The Daily Magic Formula Stock for 07/16/2008 is NeuStar Inc. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100%.
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We provide the communications industry with essential clearinghouse services. Our customers use the databases we contractually maintain in our clearinghouse to obtain data required to successfully route telephone calls in North America, to exchange information with other communications service providers and to manage technological changes in their own networks. We operate the authoritative directories that manage virtually all telephone area codes and numbers, and we enable the dynamic routing of calls among thousands of competing communications service providers, or CSPs, in the United States and Canada. All CSPs that offer telecommunications services to the public at large, or telecommunications service providers, such as Verizon Communications Inc., Sprint Nextel Corporation, and AT&T Corp., must access our clearinghouse to properly route virtually all of their customersâ€™ calls. We provide clearinghouse services to emerging CSPs, including Internet service providers, mobile network operators, cable television operators, and voice over Internet protocol, or VoIP, service providers. In addition, we provide domain name services, including internal and external managed DNS solutions that play a key role in directing and managing traffic on the Internet, and we manage the authoritative directories for the .us and .biz Internet domains. We operate the authoritative directory for U.S. Common Short Codes, part of the short messaging service relied upon by the U.S. wireless industry, and provide solutions used by mobile network operators worldwide to enable mobile instant messaging for their end users.
We were founded to meet the technical and operational challenges of the communications industry when the U.S. government mandated local number portability in 1996. While we remain the provider of the authoritative solution that the communications industry relies upon to meet this mandate, we have developed a broad range of innovative services to meet an expanded range of customer needs. We provide the communications industry with critical technology services that solve the addressing, interoperability and infrastructure needs of CSPs. These services are used by CSPs to manage a range of their technical and operating requirements, including:
â€˘ Addressing. We enable CSPs to use critical, shared addressing resources, such as telephone numbers, Internet top-level domain names, and U.S. Common Short Codes.
â€˘ Interoperability. We enable CSPs to exchange and share critical operating data so that communications originating on one providerâ€™s network can be delivered and received on the network of another CSP. We also facilitate order management and work flow processing among CSPs.
â€˘ Infrastructure. We enable CSPs to more efficiently manage their networks by centrally managing certain critical data they use to route communications over their networks.
Company Information and History
We were incorporated in Delaware in 1998 to acquire our business from Lockheed Martin Corporation. This acquisition was completed in November 1999. Our principal executive offices are located at 46000 Center Oak Plaza, Sterling, Virginia, 20166, and our telephone number at that address is (571) 434-5400.
On June 28, 2005, we effected a recapitalization, which involved (i) payment of all accrued and unpaid dividends on all of the then-outstanding shares of preferred stock, followed by the conversion of all such shares into shares of common stock, (ii) the amendment of our certificate of incorporation to provide for Class A common stock and Class B common stock, and (iii) the split of each share of common stock into 1.4 shares and the reclassification of the common stock into shares of Class B common stock. We refer to these transactions collectively as the Recapitalization. Each share of Class B common stock is convertible at the option of the holder into one share of Class A common stock, and we anticipate that all holders of Class B common stock will ultimately convert their shares into shares of Class A common stock.
On June 28, 2005, we made an initial public offering of 31,625,000 shares of Class A common stock, which included the underwritersâ€™ over-allotment option exercise of 4,125,000 shares of Class A common stock. All the shares of Class A common stock sold in the initial public offering were sold by selling stockholders and, as such, we did not receive any proceeds from that offering. In December 2005, we completed an additional offering of 20,000,000 shares of Class A common stock, all of which were sold by selling stockholders. As such, we did not receive any proceeds from that offering.
Changes in the structure of the communications industry over the past two decades have presented increasingly complex technical and operating challenges. Whereas the Bell Operating System once dominated the U.S. telecommunications industry, there are now thousands of service providers, all with disparate networks. Today these service providers must interconnect their networks and carry each otherâ€™s traffic to route phone calls, unlike in the past when a small number of incumbent wireline carriers used established, bilateral relationships. In addition, CSPs are delivering a broad set of new services using a diverse array of technologies. These services, which include voice, data and video, are used in combinations that are far more complex than the historical, uniform voice services of traditional carriers.
The increasing complexity of the communications industry has produced operational challenges, as the legacy, in-house network management and back office systems of traditional carriers were not designed to capture all of the information necessary for provisioning, authorizing, routing and billing these new services. In particular, it has become significantly more difficult for service providers to:
â€˘ Locate end-users. Identify the appropriate destination for a given communication among multiple networks and unique addresses, such as wireline and wireless phone numbers as well as IP and e-mail addresses;
â€˘ Establish identity. Authenticate that the users of the communications networks are who they represent themselves to be and that they are authorized to use the services being provided;
â€˘ Connect. Route the communication across disparate networks;
â€˘ Provide services. Authorize and account for the exchange of communications traffic across multiple networks; and
â€˘ Process transactions. Capture, process and clear accounting records for billing, and generate settlement data for inter-provider compensation.
We provide our services from a set of unique databases, systems and platforms in geographically dispersed data centers, which we refer to collectively as our clearinghouse. Our clearinghouse has been designed to provide substantial advantages in meeting the challenges facing the communications industry for both traditional voice and IP networks. First, our clearinghouse databases and capabilities provide competing CSPs with fair, equal and secure access to essential shared resources such as telephone numbers and domain names. This sharing of data is critical for locating end-users and establishing their identity. Second, our clearinghouse databases and capabilities serve as an authoritative directory to ensure proper routing of voice, advanced data applications and IP-based communications, such as mobile instant messaging, regardless of originating or terminating technologies. Third, our clearinghouse allows CSPs access through standard interfaces. Our clearinghouse also enables connections to authoritative operating data for CSPs and providers of other service elements, including content, entertainment and financial transactions. As a result, our clearinghouse facilitates advanced services, such as multi-media content services and mobile instant messaging. Finally, our services facilitate the management of networks and services, including the deployment of new technologies and protocols, the balancing of communications traffic across a CSPâ€™s internal networks, network consolidation, and the control of instant messaging services, which promote a CSPâ€™s ability to create differentiated and value-added services.
To ensure our role as a provider of essential services to the communications industry, we designed our clearinghouse to be:
â€˘ Reliable. Our clearinghouse services depend on complex technology that is designed to deliver reliability consistent with telecommunications industry standards. Under our contracts, we have committed to our customers to deliver high quality services across numerous measured and audited service levels, such as system availability, response times for help desk inquiries and billing accuracy, consistent with telecommunications industry standards.
â€˘ Scalable. The modular design of our clearinghouse enables capacity expansion without service interruption or quality of service degradation, and with incremental investment that provides significant economies of scale.
â€˘ Neutral. We provide our services in a competitively neutral way to ensure that no one telecommunications service provider, telecommunications industry segment or technology or group of telecommunications customers is favored over any other. Moreover, we have committed not to be a telecommunications service provider in competition with our customers.
â€˘ Trusted. The data we collect are important and proprietary. Accordingly, we have appropriate procedures and systems to protect the privacy and security of customer data, restrict access to the system and generally protect the integrity of our clearinghouse. Our performance with respect to neutrality, privacy and security is independently audited regularly.
NeuStar Clearinghouse Services
â€śAddressesâ€ť are a shared resource among CSPs. Each communications device must have a unique address so that communications can be routed properly to that device. With the development of new technologies, the number and type of addressing resources increase, and the advent of bundled services, such as voice plus text messaging, may require that multiple addresses be identified for what is intended to be a single, integrated communication to one or more devices used by a single user or a group of users.
For communications to reliably reach the intended users, we believe that the communications industry requires a trusted, authoritative administrator of addressing directories to route communications. Moreover, we believe that CSPs must have fair access to shared addressing resources and must be able to access the administratorâ€™s systems to ensure the proper routing of communications. We provide a range of addressing services to meet these needs, including:
â€˘ Telephone Number Administration. As the North American Numbering Plan Administrator, we maintain the authoritative database of telephone numbering resources for North America. We allocate telephone numbers by geographic location and assign telephone numbers to telecommunications service providers. We administer area codes, including area code splits and overlays, and collect and forecast telephone number utilization rates by service providers. As the National Pooling Administrator, we also manage the administration of inventory and allocation of pooled blocks of unassigned telephone numbers by reassigning 1,000-number blocks of assigned but unused telephone numbers to telecommunications service providers requiring additional telephone numbers. We provide these services under fixed-fee contracts with the Federal Communications Commission, or FCC.
â€˘ Telephone Number Pooling. In addition to the administrative functions associated with our role as the National Pooling Administrator, we also implement the administration of the allocation of pooled blocks of unassigned telephone numbers through our clearinghouse, including the reallocation of pooled blocks of telephone numbers to the consolidated network of consolidating carriers following a merger or other business combination. We are paid on a per transaction basis for this service.
â€˘ Internet Domain Name Services .
â€˘ Ultra Services. We provide a suite of services that play a key role in directing and managing Internet traffic and monitoring the performance of websites, enabling thousands of customers to intelligently and securely control and distribute Internet traffic, and ensuring security, scalability and reliability of websites and email. We are paid a recurring monthly fee based on contractually established monthly minimum transaction volumes, and a per transaction fee for transactions processed in excess of these monthly volumes.
â€˘ .BIZ and .US Domains. We operate the authoritative registries of Internet domain names for the .biz and .us top level domains. All Internet communications routing to a .biz or .us address must query a copy of our directory to ensure that the communication is routed to the appropriate destination. We are paid on a subscription basis for each name in the registries, which together currently contain over three and a half million registered domain names.
â€˘ Registry Gateway Services. We are the exclusive provider of wholesale registration services to domain name retailers for the .cn (China) and .tw (Taiwan) Internet domains for all regions outside of the home countries. We are paid on a subscription basis for each name sold through the gateway.
â€˘ U.S. Common Short Codes. We operate the authoritative U.S. Common Short Code registry on behalf of the leading wireless providers in the United States. A Common Short Code is a string of five or six numbers, which serves as the â€śaddressâ€ť for text messages that are sent from wireless devices to businesses or organizations on a many-to-one basis. U.S. Common Short Codes are often used by consumer brand companies and organizations to count votes using wireless devices in promotional marketing efforts, such as votes for sporting event MVPs, to register for contests and special offers, to download applications such as ring tones, and used for product awareness campaigns. We are paid on a subscription basis for each code in the registry.
To provide communications across multiple networks involving multiple service providers, industry participants must exchange essential operating data. We believe that our clearinghouse is the most efficient, logistically practical and economical means for each CSP to exchange the large volumes of operating data that are required to deliver communications services between networks. Our services include:
â€˘ Wireline and Wireless Number Portability. Our clearinghouse is the master, authoritative directory that allows end users to change their telephone carrier without changing their telephone numbers. In addition, service providers use this service to change the network identification associated with their end usersâ€™ telephone numbers after a merger or consolidation. We have provided this service for wireline local number portability since 1997, and in 2003 we expanded our service to provide portability of telephone numbers between wireless telecommunications service providers and between wireline and wireless telecommunications service providers. We are paid on a per transaction basis for this service.
â€˘ Order Management Services. We provide centralized clearinghouse services that permit our customers, through a single interface, to exchange essential operating data with multiple CSPs in order to provision services. We are typically paid on a per transaction basis for each order we process.
Infrastructure and Other
Constant changes in the communications service industry require providers to make frequent and extensive changes in their own network infrastructure. Our infrastructure services are used by CSPs to efficiently reconfigure their networks and systems in response to changes in the market. Our services include:
â€˘ Network Management. Our customers use our clearinghouse to centrally process changes to essential network elements that are used to route telephone calls. We are paid on a per transaction basis for these services. Our network management services are used by our customers for a variety of different purposes, such as to replace and upgrade technologies, to balance network traffic and to reroute traffic on alternative networks in the event of a service disruption.
â€˘ Connection Services. We provide standard connections for those CSPs that connect directly to our clearinghouse. We are paid an established fee based on the type of connection.
NeuStar Next Generation Messaging Services
Mobile Instant Messaging. We provide scalable solutions to mobile network operators worldwide, which allow them to manage instant messaging, or IM, and to create their own branded IM services. We are typically paid a monthly fee on a per-active user basis.
Sales Force and Marketing
As of December 31, 2007, our sales and marketing organization consisted of approximately 245 people who work together to proactively deliver advanced technologies and solutions to serve our customersâ€™ needs. Our sales teams work closely with our customers to identify and address their needs, while our marketing team works closely with our sales teams to deliver comprehensive services, develop a clear and consistent corporate image and offer a full customer support system.
We have an experienced sales and marketing staff who offer extensive knowledge in the management of telephone numbers and domain name systems, number portability and IP clearinghouse services. We believe we have close relations with our customers, and we know their systems and operations. We have worked closely with our customers to develop solutions such as national pooling, U.S. Common Short Codes, number translation services, and the provisioning of service requests for VoIP providers. Our sales teams strive to increase the services purchased by existing customers and to expand the range of services we provide to our customers.
We provide customer support 24 hours a day, 7 days a week and 365 days a year. Customer support personnel are in charge of implementation of our service offerings from the point at which a contract is signed until the point at which our services are fully operational. Post-delivery, our staff works closely with our customers to ensure that our service level agreements are being met. They continually solicit customer feedback and are in charge of bringing together the proper internal resources to troubleshoot any problems or issues that customers may have. Performance of these individuals is measured by customer satisfaction surveys as well as by their ability to limit service downtime.
We operate geographically diverse state-of-the-art data centers that support our services. Our data centers are custom designed for the processing and transmission of high volumes of transaction-related, time-sensitive data in a highly secure environment. We are committed to employing best-of-breed tools and equipment for application development, infrastructure management, operations management, and information security. In general, we subscribe to the highest level of service and responsiveness available from each third party vendor that we use. Further, to protect the integrity of our systems, the major components of our networks are generally designed to eliminate any single point of failure.
We consistently exceed our contractual service level requirements, and our performance results are monitored internally and subjected to independent audits on a regular basis for some of our services.
Research and Development
We maintain a research and development group, the principle functions of which are to develop new services and improvements to existing services, oversee quality control processes and perform application testing. Our processes surrounding the development of new services and improvement to existing services focus on the challenges communicated to us by our customers related to the management of an expanding array of technologies and end-user services across a growing number of CSPs. We employ industry experts in areas of technology that we believe are key to solving these problems. Our quality control and application testing processes focus predominantly on highly technical support issues, which are identified through both internal and external feedback mechanisms, and continuous testing of our applications and system platforms to ensure uptime commensurate to service level standards we have committed to our customers. As of December 31, 2007, we had approximately 219 employees dedicated to research and development, which consists of software engineers, project managers and documentation specialists. We expense our research and development costs as incurred. Our research and development expense was $11.9 million, $17.6 million and $27.4 million for the years ended December 31, 2005, 2006 and 2007, respectively.
We serve traditional providers of communications, including local exchange carriers, such as Verizon Communications Inc. and AT&T, Inc.; competitive local exchange carriers, such as XO Holdings, Inc. and Level 3 Communications, Inc.; wireless service providers, such as Verizon Wireless Inc., and Sprint Nextel Corporation; and long distance carriers. We also serve emerging CSPs, including Comcast Corporation, Time Warner Telecom Inc., Cox Communications, Inc. and Cbeyond, Inc., and fast-growing emerging providers of VoIP services, such as Vonage Holdings Corp.
In addition to serving traditional CSPs, we also serve a growing number of customers who are either enablers of Internet services or providers of information and content to Internet and telephone users. For example, customers for our managed DNS services include a wide range of both large and small enterprises, including registry operators, such as Afilias Limited, and e-commerce companies, such as Amazon.com, Inc. All Internet service providers rely on our Internet registry services to route all communications to .biz and .us Internet addresses. Domain name registrars, including Network Solutions, Inc., The Go Daddy Group, Inc., and Register.com, Inc. pay us for each .biz and .us domain name they register on behalf of their customers. Wireless service providers rely on our registry to route all U.S. Common Short Code communications, but the bulk of our customers for U.S. Common Short Codes are the information and entertainment content providers who register codes with us to allow wireless subscribers to communicate with them via text messaging. Mobile network operators throughout Europe, including several country operators affiliated with Vodafone Group Plc , rely on our instant messaging solutions to provide mobile instant messaging to their end users.
Our customers include over 8,700 different entities, each of which is separately billed for the services we provide, regardless of whether it may be affiliated with one or more of our other customers. No single entity accounted for more than 10% of our total revenue in 2007. The amount of our revenue derived from customers inside the United States was $235.5 million, $317.3 million and $387.4 million for the years ended December 31, 2005, 2006 and 2007, respectively. The amount of our revenue derived from customers outside the United States was $7.0 million, $15.7 million and $41.8 million for the years ended December 31, 2005, 2006 and 2007, respectively. The amount of our revenue derived under our contracts with North American Portability Management LLC was $188.8 million, $249.3 million and $301.8 million for the years ended December 31, 2005, 2006 and 2007, respectively.
Lisa Hook has served as our President and Chief Operating Officer since joining us in January 2008. Prior to joining NeuStar, Ms. Hook served as President and Chief Executive Officer of Sunrocket, Inc., a voice over IP (â€śVoIPâ€ť) service provider, from 2006 to 2007. From 2001 to 2004, she held several executive-level posts at America Online, Inc., a web services company, including President, AOL Broadband, Premium and Developer Services; President, AOL Anywhere; and Senior Vice President and Chief Operating Officer, AOL Mobile. After leaving America Online in 2004, Ms. Hook briefly consulted for AOL and served on various corporate boards. Earlier, she was partner at Brera Capital Partners, LLC and managing director at Alpine Capital Group LLC. Ms. Hook also served in executive and special advisory roles at Time Warner, Inc., was legal adviser to the Chairman of the Federal Communications Commission, and was a senior attorney at Viacom International, Inc. Ms. Hook also serves on the boards of directors for Reed Elsevier PLC, Reed Elsevier NV and Reed Elsevier Group plc.
Jeffrey A. Babka has served as our Senior Vice President and Chief Financial Officer since joining us in April 2004. From April 2002 until joining us, he was Executive Vice President, Finance and Administration and Chief Financial Officer of Indus International, a publicly held service delivery management software company. From August 2000 to March 2002, Mr. Babka served as Vice President, Finance and Chief Financial Officer for the Global Accounts Business Unit of Concert Communications, an international joint venture between AT&T and British Telecommunications plc, a voice and data service provider. Prior to 2000, Mr. Babka held several executive positions in finance and business operations management with AT&T, Lucent, Bank of America and Global Crossing.
Mark D. Foster has served as our Senior Vice President and Chief Technology Officer since November 1999. Prior to joining us, Mr. Foster was an independent consultant working full-time in a similar capacity from 1996 until November 1999 for the Communications Industry Services group of Lockheed Martin. From 1994 through 1995, Mr. Foster worked as an independent consultant to a group of communications industry companies and, in this capacity, was involved in the industry technical, policy and regulatory discussions leading to the adoption of local number portability. From 1993 to early 1994, Mr. Foster was the Managing Director of the Stratus Telecom Development Center for Stratus Computers, Inc., a specialized high-availability computer manufacturer. Prior to that, from 1987 to 1993, Mr. Foster was the Senior Vice President of Engineering and Operations of Phone Base Systems, which sold advanced intelligent telecommunications network technology and services. The technology division of Phone Base Systems was sold to Stratus Computers in 1993. From 1985 through 1986, Mr. Foster was Vice President of Engineering and Operations for Quest Communications, a provider of enhanced telecommunications services. From 1978 through 1986, Mr. Foster was an independent consultant providing systems design and engineering services in the communications industry. From 1977 through 1978, Mr. Foster was a senior systems engineer at C3, Inc., a computer software company specializing in real-time data communications systems for the United States government.
John B. Spirtos has served as a Senior Vice President of NeuStar since October 2004 and is our Senior Vice President, Corporate Development. Prior to joining us, from May 2003 to September 2004, he served as Senior Vice President of Mergers and Acquisitions and Corporate Strategy at Corvis Corporation, a manufacturer of communications switching and transport equipment, and its wholly owned subsidiary, Broadwing Communications, LLC, an integrated communications service provider. From October 1998 to April 2003, he was a general partner at OCG Ventures, LLC and
HRLD Ventures, LP, where he focused on investments in cable and telecommunications components manufacturers, systems integrators and service providers.
Raymond A. Saulino has served as a Senior Vice President since joining us in April 2006 and has been our Senior Vice President, Sales and Business Development, since April 2007. Prior to becoming our Senior Vice President, Sales and Business Development, Mr. Saulino served as our Senior Vice President of Business Integration. Before he joined the Company, he led several business units in the government services sector of Affiliated Computer Services Inc., a provider of business process outsourcing and information technology services from March 2002 to April 2006. Prior to Affiliated Computer Services, Mr. Saulino was a founder and President, Chief Operating Officer of PRWT Services, Inc., a Lockheed Martin IMS Corporation business partner, where he spent 15 years after leaving Lockheed Martin Corporation in 1987.
Martin K. Lowen has served as a Senior Vice President since May 2005 and as our General Counsel and Secretary since September 2002. Upon joining us in June 2000, he served as Vice President of Law and Business Development. Prior to joining us, Mr. Lowen was an Assistant Vice President at TeleGlobe Communications, a provider of international telecommunications services, from January 1999 to May 2000, where he provided legal advice to senior management and directed many activities within that companyâ€™s Legal Department. Prior to January 1999, he was a director in the legal department at MCI Communications Corp. and an associate with Skadden, Arps, Slate, Meagher & Flom LLP and Hogan & Hartson LLP.
MANAGEMENT DISCUSSION FROM LATEST 10K
We continued to experience increased demand for our services in 2007, resulting in a 29% increase in revenue over 2006. Under our contracts to provide telephone number portability services in the United States, we processed 318.5 million transactions, a growth of 36% over 2006. We believe that this growth in transaction volume demonstrates strong demand for our services from numerous sources, including, most significantly, customers who have been optimizing their network and who have been upgrading to next generation technologies, such as Internet Protocol, or IP, systems. Revenue growth from increased transaction volume was partially offset by the reduction in per transaction pricing that went into effect as part of the amendment and extension of these contracts in September 2006. In addition, with increased reliance by many enterprises on the Internet as a key enabling technology for their businesses, we have experienced significant growth in demand for NeuStar Ultra Services.
To support our corporate goals of continued growth and to meet the demands of our customers, we initiated several programs in 2007 to maintain our position in the industry as a provider of essential services. In particular, we have fully integrated our Ultra Services operations team and technology, leading to streamlined capabilities and enhanced scalability of our Ultra Services operations. Further, we made substantial investments in the business we acquired from Followap Inc. in November 2006, which we believe will position this business to take advantage of the maturing market for mobile instant messaging services. In particular, we have assembled a team with the skills to enable this business to realize the potential of this developing technology and drive its adoption in the market.
We provide the communications industry with critical technology services that solve the industryâ€™s addressing, interoperability and infrastructure needs. These services are used by CSPs to manage a range of their technical and operating requirements, including:
â€˘ Addressing. We enable CSPs to use critical, shared addressing resources, such as telephone numbers, Internet top-level domain names, and U.S. Common Short Codes.
â€˘ Interoperability. We enable CSPs to exchange and share critical operating data so that communications originating on one providerâ€™s network can be delivered and received on the network of another CSP. We also facilitate order management and work flow processing among CSPs.
â€˘ Infrastructure and Other. We enable CSPs to more efficiently manage changes in their own networks by centrally managing certain critical data they use to route communications over their own networks.
We derive a substantial portion of our annual revenue on a transaction basis, most of which is derived from long-term contracts.
Our costs and expenses consist of cost of revenue, sales and marketing, research and development, general and administrative, and depreciation and amortization.
Cost of revenue includes all direct materials, direct labor, and those indirect costs related to the generation of revenue such as indirect labor, materials and supplies and facilities cost. Our primary cost of revenue is related to personnel costs associated with service implementation, product maintenance, customer deployment and customer care, including salaries, stock-based compensation and other personnel-related expense. In addition, cost of revenue includes costs relating to developing modifications and enhancements of our existing technology and services, as well as royalties paid related to our U.S. Common Short Code services. Cost of revenue also includes our information technology and systems department, including network costs, data center maintenance, database management, data processing costs, and facilities costs.
Sales and marketing expense consists of personnel costs, such as salaries, sales commissions, travel, stock-based compensation, and other personnel-related expense; costs associated with attending and sponsoring trade shows; costs of computer and communications equipment and support services; facilities costs; consulting fees; costs of marketing programs, such as Internet and print, including product branding, market analysis and forecasting; and customer relationship management.
Research and development expense consists primarily of personnel costs, including salaries, stock-based compensation and other personnel-related expense; consulting fees; and the costs of facilities, computer and support services used in service and technology development.
General and administrative expense consists primarily of personnel costs, including salaries, stock-based compensation, and other personnel-related expense, for our executive, administrative, legal, finance, and human resources functions. General and administrative expense also includes facilities, support services, and professional services fees.
Depreciation and amortization relates to amortization of identifiable intangibles, and the depreciation of our property and equipment, including our network infrastructure and facilities related to our services.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our 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 Securities and Exchange Commission considers an accounting policy to be critical if it is important to a companyâ€™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 correct, actual results may differ from those estimates.
We believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operation for future periods could be materially affected. See Item 1A of this report, â€śRisk Factors,â€ť for certain matters that may bear on our future results of operations.
Our revenue recognition policies are in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition . We provide the following services pursuant to various private commercial and government contracts.
Addressing. Our addressing services include telephone number administration, implementing the allocation of pooled blocks of telephone numbers, directory services for Internet domain names and U.S. Common Short Codes, and internal and external managed domain name services. We generate revenue from our telephone number administration services under two government contracts. Under our contract to serve as the North American Numbering Plan Administrator, we earn a fixed annual fee and recognize this fee as revenue on a straight-line basis as services are provided. Under our contract to serve as the National Pooling Administrator, we earn a fixed fee associated with administration of the pooling system plus reimbursement for costs incurred. We recognize revenue for this contract based on costs incurred plus a pro rata amount of the fixed-fee. In the event we estimate losses on our fixed fee contracts, we recognize these losses in the period in which a loss becomes apparent.
In addition to the administrative functions associated with our role as the National Pooling Administrator, we also generate revenue from implementing the allocation of pooled blocks of telephone numbers under our long-term contracts with North American Portability Management LLC, and we recognize revenue on a per transaction fee basis as the services are performed. For our Internet domain name services, we generate revenue for Internet domain registrations, which generally have contract terms between one and ten years. We recognize revenue on a straight-line basis over the lives of the related customer contracts.
We generate revenue through internal and external managed domain name services. Our revenue consists of customer set-up fees, monthly recurring fees and per transaction fees for transactions in excess of pre-established monthly minimums under contracts with terms ranging from one to three years. Customer set-up fees are not considered a separate deliverable and are deferred and recognized on a straight-line basis over the term of the contract. Under our contracts to provide our managed domain name services, customers have contractually established monthly transaction volumes for which they are charged a recurring monthly fee. Transactions processed in excess of the pre-established monthly volume are billed at a contractual per transaction rate. Each month we recognize the recurring monthly fee and usage in excess of the established monthly volume on a per transaction basis as services are provided. We generate revenue from our U.S. Common Short Code services under short-term contracts ranging from three to twelve months, and we recognize revenue on a straight-line basis over the term of the customer contracts.
Interoperability. Our interoperability services consist primarily of wireline and wireless number portability and order management services. We generate revenue from number portability under our long-term contracts with North American Portability Management LLC and Canadian LNP Consortium Inc. We recognize revenue on a per transaction fee basis as the services are performed. We provide order management services consisting of customer set-up and implementation followed by transaction processing under contracts with terms ranging from one to three years. Customer set-up and implementation is not considered a separate deliverable; accordingly, the fees are deferred and recognized as revenue on a straight-line basis over the term of the contract. Per transaction fees are recognized as the transactions are processed. We generate revenue from our inter-carrier mobile instant messaging services under contracts with mobile operators that range from one to three years. These contracts consist of license fees based on the number of subscribers that use mobile instant messaging services, as well as fees for set-up and implementation. We recognize license fee revenue ratably over the term of the contract after completion of customer set-up and implementation. Customer set-up and implementation is not considered a separate deliverable; accordingly, the fees are deferred and recognized as revenue on a straight line basis over the remaining term of the contract following delivery of the set-up and implementation services.
Infrastructure and Other. Our infrastructure services consist primarily of network management and connection services. We generate revenue from network management services under our long-term contracts with North American Portability Management LLC. We recognize revenue on a per transaction fee basis as the services are performed. In addition, we generate revenue from connection fees and system enhancements under our contracts with North American Portability Management LLC. We recognize our connection fee revenue as the service is performed. System enhancements are provided under contracts in which we are reimbursed for costs incurred plus a fixed fee. Revenue is recognized based on costs incurred plus a pro rata amount of the fee. We generate revenue from our intra-carrier mobile instant messaging services under contracts with mobile operators that range from one to three years. These contracts consist of license fees based on the number of subscribers that use mobile instant messaging services, as well as fees for set-up and implementation. We recognize license fee revenue ratably over the term of the contract after completion of customer set-up and implementation. Customer set-up and implementation is not considered a separate deliverable; accordingly, the fees are deferred and recognized as revenue on a straight line basis over the remaining term of the contract following delivery of the set-up and implementation services.
We provide wireline and wireless number portability, implement the allocation of pooled blocks of telephone numbers and provide network management services pursuant to seven contracts with North American Portability Management LLC, an industry group that represents all telecommunications service providers in the United States. We recognize revenue under our contracts with North American Portability Management LLC primarily on a per transaction basis. The aggregate fees for transactions processed under these contracts are determined by the total number of transactions, and these fees are billed to telecommunications service providers based on their allocable share of the total transaction charges. This allocable share is based on each respective telecommunications service providerâ€™s share of the aggregate end-user services revenue of all U.S. telecommunications service providers, as determined by the FCC. On November 3, 2005, BellSouth Corporation filed a petition seeking changes in the way our customers are billed for services provided by us under our contracts with North American Portability Management LLC. In response to the BellSouth petition, the FCC solicited comments from other interested parties. As of February 15, 2008, the FCC had not indicated whether it will take any action based on this petition, and the BellSouth petition remains pending. We do not believe that the proposed change to the manner in which we bill for services under these contracts would have a material impact on our customersâ€™ demand for these services. In addition, on June 13, 2007, Telcordia Technologies, Inc. filed a petition with the FCC requesting an order that would require North American Portability Management LLC to conduct a new bidding process to appoint a provider of telephone number portability services in the United States. As of February 15, 2008, the FCC had not initiated a formal rulemaking process, and the Telcordia petition remains pending. Under our contracts, we also bill a Revenue Recovery Collections, or RRC, fee of a percentage of monthly billings to our customers, which is available to us if any telecommunications service provider fails to pay its allocable share of total transactions charges. If the RRC fee is insufficient for that purpose, these contracts also provide for the recovery of such differences from the remaining telecommunications service providers.
The per transaction pricing under these contracts provided for annual volume-based credits that were earned on all transactions in excess of the pre-determined annual volume threshold. For 2005 and 2006, the maximum aggregate volume-based credit was $7.5 million, which was applied via a reduction in per transaction pricing once the pre-determined annual volume threshold was surpassed. When the aggregate credit was fully satisfied, the per transaction pricing was restored to the prevailing contractual rate. In both 2005 and 2006, the pre-determined annual transaction volume threshold under these contracts was exceeded, which resulted in the issuance of $7.5 million of volume-based credits for both years. In September 2006, we amended our contracts with North American Portability Management LLC. Under these amended terms, there are no volume-based credits that were applied in 2007 or will be applied in later fiscal periods.
Service Level Standards
Pursuant to certain of our private commercial contracts, we are subject to service level standards and to corresponding penalties for failure to meet those standards. We record a provision for these performance-related penalties when we become aware that required service levels that would trigger such a penalty have not been met, which results in a corresponding reduction of our revenue.
For more information regarding how we recognize revenue for each of our service categories, please see the discussion above under â€ś â€” Revenue Recognition.â€ť
We have made numerous acquisitions, including the 2006 acquisitions of UltraDNS Corporation and Followap Inc., resulting in our recording of goodwill, which represents the excess of the purchase price over the fair value of assets acquired, as well as other definite-lived intangible assets. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets , or SFAS No. 142, goodwill and indefinite-lived intangible assets are not amortized, but are reviewed for impairment upon the occurrence of events or changes in circumstances that would reduce the fair value of such assets below their carrying amount. Goodwill is required to be tested for impairment at least annually, or on an interim basis if circumstances change that would indicate the possibility of impairment. For purposes of our annual impairment test, we have identified and assigned goodwill to two reporting units, our Clearinghouse segment and our NGM segment.
Goodwill is tested for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of a reporting unitâ€™s net assets, including assigned goodwill, to the book value of its net assets, including assigned goodwill. Fair value of the reporting unit is determined using both an income and market approach. To assist in the process of determining if a goodwill impairment exists, we perform internal valuation analyses and consider other market information that is publicly available, and we may obtain appraisals from external advisors. If the fair value of the reporting unit is greater than its net book value, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unitâ€™s net book value, we perform a second step to measure the amount of the impairment, if any. The second step would be to compare the book value of the reporting unitâ€™s assigned goodwill to the implied fair value of the reporting unitâ€™s goodwill, using a theoretical purchase price allocation based on this implied fair value to determine the magnitude of the impairment. If we determine that an impairment has occurred, we are required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made.
The goodwill impairment test and the determination of the fair value of intangible assets involve the use of significant estimates and assumptions by management, and are inherently subjective. In particular, for each of our reporting units, the significant assumptions used include market penetration, anticipated growth rates, and risk-adjusted discount rates for the income approach, as well as the selection of comparable companies and comparable transactions for the market approach. Changes in estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. Specifically, for our NGM reporting unit, due to the early stage of its operations and the emerging nature of mobile instant messaging technology, key assumptions incorporated within the valuation have a higher degree of subjectivity and are more likely to change over time. We believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable. However, any changes in key assumptions about our businesses and their prospects, or changes in market conditions, could result in an impairment charge. Such a charge could have a material effect on our consolidated financial statements because of the significance of goodwill and intangible assets to our consolidated balance sheet.
Impairment of Long-Lived Assets
Our long-lived assets primarily consist of property and equipment and intangible assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , we review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the assets. Recoverability measurement and estimating of undiscounted cash flows is done at the lowest possible level for which there is identifiable assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of assets exceeds the fair value of the assets. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell.
Accounts Receivable, Revenue Recovery Collections, and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. In accordance with our contracts with North American Portability Management LLC, we bill a RRC fee of a percentage of monthly billings to our customers. The aggregate RRC fees collected may be used to offset uncollectible receivables from an individual customer. The RRC fees are recorded as an accrued liability when collected. For the period from January 1, 2005 through June 30, 2005, this fee was 2% of monthly billings. On July 1, 2005, the RRC fee was reduced to 1%. Any accrued RRC fees in excess of uncollectible receivables are paid back to the customers annually on a pro rata basis. All other receivables related to services not covered by the RRC fees are evaluated and, if deemed not collectible, are appropriately reserved.
Deferred Income Taxes
We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting bases and the tax bases of assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. The realization of deferred tax assets is contingent upon the generation of future taxable income. When appropriate, we recognize a valuation allowance to reduce such deferred tax assets to amounts that are more likely than not to be ultimately realized. The calculation of deferred tax assets (including valuation allowances) and liabilities requires us to apply significant judgment related to such factors as the application of complex tax laws, changes in tax laws and our future operations. We review our deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in our assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.
Income tax provision includes U.S. federal, state and local income taxes and is based on pre-tax income or loss. The provision or benefit for income taxes is based upon our estimate of our annual effective income tax rate. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes and our ability to use tax credits and net operating loss carryforwards.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes â€” an interpretation of FASB Statement No. 109 , or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterpriseâ€™s financial statements in accordance with SFAS No. 109. FIN 48 is effective for fiscal years beginning after December 15, 2006, and was adopted by us on January 1, 2007. FIN 48 provides a two-step approach to recognize and measure tax benefits when the benefitsâ€™ realization is uncertain. The first step is to determine whether the benefit is to be recognized; the second step is to determine the amount to be recognized. Income tax benefits should be recognized when, based on the technical merits of a tax position, the entity believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not ( i.e. , a probability of greater than 50 percent) that the tax position would be sustained as filed. If a position is determined to be more likely than not of being sustained, the reporting enterprise should recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The cumulative effect of applying the provisions of FIN 48 upon adoption is to be reported as an adjustment to beginning retained earnings. Our practice is to recognize interest and penalties related to income tax matters in income tax expense.
Consolidated Results of Operations
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2007
Total revenue. Total revenue increased $96.2 million due primarily to increases in infrastructure transactions under our contracts to provide telephone number portability services in the United States, our expanded range of DNS services, and growth in the use of U.S. Common Short Codes.
Addressing. Addressing revenue increased $5.9 million due to the expanded range of DNS services we offer as a result of our acquisition of UltraDNS Corporation in April 2006, and the continued increase in the use of U.S. Common Short Codes. Specifically, revenue from DNS services increased $18.4 million, consisting of a $15.0 million increase in revenue from increased use of our NeuStar Ultra Services, and a $3.4 million increase in revenue from an increased number of domain names under management. In addition, revenue from U.S. Common Short Codes increased $7.8 million due to an increased number of subscribers for U.S. Common Short Codes. These increases were offset by a decrease of $19.5 million in revenue under our contracts to provide telephone number portability services in the United States. We believe that this reduction in addressing revenue was due to a return to normal network expansion activities by carriers from unusually high levels in 2006, and the reduced pricing under these contracts that went into effect on January 1, 2007.
Interoperability. Interoperability revenue increased $5.2 million, of which $1.8 million was attributable to our Clearinghouse business segment and $3.4 million was attributable to our NGM business segment. Clearinghouse revenue increased predominantly due to increased demand for telephone number portability services in advance of the introduction of wireless number portability in Canada. Specifically, revenue from telephone number portability services in Canada increased $6.4 million, which was partially offset by a decrease in revenue of $4.8 million under our contracts to provide telephone number portability services in the United States due to decreased competitive churn. NGM revenue was $3.4 million, which was driven by an expansion of the number of carrier customers utilizing inter-carrier services and the initial stages of end user adoption of mobile instant messaging. We acquired the NGM business at the end of November 2006; thus there was no corresponding NGM revenue in 2006.
Infrastructure and other. Infrastructure and other revenue increased $85.0 million, of which $80.4 million was attributable to our Clearinghouse business segment and $4.6 million was attributable to our NGM business segment. Clearinghouse revenue increased predominantly due to increased demand for our network management services, primarily due to customers making changes to their networks that required actions such as disconnects and modifications to network elements. We believe these changes were driven largely by trends in the industry, including the implementation of new technologies by our customers, such as wireless technology upgrades and network optimization. In addition, infrastructure revenue from our NGM business segment increased $4.6 million, which was driven by an expansion of the number of carrier customers utilizing intra-carrier services and the initial stages of end user adoption of mobile instant messaging.
Cost of revenue. Cost of revenue increased $8.8 million, of which $2.0 million was attributable to our Clearinghouse business segment and $6.8 million was attributable to our NGM business segment. Clearinghouse cost of revenue increased due to an increase of $5.7 million in royalty expenses related to U.S. Common Short Code services. This increase was offset by a reduction of $3.0 million in personnel and personnel-related expense, which was driven by increased operating efficiencies relating to support of our platforms, and a reduction of $1.5 million in contractor costs and professional fees. NGM cost of revenue totaled $7.3 million for 2007, representing a $6.8 million increase over the one month of cost of revenue we incurred following our acquisition of Followap in November 2006.
Sales and marketing. Sales and marketing expense increased $23.2 million, of which $13.6 million was attributable to our Clearinghouse business segment and $9.6 million was attributable to our NGM business segment. Clearinghouse sales and marketing expense increased $9.5 million in personnel and personnel-related expense due primarily to additions to our sales and marketing team to focus on branding, product launches, expanded DNS service offerings, and new business development opportunities, including international expansion. In addition, external costs and other general marketing expense increased $2.0 million. NGM sales and marketing expense totaled $10.6 million for 2007, representing a $9.6 million increase over the one month of sales and marketing expense we incurred following our acquisition of Followap in November 2006.
Research and development. Research and development expense increased $9.7 million, of which $2.4 million was attributable to our Clearinghouse business segment and $7.3 million was attributable to our NGM business segment. Clearinghouse research and development expense increased $2.5 million in personnel and personnel-related expense due primarily to additions to our research and development team to support our service offerings. NGM research and development expense totaled $7.9 million for 2007, representing a $7.3 million increase over the one month of research and development expense we incurred following our acquisition of Followap in November 2006.
General and administrative. General and administrative expense increased $13.7 million, of which $5.7 million was attributable to our Clearinghouse business segment and $8.0 million was attributable to our NGM business segment. Clearinghouse general and administrative expense increased $3.9 million in personnel and personnel-related expense due to increased headcount to support business growth. In addition, this increase was further augmented by the reversal of a legal contingency accrual of $1.5 million in the second quarter of 2006 for which there was no comparable reversal during the year ended December 31, 2007. NGM general and administrative expense totaled $8.2 million for 2007, representing an $8.0 million increase over the one month of general and administrative expense we incurred following our acquisition of Followap in November 2006.
Depreciation and amortization. Depreciation and amortization expense increased $13.7 million, of which $5.1 million was attributable to our Clearinghouse business segment and $8.6 million was attributable to our NGM business segment. Clearinghouse depreciation and amortization expense increased primarily due to a $3.4 million increase in depreciation of capital assets and a $1.7 million increase in amortization of identified intangibles as a result of our acquisition of UltraDNS. NGM depreciation and amortization expense totaled $9.5 million for 2007, representing an $8.6 million increase over the one month of depreciation and amortization expense we incurred following our acquisition of Followap in November 2006. This increase was primarily due to $7.1 million of expense related to the amortization of identified intangibles as a result of our acquisition of Followap.
Interest expense. Interest expense for the year ended December 31, 2007 increased $0.4 million as compared to the year ended December 31, 2006 due primarily to higher average balances under notes payable.
Interest and other income. Interest and other income for the year ended December 31, 2007 increased $1.1 million as compared to the year ended December 31, 2006 due to higher yields on average combined cash and short-term investment balances.
Provision for income taxes. Income tax provision for the year ended December 31, 2007 increased $9.4 million as compared to the year ended December 31, 2006 due primarily to an increase in income from operations. Our annual effective tax rate decreased to 39.7% for the year ended December 31, 2007 from 41.0% for the year ended December 31, 2006.
Brandon Pugh - Director of Finance, Investor Relations
Thank you and good afternoon everyone. Welcome to our first quarter 2008 earnings call. Joining us today from NeuStar are Jeff Ganek, Chairman and Chief Executive Officer; and Jeff Babka, Senior Vice President and Chief Financial Officer. Our call today will begin with comments from Jeff Ganek, then Jeff Babka will follow up with a discussion of our financial performance, after which we will open the line to questions from qualified investors and research analysts.
Statements by NeuStar executives during this presentation include information that constitutes forward-looking statements made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, including without limitation, statements about NeuStar's expectations, believes, and business results in the future. We cannot assure you that our expectations will be achieved, or that any deviations will not be material.
Forward-looking statements are subject to many assumptions, risks, and uncertainties and they cause future results to differ material from those anticipated, including the risks and other factors listed in NeuStar's filings with the Securities and Exchange Commission, including without limitation, NeuStar's annual report on Form 10-K for the year ended December 31st, 2007 and other subsequent and current periodic reports. All forward-looking statements are based on information available to NeuStar as of today's date. NeuStar undertakes no obligation to update any of the forward-looking statements, including as a result of any new information, future events, changed expectations, or otherwise. As you listen to today's call, we encourage you to have our press release in front of you, which includes our financial results, metrics and commentary for the quarter as well as the reconciliation of certain non-GAAP measures with the most directly comparable GAAP measures.
With that, I am pleased to introduce NeuStar's Chairman and CEO, Jeff Ganek. Jeff?
Jeffrey E. Ganek - Chairman of the Board and Chief Executive Officer
Thanks, Brandon. Welcome to our first quarter earnings call. I am eased to speak with you this afternoon to discuss NeuStar's quarterly performance and full year outlook. Jeff Babka, NeuStar's CFO will provide details of our quarterly results and full year guidance.
Let me begin with the summary of our first quarter highlights. First quarter revenue totaled $117.4 million at an increase of 20% from the $97.4 million in the first quarter of 2007. Transactions under our contracts to provide telephone number portability service in United States grew 22% from the first quarter of 2007, which was $3 million or 4% above of our previous guidance provided in February.
Net loss for the quarter totaled $4.5 million. Absent the impairment charge of $29 million, net income would have been $24.6 million. Also during the first quarter, we initiated a stock buyback program and executed on $103.8 million of the target at $125 million to $150 million that we announced back in February of this year.
Overall, our performance and results in the quarter were very positive. It demonstrates that NeuStar is in the fast growing markets, that we have strong positions with competitive advantages and that our business model has operating leverage that enables simultaneous growth and cost management. However, as you saw in our press release issued earlier today, market events in March and April delayed growth in the mobile instant messaging market. As a result, we've reduced revenue guidance for our NGM unit. And accordingly, we recorded a goodwill impairment charge of $29 million on the NGM business that we acquired in November, 2006 for $139 million. The current future business prospects for this business are of major interest to investors. So, I will address these issues right up front, and Jeff Babka will discuss the financial impact later in the call.
Importantly, mobile IM, mobile instant messaging is an early stage embryonic market that's growing. We are confident that it will grow in the future to ultimately become very large. However, the timing of growth in the market is slower than projected. The simple fact is that our customers, the mobile service operators haven't launched marketed mobile instant messaging services as quickly as it had initially anticipated. Their introduction of the service has been delayed by a few very specific recent events. During March and April, large players in the market that is the mobile operators and the Internet service providers or ISPs; they were all pre-occupied by working out their relative roles that they'll play in the mobile IM market.
As they neared the large scale introduction of the service, the importance of the role, each would play became of concern. Negotiations during the last eight weeks about their relative roles delayed their introduction of the service. Here is the issue: as this large projected market takes form, who'll be the lead provider of the new service and how will the various players cooperate. Today, worldwide instant messaging is provided principally by ISPs, the Internet service providers, and it's delivered to more than 400 million users or largely at desktop computers. The challenge and the opportunity of mobile IM is to make it available to the more than 2 billion, billion with the B, wireless handsets, whose users already use SMS text services generating more than $60 billion with the B of annual revenue to the mobile operators.
IM, instant messaging is the next generation of messaging that offers great advantages over SMS text. So, the future of IM is large and it is on the wireless handset. The stakes here are enormous given the great potentials of the market. Over the last month as the mobile operators and the ISPs have been working to define their roles, the launch in marketing a mobile instant messaging service has been delayed. But progress has been made. Certain of our major customers have reached agreements with each other, enabling them to refocus on launch and marketing of the service. We now project a delayed ramp-up of subscribers and service volumes.
NGM revenues in 2008 are now forecast to approximate $20 million. That's deep growth from 2007. These revenues will come largely from existing NeuStar customers and existing products and services. We continue to believe that overtime, mobile IM will be a large revenue driver. We'll speak more about NGM during questions and answers later in this hour. So, I'll move on now to other areas of the NeuStar business, which in the first quarter performed admirably. These businesses, which represent the bulk of the company, are strongly growing and producing profits and cash flow in line with our expectations.
Our business is solid; macro trends in the market are and will drive demand for our services. And numbering will impact services growth will continue this year and beyond as the network operators rely on us to manage market trends like the Internet protocol, IP revolution. NeuStar's Ultra Services will maintain a steep trajectory as growth in e-commerce and complex web services for an increased demand for Internet infrastructure services. Common Short Codes will grow with the emergence of mobile advertising and mobile marketing. Registry services will grow with a demand for domain space on the Internet increases. Even in NGM, growth over 2007 will be at a high rate. Overall, NeuStar is in markets that are growing and or will be large. And in each of those markets, we have got a strong competitive position as a global leader.
Let me talk about some of these growth engines in more detail. First numbering; the impact has grown in transactions every year since its inception in 1996, and we are committed to our goal of attaining at least a 10% annual growth rate over the next four years. The growth is predicated on continued change in the communications industry. Our customers... all the network operators depend on our services to manage change from broad market trends that are driving change in the industry. Examples of the trends include: first, transition of network and services to the Internet Protocol Technology; second, and this is very timely today, the introduction of new technologies such as WiMAX and LTE or 4G; third, third is the additional spectrum usage that will bring new service provider entrance to the wireless and IP markets. New applications and features will increase the complexity of voice and data services that depend upon NeuStar's directory services.
Also, new voice communications service providers especially VoIP providers firm, Internet service providers, or trends that will drive demand for NeuStar. And of course, increasingly challenging network management jobs that require architecture and leading optimization on the part of all the networks is fundamental to why NeuStar usage has continued and will continue to grow. We believe that the largest driver of future growth is and will be the shift to Internet protocol or IP. IP has already created considerable growth for us in the future. It will drive more demand in many ways. Since the IP world has greater need for trusted directory services than does our existing voice environment.
With our unmatched customer relations technology and physical infrastructure, NeuStar is well positioned as the trusted provider of directory services that voice and Internet traffic depend upon. We look forward to serving the demands of the emerging IP world. The continued high growth of our numbering impact feeds on itself has more and more telephone numbers get populated into our dynamic core rooting database. As a total aggregate quantity of telephone numbers increases, so does our propensity for increased transactions in the future. Once the telephone number has rooting attribute changed once and it's placed in the database, it's more likely to incur additional transactions overtime.
Another key growth engine at NeuStar is our suite of Ultra Services. Other than the impact, Ultra was the largest revenue growth driver from the comparable quarter in 2007. Ultra maintained its 2007 momentum with strong first quarter continuing to exceed expectations. At e-commerce spending complex web services and Internet traffic in general flourished the demand for Ultra Services increases across all industry vertical markets both in our core markets such as e-commerce and entertainment along with developing markets such as software as a service and social networking. Across these different segments, customers will rely on NeuStar to manage the quality, safety, and reliability of mission critical Internet traffic.
The first quarter alone, Ultra recorded over 175 new customer wins for its services, including NGM and Blinks [ph]. They also upgraded over 190 existing customers including the likes of Linkedin, StubHub, and the Carlyle Group. Through our acquisition of Webmetrics in January, a leading provider of web and network performance testing, monitoring, and measurement services, Ultra is attracting new customers of broadening our portfolio suite of Internet infrastructure services.
Two other contributors to our growth in revenues were our Common Short Code Service and our domain name registry service. The quantity of Common Short Codes under management grew over 2,800. It is a 26% growth from the same quarter last year. This is fueled by strong renewal rates and increases in incremental new code sales. Brand managers and advertisers are adding mobile to the marketing mix as well as integrating it into their traditional marketing channels. In Common Short Codes, NeuStar is producing real growing revenues from services that are essential to approving segment of the market from mobile, marketing, and advertising. In the future, NeuStar expects the growth of this market to drive new large opportunities for NeuStar's directory services.
Domain names have a similar growth problem. Domain names under management have grown to approximately $3.7 million, which is a 24% growth from the same quarter last year. To summarize, today we are a global company with revenues and growth potential in fast growing large and diverse markets. In these markets existing and new, we are a global leader with strong competitive position. Our business model has operating leverage that enables growth and profitability. We continue to produce strong financial results overalland to build the foundation for a sustained growth profitability and cash flow for our shareholders.
We standby our long-term growth target of 20% revenue growth. We are working aggressively to compensate for the shortfall from 2008 guidance that the NGM issue has caused. Internally, on an operating basis, we are aiming to meet and exceed our announced revenue targets. In addition, we are managing cost and efficiencies diligently as reflected in our strong net income performance, not including the non-cash impairment charge. We remain confident of and committed to the profit targets we announced today.
Before I turn it over to Jeff Babka, NeuStar's CFO, I'd like to talk about the transition of my friend and colleague Mark Foster. For the last 12-years, Mark's contributions to the industry and to the company have been well recognized. From our beginning as a small startup organization, he led the development of a highly skilled and potent organization, which is now in place driving the technology of new products of the company. We understand Mark's need to spend more time with his family. We appreciate his continued commitment to the company as a senior adviser. I believe his contributions will continue to be valuable and I look forward to continuing a very productive relationship.
Now, I'd like to introduce Jeff Babka, NeuStar's CFO to review the numbers in more detail and provide guidance for our future performance. Jeff?
Jeffrey A. Babka - Senior Vice President and Chief Financial Officer
Thank you, Jeff, and good afternoon everyone. As Jeff has already discussed, we had a strong first quarter versus our guidance on revenue, and would have exceeded our guidance on profitability measures if not for having to record the non-cash good will impairment charge relative to NGM. Our reduced forecast in NGM caused by the issues, which drove the impairment charge, has also impact our guidance for the year, which I will discuss later in my comments. I'll also discuss the financial impact of the NGM situation on the company in detail.
The highlights of the first quarter include the following. NeuStar's total revenue in the quarter was $117.4 million, a 20% increase from the first quarter of last year. EBITDA for the quarter totaled $21.1 million versus $38.4 million in the first quarter of last year. Without the impairment charge, first quarter EBITDA would have been 50.2 million. EBITDA margin came in at the 18%, absent the impairment charge, first quarter EBITDA margin would have been 42.7% compared to 39.4% in the first quarter of 2007 and our February guidance for the quarter of 37%.
Net loss for the quarter totaled $4.5 million or $0.06 per share versus net income of 18 million or $0.23 per share in the first quarter of 2007. Without the impairment charge, net income would have been $24.6 million or $0.31 per share. Transactions on our contracts to provide telephone number affordability services in the United States totaled $87 million, up 22% from the first quarter of last year and $3 million higher than our guidance provided in February. NGM revenue totaled $3.9 million, up 500,000 in the first quarter of last year, but down from $4.2 million in the previous quarter.
I'd like to point out that in the fourth quarter of 2007, approximately 1.1 million of NGM revenue resulted from accumulative catch-up of previously billed but unrecognized revenue. Cash, cash equivalents and short-term investments ended the quarter at $86.5 million down from $198.7 million at the start of the year. This decrease resulted primarily from using $103.8 million of our cash to purchase NeuStar shares in accordance with the share repurchase plan announced on February 19. We concluded $125 million of repurchases in early April. In addition, at the end of the quarter, we had $39.4 million of cash in long-term investments.
With respect to revenue, our revenue growth for this quarter was driven primarily by four key areas. Telephone number portability services primarily in infrastructure, increased demand for Ultra Services, continued demand for U.S. Common Short Codes and increased utilization of our next generation messaging services. Addressing revenue in the quarter totaled $30.2 million, up $3.2 million or 12% from the same quarter last year. Ultra Services revenue in the quarter amounted to $9.7 million, an increase of $2.7 million, followed by domain name services, which increased by $1.6 million and U.S. Common Short Codes, which increased $1.4 million.
Offsetting these increases was a $2.6 million reduction in revenue from pooling transactions due to slower growth in the number new entrants in the market place in 2008 than into the same quarter of 2007. Interoperability revenue totaled $16.4 million, up $1.5 million or 10% from the same quarter last year. This increase was driven primarily from our NGM business, which totaled $2.1 million, an increase of $1.9 million from the first quarter of 2007. Infrastructure revenue amounted to $70.8 million, up $15.3 million or 28% from the first quarter of last year. Infrastructure was the largest growing revenue category this quarter driven predominantly by network optimization activities, vendor changes, and the implementation of new technologies such as VoIP. In addition, NGM infrastructure services contributed $1.4 million to this growth.
Now, with respect to our impact contract revenue, I'd like to highlight the fact that revenue this quarter included the impact of the change andper transaction pricing for the company's contracts to provide telephone number portability services in the United States. Throughout 2007, the pricing was based on a fixed per transaction price of $0.91. Starting in 2008, the per-transaction pricing is based on an annualized volume table established for the September, 2006 amendments to these contracts that we previously announced. For the first quarter of this year, that per transaction rate was approximately $0.88. The $0.03 per transaction rate reduction resulted in a revenue reduction of approximately $2.6 million for the first quarter.
Now, turning to costs and expense, I will compare the current quarter to the previous quarter. In the first quarter, operating expense totaled $106.4 million, an increase of 32.1 million on a sequential basis. Looking at cost and expense by functional category, the goodwill impairment charge, previously mentioned amounted to 29 million in the first quarter for which there was no corresponding charge in the previous quarter. Cost of revenue, sales and marketing in R&D, were all essentially flat with the fourth quarter of 2007. General and administrative expense totaled $16.5 million, an increase of $2.9 million from the fourth quarter 2007.
Depreciation and amortization totaled $10.1 million in the first quarter, up 300,000 from the fourth quarter. Of this amount, amortization of intangibles related to the application of purchase accounting for acquisitions totaled $3.8 million, 1.8 million of which is attributable to our follow-up acquisition, which we now refer to as NGM.
Now for some brief comments relative to our balance sheet and capital expenditures; cash generation remains healthy with cash provided from operations in the quarter, amounting to $54.1 million. Our accounts receivable were $62.7 million, a decrease of $13.9 million from the start of the quarter. Deferred revenue decreased by $400,000 to $49.9 million from the start of the quarter, and finally capital expenditures totaled $6.7 million for the quarter, primarily reflecting investments in our systems infrastructure. Before a discussion of our outlook to year, I'd like to comment specifically on the financial impact of NGM on our results and guidance.
The events, which transpired towards end of the first quarter and into April that Jeff described, resulted and are having to adjust our revenue forecast for NGM. As a result, even though we typically perform our goodwill impairment testing annually as of October 1st, the events that occurred late in the first quarter caused us to have to perform in interim impairment analysis. This analysis led us to conclude that the NGM related goodwill resulting of our purchase of follow up in November 2006 was $29 million less than its carrying value on our books.
Accordingly, we recorded a non-cash charge for that amount in our first quarter results. This charge is not deductible for tax purposes. The non-cash impairment charge resulted in a loss in the first quarter arising what would have been a very high margin, high bottom line quarter for NeuStar. In addition, it will affect our projected level of EBITDA and net income for the year. The charge being taken as a result of lowering our NGM revenue forecast is by no means indicative of our lack of confidence in the business. Mobile IP is an important component of our future growth strategy and NGM has established a very strong market position, which we expect to produce growth for NeuStar as the mobile instant messaging market develops and grows.
Moving on to our guidance for 2008, to summarize; total revenue is now projected to range between $500 million to $515 million, representing growth between 17% and 20%. This new range reflects the reduction of guidance relative to NGM, down to approximately $20 million for the year, versus our previous guidance of between $35 million and $40 million. EBITDA is projected to exceed $107 million and net income is projected to exceed $70 million reflecting the impact of the NGM goodwill impairment charge on our February guidance, which was $206 million an EBITDA and $103 million in net income.
Net income guidance also incorporates reduced income for the year, caused by the use of our cash and share repurchases. On a per share basis, EBITDA is projected at $2.27 per share and net income is projected at $0.90 per share. With respect to the impact, we reaffirm our previous guidance for transactions to exceed $350 million for the year. In addition for the second quarter, we expect impact transactions to exceed $83 million. At $83 million transactions, the per-transactions pricing in the second quarter and the year-to-date period will approximate $0.88.
In closing, we have reduced our total company revenue guidance by a $15 million range that tops out at our previous guidance of $515 million. However, it's still early in the year, and we believe that incremental revenue from our existing and new service offerings may enable us to exceed the projected revenue range. Our NeuStar team is incented to drive revenue in excess of $515 million and maximize profitability. Hence we will look for opportunity at least to cultivate new revenue opportunities while continuing to manage expenses prudently. From a cash perspective, the NeuStar business will deliver results that meet or exceed that which we projected in our previous guidance.
Let me reiterate what Jeff said earlier. Our business is sound and growing and positioned well in every market we have chosen to enter. Even at the low end of our guidance range on revenue for 2008, we will have grown the business over 17% from 2007 and are positioned to continue to produce margins on an absolute and per share basis that are very strong.
That concludes our formal remarks. Operator, you may now open the call for questions.