarter of last year was a very, very strong quarter as was evidenced in driving $318.05 million transactions. So we are looking at that now more on a sequential type basis, just because that's kind of how the business is, its not like we managed this with targets over what the quarters were at the end of last year. There is some lumpiness on some of the applications that are driving it but at $360 million transactions particularly with the transactions we recorded in the growth in the first quarter of this year, that would drive 13% growth... we think it sets us up well for continued growth in the future, but no specific reasons why versus last year that its any where significantly lower on the rate.

Katherine Egbert - Jefferies & Company

Okay and then the follow up on what's the expected dilution on earnings per share basis for NGM for the rest of year and is the potential to get any others EPS solution back as the organization takes effect?

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

Yeah, Katherine as I said in the first quarter of the... or second quarter of this year was a little over $10 million on a dilution respective. We expect that to go down in the second half of this year. I haven't done the calculation yet on it but, obviously we see that the deluge of effect lessening as revenue increases, we don't have an appreciable amount of increase in the operating expense level there, its is really a function of ramping up the revenue and that's what's going to drive it now recognizing what we are spending the money on right now is basically building the platform in deliverables that will enable us to get, all of the launches successful at the 36 careers we have under contract, which set us up for future revenue growth. So it absolutely is critical that we keep spending on that, that we have reduce those deliverables... we are not going to mortgage the future for the sake of saving a couple million dollars this year. We have got 36 customers, we have made commitments to and we are going to continue to fulfill on those commitments and if there is a dilutive effect in the overall business I mean the good news is I think we can absorb it with in the guidance that we've provided previously and that's the... really the right business decision to make.

Katherine Egbert - Jefferies & Company

Okay. Got you, thanks.

Operator

From Wedbush Morgan Securities, Scott Sutherland.

Scott Sutherland - Wedbush Morgan Securities

Yeah just a quick follow up question, you did mention you spending almost about $15 million on OpEx on the NGM business. May be... can you go in little more detail, what's critical, what that needs to sent on, what's been built out that you will just need to continue and is there something that... looks at this point you're going to need to be ramping up to $60 million a year if not more run rate before this becomes a breakeven business, is that the correct way to look at it?

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

Well there are some outsource services we have at this stage that are kind of driving some of the expenses currently that are not necessarily going to be in the run rate as we go into 2009. We we've got software development teams, we're building process controls, quality controls throughout the process... keep in mind we didn't buy this to be a $50, $60 million business, we bought this to be ultimately be well in excess of $100 million in revenue. So we've got to do that, the basics right now to get it to to build the platform. Yeah, as I said we are generating and conferring about $15 million roughly in expense right now. Probably going to maintain relatively flat for the remainder of the year, and the rest... the revenue ramps up going into next year, breakeven for the business comes sometime in 2009, at this stage of the game we are in the process of putting together our revenue forecast, but again it's the type of things we are spending on as I talked about. It's really building the platform and building the controls throughout the business and doing things like start being actually implementation. That's not small change when you are trying to build those controls in an operation over in Israel. So its all things that we have rationalized and are comfortable that we absolutely need to be spending the money on that this year, if there was way for as to cut it back we will would have found that and as Lisa has been driving some change via expanding the centralized operations and that will drive us with some savings for the long term. But again we've got deliverables we need to meet right now and we need to be continuing spending to do that. Hitting $20 million this year is going to require a significant ramp up of revenue this year and from the 7.2 or so that we've got so far, it's really the right decision to be made for this business to be spending on these things.

Scott Sutherland - Wedbush Morgan Securities

Okay, and the second question is, you're increasing your transaction guidance by about $10 million transactions or just over $8 million, how should we view that, that you are not reasonable guidance, is something that might be weaker in overall business, in other businesses or do you just have more comfort in the guidance range and if I can slip in one other question, what do you think about price increases on domain names given competitor recently increased theirs?

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

Well, let me take the first one and I'll toss Jeff the other one on the domain names. But 10 million transactions would drive roughly $7 million in revenue. The spread on our guidance is between $500 million and $515 million and we bottoms up this every time we do a forecast and right now sitting two quarters into the year, I'd have to say that our confidence level on the guidance has increased because of the fact that we now have the additional transactions and impact over and above our original guidance. So it wasn't anything we saw that would cause us to take the numbers up, the range we think as adequate. The profitability in the guidance's is what we're expecting and we'll take another look at that when we finish the third quarter.

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

Could I ask you to repeat your question about the domain names?

Scott Sutherland - Wedbush Morgan Securities

Yeah you guys have in your contract the ability to raise the prices evidently as one or your competitor recently raised their prices and you typically followed them, so what are your thoughts on that at this point in time?

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

So... you're exactly right, we do have the ability to raise the prices and where the competitive market allows us to do it we certainly would but we are seeing strong growth there, we feel that we've got competitive advantages that are driving that growth prices, part of the mix of the value we're delivering to the market place and where it makes overall revenue in strategic sense to raise the price we'll consider it. Our business plan reaching our numbers doesn't require that we do so.

Scott Sutherland - Wedbush Morgan Securities

Okay, great. Thank you.

Operator

[Operator Instructions] we'll take a follow up question from Sterling Auty, J.P. Morgan.

Sterling Auty - J.P. Morgan

Yeah, thanks couple of follow ups, so if we look at the strength in the transactions in the quarter and based on the price, you get a certain amount of revenue upside even if you take what I would consider the short form NGM revenue. There's still kind of a $1 to $2 million kind of difference. Was there anything else that kind of came in less than you would have expected, whether its... kind of the the other pieces within addressing, some of the other pieces in infrastructure, connection fees. Any other areas that came in less than you would have thought in the quarter?

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

No. It's really strong across all of the front Sterling, nothing really unusual. As we look out in the third and fourth quarter of the year... recognizes in that, built in the original budget, we've got it could be things in there, revenue from new products, increased expansion of markets and so forth, so there's some degree of variability when you start the year, in terms of where your revenue in the third and fourth quarter is going to come from. As we're sitting here right now, we're pretty well positioned for to get within the guidance level we have, but there's really nothing that we've seen in our numbers that would cause us pause relative to performance year-to-date.

Sterling Auty - J.P. Morgan

Okay. So order management and then their operability was fine as well?

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

Right.

Sterling Auty - J.P. Morgan

Okay. Let's switch gears. You talked at the LSA about the pilot program that you're doing for the GSMA and kind of the IP / ENUM, can you give us an update on how that pilot project went, and kind of where things stand?

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

Sure Sterling, important question about one of those pillars that we think support the long term future growth of the business. The pilot is in process, we've got seven large GSM mobile operators worldwide connected in, fully participating in the pilot that is precisely the number of operators we wanted to demonstrate that in fact this is a valuable and essential service for next generation wireless services. We expect that the Pilot will be completed over the next few months. And that commercial service will be out in the market place by the end of the year. We are very happy with the progress there. We have repeatedly shied from specifying revenues from NRS this year or even next year. This is such a large impact new innovative product that we want to be a big prudent to make sure that as we deliver the technology, the platform that the market is available with us so far we are meeting all of our expectations.

Sterling Auty - J.P. Morgan

Okay, and how about the registry business, it's still growing sequentially, maybe not quite at the rate that you saw a few quarters ago, is there anything in there. I know it might be a stretch for that business like that, but obviously to maintain, seeing new rules, things of that nature. Some more color on what you are seeing in that registry business and other opportunities to may be expand that business to grow up your other TLDs.

Unidentified Company Representative

Sure Sterling and in fact I can. The global organization that overseas internet domain names is seriously considering opening up a large number of new top level domain names. We believe that as that happens, we are physically with our existing technology, with our existing deployment of DNS platforms throughout the internet. We are in the position to provide the service is that if those, is new TLDs will provide, we think that's a real interesting opportunity. But it's yet to manifest itself in a real opening by the I-10 [ph] Organization.

Sterling Auty - J.P. Morgan

Okay and last question would be; on the international front, sort of versus Turkey [ph] and others talk about India and we would go through this, they went live with Singapore. Factors about what some of the other international expansion opportunities might be better more near term? And how is NueStar positioned, what are you thinking about and in terms of your ability to capture?

Unidentified Company Representative

So we have and we'll continue to evaluate all international opportunities for Local Number Portability. And as you know we do Local Number Portability in Taiwan. We are selected to do it in Brazil as well. In general, we find that Local Number Portability on a country-by-country basis may or may not be a economically and strategically important path for NeuStar. So while we look at each opportunity as one where we should consider, we may decide from time-to-time to let opportunities go by when and focus instead on the international worldwide capabilities of our GSM association in our rest [ph] project and other kinds of multinational market IP directory services.

Sterling Auty - J.P. Morgan

Got it. Thanks.

Operator

I show no further questions at this time. Mr. Ganek, I would like to turn the conference over to you for any additional and closing comments.

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

I want to thank everybody for spending this hour with us. We are very, very proud of the results that we turned in, in the first half of this year; continued growth in demand for our services drove revenues considerably higher in the second quarter. We have continued to deliver very high quality, high reliability service that has gained us high marks for customer satisfaction; we believe that our results in the first half reflect the industry's real, large and expanding need for directory services provided from a trusted, competitively neutral hub. We think, this is just a start of where NeuStar is going in the long term. We are happy to have everybody on this call as shareholders I look forward to talking with you next quarter.

Brandon Pugh - Director of Finance and Investor Relations

And Jeff if I can add I encourage the investors and analysts on the phone here to look at the supplemental materials that we have provided on our Investor Relations website. We think that provide some additional transparency and information that would be helpful in the building of your models. We would appreciate feedback from you as to whether or not find it helpful and other type of things you might want us to add. And that we look forward to seeing you on the call next quarter.

Operator

With that that does conclude today's conference. We thank you all for joining us.

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