Sunday, November 14, 2010

NeuStar Inc.: A Telecom Monopoly

NeuStar Inc. (NSR) is a telecom industry monopoly. The Company provides clearinghouse services to the telecom industry, making interoperability possible for competing communication service providers. It operates the authoritative directories containing all the phone area codes and numbers in North America, facilitates the routing of calls among competing providers, manages top-level Internet domain name services (.biz and .us), and administers U.S. common short codes (shorter phone numbers used for value-added services).
Unlike most monopolies, NeuStar does not seem to have a great deal of pricing power. There appears to be a history of the Company renegotiating contracts for lower rates. That being said, NeuStar is consistently profitable and maintains a very strong balance sheet.

In a press release dated October 28, 2010, the Company reported results for the third quarter 2010. 

Highlights from that release are as follows:

·         Revenue increased 11% from 3Q09 to $130.5 million.
·         Net income increased 22% from 3Q09 to $29.9 million.
·         Earnings per diluted share increased 22% from 3Q09 to $0.39.
·         EBITDA increased 16% from 3Q09 to $57.9 million, representing a 44% margin

·         Cash, cash equivalents and short-term investments totaled $377.5 million as of September 30th.
The Company reports for two operating segments: Carrier Services and Enterprise Services. Carrier Services include Numbering Services, Order Management Services and IP Services. The Enterprise Services segment includes internet infrastructure and registry services. The third quarter report shows revenue and earnings growth in both operating segments.

Historically, the Company shows consistency in its growth profile.

Growth %
3 Year
5 Year
Sales
13.0
23.8
Gross Income
14.1
26.0
Net Income
11.0
23.1
EPS Diluted
12.5
16.3




For the seven fiscal years ending 12/31/2009, the gross profit margin averaged 73.76%. In the twelve month period ending 09/30/2010, the gross margin was 77.00%. The seven year average operating margin is 29.77% as compared to 35.40% for the trailing twelve months. The net profit margin for the TTM 09/30/2010 is 21.30% whereas the average net profit margin for the prior seven fiscal years is 17.31%. Both operating and net margins have been strong during each of the past seven years with the notable exception of 2008.

EPS diluted have grown from $0.72 in FY05 to $1.34 in FY09. The lone exception is 2008 when EPS diluted declined to $0.06. For the TTM ending 09/10, EPS diluted rose to $1.47. There are ten analyst estimates for FY10. The estimates range from $1.50 to $1.54 per share. The analysts estimate FY11 EPS to range from $1.65 to $1.74; the consensus is $1.74.

The balance sheet is clean and strong. Cash, cash equivalents and short-term investments total $377.50 million as of September 30, 2010. On the other hand, total liabilities are reported at $114.9 million. Long term debt is $5.4 million. Current liabilities include $26.117 million in deferred revenue. The Company also books $8.923 million in long term deferred revenue. The current ratio is 5.1X and times interest earned is 116.6X. The Company should have no difficulties is covering their short term obligations. Return on equity and return on assets are 20.4% and 16.6% respectively.

NeuStar does not pay a dividend though the Company’s free cash flow of $1.44 per share could support one. NeuStar has in place a three year, $300 million share repurchase plan.

We think NeuStar has the potential to appreciate to $40 in the next twelve months.

Disclosure: The author has a long position in NSR.
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