Revenue was good at 92 versus consensus 89-92
EPS was a clean miss - 0.24 versus consensus 0.25
Revenue guidance for FY07 also good at 428 versus consensus 423, but that includes 25 from followap. Organic revenue growth (excluding followap) is thus forecast to grow only 20% in 2007.
EPS is well below consensus - FY07 guidance 1.04-1.09 versus consensus 1.10
plus, all the execs announced they are dumping 20-30% of their shares.
NSR missed. Consensus was GAAP. GAAP version of guidance was below consensus.
Revenue for 07 is terrible. Basically in line with where consensus was on the last call - back in November BEFORE they made the acquisition. That acquisition is supposed to add $25 million in 07. So the core business is expected to do far worse than people thought back in November.
Sell side is coming out hard in favor of this one. With all the acquisitions and secondary offerings, there's a lot of banking work at stake.
I said that NSR has better barriers to entry from competition than GOOG and EBAY, which actually is true - I didn't say they were necessarily better - paid search is a much bigger market than NSR's market, hence why GOOG structurally has a better market. But given NSR's size relative to it's market opportunity, there remains plenty of runway for them as well and this is how my discussion was framed. Sarcasm duly noted.
I'm not apt to continue the conversation, as you've now digressed past our original focus and have resorted to much "cheaper" tactics - stock sales and such. You're outside the fundamentals at this point and you're trying to take cheap shots at this point - I'm taking the high road there. So while I've written some stuff below, I think we should just agree to disagree. You're not going to convince me and I'm not going to convince you. We'll let the market sort it out and see what happens...thanks for the discussion.
All I will say on the stock sales are that 10B5-1 is a pre-determined plan over period of time to sell shares,and takes inside information out of the equation. There is no way to sell shares that is LESS offensive to shareholders than under this plan. As for selling, if you'd made $10mm in equity over the past 10 years with the company, and $9.5mm of it was tied up in the stock of one company, what would you do? Don't know about you, but diversification, for as long as they've been at the company, is legitimate I think. No one ever likes to see management sell, but I think it's understandable - upper level management is still keeping plenty of skin/wealth in the game.
As for Warburg Pincus, they are a buyout fund - as I'm sure you're aware, they generally invest in 5-7 years and look for an exit - Pincus did an MBO out of Lockheed in 1996 - after selling the last slug in the middle of last year, Pincus' overall holding period was much longer, nearly 10 years overall. I'm not surprised they sold when you consider their investment horizon.
As for the investment in Telecordia, I'm sure Pincus used their knowledge and expertise from their NSR experience in conducting the due diligence on this company before investing, but they are simply two investments by a buyout fund, a fund that focuses on telecom investments. What a shock that a telecom investment fund would sell its stake in one telecom services company and buy a stake in another - SCANDAL!
okay okay, i guess youre right. NSR is like GOOG and EBAY but better.
one question - why did NSR's former biggest investor dump almost all their shares in the IPO and accelerated secondary, then turnaround and buy telcordia, which competes with NSR?
also, why are the insiders dumping so hard, today announcing 10b5-1 plans to sell stock every day for the next year?
I certainly am not sure there won't be another renegotiation, but if NSR continues to push their virtual monopoly out another 5+ years every time they sign a deal, and as long as the economics on a price vs. volume basis are attractive, I'd love to see NSR renegotiate every day of the week. No one has visibility and monopoly like this that I know of. If NANPA breaks their contract at any time from now until 2014, NSR gets 20% premiums on pricing.
They ARE a category killer - you said it yourself - "they are the Switzerland of the telecom industry". No one has the control or the position they have in the telecom services business (or sustainable 75% Gross margins!). I'm not comparing their absolute business to GOOG or EBAY, but their business MODEL (margins, FCF, Returns, ROE) - if you want to take it a step further, NSRs model is actually BETTER than EBAY and GOOG, as there is less competition overall and the contracts are long-term that guarantee business. GOOG theoretically could get obseleted by new technology while NSR is locked in - this sort of visibility on 75% of revenues should alone yield a premium multiple.
Your thoughts on convergence of NSR growth rates toward churn and new number allocations is only true if new telecommunications methods are NOT developed, and if NSR DOESN'T expand geographically to other parts of the world (organic or inorganic). As VOIP moves in (nevermind SIP-IX which is still in its infancy) there will still be very strong growth for years to come here and don't forget CSCs and now Mobile IM. The only constant in telecom is CHANGE.
While I agree that some of the telecom M&A has boosted NSR's results in the past, I would argue that NSR remains at the front-end of a whole tidal wave of transactions that will come as a result of the largest year for telecom M&A ever in 2006. They've only just begun on M&A transactions that closed last year, and they have a long tail, oftentimes 3-4 years in length, with growth throughout that period - this doesnt' even include if Sprint and Nextel decide to merge their networks - that would only be in addition to the other M&A transactions. Note also that NSR continues to offer more and more services all the time, so it's not like NSR is static either. One of the major misconceptions on this stock is that the only numbers that matter directionally on transactions are churn and subscriber data from the government - I think it's pretty clear at this point that there are a lot of other services that NSR offers that there aren't any "trackable" data for - the data does not nearly capture NSR's overall business.
You'll be waiting a very long time if you think NSR growth rates will be at the 2-4% level of US wireline/wireless churn. You're not realizing that the telecoms continue to further use NSR for more transactions as time passes - penetration of NSR services continues to increase but is still relatively low. It's much more dynamic than the static environment you describe.
"the contract is in place with NANPA now through 2014 - price declines from when the contract is signed until this date are spelled out specifically for the entire period. There is no ambiguity here and the pricing scenarios are very well defined. 2007 is clearly the big step down - while subsequent years still have price declines for volume, they are much less than the decrease in '07."
This is all 100% true. But there was no ambiguity in the old contract, with a fixed pricing schedule through 2010. But all of a sudden that contract was thrown out and replaced with this one. How do we know that won't happen again.
"it's growth and monopolistic nature serve more as comparisons to other category killer/distruptive technologies like GOOG, EBAY, CSGP, VPRT, INWK just to name a few."
In what sense is NSR a "disruptive" business model. What are they disrupting? What category are they killing? You cant be serious comparing them to GOOG and EBAY.
They are doing basically the same thing they started doing in 1986 (then part of lockheed). Acting as a switzerland to manage numbers between carriers. They got a boost in 2005-2006 from wireless number portability, a boost in revenue that made them looks like a fast grower and allowed them to go public. They also got some boosts from telecom M&A. Those are not going to be repeated - long term Neustar's growth will converge with natural rates of new phone number allocations and churn. Their high valuation will give them the opportunity to do some more acquisitions, muddying the water with charges and pro forma accounting. But the outcome will be the same.
As for pricing, it's not a hope or speculation on my part - the contract is in place with NANPA now through 2014 - price declines from when the contract is signed until this date are spelled out specifically for the entire period. There is no ambiguity here and the pricing scenarios are very well defined. 2007 is clearly the big step down - while subsequent years still have price declines for volume, they are much less than the decrease in '07.
I agree with you that NSR really isn't a software company, though their primary service does include software - most analysts on the Street that cover NSR tend to be software analysts, so that's why I called the "peer" group the software companies. I have to disagree that they are a direct comparable to VRSN. They really aren't that similar at all, and I would take issue with your statement that VRSN is growing faster than NSR. If you look at apples to apples comparisons of operating results for NSR, "core" earnings will move to $1.33 (at midpoint) from $1.08 in '06 and then realize that Followap is $0.09 of dilution in '07, EPS growth is at least 25%, and this does not consider that NSR has a history of modest beat, modest raising of guidance as the year progresses - these stated numbers likely have some upside. VRSN is not growing nearly as fast, on either EPS and CERTAINLY not on revenue. I agree that NSR is a business service, but it's growth and monopolistic nature serve more as comparisons to other category killer/distruptive technologies like GOOG, EBAY, CSGP, VPRT, INWK just to name a few. Business models are different, but compare the margin and free cash profiles when you get a chance and you will see their competitive positions are similar. Take a look at valuations of these and you will find that NSR is not really expensive at all.
Investors seem unwilling to pay up for growth in this market, so I'm not surprised by your commentary. If NSR is growing much faster than the group, it deserves to trade at a premium to the group - plain and simple. There are no other software companies (definitely not VRSN or SVR) that are growing revenues, organically or even with acquisitions, at the pace of NSR - this includes your mention of the "best, fastest growing software names". In their market cap range, nothing comes close to the growth of NSR.
The bottom feeders are already out with their ugly pump notes this morning.
JPMorgan writes 'Q4 Beat and Raise'. Later they offer the odd logic, "NSR acquired Followap in November and absorbed $2.2M of dilutive expenses but never changed quarterly guidance. So we look at inline EPS of $0.24 GAAP as a $0.02 beat on core operations." So its an inline quarter after you back out an acquisition that happened 3 months ago, and after you already adjusted your estimates in November with a note named 'Neustar:Correcting Estimate Reconciliation'.
They also dont bother mentioning the 10b5-1 plan for sr execs to dump 20-30% of their stock.