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 has been a standout. 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.
Super-High Margins The monthly costs billed to phone carriers are believed to be generally passed through to you and me, lumped in with other charges on our phone bills. That's where those 65%-plus margins come in. While the price of the portability contract is fixed at a high price, expected to be $466 million in 2014, the push into security and marketing analytics also has high margin. They're high, Hook said at a recent investment conference, because cost of goods "is fairly low, because we're doing this all off of the data that we're already acquiring for free from our customers to provide back to them in providing those network routing and addressing decisions." That's where this gets interesting. As far back as 2006, Telcordia, now part of Ericsson ( ERIC), began petitioning the Federal Communications Commission to put the contracts up for bid. With Neustar's contracts expiring in 2015, it did -- putting out a request for proposals. "We expect that there will be significant competition as a result of this process," Neustar warns in its 10-K. It's unknown just how much competition, but this much is clear: A decision, or at least a recommendation, on what should happen with the contracts was expected in August. It was then pushed out, without explanation, to January. Neustar Remains 'Confident' In response to the delay, Neustar said it remains "confident" it will retain the contract. And, besides, the company is quick to point out that its non-portability business is growing faster than portability. Jonathan Ho of William Blair is so unconcerned that a month ago -- when the stock was roughly where it is now -- he went so far as to upgrade Neustar, saying in a report he believes it "will likely be selected as the sole provider" of the contract. The company had made "significant investments in infrastructure to extend the value of the ...database," Ho added. Still, he believes the price of Neustar will be cut by 20%, "partly offset by continued growth in transactions, resulting in a 15% revenue decline in 2016." And some critics believe the cuts will or should be greater -- largely because of the same high margins that have made it so attractive to Wall Street.