TransUnion (TRU) Earnings Call Transcript & Summary

Good morning or good evening, depending on where everyone is. It's Jeff Meuler, Baird's Information and Education Solutions analyst. Next up, very pleased to host TransUnion, which is one of the big 3 global credit bureaus and really a broader consumer information solution company with a strong track record of innovation-driven growth that's been peer-leading for multiple years now. With us today on the webcast from TransUnion are Todd Cello, the CFO, I guess, in the middle, as I see it, but he's been with TransUnion over 20 years through multiple economic cycles, multiple forms of ownership. So he has managed through a lot of different situations. He held pretty much every key finance role in the organization before being promoted as CFO in 2017. Then also with us Aaron Hoffman, who heads IR for the company. He's been a tremendous resource for me. I'm sure for many of you as well for the last 4-plus years. He has over 20 years of IR experience across a range of companies and industries. Then also with us Aaron's IR teammate, Ryan Rendino.

So just to start, I gave a brief company overview, but just anything that you would add, Todd, that's important about the company or the culture that's allowed you to drive that industry-leading growth on a sustainable basis?

Yes. I think from a culture point of view, the transformation that took hold when we were a private equity ownership and when Jim Peck came in to be our CEO, there's a culture of accountability that, in my years being in a TransUnion, is more pronounced than it ever has been in the past. So what do I mean by that? Not that there wasn't accountability at TransUnion before, but it's more about individual ownership and the ability to take risks. And prior to the transformation, I would say, the company was hesitant to do that. And our private equity owners and Jim, both enabled us to take those chances but to be accountable to it. So we didn't do things -- we did things all the way. And we put someone's name next to initiatives. And if something didn't work, we shut it down. And that was very different from where we were at. And I'm pleased to say that where we're at today, in 2020, it's a lot of the same move with that. So the accountability is probably the biggest part of the culture.

Okay. And then I do want to get into some of the more long term drivers, but just given that it is a dynamic environment, you gave us subsegment or subsector trends for U.S. Financial Services on your Q1 call. You've had a competitor report a few weeks later, which it's obviously a dynamic environment, but their commentary suggested some, I guess, improvement in the 3 to 4 weeks since you had reported. Can you just kind of recap the end market trends for us? And have you similarly seen kind of continued stabilization to improvement since kind of things bottomed out or seemingly bottomed out in early April?

Yes, Jeff, that's a great question. And last week, we put out an 8-K to provide an update on what we were seeing in our end markets. So let me go through that in a little bit more detail. But if I go back, let me start with our earnings call on April 28. And what we did different than what we had ever done before is we provided the market and our investors with a view into the current quarter, which we had never done. And the reason for that is our Q1 results were pretty strong. And we beat the high end of our revenue guidance and adjusted EBITDA was right within range. But that clearly was not indicative as to what was truly going on at TransUnion and just the market in general. So what we did is we showed our online credit report volumes for financial services, which is our -- half of our U.S. markets' business. And then we showed the end markets, specifically in the online volumes for mortgage, in auto, credit targeting, consumer lending. And then provided for all the other verticals in the U.S. as well as international regions and our consumer interactive in a more kind of qualitative perspective. And the reason we did all of that was we wanted to -- we couldn't be as precise as we normally would be with guidance. So what we did is we created a scenario-based outlook for that. So using all the information that I just outlined that serve as a foundation or a launching off point for 3 scenarios that we laid out. So the first -- the scenario that we laid out was our base case outlook. And what we put in the 8-K last week was that we have increased confidence that we're going to be able to achieve that outlook. And then let me -- as to get into your question, the trends that we're seeing now, if they continue on for the rest of June and second quarter, there is a likelihood that we'll be able to achieve our upside case scenario. So what's that mean? So in the U.S. markets' financial services, overall, inquiry volumes have been better since we reported earnings at the end of April. In particular, we've seen an acceleration in mortgage as well as in auto. So there are some dynamics there that just pertain to our customers about to stimulate some activity, but also just the reopenings in general. Emerging verticals, you ship out of financial services. Our insurance business continues to perform relatively well. And the reason for that is just the shopping trends. So you see a lot of advertising for insurance companies when -- and when a customer -- consumer is interested in applying for insurance that drives a transaction volumes for us. So overall, that's been holding on. Our health care vertical also has been holding up more probably for -- not necessarily the -- not a good reason. And what I mean by that is that the health care system, as everyone knows, is under tremendous pressure now caring for COVID-19. So what we're seeing is more of the elective and preventative care falling by the wayside, and that's where hospitals generate the revenue and much of their cash flows. So what we're seeing is an uptick in our products on the back end of the revenue cycle management, where we help recover uncompensated care from commercial insurance or government-type programs. So why are we doing that? We're doing it because they need cash flow during these very -- these times right now. So we're seeing that perform well. And then our public sector business remains relatively unaffected, and we're pursuing new opportunities there, in particular, with potentially even helping with COVID-19 mitigation efforts as we go forward in dealing with this. And then our other businesses, Consumer Interactive is tracking a little bit better. So what we're seeing is our direct business continuing to perform well. It's effective target marketing on our part, but also what we're seeing is just consumers being concerned about managing their credit as well as their identity. And so they're willing to pay for those products and services. Our indirect channel in Consumer Interactive is under a little bit of pressure, but holding up relatively well. So think about the aggregators in that space pulling back on marketing. And then finally, International. By and large, what we're seeing in International is consistent with what we talked about on our earnings call over a month ago. So we haven't seen material changes. And I think with the way we were seeing it, it's a developed market. So more like Canada, the U.K. as an example. They're performing a little bit better than the emerging markets. And emerging markets, examples would be our businesses in Africa, India, Latin America. And what's going on there is there's just more of a need, less digitization and more of a need to be in person. And I think more importantly, the lockdowns in those geographies are a little bit more stringent, which has had an impact. So the net-net of this is, like I said, base case, we feel pretty comfortable with increased level of confidence in that. But if these trends that I just went through continue on, in particular in these markets, there's a good chance for the upside case.

That's a perfect breakdown. And then for consumer loans or personal loans, which is an area that you're overweight because you've been a really strong partner to the fintech industry and that served you well in recent years. Just any improvement there or what's going on in that end market?

Yes. That's a great question, Jeff. So what we're seeing right now is the volumes there, as we showed during our earnings call there, they're still down. And if you think about just the demand side of the equation for consumer lending, short-term loans are not necessarily a priority for consumers at this point. Unfortunately, they're taking advantage of other types of liquidity options. So things like forbearance or different things with anti-eviction rulings, if you're in an apartment or then there was stimulus checks or unemployment benefits. Plus, when consumers are dealing with that much difficulty in their personal lives, they're not necessarily spending on things like vacations or home improvement, which you typically would go and get a personal loan for. So I think the demand side of that is down. But we are starting to see that tick a little bit back up. Conversations that we are having with our customers that they are planning to ramp up volumes, but they're just not kind of -- let's just say they're being cautious for the time being. But what's been interesting is these customers are still very active. And in particular, during this time, we've actually won new business from a relatively large fintech player where we weren't the primary bureau. And to your point, at the beginning -- at your question, this is an industry that we've built a very nice position in. And this was one that we didn't have the relationship with. So we were able to win business during this time.

Okay. Perfect. And then when you, I guess, compare your results to the 2 peers that have now reported, I think we kind of just walked through, part of the difference was that you reported 3 to 4 weeks earlier than some peers, and you gave scenario-based and you're actually tracking towards the kind of the upper case. I guess just as I see it, there are some kind of mix negatives for TransUnion in the current environment. One is the personal loans, another is less mortgage, at least, than 1 peer. You don't have an unemployment claims business. But it looks to me like maybe other than Consumer Interactive, everywhere that you go head-to-head that you're either in line or outpacing your peers. I guess is that the way that you see it? And then just how do you think about the cyclicality of your business relative to peers? I would think there's some unique aspects of this down market where some of your emerging verticals are not performing as countercyclically as they normally would in a world where there's not physical shutdowns and there's just weak GDP.

No, that's right. And if you think about how we've always spoke about our emerging vertical business, we did talk about that as being something that would be countercyclical in a, dare I say, a normal recession. Clearly, nobody anticipated this type of global impacts to business just kind of overall. So I would say that our vertical -- our emerging verticals are performing relatively well. I touched on insurance already in the previous question, just in regards to the shopping activity that we've seen for auto insurance. So that's been helpful for us. Health care, I touched that as well, too, that that's a business that right now is performing somewhat okay because of the need to collect on uncompensated care. The rest of the other emerging verticals are under a little bit more pressure. So if you want to take a couple of examples of that collections, in particular, we've always talked about that being something that would be countercyclical. Well, there's a lot of policy-driven moratoriums on collections right now, which are absolutely the right thing for consumers at this point in time. But if you think about a normal recession, what we would be doing is we would be helping our customers on the collection space identify consumers that do have the means to pay their bills and to put them on some type of payment plan, while there's moratoriums. And secondarily, many of the third-party collection are customers they couldn't even get into the office because they're call-center based. So they just -- they couldn't work. So that part clearly was under pressure. Another example, too, in the emerging verticals is just our telecommunications business where we work with many of the mobile operators. With their storefronts closed, there is less purchasing activity and less checks for credit or deposits, which have had an impact on this. But on the flip side of that, our public sector businesses had seen some limited downside risk. And as I already alluded to, there's a potential upside for us there as we can potentially work on mitigation activities for COVID-19, which is something that we continue to explore. So to the beginning of your question about how does this relate to our competitors? I would say that what we're seeing, first, in financial services is relatively aligning. Mortgages up across the board for everybody right now. So we'll clearly have an issue a year from now with a comparable because mortgages has been a really high level. I think you've heard from our competition about auto as well, too, being on an uptick as well. And I think that was a little bit of a surprise to people when we released our earnings. But then when you dig into it and you say, well, not every state was closed down, auto dealerships were open, online delivery, online orders and delivery capabilities and then just the incentives in this space. Those are really the drivers that we've seen. So we see that align. And then even the commentary on our international businesses seem to somewhat align as well, too.

Okay. And then could you -- as somebody that's managed this in prior down cycles, can you give us some perspective of how quickly in the past when you've come out of a down cycle, you've gone back to your prior growth trends? And I guess what were the lessons learned, like how are you managing the business differently from an expense perspective or funding initiatives or in engaging with clients to kind of get back to prior growth trends even quicker potentially this cycle?

Yes. That's a great question. I mean I think the last time we saw something of this severity, it was the great financial crisis going back to 2008 and 2009. Obviously, this is very different from an economic standpoint, but TransUnion is extremely different. Our portfolio was heavily dependent at that time on U.S. Financial Services. And we made -- you know this already and many on this call do, I mean we've made a concerted effort to significantly diversify into different verticals in the U.S. but also our geographic footprint internationally as well. So what we're doing differently this time around, as I'd say, we're increasing the touch points with our customers from the onset. So what do I mean by that? We've been very proactive, in particular, with advisory boards. This is where we have our customers on panels where they and other customers are telling us what the trends are and what their pain points are. So we've held over 30 of those, already through the second quarter to this point. In addition to that, what I think we're doing differently is, besides the touch points, it's the proactiveness on our product, tailoring packages and products to our customer needs. So a couple of good examples of that would be what we're doing with CreditVision. So everyone knows CreditVision with trended data capabilities. But there's ways that we've been able to tailor the capability by creating incremental or new data attributes specific to this situation that we're living in. So we have 25 new attributes that are live. And then we have 30 more that are coming in June. We refer to these as a CreditVision Acute Relief Attributes. So on top of having -- being able to identify specific attributes on our consumer file related to this, we've also developed what we call a CreditVision Acute Relief risk score, which is, in essence, using trended data but not having delinquency information. So being able to help our customers understand the underlying impact of COVID-19 on the customers and to have them better be able to tailor their offerings to them. So more touch points, more proactive on the product development side. And you asked you a question about expense as well, too, that I just want to touch on. So we were very deliberate with expenses and not being too drastic with cutting. We were prudent in our approach because Q1 was shaping up to be an exceptionally strong quarter for us until the second half of March. So when Chris and I and the rest of the leadership team looked at what that momentum was and what it looked like, we just felt it was prudent to put a hiring freeze and curtail the travel program, do things that would protect our associates, working remotely, but keeping investments that are important to us in our future growth potential alive. So talking about our technology transformation as well as the work that we've been doing with solutions, which is going to drive our new innovation as well as the operations group, which I've spoken to about before in the past. So we've been very deliberate to make certain that those investments are maintained. So when people saw our base case outlook, they saw a degradation in margins and that was deliberate. We didn't want to cut into muscle until we saw that there was something -- if there is something structural that's happening. So that's what we continue to assess on the cost side.

I think it's really helpful when you talk about kind of all of the new data attributes and the risk scores that are part of your trended data solutions because I think trended data is a lot more sophisticated than some investors from the outside may think. But just before we get into kind of what the next big initiatives are, can you just talk to kind of what the remaining runway is for trended data? And do these types of, I guess, initiatives where you have new data attributes, new risk scores, does that increase revenue even with the existing user base of CreditView -- or CreditVision, sorry?

Yes. So for sure. So we -- so you know that CreditVision has been a differentiator for TransUnion for some time. So I go back to your first question about the company and my thoughts and think about when I said about accountability. To me, CreditVision really underscores that. CreditVision has been around for many years. And we had it working off the site at someone's desk, and we never really put meaningful investment and people behind it until 2012, 2013. And once we did, it came to fruition and we gained a very nice position in mortgage and with the fintechs. Then we started to roll it out internationally. So when we look at the runway, I'm pretty excited that there's quite a bit more to go there. If you just took CreditVision, and before COVID-19, and the capabilities that we had, there was a lot of applicability for growth just in other end markets within the U.S., in particular, Financial Services getting further into banking and credit card is something that we've seen some really good momentum on. International, we've talked about the great success in the past that we've had in Canada and just being clearly differentiated with our capabilities there. So we've taken that product to almost every other market like India, in the U.K., and it's very early on in the adoption there. So what these initiatives do that I talked about, we're constantly able to innovate and bring new attributes and new scores to our capabilities and trended data. It just makes us that much more broad-based in our offerings. It enables us to almost come at any issue for our customers and be able to show trended data in how they will make different decisions. So there's still quite a bit runway left.

So it's obviously a moving target, but it's been a tremendous differentiator for you and it's driven a lot of revenue and growth. Is there a next trended data? And I'm not talking about CV Link, but just from a revenue opportunity perspective for TransUnion, like does Prama have that much potential over the next 5 or 10 years or just anything else that you would point to that could kind of be the next big needle mover from a revenue perspective?

Yes, sure. So I would say, just to answer on Prama, I mean Prama really hits to the heart of our capabilities with analytics. And it's something that TransUnion has worked with its customers for 4 years. And what Prama really is all about, it's about making that process and understanding our customers' data and being able to develop risk scores easier for them. So that's -- it's still -- it's a very important initiative for us because our customers are getting more and more sophisticated, and as they get more sophisticated, their demands on us are ever greater. So we need to be able to respond to that and have capabilities where we're able to ingest data, find the commonalities and help our customers be able to build scores based on their risk tolerances and how they would want to potentially run a campaign. But other areas that we see potential for growth, I mean, I think is, first, our fraud product. So when you think about the portfolio that we have today, IDVision is more of our legacy products where we leverage our core credit data assets. And we are identifying a consumer during the account origination process. But we've acquired assets such as iovation, which has device-based information and reputation consortium on over 6.5 billion devices. So that brought us into a whole different spot in fraud. We had acquired a business by the name of Trustev about 5 years ago that enabled digital verification technology. And then in the U.K., 1/3 of the business that we acquired with Callcredit is fraud, and they have a couple of products called CallValidate and CallML, which are leading in that market. So I went through all that because we have 4 kind of distinct products, and what we're working on right now is how do we bring all that together on a common platform because our lives just has gone digital. And I think we've seen that during this pandemic about how dependent we are on digital channels. So being able to bring our fraud capabilities in and partners, definitely a nice -- which should be a nice source of growth for us in the future. Other areas, though, too, is just our verticals we're excited about. We continue to be excited about the potential of insurance. Gaming is another vertical where we see some potential upside, and then our international geographies, U.K. and India, in particular, I would highlight. Once we get back some traction on those businesses, we're performing really well and they have some great data assets.

Good to have a big portfolio of growth drivers the typical TransUnion way. I guess just to wrap it up, kind of keying off my last point, you spoke earlier about the increased kind of utility of trended data in this environment and some new attributes. You just referenced kind of this environment serving as a catalyst for more digital, which can be a positive for you or for certain of your solutions. Any other kind of structural end market shifts that you're starting to pick up on or think may play out where this environment is serving as a positive catalyst for your business over the intermediate term?

Yes. I think it's -- the way to answer that question, Jeff, is really just to kind of go back to how we are responding. And it's really about the customer touch points and understanding what -- where they're headed and what their needs are. So -- and we take a lot of pride in that proactiveness in reaching out and truly partnering with our customers. So I -- and so what we're seeing right now as far as where we're able to help our customers, I talk -- I spoke about health care already and just what we're able to do in the back end of the revenue cycle management. And there's just a lot more that we can do there. Fraud, I just went through that. That's another one that we feel really good about being able to bring more relevant products to market post this pandemic as things change. But the structural changes at this point, not necessarily, we're very focused on it, but not necessarily seeing anything that I would say structural.

Getting back to your old ways is a pretty good outcome, too.

Yes.

So I guess, we'll conclude it there. Thank you all for joining. Thanks to the investors as well, but really appreciate it, Todd, Aaron and Ryan. With that, I will conclude the TransUnion session, again, thanks. The next sessions for the Baird conference will be WNS Limited, ServiceMaster Global, Shoe Carnival, Constellation Brands and Gannett. So thank you all.

Thanks, Jeff.