Neu Star, Inc.

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Neu Star, Inc.

46000 Center Oak Plaza
Sterling, Virginia 20166
U.S.A.
Telephone: (571) 434-5400
Fax: (571) 434-5401
Web site: http://www.neustar.com

Public Company
Incorporated: 1998
Employees: 502
Sales: $242.5 million (2005)
Stock Exchanges: New York
Ticker Symbol: NSP
NAIC: 517910 Other Telecommunications

Listed on the New York Stock Exchange, NeuStar, Inc., provides vital impartial clearinghouse services to the communications and Internet industry. Originally formed to oversee government-mandated local telephone number portability, allowing individuals to keep their numbers when changing service providers, the Sterling, Virginia-based company has since expanded its role to include a range of addressing, interoperability, and infrastructure services. As part of its addressing functions, NeuStar acts as the administrator of the North American Numbering Plan (the three-digit area codes and seven-digit numbers used to route telephone calls), assigns new area codes, allocates telephone numbers, acts as a registry for the Common Short Codes used in text messaging and Wireless Do-Not-Call, provides registry services for .biz and .us Internet domain names, and provides gateway services for .cn (China) and .tw (Taiwan) Internet domain names. NeuStar facilitates the exchange of data between different communications' networks, and includes number portability as well as other order management and exchange services, such as customer account record exchange, enhanced 911, access service request, and local service request. NeuStar's infrastructure services help communication companies to manage their networks, manage changes, and deal with disaster recovery. NeuStar also helps its customers comply with law enforcement requests in areas such as wire taps. NeuStar is 72 percent owned by investment firm Warburg Pincus L.L.C., but the majority of the voting shares, 59 percent, are held by an irrevocable trust, established to maintain the company's position of impartiality.

TELECOMMUNICATIONS ACT OF 1996 LEADING TO NEUSTAR

As the telecommunications industry moved toward an era of greater competition for local telephone service in the 1990s, a number of state regulatory bodies and communication companies began addressing the key issue of local number portability (LNP), the ability of customers to transfer their phone numbers when they changed carriers. Heading an effort funded by a group of communication companies to find a way to allow different networks to efficiently make the necessary exchange of information was NeuStar's chief technology officer, Mark D. Foster. An experienced hand with a degree in physics and computer science from the California Institute of Technology, Foster was the lead inventor of LNP. In the meantime, the Illinois Commerce Commission (ICC) took the lead in selecting a standard LNP architecture, opting for AT&T/Lucent Technologies' system, which was later adopted by the Federal Communications Commission. LNP then became mandated by the Telecommunications Act of 1996, signed into law by President Clinton in February of that year. Two months later Lockheed Martin Corporation's Communications Industry Service division, for whom Foster worked as a consultant, won ICC's first numbering portability contract, establishing a Number Portability Administration Center (NPAC) in Chicago. Seven other regional limited liability companies and LNP databases were established according to the markets of the six Bell Operating Company regions, plus Canada. The system developed by Communications Industry Service was tested and certified in October 1997, and following a successful trial in Chicago, the Lockheed division was selected to serve as LNP administrator by four of the other regional limited liability companies. Perot Systems was selected by the other three, but because it failed to deliver a workable system on time, Lockheed Martin gained the rest of the business.

The Telecommunications Act of 1996 also mandated that the North American Numbering Plan Administration (NANPA) be administered by a neutral party. NANPA had been created in 1947 by AT&T to ensure that there would be enough phone numbers available as the United States underwent a boom in telecommunications, leading to the three-digit area code and the elimination of letter prefixes that relied on words, such as the title of Glenn Miller's Big Band tune "Pennsylvania 6-5000." Canada and 19 Caribbean countries eventually adopted the plan. After the breakup of AT&T in 1984, NANPA became the responsibility of Bellcore, owned by the seven so-called Baby Bells. With the change in the law in 1996, the Federal Communications Commission wanted NANPA turned over to a company that had no vested interest in telecom decisions. While the FCC established an advisory board to pick a new administrator, Bellcore changed owners and was no longer saddled with a conflict of interest. Nevertheless, it had to compete against three other companies outside of the telecommunications industry, one of which was aircraft and defense contractor Lockheed and its Communications Industry Services division, which was awarded the business in 1997 by outbidding Center for Communications Management Information and Mitrotek Systems.

SPINOFF IN 1999

Lockheed soon developed a conflict of interest itself, however, when in August 1998 it proposed acquiring Comsat Corporation, a company involved in satellite communications. Mitrotek complained that Lockheed would no longer be impartial, since as a carrier Comsat would be turning to Communications Industry Services for phone numbers. Lockheed decided to divest the business, and in December 1998 the management of Communications Industry Services, headed by Jeffrey E. Ganek, formed a corporation and enlisted the backing of Warburg Pincus to buy the division from Lockheed Martin. Mitrotek continued to complain, noting that Warburg had investments in a number of telecom companies, including MCI WorldCom. The original ownership transfer plan was scrapped in July 1999, replaced by a proposal to form a new company called NeuStar Inc., the name a play on the word "neutral." It would be part owned by Lockheed, Warburg, management, and an irrevocable trust, which would hold a majority of the voting shares. In November 1999 the transfer was approved and completed and NeuStar became the new NANPA, with Ganek taking over as CEO and assuming the chairmanship and Foster becoming chief technology officer.

COMPANY PERSPECTIVES

NeuStar is an essential component of the operations of service providers globally. No matter what segment of communications you're in, we can help your company significantly reduce costs, speed up time to market for new services and grow your business in lasting ways.

As NANPA, NeuStar had to contend with a more difficult landscape than had BellCore. In the wake of deregulation in the telecommunications field, there were thousands of companies competing, and NeuStar was responsible for maintaining a central database of telephone numbers and providing interoperability among a plethora of diverse service providers and their systems. There was also an escalating demand for local telephone numbers due to the increase in the amount of fax machines, cell phones, and Internet access lines in the 1990s. The result, according to industry jargon, was "number exhaustion." In the second half of the 1990s more than 100 new area codes were added to address the need, but there was not an endless supply and NeuStar had to husband them for as long as possible in order to prevent a costly upgrade in industry systems for as long as possible. Ultimately, it might become necessary to make the switch to an 11—or 12—digit number-ing system, but putting off that day as long as possible was a priority. Another factor causing number exhaustion was the decade-old practice of NANPA assigning phone numbers in lots of 10,000, regardless of need. It led to stockpiling, a situation that grew worse with the entry of so many new companies following deregulation. As part of an effort to develop new lines of business, NeuStar won contracts in more than a dozen states to manage telephone number pooling, a way to conserve numbers and stave off the need for new area codes.

NeuStar began the 2000s with three main business lines: NANPA, telephone number pooling, and local number portability administration. Whereas it may have been NeuStar's original business, local number portability was a growth field as people regularly changed service providers, for which NeuStar received a transaction fee, and wireless carriers moved to local number portability as well. As a result, even as the telecommunications industry suffered a difficult year in 2000, NeuStar continued to grow.

Foster soon realized that the clearinghouse functions NeuStar provided for telecommunications providers, and its technical capabilities, could also be applied to the Internet. In November 2000 NeuStar won a contract to provide registry services for the .biz domain name. The registry was launched in October 2001. Another opportunity the company pursued was to match telephone numbers with Internet addresses in a database, so that Internet services could be accessed from devices using telephone keypads limited to 12 numbers. The technology also had other potential applications including the improvement of VoIP technology that permitted telephone calls to be made over the Internet. In 2000 NeuStar was the first to demonstrate the efficacy of the ENUM protocol established by the Internet Engineering Task Force, a major force in the ongoing effort to engineer the development of the Internet. NeuStar then began long-term public trials of an ENUM system.

In June 2001 NeuStar had landed enough state number pooling contracts, more than 20, that it was awarded the FCC's National Pooling contract. Also in 2001, NeuStar launched its Customer Account Record Exchange (CARE), a clearinghouse that handled the exchange of records between local exchange carriers, as well as interexchange carriers. Service switching could be performed more efficiently and save carriers money.

NeuStar grew revenues to $74.2 million in 2001, and while the company lost $46.4 million it was moving closer to profitability. The company also secured $53 million in new capital from investors, including DB Capital Partners and ABS Capital Partners. In 2002 sales increased to $90.1 million and the net loss decreased to $38.3 million. In that year, NeuStar expanded its Internet business by launching a .us registry as well as the .cn and .tw registry gateways for China and Taiwan.

FIRST PROFIT IN 2003

NeuStar introduced a number of initiatives in 2003. It began offering local service request (LSR) and access service request (ASR) services, as well as adding number portability services to the wireless industry. It also opened a registry for the five-digit Common Short Codes used in text messaging by wireless devices. For the year, sales increased to $111.7 million and the company turned its first profit, nearly $14.5 million.

New service offerings continued in 2004. In February NeuStar launched the first convergence clearinghouse, providing services to help in the coordination between wireline, wireless, and cable company service providers, assisting in areas such as order and provisioning, routing, and billing services. NeuStar also began offering number portability for these communication companies. Later in 2004 Neustar launched an IP (Internet protocol) Traffic Exchange relying on ENUM technology to provide coordination services to companies providing IP-based products. Another major service addition was the introduction of the Identity Services Exchange, a system to use identity information of consumers in a secure way to allow wireline and wireless service providers to offer a host of new services, such as calendar sharing and online gaming. In 2004, NeuStar also began offering number portability services in Taiwan, and added non-English .biz domain names (starting with the German language). For the year, revenues jumped to $165 million and net income improved to $35.6 million.

KEY DATES

1996:: NeuStar's predecessor is formed as a Lockheed Martin division.
1999:: NeuStar is spun off.
2001:: The first Internet registry is launched.
2005:: NeuStar is taken public.

In February 2005 NeuStar grew externally by acquiring Fiducianet, Inc., a provider of law enforcement compliance and fraud management services for wireline, wireless, and cable service providers. The additional service capabilities bolstered NeuStar as it prepared to go public and provide a payback to its investors. In June 2005 the company completed an initial public offering of stock, selling more than 31 million shares of Class A common stock at $22 per share. Another 20 million shares priced at $32.30 per share were sold in December. Because the shares of both offerings were sold by existing shareholders, NeuStar did not receive any of the proceeds, but it did gain stock that could be used in making acquisitions. The company used some of those shares to acquire Foretec Seminars Inc., a provider of secretarial services to the Internet Engineering Task Force.

NeuStar reported sales of $242.5 million in 2005, a significant increase over the prior year, and net income topped $51 million. The company continued to expand in 2006 on a number of fronts. It opened a registry for six-digit Common Short Codes, supplementing its already successful five-digit code registry, and later in the year added a content rating feature. NeuStar completed a significant acquisition in April 2006, paying more than $61 million for UltraDNS Corp., a leading provider of directory infrastructure services to Internet companies. Although in business for a decade, NeuStar remained little known by the general public, but it was steadily becoming an important player in the global communications industry.