NeuStar, Inc. (NYSE:NSR) Q4 2009 Earnings Call February 10, 2010 4:30 AM ET
Brandon Pugh - Senior Director of Finance & IR
Jeff Ganek - Chairman & CEO
Paul Lalljie - CFO
Daniel Meron - RBC Capital Markets
Scott Sutherland - Wedbush Securities
Sterling Auty - JPMorgan
Jonathan Ho - William Blair
Will Power - Robert Baird
John Bright - Avondale
Ladies and gentlemen thank you for standing by and welcome to the NeuStar fourth quarter investor conference call. The company's release made earlier today is available from its 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 Wednesday, February 10, 2010 and a replay of the call will be accessible until midnight February 17 by dialing 888-203-1112 and entering conference ID 4017541. International callers should dial 719-457-0820. Also 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, Senior Director of Finance, and Investor Relations of NeuStar. Please go ahead, sir.
Thank you and good afternoon everyone. Welcome to our fourth quarter 2009 earnings call. Joining us today from NeuStar are Jeff Ganek, Chairman and Chief Executive Officer and Paul Lalljie, our Chief Financial Officer. Our call today will begin with comments from Jeff Ganek. Then Paul Lalljie will follow with a discussion of our financial performance, after which we will open the line to questions from qualified investors and research analysts.
Before we begin, I'd like to remind everyone that some of the information discussed on this call including our projections regarding revenue, EBITDA and EBITDA margin for the coming year contain forward-looking statements. These statements involve risks and uncertainties, and may cause actual results to differ material from those said forth in the statements. And we cannot assure you that our expectations will be achieved whether any of these deviations will not be material. Additional information concerning these risks and uncertainties can be found at the company's annual report on Form 10-K for the year ended December 31, 2008 and its other subsequent and current periodic reports filed with the U.S. Securities and Exchange Commission.
NeuStar assumes no obligation to update any forward-looking statements. As you listen to today's call, we will discuss certain non-GAAP financial measures. We encourage you to have our press release in front of you which can be found in our Investor Relations website and includes their financial results, metrics commentary for the quarter and the reconciliation of certain non-GAAP measures with the most directly comparable GAAP measures.
You will find additional disclosures regarding non-GAAP measures under the Investors Relations tab on our website www.neustar.biz including reconciliation of these measures with the most directly comparable GAAP measures. In addition, we're providing supplemental information to this filings report on our website at www.neustar.biz included in the supplemental information our key performance metrics by revenue categories, head count and other details and our expenses.
With I'm pleased to introduce to NeuStar's Chairman and Chief Executive Officer Jeff Ganek. Jeff?
Thanks Brandon. Welcome to today's conference call. I'm pleased to discuss our results for the fourth quarter and full-year 2009 along with our 2010 outlook. As you know last year overall spending in the market attracted consumers and enterprises alike, making 2009 a challenging year. We took the opportunity to focus on strong reliable profits in cash flow in the near term while strengthening NeuStar's position in anticipation of the economy's rebound in the future.
Despite 2009s economic difficulties we met our 2009 goals. As a result we produced strong financial results. We have high visibility into continued revenue growth, strong profitability and cash flow. Let me highlight some of our 2009 results for you. Paul Lalljie our CFO will then provide additional specifics. First I will discuss our overall financial results for 2009. Consolidated revenue for the full year totaled just over $480 million yielding an EBITDA margin of 43%, a net income margin of 21% and over a $175 million in cash generation.
While producing results that exceeded our goals, we drove cost efficiencies making the store more effective and dynamic. For example we located, we relocated certain operations to more cost effective geographies and in our NGM segment we realigned our resources to match the slow uptake in the market to mobile instant messaging. As a result we came out of the fourth quarter with NGM operating on an EBITDA neutral basis. Let me turn now to a discussion of some important developments in the market and the business. They are all linked by growing customer requirements to seamlessly interconnect voice and IP networks.
The change made last year to the contracts under which we provide telephone number portability in the United States is a development that has had material impact. The change delivered improved predictability for NeuStar revenue growth as important they provide significant value to our customers. These amendments allow the industry to establish and use three new internet protocol or IP fields in NeuStar's NPAC directory related to three fast growing next gen applications which are voice over IP, SMS text messaging and MMS which you may know as transferring the photos between mobile handsets.
We initiated this bold move to keep NeuStar and the number of portability administration center or NPAC, essential in the world of IP as it is today in the voice world as a result NeuStar will benefit in the future from new incremental revenue growth opportunities in IP early results are encouraging.
We believe that customer actions in 2009 indicate there will be strong demand for increased IP functionality in 2010 and future years. Related development during 2009 was the progress we made towards increasing the capacity of our number portability directory to manage a greater quantity of telephone numbers. Working with our customers the network operators we designed technical solutions that will enable more efficient processing of larger quantities of telephone numbers.
During 2009, plans to moderately increase the quantity of telephone numbers in our directory were postponed while the technical solution was developed. As a result, the $7.5 million threshold credit in our amended LNP contracts was not earned and impacted revenues were higher for the quarter and for the year.
We believe the new technical solutions opens prospects for growth in the quantity of telephone numbers in our directory. Another important development in the market last year was that demand for our services picked up in the back half of 2009. For LNP services, specifically demand continued to increase as evidenced by the annual transaction growth over 2008. Network operators see value in utilizing our LNP services to improve routine efficiencies to realize better optimization of their networks as traffic volumes steadily climbs.
For non-LNP surfaces, we're pleased with the traction that we've seen these last couple of quarters especially in our ultra services. Internet traffic is up, website complexity is growing and NeuStar's ability to help, measure and manage that growth has led to revenue increases as we've signed up new customers for DNS services and upgrade our existing customers in the higher service level plans. Annual revenue growth for ultra services was a solid 28% lower than historical levels yet very strong and a dampened economy.
Anticipating continued demand and prospects for future growth during 2009 we strengthened our sales capabilities and processes to provide for scalability, efficiency and extended reach. We enhanced our global distribution via reseller agreements and indirect channels such as rack space and info blocks. Beyond these moves to strengthen our channels another recent area of focus is the strengthening of our brand and identity in the marketplace.
Our new website and logo tells a story that NeuStar is a different company than it was 10 years ago where larger with new innovative services across new markets and opportunities. The re-branding introduces the new NeuStar to the marketplace were centered on our unique trust reliability and competitive neutrality. I think this is a good opportunity to segue into our key objectives for 2010. In 2010 we expect organic growth across our financial metrics. NeuStar anticipates annual revenue growth in the range of 8% to 11%. Our EPS and cash from operations are also expected to increase from 2009.
Because of our market position and business model visibility for these financial results is high. At the same time we are strengthening the business by investing across our current portfolio of services to expand and solidify our market position. We will introduce innovative value added features and increase our presence internationally. We are also pursuing future growth opportunities for emerging markets. As the internet IP based applications and mobile networks evolve and grow there are emerging requirements in the market for trusted provider of hub based directory and registry services where NeuStar is already a world leader.
Good example is our offering for 2D barcode services that facilitate mobile e-commerce. We are working in conjunction with our partners at the GSM association that's the association of nearly 800 mobile operators worldwide, we are working with them to enable 2D barcodes. Another example is our recent selection for key role with the Digital Entertainment Content Ecosystem or DECE. The DECE is coalition of 48 leading entertainment consumer electronics and technology companies including Sony, Paramount, Warner, Comcast and Best Buy among others. The mission of their coalition is to enable the digital distribution across the networks of movies and other content.
To digitally deliver movies to coalition requires a trusted hub to do authentication, authorization and generally enable interoperability across the content providers, networks, and distribution channels. We at NeuStar already play that role in our existing markets. The coalition selected us to build and operate the hub based service that is key to their vision of the future for content distribution.
These initiatives 2D barcodes and the DECE initiative are in early stage cutting edge of markets that provide long-term growth potential. In closing, let me reemphasize that in 2009 solid financial results and achievement of our operating goals position us for growth in 2010 and beyond. While continuing our focus on profitability and cash generation, we also will make strategic investments to fuel long-term growth for shareholders. With that please let me had the call over to Paul Lalljie.
Thanks Jeff and good afternoon everyone. Before discussing results, let me highlight some of our achievements for 2009. In January we announced a bold and innovate change to our business model and as part of this change, we expanded our directory to include three IP fields while we were expecting to add only one in the first year. In ultra services, we expanded our service offerings and our sales and distribution capabilities and also in our NGM business segment we delivered in our commitment to achieve EBITDA breakeven during the fourth quarter.
We ended the year with approximately $342 million of cash up from $162 million at the beginning of the year. And our balance sheet remains strong with substantially no debt. Through strong execution including service and sales expansion our fourth quarter and full year performance was a success. Now let me review results for the quarter. Revenue for the quarter totaled $134.2 million up $6.8 million or 5% over the fourth quarter of 2008.
This includes the $7.5 million of unearned customer credit that Jeff discussed earlier. During the third and fourth quarter we agreed with our customers to expand the functionality of our services under statements of work. In the fourth quarter we recognized over $4 million of revenue or work under these SOWs so we expect to recognize an additional $5 million during 2010. For the quarter revenue from our NPAC services totaled $79 million.
Revenue from our non NPAC services totaled $55 million which represents a 29% year-over-year growth. Ultra services revenue totaled $17 million up $5.4 million or 46% from the fourth quarter of last year. Revenue from our NGM business segment totaled $3.6 million compared to $3.9 million for the fourth quarter of 2008. Operating expense for the quarter totaled $85.9 million a decrease of 44% from $154.5 million in the fourth quarter of 2008. Excluding impairment charges and adjustment to depreciation and amortization taken in the fourth quarter of last year total operating expense increased 17%. Note that operating expense for the fourth quarter includes a 3.3 million of restructuring charge compared to a 1.7 million charge in the corresponding quarter of 2008. Net income for the quarter totaled $27.8 million or $0.37 per diluted share while EBITDA totaled 58.2 million representing a 43% margin.
Now for discussion of the year, consolidated revenue totaled $480.4 million compared to $488.8 million in 2008. Revenue from our non-NPAC services totaled $187.9 million an increase of approximately 12% year-over-year, this increase was driven by Ultra services revenue which grew 28% to a total of 55.4 million for the year. Revenue from our NPAC services totaled $292.5 million a decrease of 9% from 2008. This decrease as we have discussed earlier was driven by the amended pricing terms on the LNP contacts.
Ending on to revenue by category. Revenue in the addressing category totaled $134.3 million up $3.5 million or 3% from the full year of 2008 this was driven by an increase of $12 million from Ultra Services and an increase of $2.1 million from our domain name registry services. Both of these increases were offset by a decrease of 10.5 million from our NPAC services. The increase in Ultra revenue is driven by improved sales momentum as well as the one time business analytics revenue we discussed in our last call. And to operability revenues, total $58.7 million down $5.6 million or 9% from 2008. This decrease is driven by a $3.4 million reduction in revenue from our NPAC services and lower revenue from our telephone number portability services in Canada.
Infrastructure and other revenue totaled $287.4 million down $6.4 million or 2% from 2008 driven by a $14.6 million decrease from our amended LNP contract. This decrease was offset by an increase in revenue for portability solutions outside the U.S. and the revenue from statements of work for functionality enhancement that our customers requested. In summary, our relative year-over-year revenue comparison is due to lower pricing associated with our amended LNP contract.
However, those same contracts provide greater scope and opportunity for growth. In our non-NPAC services we saw growth of approximately 12% in difficult market conditions. Now for the review cost for the year, operating expense totaled $312.8 million a decrease of 26% from $419.7 million from 2008 excluding the impairment charges taken in 2008. Total operating expense increased 1%. Let me point out that the 2009 operating expense includes a $6 million restructuring change compared to a $1.7 million charge in 2008. Net income for the year totaled $101.1 million, or $1.34 per diluted share compared to $4.3 million or $0.06 per diluted shares for 2008.
EBITDA for the year totaled $205.6 million representing a 43% margin. Now for a review of selecting balance sheet items as of December 31, 2009. Cash, cash equivalents and short term investments totaled $342.2 million compared to $303.2 million as of September 30. And $106 to $107 million as of December 31, 2008. Capital expenditure for the quarter and the year totaled $6.6 and $25.5 million respectively. Accounts receivables totaled $67 million compared to $64.3 million for the September quarter and $72.6 million as of December 31, 2008.
Let me move on to a discussion of our guidance for 2010. Given our predictable and reliable revenue stream primarily from our LNP contracts, the improving trends in our ultra services business and our customer's increasing demand for our services, we are confident about our growth prospects for 2010. However as the economy is still in a recovery mode we remain somewhat cautious. With that said revenue is expected to range between $520 and $535 million. That range represents 8% to 11% growth from 2009 and our goal is to target the upper end of the range. Included in our revenue range is $322 million of revenue from our NPAC services. We expect EBITDA margins to exceed 42% for any level within the revenue range on a full year basis. Because of the nature of our business and our demonstrated ability to manage cost, we remain confident that we can reach this EBITDA goal regardless of the market.
Let me elaborate on what you should expect EBITDA margins to be on a quarterly basis as we go through the year. As you know because adoption rates for our innovative services are often lumpy and may cause quarterly results to vary albeit around the trend line, we don't provide quarterly guidance. With that said, in the first quarter even if we're tracking against our goal to hit the upper end of the revenue range, EBITDA margins are expected to be below the annual average.
However by the end of the year we are confident of reaching EBITDA margins in excess of 42%. Our guidance also includes capital expenditure to range between $25 million and $35 million. Our effective annual tax rate is anticipated to be approximately 40% and our fully diluted weighted average shares outstanding is expected to be approximately $77 million.
To conclude we have successfully accomplished the goals we have consistently shared with you during the year. In 2009 we delivered a strong profit that is EBITDA margins of 43% both for the year and quarter. We delivered high cash flows as demonstrated by cash from operations of approximately $175 million for the year, all of this while positioning the business for growth. Specifically we have three IP fields in our directory, a growing number of global IP exchange customers and a new innovative service with the DECE.
Overall our performance reflects our focus on expanding in the markets we serve, prudent cost management and investing in innovative services. Thank you for your time. Operator, you may now open up the call for questions.
(Operator Instructions). And your first question comes from Daniel Meron at RBC Capital Markets.
Daniel Meron - RBC Capital Markets
A couple of questions on my side. First of all, congrats on the good execution. Can you give us a little bit of sense on the DECE projects? What's the impact on your operations and how should we think about it for the full-year also from the cost perspective and from the revenue perspective? And what are the long-term prospects from that as well?
Daniel, a couple of overarching comments from a financial perspective first and then I'll hand it over to Jeff. One of the things that we do as we plan our budgets, Lisa Hook, our president sits with the operations team and the finance team as we go through the budget process and we plan for investment in innovative services. The DECE is one of those opportunities that falls within that category and today if we have captured a bucket of cost within the guidance that we have provided, that provides for investing in these services.
We expect a minimum level of revenues from DECE this year. We've just been awarded this franchise within the last few weeks and we are working with the consortium that is effectively all of the movie studios Best Buy, Comcast and other large industry players to change the way people acquire movies and other content. We think this has the potential to be a very large and important operation for the industry and certainly for NeuStar. We're in the very early phases. We think that that it will take more than a year to evolve to an identifiable and revenue growing business.
Daniel Meron - RBC Capital Markets
And then just on the growth side, can you break it down between the 8% to 11% growth between the NPAC and the non NPAC business? How should we think about both sides of the equation here?
So in 2009 revenue from the NPAC business was $292.5 million. In 2010 that number is expected to be $322.1 million and just to be specific, the $322.1 million is a number that is net of all of the credits that our customers can earn in 2010. That represents approximately 10% year-over-year growth in itself. So that leaves us with the non LNP business and from that perspective that number is expected to range anywhere between $198 million to $213 million from a non LNP basis and on the high end of the range, that's about a 13% year over year growth.
Next up we have Scott Sutherland of Wedbush Securities.
Scott Sutherland - Wedbush Securities
Awfully good job in the quarter. Questions on your investments. You're marking $30 million more fixed revenue on this on this new LNP contract or the price escalator and some other profit benefits from the NGM business. So as you invest in the DECE and bar code type stuff, are we talking about $5 million or $10 million and you've always said you're invested in business that give $100 million or more. Are these the types business that you see long term, are those types of businesses?
Yes and I can elaborate more. We believe that these are both great opportunities in and of themselves. What we believe is that they represent fundamental changes as a result of disruptive technology changes as networks move to IP and the internet becomes mobile and not surprising to us as industries adapt to the new mobile internet environment.
They see the need for a trusted reliable hub services provider. We're it. That's why we want it. We think there are large opportunities here we have built into the guidance that Paul and I have described to you, sufficient funds to invest in these opportunities, to strengthen our existing products, to extend our sales and operating capabilities so that we can deliver highly reliable revenue growth, strong profitability and very strong cash generation while we're building up the infrastructure that will generate material future growth for our shareholders.
Scott Sutherland - Wedbush Securities
Your generating a lot of cash on to the balance sheet. What are your current thoughts on buy backs and M&A and Paul, if you can give me amortization and stock comp numbers as well, that would be great?
All right, let me start with the first piece of the question and then I'll go to the amortization and stock-based compensation. So, from a pure numbers perspective if you look at our sequential cost as we went through 2009, first quarter of 2009, total OpEx was about $75 million, 75, 76 Q2; 76, 77, Q3. In Q4 total OpEx was $85 million.
Said differently one of the things that we mentioned quite clearly in our second quarter Paul was the fact that we're not going to starve the business from funds so that we can provide for growth and what we did in the first half of last year was to make sure we can manage expense and deliver the profits and the margins that we've delivered.
So as we got into the last half of the year, we were able to increase spend. In 2010 we expected to the annualized exit rate out of Q4, number one. And number two, we do have growth opportunities. We do have sales expansion opportunities that we plan to spend on and that goes to the first piece of your question which is the incremental revenue from the NPAC business.
The second aspect of your question more to the use of proceeds, use of cash if you will, one of the things that we have consistently said as an organization is that we see ourselves as a growth company. We see ourselves as a company whose ambition is to get back to the growth levels that we've enjoyed in the past. One of the ways for us to do that is to sell more of our existing services to our existing customers.
More importantly in order to venture into new markets, in order to broaden our service suite, we have to invest. We have to do that by growing things organically or by acquiring inorganically. So at the end of the day the first and primary use of cash for us would be acquisitions and then the second use of cash would be to return to shareholders.
We are still in that process of going through our 2010 plan of making sure what our objectives are from an acquisition perspective, what are the things we need to do. A good example as we branch out into new areas in IP is into next generation businesses. Do we have all the capabilities in house or do we need to go out and get some of that.
And to some extent that's the philosophy, the guiding principles we use when it comes to thinking about use of cash. From a stock based compensation perspective, total stock based compensation for the quarter was about $1.7 million, approximately $0.5 million in cost of revenue, $1.2 million in sales and marketing, about $300,000 in R&D and $2.1 million in G&A. I apologize if I went too quickly on that one.
We have our next question now from Sterling Auty at JPMorgan.
Sterling Auty - JPMorgan
Two areas, first one on the credit, how many phone numbers are actually in the NPAC database at year end? How close did the industry come to earning the credit and remind me, I don't think there's any cost associated with that. So if I actually back out the $7.5 million that went into revenue in the quarter it looks like you actually fell short on your EBITDA guidance. When did you know the credit was going to be earned? Did you actually spend a little bit more because you knew that would in the revenue? Just help me kind of collect that answer.
Let me start from a pure financial prospective and Jeff will add some color after that. A couple of things. One of the things that Jeff pointed out is that we knew probably midway through the quarter probably beginning of December and one of the things that we did, we also had the DC opportunity turning up for us in the last month of the quarter. So one of the things we did was we took the opportunity to spend and we took the opportunity to get ahead of the curve for the first quarter of 2010.
As you know, in Q4 of 2009 we described this statement of works that we had. Statement of works we were expecting about $9 million of statement of work revenue in the fourth quarter and the statement of works revenues generally recognize on a cost plus basis. So that's the level of effort that we put into it is the revenue that we get out of it if you were to enter today. So one of the things that we did there, we did recognized $4 million of statement of work revenue and some of that is going to show up in 2010. So there are two elements. There is the revenue that does not recur from Q4 to Q1 and then there is the additional spend in opportunities such as the DECE in the fourth quarter and offset by the $7.5 million.
Sterling, at the end of 2009 there were almost 360 million telephone numbers in our NPAC directory registry and that's a growth over the prior year and during 2009 we were working with our customers on new applications, new ways for them to use the directory capabilities of the NPAC, applications that required and would be facilitated by there being large quantities of the additional telephone numbers in our database. As we did this, it became apparent that there were technology solutions that we and our customers could implement that would make the management of large quantities of telephone numbers more efficient, more effective and more robust.
We developed and defined those solutions and worked with our customers to bring them to the NPAC. While the fundamental work was going on, work that which set the NPAC up to be more robust and adaptable to next generation challenges, the addition of large amounts of new telephone numbers to the database were postponed and the consequence of that is that in 2009, the threshold level of new telephone numbers required to earn the credit was not reached.
Having said that, we believe that the technology solution developed in conjunction with our customers sets the table for the addition of material new volumes of telephone numbers allowing for; enabling the significantly new applications of the NPAC facility and we think we're going to start seeing the impact of that later in 2010.
Before you move on to the next half of the question, let's go back to the first piece there a little bit. If you take the $7.5 million out of the $480.4 million which is the revenue we came in at, that's $472.9 million and if you take the $7.5 million directly out of the EBITDA which is $205.6 million it gives you $198.1 million. That is a 42% EBITDA margin. The guidance was for 42.
Sterling Auty - JPMorgan
Okay fair enough and then in terms of the Ultra Services, when I look at the metrics they have in the supplement, just give us a little bit more color. So the new customers adds were strong but I wouldn't expect people to bring on Ultra Services right in the fourth quarter when the heart of when they need it they should go in the third quarter. So I think the seasonality is there but just walk us through the big jump in the revenue quarter-over-quarter, how much of it was from new customers, how much of it was from the upgrades and volume related versus may be other stuff like analytics.
So there are a couple of things Sterling. As you know we've announced our partnership, our channel relationship with Infloblox. That helped us a little bit in the fourth quarter and that was not there before. So that accounts for some of the up tick that you have there and then from a pure statement of works, business analytics as you refer to it, that's about $2.5 million number. And in terms of the remainder that's left from a growth perspective, I think 55% of that growth came from new customers and 45% from upgrades.
(Operator Instructions). We will move on now to Jonathan Ho at William Blair
Jonathan Ho - William Blair
My first question is on the altered DNS business and what do you think about the growth rate in 2010 and in particular what services are you really seeing attraction in this business?
So a few things. One of the ways that we've driven growth in that business is broadening the scope of service. In 2009 you may have seen the press releases announcing the broadening of the scope to include something called reporting capabilities for our customers. At the end of the day if we are managing their traffic and helping them to route DNS traffic more efficiently, what better way to help them, to give them the ability to see the vital signs of the traffic and advanced reporting is the name of that service that layers on top of what we had in 2009.
There is something that's called cash defender that we announced in 2009. There is a layer of security that we added in 2009. There is something that's called an internalization again which is simply new and it's a bundled service offering. So its adding more value to the customers at an incremental charge. So we expect that business, we excited 2009 with healthy indicators in that business and we believe that if we can continue have reseller arrangements the way we do at Infloblox we can stay at or above the growth rates of 2009. We also had a reseller arrangement with Rackspace that we mentioned in 2009. So that is one of the areas we look forward for growth. We are bullish on that side of the business.
Jonathan Ho - William Blair
Excellent. Can you talk also a little bit about the NGM business? You guys said that it crossed over break even during the quarter. How do we think about this business in 2010 and maybe the prospects for growth at this point?
So one of the things that we have consistently messaged is that we will align the cost with the revenue stream. Revenue for the NGM business was approximately $13 million in 2009. In the fourth quarter, the EBITDA margin was a loss of $2.5 million. We crossed over to EBITDA threshold in December. We expect 2010 to be at least EBITDA neutral. We expect to be the service to customers that we have, but more importantly, we expect to broaden the service that we have to somewhat reinvent the way we delivered our service, and we expect to see growth in that business, and probably 2010 is our year of reorganizing, repositioning that business, and then we expect growth after that in that business.
So from a cost perspective, it should not be a drain in the company's margin from a negative cash flow perspective and then from a revenue growth perspective, it should contribute similarly as it did in 2009.
Moving on now to Will Power at Robert Baird.
Will Power - Robert Baird
Two quick questions. First, Paul on the EBITDA guidance for Q1, it sounds like you're expecting a bit of a down tick in margins in Q1, I guess I just wondered if I could get a little more clarity there. Is that just a function of the investment cost, you alluded to earlier perhaps been somewhat front end loaded or is there any revenue seasonality that might be impacting that?
Couple of things, on a sequential basis we have increased revenue on a sequential basis, number one. Number two, we increased our operating expenditures as we exited Q4 primarily as we invested in some of these new innovative businesses that we will not see revenue in 2010 more importantly not in the first quarter and at the end of the day we've demonstrated we have an ability to manage costs as best as we could.
You may recall a similar discussion first quarter of 2009. We were expecting EBITDA margins to be below 40% and I think we delivered 41%. We want to be explicit. We wanted to share with you the guiding principles that we use, as we think about margins and how we think of it. At the end of the day, we'll do our best and manage the margins. I am not sure if there is a lot of color that we will give to that, we try not to get quarterly guidance.
Will Power - Robert Baird
Okay that's fair and then the second question I was wonder if you could just give an update on the pathfinder product, where do we stand on that, what kind of progress have you made there.
I am sorry could you please repeat the question.
Will Power - Robert Baird
Yeah I was just kind of curious where you kind of stood on the PathFinder product, the GSMA, where you kind of stood on that and what you have seen on that front.
So the PathFinder product is still in its embryonic phases. We find that mobile operators and others are very interested in talking with us, working with us on it. We've got signed up 20 customers, 11 partners and we believe that as the volume of IP traffic increases among mobile operators worldwide, and as the complexity of IP applications they're delivering expands the value is that PathFinder will provide to them will become much more apparent. We think we're world leader. We've got large network operators telling us where a global standard for this kind of capability and I think we're early. We're the leader in the marketplace, when the market catches up with us. We'll be there waiting to serve them.
Last question we have today will come from John Bright at Avondale.
John Bright - Avondale
Jeff, first question, in your prepared remarks you talked about the three IP sales and you alluded to one, VOIP, two SMS text, and three MMS. Give us a sense in how NeuStar plays in each of these services, so we can have a good understanding on why these are meaningful.
These are meaningful because given a telephone number; a communication can be rooted to an IP address associated with it. So you could conceivably on an IP telephone dial, a 10 digit telephone number and have the networks deliver that communication to an IP address rather than to a telephone number voice address.
Similarly for an SMS today, it is virtually impossible to originate or deliver an SMS text message to any device other than a mobile handset. Some carriers for example, Verizon are spending lots of money putting fiber into homes and there is really no functional reason, why there is no market reason, why it isn't just as valuable to originate and received SMS messages on a home front to (inaudible) and in order to do that, you need a mechanism so that an SMS message IP based, can be addressed to a 10 digit telephone number but via the impact delivered to the associated IP address. And the same principle applies to (inaudible) or other applications of MMS. The real function here is how you can make interoperable voice networks and voice network addresses with IP addresses and IP networks.
John Bright - Avondale
Then my second question Jeff is also in your prepared remarks, you talked about strategic investments to fuel long-term growth for NeuStar, maybe if you could give us the brief thought on what you believe are NeuStar's core competencies and maybe characterize the optimal profile of such a strategic investment.
Sure. Good question John. NeuStar's core competencies is building, operating, managing directory hubs to which a large number of service providers connect to and rely upon in order to interoperate. The service providers are frequently not just independent but they are competitors and have the reason to be rival risk with each other at the same time that they are collaboratively originating and delivering communications to the same end users. They need to cooperate.
More than any other company, in the world NeuStar manages those complex communities of network operators and other service providers. We've demonstrated that we know how to do this technically, operationally and socially politically. We know how to deliver the service, keep the customers happy. We know how to do this in a way that rose revenues and creates profit and cash flows and we are finding now with the advancement of IP technologies that are disrupting not only communication industries but other related markets such as movies and content distribution that the service provided among network operators by the NPAC is very similar to what's needed by the movie producers and the retailers of movie and content and its not surprising when the DECE said to themselves how are we going to make movies and content available digitally across the network.
Who are we going to get to provide our community a trusted and reliable hub directory that enables authentication, authorization on a reliable, trusted, competitively neutral way? We got chosen because we do that. I think the DECE John is the poster boy example of the profile of businesses that NeuStar ought to be investing in and growing. It's exactly what we already do. It's exactly what we're producing profits, growth and value from and it's something we do better than anybody in the world. We think that doing it for number portability is just a special case of the general problem and we are moving aggressively to solve the general problem for a growing market demand.
With that we will conclude the question-and-answer-session session. I would like now to turn things back over to NeuStar's CEO Jeff Ganek for additional and closing remarks.
Thanks very much. Today we reported very strong financial results. We had strong profitability, strong cash flow in excess of the plan that we had set earlier in 2009. During the year, we add significant strength to our products, to our processes, to our organization. We won new franchises and began to focus new investment within our financial plan, so that we've got the foundation for continued, reliable financial results and the foundation for significant revenue growth in the future when a robust set of economic conditions return. Thank you very much for spending this time with Paul Lalljie and myself, and for everybody in snow, be careful traveling home.
Ladies and Gentlemen, thank you once more for joining us. That will conclude the call. Have a good day.
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