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EX-10.17 - EXHIBIT 10.17 - NEUSTAR INCexhibit1017.htm
EX-31.1 - EXHIBIT 31.1 - NEUSTAR INCexhibit311q12016.htm
EX-31.2 - EXHIBIT 31.2 - NEUSTAR INCexhibit312q12016.htm
EX-32.1 - EXHIBIT 32.1 - NEUSTAR INCexhibit321q12016.htm

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, 2016
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 54,379,265 shares of Class A common stock, $0.001 par value, and 1,864 shares of Class B common stock, $0.001 par value, outstanding at April 25, 2016.



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
 



PART IFINANCIAL INFORMATION
Item 1.
Financial Statements
NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2015
 
March 31,
2016
 
 
 
(unaudited)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
89,097

 
$
69,844

Restricted cash
2,363

 
2,619

Accounts receivable, net of allowance for doubtful accounts of $4,512 and $5,110, respectively
167,593

 
189,010

Unbilled receivables
17,712

 
14,106

Prepaid expenses and other current assets
30,216

 
39,337

Deferred costs
6,676

 
7,637

Income taxes receivable
5,883

 

Total current assets
319,540

 
322,553

Property and equipment, net
147,764

 
143,855

Goodwill
1,186,983

 
1,190,409

Intangible assets, net
529,279

 
507,249

Other assets, long-term
18,681

 
18,229

Total assets
$
2,202,247

 
$
2,182,295

See accompanying notes.


3


NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2015
 
March 31,
2016
 
 
 
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$
28,392


$
19,609

Accrued expenses
134,632


99,312

Deferred revenue
91,006


94,240

Notes payable
131,272


132,749

Capital lease obligations
4,791


4,145

Income taxes payable

 
1,173

Other liabilities
10,875


11,345

Total current liabilities
400,968


362,573

Deferred revenue, long-term
22,998


23,558

Notes payable, long-term
957,509


933,696

Capital lease obligations, long-term
1,831


1,034

Deferred income tax liabilities, long-term
38,701


50,809

Other liabilities, long-term
56,741


58,020

Total liabilities
1,478,748


1,429,690

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, 2015 and March 31, 2016



Class A common stock, par value $0.001; 200,000,000 shares authorized; 80,233,896 and 81,665,485 shares issued; and 53,516,287 and 54,372,752 shares outstanding at December 31, 2015 and March 31, 2016, respectively
80


82

Class B common stock, par value $0.001; 100,000,000 shares authorized; 2,270 and 2,270 shares issued and outstanding at December 31, 2015 and March 31, 2016, respectively



Additional paid-in capital
729,273


738,345

Treasury stock, 26,717,609 and 27,292,733 shares at December 31, 2015 and March 31, 2016, respectively, at cost
(920,439
)

(934,523
)
Accumulated other comprehensive (loss) income
(1,904
)

837

Retained earnings
916,489


947,864

Total stockholders’ equity
723,499


752,605

Total liabilities and stockholders’ equity
$
2,202,247


$
2,182,295

See accompanying notes.

4


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 March 31,
 
2015
 
2016
Revenue
$
251,388

 
$
287,298

Operating expense:
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
64,158

 
91,351

Sales and marketing
46,734

 
55,323

Research and development
6,454

 
7,549

General and administrative
24,657

 
27,518

Depreciation and amortization
29,924

 
38,482

Restructuring charges

 
2,664

 
171,927

 
222,887

Income from operations
79,461

 
64,411

Other (expense) income:
 
 
 
Interest and other expense
(6,722
)
 
(17,111
)
Interest income
226

 
174

Income before income taxes
72,965

 
47,474

Provision for income taxes
26,751

 
16,099

Net income
$
46,214

 
$
31,375

Net income per common share:
 
 
 
Basic
$
0.83

 
$
0.58

Diluted
$
0.81

 
$
0.57

Weighted average common shares outstanding:
 
 
 
Basic
55,974

 
53,953

Diluted
56,849

 
54,940

See accompanying notes.

5


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended 
 March 31,
 
2015
 
2016
Net income
$
46,214

 
$
31,375

Other comprehensive (loss) income, net of tax:
 
 
 
Available for sale investments, net of tax:
 
 
 
Change in net unrealized gains, net of tax
(14
)
 
3,816

Reclassification for gains included in net income, net of tax
(23
)
 
(1,018
)
Net change in unrealized gains on investments, net of tax
(37
)
 
2,798

Foreign currency translation adjustment, net of tax:
 
 
 
Change in foreign currency translation adjustment, net of tax
(873
)
 
(57
)
Reclassification adjustment included in net income, net of tax
239

 

Foreign currency translation adjustment, net of tax
(634
)
 
(57
)
Other comprehensive (loss) income, net of tax
(671
)
 
2,741

Comprehensive income
$
45,543

 
$
34,116

See accompanying notes.

6


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended 
 March 31,
 
2015
 
2016
Operating activities:
 
 
 
Net income
$
46,214

 
$
31,375

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,924

 
38,482

Stock-based compensation
8,230

 
9,876

Amortization of deferred financing costs and original issue discount on debt
842

 
4,545

Tax benefit from equity awards
(34
)
 
(323
)
Deferred income taxes
17,322

 
10,020

Provision for doubtful accounts
2,100

 
1,800

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(20,302
)
 
(23,716
)
Unbilled receivables
1,083

 
3,598

Prepaid expenses and other current assets
(9,379
)
 
(8,179
)
Deferred costs
(484
)
 
(854
)
Income taxes
7,086

 
4,520

Other assets
(3,922
)
 
652

Other liabilities
2,931

 
1,257

Accounts payable and accrued expenses
(28,521
)
 
(44,308
)
Deferred revenue
(1,272
)
 
2,477

Net cash provided by operating activities
51,818

 
31,222

Investing activities:
 
 
 
Purchases of property and equipment
(6,055
)
 
(9,870
)
Net cash used in investing activities
(6,055
)
 
(9,870
)
Financing activities:
 
 
 
Increase in restricted cash
(352
)
 
(256
)
Payments under notes payable obligations
(2,031
)
 
(26,881
)
Principal repayments on capital lease obligations
(1,691
)
 
(1,459
)
Proceeds from issuance of stock
442

 
150

Tax benefit from equity awards
34

 
323

Repurchase of restricted stock awards and common stock
(20,387
)
 
(12,469
)
Net cash used in financing activities
(23,985
)
 
(40,592
)
Effect of foreign exchange rates on cash and cash equivalents
(1,277
)
 
(13
)
Net increase (decrease) in cash and cash equivalents
20,501

 
(19,253
)
Cash and cash equivalents at beginning of period
326,577

 
89,097

Cash and cash equivalents at end of period
$
347,078

 
$
69,844

See accompanying notes.

7

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016



1.
DESCRIPTION OF BUSINESS AND ORGANIZATION
NeuStar, Inc. (the Company or Neustar) offers authoritative, hard-to-replicate data sets and proprietary analytics that provide insights to help clients promote and protect their businesses. The Company’s proprietary, cloud-based platforms and differentiated data sets offer informative, real-time analytics, which enable clients to make actionable, data-driven decisions. The Company provides chief marketing officers a comprehensive suite of services to plan their media spend, identify and locate desired customers, invest effectively in marketing campaigns, deliver relevant offers and measure the performance of these activities. Security professionals use the Company’s solutions to maximize web performance and protect against malicious attacks. The Company enables the exchange of essential operating information across multiple carriers to provision and manage services, assisting clients with fast and accurate order processing and immediate routing of customer inquiries. The Company provides communications service providers in the United States critical infrastructure that enables the dynamic routing of calls and text messages.
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, 2016 are not necessarily indicative of the results that may be expected for the full fiscal year. The consolidated balance sheet as of December 31, 2015 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, 2015 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; identification and valuation of acquired intangible assets; 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.
Reclassifications
Within the consolidated statement of cash flows for the three months ended March 31, 2015, the Company reclassified $8.7 million from cash provided by operating activities to cash used in financing activities related to the exercise of equity awards and presentation of tax benefits to conform with current period presentation.
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

8

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


Level 3. Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
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) and $350 million incremental term loan facility (2015 Incremental Term Facility) using pricing service quotations as quoted by Bloomberg (Level 2) (see Note 5). 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 5). 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 5).
The estimated fair values of the Company’s financial instruments are as follows (in thousands):
 
December 31, 2015
 
March 31, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
2013 Term Facility (including current portion, net of discount)
300,328

 
296,013

 
298,332

 
288,255

2013 Revolving Facility
175,000

 
175,000

 
175,000

 
175,000

2015 Incremental Term Facility (including current portion, net of discount)
337,947

 
341,326

 
315,216

 
318,870

Senior Notes (including current portion)
300,000

 
249,000

 
300,000

 
238,140

Restricted Cash
As of December 31, 2015 and March 31, 2016, cash of $2.4 million and $2.6 million, respectively, was restricted as collateral for certain of the Company’s outstanding letters of credit and for deposits on leased facilities.
Recent Accounting Pronouncements - Effective
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805): Business Combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the standard, with earlier application permitted for financial statements that have not been issued. The Company’s adoption of this ASU did not impact its consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Effective
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that long-term lease arrangements be recognized on the balance sheet. The standard is effective for interim and annual periods beginning after December 31, 2018, and early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this standard, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB decided to defer

9

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


by one year the effective dates of the standard. As a result, the standard will be effective for annual and interim periods beginning after December 15, 2017. Companies may adopt the standard as early as the original effective date (i.e. annual reporting periods beginning after December 15, 2016). Early adoption prior to that date is not permitted. The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period presented. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
3.
ACQUISITIONS
Bombora Acquisition
On July 30, 2015, the Company acquired Bombora Technologies Pty Ltd (Bombora) and expanded the Company’s registry services. As of March 31, 2016, the estimated preliminary purchase price was $87.7 million and subject to the finalization of the fair value of acquired deferred income tax assets and assumed income and non-income based tax liabilities.
MarketShare Acquisition
On December 9, 2015, the Company completed its acquisition of MarketShare Partners, LLC (MarketShare), a marketing analytics technology provider to major brands. The acquisition of MarketShare expanded the Company’s marketing services by creating a complete data-driven solution to Chief Marking Officers as they plan, optimize and allocate their entire marketing budget and resources across all channels. 
The transaction was accounted for under the acquisition method of accounting in accordance with the Business Combination Topic of the FASB ASC. The total preliminary purchase price was $442.4 million, consisting of cash consideration of $429.1 million and non-cash consideration of $13.3 million paid in shares of NeuStar Class A Common Stock, which shares are subject to certain transfer restrictions. During the three months ended March 31, 2016, the Company recorded working capital adjustments of $0.9 million, reducing the preliminary purchase price to $441.5 million. In addition, the Company adjusted its preliminary valuation of acquired assets and assumed liabilities based upon new information that was received pertaining to acquisition date fair values.
The allocation of the preliminary purchase price is pending the finalization of the acquired company’s working capital as of the closing date and the finalization of the fair value of acquired deferred income tax assets and assumed income and non-income based tax liabilities. The following table summarizes the preliminary purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities and reflects the measurement period adjustments recorded during the three months ended March 31, 2016 (in thousands):
Cash and cash equivalents
$
7,504

Accounts receivable
8,954

Prepaids and other assets
6,344

Accounts payable and accrued expenses
(8,857
)
Deferred revenue
(2,062
)
Deferred tax liability
(10,862
)
Net tangible assets acquired
1,021

Customer relationships
30,000

Acquired identified technology
100,000

Goodwill
310,490

Total preliminary purchase price allocation
$
441,511

As of March 31, 2016, of the total goodwill balance of $310.5 million, approximately $201.2 million is expected to be deductible for tax purposes.
Pro Forma Financial Information for the MarketShare Acquisition
The following unaudited pro forma financial information summarizes the Company’s results of operations for the period

10

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


indicated as if the Company’s acquisition of MarketShare had been completed as of the beginning of the earliest period presented. These pro forma amounts (unaudited and in thousands) are not indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of the periods presented and should not be construed as representative of the future consolidated results of operations or financial condition of the combined entity. The pro forma financial information for all periods presented also includes the effect of the related 2015 financing, amortization expense from the acquired intangible assets, adjustments to interest expense and related tax effects.
 
Three Months Ended March 31, 2015
 
Pro forma revenue
$
261,813

 
Pro forma income from operations
$
67,049

 
Pro forma net income
$
40,458

 
Caller Authentication Assets Acquisition
On December 18, 2015, the Company acquired caller authentication assets from Transaction Network Services, Inc., enhancing its position in the caller authentication market that includes subscriber data storage, database management, caller identification and verification services. As of March 31, 2016, the estimated preliminary purchase price was $220.0 million, of which $22.0 million was deposited into escrow to satisfy post-closing indemnification claims. The preliminary purchase price is subject to the finalization of the fair value of acquired deferred income tax assets and assumed non-income based tax liabilities.
4.
GOODWILL
Goodwill
The Company’s goodwill as of December 31, 2015 and March 31, 2016 is as follows (in thousands):
 
December 31,
2015
 
Acquisitions
 
Adjustments (1)
 
Foreign Currency Translation
 
March 31,
2016
Gross goodwill
$
1,280,585

 
$

 
$
(140
)
 
$
3,566

 
$
1,284,011

Accumulated impairments
(93,602
)
 

 

 

 
(93,602
)
Net goodwill
$
1,186,983

 
$

 
$
(140
)

$
3,566

 
$
1,190,409

(1) During the three months ended March 31, 2016, the Company adjusted its preliminary purchase price and preliminary valuation of assets acquired and liabilities assumed in the 2015 acquisitions (see Note 3).

11

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


5.
NOTES PAYABLE
Notes payable consist of the following (in thousands):
 
December 31,
2015
 
March 31,
2016
2013 Term Facility (net of discount)
$
300,328

 
$
298,332

2013 Term Facility deferred financing fees
(1,683
)
 
(1,483
)
2013 Revolving Facility
175,000

 
175,000

2013 Revolving Facility deferred financing fees
(2,162
)
 
(1,900
)
Senior Notes
300,000

 
300,000

Senior Notes deferred financing fees
(11,637
)
 
(11,289
)
2015 Incremental Term Facility (net of discount)
337,947

 
315,216

2015 Incremental Term Facility deferred financing fees
(9,012
)
 
(7,431
)
Total
1,088,781

 
1,066,445

Less: current portion, net of discount
(131,272
)
 
(132,749
)
Long-term portion
$
957,509

 
$
933,696

Credit Facilities and Senior Notes
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). In addition, the Company closed an offering of $300 million aggregate principal amount of senior notes (Senior Notes).
On December 9, 2015, the Company amended its 2013 Credit Facilities to provide for (i) the permissibility of an incremental term facility under the 2013 Credit Agreement (the 2013 Credit Agreement), (ii) the addition of a senior secured leverage financial measurement covenant; (iii) streamlined conditions for the incurrence of an incremental term facility to be used for a permitted acquisition; (iv) a required escrow and prepayment (such prepayment to be for the benefit of the incremental facility lenders) by the Company under certain specified circumstances; and (v) certain tax related changes favorable to the Company to the terms of the 2013 Credit Agreement and related security agreement.
On December 9, 2015, the Company borrowed $350 million under its incremental term facility (the 2015 Incremental Term Facility, and together with the 2013 Term Facility and the 2013 Revolving Facility, the Amended 2013 Credit Facilities). The proceeds of the 2015 Incremental Term Facility were used to consummate the acquisition of MarketShare and to pay related fees and expenses.
The Company may voluntarily prepay the borrowings under the Amended 2013 Credit Facilities at any time in minimum amounts of $1 million or an integral multiple of $500,000 in excess thereof. In April 2016, the Company made a $25 million voluntary principal prepayment towards the outstanding principal balance of its 2013 Term Facility. The Amended 2013 Credit Facilities provide for mandatory prepayments with the net cash proceeds of certain debt issuances, insurance receipts, and dispositions. The Amended 2013 Credit Facilities also contain 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.
As of March 31, 2016, 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.
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.

12

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


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.
6.
STOCKHOLDERS’ EQUITY
As of March 31, 2016, a total of 5,476,534 shares were available for grant or award under the Company’s stock incentive plans and a total of 277,564 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, 2015 and 2016 was $8.2 million and $9.9 million, respectively. As of March 31, 2016, total unrecognized compensation expense was estimated at $53.6 million, which the Company expects to recognize over a weighted average period of approximately 1.5 years. Total unrecognized compensation expense as of March 31, 2016 is estimated based on outstanding non-vested stock options, 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.
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, 2015
1,356,904

 
$
24.70

 
 
 
 
Granted

 

 
 
 
 
Exercised
(112,540
)
 
15.70

 
 
 
 
Forfeited
(38,667
)
 
26.44

 
 
 
 
Outstanding at March 31, 2016
1,205,697

 
$
25.49

 
$
0.9

 
2.8
Exercisable at March 31, 2016
954,360

 
$
25.24

 
$
0.9

 
2.2
The aggregate intrinsic value of options exercised for the three months ended March 31, 2016 was $0.9 million.
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. As of March 31, 2016, the level of achievement of the performance target awards for the 2016 performance year was 100.0% of target.

13

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


The following table summarizes the Company’s non-vested PVRSU activity for the three months ended March 31, 2016:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Non-vested at December 31, 2015
1,366,572

 
$
26.78

 
 
Granted
834,499

 
24.11

 
 
Vested
(882,243
)
 
28.29

 
 
Forfeited
(37,833
)
 
28.70

 
 
Non-vested at March 31, 2016
1,280,995

 
$
23.94

 
$
31.5

The aggregate intrinsic value of PVRSUs vested during the three months ended March 31, 2016 was approximately $21.8 million. The Company repurchased 339,783 shares of common stock for an aggregate purchase price of $8.4 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, 2016:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2015
2,074,120

 
$
30.42

 
 
Granted
1,400

 
20.43

 
 
Vested
(436,806
)
 
33.49

 
 
Forfeited
(49,547
)
 
37.65

 
 
Outstanding at March 31, 2016
1,589,167

 
$
29.35

 
$
39.1

The aggregate intrinsic value of restricted stock units vested during the three months ended March 31, 2016 was approximately $10.6 million. The Company repurchased 167,483 shares of common stock for an aggregate purchase price of $4.1 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.
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, 2016
Dividend yield
%
Expected volatility
33.37
%
Risk-free interest rate
0.23
%
Expected life of employee stock purchase plan options (in months)
6


14

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


7.
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,
 
2015
 
2016
Computation of basic net income per common share:
 
 
 
Net income
$
46,214

 
$
31,375

Weighted average common shares and participating securities outstanding – basic
55,974

 
53,953

Basic net income per common share
$
0.83

 
$
0.58

Computation of diluted net income per common share:
 
 
 
Weighted average common shares outstanding – basic
55,974

 
53,953

Effect of dilutive securities:
 
 
 
Stock-based awards
875

 
987

Weighted average common shares outstanding – diluted
56,849

 
54,940

Diluted net income per common share
$
0.81

 
$
0.57

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 1,894,657 and 1,900,569 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, 2015 and 2016, respectively.
8.
RESTRUCTURING CHARGES
2016 Restructuring
In the first quarter of 2016, the Company recorded restructuring charges of $2.7 million related to estimated severance and severance-related costs and expects to pay this amount in the second quarter of 2016.
9.
INTEREST AND OTHER EXPENSE
Interest and other expense consists of the following (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2016
Interest and other expense:
 
 
 
Interest expense
$
6,460

 
$
16,566

Gain on asset disposals
(169
)
 

Foreign currency transaction loss
431

 
545

Total interest and other expense
$
6,722

 
$
17,111

10.
INCOME TAXES
The Company’s effective tax rate, including discrete items, decreased to 33.9% for the three months ended March 31, 2016 from 36.7% for the three months ended March 31, 2015, primarily due to the Company’s federal research and development credit which was not available in the first quarter of 2015 and the reversal of certain of the Company's unrecognized tax benefits in the first quarter of 2016 upon the completion of an Internal Revenue Service (IRS) audit for Neustar Information Services, Inc. (formerly TARGUSInformation Corporation), a subsidiary of the Company, for the year ended December 31, 2010.

15

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


As of December 31, 2015 and March 31, 2016, the Company had unrecognized tax benefits of $7.5 million and $7.5 million, respectively, of which $6.9 million and $6.9 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, 2015 and 2016, potential interest and penalties were insignificant. Interest and penalties are primarily due to uncertain tax positions assumed in acquisitions. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
The Company files income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. The tax years 2009 through 2014 remain open to examination by the major taxing jurisdictions to which the Company is subject. During the first quarter of 2016, the IRS completed an examination of the 2010 federal income tax return of Neustar Information Services, Inc. No adjustments were made as a result of the audit.
The Company anticipates that total unrecognized tax benefits will decrease by approximately $1.4 million over the next 12 months due to the expiration of certain statutes of limitations and settlement of tax audits.
11.
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.
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, 2015 and 2016, and geographic property and equipment as of December 31, 2015 and March 31, 2016 are as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2016
Revenue by geographical areas:
 
 
 
United States
$
235,554

 
$
264,692

International
15,834

 
22,606

Total revenue
$
251,388

 
$
287,298

 
 
 
 
Revenue by service:
 
 
 
Marketing Services
$
37,227

 
$
57,671

Security Services
39,642

 
48,647

Data Services
48,158

 
53,156

NPAC Services
126,361

 
127,824

Total revenue
$
251,388

 
$
287,298

 
December 31,
2015
 
March 31,
2016
Property and equipment, net
 
 
 
United States
$
145,077

 
$
141,407

Australia
2,171

 
1,942

Other
516

 
506

Total property and equipment, net
$
147,764

 
$
143,855


16

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


12.
SUPPLEMENTAL GUARANTOR INFORMATION
The following schedules present condensed consolidating financial information of the Company as of December 31, 2015 and March 31, 2016 and for the three months ended March 31, 2015 and 2016 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 condensed 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.

17

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
48,061

 
$
27,092

 
$
13,944

 
$

 
$
89,097

Restricted cash
1,260

 
1,103

 

 

 
2,363

Accounts receivable, net
91,899

 
71,062

 
4,632

 

 
167,593

Unbilled receivables
2,357

 
14,694

 
661

 

 
17,712

Prepaid expenses and other current assets
23,080

 
8,551

 
1,868

 
(3,283
)
 
30,216

Deferred costs
1,119

 
2,876

 
2,681

 

 
6,676

Income taxes receivable
10,661

 

 

 
(4,778
)
 
5,883

Intercompany receivable
26,030

 

 

 
(26,030
)
 

Total current assets
204,467

 
125,378

 
23,786

 
(34,091
)
 
319,540

Property and equipment, net
135,445

 
9,302

 
3,017

 

 
147,764

Goodwill
94,153

 
984,017

 
108,813

 

 
1,186,983

Intangible assets, net
13,751

 
462,848

 
52,680

 

 
529,279

Net investments in subsidiaries
1,545,227

 

 

 
(1,545,227
)
 

Other assets, long-term
16,071

 
1,283

 
2,635

 
(1,308
)
 
18,681

Total assets
$
2,009,114

 
$
1,582,828

 
$
190,931

 
$
(1,580,626
)
 
$
2,202,247

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
18,945

 
$
7,522

 
$
1,925

 
$

 
$
28,392

Accrued expenses
98,761

 
29,262

 
6,609

 

 
134,632

Income taxes payable

 
3,068

 
1,496

 
(4,564
)
 

Deferred revenue
24,929

 
46,153

 
19,924

 

 
91,006

Notes payable
131,272

 

 
3,283

 
(3,283
)
 
131,272

Capital lease obligations
3,927

 

 
864

 

 
4,791

Other liabilities
9,937

 
279

 
659

 

 
10,875

Intercompany payable

 
18,199

 
7,831

 
(26,030
)
 

Total current liabilities
287,771

 
104,483

 
42,591

 
(33,877
)
 
400,968

Deferred revenue, long-term
8,239

 
9,734

 
5,025

 

 
22,998

Notes payable, long-term
957,509

 

 

 

 
957,509

Capital lease obligations, long-term
1,825

 

 
6

 

 
1,831

Deferred income tax liabilities, long-term

 
42,865

 
7,658

 
(11,822
)
 
38,701

Other liabilities, long-term
41,978

 
8,652

 
6,111

 

 
56,741

Total liabilities
1,297,322

 
165,734

 
61,391

 
(45,699
)
 
1,478,748

Total stockholders’ equity
711,792

 
1,417,094

 
129,540

 
(1,534,927
)
 
723,499

Total liabilities and stockholders’ equity
$
2,009,114

 
$
1,582,828

 
$
190,931

 
$
(1,580,626
)
 
$
2,202,247


18

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2016
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
30,363

 
$
31,706

 
$
7,775

 
$

 
$
69,844

Restricted cash
1,260

 
1,359

 

 

 
2,619

Accounts receivable, net
101,728

 
81,287

 
5,995

 

 
189,010

Unbilled receivables
1,491

 
12,161

 
454

 

 
14,106

Prepaid expenses and other current assets
29,992

 
6,952

 
2,393

 

 
39,337

Deferred costs
1,297

 
3,374

 
2,966

 

 
7,637

Income taxes receivable
4,909

 

 

 
(4,909
)
 

Intercompany receivable
24,250

 
3,091

 

 
(27,341
)
 

Total current assets
195,290

 
139,930

 
19,583

 
(32,250
)
 
322,553

Property and equipment, net
131,946

 
9,181

 
2,728

 

 
143,855

Goodwill
94,153

 
983,979

 
112,277

 

 
1,190,409

Intangible assets, net
12,979

 
441,202

 
53,068

 

 
507,249

Net investments in subsidiaries
1,531,805

 

 

 
(1,531,805
)
 

Other assets, long-term
14,042

 
1,271

 
2,916

 

 
18,229

Total assets
$
1,980,215

 
$
1,575,563

 
$
190,572

 
$
(1,564,055
)
 
$
2,182,295

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
8,361

 
$
9,219

 
$
2,029

 
$

 
$
19,609

Accrued expenses
65,056

 
27,811

 
6,445

 

 
99,312

Deferred revenue
25,130

 
47,439

 
21,671

 

 
94,240

Notes payable
132,749

 

 
3,091

 
(3,091
)
 
132,749

Capital lease obligations
3,665

 

 
480

 

 
4,145

Income taxes payable

 
4,966

 
1,116

 
(4,909
)
 
1,173

Other liabilities
9,085

 
1,439

 
821

 

 
11,345

Intercompany payable

 
20,656

 
3,593

 
(24,249
)
 

Total current liabilities
244,046

 
111,530

 
39,246

 
(32,249
)
 
362,573

Deferred revenue, long-term
8,407

 
9,358

 
5,793

 

 
23,558

Notes payable, long-term
933,696

 

 

 

 
933,696

Capital lease obligations, long-term
1,034

 

 

 

 
1,034

Deferred income tax liabilities, long-term
16,946

 
37,192

 
6,976

 
(10,305
)
 
50,809

Other liabilities, long-term
43,228

 
8,245

 
6,547

 

 
58,020

Total liabilities
1,247,357

 
166,325

 
58,562

 
(42,554
)
 
1,429,690

Total stockholders’ equity
732,858

 
1,409,238

 
132,010

 
(1,521,501
)
 
752,605

Total liabilities and stockholders’ equity
$
1,980,215

 
$
1,575,563

 
$
190,572

 
$
(1,564,055
)
 
$
2,182,295



19

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


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

 
$
10,808

 
$
260

 
$
(11,541
)
 
$
45,543




20

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2016
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
166,939

 
$
118,407

 
$
12,560

 
$
(10,608
)
 
$
287,298

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
41,676

 
50,927

 
7,277

 
(8,529
)
 
91,351

Sales and marketing
30,813

 
22,535

 
3,179

 
(1,204
)
 
55,323

Research and development
5,471

 
1,623

 
455

 

 
7,549

General and administrative
22,334

 
5,872

 
187

 
(875
)
 
27,518

Depreciation and amortization
13,324

 
22,796

 
2,362

 

 
38,482

Restructuring charges
2,664

 

 

 

 
2,664

 
116,282

 
103,753

 
13,460

 
(10,608
)
 
222,887

Income (loss) from operations
50,657

 
14,654

 
(900
)
 

 
64,411

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(16,280
)
 
(154
)
 
(677
)
 

 
(17,111
)
Interest income
113

 
70

 
(9
)
 

 
174

Income (loss) before income taxes and equity income in consolidated subsidiaries
34,490

 
14,570

 
(1,586
)
 

 
47,474

Provision (benefit) for income taxes
11,611

 
5,212

 
(724
)
 

 
16,099

Income (loss) before equity income in consolidated subsidiaries
22,879

 
9,358

 
(862
)
 

 
31,375

Equity income in consolidated subsidiaries
8,496

 
147

 

 
(8,643
)
 

Net income (loss)
$
31,375

 
$
9,505

 
$
(862
)
 
$
(8,643
)
 
$
31,375

Comprehensive income
$
29,517

 
$
9,495

 
$
3,747

 
$
(8,643
)
 
$
34,116






21

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


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
$
44,528

 
$
44,353

 
$
(615
)
 
$
(36,448
)
 
$
51,818

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 benefit from equity awards
34

 

 

 

 
34

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
(23,634
)
 
(37,518
)
 
719

 
36,448

 
(23,985
)
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



22

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2016


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2016
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
29,576

 
$
49,676

 
$
(5,616
)
 
$
(42,414
)
 
$
31,222

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(8,037
)
 
(1,833
)
 

 

 
(9,870
)
Net cash used in investing activities
(8,037
)
 
(1,833
)
 

 

 
(9,870
)
Financing activities:
 
 
 
 
 
 
 
 
 
Increase of restricted cash

 
(256
)
 

 

 
(256
)
Payments under notes payable obligations
(26,881
)
 

 

 

 
(26,881
)
Principal repayments on capital lease obligations
(1,459
)
 

 

 

 
(1,459
)
Proceeds from issuance of stock
150

 

 

 

 
150

Tax shortfall from equity awards
323

 

 

 

 
323

Repurchase of restricted stock awards and common stock
(12,469
)
 

 

 

 
(12,469
)
(Distribution to) investment by parent

 
(42,962
)
 
548

 
42,414

 

Net cash (used in) provided by financing activities
(40,336
)
 
(43,218
)
 
548

 
42,414

 
(40,592
)
Effect of foreign exchange rates on cash and cash equivalents
1,099

 
(11
)
 
(1,101
)
 

 
(13
)
Net (decrease) increase in cash and cash equivalents
(17,698
)
 
4,614

 
(6,169
)
 

 
(19,253
)
Cash and cash equivalents at beginning of period
48,061

 
27,092

 
13,944

 

 
89,097

Cash and cash equivalents at end of period
$
30,363

 
$
31,706

 
$
7,775

 
$

 
$
69,844



23


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 by integrating the acquisitions from 2015 and entering into marketing services strategic partnerships. We continued to see an increase in the use of generic top-level domains, or gTLDs, while steadily growing our DNS services.
During the first quarter, revenue increased 14% to $287.3 million as compared to $251.4 million in 2015. This increase in revenue was driven by a 55% increase in Marketing Services revenue to $57.7 million as compared to $37.2 million, a 23% increase in Security Services revenue to $48.6 million as compared to $39.6 million, a 10% increase in Data Services revenue to $53.2 million as compared to $48.2 million, and a 1% increase in NPAC Services revenue to $127.8 million as compared to $126.4 million.
On March 26, 2015, the Federal Communications Commission, or FCC, approved a competitor to serve as the next Local, Number Portability Administrator, or LNPA, and authorized the North American Portability Management LLC, or NAPM, to begin contract negotiations with that competitor.  On April 6, 2015, we filed a Petition for Review asking the U.S. Court of Appeals for the District of Columbia Circuit to “hold unlawful, vacate, enjoin, and set aside” the FCC’s Order approving the North American Numbering Counsel’s recommendation. On June 19, 2015, the Court of Appeals granted the requests made by third-party petitioners to intervene in the case.  On July 21, 2015, the Court of Appeals dismissed the FCC’s motion to hold the case in abeyance pending further FCC action and ruled that the issues raised in the FCC’s motion to dismiss should be addressed in the parties’ briefs on the merits.  We filed our initial brief on September 21, 2015; the briefing schedule concluded on December 17, 2015. A date has not been set for oral arguments, but we expect that they will take place in 2016.
On April 7, 2015, we amended our seven regional contracts with the NAPM. Under this amendment, we will provide LNPA services for an annual fixed fee of $496.1 million until the termination of these contracts. The contracts will automatically renew on July 3, 2016 for additional one-year terms commencing as of October 1, 2016, unless NAPM provides a notice of non-renewal at least 90 days prior to the end of the then-current term.  Once a notice of non-renewal is provided, NAPM must also provide us with at least 180-days advance notice of its intention to terminate these contracts. We cannot be certain how long we will provide LNPA services. In addition to LNPA services, we are providing certain transition services on a cost-plus basis. On April 20, 2016, the NAPM Transition Oversight Manager published a presentation containing a preliminary overall transition timeline for LNPA services. This preliminary timeline showed the transition period extending through the third quarter of 2017.
Prior to this amendment, we provided LNPA services under our contracts with NAPM for a fixed fee with a 6.5% annual price escalator. These contracts were due to expire on June 30, 2015. The 2015 LNPA service fixed fee under the prior contract terms represents the impact of a 6.5% annual escalator on the 2014 LNPA service fixed fee of $465.8 million, resulting in a 2015 LNPA service fixed fee of $496.1 million. Under the April 7, 2015 amendment, the annual LNPA service fixed fee remains the same at $496.1 million for the duration of the amended term of the contracts. As a result, the amendment will not have an impact on our revenue growth rate for the year ended December 31, 2016.
Loss of the NPAC contracts will have a material adverse impact on our future operating results when compared to our current financial profile.  We expect to lose approximately $500 million of annual revenue and this loss will adversely impact our income from operations and operating margin.  Additionally, this loss may have a disproportionate material negative impact

24


on our operating margin because of the largely fixed and shared cost structure that is designed to support all of our services.  As a result of the uncertain contract end date and due to our cost structure, which is organized by function, we are currently analyzing the impact of the termination of the contracts on our income from operations in an effort to quantify such impacts.  Our disclosure will expand as we evaluate the cost structure that will be in place to support our ongoing business or as we learn more about the timing of the NPAC contract termination.
Given the transition timeline published on April 20, 2016, we determined that the structure of our organization is appropriate at this time.
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, 2016, for certain matters that may bear on our results of operations.
For a discussion of selected critical accounting policies refer to our critical accounting policies described in 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, 2015.

25


Consolidated Results of Operations
Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2016
The following table presents an overview of our results of operations for the three months ended March 31, 2015 and 2016:
 
Three Months Ended March 31,
 
2015
 
2016
 
2015 vs. 2016
 
$
 
$
 
$ Change
 
% Change
 
(unaudited)
(dollars in thousands, except per share data)
Revenue
$
251,388

 
$
287,298

 
$
35,910

 
14.3
 %
Operating expense:
 
 
 
 
 
 
 
Cost of revenue (excludes depreciation and amortization shown separately below)
64,158

 
91,351

 
27,193

 
42.4
 %
Sales and marketing
46,734

 
55,323

 
8,589

 
18.4
 %