2015-12-10

Caveat Emptor: Neustar MarketShare Acquisition, 2016 $NSR Guidance

Third UPDATE Jan 7, 2016: Will Technology and Domain Name Registry Services Company NeuStar (NYSE: NSR) Go Down Like SunRocket Did Under CEO Lisa Hook's Leadership?
"Her tenure at SunRocket betrays a lack of ethical duty to the company's employees and most of all, the 200,000 subscribers who paid the cost for her failure. It is remarkable that just two years after this highly-publicised failure, she would be assigned the top job managing a large public company with a $1.5B market cap. As to why SunRocket failed, there are a couple of great post-mortems written here, here and here. All seem to suggest the same cause: poor management." (Seeking Alpha, infra)
John Zhang, writer at Seeking Alpha, has penned a new post on NeuStar: NeuStar: CEO's Track Record Reinforces The Bear Case (Seeking Alpha), and asks: "... Was it a coincidence that NeuStar lost their most important contract and the long-held Common Short Codes contract under Lisa Hook's leadership? It's possible, but the evidence of management missteps suggest otherwise. These events signal incompetence at the top, and that the bulk of the responsibility lies with Lisa Hook ... NeuStar submitted a bid so ludicrously high for the NPAC contract that it would have lost out to any other bidder ... We think these are not isolated incidents, but indicative of a larger trend. One could cite more examples of dubious actions, such as canceling the share repurchase programme halfway through to acquire a loss-making entity at rich multiples. (Recall that the $200M buyback was announced on the same day of the contract loss, which artificially propped up the share price). Furthermore, we are perturbed by the lack of disclosure with regard to the change in financial covenants and cancellation of the share repurchase program, which was conveniently excluded from the press release..." Read more at Seeking Alpha. [Disclosure: Zhang is short Neustar]
"Loss of the NPAC contracts on or after September 30, 2016 will have a material impact on our future operating results when compared to our current financial profile.  We expect to lose approximately $500 million of annual revenue and this loss will adversely impact our income from operations and operating margin.  Additionally, this loss may have a disproportionate material negative impact on our operating margin because of the largely fixed and shared cost structure that is designed to support all of our services.  We are unable to quantify the impact on our income from operations and operating margin at this time because the end date of the NPAC contract is uncertain and due to our largely fixed and shared cost structure .... When our seven contracts with North American Portability Management LLC are terminated, the timing of which is uncertain, our revenue and profitability may be materially adversely affected. We cannot be certain whether our contracts to provide local number portability services will be extended beyond September 30, 2016. Once the contracts terminate, our annual revenue will decrease by approximately $500 million. As a result of the uncertain contract end date and due to our cost structure, which is organized by function, the impact of the termination of the contracts on our income from operations is not currently quantifiable. At the time of termination, our revenue and profitability will be dependent upon the success of our remaining business. If we are not able to replace this lost revenue and adjust our operating plans to support our remaining business, our total revenue and profitability may be materially adversely affected." Neustar 10-Q, Oct 29, 2015 (emphasis added)
Second UPDATENeuStar:2016 Guidance Makes Little Sense - NeuStar, Inc. (NYSE:NSR) | (Paulo Santos) Seeking Alpha: "... NSR has been delaying the recognition of the loss of this [NAPM] contract for quite long now. This has been the case because there's good reason to believe the said contract represents NSR's entire EBITDA profitability ... NSR isn't yet fully ready to recognize just how much profitability it stands to lose (hint: all of it)... In case anyone has doubts regarding what's happening to this contract, you can always visit NAPM's own website, which includes a tab labeled "LNPA Transition" ... NSR was charging nearly $500 million per year for something which is now being awarded ... for 7 years ($142.9 million per year) … a reflection of the massive margins NSR is realizing on this contract ... Assumptions are supposed to be very likely to happen, not this [2016 guidance] ..." (emphasis added, read more at the link above)

First UPDATE Dec 10, 2015: see Neustar: Management Sets Themselves Up To Fail With 2016 Guidance - NeuStar, Inc. (NYSE:NSR) | Seeking Alpha (John Zhang): "... the odds of Neustar meeting the [2016] guidance is close to zero. Like most companies that try to mislead shareholders, Neustar has hidden a number of extremely questionable assumptions in their guidance figures to artificially inflate the numbers. Furthermore, the shocking non-mention of a change in financial covenants in their press release is worth examining closely, as it shows Neustar's risk of default in 2016 has increased dramatically... Neustar's share price is set up for a temporary boost followed by a drastic decline once the true state of their financials are revealed..." (emphasis added, read more at link above)


--[Note: Original Domain Mondo post, 10 Dec 2015, below]--

Pursuant to a Form 8-K filed with the SEC on December 9, 2015, technology company and domain name registry operator Neustar, Inc. (NYSE:NSR) disclosed it has completed its acquisition of MarketShare Partners LLC for approximately $450 million (using cash, shares, and debt--see further below) and issued 2016 guidance:
"The company [Neustar] expects its 2016 revenue to range from $1.16 billion to $1.20 billion, representing growth of 11% to 15%."
But--Caveat Emptor--
"This [2016] guidance assumes that the company will remain the local number portability administrator for 2016." (emphasis added)
  • Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. and
  • Item 3.02. Unregistered Sales of Equity Securities (emphasis added)
Press Release, dated December 9, 2015

Also note in the Form 8-K:
Item 9.01. Financial Statements and Exhibits.
(b) Financial Statements of Business Acquired.
The financial statements required by this item are not being filed herewith. To the extent information is required by this item, it will be filed with the SEC by amendment as soon as practicable, but no later than 71 days after the date on which this Current Report on Form 8-K is required to be filed.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item is not being filed herewith. To the extent such information is required by this item, it will be filed with the SEC by amendment as soon as practicable, but no later than 71 days after the date on which this Current Report on Form 8-K is required to be filed. (emphasis added)

Finally note the one after-hours trade of only 200 shares (see charts below) which jumped the share price of Neustar:
Neustar stock chart, Sept 9, 2015
Neustar stock chart, Dec 9, 2015 (source: google.com)

After hours trading in Neustar shares Sept 9, 2015
After hours trading in Neustar shares Dec 9, 2015 (source: Nasdaq

Caveat Emptor!



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