Form 10-Q NEUSTAR INC For: Jun 30

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July 30, 2015 4:21 PM EDT

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 June 30, 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 54,398,748 shares of Class A common stock, $0.001 par value, and 2,270 shares of Class B common stock, $0.001 par value, outstanding at July 27, 2015.


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 I – FINANCIAL INFORMATION
Item 1.
Financial Statements
NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2014
 
June 30,
2015
 
 
 
(unaudited)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
326,577

 
$
411,975

Restricted cash
2,191

 
2,531

Accounts receivable, net of allowance for doubtful accounts of $3,154 and $3,501, respectively
155,086

 
162,847

Unbilled receivables
13,084

 
13,498

Prepaid expenses and other current assets
24,392

 
31,187

Deferred costs
6,951

 
7,758

Income taxes receivable
15,956

 
—

Deferred income tax assets
10,380

 
16,513

Total current assets
554,617

 
646,309

Property and equipment, net
161,604

 
147,611

Goodwill
692,269

 
691,033

Intangible assets, net
302,622

 
271,187

Other assets, long-term
30,996

 
32,491

Total assets
$
1,742,108

 
$
1,788,631

See accompanying notes.


3

NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2014
 
June 30,
2015
 
 
 
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$
8,439


$
6,455

Accrued expenses
94,771


89,073

Income taxes payable
—

 
4,847

Deferred revenue
73,908


74,244

Notes payable
7,972


7,972

Capital lease obligations
3,702


4,175

Other liabilities
23,125


24,116

Total current liabilities
211,917


210,882

Deferred revenue, long-term
27,017


21,872

Notes payable, long-term
775,318


771,331

Capital lease obligations, long-term
5,579


3,928

Deferred income tax liabilities, long-term
49,111


60,372

Other liabilities, long-term
53,683


61,200

Total liabilities
1,122,625


1,129,585

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 June 30, 2015
—


—

Class A common stock, par value $0.001; 200,000,000 shares authorized; 80,917,293 and 81,577,247 shares issued; and 55,080,441 and 54,827,260 shares outstanding at December 31, 2014 and June 30, 2015, respectively
81


82

Class B common stock, par value $0.001; 100,000,000 shares authorized; 3,082 and 2,270 shares issued and outstanding at December 31, 2014 and June 30, 2015, respectively
—


—

Additional paid-in capital
674,385


690,433

Treasury stock, 25,836,852 and 26,749,987 shares at December 31, 2014 and June 30, 2015, respectively, at cost
(898,520
)

(921,328
)
Accumulated other comprehensive loss
(1,645
)

(2,352
)
Retained earnings
845,182


892,211

Total stockholders’ equity
619,483


659,046

Total liabilities and stockholders’ equity
$
1,742,108


$
1,788,631

See accompanying notes.

4

NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2015
 
2014
 
2015
Revenue
$
237,457

 
$
256,767

 
$
467,354

 
$
508,155

Operating expense:
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
60,844

 
67,551

 
119,455

 
131,709

Sales and marketing
48,637

 
50,942

 
98,628

 
97,676

Research and development
6,932

 
5,997

 
13,991

 
12,451

General and administrative
26,008

 
24,729

 
52,299

 
49,386

Depreciation and amortization
30,086

 
29,438

 
57,726

 
59,362

Restructuring charges
200

 
—

 
5,166

 
—

 
172,707

 
178,657

 
347,265

 
350,584

Income from operations
64,750

 
78,110

 
120,089

 
157,571

Other (expense) income:
 
 
 
 
 
 
 
Interest and other expense
(7,270
)
 
(6,481
)
 
(13,267
)
 
(13,203
)
Interest income
163

 
69

 
258

 
295

Income before income taxes
57,643

 
71,698

 
107,080

 
144,663

Provision for income taxes
20,796

 
26,640

 
38,550

 
53,391

Net income
$
36,847

 
$
45,058

 
$
68,530

 
$
91,272

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.62

 
$
0.81

 
$
1.14

 
$
1.64

Diluted
$
0.61

 
$
0.80

 
$
1.11

 
$
1.61

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
58,973

 
55,377

 
60,100

 
55,676

Diluted
60,388

 
56,238

 
61,539

 
56,563

See accompanying notes.

5

NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2015
 
2014
 
2015
Net income
$
36,847

 
$
45,058

 
$
68,530

 
$
91,272

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Available for sale investments, net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains, net of tax of $(29), $(11), $(19) and $(20), respectively
46

 
(17
)
 
99

 
(31
)
Reclassification for gains included in net income, net of tax of $0, $0, $12 and $(15), respectively
—

 
—

 
(19
)
 
(23
)
Net change in unrealized gains on investments, net of tax
46

 
(17
)
 
80

 
(54
)
Foreign currency translation adjustment, net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax of $87, $(353), $163 and $(628), respectively
(151
)
 
(194
)
 
(205
)
 
(1,067
)
Reclassification adjustment included in net income, net of tax of $0, $112, $0 and $266, respectively
—

 
175

 
—

 
414

Foreign currency translation adjustment, net of tax
(151
)
 
(19
)
 
(205
)
 
(653
)
Other comprehensive loss, net of tax
(105
)
 
(36
)
 
(125
)
 
(707
)
Comprehensive income
$
36,742

 
$
45,022

 
$
68,405

 
$
90,565

See accompanying notes.

6

NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended 
 June 30,
 
2014
 
2015
Operating activities:
 
 
 
Net income
$
68,530

 
$
91,272

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
57,726

 
59,362

Stock-based compensation
27,285

 
17,697

Amortization of deferred financing costs and original issue discount on debt
1,671

 
1,696

Tax (benefit) shortfall from equity awards
(2,194
)
 
8,809

Deferred income taxes
(20,361
)
 
4,618

Provision for doubtful accounts
3,113

 
3,900

Loss (gain) on disposal of assets
1,057

 
(626
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(1,722
)
 
(12,237
)
Unbilled receivables
1,950

 
(414
)
Notes receivable
1,008

 
—

Prepaid expenses and other current assets
1,330

 
(5,384
)
Deferred costs
1,463

 
(736
)
Income taxes
17,843

 
11,994

Other assets
(279
)
 
(2,281
)
Other liabilities
4,126

 
7,018

Accounts payable and accrued expenses
(25,225
)
 
(6,259
)
Deferred revenue
(718
)
 
(4,477
)
Net cash provided by operating activities
136,603

 
173,952

Investing activities:
 
 
 
Purchases of property and equipment
(25,671
)
 
(13,395
)
Business acquired, net of cash acquired
(120,371
)
 
—

Net cash used in investing activities
(146,042
)
 
(13,395
)
Financing activities:
 
 
 
Decrease (increase) in restricted cash
72

 
(340
)
Proceeds from notes payable
175,000

 
—

Payments under notes payable obligations
(4,062
)
 
(4,062
)
Principal repayments on capital lease obligations
(1,544
)
 
(1,862
)
Proceeds from issuance of stock
6,156

 
5,373

Tax benefit (shortfall) from equity awards
2,194

 
(8,809
)
Repurchase of restricted stock awards and common stock
(145,826
)
 
(64,932
)
Net cash provided by (used in) financing activities
31,990

 
(74,632
)
Effect of foreign exchange rates on cash and cash equivalents
(8
)
 
(527
)
Net increase in cash and cash equivalents
22,543

 
85,398

Cash and cash equivalents at beginning of period
223,309

 
326,577

Cash and cash equivalents at end of period
$
245,852

 
$
411,975

See accompanying notes.

7
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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. 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 six months ended June 30, 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.
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

8
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


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 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, 2014
 
June 30, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Cash and cash equivalents
$
326,577

 
$
326,577

 
$
411,975

 
$
411,975

Restricted cash (current assets)
2,191

 
2,191

 
2,531

 
2,531

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

 
289,794

 
304,303

 
287,187

2013 Revolving Facility
175,000

 
175,000

 
175,000

 
175,000

Senior Notes (including current portion)
300,000

 
255,750

 
300,000

 
269,424

Restricted Cash
As of December 31, 2014 and June 30, 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (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 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.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The guidance is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Adoption prior to that date is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-03 on the Company’s consolidated financial statements will result in a balance sheet reclassification of net deferred financing costs related to our 2013 Credit Facilities (see Note 5). As of June 30, 2015, the Company’s deferred financing costs related to its 2013 Credit Facilities were $17.6 million.
3.
ACQUISITION
On April 14, 2014, the Company acquired .CO Internet S.A.S (.CO Internet) and certain associated assets. .CO Internet is the exclusive operator of the worldwide registry for Internet addresses with the “.co” top-level domain. This acquisition expanded the Company’s registry services, which includes the .biz and .us top-level domains. As of December 31, 2014, the preliminary purchase was $115.1 million and the goodwill balance was $36.6 million. The allocation of the purchase price was preliminary pending the finalization of acquired deferred income tax assets and assumed income and non-income-based tax liabilities. During the six months ended June 30, 2015, the Company adjusted its preliminary valuation of its acquired deferred tax assets and assumed income tax liabilities. As of June 30, 2015, the adjusted purchase price was $118.1 million and the adjusted goodwill balance was $39.6 million.  The consolidated balance sheet as of December 31, 2014 has been retrospectively adjusted to include the effect of the measurement period adjustments.

9
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


4.
GOODWILL
Goodwill
The Company’s goodwill as of December 31, 2014 and June 30, 2015 is as follows (in thousands):
 
December 31,
2014 (1)
 
Adjustments (2)
 
Disposals (3)
 
June 30,
2015
Gross goodwill
$
782,871

 
$
3,000

 
$
(1,236
)
 
$
784,635

Accumulated impairments
(93,602
)
 
—

 
—

 
(93,602
)
Net goodwill
$
689,269

 
$
3,000


$
(1,236
)
 
$
691,033

(1) Balance as originally reported at December 31, 2014, prior to the reflection of measurement period adjustments.
(2) During the six months ended June 30, 2015, the Company adjusted its preliminary valuation of acquired deferred tax assets and assumed income and non-income based tax liabilities related to its acquisition of .CO Internet (see Note 3).
(3) Reflects the goodwill associated with the Company’s sale of certain Data Services assets and liabilities used to deliver lawful intercept services.
5.
NOTES PAYABLE
Notes payable consist of the following (in thousands):
 
December 31,
2014
 
June 30,
2015
2013 Term Facility (net of discount)
$
308,290

 
$
304,303

2013 Revolving Facility
175,000

 
175,000

Senior Notes
300,000

 
300,000

Total
783,290

 
779,303

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

 
$
771,331


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 June 30, 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.
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

10
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


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 June 30, 2015, a total of 1,554,382 shares were available for grant or award under the Company’s stock incentive plans and a total of 336,100 shares were available to be issued under the Company’s Employee Stock Purchase Plan (ESPP). On May 27, 2015, at the Company’s annual meeting of stockholders, the Company’s stockholders approved a proposal to make an additional 3,000,000 shares available for grant under the Company’s stock incentive plans.
Stock-based compensation expense recognized for the three months ended June 30, 2014 and 2015 was $15.6 million and $9.5 million, respectively, and $27.3 million and $17.7 million for the six months ended June 30, 2014 and 2015, respectively. As of June 30, 2015, total unrecognized compensation expense was estimated at $50.8 million, which the Company expects to recognize over a weighted average period of approximately 1.4 years. Total unrecognized compensation expense as of June 30, 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
(370,664
)
 
25.33

 
 
 
 
Forfeited
(102,046
)
 
30.31

 
 
 
 
Outstanding at June 30, 2015
1,571,195

 
$
24.88

 
$
7.1

 
3.4
Exercisable at June 30, 2015
1,058,397

 
$
24.05

 
$
5.5

 
2.2
The aggregate intrinsic value of options exercised for the six months ended June 30, 2015 was $0.7 million.

11
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


Restricted Stock Awards
The following table summarizes the Company’s non-vested restricted stock activity for the six months ended June 30, 2015:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2014
39,194

 
$
27.21

 
 
Granted
—

 
—

 
 
Vested
(32,494
)
 
26.46

 
 
Forfeited
(3,175
)
 
30.61

 
 
Outstanding at June 30, 2015
3,525

 
$
31.05

 
$
0.1

The total aggregate intrinsic value of restricted stock vested during the six months ended June 30, 2015 was $0.9 million. During the six months ended June 30, 2015, the Company repurchased 12,595 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. In the second quarter of 2015, the Company revised its estimate of the level of achievement of the performance target for the 2015 performance year to greater than 100.0% of target, resulting in an increase in stock-based compensation expense of approximately $0.8 million. The Company’s consolidated net income for the three and six months ended June 30, 2015 was $45.1 million and $91.3 million, respectively, and diluted net income per common share was $0.80 and $1.61 per share, respectively. If the Company had continued to use the previous estimate of achievement of 100%, the as adjusted net income for the three and six months ended June 30, 2015 would have been approximately $45.6 million and $91.8 million, respectively, and the as adjusted diluted net income per common share would have been approximately $0.81 and $1.62 per share, respectively.
The following table summarizes the Company’s non-vested PVRSU activity for the six months ended June 30, 2015:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Non-vested at December 31, 2014
1,810,952

 
$
37.76

 
 
Granted
921,912

 
27.12

 
 
Vested
(1,718,280
)
 
37.37

 
 
Forfeited
(95,020
)
 
30.01

 
 
Non-vested at June 30, 2015
919,564

 
$
28.62

 
$
26.9

The total aggregate intrinsic value of PVRSUs vested during the six months ended June 30, 2015 was approximately $45.8 million. The Company repurchased 683,127 shares of common stock for an aggregate purchase price of $18.2 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.

12
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


Restricted Stock Units
The following table summarizes the Company’s restricted stock units activity for the six months ended June 30, 2015:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2014
1,071,814

 
$
39.60

 
 
Granted
1,009,142

 
27.40

 
 
Vested
(203,067
)
 
41.87

 
 
Forfeited
(105,257
)
 
34.87

 
 
Outstanding at June 30, 2015
1,772,632

 
$
32.67

 
$
51.8

The total aggregate intrinsic value of restricted stock units vested during the six months ended June 30, 2015 was approximately $5.6 million. The Company repurchased 77,271 shares of common stock for an aggregate purchase price of $2.1 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 weighted-average assumptions:
 
Three and
Six Months Ended
June 30, 2015
Dividend yield
—
%
Expected volatility
35.41
%
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 and six months ended June 30, 2015, the Company repurchased 1.4 million and 1.6 million shares, respectively, of its Class A common stock at an average price of $27.72 and $27.15 per share, respectively, for a total purchase price of $38.0 million and $44.2 million, respectively.

13
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


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 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2015
 
2014
 
2015
Computation of basic net income per common share:
 
 
 
 
 
 
 
Net income
$
36,847

 
$
45,058

 
$
68,530

 
$
91,272

Weighted average common shares and participating securities outstanding – basic
58,973

 
55,377

 
60,100

 
55,676

Basic net income per common share
$
0.62

 
$
0.81

 
$
1.14

 
$
1.64

Computation of diluted net income per common share:
 
 
 
 
 
 
 
Weighted average common shares and participating securities outstanding – basic
58,973

 
55,377

 
60,100

 
55,676

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock-based awards
1,415

 
861

 
1,439

 
887

Weighted average common shares outstanding – diluted
60,388

 
56,238

 
61,539

 
56,563

Diluted net income per common share
$
0.61

 
$
0.80

 
$
1.11

 
$
1.61

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 1,090,367 and 751,702 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 June 30, 2014 and 2015, respectively. Common stock options to purchase an aggregate of 934,787 and 1,066,636 shares were excluded from the calculation of the denominator for diluted net income per common share due to their anti-dilutive effect for the six months ended June 30, 2014 and 2015, respectively.
8.
INTEREST AND OTHER EXPENSE
Interest and other expense consists of the following (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2015
 
2014
 
2015
Interest and other expense:
 
 
 
 
 
 
 
Interest expense
$
6,175

 
$
6,386

 
$
12,260

 
$
12,846

Loss (gain) on asset disposals
1,057

 
(85
)
 
1,057

 
(254
)
Foreign currency transaction loss (gain)
18

 
180

 
(48
)
 
611

Other
20

 
—

 
(2
)
 
—

Total interest and other expense
$
7,270

 
$
6,481

 
$
13,267

 
$
13,203

9.
INCOME TAXES
The Company’s effective tax rate increased to 36.9% for the six months ended June 30, 2015 from 36.0% for the six months ended June 30, 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 six months ended June 30, 2015.
As of December 31, 2014 and June 30, 2015, the Company had unrecognized tax benefits of $13.6 million and $16.5 million, respectively, of which $12.8 million and $15.7 million, respectively, would affect the Company’s effective tax rate if recognized.

14
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the three months ended June 30, 2014 and 2015, the Company recognized potential interest and penalties of $21,000 and $2.7 million, respectively. During the six months ended June 30, 2014 and 2015, the Company recognized potential interest and penalties of $55,000 and $2.8 million, respectively. 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 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 audits 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.
10.
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 and six months ended June 30, 2014 and 2015, and geographic area long-lived assets as of December 31, 2014 and June 30, 2015 are as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2015
 
2014
 
2015
Revenue by geographical areas:
 
 
 
 
 
 
 
United States
$
221,189

 
$
237,490

 
$
434,971

 
$
473,044

International
16,268

 
19,277

 
32,383

 
35,111

Total revenue
$
237,457

 
$
256,767

 
$
467,354

 
$
508,155

 
 
 
 
 
 
 
 
Revenue by service:
 
 
 
 
 
 
 
Marketing Services
$
34,972

 
$
40,889

 
$
67,826

 
$
78,116

Security Services
34,412

 
40,451

 
64,544

 
80,093

Data Services
49,384

 
49,236

 
97,502

 
97,394

NPAC Services
118,689

 
126,191

 
237,482

 
252,552

Total revenue
$
237,457

 
$
256,767

 
$
467,354

 
$
508,155

 
December 31,
2014
 
June 30,
2015
Long-lived assets, net
 
 
 
United States
$
385,432

 
$
344,477

Colombia
78,786

 
74,318

Other
8

 
3

Total long-lived assets, net
$
464,226

 
$
418,798

11.
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

15
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


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.
12.
SUPPLEMENTAL GUARANTOR INFORMATION
The following schedules present condensed consolidating financial information of the Company as of December 31, 2014 and June 30, 2015 and for the three and six months ended June 30, 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 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.

16
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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

 
(2,986
)
 
15,956

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

 
(27,733
)
 
554,617

Property and equipment, net
149,024

 
12,566

 
14

 
—

 
161,604

Goodwill
95,388

 
565,425

 
31,456

 
—

 
692,269

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

 
1,917

 
20

 
—

 
30,996

Total assets
$
1,599,531

 
$
963,459

 
$
48,571

 
$
(869,453
)
 
$
1,742,108

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
—

 
2,986

 
—

 
(2,986
)
 
—

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

 
80,207

 
16,487

 
(27,733
)
 
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

 
45,582

 
—

 
(284
)
 
49,111

Other liabilities, long-term
44,246

 
9,437

 
—

 
—

 
53,683

Total liabilities
980,504

 
153,651

 
16,487

 
(28,017
)
 
1,122,625

Total stockholders’ equity
619,027

 
809,808

 
32,084

 
(841,436
)
 
619,483

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

 
$
963,459

 
$
48,571

 
$
(869,453
)
 
$
1,742,108


17
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
387,891

 
$
16,822

 
$
7,262

 
$
—

 
$
411,975

Restricted cash
1,260

 
1,271

 
—

 
—

 
2,531

Accounts receivable, net
102,628

 
58,324

 
1,895

 
—

 
162,847

Unbilled receivables
1,589

 
10,941

 
968

 
—

 
13,498

Prepaid expenses and other current assets
27,191

 
3,351

 
645

 
—

 
31,187

Deferred costs
5,315

 
2,443

 
—

 
—

 
7,758

Income taxes receivable
—

 
—

 
284

 
(284
)
 
—

Deferred income tax assets
7,121

 
3,828

 
—

 
5,564

 
16,513

Intercompany receivable
27,804

 
—

 
—

 
(27,804
)
 
—

Total current assets
560,799

 
96,980

 
11,054

 
(22,524
)
 
646,309

Property and equipment, net
137,707

 
9,897

 
7

 
—

 
147,611

Goodwill
94,152

 
565,425

 
31,456

 
—

 
691,033

Intangible assets, net
15,294

 
251,630

 
4,263

 
—

 
271,187

Net investments in subsidiaries
811,408

 
—

 
—

 
(811,408
)
 
—

Deferred income tax assets, long-term
—

 
—

 
334

 
(334
)
 
—

Other assets, long-term
30,653

 
1,831

 
7

 
—

 
32,491

Total assets
$
1,650,013

 
$
925,763

 
$
47,121

 
$
(834,266
)
 
$
1,788,631

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
3,995

 
$
1,925

 
$
535

 
$
—

 
$
6,455

Accrued expenses
69,146

 
18,347

 
1,580

 
—

 
89,073

Income taxes payable
4,457

 
674

 
—

 
(284
)
 
4,847

Deferred revenue
31,296

 
41,431

 
1,517

 
—

 
74,244

Notes payable
7,972

 
—

 
—

 
—

 
7,972

Capital lease obligations
4,175

 
—

 
—

 
—

 
4,175

Other liabilities
23,333

 
742

 
41

 
—

 
24,116

Deferred income tax liabilities
—

 
—

 
92

 
(92
)
 
—

Intercompany payable
—

 
18,371

 
9,433

 
(27,804
)
 
—

Total current liabilities
144,374

 
81,490

 
13,198

 
(28,180
)
 
210,882

Deferred revenue, long-term
8,441

 
13,431

 
—

 
—

 
21,872

Notes payable, long-term
771,331

 
—

 
—

 
—

 
771,331

Capital lease obligations, long-term
3,928

 
—

 
—

 
—

 
3,928

Deferred income tax liabilities, long-term
21,327

 
44,023

 
—

 
(4,978
)
 
60,372

Other liabilities, long-term
51,692

 
9,508

 
—

 
—

 
61,200

Total liabilities
1,001,093

 
148,452

 
13,198

 
(33,158
)
 
1,129,585

Total stockholders’ equity
648,920

 
777,311

 
33,923

 
(801,108
)
 
659,046

Total liabilities and stockholders’ equity
$
1,650,013

 
$
925,763

 
$
47,121

 
$
(834,266
)
 
$
1,788,631



18
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2014
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
163,374

 
$
68,878

 
$
6,155

 
$
(950
)
 
$
237,457

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
41,238

 
18,574

 
1,908

 
(876
)
 
60,844

Sales and marketing
35,040

 
11,767

 
1,845

 
(15
)
 
48,637

Research and development
6,591

 
324

 
17

 
—

 
6,932

General and administrative
23,980

 
2,244

 
(157
)
 
(59
)
 
26,008

Depreciation and amortization
12,152

 
15,720

 
2,214

 
—

 
30,086

Restructuring charges
—

 
202

 
(2
)
 
—

 
200

 
119,001

 
48,831

 
5,825

 
(950
)
 
172,707

Income from operations
44,373

 
20,047

 
330

 
—

 
64,750

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(7,335
)
 
—

 
65

 
—

 
(7,270
)
Interest income
159

 
—

 
4

 
—

 
163

Income before income taxes and equity income (loss) in consolidated subsidiaries
37,197

 
20,047

 
399

 
—

 
57,643

Provision for income taxes
10,959

 
8,842

 
995

 
—

 
20,796

Income before equity income (loss) in consolidated subsidiaries
26,238

 
11,205

 
(596
)
 
—

 
36,847

Equity income (loss) in consolidated subsidiaries
10,609

 
(1,111
)
 
—

 
(9,498
)
 
—

Net income (loss)
$
36,847

 
$
10,094

 
$
(596
)
 
$
(9,498
)
 
$
36,847

Comprehensive income (loss)
$
36,790

 
$
10,033

 
$
(584
)
 
$
(9,497
)
 
$
36,742




19
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
176,205

 
$
85,798

 
$
3,610

 
$
(8,846
)
 
$
256,767

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
43,875

 
28,701

 
2,682

 
(7,707
)
 
67,551

Sales and marketing
38,844

 
12,988

 
156

 
(1,046
)
 
50,942

Research and development
4,951

 
1,039

 
7

 
—

 
5,997

General and administrative
21,996

 
2,710

 
116

 
(93
)
 
24,729

Depreciation and amortization
12,954

 
16,200

 
284

 
—

 
29,438

 
122,620

 
61,638

 
3,245

 
(8,846
)
 
178,657

Income from operations
53,585

 
24,160

 
365

 
—

 
78,110

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(6,487
)
 
8

 
(2
)
 
—

 
(6,481
)
Interest income
63

 
6

 
—

 
—

 
69

Income before income taxes and equity income in consolidated subsidiaries
47,161

 
24,174

 
363

 
—

 
71,698

Provision for income taxes
11,158

 
15,310

 
172

 
—

 
26,640

Income before equity income in consolidated subsidiaries
36,003

 
8,864

 
191

 
—

 
45,058

Equity income in consolidated subsidiaries
9,055

 
487

 
—

 
(9,542
)
 
—

Net income
$
45,058

 
$
9,351

 
$
191

 
$
(9,542
)
 
$
45,058

Comprehensive income
$
45,179

 
$
9,231

 
$
154

 
$
(9,542
)
 
$
45,022



20
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2014
(in thousands)

 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
325,430

 
$
134,420

 
$
9,643

 
$
(2,139
)
 
$
467,354

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
82,983

 
36,148

 
2,335

 
(2,011
)
 
119,455

Sales and marketing
72,234

 
23,424

 
2,997

 
(27
)
 
98,628

Research and development
13,000

 
967

 
24

 
—

 
13,991

General and administrative
48,224

 
4,088

 
88

 
(101
)
 
52,299

Depreciation and amortization
23,930

 
31,332

 
2,464

 
—

 
57,726

Restructuring charges
3,338

 
1,691

 
137

 
—

 
5,166

 
243,709

 
97,650

 
8,045

 
(2,139
)
 
347,265

Income from operations
81,721

 
36,770

 
1,598

 
—

 
120,089

Other (expense) income:
 
 
 
 
 
 
 
 

Interest and other expense
(13,398
)
 
5

 
126

 
—

 
(13,267
)
Interest income
250

 
1

 
7

 
—

 
258

Income before income taxes and equity income (loss) in consolidated subsidiaries
68,573

 
36,776

 
1,731

 
—

 
107,080

Provision for income taxes
21,389

 
16,056

 
1,105

 
—

 
38,550

Income before equity income (loss) in consolidated subsidiaries
47,184

 
20,720

 
626

 
—

 
68,530

Equity income (loss) in consolidated subsidiaries
21,346

 
(336
)
 
—

 
(21,010
)
 
—

Net income
$
68,530

 
$
20,384

 
$
626

 
$
(21,010
)
 
$
68,530

Comprehensive income
$
68,442

 
$
20,324

 
$
648

 
$
(21,009
)
 
$
68,405



21
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
351,586

 
$
166,479

 
$
7,520

 
$
(17,430
)
 
$
508,155

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
88,255

 
53,154

 
5,401

 
(15,101
)
 
131,709

Sales and marketing
72,846

 
27,040

 
(25
)
 
(2,185
)
 
97,676

Research and development
10,497

 
1,944

 
10

 
—

 
12,451

General and administrative
44,030

 
5,200

 
300

 
(144
)
 
49,386

Depreciation and amortization
26,201

 
32,594

 
567

 
—

 
59,362

 
241,829

 
119,932

 
6,253

 
(17,430
)
 
350,584

Income from operations
109,757

 
46,547

 
1,267

 
—

 
157,571

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(13,285
)
 
30

 
52

 
—

 
(13,203
)
Interest income
283

 
10

 
2

 
—

 
295

Income before income taxes and equity income in consolidated subsidiaries
96,755

 
46,587

 
1,321

 
—

 
144,663

Provision for income taxes
25,599

 
27,221

 
571

 
—

 
53,391

Income before equity income in consolidated subsidiaries
71,156

 
19,366

 
750

 
—

 
91,272

Equity income in consolidated subsidiaries
20,116

 
967

 
—

 
(21,083
)
 
—

Net income
$
91,272

 
$
20,333

 
$
750

 
$
(21,083
)
 
$
91,272

Comprehensive income
$
91,195

 
$
20,039

 
$
414

 
$
(21,083
)
 
$
90,565









22
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2014
(in thousands)

 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by operating activities
$
124,430

 
$
72,284

 
$
10,914

 
$
(71,025
)
 
$
136,603

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(24,352
)
 
(801
)
 
(518
)
 
—

 
(25,671
)
Business acquired, net of cash acquired
(120,145
)
 
(226
)
 
—

 
—

 
(120,371
)
Net cash used in investing activities
(144,497
)
 
(1,027
)
 
(518
)
 
—

 
(146,042
)
Financing activities:
 
 
 
 
 
 
 
 
 
(Increase) decrease of restricted cash
(1
)
 
70

 
3

 
—

 
72

Proceeds from notes payable
175,000

 
—

 
—

 
—

 
175,000

Payments under notes payable obligations
(4,062
)
 
—

 
—

 
—

 
(4,062
)
Principal repayments on capital lease obligations
(1,544
)
 
—

 
—

 
—

 
(1,544
)
Proceeds from issuance of stock
6,156

 
—

 
—

 
—

 
6,156

Tax benefit from equity awards
2,189

 
—

 
5

 
—

 
2,194

Repurchase of restricted stock awards and common stock
(145,826
)
 
—

 
—

 
—

 
(145,826
)
(Distribution to) investment by parent
—

 
(72,104
)
 
1,079

 
71,025

 
—

Net cash provided by (used in) financing activities
31,912

 
(72,034
)
 
1,087

 
71,025

 
31,990

Effect of foreign exchange rates on cash and cash equivalents
(27
)
 
(2
)
 
21

 
—

 
(8
)
Net increase (decrease) in cash and cash equivalents
11,818

 
(779
)
 
11,504

 
—

 
22,543

Cash and cash equivalents at beginning of period
214,959

 
1,075

 
7,275

 
—

 
223,309

Cash and cash equivalents at end of period
$
226,777

 
$
296

 
$
18,779

 
$
—

 
$
245,852



23
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
175,746

 
$
78,812

 
$
(3,650
)
 
$
(76,956
)
 
$
173,952

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(11,408
)
 
(1,833
)
 
(154
)
 
—

 
(13,395
)
Net cash used in investing activities
(11,408
)
 
(1,833
)
 
(154
)
 
—

 
(13,395
)
Financing activities:
 
 
 
 
 
 
 
 
 
Increase of restricted cash
—

 
(340
)
 
—

 
—

 
(340
)
Payments under notes payable obligations
(4,062
)
 
—

 
—

 
—

 
(4,062
)
Principal repayments on capital lease obligations
(1,862
)
 
—

 
—

 
—

 
(1,862
)
Proceeds from issuance of stock
5,373

 
—

 
—

 
—

 
5,373

Tax shortfall from equity awards
(8,809
)
 
—

 
—

 
—

 
(8,809
)
Repurchase of restricted stock awards and common stock
(64,932
)
 
—

 
—

 
—

 
(64,932
)
(Distribution to) investment by parent
—

 
(78,952
)
 
1,996

 
76,956

 
—

Net cash (used in) provided by financing activities
(74,292
)
 
(79,292
)
 
1,996

 
76,956

 
(74,632
)
Effect of foreign exchange rates on cash and cash equivalents
280

 
(471
)
 
(336
)
 
—

 
(527
)
Net increase (decrease) in cash and cash equivalents
90,326

 
(2,784
)
 
(2,144
)
 
—

 
85,398

Cash and cash equivalents at beginning of period
297,565

 
19,606

 
9,406

 
—

 
326,577

Cash and cash equivalents at end of period
$
387,891

 
$
16,822

 
$
7,262

 
$
—

 
$
411,975




24
NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2015


13.
SUBSEQUENT EVENT
On July 30, 2015, the Company completed its acquisition of Bombora Technologies Pty Ltd, the registry services provider for the “.au” top-level domain and many other top-level domains. Total consideration for this purchase, which is subject to certain customary working capital adjustments, includes cash consideration of $86.9 million, of which $54.9 million was paid to the sellers at closing and $32.0 million was deposited into escrow for the satisfaction of potential indemnification and certain performance obligations. The purchase price will be accounted for under the acquisition method of accounting in accordance with Business Combination Topic of the FASB ASC.
The Company serves as the registry operator for the administration of U.S. Common Short Codes through its contract with the CTIA — The Wireless Association® (CTIA). This contract expires on December 31, 2015. The CTIA has advised the Company that a competitor will provide these services beginning January 1, 2016. During the last twelve months ended June 30, 2015, the Company recognized revenue of $37.6 million and associated royalty expense of $25.6 million related to this contract. The Company will not earn revenue or incur royalty expense associated with this contract after December 31, 2015.

25

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 second quarter, we expanded our highly competitive solutions in information services by augmenting our existing capabilities 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.
During the second quarter, revenue increased 8% to $256.8 million as compared to $237.5 million in 2014. This increase in revenue was driven by an 18% increase in Security Services revenue to $40.5 million as compared to $34.4 million, a 17% increase in Marketing Services revenue to $40.9 million as compared to $35.0 million, and a 6% increase in NPAC Services revenue to $126.2 million as compared to $118.7 million. Data Services revenue totaled $49.2 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 Local Number Portability Administrator, or LNPA.  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 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.  The Court of Appeals has not yet issued a briefing schedule.
On April 7, 2015, we amended our seven regional contracts with North American Portability Management, LLC, or NAPM. Under this amendment, we will provide LNPA services for an annual fixed fee of $496.1 million through at least September 30, 2016.  After September 30, 2016, 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 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 the contracts. Further, in addition to LNPA services, we will provide certain transition services on a cost-plus basis. We cannot be certain whether LNPA services or transition services will be extended beyond September 30, 2016.
Prior to this amendment, we provided LNPA services under a fixed fee contract with a 6.5% annual price escalator. This contract was 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 fixed fee of $248.1 million for the first half of 2015, or $496.1 million on an annualized basis. Under the April 7, 2015 amendment, the LNPA service fixed fee remains at the same annualized rate of $496.1 million for the duration of the amended term of the contracts which is at least through September 30, 2016. As a result, we do not expect the amendment to have an impact on our revenue growth rate through December 31, 2015. In 2016, our consolidated revenue and margin may not grow at the same rate as they have historically due to the rescission of the 6.5% annual price escalator. Once this arrangement terminates, our growth and profitability will be dependent upon the success of our remaining services.
During the second quarter, we created a dedicated LNPA Transition Project Management Office to manage our response to the NAPM’s transition-related processes and requests, as well as to support other constituents’ needs.

26

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 June 30, 2015, for certain matters that may bear on our results of operations.
The following discussion of selected critical accounting policies supplements the information relating 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, 2014.
Stock-Based Compensation
We recognize stock-based compensation expense in accordance with the Compensation – Stock Compensation Topic of the FASB ASC which requires the measurement and recognition of compensation expense for stock-based awards granted to employees based on estimated fair values on the date of grant.
See Note 6 to our Financial Statements in Item 1 of Part I of this report for information regarding our assumptions related to stock-based compensation and the amount of stock-based compensation expense we incurred for the periods covered in this report.
We estimate the fair value of our restricted stock unit awards based on the fair value of our common stock on the date of grant. Our outstanding restricted stock unit awards are subject to service-based vesting conditions and performance-based vesting conditions. We recognize the estimated fair value of service-based awards, net of estimated forfeitures, as stock-based compensation expense over the vesting period on a straight-line basis. Awards with performance-based vesting conditions require the achievement of specific financial targets at the end of the specified performance period and are subject to the employee’s continued employment over the vesting period. We recognize the estimated fair value of performance-based awards, net of estimated forfeitures, as stock-based compensation expense over the vesting period, which considers each performance period or tranche separately, based upon our determination of the level of achievement of the performance targets. At each reporting period, we reassess the level of achievement of the performance targets for the related performance period. Determining the level of achievement of the performance targets involves judgment, and the estimate of stock-based compensation expense may be revised periodically based on changes in performance. If any performance goals specific to the restricted stock unit awards are not met, we do not recognize any compensation cost for such awards, and we reverse any such compensation costs to the extent previously recognized. In the second quarter of 2015, we revised our estimate of achievement of the performance target for the 2015 performance year to greater than 100% of target, resulting in an increase in stock-based compensation expense of approximately $0.8 million (see Note 6 to our Financial Statements in Item 1 of Part I of this report.)

27

Consolidated Results of Operations
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2015
The following table presents an overview of our results of operations for the three months ended June 30, 2014 and 2015:
 
Three Months Ended June 30,
 
2014
 
2015
 
2014 vs. 2015
 
$
 
$
 
$ Change
 
% Change
 
(unaudited)
(dollars in thousands, except per share data)
Revenue
$
237,457

 
$
256,767

 
$
19,310

 
8.1
 %
Operating expense:
 
 
 
 
 
 
 
Cost of revenue (excludes depreciation and amortization shown separately below)
60,844

 
67,551

 
6,707

 
11.0
 %
Sales and marketing
48,637

 
50,942

 
2,305

 
4.7
 %
Research and development
6,932

 
5,997

 
(935
)
 
(13.5
)%
General and administrative
26,008

 
24,729

 
(1,279
)
 
(4.9
)%
Depreciation and amortization
30,086

 
29,438

 
(648
)
 
(2.2
)%
Restructuring charges
200

 
—

 
(200
)
 
(100.0
)%
 
172,707

 
178,657

 
5,950

 
3.4
 %
Income from operations
64,750

 
78,110

 
13,360

 
20.6
 %
Other (expense) income:
 
 
 
 
 
 
 
Interest and other expense
(7,270
)
 
(6,481
)
 
789

 
(10.9
)%
Interest income
163

 
69

 
(94
)
 
(57.7
)%
Income before income taxes
57,643

 
71,698

 
14,055

 
24.4
 %
Provision for income taxes
20,796

 
26,640

 
5,844

 
28.1
 %
Net income
$
36,847

 
$
45,058

 
$
8,211

 
22.3
 %
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.62

 
$
0.81

 
 
 
 
Diluted
$
0.61

 
$
0.80

 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
58,973

 
55,377

 
 
 
 
Diluted
60,388

 
56,238

 
 
 
 
Revenue
Revenue. Revenue increased $19.3 million driven by strong demand for our Security and Marketing Services and a $7.5 million increase in revenue from NPAC Services. Security Services revenue increased $6.0 million driven by an increase in revenue of $3.6 million resulting from demand for our DNS services and an increase in revenue of $2.4 million from domain name registries. Revenue from our Marketing Services increased $5.9 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 that in the second quarter of 2014. In particular, revenue from carrier provisioning services decreased $1.1 million driven by the completion of a 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 $6.7 million due to an increase of $4.0 million in costs related to our information technology and systems, an increase of $3.1 million in personnel and personnel-related expense and an increase of $0.3 million in contractor costs incurred to support our business operations, partially offset by a decrease of $0.8 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 increased $2.3 million due to an increase of $1.8 million in advertising and marketing costs and an increase of $1.4 million in personnel and personnel-related expensed, partially offset by

28

a decrease of $0.9 million in maintenance and general facilities costs. The increase in advertising and marketing costs was due to advertising campaigns to drive brand awareness and NPAC-related costs.
Research and development. Research and development expense decreased $0.9 million due to a decrease of $0.7 million in personnel and personnel-related expense and a decrease of $0.2 million in maintenance and general facilities costs.
General and administrative. General and administrative expense decreased $1.3 million due to a decrease of $1.8 million in maintenance and other administrative costs and a decrease of $0.9 million in personnel and personnel-related costs, partially offset by an increase of $1.4 million in professional fees. The decrease in maintenance and other administrative costs was driven by a gain of $2.1 million from the sale of certain assets and liabilities. The increase in professional fees was driven by an increase in costs incurred to pursue new business opportunities and support corporate initiatives.
Depreciation and amortization. Depreciation and amortization expense decreased $0.6 million due to a decrease of $0.3 million in amortization expense related to acquired intangible assets. In addition, depreciation expense decreased $0.3 million.
Restructuring expense. Restructuring expense decreased $0.2 million. Restructuring charges recorded during the three months ended June 30, 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 decreased $0.8 million due to a decrease of $1.1 million in losses recorded in 2014 in connection with asset disposals, partially offset by an increase of $0.2 million in foreign currency transaction losses and an increase of $0.2 million in interest expense.
Interest income. Interest income for the three months ended June 30, 2015 was comparable to the income for the three months ended June 30, 2014.
Provision for income taxes. Our effective tax rate for the three months ended June 30, 2015 increased to 37.2% from 36.1% for the three months ended June 30, 2014 primarily due to an increase in our domestic production activities deduction for the three months ended June 30, 2014. Excluding discrete tax items, our effective tax rate was approximately 37.7% and 36.7% for the three months ended June 30, 2014 and 2015, respectively.

29


Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2015
The following table presents an overview of our results of operations for the six months ended June 30, 2014 and 2015:
 
Six Months Ended June 30,
 
2014
 
2015
 
2014 vs. 2015
 
$
 
$
 
$ Change
 
% Change
 
(unaudited)
(dollars in thousands, except per share data)
Revenue
$
467,354

 
$
508,155

 
$
40,801

 
8.7
 %
Operating expense:
 
 
 
 
 
 
 
Cost of revenue (excludes depreciation and amortization shown separately below)
119,455

 
131,709

 
12,254

 
10.3
 %
Sales and marketing
98,628

 
97,676

 
(952
)
 
(1.0
)%
Research and development
13,991

 
12,451

 
(1,540
)
 
(11.0
)%
General and administrative
52,299

 
49,386

 
(2,913
)
 
(5.6
)%
Depreciation and amortization
57,726

 
59,362

 
1,636

 
2.8
 %
Restructuring charges
5,166

 
—

 
(5,166
)
 
100.0
 %
 
347,265

 
350,584

 
3,319

 
1.0
 %
Income from operations
120,089

 
157,571

 
37,482

 
31.2
 %
Other (expense) income:
 
 
 
 
 
 
 
Interest and other expense
(13,267
)
 
(13,203
)
 
64

 
(0.5
)%
Interest income
258

 
295

 
37

 
14.3
 %
Income before income taxes
107,080

 
144,663

 
37,583

 
35.1
 %
Provision for income taxes
38,550

 
53,391

 
14,841

 
38.5
 %
Net income
$
68,530

 
$
91,272

 
$
22,742

 
33.2
 %
Net income per common share:
 
 
 
 
 
 
 
Basic
$
1.14

 
$
1.64

 
 
 
 
Diluted
$
1.11

 
$
1.61

 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
60,100

 
55,676

 
 
 
 
Diluted
61,539

 
56,563

 
 
 
 
Revenue
Revenue. Revenue increased $40.8 million driven by strong demand for our Security and Marketing Services and a $15.1 million increase in revenue from NPAC Services. Security Services revenue increased $15.5 million driven by an increase in revenue of $8.5 million from domain name registries and an increase in revenue of $7.0 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 and the launch of new generic top-level domains. Revenue from our Marketing Services increased $10.3 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 that in the first quarter of 2014. In particular, revenue from carrier provisioning services decreased $2.4 million driven by consolidation of the customer base and the completion of client projects. 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 $12.3 million due to an increase of $6.8 million in costs related to our information technology and systems, an increase of $5.4 million in personnel and personnel-related expense, and an increase of $0.3 million in contractor costs incurred to support our business operations, partially offset by a decrease of $0.2 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.

30

Sales and marketing. Sales and marketing expense decreased $1.0 million due to a decrease of $1.3 million in maintenance and general facilities costs and a decrease of $1.0 million in advertising and marketing costs, partially offset by an increase of $1.3 million in personnel and personnel-related expense. The decrease in advertising and marketing costs was driven by a decrease of $1.3 million in costs associated with NPAC-related campaigns, partially offset by an increase in costs associated with other professional fees.
Research and development. Research and development expense decreased $1.5 million due to a decrease of $1.2 million in personnel and personnel-related expense and a decrease of $0.3 million in maintenance and general facilities costs.
General and administrative. General and administrative expense decreased $2.9 million due to a decrease of $2.2 million in personnel and personnel-related expense and a decrease of $1.0 million in maintenance and other administrative costs, partially offset by an increase of $0.3 million in professional fees. The decrease in maintenance and other administrative costs was driven by a gain of $2.1 million from the sale of certain assets and liabilities.
Depreciation and amortization. Depreciation and amortization expense increased $1.6 million due to an increase of $1.4 million in amortization expense related to acquired intangible assets. In addition, depreciation expense increased $0.2 million.
Restructuring expense. Restructuring expense decreased $5.2 million. Restructuring charges recorded during the six months ended June 30, 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 for the six months ended June 30, 2015 was comparable to the interest and other expense for the six months ended June 30, 2014.
Interest income. Interest income for the six months ended June 30, 2015 was comparable to the income for the six months ended June 30, 2014.
Provision for income taxes. Our effective tax rate for the six months ended June 30, 2015 increased to 36.9% from 36.0% for the six months ended June 30, 2014 primarily due to the reversal of unrecognized tax benefits in 2014 upon the completion of an Internal Revenue Service audit for the year ended December 31, 2009 offset by an increase in our domestic production activities deduction for the six months ended June 30, 2015. Excluding discrete tax items, our annual effective tax rate was approximately 37.7% and 36.7% for the six months ended June 30, 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.
Total cash and cash equivalents were $412.0 million at June 30, 2015, an increase of $85.4 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 5 to our Financial Statements in Item 1 of Part I of this report.

31

Discussion of Cash Flows
Cash flows from operations
Net cash provided by operating activities for the six months ended June 30, 2015 was $174.0 million, as compared to $136.6 million for the six months ended June 30, 2014. This $37.3 million increase in net cash provided by operating activities was the result of an increase in net income of $22.7 million, an increase in non-cash adjustments of $27.2 million and a decrease in net changes in operating assets and liabilities of $12.6 million.
Non-cash adjustments increased $27.2 million, driven by an increase of $25.0 million in deferred income taxes, a net increase of $11.0 million in tax (benefit) shortfall from equity awards, an increase of $1.6 million in depreciation and amortization expense and an increase of $0.8 million in the provision for doubtful accounts. These total increases of $38.4 million in non-cash adjustments were partially offset by a decrease of $9.6 million in stock-based compensation and a decrease of $1.7 million in loss on asset disposals.
Net changes in operating assets and liabilities decreased $12.6 million primarily due to a decrease of $12.9 million in accounts and unbilled receivables, a decrease of $6.7 million in prepaid expenses and other current assets, a decrease of $5.8 million in income taxes, a decrease of $3.8 million in deferred revenue, a decrease of $2.2 million in deferred costs, a decrease of $2.0 million in other assets, and a decrease of $1.0 million in notes receivable. These total decreases of $34.4 million in net changes in operating assets and liabilities were partially offset by an increase of $19.0 million in accounts payable and accrued expenses and $2.9 million in other liabilities.
Cash flows from investing
Net cash used in investing activities for the six months ended June 30, 2015 was $13.4 million, as compared to $146.0 million for six months ended June 30, 2014. This $132.6 million decrease in net cash used in investing activities was due to a decrease of $120.4 million in cash used for acquisitions and a decrease of $12.3 million in cash used for purchases of property and equipment.
Cash flows from financing
Net cash used in financing activities was $74.6 million for the six months ended June 30, 2015, as compared to net cash provided by financing activities of $32.0 million for the six months ended June 30, 2014. This $106.6 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 decrease of $11.0 million in tax benefit (shortfall) from equity awards, a $0.8 million decrease in cash proceeds from the issuance of stock, a decrease of $0.4 million in restricted cash and a decrease of $0.3 million in cash used in principal repayments on capital lease obligations. These total decreases of $187.5 million in net cash provided by financing activities were partially offset by a $80.9 million decrease in cash used for share repurchases and for the net down of employee shares.
Recent Accounting Pronouncements
See Note 2 to our Financial Statements in Item 1 of Part 1 of this report for a discussion of the effects of recent accounting pronouncements.
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 June 30, 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 second 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 of 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 rules 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. 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.  The Court of Appeals has not yet issued a briefing schedule.
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 June 30, 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)
April 1 through April 30, 2015
637,405

 
$
26.77

 
635,135

 
$
126,740,294

May 1 through May 31, 2015
156,572

 
27.05

 
153,152

 
122,608,100

June 1 through June 30, 2015
594,672

 
29.01

 
582,056

 
105,723,830

Total
1,388,649

 
$
27.76

 
1,370,343

 
$
105,723,830

(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 18,306 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.

32

Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.
Item 6.
Exhibits
See exhibits listed under the Exhibit Index below.

33

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:
July 30, 2015
 
By:
 
/s/ Paul S. Lalljie
 
 
 
Paul S. Lalljie
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer and Duly Authorized Officer)


34

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.
 
 
 
10.1.1
 
Amendment No. 98, dated July 13, 2015, to the contractor services agreement by and between NeuStar, Inc. and North American Portability Management, L.L.C.
 
 
 
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


35
Amendment No. 98 (NE)
SOW:    þ No
o Yes



Pursuant to Instruction 2 to Item 601 of Regulation S-K, NeuStar, Inc. has filed an agreement with the North American Portability Management LLC, as successor to Northeast Carrier Acquisition Company, LLC, which is one of seven agreements that are substantially identical in all material respects other than the parties to the agreements. North American Portability Management, LLC succeeded to the interests of Northeast Carrier Acquisition Company, LLC and each of the other entities listed below. The following list identifies the other parties to the six agreements that have been omitted pursuant to Instruction 2 to Item 601:

•
LNP, LLC (Midwest)
•
Southwest Region Portability Company, LLC
•
Western Region Telephone Number Portability, LLC
•
Southeast Number Portability Administration Company, LLC
•
Mid-Atlantic Carrier Acquisition Company, LLC
•
West Coast Portability Services, LLC




STATEMENT OF WORK
UNDER
CONTRACTOR SERVICES AGREEMENT
FOR
NUMBER PORTABILITY ADMINISTRATION CENTER/SERVICE
MANAGEMENT SYSTEM


BILLING, COLLECTION AND REMITTANCE OF TRANSITION OVERSIGHT
MANAGER CHARGES

Page 1

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes



STATEMENT OF WORK UNDER
CONTRACTOR SERVICES AGREEMENT
FOR
NUMBER PORTABILITY ADMINISTRATION CENTER/SERVICE MANAGEMENT SYSTEM

Billing, Collection and Remittance of Transition Oversight Manager Charges

1.
PARTIES

This Statement of Work No. 98 (this “Statement of Work” or “SOW”) is entered into pursuant to Article 13 and Article 30, and upon execution, shall be a part of the Contractor Services Agreements for Number Portability Administration Center/Service Management System, as amended and in effect immediately prior to the SOW Effective Date (each such agreement referred to individually as the “Master Agreement” and collectively as the “Master Agreements”), by and between NeuStar, Inc., a Delaware corporation (“Contractor”), and the North American Portability Management LLC, a Delaware limited liability company (the “Customer”), as the successor in interest to and on behalf of Northeast Carrier Acquisition Company, LLC (the “Subscribing Customer”).
2.
EFFECTIVENESS AND SUBSCRIBING CUSTOMERS

This Statement of Work shall be effective as of the last date of execution below (the “SOW Effective Date”), conditioned upon execution by Contractor and Customer, as the successor in interest to and on behalf of all the limited liability companies listed below for the separate United States Service Areas (the “Subscribing Customers”).
•
LNP, LLC (Midwest)
•
Mid-Atlantic Carrier Acquisition Company, LLC
•
Northeast Carrier Acquisition Company, LLC
•
Southeast Number Portability Administration Company, LLC
•
Southwest Region Portability Company, LLC
•
West Coast Portability Services, LLC
•
Western Region Telephone Number Portability, LLC

The number in the upper left-hand comer refers to this Statement of Work. Capitalized terms used herein without definition or which do not specifically reference another agreement shall have the meanings as defined in the Master Agreement.
3.
CONSIDERATION RECITAL & TERM

In consideration of the terms and conditions set forth in this Statement of Work, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Contractor and Customer agree as set forth in this Statement of Work.
Unless sooner terminated by either Customer or Contractor pursuant to Section 6.14, this SOW shall expire on the date of the latest Designated Service Completion Date for any of the Subscribing Customers, as set

Page 2

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes


forth in Article 24 of the Master Agreement. Upon the occurrence of the first Designated Service Completion Date for any Subscribing Customer, as set forth in Article 24, and until termination of this SOW, the TOM Fees (as defined in Section 6.1) shall be apportioned among the seven Service Areas pursuant to the respective apportionment among the Service Areas then in effect for the month immediately preceding the month in which such first Designated Service Completion Date occurs.
4.
APPLICABLE DOCUMENTS

The following internal documents are applicable to the Additional Services contemplated under this SOW:
    Requirements Traceability Matrix
    System Design
    Detailed Design
    Integration Test Plan
    System Test Plan
    NPAC Software Development Process Plan
    User Documentation

5.
IMPACTS ON MASTER AGREEMENT

The following portions of the Master Agreement are impacted by this SOW:
ü    Master Agreement
    Exhibit B Functional Requirements Specification
    Exhibit C Interoperable Interface Specification
    Exhibit E Pricing Schedules
    Exhibit F Project Plan and Test Schedule
    Exhibit G Service Level Requirements
    Exhibit H Reporting and Monitoring Requirements
    Exhibit J User Agreement Form
    Exhibit K External Design
    Exhibit L Infrastructure/Hardware
    Exhibit M Software Escrow Agreement
    Exhibit N System Performance Plan for NPAC/SMS Services
    Exhibit O Intermodal Ported TN Identification Service Agreement
    Exhibit P LEAP Service Agreement
    Disaster Recovery
    Back Up Plans
ü    Gateway Evaluation Process (Article 32 of Master Agreement)

6.
ADDITIONAL SERVICES

Contractor shall perform the Additional Services set forth herein. The Additional Service under this SOW consist exclusively of the work set forth in this Article 6. The Additional Services do not constitute Transition Services under Article 24.4 of the Master Agreement.

Page 3

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes


6.1    Background

Customer has or will be engaging the services of a third party (the “Transition Oversight Manager”) to oversee on behalf of Customer the transition from Contractor to a Successor Contractor in accordance ·with the U.S. Federal Communications Commission's (“FCC's”) March 27, 2015 order in Telcordia Technologies, Inc., Petition to Reform Amendment 57 and to Order a Competitive Bidding Process for Number Portability Administration; Petition of Telcordia Technologies, Inc., to Reform or Strike Amendment 70, to Institute Competitive Bidding for Number Portability Administration, and to End the NAPM LLC 's Interim Role in Number Portability Administration Contact Management; Telephone Number Portability, WC Dkt. Nos. 07-149 & 09-109, CC Dkt. No. 95-116, FCC 15-35 (the “Selection Order”). The Customer intends to enter into one or more agreements with the Transition Oversight Manager to provide such services in exchange for payment of specified charges that will be billed to and collected from Allocated Payors, as such charges are defined in Section 6.3 below (the “TOM Fees”). Customer covenants that the agreements it enters into with the Transition Oversight Manager provide, or will provide, that all TOM Fees will be billed as Allocated Charges to Allocated Payors of the NPC/SMS, and that Contractor is under no obligation to make any payments to the Transition Oversight Manager other than as specifically provided for herein with respect to the invoicing and collection of TOM Fees and the remittance of collected TOM Fees.
The parties anticipate that the FCC or its designated Bureau/Office will on the public record consent to treatment of the TOM Fees under the Selection Order as Shared Costs under the Matter of Telephone Number Portability, Third Report and Order, CC Docket 95-116, RM 8535, FCC 98-82 (the “Cost Recovery Order”) allocable to Allocated Payors of the NPAC/SMS. Accordingly, this SOW provides for a process to bill all TOM Fees to Allocated Payors as Allocated Charges as defined in the existing methods and procedures of the NPAC/SMS, but in accordance the additional requirements set forth in this SOW.
Customer has requested that Contractor perform, on behalf of Customer, the invoicing, collection, and remittance functions set forth in this SOW with respect to the TOM Fees. In doing so, Contractor is serving as Customer's billing agent for the sole purpose of, and on behalf of Customer, issuing invoices to Allocated Payors, collecting fees from Allocated Payors, and distributing collected fees, as set forth herein, associated with the TOM Fees. In this regard, Contractor is merely a pass-through billing agent of Customer with respect to the TOM Fees, and Contractor is obligated only to remit payments as specifically provided herein, and shall not otherwise be responsible either to the Transition Oversight Manager or to Customer for any TOM Fees, including any uncollected amounts from Allocated Payors in connection therewith.
6.2    Implementation Schedule

Contractor shall implement the capabilities set forth in this Section 6 no later than forty-five days after the SOW Effective Date.
6.3    TOM Fees Report

(a)Generally
Customer shall no later than the twentieth (20th) day of each month, cause the Transition Oversight Manager to provide to Contractor a report approved by Customer (the “TOM Fees Report”) setting forth (as applicable) all TOM Fees to be billed to Allocated Payors and collected by Contractor. The TOM Fees Report shall be

Page 4

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes


delivered to a Contractor-designated inbox or department. For purposes of the TOM Fees Report, “TOM Fees” shall mean the charges that Customer has incurred in connection with the Transition Oversight Manager pursuant to one or more agreements between Customer and the Transition Oversight Manager, but also including applicable Taxes (as defined below), in a form and manner supported by Contractor's billing systems, to be invoiced to Allocated Payors and paid by such Allocated Payors under this SOW. Once issued, the TOM Fees Report is conclusive for the time periods required to be included therein, such that any corrections thereto shall be made only in a subsequent TOM Fees Report.
(b)Taxes
For purposes of the TOM Fees, “Taxes” shall mean all taxes and duties, including without limitation, sales, use, transfer, value added, withholding, gross receipts, and other taxes or duties assessed, incurred, or required to be collected, paid, or withheld for any reason in connection with the TOM Fees. Contractor shall not be obligated to determine whether Taxes apply and shall not be responsible or liable to any taxing authority for such Taxes, including collecting, reporting, or remitting any such Taxes arising from the TOM Fees. As a condition precedent to the obligations of the Contractor under this SOW to bill to and collect from Allocated Payors TOM Fees, including Taxes, Customer shall cause the Transition Oversight Manager to indemnify, defend, and hold harmless Contractor, suitable in form and content to Contractor in its sole discretion, acting reasonably, from and against any all liability for such Taxes, including reasonable attorneys' fees, and any interest and penalties thereon, subject to the obligations of the Contractor to bill, collect, and properly account for the Taxes, as set forth in this SOW.
6.4    Invoicing

Contingent upon (a) Customer procuring and maintaining the indemnity and hold harmless set forth in, and in accordance with, Section 6.3 above and 6.10(b) below, (b) the implementation of the capabilities contemplated in this SOW in accordance with Section 6.2 above, and (c) the FCC or its designated Bureau/Office consenting on the public record to TOM Fees under the Selection Order being treated as Shared Costs allocable to Allocated Payors of the NPAC/SMS under the Cost Recovery Order, Contractor shall, each month commencing after the first delivery of aTOM Fees Report, include in the invoices that it currently sends to Allocated Payors under Article 35 of the Master Agreement a single line item, except Taxes, which Taxes shall be separately stated, if elected and directed by Customer on the TOM Fees Report, setting forth the aggregate amount of TOM Fees, as calculated from the TOM Fees Report. The TOM Fees Report shall be allocated and invoiced to Allocated Payors in the same manner as all other Allocated Charges under the Master Agreement, subject, however, to application of Section 3 of this SOW upon the occurrence of the first Designated Services Completion Date in any Service Area.
Each invoice containing TOM Fees for a respective Allocated Payor shall contain a statement in Contractor's existing cover letter to invoices (a) generally explaining the reason for invoicing TOM Fees and (b) identifying and itemizing both the amount of the total TOM Fees in the respective Service Area and the share of the TOM Fees allocable to the respective Allocated Payor for that invoice. Customer and Contractor shall in good faith agree on a statement to be inserted in Contractor's existing cover letter generally explaining the reason for invoicing TOM Fees. The format and length of the cover letter is reserved to sole and reasonable discretion of Contractor.


Page 5

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes


6.5    Satisfaction Priority

With respect to any invoice containing TOM Fees under this SOW, payments made by and received from or on behalf of Allocated Payors to Contractor pursuant to such invoices shall first be applied by Contractor to the amount of TOM Fees shown on such invoice (and disbursed in accordance with Section 6.6 below), and then to the amounts of other charges shown on such invoice, it being understood that the collection by Contractor of Allocated Charges at the RRC Rate as set forth in Section 6.13(b) shall be used to satisfy any unpaid amounts of the TOM Fees.

6.6    Remittance of Payments

Contractor shall by the twentieth (20th) day of each month remit the TOM Fees applied pursuant to Section 6.5 above to one account designated by Customer. Any and all questions, inquiries, or disputes from the TOM concerning the TOM Charges shall be exclusively directed to Customer, such that Contractor shall have no obligation to field such questions, inquiries, or disputes; provided, however, that Contractor shall be obligated to communicate with Customer regarding the operation and implementation of this SOW and to cooperate in connection with all audits and evaluations provided under this SOW and the Master Agreements. Notwithstanding anything to the contrary, remittance of TOM Fees under this Article 6.6 shall not be measured under any Service Level Requirement (SLR) under Exhibit G or under the Gateway Evaluation Process (GEP) under Article 32 of the Master Agreement.

6.7    Contractor Billing Report

Contractor shall by the thirtieth (30th) day of each month deliver to Customer a report by Service Area with a mutually-agreed format setting forth a summary of (1) the TOM Fees invoiced by Contractor in the last billing period and in the aggregate, including Taxes, (2) the TOM Fees collected and applied pursuant to Section 6.5 to invoices in the last billing period and in the aggregate, and (3) the TOM Fees actually remitted in the last billing period and in the aggregate pursuant to Section 6.6 to the account designated by Customer.

6.8    Limited Waivers

(a)Gateway Evaluation Process
Commencing with the first invoice issued under the Master Agreement that also sets forth TOM Fees and concluding with the third invoice thereafter, the computation, division, apportioning, issuance, application, and invoicing of all fees calculated under the Master Agreement shall not be auditable or included in determining “Billing Timeliness” for purposes of Element No. 7a, determining “Billing Accuracy” for purposes of Element No. 7b, and determining “Reporting” for purposes of Element No. 2 of the Gateway Evaluation Process, as set forth in Article 32 of the Agreement.

In all cases, including before and after the issuance of the third invoice hereunder, (1) the failure of the Customer or the Transition Oversight Manager to deliver to Contractor the TOM Fees Report on or before the twentieth (20th) day of each month shall excuse all failures of timeliness under Element No. 7a and Element No. 2, and (2) any errors in the TOM Fees Report shall excuse all failures of accuracy under Element No. 7b and Element No. 2 based upon the TOM Fees Report.

Page 6

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes



In all cases, including before and after the issuance of the third invoice hereunder, the computation, division, apportioning, issuance, application, and invoicing of TOM Fees shall not be auditable or included in determining “Billing Timeliness” for purposes of Element No. 7a, determining “Billing Accuracy” for purposes of Element No. 7b, and determining “Reporting” for purposes of Element No. 2 of the Gateway Evaluation Process, as set forth in Article 32 of the Agreement.

Nothing herein shall preclude Contractor from issuing an adjustment credit to reflect the proper computation, division, apportioning, issuance, application, and invoicing under any one or more invoices issued thereafter. For purposes of the Gateway Evaluation Process, a copy of this SOW shall serve as a waiver letter signed by Contractor and Customer.

(b)Service Level Requirements
The measurement of SLR 12 - SLR 15 under Exhibit G of the Master Agreement shall exclude calls to Contractor's Help Desk that concern or relate to TOM Fees shown on invoices issued pursuant to this SOW.

6.9    No Liability

Contractor shall have no liability whatsoever to Customer or the Transition Oversight Manager for any non-payment by Allocated Payors of TOM Fees.

6.10    Collections

Contractor shall continue to perform collections-related activities in accordance with its normal business operations and consistent with past practices in connection with invoices issued under the Master Agreement.

6.11    Indemnification

As a condition precedent to Contractor issuing to Allocated Payor invoices setting forth TOM Fees, and in addition to the obligation to procure an indemnity as set forth in Section 6.3 above, Customer shall procure and maintain directly from the Transition Oversight Manager an indemnity and hold harmless, suitable in form and content to Contractor in its sole discretion, acting reasonably, for the benefit of Contractor for any Transition Oversight Manager Charges not paid.

6.12    Out of Scope Services

This SOW contains the agreed upon terms and conditions that shall govern Contractor's performance of the Additional Services described herein. The Additional Services provided for in this SOW shall not be interpreted, implied, or assumed to include any other service(s), including additional or changed services, not specifically described in Article 6 above. Any and all requested or required services or change orders (hereinafter “Out of Scope Services”) may be provided in accordance with Article 13 of the Master Agreement.


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CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes


6.13    Amendments

(a)TOM Fees Due and Owing under NPAC/SMS User Agreements
The Master Agreement is hereby amended to provide that, in accordance with the FCC or its designated Bureau/Office public record consent referenced above, (i) TOM Fees under the Selection Order are Shared Costs allocable to Allocated Payors of the NPAC/SMS under the Cost Recovery Order, and therefore TOM Fees, when properly invoiced by Contractor, arc amounts due and owing by Users to Contractor under Section 7.1 of the NPAC/SMS User Agreement, which, if not paid, give rise to the termination rights by Contractor set forth in Section 10.1 of the NPAC/SMS User Agreement and (ii) Contractor is entitled to apply all unpaid amounts of the TOM Fees to the Revenue Recovery Charge (as that term is defined below) under Statement of Work No. 11.

(b)Revenue Recovery Charge
The rate for invoicing Allocated Charges that results from the calculation set forth in Section 4(b) of the Billing and Collection Key Terms and Guidelines of Statement of Work No. 11 (such rate, the “RRC Rate”), which is expressed as a percentage, is hereby increased by 0.25%, such that 0.25% shall be added to the percentage amount of the calculated result under Section 4(b) thereof, but in no event shall the RRC Rate be less than One Hundred and Three Quarters Percent (100.75%). For example, if the RRC Rate for invoicing Allocated Charges is calculated under SOW 11 to equal 101.00%, then, as a result of this SOW, the RRC Rate shall be increased to 101.25%.

The difference in any month between (a) the product of the RRC Rate and the Allocated Charges and (b) the Allocated Charges is referred to as the “Revenue Recovery Charge” or “RRC”. For the avoidance of doubt, the RRC shall be available for use by Contractor under the Master Agreement to satisfy any unpaid amounts of the TOM Fees.

6.14    Limited Right to Terminate this SOW and Election by Customer in Lieu Thereof

If in any three (3) consecutive calendar months the average monthly Excess RRC Amount for all seven (7) Service Areas served by Contractor is less than One Hundred Thousand Dollars ($100,000), then Contractor may at any time terminate this SOW upon thirty (30) days' prior written notice to Customer; provided, however, that during such thirty (30) days' time period, the Customer shall have the right to give written notice to Contractor of its election for Contractor, in lieu of terminating this SOW, to change the priority under Section 6.5 to allow Contractor to apply payments made by and received from or on behalf of Allocated Payors to Contractor pursuant to such invoices first to all fees due and owing under the Master Agreements that are not the TOM Fees and then, any remaining amount to TOM Fees shown on such invoices. It being understood that upon such election and change of priority under Section 6.5, the Allocated Charges collected by Contractor at the RRC Rate as set defined in Section 6.13(b) shall be used to first satisfy all fees due and owing under the Master Agreement that are not TOM Fees, and then to satisfy TOM Fees. If Customer delivers such written election to Contractor, Contractor shall, in lieu of termination of this SOW, change the priority under Section 6.5 commencing with the next billing month and continuing for the remainder of the term of this SOW. In addition, the Customer may at any time terminate this SOW upon thirty (30) days' prior written notice to Contractor.

Page 8

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes



For the purpose of this Section 6.14, the “Excess RRC Amount” shall equal the difference between (a) the amount of the RRC (as defined in Section 6.12(b) above) calculated and issued in any month and (b) the aggregate amount in uncollectible invoices that Contractor determines for that month under its normal business practices (e.g., 60-days past due).

7.    COMPENSATION

There is no charge associated with the performance of the Additional Service under this SOW.

8.    INCLUSION IN AUDITS

The billing, collection and remittance set forth this SOW shall be included in the audits provided for in Section 14.4 of the Master Agreements.

9.    MISCELLANEOUS

9.1    Except as specifically modified and amended hereby, all the provisions of the Master Agreement and the User Agreements entered into with respect thereto, and all exhibits and schedules thereto, shall remain unaltered and in full force and effect in accordance with their terms. From and after the SOW Effective Date hereof, any reference in the Master Agreement to itself and any Article, Section or subsections thereof or to any Exhibit thereto, or in any User Agreement to itself or to the Master Agreement and applicable to any time from and after the SOW Effective Date hereof, shall be deemed to be a reference to such agreement, Article, Section, subsection or Exhibit, as modified and amended by this SOW. From and after the SOW Effective Date, this Statement of Work shall be a part of the Master Agreement, including its Exhibits, and, as such, shall be subject to the terms and conditions therein. Each of the respective Master Agreements with respect to separate Service Areas remains an independent agreement regarding the rights and obligations of each of the Parties thereto with respect to such Service Area, and neither this SOW nor any other instrument shall join or merge any Master Agreement with any other, except by the express written agreement of the Parties thereto.

9.2    This SOW may be executed in two or more counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument.

9.3    This SOW is the joint work product of representatives of Customer and Contractor; accordingly, in the event of ambiguities, no inferences will be drawn against either party, including the party that drafted the Agreement in its final form.

9.4    This SOW sets forth the entire understanding between the Parties with regard to the subject matter hereof and supersedes any prior or contemporaneous agreement, discussions, negotiations or representations between the Parties, whether written or oral, with respect thereto. The modifications, amendments and price concessions made herein were negotiated together and collectively, and each is made in consideration of all of the other terms herein. All such modifications, amendments and price concessions are interrelated and are dependent on each other. No separate, additional or different consideration is contemplated with respect

Page 9

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes


to the modifications, amendments and price concessions herein.

9.5    This SOW shall not be deemed to create any rights in third parties, including the Transition Oversight Manager, Allocated Payors or Users, or by itself to create any additional obligations on either Customer or Contractor to third parties.






[THIS SPACE INTENTIONALLY LEFT BLANK]

Page 10

CONFIDENTIAL
Amendment No. 98 (NE)
SOW:    þ No
o Yes




IN WITNESS WHEREOF, the undersigned have executed this Amendment:


CONTRACTOR: NeuStar, Inc.
By:     /s/ Steven M. Boyce            
Its:    Vice President, Finance & Treasurer    
Date:    July 9, 2015                

CUSTOMER: North American Portability Management LLC, as successor in interest to and on behalf of the Northeast Carrier Acquisition Company, LLC

By:     /s/ Timothy J. Decker            
Its:    NAPM LLC Co-Chair            
Date:    July 10, 2015                

By:     /s/ Tim Kagele                
Its:    NAPM LLC Co-Chair            
Date:    July 13, 2015                



Page 11

CONFIDENTIAL


Exhibit 31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lisa A. Hook, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of NeuStar, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
July 30, 2015
 
/s/ Lisa A. Hook
 
 
 
 
 
Lisa A. Hook
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)




Exhibit 31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul S. Lalljie, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of NeuStar, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
July 30, 2015
 
/s/ Paul S. Lalljie
 
 
 
 
 
Paul S. Lalljie
 
 
Chief Financial Officer
 
 
(Principal Accounting Officer)




Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. 1350
Pursuant to 18 U.S.C. 1350, each of the undersigned certifies that, to the best of his/her knowledge:
1.
The quarterly report on Form 10-Q of NeuStar, Inc. for the quarter ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
Information contained in such quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of NeuStar, Inc.
 
 
 
 
 
 
 
July 30, 2015
 
By:
 
/s/    Lisa A. Hook        
 
 
 
 
 
Lisa A. Hook
President and Chief Executive Officer
 
 
 
 
 
July 30, 2015
 
By:
 
/s/    Paul S. Lalljie        
 
 
 
 
 
Paul S. Lalljie
Chief Financial Officer
A signed original of this written statement has been provided to NeuStar, Inc. and will be retained by NeuStar, Inc. and furnished to the Securities and Exchange Commission or its staff upon request



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