NeuStar Inc. 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., 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 Partners 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