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 UPDATE: NeuStar: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)

That's a BIG assumption, see previous posts on Domain Mondo:

• Investors Flee Neustar, $NSR Stock Down 19% in Five Trading Days
• Neustar $NSR Shares Tanked Friday After Marketshare Announcement
• Neustar $NSR Will Lose $500 Million Annual Revenue, 80% Downside?

And see on Seeking Alpha:

• NeuStar: Costly Acquisition Strengthens Bear Case
• NeuStar: The Loss Of The NAPM Contract Sees New Disclosure
• Neustar: 80%+ Downside Within 13 Months
• $NSR among S&P 1500 Most Heavily Shorted Stocks | Seeking Alpha

Further Caveat: Investors should read closely the Form 8-K and attached exhibits:

Form 8-K, including documents referenced therein, and items:

• 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)

AMENDMENT NO. 1 TO THE CREDIT AGREEMENT AND SECURITY AGREEMENT
AMENDMENT NO. 2 TO CREDIT AGREEMENT

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, Dec 9, 2015 (source: google.com)

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

Caveat Emptor!

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DISCLAIMER

Alphabet, Google Reorg FACTS, The Google Hooli XYZ Connection

Step one: go to http://t.co/mK7lm118Ee Step two: click the period after "drone delivery effort. Step three: enjoy. pic.twitter.com/2y0HguSVSM

— Alex Weprin (@alexweprin) August 10, 2015

FACTS:

• Google is not changing its principal domain name or its consumer-facing main business name--its main business name is Google, and the principal business domain name is, and will continue to be, google.com.
• Google is forming a holding company, Alphabet Inc., which through a merger reorganization will emerge as the holding company of Google and all its affiliated businesses: Nest, Google Ventures, etc.  
• Stockholders will not be affected--the stock will continue to trade under the symbols GOOG amd GOOGL, but financial reporting will have two reportable segments: (a) Google (main business) and (2) everything else.
• Alphabet Inc. has a domain name of abc.xyz with a one page website (see Hooli connection above) that has a link "Investors" in the upper right corner that forwards to investor.google.com.
• Google's domain name registrar, Google Domains, still does not support .xyz domains (see screenshot below). Registrar of ABC.xyz is MarkMonitor, Inc., not Google Domains, according to the WHOIS. 

Google Domains does NOT support .XYZ domain names

From the Form 8-K:

Google's New Operating Structure:
On August 10, 2015, Google Inc. (“Google”) announced plans to create a new public holding company, Alphabet Inc. (“Alphabet”), and a new operating structure to increase management scale and focus on its consolidated businesses. Under the new operating structure, its main Google business will include search, ads, maps, apps, YouTube and Android and the related technical infrastructure (the “Google business”). Businesses such as Calico, Nest, and Fiber, as well as its investing arms, such as Google Ventures and Google Capital, and incubator projects, such as Google X, will be managed separately from the Google business.

In connection with the new operating structure and upon completion of the Alphabet Merger (as defined below), Larry Page will become the Chief Executive Officer (CEO) of Alphabet, Sergey Brin will become the President of Alphabet, Eric E. Schmidt will become the Executive Chairman of Alphabet, Ruth Porat will become the Senior Vice President and Chief Financial Officer (CFO) of Alphabet and David C. Drummond will become the Senior Vice President, Corporate Development, Chief Legal Officer and Secretary of Alphabet. Larry, Sergey, Eric and David will transition to these roles from their respective roles at Google, whereas Ruth will also retain her role as the CFO of Google.

Concurrently upon completion of the Alphabet Merger, Sundar Pichai, age 43, will become the new CEO of Google Inc. Sundar is currently the Senior Vice President of Products at Google and oversees product management, engineering, and research efforts for Google’s products and platforms. Since joining Google in 2004, Sundar has led a number of key consumer products which are now used by hundreds of millions of people and, prior to his current role, served as Google’s SVP of Android, Chrome and Apps. Sundar received a B.Tech. (Hons.) from the Indian Institute of Technology Kharagpur, a M.S. from Stanford University, and an MBA from The Wharton School of the University of Pennsylvania.

Holding Company Reorganization
Later this year, Google intends to implement a holding company reorganization (the “Alphabet Merger”), which will result in Alphabet owning all of the capital stock of Google. Alphabet will initially be a direct, wholly owned subsidiary of Google. Pursuant to the Alphabet Merger, a newly formed entity (“Merger Sub”), a direct, wholly owned subsidiary of Alphabet and an indirect, wholly owned subsidiary of Google, will merge with and into Google, with Google surviving as a direct, wholly owned subsidiary of Alphabet. Each share of each class of Google stock issued and outstanding immediately prior to the Alphabet Merger will automatically convert into an equivalent corresponding share of Alphabet stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Google stock being converted. Accordingly, upon consummation of the Alphabet Merger, Google’s current stockholders will become stockholders of Alphabet. The stockholders of Google will not recognize gain or loss for U.S. federal income tax purposes upon the conversion of their shares in the Alphabet Merger. The Alphabet Merger will be conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporations. Effective upon the consummation of the Alphabet Merger, Alphabet will adopt an amended and restated certificate of incorporation and amended and restated bylaws that are identical to those of Google immediately prior to the consummation of the Alphabet Merger, except for the change of the name of the corporation as permitted by Section 251(g). Furthermore, the conversion will occur automatically without an exchange of stock certificates. Stock certificates previously representing shares of a class of Google stock will represent the same number of shares of the corresponding class of Alphabet stock after the Alphabet Merger. Following the consummation of the Alphabet Merger, shares of Class C Capital Stock and Class A Common Stock will continue to trade on the NASDAQ Global Select Market under the symbol “GOOG” and “GOOGL” respectively. With respect to Alphabet stock, Larry, Sergey, Eric and their respective specified affiliated entities, as well as Alphabet, will be bound, without any modification, by the same restrictions, undertakings and obligations that are imposed under the Transfer Restriction Agreements, related Joinders and other documentation entered into in connection with the prior settlement of the litigation relating to Class C Capital Stock. Upon consummation of the Alphabet Merger, the directors of Alphabet will be the same individuals who are the directors of Google immediately prior to the Alphabet Merger.

Financial Reporting
The new legal and operating structure will be introduced in phases over the coming months and when finalized, Google anticipates that it will result in two reportable segments for financial reporting purposes, with the Google business presented separately from other Alphabet businesses taken as a whole. Accordingly, Alphabet will report its results under this new structure commencing with its Q4 earnings release and its Annual Report on Form 10-K for the period ending December 31, 2015.

Other Changes
Concurrently upon completion of the Alphabet Merger, Omid Kordestani will transition from his role as Google’s Chief Business Officer to become an Advisor to Alphabet and Google. --end of Form 8-K excerpt--

More info at Larry Page's blog post: Google Announces Plans for New Operating Structure – Investor Relations – Google

Why is Google doing this? Larry and Sergey want to do different new things and leave Sundar Pichai CEO of Google, in charge of the main business. Think of Google as becoming a 21st Century Berkshire Hathaway--Warren Buffett's holding company, whose name belonged to a textile mill he took over (Buffett called it his "worst trade" or investment) and later sold off, retaining the name. If you go to berkshirehathaway.com today, you'll find a very simple website with some links--the main businesses have their own websites--e.g., Geico.com. Expect no more from abc.xyz.

I also suspect that Google is going to start other new businesses--online banking, for example--that will need to be run separately from Google.com.

Google's stock was up in after hours trading to $705.00 on the news:

GOOGL stock chart: 10 Aug 2015 (source: google.com)

See also: Domain Mondo: Google Q2 2015 Earnings Conference Call, Webcast, July 16th, Replay


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