Neustar $NSR Will Lose $500 Million Annual Revenue, 80% Downside?

See also newer posts  on Domain MondoCaveat Emptor: Neustar MarketShare Acquisition, 2016 $NSR Guidance (10 Dec 2015); Investors Flee Neustar $NSR, Stock Down 19% in Five Trading Days (12 Nov 2015) and Nov 9, 2015: Neustar $NSR Shares Tanked Friday After Marketshare Announcement

(Editor's Note: This post's original title was: "LIVE Webcasts: Neustar, Web.com, Q3 2015, $NSR 80% Downside Risk?")

"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. Our disclosure will expand as we evaluate the cost structure that will be in place to support our ongoing business, as we approach September 30, 2016 or as we learn more about the timing of the NPAC contract termination." p. 27 Neustar 10-Q (emphasis added), filed with the SEC October 29, 2015

"Since our previous article detailing how NeuStar (NYSE:NSR) is unlikely to survive without its NPAC contract, management has strengthened the bear case once again by making a rather costly acquisition and increasing leverage significantly, while canceling its share repurchase scheme ... What slightly befuddles us is that management would take on so much leverage at a time when the survival of the company hangs in the balance. Clearly, the company is extremely cash strapped as they were forced to cancel their $150M share repurchase program after only spending ~$102M (or two thirds of the allocated amount). Recall that management announced this share repurchase programme on the same day that they confirmed the loss of the NPAC contract. (The termination of the share repurchase was only announced through a passing remark in the conference call. There was no press release)."--John Zhang, Seeking Alpha, Nov. 9, 2015 

3rd UPDATE 30 Oct 2015: Seeking Alpha has now picked up on the Neustar disclosure (see 2nd Update below): NeuStar: The Loss Of The NAPM Contract Sees New Disclosure - NeuStar, Inc. (NYSE:NSR) | Seeking Alpha. In addition the transcript from yesterday's call has been released by Seeking Alpha--excerpts--emphasis and links added:

"... with Bombora, we're the clear global leader in launching and operating TLDs. To-date, we have launched 122 new TLDs or Top Level Domains, including notable names like .nyc, .science, and .club. We have several hundred more to launch including over 150 brand TLDs, which present great opportunities for us to cross-sell other services ...

"... First question is on the recent filings or documents that we saw filed on the SEC at your website. The SEC is currently asking for more segments' margin disclosure. What is your plan to address this, because the documents that were filed so far really don't indicate what you're planning to take?

Paul S. Lalljie - Chief Financial Officer & Senior Vice President:
"... as you can see from the outline and in all of our public filings, we generally capture information at the consolidated level. As we get closer to an end date for the impact, we will revisit our disclosures. Unfortunately that date is not very specific at this point in time, and as you can see in our 10-Q page 27 of 151, we have disclosures about expecting to lose the $500 million of revenue, but we – it is uncertain at this point in time what the impact will be, although we believe the impact on operating margin will be disproportionate, meaning it's not a dollar-for-dollar impact...

Will V. Power - Robert W. Baird & Co., Inc. (Broker):
"... on the Bombora deal I think you said $2.8 million of revenue contribution. Did you all give the EBITDA contribution? I know it would be small, but be curious to know what that might have been. If you're able to disclose that?

Paul S. Lalljie - Chief Financial Officer & Senior Vice President:
"I don't think we gave the EBITDA contribution, but I think in our explanation of expenses, we did include $2.7 million of acquisition-related operating expense and that should be primarily Bombora."

Based on the above, it is clear that the expected (approximately) $500 million loss disclosed in the 10-Q (see above and below), will have a "disproportionate impact on operating margin"--meaning impact on EBITDA and profits. On the Bombora deal, it appears to be a low-margin business at present: $2.8M revenue less $2.7 (approx) expenses= $100,000 EBITDA contribution for the quarter--Caveat Emptor!

2nd UPDATE 29 Oct 2015: Neustar admits "annual revenue will decrease by approximately $500 million" upon termination of NPAC contracts. and "total revenue and profitability may be materially adversely affected" (see 10-Q excerpt below). Note that 2014 total annual revenue was only $964 million, of which John Zhang (see further below) has stated "NPAC contract accounts for over 100% of Neustar's EBITDA" (Earnings Before Interest, Taxes, Depreciation, Amortization):

Item 1A. Risk Factors (p.33-34, Form 10-Q) (emphasis added)
"In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2014, filed with the SEC on February 13, 2015. The risks discussed in this Quarterly Report and in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks set forth below and described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

"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."

UPDATE: Neustar misses on revenue: NeuStar (NYSE:NSR): Q3 EPS of $1.29 beats by $0.17.
Revenue of $261.7M (+7.3% Y/Y) misses by $0.31M. Press Release. Neustar stock closed today DOWN 3.93% at $26.89 (price decrease $1.10 ).
Web.com (NASDAQ:WWWW): Q3 EPS of $0.62 beats by $0.02; Revenue $140.4M (-2.4% Y/Y) beats by $0.85M. Earnings Release.

Domain Name Registry operator Neustar (NYSE: NSR) and Domain Name Registrar Web.com Group, Inc. (NASDAQ: WWWW - Web.com, NetworkSolutions.com, Register.com) both report Q3 2015 earnings after the market close today and each will have live webcasts at 5 pm ET. Here are the links to Web.com's earnings and live webcast [Web.com Group (WWWW) David L. Brown on Q3 2015 Results - Earnings Call Transcript | Seeking Alpha] BUT the more interesting story is Neustar:

Neustar 5-year stock chart as of Oct 28, 2015
Neustar 5-year stock chart as of Oct 28, 2015 (source: google.com)
Neustar, Inc., (NYSE: NSR) will report Q3 2015 results on Thursday, October 29, 2015, after the close of regular trading. The third quarter earnings release will be followed by a teleconference and webcast beginning at 5:00 p.m. ET. For the live or archived webcast via the Internet, go to the Investor Relations section of the Neustar website: http://www.neustar.biz/about-us/investor-relations (source: NSR press release).

To participate in the teleconference: 800-765-0709 (international callers: 913-312-0860) and enter PIN 447718 (a few minutes prior to the call in order to register). A replay of the call will be available through 11:59 p.m. (Eastern Time) on Thursday, November 5, 2015 by dialing 877-870-5176 (international callers should dial 858-384-5517) and entering PIN 447718.

Principal domain name: neustar.biz
Stock exchange and Symbol: NYSE: NSR

About Neustar, Inc.(source: Neustar): Neustar, Inc., is the first real-time provider of cloud-based information services, enabling marketing and IT security professionals to promote and protect their businesses. With a commitment to privacy and neutrality, Neustar operates complex data registries and uses its expertise to deliver actionable, data-driven insights that help clients make high-value business decisions in real time, one customer interaction at a time.

Neustar is also a domain name registry operator for top-level domains (TLDs) such as .biz, .us (ccTLD for the U.S.), .co (ccTLD for Colombia), and other TLDs, (.nyc, .travel) as well as providing services for other TLD registry operators.

Neustar insiders have been selling their shares in Neustar, generally a bearish sign. In a recent Seeking Alpha article: Neustar: 80%+ Downside Within 13 Months (Oct 14, 2015), John Zhang, a self-described contrarian value investor, concludes (emphasis added):
  • There is a highly probable 80%+ downside within the next 13 months, with a chance the NSR may face default in the next 3 years due to continued deterioration in the non-NPAC business combined with the large liabilities on the balance sheet;
  • The NPAC contract (FCC's Numbering Portability Administration Contract) accounts for over 100% of Neustar's EBITDA;.
  • "Neustar risks breaching debt covenants in 2016 and 2017, and is unlikely to be able to refinance $300M in Senior Notes maturing in 2018;"
But what about Neustar's well-known acquisitions in the domain name industry, including .CO
and ARI Registry Services? Zhang specifically mentions .CO:

"... in March 2014, Neustar acquired .CO Internet S.A.S., the exclusive operator of .CO domain names. However, management disclosed in the next few quarters that [acquisition] contributed to incremental expenses and lower-than-expected revenues ... non-NPAC growth is slowing and margins are deteriorating. Furthermore, Neustar had to take on incremental amounts of debt to fund these purchases, leading to high leverage over the past few years." (emphasis added)

See also on Domain Mondo:

Caveat Emptor!

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