Tickers in this Article: NSR, T, VZ, S, LVLT, VRSN
Neustar (NYSE:NSR) was founded in 1998 to address regulations in the telecom industry resulting from the 1996 Telecommunications Act. A major change concerned number portability, and Neustar has evolved into the effective clearinghouse for the industry. It reported second quarter results that showed sales continue to grow robustly, and though profit growth was subdued, the firm sported impressive profit margins that should grow around 20% for the full year. TUTORIAL: The Industry Handbook: The Telecommunications Industry

Second Quarter Recap
Sales advanced 16% to $147.7 million as both of Neustar's operating units reported positive quarterly growth. The carrier services segment accounted for the majority of the top line at 75% and grew 13% on higher numbering service and number portability revenue. The company maintains the national databases of the U.S. and Canadian telephone numbers, which allows portability as customers switch carriers between the likes of AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S) and Level 3 Communications (Nasdaq:LVLT). The rest of sales consist of enterprise services and include internet infrastructure and registry services. This second segment saw robust 25% growth during the quarter and competes against VeriSign (Nasdaq:VRSN), which also helps facilitate the tracking and registration of internet domain names.

Operating expenses jumped 24% to outstrip sales growth, as new sales "required higher levels of support" such as a new customer service center and royalty expenses. Operating income still rose 3.6% to $55.2 million from the increase in sales, with a very healthy operating margin in excess of 37%. Net income was up 13.2% to $32.4 million. Earnings per share (EPS) was up 16.2% to 43 cents. (For more on EPS, see Investors Beware: There Are 5 Types Of Earnings Per Share.)

For the full year, Neustar currently expects sales between $585 million and $600 million, or as much as 13.8% growth from 2010. Management projects operating earnings between $127 million and $133 million, or $1.68 to $1.76 diluted EPS.

Bottom Line
In a recent investment presentation, Neustar listed assets including 2.9 billion global phone numbers, 2.8 billion IP addresses and 5.1 million global domain names. Its business is to ensure portability of these numbers and addresses across different carrier networks and through various mediums, including voice, text, web and video. The company charges a fee for facilitating number portability and maintaining domain registries.

Over the past five years, Neustar has grown briskly as sales are up close to 17% annually, while profits have advanced at a more than 14% annual clip. Growth trends look strong for the next few years, though there appears to be some uncertainty past June 2015, as a contract to renew its Number Portability Administration Center (NPAC) is up for renewal and will be put out for bid.

As it stands currently, the stock appears fairly valued at a forward earnings multiple just under 15. The trailing free cash flow multiple is more rich at nearly 19, but the company remains impressively profitable and appears to have appealing growth prospects going forward, though contract negotiations in a few years add a degree of uncertainty. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)

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