TransUnion (TRU) Earnings Call Transcript & Summary

This call is not for media representatives or Bank of America Securities investment bankers or commercial bankers, including corporate and commercial FX. All such individuals are instructed to disconnect now. A replay will be available for Bank of America Securities investment bankers and commercial bankers, including corporate and commercial FX. The replay is not available to the media. Good day, and welcome to the TransUnion call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Gary Bisbee, Bank of America analyst. Please go ahead.

Yes. Thank you, and welcome, everybody, who's dialed in and listening to the webcast. I'm Gary Bisbee. I cover the business and information services sector here at Bank of America. We're happy to have you at, I guess, what we're now calling the virtual Bank of America Information Services Conference 2020. I'm pleased to, this morning, have the management team of TransUnion here for this fireside chat call. From the company, we have President and CEO, Chris Cartwright; Chief Financial Officer, Todd Cello; and Aaron Hoffman from Investor Relations. The -- given the format of the call across both the webcast and the call, I will be the one asking all the questions today. Please feel free to e-mail me if there's questions you like to be asked, and we'll try to get to as many of those as we can. And with that, let's dive into it.

I think given what's going on in the world. Maybe the best place to start is if I could just ask the team what thoughts you have, if any, at this point on the impact of the coronavirus on your business or key end markets you've seen to date and how you're thinking about it going forward.

Okay. Great, Gary. And good morning, everyone. This is Chris. First, I'd just like to say thank you to Bank of America, and thank you to Gary for being flexible and pivoting to this teleconference format so we still have this opportunity to get together. Obviously, there's a lot going on in the world and lot for us to talk about, and I think effective communication is really important in times like this. Yes. So we are -- we're thinking a lot and focused on the coronavirus issue initially, taking care of our employee population. We have been implementing various degrees of work from home, social distancing, travel diminishment policies. And I think you'll see us continue down that path, where in the coming weeks, we will likely be working from home, except in nonessential type of situations. So certainly doing our part there. Now in terms of the impact that we've seen because of coronavirus on our business, I can say that overall, the company continues to perform well. We feel like -- we feel comfortable with the guidance that we have provided for the first quarter. And when we look to our Asia business, while we did experience some -- I mean, more or less, we're performing as expected there when we look at our Hong Kong operations. Now Hong Kong, while part of China, is certainly not the heart of virus concerns. On the 3-point kind of severity scale, it's a level 1 environment. And the good news is that business has performed fine. However, it may not be the perfect benchmark for the rest of our portfolio. There's more -- higher subscription component in that business. But at this point, I think we're holding up quite well. And if anything, we've really benefited from the lower interest rates because a good portion or a decent portion of our portfolio has some mortgage exposure. It's about 8%. And we've seen quite a bit of growth in that due to the low interest rates and the refinance boom that it's driven. So I'll pause there. That's what we have experienced kind of to date in the first quarter.

Great. Thanks. And I guess 2 follow-up questions on that, and then we'll get on to the more important longer-term growth and fundamentals of the business. But first of all, last time we saw a market dislocation in the fourth quarter of 2018, your fintech customer base reacted by pulling back meaningfully on marketing spend in the next quarter, which had some impact on your growth Q1 of last year. Do you have any way to think about the risk of that happening today given what feels like a more -- potentially more difficult environment?

Yes. I definitely understand the question and the spirit of it. I mean we are watching closely the volumes that come in from all of our geographies and all of the markets that we compete in within those geographies. I mean on a daily basis, we have that kind of reporting. And again, we're not concerned with the impact that we're seeing. However, this is a very rapidly changing public health situation, very difficult for us or really anybody to forecast too far ahead. But all parts of the business are doing fine at this point.

And just one last one, at the risk of beating it to death -- but obviously, growth in consumer credit over time is dependent on 2 key elements: consumers' demand for credit and financial institutions' willingness to lend or provide credit. On that second one, are you hearing or seeing anything different from your banking customers to date? I guess maybe from the earlier questions, the answer is not really to this point. But any thoughts on that?

Yes. Look, so we haven't -- I haven't seen any changes in credit policy or risk management practices put into effect later. I can't really speak to what the banks are considering at this point. But I have to believe everybody is on guard, and the markets are increasingly cautious. And so I'm sure that everybody is thinking it through with an idea or with a -- with the intent of acting in a way to preserve stability and soundness in our markets.

Okay. Good. Well, thanks for all that color. Let's move on to the longer-term fundamentals. I think what's been most impressive to me about TransUnion since the company's IPO has just been the breadth of innovation and product momentum and really the diversity of drivers that have driven strong above-market growth. We could cite trended data, alternative data, insurance, fintech, fraud, India, the list goes on. I guess I wanted to ask you 2 questions on this. First of all, appreciating that there's a number of drivers, can you help us think through what you see maybe as the largest 2 or 3 drivers as we think about your business over the next couple of years?

Yes. Sure. Let me answer it on a couple of levels. And I will get to your specific question of the top 2 or 3 opportunities. I've been part of this growth turnaround in TransUnion almost since the beginning. I've been here about 7 years. And we've had a really good platform for growth for a variety of reasons. You touched on a few of them, certainly being first to market with trended data, a benefit that I inherited and our previous CEO, Jim Peck, inherited when we got here because the business had been developing that product. I feel like we pushed early in the alternative, and we made the right call on the fintech space, et cetera. But generally speaking, the way we think about growth is we focused on our position within Financial Services, which is still a very important part of the overall portfolio, the largest single segment in the U.S., and that's true across all of our international markets. And we said we had to innovate. We had to improve the core offering, still moving from traditional credit estimation to trend-based credit estimation and then starting to bring in all of this alternative data. And at the same time, we wanted to broaden our suite of offerings across the Financial Services value chain. And that led to innovation around various forms of online fraud mitigation, which is a huge and growing risk for financial institutions as well as deepening our analytics capabilities; our decisioning software sophistication; and then finally, enabling our financial institution partners to offer the type of credit-based consumer engagement products that we saw popping up on the web with those different business models so that they could attract and interact and retain their customers to the highest degree possible. So a lot of innovation in core Financial Services drove growth. And then we took that know-how and those products and began to export them to the various markets that we serve around the world. At the same time, again, starting in the U.S., we started looking at adjacent markets that had similar needs, where maybe reserving them with just -- narrowly with just credit reports. And we began expanding into those adjacencies and again, building out broader and deeper suites of solutions. That would include applying our capabilities to the government market, going deeper in insurance, telecommunications and general utilities. And then after we acquired one of the leading public records-based investigative solutions in TLOxp, we expanded across a long tail of vertical markets that primarily needed investigative software but also had an appetite for credit and credit scoring models, right? So again, that opened up many avenues of growth by expanding into market adjacencies. And with that, in terms of the overall market segment template for our growth and our approach of breadth and depth within each segment, we started looking to new markets: markets like the U.K., which we were privileged to be able to expand into and is doing pretty well; and even markets like the Philippines, where we set up the first consumer credit bureau, in partnership with the local banks there and the local government. So at a conceptual level, I want investors to understand how we think about the vectors of growth here. We had to systematically broaden the addressable markets that we're serving, the number of customers that we can sell to and the number of products that we can sell to those customers, all while leveraging this foundation around data acquisition and management and analysis and delivery. Now with all that said, I think this growth program that we've pulled together and have been extending globally is still in earlier middle innings. It's going to vary by market, by adjacency, by product. I'll spare you that detail. But I think we've got a lot of room to run. Current market dislocation aside, over the -- in the fullness of time, there's a lot of opportunity to continue to grow with all of the things that we've done, which we'll just refer to as our growth platform. Specifically, within that, though, I do think our fraud mitigation solutions are worth a call-out. The bureaus have been involved in fraud mitigation for a number of years now primarily leveraging what we know about what a consumer carries in their wallet. Now in the case of TransUnion, we have both wallet-based insights, but we also have a lot of knowledge that we derive from our public records-based investigative solutions. And so we use this to ask consumers questions when they're trying to log on and conduct an e-commerce transaction of all flavors. That's called knowledge-based authentication, and that's old-school fraud mitigation, although it still has a very important role. As all of that information has gotten proliferated out in the world, it's easier for bad actors to defeat systems like that. It's harder for bad actors, though, to skirt systems that are based on a reputation of an individual device or individuals associated with that device. And that's why you saw us make a couple of acquisitions. First, we put our toe in the water by acquiring a device-based fraud mitigation company called Trustev. They're based in Ireland or serving the U.K. And we gained a lot of market understanding before we made a bigger move a couple of years later by acquiring iovation. And we've talked a lot about iovation in the past. It's one of the leading providers of device-based fraud mitigation. And at the core, it's got a large contributory database of fraudulent behavior associated with over 8 billion devices that they've seen in their 15-year history. And then it evolved beyond that, where it's also a very sophisticated behavioral analysis tool. And so it's looking at the behavior of a device on a website and comparing it to statistical patterns of good and bad behavior, if you will. And so together, we've created this powerful package of old-world and new-world fraud mitigation capabilities that has global applications in what is a fast-growing and very difficult fraud market. And I'd say, look, the third area, we've got trended data. We've got fraud. And the third area is our emerging analytics suite. We've been talking about Prama. Prama is a brand that we created that covers a suite of analytics functionality. It starts with a data hub, where clients can come in and tap into all different types of data that we provide and increasingly upload their own data. They can use our very performant match logic to create a composite around an individual for further analytics. And then over time, we're just -- we're increasingly building sophisticated analytics solutions that help them get the insights they need to optimize their performance.

That's great color. Maybe if I could transition to the new 3-year technology infrastructure investment cycle you began to discuss in the most recent quarter. And I think there's been a lot of talk about the benefit of the cloud. And certainly you, among others, have talked about some of the benefits of moving a portion of the infrastructure to the public cloud. As we sit here and think about the 3 years and beyond, what are the key benefits from these investments? And the secondary part of that, do you see many risks? Or what are the risks of either disruption or other from pushing forward with this investment cycle?

Yes. Great question. Let me emphasize a couple of things. First, I'll start with the risks, and then I'll pivot to the benefits. So -- and I also want to just emphasize what we're doing because I think talking about this type of an accelerated technology investment, if you will, or evolution as just a cloud migration really understates the scope of what we're doing and the eventual benefits that we'll enjoy. So I think everybody on this call has gotten familiar with the cloud value proposition, it's, of course, part -- just the economies of scale of operating data centers on a global basis and being able to sell capacity by the drink within that. So there's some basic unit -- there can be some basic unit economics. And that's particularly true for applications where the demand is lumpy or spiky. And that's true in a lot of the analytic products that we build because you never know when a big bank or a small bank is going to want to do a very big data-intensive analysis. And so being able to flex cost effectively within a cloud provider and then scale down at the end of the analysis helps us optimize cost. The other component of it is when you think of your average or typical technology stack, starting at data center operations upward, there's a lot of utility functionality that's getting automated by cloud providers and can be called by developers as a service. And so that simply means like if you think of the universe of technical activities required to run an application, a chunk of them, some proportion, and I'm not going to say whether it's 15% or 25%. I would be swagging. But some portion of them, we can now outsource and procure with a simple machine command as opposed to having real estate, utilities, hardware, people and software investment to do it in-house, right? So those are the foundational benefits of migrating some of our applications to the cloud. However, just as important and arguably, more important, is establishing a state-of-the-art and standardized services and microservices, software architecture in the cloud that becomes the go-forward architecture for all of our various solutions at TransUnion. That's what we're in the process of doing this year. We're building out this foundation. We're migrating our next-gen services architecture to the cloud. And then we're building out all the new applications, like all the intensive development we're doing on Prama, and a variety of other initiatives are benefiting from both the cloud and the streamlined, more component-reusable architecture. And then over time, the various developers, who are organized into agile scrum teams at TransUnion, and own chunks of our application portfolio will be migrating legacy applications to the new state-of-the-art cloud and services-oriented architecture as well as continuing their various security, reliability and innovation investments. The net-net, the architectural streamlining will reduce the cost of supporting our current customers and make us dramatically more nimble in building new things. And again, we're a company that's very focused on organic top line growth. It is supported by product innovation along its breadth and depth concept: servicing clients in the different verticals. And so this is really foundational to how we compete. Now you asked about risks. Obviously, there are always risks. We encountered a lot of those risks when we were migrating off the mainframe during Project Spark. But during that 3-year process, we were able to build out and migrate from the mainframe to a modern distributed big data platform that's run on internal clouds and then migrate all of our U.S. customers to that. And we did it with entirely internal resources in a relatively compressed year without much client or, certainly, revenue disruption. So we feel like we're battle-hardened. We've done -- we've executed a complicated dive like this before. And then we've had 3 years of building out after the achievements of Spark into an even more secure and reliable and component-based software foundation. So of course, you got to be smart. You got to execute well. You have to temper your ambitions. You have to do these things -- you're servicing multiple masters, migrating to the new architecture in the cloud while continuing a pace of innovation and continuing with all of your security investments. But we think we're well positioned to do it. And that's one reason why we've given ourselves 3 years because as a result of 6 or 8 years of tech investment, we feel like we are in a pretty good place. We run cost effectively and secure and with high reliability. And so now we're going to take a measured, metered approach to getting to the next generation of our tech stack.

Yes. That makes a lot of sense. I guess one of the reasons, I think, you've called out the expense will be what it is, as you're going to leverage some external resources as well this time, if I understand it. But is -- do you believe that your internal technology, talent and resources will -- a portion of what they've been doing will have to be diverted to these efforts? And could we risk any impact in the level of innovation or product development you've had? Or are you comfortable the way you're planning and phasing this that, that is likely to be unimpacted?

Yes. It's a great question. And the short answer is, I am comfortable. A couple of points to emphasize are while we've put aside some -- or we've allocated some incremental dollars over each of the next 3 years, the vast majority of that is for accelerated internal hiring of development resources in both local markets, but primarily in our global software innovation center, which is -- we have a couple in India, one particularly large one. And so over this period, we have been -- we've stood up a center of excellence in software development in Chennai. It's well over 1,000 people -- persons, rather. And we're going to -- and we've -- it's become a hub for expertise and innovation and a variety of foundational technologies for us, right? So we've been able to hire great talent and hire cost effectively by leveraging Chennai. And we're going to just continue to do that, frankly, accelerate doing that in order to meet the surge in resource demand required to continue innovation while also migrating to the next gen.

Great. Okay. So moving on. I think one of the key debates among investors, and I'm sure for you internally, is just the concept of level of investment to continue to drive above-market growth versus the ability to let some of the high incremental profitability of your business fall through into margin expansion. How do you compete -- how do you think about these competing outcomes there as you said earlier, the concept of multiple masters that you're managing? Is this -- and I ask in part, Chris, because obviously, before moving up to the CEO role, you ran the U.S. business and also had oversight of product development and innovation. I know investment is near and dear to how you think about growing the business. So how do you think about that?

Yes. Great question and one that investors always ask us. We're fortunate we've got Todd Cello here, my CFO, this morning, and he's really the guy that makes sure that we are serving both masters properly. So I'm going to defer this question to him.

Okay. Thanks, Chris. And good morning, Gary, and to everyone else that's joined today. So yes, as we think about our adjusted EBITDA margin, as everyone is aware, since our IPO in 2015, we significantly expanded the margin. At that time, TransUnion had about a 35% adjusted EBITDA margins, and we finished 2019 at 39.8%. And over that period of time, Project Spark, some of the work that we did in international, fitting the team into our global operating matrix as well as just a good flow-through of the organic products and the innovation, really drove on that level of margin. And if you look at our guidance for 2020, at the high end, we're contemplating that we will be over 40% for the full year. And obviously, that would be for the first time. So we feel that, that's strong. However, yes, it's quite a debate for us internally as to what master we should be serving. Should we be looking at continuing our top line growth? Or should we be throwing more to the bottom line? But one of the key things to keep in mind as we answer that question is so much of our growth over the last several years has been predicated on the success of our product innovation. And you just heard Chris talk about that, in particular with trended data, as an example of that. And with Chris moving into the CEO role last May, he made a series of organizational changes, one of those being to elevate our product group, which we refer to as solutions, to report directly into him. And it's not as if Jim Peck, when he was the CEO, didn't care about that. He did. He had it under Chris, and he had it under Chris, maybe unbeknownst to us at the time, but it was to help him kind of groom to ultimately ascend into the CEO role. So Chris clearly understood the importance of it, and he's put a focus on it. So now we have a dedicated team that they're chartered with continuing our innovation and sustaining that top line growth rate that we have. Conversely, we also set up a group that we refer to as operations. And what we do -- just simply, what we're up to there is to find efficiencies in how we do business or said another way, just to make TransUnion an easier place to do business with, tried to remove the points of friction that are there. So the thought process with those 2 groups is that the operations team will help us find some savings that we'll then be able to deploy back into the solutions group to enable us to fuel so much of the top line growth -- the investments that we need to drive the top line growth. So what do you want to take away from this comment? I would say that our focus continues to be on the top line and making the necessary investments. However, I think what you see from us is a very balanced approach in how we handle this. If you just simply look at our 2020 guidance, I think that's a good reflection of it, many of the investments that I've been alluding to are in our operating expense plan for the full year to continue the investment in innovation. But at the same time, we're still calling for margin expansion at the high end of our guidance. So we are always striving to find that necessary balance to provide both.

Fair enough. And I guess another way to think about that would be the medium-term growth targets that you've discussed historically imply somewhat faster EBITDA growth than revenue. So there is an expectation despite continued heavy investment that there is potential for moderate margin expansion. Is that fair?

I think that's fair. Yes, I think that's fair.

And maybe one last one on margins, Todd. Is -- given mix within the business and other factors and obviously the continued desire to invest for growth, which I think, I and your investors fully support, by the way, is there a point where you feel like there's a ceiling on margins? Are some of the more growthy stuff lower margin? Or is there anything else that would, at some point in the future, lead that to be the case? Or are you pretty comfortable in the next few years as long as you deliver that top line growth that there's some room for improvement?

I think there's obviously a ceiling, but it would be pretty extreme, right? I mean we're not -- and I think the way we take a step back from this is we look at where we're at relative to our peers. And our adjusted EBITDA margin is quite attractive relative to our peer group. So yes, I would say, margin -- as far as what to expect from us, I guess, I'm going to go back to what I already said that I think you have to expect us to just be balanced in the approach that we take with that. You're probably not going to see a 500 basis point increase over 5 years, like I just talked about, right, from 2015 through 2019. That's definitely not on our radar. If we wanted to, we could do that. I'm certain that we could, but it would come at the detriment of us making the investments that I talked about, right? So I think that's where I -- I know I keep on using this word, balance, but that's really how we think about it. We're trying to do both. And quite honestly, things are tough, right? When you do innovation, it's a hard thing. Or when you look at M&A, it's another example. A lot of the targets have margins that are below TransUnion's margins. So when we look at M&A, we push ourselves really hard to figure out how we're going to be able to scale those businesses up so our investors get to enjoy the same level of margin that we're at right now.

Yes. Well, this is Chris. Just to reinforce that, I mean, there are certain business models that we have steered away from, things that are very services-intensive, because it's not really compatible with either our market positioning with clients or our current financial profile. So while we'll buy something that has lower margins, it's only if we really believe that we can scale it up. Now maybe not all the way to 40%, but it's got to be -- it has to have the potential to become a very attractive margin business that accelerates top line growth and is synergistic with the rest of what we do.

Yes. That makes sense. Maybe that's a good transition to M&A more broadly. You had an outsized year in 2018 with a couple of significant purchases in iovation and Callcredit. Are -- how are you thinking about either the pipeline or desire and ability to do further M&A here? Is it safe to say that those large acquisitions are sufficiently integrated that you would entertain something chunkier this year if the opportunity arose and maybe with the recent market volatility, if valuations felt a little better?

Yes. I think -- well, first, I agree with your statement that the big deals that we did, namely Callcredit, iovation and then smaller deal in Healthcare, those are nicely integrated at this point. And the hardest one to integrate, of course, was Callcredit. We have more work to do there on the cost side and kind of retooling the org. That's all behind us, and we're really focused on growth. And we're focused on bringing in products from -- global products that can help them grow in the market. We've also deleveraged nicely and ahead of the guidance that we had given investors when we bought those businesses, and our leverage grew to 4.9x. Now we're 3.2x and heading south from there on the current path. So sure, if we found something that was chunky this year and attractive and we thought represented good value for shareholders, yes, we're -- we would definitely pursue it. During this period, we've remained active in the market looking for opportunities. Internationally, we have emphasized expanding territories, if you will. And in the U.S., it's expanding capabilities and, again, buying those businesses that we think make sense in the U.S. and have the potential to go outside of the U.S. and see their growth through innovation. So we're active. We're looking -- we assure valuations are rich. Up until this crisis around COVID-19, the markets have been very attractive for both M&A and growth. The current picture is certainly less certain, but we expect to continue to be looking and active in the marketplace.

Thanks. I think we have time for one more before we got to let you go. I guess, Todd, I'll close with one for you. Over the last 18 months, you've been steadily repaying debt. And my sense of it was, particularly with the interest rate increases of 1 year-plus ago, you'd made that decision that there was a good return on doing that. With leverage closing in on 3 from temporarily above 4 and interest rates down meaningfully since last summer, does the thought process around deciding to repay debt versus other opportunities -- has that changed at all? Or is that evolving?

Yes. Sure. No, Gary, it's a great question and something that every time we find ourselves in position with excess cash that we run the analysis, and we make sure that we're making the right decision. So just to kind of reiterate what Chris already said, the high watermark for us in deleveraging -- with our leverage ratio was 4.9x at the end of the second quarter of 2018 because of the acquisitions of Callcredit and iovation. We're at 3.2x at the end of Q4 of 2019. And a lot of that had to do with just us being proactive with scaling of the U.K. business, as Chris spoke about already, but also all the other acquisitions that we've made plus the organic growth. So in the absence of any M&A like that, we always are then going, "Okay, what do we do with the cash? How do we most efficiently use it?" And we look at both scenarios of either a stock buyback or a debt prepayment. And typically, the impact that we see is it's about the same to EPS when we run the math. So whether we're paying down debt and getting interest expense savings or if we're buying stock and obviously reducing the outstanding amount, the EPS impact is roughly about the same. And even when we look at that in situations today that we find ourselves in with TransUnion stock down from the highest that it was at, we argue that we could buy more shares then, right? And -- but when we look at what the interest savings are, we're, in essence, coming up with roughly the same impact. So the result of that -- the posture then that we've been taking is to prepay debt just in an effort to derisk the balance sheet. And you've seen us do that over the last, call it, 5 quarters from Q4 2018 through the last quarter of 2019 when we prepaid about $400 million. And then that obviously creates additional capacity for us. Back to the question on M&A that as we pay down, it will enable us to have just that much more capacity to use debt if we do find an asset that we find attractive and aligned with our strategy.

Okay. Fair enough. Well, let's leave it there, guys. Thank you very much for your -- again, for your willingness to do it in this virtual environment. Appreciate all your thoughts and your time, and stay safe and healthy. I'll talk to you soon. Thank you.

Thank you, Gary.

Thank you, Gary. Have a great day. Bye-bye.