Why Neustar Could Fall
By: Herb Greenberg | 10/03/13 - 12:47 PM EDT
NEW YORK (TheStreet
) -- Its name may not ring a bell, but in the deep-in-the-weeds backwaters of the deeply-arcane, acronym-riddled world of telecommunications, Neustar (NSR)
has been a standout.
It's best known for running the database that makes it possible for you take your phone number with you if you move or change carriers.
The database is a big business for Neustar, generating about 48% of its revenue. It's also profitable -- so profitable that with gross margins exceeding 65%, Neustar routinely produces impressive positive free cash flow.
Not surprisingly, its stock has doubled over the past two years.
Contract Up for Grabs
But there's a hitch: For the first time since Neustar started managing the database in 1997, the portability contract, as it's called, is up for grabs.
It's unlikely Neustar will lose it, at least entirely, but it's also possible the contract could be split with others, or the price Neustar is paid could be sharply reduced.
Therein lies our story.
Spun out of Lockheed-Martin (LMT)
in 1999, Neustar has been all about databases that surround telephone numbers.
In recent years, to lessen the blow of being so heavily tied to one thing, it has been diversifying into such things as marketing analytics and security analytics. It's even the keeper of the dot-biz Internet domain.
But the heart of the company, even though its percent of sales has been declining, is the portability database.
As CEO Lisa Hook described it at a recent investment conference:
"It is an information exchange, or a registry service, that is used by every telecommunications service provider in the United States to create and complete telephone calls. So, it's a data service that injects information into every network that tells where every telephone number is, what its attributes are, and the physical location of the phone number. That's been extant in the industry for the past 18 years. It's a single contract with the entire industry, or a body that represents the entire industry. Private contract, paid for by all of the carriers. We've renewed it now four times."