NSR-2015.3.31-10Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-32548
 
NeuStar, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
52-2141938
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
21575 Ridgetop Circle
Sterling, Virginia 20166
(Address of principal executive offices) (zip code)
(571) 434-5400
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
There were 55,365,007 shares of Class A common stock, $0.001 par value, and 3,082 shares of Class B common stock, $0.001 par value, outstanding at April 27, 2015.

Table of Contents


NEUSTAR, INC.
INDEX
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
EX – 31.1
 
 
EX – 31.2
 
 
EX – 32.1
 
 
EX – 101 INSTANCE DOCUMENT
 
EX – 101 SCHEMA DOCUMENT
 
EX – 101 CALCULATION LINKBASE DOCUMENT
 
EX – 101 DEFINITION LINBASE DOCUMENT
 
EX – 101 LABELS LINKBASE DOCUMENT
 
EX – 101 PRESENTATION LINKBASE DOCUMENT
 

Table of Contents


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2014
 
March 31,
2015
 
 
 
(unaudited)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
326,577

 
$
347,078

Restricted cash
2,191

 
2,543

Accounts receivable, net of allowance for doubtful accounts of $3,154 and $3,268, respectively
155,086

 
172,995

Unbilled receivables
13,084

 
12,001

Prepaid expenses and other current assets
24,392

 
33,771

Deferred costs
6,951

 
7,618

Income taxes receivable
16,309

 
528

Deferred income tax assets
10,380

 
15,761

Total current assets
554,970

 
592,295

Property and equipment, net
161,604

 
153,505

Goodwill
689,269

 
689,269

Intangible assets, net
302,622

 
286,904

Other assets, long-term
30,643

 
33,577

Total assets
$
1,739,108

 
$
1,755,550

See accompanying notes.


3
Table of Contents


NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2014
 
March 31,
2015
 
 
 
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$
8,439


$
6,305

Accrued expenses
94,771


73,733

Deferred revenue
73,908


75,366

Notes payable
7,972


7,972

Capital lease obligations
3,702


3,282

Other liabilities
23,125


24,035

Total current liabilities
211,917


190,693

Deferred revenue, long-term
27,017


24,287

Notes payable, long-term
775,318


773,324

Capital lease obligations, long-term
5,579


4,990

Deferred income tax liabilities, long-term
50,666


73,139

Other liabilities, long-term
49,705


51,726

Total liabilities
1,120,202


1,118,159

Commitments and contingencies
—


—

Stockholders’ equity:



Preferred stock, $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding as of December 31, 2014 and March 31, 2015
—


—

Class A common stock, par value $0.001; 200,000,000 shares authorized; 80,917,293 and 82,780,338 shares issued; and 55,080,441 and 55,979,575 shares outstanding at December 31, 2014 and March 31, 2015, respectively
81


83

Class B common stock, par value $0.001; 100,000,000 shares authorized; 3,082 and 3,082 shares issued and outstanding at December 31, 2014 and March 31, 2015, respectively
—


—

Additional paid-in capital
674,385


679,429

Treasury stock, 25,836,852 and 26,800,763 shares at December 31, 2014 and March 31, 2015, respectively, at cost
(898,520
)

(924,142
)
Accumulated other comprehensive loss
(2,222
)

(3,123
)
Retained earnings
845,182


885,144

Total stockholders’ equity
618,906


637,391

Total liabilities and stockholders’ equity
$
1,739,108


$
1,755,550

See accompanying notes.

4
Table of Contents


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 March 31,
 
2014
 
2015
Revenue
$
229,897

 
$
251,388

Operating expense:
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
58,611

 
64,158

Sales and marketing
49,991

 
46,734

Research and development
7,059

 
6,454

General and administrative
26,291

 
24,657

Depreciation and amortization
27,640

 
29,924

Restructuring charges
4,966

 
—

 
174,558

 
171,927

Income from operations
55,339

 
79,461

Other (expense) income:
 
 
 
Interest and other expense
(5,997
)
 
(6,722
)
Interest income
95

 
226

Income before income taxes
49,437

 
72,965

Provision for income taxes
17,754

 
26,751

Net income
$
31,683

 
$
46,214

Net income per common share:
 
 
 
Basic
$
0.52

 
$
0.83

Diluted
$
0.50

 
$
0.81

Weighted average common shares outstanding:
 
 
 
Basic
61,240

 
55,974

Diluted
62,753

 
56,849

See accompanying notes.

5
Table of Contents


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended 
 March 31,
 
2014
 
2015
Net income
$
31,683

 
$
46,214

Other comprehensive loss, net of tax:
 
 
 
Available for sale investments, net of tax:
 
 
 
Change in net unrealized gains, net of tax of $34 and $(9), respectively
53

 
(14
)
Reclassification for gains included in net income, net of tax of $(12) and $(15), respectively
(19
)
 
(23
)
Net change in unrealized gains on investments, net of tax
34

 
(37
)
Foreign currency translation adjustment, net of tax:
 
 
 
Change in foreign currency translation adjustment, net of tax of $(86) and $(505), respectively
(54
)
 
(1,103
)
Reclassification adjustment included in net income, net of tax of $0 and $153, respectively
—

 
239

Foreign currency translation adjustment, net of tax
(54
)
 
(864
)
Other comprehensive loss, net of tax
(20
)
 
(901
)
Comprehensive income
$
31,663

 
$
45,313

See accompanying notes.

6
Table of Contents


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended 
 March 31,
 
2014
 
2015
Operating activities:
 
 
 
Net income
$
31,683

 
$
46,214

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,640

 
29,924

Stock-based compensation
11,726

 
8,230

Amortization of deferred financing costs and original issue discount on debt
857

 
842

Tax (benefit) shortfall from equity awards
(2,311
)
 
8,695

Deferred income taxes
(2,534
)
 
17,322

Provision for doubtful accounts
1,528

 
2,100

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(4,553
)
 
(20,302
)
Unbilled receivables
1,525

 
1,083

Notes receivable
602

 
—

Prepaid expenses and other current assets
1,625

 
(9,379
)
Deferred costs
332

 
(484
)
Income taxes
20,169

 
7,086

Other assets
7

 
(3,922
)
Other liabilities
3,040

 
2,931

Accounts payable and accrued expenses
(32,419
)
 
(28,521
)
Deferred revenue
1,974

 
(1,272
)
Net cash provided by operating activities
60,891

 
60,547

Investing activities:
 
 
 
Purchases of property and equipment
(11,584
)
 
(6,055
)
Business acquired, net of cash acquired
(13,567
)
 
—

Net cash used in investing activities
(25,151
)
 
(6,055
)
Financing activities:
 
 
 
Decrease (increase) in restricted cash
73

 
(352
)
Proceeds from notes payable
175,000

 
—

Payments under notes payable obligations
(2,031
)
 
(2,031
)
Principal repayments on capital lease obligations
(715
)
 
(1,691
)
Proceeds from issuance of stock
3,337

 
442

Tax benefit (shortfall) from equity awards
2,311

 
(8,695
)
Repurchase of restricted stock awards and common stock
(50,499
)
 
(20,387
)
Net cash provided by (used in) financing activities
127,476

 
(32,714
)
Effect of foreign exchange rates on cash and cash equivalents
(72
)
 
(1,277
)
Net increase in cash and cash equivalents
163,144

 
20,501

Cash and cash equivalents at beginning of period
223,309

 
326,577

Cash and cash equivalents at end of period
$
386,453

 
$
347,078

See accompanying notes.

7
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015



1.
DESCRIPTION OF BUSINESS AND ORGANIZATION
NeuStar, Inc. (the Company or Neustar) is a neutral and trusted provider of real-time information services and analytics. The Company's authoritative, hard-to-replicate data sets and proprietary analytics provide insights to help its clients promote and protect their businesses. The Company primarily serves marketing and security functions in the communications, financial services, media and advertising, retail and eCommerce, Internet, and technology industries. The Company's integrated marketing solution enhances its clients' ability to acquire and retain valuable customers across disparate platforms. The Company operates top-level domain names and provides services to help its clients optimize their web performance. The Company enables the exchange of essential operating information across multiple carriers to provision and manage services. The Company operates the user authentication and rights management system, which supports the digital content locker that consumers use to access their entertainment content. The Company provides the critical infrastructure that enables the dynamic routing of calls and text messages for communications service providers in the United States.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the full fiscal year. The consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Significant estimates and assumptions are inherent in the analysis and the measurement of deferred tax assets; the identification and quantification of income tax liabilities due to uncertain tax positions; and recoverability of goodwill. The Company bases its estimates on historical experience and assumptions that it believes are reasonable. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosure Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
•
Level 1. Observable inputs, such as quoted prices in active markets;
•
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3. Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.


8
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level at which to classify them for each reporting period. Due to their short-term nature, the carrying amounts reported in the accompanying unaudited consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The Company determines the fair value of its $325 million senior secured term loan facility (2013 Term Facility) using pricing service quotations as quoted by Bloomberg (Level 2) (see Note 3). The Company believes the carrying value of its revolving credit facility (2013 Revolving Facility) approximates the fair value of the debt as the term and interest rate approximates the market rate (Level 2) (see Note 3). The Company determines the fair value of its $300 million aggregate principal amount of 4.50% senior notes due 2023 (Senior Notes) using a secondary market price on the last trading day in each period as quoted by Bloomberg (Level 2) (see Note 3).
The estimated fair values of the Company’s financial instruments are as follows (in thousands):
 
December 31, 2014
 
March 31, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Cash and cash equivalents
$
326,577

 
$
326,577

 
$
347,078

 
$
347,078

Restricted cash (current assets)
2,191

 
2,191

 
2,543

 
2,543

2013 Term Facility (including current portion, net of discount)
308,290

 
289,794

 
306,296

 
292,325

2013 Revolving Facility
175,000

 
175,000

 
175,000

 
175,000

Senior Notes (including current portion)
300,000

 
255,750

 
300,000

 
253,725

Restricted Cash
As of December 31, 2014 and March 31, 2015, cash of $2.2 million and $2.5 million, respectively, was restricted as collateral for certain of the Company's outstanding letters of credit and for deposits on leased facilities.
3.
NOTES PAYABLE
Notes payable consist of the following (in thousands):
 
December 31,
2014
 
March 31,
2015
2013 Term Facility (net of discount)
$
308,290

 
$
306,296

2013 Revolving Facility
175,000

 
175,000

Senior Notes
300,000

 
300,000

Total
783,290

 
781,296

Less: current portion, net of discount
(7,972
)
 
(7,972
)
Long-term portion
$
775,318

 
$
773,324


2013 Credit Facilities
On January 22, 2013, the Company entered into a credit facility that provided for a $325 million senior secured term loan facility (2013 Term Facility) and a $200 million senior secured revolving credit facility (2013 Revolving Facility, and together with the 2013 Term Facility, the 2013 Credit Facilities). The 2013 Revolving Facility and 2013 Term Facility mature on January 22, 2018. As of March 31, 2015, outstanding borrowings under the 2013 Revolving Facility were $175.0 million and available borrowings under the same facility were $8.2 million, exclusive of outstanding letters of credit totaling $16.8 million.
The 2013 Credit Facilities provide for mandatory prepayments with the net cash proceeds of certain debt issuances, insurance receipts, and dispositions. The 2013 Term Facility also contains certain events of default, upon the occurrence of which, and so long as such event of default is continuing, the amounts outstanding may, at the option of the required lenders, accrue interest at an increased rate and payments of such outstanding amounts could be accelerated, or other remedies undertaken.

9
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


Senior Notes
On January 22, 2013, the Company closed an offering of $300 million aggregate principal amount of 4.50% senior notes due 2023. The Senior Notes are the general unsecured senior obligations of the Company and are guaranteed on a senior unsecured basis by certain of its domestic subsidiaries, or the Subsidiary Guarantors. Interest is payable on the Senior Notes semi-annually in arrears at an annual rate of 4.50%, on January 15 and July 15 of each year, beginning on July 15, 2013.
If the Company experiences certain changes of control together with a ratings downgrade, it will be required to offer to purchase all of the Senior Notes then outstanding at a purchase price equal to 101.00% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. If the Company sells certain assets and does not repay certain debt or reinvest the proceeds of such sales within certain time periods, it will be required to offer to repurchase the Senior Notes with such proceeds at 100.00% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The Senior Notes contain customary events of default, including among other things, payment default, failure to provide certain notices and defaults related to bankruptcy events. The Senior Notes also contain customary negative covenants.
4.
STOCKHOLDERS’ EQUITY
As of March 31, 2015, a total of 4,433,569 shares were available for grant or award under the Company's stock incentive plans and a total of 405,182 shares were available to be issued under the Company's Employee Stock Purchase Plan (ESPP).
Stock-based compensation expense recognized for the three months ended March 31, 2014 and 2015 was $11.7 million and $8.2 million, respectively. As of March 31, 2015, total unrecognized compensation expense was estimated at $33.5 million, which the Company expects to recognize over a weighted average period of approximately 1.3 years. Total unrecognized compensation expense as of March 31, 2015 is estimated based on outstanding non-vested stock options, non-vested restricted stock awards, non-vested restricted stock units and non-vested performance vested restricted stock units (PVRSUs). Stock-based compensation expense may increase or decrease in future periods for subsequent grants or forfeitures, and changes in the estimated fair value of non-vested awards granted to consultants.
Stock Options
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock options granted. The following table summarizes the Company’s stock option activity:
 
Shares
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
(in millions)
 
Weighted-
Average
Remaining
Contractual
Life
(in years)
Outstanding at December 31, 2014
2,043,905

 
$
25.23

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(219,405
)
 
25.79

 
 
 
 
Forfeited
(58,058
)
 
28.00

 
 
 
 
Outstanding at March 31, 2015
1,766,442

 
$
25.07

 
$
2.3

 
3.53
Exercisable at March 31, 2015
1,231,742

 
$
24.38

 
$
0.3

 
2.43
The aggregate intrinsic value of options exercised for the three months ended March 31, 2015 was $0.1 million.

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Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


Restricted Stock Awards
The following table summarizes the Company’s non-vested restricted stock activity for the three months ended March 31, 2015:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2014
39,194

 
$
27.21

 
 
Granted
—

 
—

 
 
Vested
(32,144
)
 
26.46

 
 
Forfeited
(3,175
)
 
30.61

 
 
Outstanding at March 31, 2015
3,875

 
$
30.63

 
$
0.1

The total aggregate intrinsic value of restricted stock vested during the three months ended March 31, 2015 was $0.9 million. During the three months ended March 31, 2015, the Company repurchased 12,477 shares of common stock for an aggregate purchase price of approximately $0.3 million pursuant to the participants’ rights under the Company’s stock incentive plans to elect to use common stock to satisfy their minimum tax withholding obligations.
Performance Vested Restricted Stock Units
The fair value of a PVRSU is measured by reference to the closing market price of the Company’s common stock on the date of the grant. The Company recognizes the estimated fair value of PVRSUs, net of estimated forfeitures, as stock-based compensation expense over the vesting period, which considers each performance period or tranche separately, based upon the Company's determination of the level of achievement of the performance target. The estimated level of achievement of the performance target awards for the 2015 performance year is 100.0%.
The following table summarizes the Company’s non-vested PVRSU activity for the three months ended March 31, 2015:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Non-vested December 31, 2014
1,810,952

 
$
37.76

 
 
Granted
664,046

 
27.04

 
 
Vested
(1,712,754
)
 
37.38

 
 
Forfeited
(73,006
)
 
35.56

 
 
Non-vested March 31, 2015
689,238

 
$
28.61

 
$
17.0

The total aggregate intrinsic value of PVRSUs vested during the three months ended March 31, 2015 was approximately $45.6 million. The Company repurchased 681,049 shares of common stock for an aggregate purchase price of $18.1 million pursuant to the participants’ rights under the Company's stock incentive plans to elect to use common stock to satisfy their minimum tax withholding obligations.
Restricted Stock Units
The following table summarizes the Company’s restricted stock units activity for the three months ended March 31, 2015:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2014
1,071,814

 
$
39.60

 
 
Granted
800

 
24.60

 
 
Vested
(193,412
)
 
41.89

 
 
Forfeited
(11,387
)
 
39.00

 
 
Outstanding at March 31, 2015
867,815

 
$
39.08

 
$
21.4


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Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


The total aggregate intrinsic value of restricted stock units vested during the three months ended March 31, 2015 was approximately $5.3 million. The Company repurchased 73,349 shares of common stock for an aggregate purchase price of $2.0 million pursuant to the participants’ rights under the Company's stock incentive plans to elect to use common stock to satisfy their minimum tax withholding obligations.
Employee Stock Purchase Plan
The Company estimated the fair value of stock-based compensation expense associated with its ESPP using the Black-Scholes option pricing model, with the following assumptions:
 
Three Months Ended March 31, 2015
Dividend yield
—
%
Expected volatility
34.34
%
Risk-free interest rate
0.05
%
Expected life of employee stock purchase plan options (in months)
6

Share Repurchase Program
On March 26, 2015, the Company announced that its Board of Directors authorized a $150 million share repurchase program. The program commenced on March 27, 2015 and will expire on March 25, 2016. Share repurchases under the program will be completed in accordance with guidelines specified under Rule 10b5-1 and Rule 10b-18 of the Securities and Exchange Act of 1934. All repurchased shares are retired. During the three months ended March 31, 2015, the Company repurchased 0.3 million shares of its Class A common stock at an average price of $24.10 per share, for a total purchase price of $6.3 million.
5.
BASIC AND DILUTED NET INCOME PER COMMON SHARE
The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per common share (in thousands, except per share data):
 
Three Months Ended 
 March 31,
 
2014
 
2015
Computation of basic net income per common share:
 
 
 
Net income
$
31,683

 
$
46,214

Weighted average common shares and participating securities outstanding – basic
61,240

 
55,974

Basic net income per common share
$
0.52

 
$
0.83

Computation of diluted net income per common share:
 
 
 
Weighted average common shares and participating securities outstanding – basic
61,240

 
55,974

Effect of dilutive securities:
 
 
 
Stock-based awards
1,513

 
875

Weighted average common shares outstanding – diluted
62,753

 
56,849

Diluted net income per common share
$
0.50

 
$
0.81

Diluted net income per common share reflects the potential dilution of common stock equivalents such as options and warrants, to the extent the impact is dilutive. Common stock options to purchase an aggregate of 522,163 and 1,894,657 shares were excluded from the calculation of the denominator for diluted net income per common share due to their anti-dilutive effect for the three months ended March 31, 2014 and 2015, respectively.

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NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


6.
INTEREST AND OTHER EXPENSE
Interest and other expense consists of the following (in thousands):
 
Three Months Ended 
 March 31,
 
2014
 
2015
Interest and other expense:
 
 
 
Interest expense
$
6,085

 
$
6,460

Gain on asset disposals
—

 
(169
)
Foreign currency transaction (gain) loss
(66
)
 
431

Other
(22
)
 
—

Total interest and other expense
$
5,997

 
$
6,722

7.
INCOME TAXES
The Company’s effective tax rate increased to 36.7% for the three months ended March 31, 2015 from 35.9% for the three months ended March 31, 2014, primarily due to the reversal of the Company's unrecognized tax benefits in the first quarter of 2014 upon the completion of an Internal Revenue Service (IRS) audit for the year ended December 31, 2009, offset by an increase in the Company’s domestic production activities deduction for the three months ended March 31, 2015.
As of December 31, 2014 and March 31, 2015, the Company had unrecognized tax benefits of $13.6 million and $14.3 million, respectively, of which $12.8 million and $13.5 million, respectively, would affect the Company’s effective tax rate if recognized.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the three months ended March 31, 2014 and 2015, potential interest and penalties were insignificant.
The Company files income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. The tax years 2008 through 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject. The IRS has initiated an examination of the Company's federal income tax returns for the years 2009 through 2012 and of the 2010 federal income tax return of Neustar Information Services, Inc. (formerly TARGUSInformation Corporation), a subsidiary of the Company. While the ultimate outcome of the audit is uncertain, management does not currently believe that the outcome will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
8.
SEGMENT INFORMATION
The Company engages in business activities as a single entity and the chief operating decision maker reviews consolidated operating results and allocates resources based on consolidated reports. The Company has a single operating segment.

13
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


Enterprise-Wide Disclosures
Revenue by geographical areas is based on the billing address of the Company's clients. Geographic area revenue and service revenue from external clients for the three months ended March 31, 2014 and 2015, and geographic area long-lived assets as of December 31, 2014 and March 31, 2015 are as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2014
 
2015
Revenue by geographical areas:
 
 
 
United States
$
213,782

 
$
235,554

International
16,115

 
15,834

Total revenue
$
229,897

 
$
251,388

 
 
 
 
Revenue by service:
 
 
 
Marketing Services
$
32,854

 
$
37,227

Security Services
30,132

 
39,642

Data Services
48,118

 
48,158

NPAC Services
118,793

 
126,361

Total revenue
$
229,897

 
$
251,388

 
December 31,
2014
 
March 31,
2015
Long-lived assets, net
 
 
 
United States
$
385,432

 
$
363,855

Colombia
78,786

 
76,549

Other
8

 
5

Total long-lived assets, net
$
464,226

 
$
440,409

9.
CONTINGENCIES
On July 15, 2014, the Oklahoma Firefighters Pension and Retirement System, or OFPRS, individually and on behalf of all other similarly situated stockholders, filed a putative class action complaint in the United States District Court for the Eastern District of Virginia, Alexandria Division, or the Alexandria Division, against the Company and certain of its senior executive officers.  The OFPRS complaint asserted claims for purported violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 on behalf of those who purchased the Company's securities between April 19, 2013 and June 6, 2014, inclusive, and sought unspecified compensatory damages, costs and expenses, including attorneys’ and experts’ fees, and injunctive relief.
On October 7, 2014, the Alexandria Division issued an order appointing lead counsel and designating The Indiana Public Retirement System, or IPRS, as lead plaintiff.  On November 6, 2014, the IPRS filed an amended complaint and on December 8, 2014, the Company moved to dismiss IPRS’s amended complaint.  On December 22, 2014, IPRS filed its opposition to the Company's motion to dismiss.  On December 29, 2014, the Company filed a reply brief to the IPRS opposition.  The Alexandria Division heard oral arguments on the motions on January 22, 2015 and on January 27, 2015, and issued an order granting the Company's motion to dismiss IPRS’s amended complaint with prejudice.  On February 25, 2015, counsel for IPRS filed a notice of appeal. At this stage, the Company is unable to quantify the impact of these claims on its future consolidated financial position or results of operations.

14
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


10.
SUPPLEMENTAL GUARANTOR INFORMATION
The following schedules present condensed consolidating financial information of the Company as of December 31, 2014 and March 31, 2015 and for the three months ended March 31, 2014 and 2015 for (a) Neustar, Inc., the parent company; (b) certain of the Company's 100% owned domestic subsidiaries (collectively, the Subsidiary Guarantors); and (c) certain wholly-owned domestic and foreign subsidiaries of the Company (collectively, the Non-Guarantor Subsidiaries). Investments in subsidiaries are accounted for using the equity method; accordingly, entries necessary to consolidate the parent company and all of the guarantor and non-guarantor subsidiaries are reflected in the eliminations column. Intercompany amounts that will not be settled between entities are treated as contributions or distributions for purposes of these consolidated financial statements. The guarantees are full and unconditional and joint and several. A Subsidiary Guarantor will be released from its obligations under the Senior Notes when: (a) the Subsidiary Guarantor is sold or sells substantially all of its assets; (b) the Subsidiary Guarantor is designated as an unrestricted subsidiary as defined by the Senior Notes; (c) the Subsidiary Guarantor’s guarantee of indebtedness under the Senior Notes is released (other than discharge through repayment); or (d) the requirements for legal or covenant defeasance or discharge of the indenture have been satisfied.

15
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2014
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
297,565

 
$
19,606

 
$
9,406

 
$
—

 
$
326,577

Restricted cash
1,260

 
931

 
—

 
—

 
2,191

Accounts receivable, net
93,519

 
59,868

 
1,699

 
—

 
155,086

Unbilled receivables
3,115

 
9,652

 
317

 
—

 
13,084

Prepaid expenses and other current assets
20,322

 
3,526

 
544

 
—

 
24,392

Deferred costs
4,798

 
2,153

 
—

 
—

 
6,951

Income taxes receivable
18,935

 
—

 
7

 
(2,633
)
 
16,309

Deferred income tax assets
3,600

 
6,853

 
—

 
(73
)
 
10,380

Intercompany receivable
24,674

 
—

 
—

 
(24,674
)
 
—

Total current assets
467,788

 
102,589

 
11,973

 
(27,380
)
 
554,970

Property and equipment, net
149,024

 
12,566

 
14

 
—

 
161,604

Goodwill
95,388

 
562,425

 
31,456

 
—

 
689,269

Intangible assets, net
16,836

 
280,962

 
4,824

 
—

 
302,622

Net investments in subsidiaries
841,436

 
—

 
—

 
(841,436
)
 
—

Deferred income tax assets, long-term
—

 
—

 
284

 
(284
)
 
—

Other assets, long-term
29,059

 
1,564

 
20

 
—

 
30,643

Total assets
$
1,599,531

 
$
960,106

 
$
48,571

 
$
(869,100
)
 
$
1,739,108

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
7,025

 
$
1,332

 
$
82

 
$
—

 
$
8,439

Accrued expenses
72,423

 
20,243

 
2,105

 
—

 
94,771

Income taxes payable
—

 
2,633

 
—

 
(2,633
)
 
—

Deferred revenue
29,952

 
42,177

 
1,779

 
—

 
73,908

Notes payable
7,972

 
—

 
—

 
—

 
7,972

Capital lease obligations
3,702

 
—

 
—

 
—

 
3,702

Other liabilities
21,882

 
1,202

 
114

 
(73
)
 
23,125

Intercompany payable
—

 
12,267

 
12,407

 
(24,674
)
 
—

Total current liabilities
142,956

 
79,854

 
16,487

 
(27,380
)
 
211,917

Deferred revenue, long-term
8,592

 
18,425

 
—

 
—

 
27,017

Notes payable, long-term
775,318

 
—

 
—

 
—

 
775,318

Capital lease obligations, long-term
5,579

 
—

 
—

 
—

 
5,579

Deferred income tax liabilities, long-term
3,813

 
47,137

 
—

 
(284
)
 
50,666

Other liabilities, long-term
44,246

 
5,459

 
—

 
—

 
49,705

Total liabilities
980,504

 
150,875

 
16,487

 
(27,664
)
 
1,120,202

Total stockholders’ equity
619,027

 
809,231

 
32,084

 
(841,436
)
 
618,906

Total liabilities and stockholders’ equity
$
1,599,531

 
$
960,106

 
$
48,571

 
$
(869,100
)
 
$
1,739,108


16
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
313,819

 
$
24,201

 
$
9,058

 
$
—

 
$
347,078

Restricted cash
1,260

 
1,283

 
—

 
—

 
2,543

Accounts receivable, net
115,378

 
56,037

 
1,580

 
—

 
172,995

Unbilled receivables
1,751

 
9,474

 
776

 
—

 
12,001

Prepaid expenses and other current assets
29,509

 
3,731

 
531

 
—

 
33,771

Deferred costs
5,424

 
2,194

 
—

 
—

 
7,618

Income taxes receivable
4,239

 
—

 
69

 
(3,780
)
 
528

Deferred income tax assets
7,037

 
8,849

 
—

 
(125
)
 
15,761

Intercompany receivable
22,815

 
—

 
—

 
(22,815
)
 
—

Total current assets
501,232

 
105,769

 
12,014

 
(26,720
)
 
592,295

Property and equipment, net
142,550

 
10,945

 
10

 
—

 
153,505

Goodwill
95,388

 
562,425

 
31,456

 
—

 
689,269

Intangible assets, net
16,065

 
266,296

 
4,543

 
—

 
286,904

Net investments in subsidiaries
842,466

 
—

 
—

 
(842,466
)
 
—

Deferred income tax assets, long-term
—

 
—

 
309

 
(309
)
 
—

Other assets, long-term
32,087

 
1,483

 
7

 
—

 
33,577

Total assets
$
1,629,788

 
$
946,918

 
$
48,339

 
$
(869,495
)
 
$
1,755,550

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
5,248

 
$
709

 
$
348

 
$
—

 
$
6,305

Accrued expenses
59,227

 
13,141

 
1,365

 
—

 
73,733

Income taxes payable
—

 
3,780

 


 
(3,780
)
 
—

Deferred revenue
31,589

 
42,183

 
1,594

 
—

 
75,366

Notes payable
7,972

 
—

 
—

 
—

 
7,972

Capital lease obligations
3,282

 
—

 
—

 
—

 
3,282

Other liabilities
23,222

 
771

 
167

 
(125
)
 
24,035

Intercompany payable
—

 
10,803

 
12,012

 
(22,815
)
 
—

Total current liabilities
130,540

 
71,387

 
15,486

 
(26,720
)
 
190,693

Deferred revenue, long-term
8,587

 
15,700

 
—

 
—

 
24,287

Notes payable, long-term
773,324

 
—

 
—

 
—

 
773,324

Capital lease obligations, long-term
4,990

 
—

 
—

 
—

 
4,990

Deferred income tax liabilities, long-term
27,712

 
45,736

 
—

 
(309
)
 
73,139

Other liabilities, long-term
46,420

 
5,306

 
—

 
—

 
51,726

Total liabilities
991,573

 
138,129

 
15,486

 
(27,029
)
 
1,118,159

Total stockholders’ equity
638,215

 
808,789

 
32,853

 
(842,466
)
 
637,391

Total liabilities and stockholders’ equity
$
1,629,788

 
$
946,918

 
$
48,339

 
$
(869,495
)
 
$
1,755,550



17
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2014
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
162,056

 
$
65,542

 
$
3,488

 
$
(1,189
)
 
$
229,897

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
41,745

 
17,574

 
427

 
(1,135
)
 
58,611

Sales and marketing
37,194

 
11,657

 
1,152

 
(12
)
 
49,991

Research and development
6,409

 
643

 
7

 
—

 
7,059

General and administrative
24,244

 
1,844

 
245

 
(42
)
 
26,291

Depreciation and amortization
11,778

 
15,612

 
250

 
—

 
27,640

Restructuring charges
3,338

 
1,489

 
139

 
—

 
4,966

 
124,708

 
48,819

 
2,220

 
(1,189
)
 
174,558

Income from operations
37,348

 
16,723

 
1,268

 
—

 
55,339

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(6,063
)
 
5

 
61

 
—

 
(5,997
)
Interest income
91

 
1

 
3

 
—

 
95

Income before income taxes and equity income in consolidated subsidiaries
31,376

 
16,729

 
1,332

 
—

 
49,437

Provision for income taxes
10,430

 
7,214

 
110

 
—

 
17,754

Income before equity income in consolidated subsidiaries
20,946

 
9,515

 
1,222

 
—

 
31,683

Equity income in consolidated subsidiaries
10,737

 
775

 
—

 
(11,512
)
 
—

Net income
$
31,683

 
$
10,290

 
$
1,222

 
$
(11,512
)
 
$
31,683

Comprehensive income
$
31,652

 
$
10,291

 
$
1,232

 
$
(11,512
)
 
$
31,663




18
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
175,381

 
$
80,681

 
$
3,910

 
$
(8,584
)
 
$
251,388

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
44,380

 
24,453

 
2,719

 
(7,394
)
 
64,158

Sales and marketing
34,002

 
14,052

 
(181
)
 
(1,139
)
 
46,734

Research and development
5,546

 
905

 
3

 
—

 
6,454

General and administrative
22,034

 
2,490

 
184

 
(51
)
 
24,657

Depreciation and amortization
13,247

 
16,394

 
283

 
—

 
29,924

 
119,209

 
58,294

 
3,008

 
(8,584
)
 
171,927

Income from operations
56,172

 
22,387

 
902

 
—

 
79,461

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(6,798
)
 
22

 
54

 
—

 
(6,722
)
Interest income
220

 
4

 
2

 
—

 
226

Income before income taxes and equity income in consolidated subsidiaries
49,594

 
22,413

 
958

 
—

 
72,965

Provision for income taxes
14,441

 
11,911

 
399

 
—

 
26,751

Income before equity income in consolidated subsidiaries
35,153

 
10,502

 
559

 
—

 
46,214

Equity income in consolidated subsidiaries
11,061

 
480

 
—

 
(11,541
)
 
—

Net income
$
46,214

 
$
10,982

 
$
559

 
$
(11,541
)
 
$
46,214

Comprehensive income
$
46,016

 
$
10,578

 
$
260

 
$
(11,541
)
 
$
45,313








19
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2014
(in thousands)

 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
61,547

 
$
28,126

 
$
(783
)
 
$
(27,999
)
 
$
60,891

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(11,013
)
 
(266
)
 
(305
)
 
—

 
(11,584
)
Business acquired, net of cash acquired
(13,341
)
 
(226
)
 
—

 
—

 
(13,567
)
Net cash used in investing activities
(24,354
)
 
(492
)
 
(305
)
 
—

 
(25,151
)
Financing activities:
 
 
 
 
 
 
 
 
 
Decrease of restricted cash
—

 
70

 
3

 
—

 
73

Proceeds from notes payable
175,000

 
—

 
—

 
—

 
175,000

Payments under notes payable obligations
(2,031
)
 
—

 
—

 
—

 
(2,031
)
Principal repayments on capital lease obligations
(715
)
 
—

 
—

 
—

 
(715
)
Proceeds from issuance of stock
3,337

 
—

 
—

 
—

 
3,337

Tax benefit from equity awards
2,306

 
—

 
5

 
—

 
2,311

Repurchase of restricted stock awards and common stock
(50,499
)
 
—

 
—

 
—

 
(50,499
)
(Distribution to) investment by parent
—

 
(28,437
)
 
438

 
27,999

 
—

Net cash provided by (used in) financing activities
127,398

 
(28,367
)
 
446

 
27,999

 
127,476

Effect of foreign exchange rates on cash and cash equivalents
(84
)
 
1

 
11

 
—

 
(72
)
Net increase (decrease) in cash and cash equivalents
164,507

 
(732
)
 
(631
)
 
—

 
163,144

Cash and cash equivalents at beginning of period
214,959

 
1,075

 
7,275

 
—

 
223,309

Cash and cash equivalents at end of period
$
379,466

 
$
343

 
$
6,644

 
$
—

 
$
386,453




20
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
53,257

 
$
44,353

 
$
(615
)
 
$
(36,448
)
 
$
60,547

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(4,068
)
 
(1,833
)
 
(154
)
 
—

 
(6,055
)
Net cash used in investing activities
(4,068
)
 
(1,833
)
 
(154
)
 
—

 
(6,055
)
Financing activities:
 
 
 
 
 
 
 
 
 
Increase of restricted cash
(1
)
 
(351
)
 
—

 
—

 
(352
)
Payments under notes payable obligations
(2,031
)
 
—

 
—

 
—

 
(2,031
)
Principal repayments on capital lease obligations
(1,691
)
 
—

 
—

 
—

 
(1,691
)
Proceeds from issuance of stock
442

 
—

 
—

 
—

 
442

Tax shortfall from equity awards
(8,695
)
 
—

 
—

 
—

 
(8,695
)
Repurchase of restricted stock awards and common stock
(20,387
)
 
—

 
—

 
—

 
(20,387
)
(Distribution to) investment by parent
—

 
(37,167
)
 
719

 
36,448

 
—

Net cash (used in) provided by financing activities
(32,363
)
 
(37,518
)
 
719

 
36,448

 
(32,714
)
Effect of foreign exchange rates on cash and cash equivalents
(572
)
 
(407
)
 
(298
)
 
—

 
(1,277
)
Net increase (decrease) in cash and cash equivalents
16,254

 
4,595

 
(348
)
 
—

 
20,501

Cash and cash equivalents at beginning of period
297,565

 
19,606

 
9,406

 
—

 
326,577

Cash and cash equivalents at end of period
$
313,819

 
$
24,201

 
$
9,058

 
$
—

 
$
347,078


21
Table of Contents
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2015


11.
SUBSEQUENT EVENT
On April 7, 2015, the Company amended its seven regional contracts with North American Portability Management, LLC (NAPM) to establish a transition arrangement under which the Company will provide Local Number Portability Administrator (LNPA) services at the 2015 annual base fee of $496.1 million.  Under this arrangement, the Company will provide these services until September 30, 2016, after which the contracts will automatically renew for additional one-year terms unless NAPM provides a notice of non-renewal at least 90 days prior to the end of any renewal term.  Once a notice of non-renewal is provided, NAPM must provide the Company with at least 180 days advance notice of its intention to terminate the contracts. Further, under this amendment, the Company will provide certain transition services on a cost-plus basis.

22
Table of Contents


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements, including, without limitation, statements concerning the conditions in our industry, our operations and economic performance, and our business and growth strategy. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Many of these risks are beyond our ability to control or predict. These forward-looking statements are based on estimates and assumptions made by our management that we believe to be reasonable but are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those described in this report, in Part II, “Item 1A. Risk Factors” and in subsequent filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.
Overview
During the first quarter, we expanded our highly competitive solutions in the Information Services and Analytics, or IS&A, market by launching new services and entering into strategic partnerships. We continued to experience strong demand for our DNS Services and we are strategically positioned in the expanding gTLD market.
Revenue increased 9% to $251.4 million as compared to $229.9 million in 2014. This increase in revenue was driven by a 32% increase in Security Services revenue, a 13% increase in Marketing Services revenue, and a 6% increase in NPAC Services revenue. Of note, the 32% increase in Security Services revenue included a 17% contribution from .CO Internet, which we acquired in April 2014. Data Services revenue totaled $48.2 million, comparable to the first quarter of 2014.
On March 26, 2015, the Federal Communications Commission, or FCC, approved a competitor to serve as the next LNPA, or Local Number Portability Administrator.  The FCC Order did not award a contract, but rather, authorized contract negotiations to begin. On April 6, 2015, we filed a Petition for Review asking the U.S. Court of Appeals for the District Columbia Circuit to “hold unlawful, vacate, enjoin, and set aside” the FCC’s Order approving the North American Numbering Counsel’s recommendation. On April 7, 2015, we amended our seven regional contracts with North American Portability Management, LLC, or NAPM, to continue to provide LNPA services for a period of fifteen months ending on September 30, 2016.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements in accordance with U.S. GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenue and expense during a fiscal period. The U.S. Securities and Exchange Commission, or SEC, considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our Board of Directors, and the audit committee has reviewed our related disclosures in this report.
Although we believe that our judgments and estimates are appropriate and reasonable, actual results may differ from those estimates. In addition, while we have used our best estimates based on the facts and circumstances available to us at the time, we reasonably could have used different estimates in the current period. Changes in the accounting estimates we use are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations could be materially affected. See the information in our filings with the SEC from time to time, including Part II, “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, for certain matters that may bear on our results of operations.

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For a discussion of selected critical accounting policies refer to Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2014.
Consolidated Results of Operations
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2015
The following table presents an overview of our results of operations for the three months ended March 31, 2014 and 2015:
 
Three Months Ended March 31,
 
2014
 
2015
 
2014 vs. 2015
 
$
 
$
 
$ Change
 
% Change
 
(unaudited)
(dollars in thousands, except per share data)
Revenue
$
229,897

 
$
251,388

 
$
21,491

 
9.3
 %
Operating expense:
 
 
 
 
 
 
 
Cost of revenue (excludes depreciation and amortization shown separately below)
58,611

 
64,158

 
5,547

 
9.5
 %
Sales and marketing
49,991

 
46,734

 
(3,257
)
 
(6.5
)%
Research and development
7,059

 
6,454

 
(605
)
 
(8.6
)%
General and administrative
26,291

 
24,657

 
(1,634
)
 
(6.2
)%
Depreciation and amortization
27,640

 
29,924

 
2,284

 
8.3
 %
Restructuring charges
4,966

 
—

 
(4,966
)
 
100.0
 %
 
174,558

 
171,927

 
(2,631
)
 
(1.5
)%
Income from operations
55,339

 
79,461

 
24,122

 
43.6
 %
Other (expense) income:
 
 
 
 
 
 
 
Interest and other expense
(5,997
)
 
(6,722
)
 
(725
)
 
12.1
 %
Interest income
95

 
226

 
131

 
137.9
 %
Income before income taxes
49,437

 
72,965

 
23,528

 
47.6
 %
Provision for income taxes
17,754

 
26,751

 
8,997

 
50.7
 %
Net income
$
31,683

 
$
46,214

 
$
14,531

 
45.9
 %
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.83

 
 
 
 
Diluted
$
0.50

 
$
0.81

 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
61,240

 
55,974

 
 
 
 
Diluted
62,753

 
56,849

 
 
 
 

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Revenue
Revenue. Revenue increased $21.5 million driven by strong demand for our Security and Marketing Services and a $7.6 million increase in revenue from NPAC Services. Security Services revenue increased $9.5 million driven by an increase in revenue of $6.1 million from domain name registries and an increase in revenue of $3.4 million driven by demand for our DNS services. In particular, the increase in revenue from domain name registries was driven by the acquisition of .CO Internet, which contributed $5.2 million. Revenue from our Marketing Services increased $4.4 million driven by increased demand for our services that help clients make informed and high impact decisions to promote their products and services. Data Services revenue was comparable to the first quarter of 2014. In particular, revenue from carrier provisioning services decreased $1.3 million driven by lower transactions due to consolidation of the customer base and the completion of a multi-year client project. This decrease was partially offset by an increase in revenue from caller identification services and user authentication and rights management services.
Expense
Cost of revenue. Cost of revenue increased $5.5 million due to an increase of $2.8 million in costs related to our information technology and systems, an increase of $2.3 million in personnel and personnel-related expense, and an increase of $0.5 million in royalty costs. The increase in costs related to our information technology and systems was driven by increased data processing, telecommunications, and maintenance costs.
Sales and marketing. Sales and marketing expense decreased $3.3 million due to a decrease in advertising and marketing costs of $2.8 million and a decrease in general facilities costs of $0.4 million. The decrease in advertising and marketing costs was driven by a decrease of $2.3 million in NPAC-related costs and a decrease of $0.5 million in costs associated with other professional fees.
Research and development. Research and development expense decreased $0.6 million due to a decrease in personnel and personnel-related expense.
General and administrative. General and administrative expense decreased $1.6 million due to a decrease of $1.3 million in personnel and personnel-related expense and a decrease of $1.1 million in professional fees, partially offset by an increase of $0.8 million in maintenance and other administrative costs. The decrease in personnel and personnel-related expense was driven by a decrease of $2.2 million in stock-based compensation expense, partially offset by an increase in other personnel-related costs. Professional fees decreased by $1.1 million driven by a decrease of $1.6 million in professional fees in support of acquisitions, partially offset by an increase of $0.4 million in costs in support of the NPAC selection process.
Depreciation and amortization. Depreciation and amortization expense increased $2.3 million due to an increase of $1.6 million in amortization expense related to acquired intangible assets. In addition, depreciation expense increased $0.6 million related to an increase in capitalized software development costs and build-out of facilities.
Restructuring expense. Restructuring expense decreased $5.0 million. Restructuring charges recorded during the three months ended March 31, 2014 related to our 2014 restructuring program, which was implemented to align our resources to serve our clients more effectively. The plan was complete as of December 31, 2014.
Interest and other expense. Interest and other expense increased $0.7 million due to an increase of $0.4 million in interest expense and an increase of $0.3 million in other expense driven by foreign currency transaction losses.
Interest income. Interest income for the three months ended March 31, 2015 was comparable to the income for the three months ended March 31, 2014.
Provision for income taxes. Our effective tax rate for the three months ended March 31, 2015 increased to 36.7% from 35.9% for the three months ended March 31, 2014 primarily due to the reversal of unrecognized tax benefits in the first quarter of 2014 upon the completion of an IRS audit for the year ended December 31, 2009, offset by an increase in our domestic production activities deduction for the three months ended March 31, 2015. Excluding discrete tax items, our effective tax rate was approximately 38.0% and 36.5% for the three months ended March 31, 2014 and 2015, respectively.
Liquidity and Capital Resources
Our principal source of liquidity is cash provided by operating activities. Our principal uses of cash have been to fund share repurchases, acquisitions, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, share repurchases, capital expenditures and debt service requirements.

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Total cash and cash equivalents were $347.1 million at March 31, 2015, an increase of $20.5 million from $326.6 million at December 31, 2014. This increase in cash and cash equivalents was due to cash provided by operations.
On March 5, 2015, S&P lowered our corporate credit rating due to an increase in perceived NPAC-related business risk. In particular, our corporate credit rating was lowered from BB to BB-, our 2013 Term Facility rating was lowered from BBB- to BB+, and our Senior Notes rating was lowered from BB- to B+. Downgrades in our credit ratings do not accelerate the scheduled maturity dates of our debt, or affect the interest rates charged on any of our debt, our debt covenant requirements, or cause any other operating issue.  We believe this downgrade will not have a significant impact on our operating results; however, if our credit ratings were to be further downgraded, our access to, and cost of, debt financing may be negatively impacted.
We believe that our existing cash and cash equivalents and cash from operations will be sufficient to fund our operations for the next twelve months.
Credit Facilities
On January 22, 2013, we entered into a credit facility that provided for a $325 million senior secured term loan facility, or 2013 Term Facility, and a $200 million senior secured revolving credit facility, or the 2013 Revolving Facility, and together with the 2013 Term Facility, the 2013 Credit Facilities. In addition, we closed an offering of $300 million aggregate principal amount of senior notes, or Senior Notes. For further discussion of this debt, see Note 3 to our Consolidated Financial Statements in Item 1 of Part I of this report.
Discussion of Cash Flows
Cash flows from operations
Net cash provided by operating activities for the three months ended March 31, 2015 was $60.5 million, as compared to $60.9 million for the three months ended March 31, 2014. This $0.3 million decrease in net cash provided by operating activities was the result of an increase in net income of $14.5 million, an increase in non-cash adjustments of $30.2 million and a decrease in net changes in operating assets and liabilities of $45.1 million.
Non-cash adjustments increased $30.2 million, driven by an increase of $19.9 million in deferred income taxes, a net change increase of $11.0 million in tax (benefit) shortfall from equity awards, an increase of $2.3 million in depreciation and amortization expense and an increase of $0.6 million in the provision for doubtful accounts. These total increases of $33.8 million in non-cash adjustments were partially offset by a decrease of $3.5 million in stock-based compensation.
Net changes in operating assets and liabilities decreased $45.1 million primarily due to a decrease of $16.2 million in accounts and unbilled receivables, a decrease of $13.1 million in income taxes, a decrease of $11.0 million in prepaid expenses and other current assets, a decrease of $3.9 million in other assets, a decrease of $3.2 million in deferred revenue, a decrease of $0.8 million in deferred costs, and a decrease of $0.6 million in notes receivable. These total decreases of $48.8 million in net changes in operating assets and liabilities were partially offset by an increase of $3.9 million in accounts payable and accrued expenses.
Cash flows from investing
Net cash used in investing activities for the three months ended March 31, 2015 was $6.1 million, as compared to $25.2 million for three months ended March 31, 2014. This $19.1 million decrease in net cash used in investing activities was due to a decrease of $13.6 million in cash used for acquisitions and a decrease of $5.5 million in cash used for purchases of property and equipment.
Cash flows from financing
Net cash used in financing activities was $32.7 million for the three months ended March 31, 2015, as compared to net cash provided by financing activities of $127.5 million for the three months ended March 31, 2014. This $160.2 million decrease in net cash provided by financing activities was due to a decrease in cash of $175.0 million from borrowings completed in the first quarter of 2014, a net change decrease of $11.0 million in tax benefit (shortfall) from equity awards, a $2.9 million decrease in cash proceeds from the issuance of stock, a decrease of $1.0 million in cash used in principal repayments on capital lease obligations and a decrease of $0.4 million in restricted cash. These total decreases of $190.3 million in net cash used in financing activities were partially offset by a $30.1 million decrease in cash used for share repurchases and for the net down of employee shares.

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Recent Developments
On March 26, 2015, the FCC approved a competitor to serve as the next LNPA. The FCC Order did not award a contract, but rather, authorized contract negotiations to begin. Although we have filed a petition asking the U.S. Court of Appeals for the District of Columbia to set aside the FCC Order, this petition may not be successful.
On April 7, 2015, we amended our seven regional contracts with NAPM to establish a transition arrangement under which we will provide LNPA services at the 2015 annual base fee of $496.1 million.  Under this arrangement, we will provide these services until September 30, 2016, after which the contracts will automatically renew for additional one-year terms unless NAPM provides a notice of non-renewal at least 90 days prior to the end of any renewal term.  Once a notice of non-renewal is provided, NAPM must provide us with at least 180 days advance notice of its intention to terminate the contracts. Further, under this amendment, we will provide certain transition services on a cost-plus basis. We cannot be certain whether the transition arrangement with the NAPM will be extended beyond September 30, 2016. Once the transition arrangement terminates, we will be dependent on our other businesses. Our growth and profitability following the termination will be determined by the success of these businesses.
Recent Accounting Pronouncements
None.
Off-Balance Sheet Arrangements
None.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about our market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Our exposure to market risk has not changed materially since December 31, 2014.
Item 4.
Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of March 31, 2015, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level.
In addition, there were no changes in our internal control over financial reporting that occurred in the first quarter of 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
On July 15, 2014, the Oklahoma Firefighters Pension and Retirement System, or OFPRS, individually and on behalf of all other similarly situated stockholders, filed a putative class action complaint in the United States District Court for the Eastern District of Virginia, Alexandria Division, or the Alexandria Division, against us and certain of our senior executive officers.  The OFPRS complaint asserted claims for purported violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 on behalf of those who purchased our securities between April 19, 2013 and June 6, 2014, inclusive, and sought unspecified compensatory damages, costs and expenses, including attorneys’ and experts’ fees, and injunctive relief.
On October 7, 2014, the Alexandria Division issued an order appointing lead counsel and designating The Indiana Public Retirement System, or IPRS, as lead plaintiff.  On November 6, 2014, the IPRS filed an amended complaint and on December 8, 2014, we moved to dismiss IPRS’s amended complaint.  On December 22, 2014, IPRS filed its opposition to our motion to dismiss.  On December 29, 2014, we filed a reply brief to the IPRS opposition.  The Alexandria Division heard oral arguments on the motions on January 22, 2015 and on January 27, 2015, and issued an order granting our motion to dismiss IPRS’s amended complaint with prejudice.  On February 25, 2015, counsel for IPRS filed a notice of appeal.
On April 6, 2015, we filed a Petition for Review asking the U.S. Court of Appeals for the District Columbia Circuit to “hold unlawful, vacate, enjoin, and set aside” the FCC Order issued on March 26, 2015, approving a recommendation by the NANC for a competitor to serve as the next LNPA. Among other things, we believe the FCC Order violates the notice and comment rulemaking requirements of the Administrative Procedure Act, violates the FCC’s implementing r

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ules by selecting an entity that is not impartial or neutral to serve as the next LNPA and is arbitrary, capricious, an abuse of discretion or otherwise contrary to law.
Item 1A.
Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2014, filed with the SEC on February 13, 2015. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table is a summary of our repurchases of common stock during each of the three months in the quarter ended March 31, 2015:
Month
Total
Number of
Shares
Purchased
(1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)(3)
 
Approximate
Dollar Value of
Shares that May
Yet Be  Purchased
Under the Plans or
Programs (3)
January 1 through January 31, 2015
613,734

 
$
26.76

 
—

 
$
—

February 1 through February 28, 2015
209,289

 
26.57

 
—

 
—

March 1 through March 31, 2015
400,239

 
24.96

 
259,351

 
143,743,706

Total
1,223,262

 
$
26.14

 
259,351

 
$
143,743,706

(1)
The number of shares purchased includes shares of common stock tendered by employees to us to satisfy the employees’ minimum tax withholding obligations arising as a result of the vesting of restricted stock grants under our stock incentive plan. We purchased these shares for their fair market value on the vesting date.
(2)
The difference between the total number of shares purchased and the total number of shares purchased as part of publicly announced plans or programs is 963,911 shares, all of which relate to shares surrendered to us by employees to satisfy the employees’ minimum tax withholding obligations arising as a result of the vesting of restricted stock grants under our incentive stock plans.
(3)
On March 26, 2015, we announced the adoption of a 2015 share repurchase program, which will expire on March 25, 2016. The 2015 program authorizes the repurchase of up to $150 million of Class A common shares.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.
Item 6.
Exhibits
See exhibits listed under the Exhibit Index below.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
NeuStar, Inc.
 
 
 
 
 
Date:
April 29, 2015
 
By:
 
/s/ Paul S. Lalljie
 
 
 
Paul S. Lalljie
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer and Duly Authorized Officer)


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EXHIBIT INDEX
 
Exhibit No.
 
Description
(3.1)
 
Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to Amendment No. 7 to NeuStar's Registration Statement on Form S-1, filed June 28, 2005 (File No. 333-123635).
 
 
(3.2)
 
Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K, filed June 25, 2012.
 
 
 
(10.1)
 
Amendment No. 97, dated April 7, 2015, to the contractor services agreement by and between NeuStar, Inc. and North American Portability Management, L.L.C., incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K, filed April 8, 2015.
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
 
XBRL Instance Document
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation
 
 
101.DEF
 
XBRL Taxonomy Extension Definition
 
 
101.LAB
 
XBRL Taxonomy Extension Label
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation



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