NeuStar Twinkles on Wall Street
A successful telecom IPO?
Yes, it's true. Phone number clearinghouse NeuStar Inc. -- which aims to be a sort of phone number "Switzerland" of the telecom industry by serving as a central directory and data exchange -- saw its star rise today as it raised some $605 million during its initial public offering.
The company's offering was 27.5 million shares at $22 a share. The company's shares closed at $26 on Wednesday, up $4 from its offering price. Morgan Stanley, Credit Suisse First Boston Corp., and J.P. Morgan Chase & Co. teamed on the deal's underwriting. NeuStar will trade on the New York Stock Exchange under the ticker symbol NSR.
The beauty of NeuStar, as investors may have been thinking, is that it gives folks a way to bet on the popularity of the VOIP and wireless markets, without putting their money behind a specific equipment vendor or carrier, says Pacific Growth Equities Inc. analyst Joe Noel.
“I don’t think investors have a very clear understanding of what exactly this company does, but they see it as a safe way to play in a hot telecommunications market without having to choose which infrastructure vendor is going to end up winning,” says Noel.
Other things that might help? Growth and profit. NeuStar’s revenues grew 48 percent during 2004 to $165 million and are expected to grow 39 percent in 2005 (to $230 million) and another 35 percent in 2006, according to corporate filings. In 2004, the company reported a profit of $45 million or 79 cents a diluted share.
The company’s main revenue comes from outsourcing directories of telephone numbers to virtually all competing wireless, wireline, and VOIP carriers in the U.S. and Canada (see NeuStar's New Portability Play). Its appeal is its neutrality (the “neu” in NeuStar stands for “neutral”).
The company is a play on both phone-number portability and the increasing use of VOIP. Carriers trying to connect disparate telecom services access NeuStar’s clearinghouse to route calls, and NeuStar gets paid for connecting them. NeuStar is also aiming to be a big purveyor of ENUM data.
Noel says the need for a NeuStar is underscored by a changing and more competitive telecom industry. Carriers who once coexisted peacefully now compete directly and need a neutral third party through which to exchange information.
Carriers also use NeuStar directories to retain a subscriber’s number when services are being moved from one provider to another.
NeuStar started in 1996 as the Communications Industry Services division of defense contractor Lockheed Martin Corp. In 1999, it was bought by an investor group led by affiliates of investment bankers Warburg Pincus.
Lockheed was picked in 1995 by the FCC-mandated North American Numbering Council to take over phone-number administration from Bellcore (now Telcordia Technologies Inc.), which was formerly the research arm of the seven regional incumbent telephone companies.
Noel’s firm initiated coverage on NeuStar on IPO day, which he says is very unusual given the underwriters’ preference for waiting 40 days to see what happens. Noel has rated the NeuStar stock Overweight.
Noel says NeuStar has been achieving gross margins of 77 percent and operating margins of 38 percent, a number Noel expects to move toward 40 percent in the next two quarters.
— Mark Sullivan, Reporter, Light Reading