Neustar Reports Lower than expected earnings - Stock off 4% in After Hours Trading

Neustar is down in after hours trading as the company reported lower than expected earnings.

The stock is off close to 4 % in after hours trading at $27.15.

Neustar, Inc. (NYSE: NSR), a trusted, neutral provider of real-time information services and analytics, today announced results for the quarter ended March 31, 2014, and affirmed its revenue and adjusted net income guidance for 2014.

Results for First Quarter 2014 Compared to First Quarter 2013

Revenue increased 6% to $229.9 million
Revenue from Marketing Services increased 21% to $32.9 million
Revenue from Security Services increased 11% to $30.1 million
Net income decreased 6% to $31.7 million
Net income per share was flat at $0.50

Non-GAAP Results for First Quarter 2014 Compared to First Quarter 2013

Adjusted net income decreased 3% to $52.4 million
Adjusted net income per share increased 5% to $0.84

“Our first quarter results demonstrate that we are delivering on our strategic initiative to become a leader in information services and analytics,” said Lisa Hook, Neustar’s President and Chief Executive Officer. “Our targeted investments are paying off and we are seeing strong and growing market demand for our IS&A offerings. We are competing vigorously in the LNPA vendor selection process, and will continue to advocate strongly that we are the logical choice to remain as administrator, which we believe is beneficial to the industry and consumers alike.”

Paul Lalljie, Neustar’s Chief Financial Officer, added, “During the first quarter, we delivered 16% revenue growth in our Marketing and Security Services. We closed on the acquisition of .CO earlier this week, bolstering our position as a key player in the expanding gTLD market. We remain confident in our full-year forecast driven by our first quarter results and leading indicators, and as a result we are affirming our guidance for the year.”

Discussion of First Quarter Results

Revenue totaled $229.9 million, a 6% increase from $216.4 million in 2013. Marketing Services revenue of $32.9 million grew 21% driven by higher demand for our workflow solutions. Security Services revenue of $30.1 million grew 11% driven by increased demand for our DDoS protection services. NPAC Services revenue of $118.8 million grew 6% driven by an increase in the fixed fee established under our contracts to provide local number portability services. Data Services revenue of $48.1 million declined 5% due to lower revenue in caller identification services.

Operating expense totaled $174.6 million, a 20% increase from $145.6 million in the first quarter of 2013. This $29.0 million increase was primarily driven by $6.2 million in advertising and professional fees associated with the NPAC vendor selection process and $5.0 million in costs for restructuring initiatives designed to improve efficiencies. In addition, personnel and personnel-related costs increased $6.8 million and depreciation and amortization expense increased $3.0 million.

As of March 31, 2014, cash and cash equivalents totaled $386.5 million, compared to $223.3 million as of December 31, 2013. During the quarter, the company borrowed $175 million under its revolving credit facility. At the end of the quarter, the company’s outstanding debt under its term facilities and 4.5% senior notes was $789.3 million. During the first quarter, the company purchased approximately 1.2 million shares at an average price of $34.85 per share, for approximately $41.9 million.

Business Outlook for 2014

The company affirmed its guidance for revenue and adjusted net income provided on January 29, 2014:

Revenue to range from $945 million to $970 million, or growth of 5% to 8%
Adjusted net income to range from $233 million to $243 million, or flat to growth of 4%
Adjusted earnings per share to range from $3.64 to $3.80, or growth of 3% to 8%


NEUSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)


	Three Months Ended
	March 31,
	2013			2014
	(unaudited)
Revenue	$	216,416		$	229,897
Operating expense:
Cost of revenue (excluding depreciation and amortization shown separately below)		49,297			58,611
Sales and marketing		42,260			49,991
Research and development		7,484			7,059
General and administrative		21,882			26,291
Depreciation and amortization		24,665			27,640
Restructuring charges		2			4,966
		145,590			174,558
Income from operations		70,826			55,339
Other (expense) income:
Interest and other expense		(17,562	)		(5,997	)
Interest and other income		141			95
Income before income taxes		53,405			49,437
Provision for income taxes		19,641			17,754
Net income	$	33,764		$	31,683
Net income per share:
Basic	$	0.51		$	0.52
Diluted	$	0.50		$	0.50
Weighted average common shares outstanding:
Basic		66,184			61,240
Diluted		67,614			62,753


NEUSTAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


	December 31,			March 31,
	2013			2014
	(audited)			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	223,309		$	386,453
Restricted cash		1,858			1,785
Accounts receivable, net		152,821			156,660
Unbilled receivables		10,790			9,306
Notes receivable		1,008			406
Prepaid expenses and other current assets		23,914			22,297
Deferred costs		6,324			5,884
Income taxes receivable		7,341			—
Deferred tax assets		8,774			12,640
Total current assets		436,139			595,431
Property and equipment, net		124,285			124,345
Goodwill		643,038			650,765
Intangible assets, net		275,141			266,975
Other assets, long-term		28,704			27,974
Total assets	$	1,507,307		$	1,665,490

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,620		$	10,266
Accrued expenses		94,457			63,375
Income taxes payable		—			10,517
Deferred revenue		54,004			56,508
Notes payable		7,972			7,972
Capital lease obligations		1,894			1,442
Other liabilities		3,580			3,815
Total current liabilities		171,527			153,895
Deferred revenue, long-term		12,061			12,273
Notes payable, long-term		608,292			781,299
Capital lease obligations, long-term		2,419			2,131
Deferred tax liabilities, long-term		82,164			83,605
Other liabilities, long-term		41,270			44,349
Total liabilities		917,733			1,077,552
Stockholders’ equity:
Common stock		87			86
Additional paid-in capital		602,796			619,997
Treasury stock		(893,852	)		(902,403	)
Accumulated other comprehensive loss		(797	)		(817	)
Retained earnings		881,340			871,075
Total stockholders’ equity		589,574			587,938
Total liabilities and stockholders’ equity	$	1,507,307		$	1,665,490

Reconciliation of Non-GAAP Financial Measures

In this press release and in other public statements, Neustar presents certain non-GAAP financial measures. These non-GAAP financial measures have limitations and may not be comparable with similar non-GAAP financial measures used by other companies and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Set forth below is the reconciliation of the non-GAAP financial measure to its most directly comparable GAAP financial measure. This reconciliation should be carefully evaluated. Prior disclosures of non-GAAP figures may not exclude the same items and as such should not be used for comparison purposes.

Reconciliation of Net Income to Adjusted Net Income

The following is a reconciliation of net income to adjusted net income for the three months ended March 31, 2014 and the year ending December 31, 2014. Management believes that this measure enhances investors’ understanding of the company’s financial performance and the comparability of the company’s operating results to prior periods, as well as against the performance of other companies.


	Three Months Ended						Year Ending
	March 31, 2014						December 31,
	2013			2014			2014 ⁽¹⁾
	(in thousands, except per share data)
	(unaudited)
Revenue	$	216,416		$	229,897		$	957,500

Net income	$	33,764		$	31,683		$	150,000
Add: Stock-based compensation		8,957			11,726			63,000
Add: Amortization of acquired intangible assets		12,372			14,066			61,000
Add: Loss on debt modification and extinguishment ⁽²⁾		10,886			—			—
Add: Restructuring charges ⁽³⁾		2			4,966			12,000
Add: Acquisition-related costs⁽⁴⁾		—			1,580			2,000
Less: Adjustment for provision for income taxes ⁽⁵⁾		(11,849	)		(11,613	)		(50,000	)
Adjusted net income	$	54,132		$	52,408		$	238,000
Adjusted net income margin ⁽⁶⁾		25	%		23	%		25	%
Adjusted net income per diluted share	$	0.80		$	0.84		$	3.75
Weighted average shares outstanding – diluted		67,614			62,753			63,500

(1)		The amounts expressed in this column are current estimates of the results for the full year as of the date of this press release. This reconciliation is based on the midpoint of the revenue guidance.
(2)		Amount represents loss on debt modification and extinguishment related to the refinancing of the company’s 2011 credit facility in the first quarter of 2013.
(3)		Amount represents restructuring charges related to the termination or relocation of certain employees and the reduction in or closure of leased facilities.
(4)		Amounts represent costs incurred by the company in connection with completed acquisitions.
(5)		Adjustment reflects the estimated tax effect of tax-deductible adjustments for stock-based compensation expense, amortization of acquired intangible assets, loss on debt modification and extinguishment and acquisition-related costs, based on the effective tax rate for the applicable period.
(6)		Adjusted net income margin is a measure of adjusted net income as a percentage of revenue.