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NeuStar: Competition Didn't Cause Fee Cut

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News Analysis
Light Reading
9/22/2006
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Neustar Inc. (NYSE: NSR) has quickly recovered after falling nearly 7 percent overnight after the company announced it will soon charge carriers less to operate the database it uses to connect and route telephone calls in the U.S. (See NeuStar Extends Contracts.)

NeuStar shares were down $0.56 (1.93%) to $28.44 in mid-afternoon trading on Friday.

The company said Thursday it had amended and extended seven exclusive contracts with the North American Portability Management LLC (NAPM), a consortium of telephone carriers that use NeuStar's directory to route calls in the U.S. NeuStar says it has extended its contracts by two years to 2015 and also reduced its per-call transaction rates starting next year.

NeuStar will continue getting $1.05 per transaction for the rest of 2006, and then will lower the price to 91 cents for transactions during 2007. Starting in 2008, the rate drops to a sliding scale of 75 cents to 95 cents, depending on transaction volume.

NeuStar’s contracts with NAPM have contributed about three fourths of its total revenues over the past three years, analysts say.

Investors at first didn’t take the news well. NeuStar stock closed at $29 dollars Thursday, dropped overnight, and bottomed out at $25 in mid-morning trading Friday. The stock then quickly recovered.

“The pricing change may reflect competition, I suspect from players like Telcordia Technologies Inc. and VeriSign Inc. (Nasdaq: VRSN), for what are NeuStar's core contracts, and also represents volume pricing based on continuing growth,” says Heavy Reading analyst John Longo. “The real question is how effectively they continue to manage their performance for the rest of the term of the contract.”

NeuStar CEO Jeff Ganek denies his company was pressured by competition into reducing its rates. Ganek says his company is merely trying to “strengthen its position” as the sole owner of the contract in the future. NeuStar says transactions have grown at a compounded annual rate of more than 35 percent since January 2004.

"You can’t complete a telephone call in the U.S. without using NeuStar,” Ganek says. “We cannot charge monopoly rents; we have to share the benefits of fast volume growth with our industry.” NeuStar says the amended pricing will save carriers approximately $30 million in the first year alone.

Several analysts came out Friday with sympathetic views of NeuStar’s contract renegotiation. “We believe investors are overreacting to NeuStar's price reduction and contract extension,” says ThinkEquity LLC analyst Jonathan Hoopes in a research note Friday.

“With the NP [number portability] transaction pipeline now locked up until 2015, NeuStar can redeploy assets and focus on next-gen growth initiatives that should expand the company's international presence, which accounted for only 3 percent of revenues in fiscal 2005.” (See NeuStar Unveils SIP-X.)

The company declined to provide 2007 guidance. (See Neustar Reports Q2.)

— Mark Sullivan, Reporter, Light Reading

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voyce_overipee1
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voyce_overipee1,
User Rank: Light Beer
12/5/2012 | 3:39:52 AM
re: NeuStar: Competition Didn't Cause Fee Cut
95 cents a dip? holy crap. It's like printing money. I'm really surprised they weren't forced to go with flat rate. The transactions are increasing faster anyway, so lowering the per-dip fee is not going to hurt their earnings in the end.
telcobiz
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telcobiz,
User Rank: Light Beer
12/5/2012 | 3:39:47 AM
re: NeuStar: Competition Didn't Cause Fee Cut
Please help me to understand Neustar!

I understand what NeuStar's business does, but what I don't understand is why the RBOC's let someone carve out this nice little monopoly from THEIR business?

This company does not seem, to me, to be at all essential for the execution of a number portability system however they sure do make a nice profit from it, profit from operations exceeding 50%, With some form of FCC gifted monopoly, till 2012, but why?

confused


alchemy
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alchemy,
User Rank: Light Beer
12/5/2012 | 3:39:45 AM
re: NeuStar: Competition Didn't Cause Fee Cut
fgoldstein writes:
The dip charges for each call are a modest fraction of a penny. Of course they're made for pretty much every call nowadays.

...a very nice government-mandated monopoly indeed. And now NeuStar is madly lobbying in Washington D.C. to get themselves in the same sort of monopoly business for VoIP. They champion a VoIP 911 solution that pretty much assures them the business. They push their ENUM at anybody and everybody. I guess you have to tip your hat to them for being so good at the government mandate game. When your roots are as a defense contractor, you develop a very different skill set from the rest of us.
fgoldstein
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fgoldstein,
User Rank: Light Sabre
12/5/2012 | 3:39:45 AM
re: NeuStar: Competition Didn't Cause Fee Cut
It's not 95 cents a dip. It's more like 95 cents to write into the database, which is done when a number is ported. I am not sure about the exact pricing but a port operation generally takes two writes, one to stage it (and give notice) and one to complete it.

The dip charges for each call are a modest fraction of a penny. Of course they're made for pretty much every call nowadays.
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