TransUnion (TRU) Earnings Call Transcript & Summary

Hello, and welcome, everyone, joining us on the webcast. My name is Andrew Nicholas, and I'm research analyst covering info services, consulting and HR technology sectors here at William Blair. Before getting started, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome the management team of TransUnion to the 40th Annual William Blair Growth Stock Conference. With us today, we have CEO, Christopher Cartwright; and CFO, Todd Cello. Thank you to each of you for joining us.

It's our pleasure. Thanks for having us.

Given this is a generalist conference and in place of what I think would usually be a 20-minute-or-so presentation, company overview presentation, I was hoping you could just start us off by taking a couple of minutes to give a quick snapshot of the business, primary services you provide, maybe a little bit of history of the business before we kind of move into some of the more current -- relevant topics on the current environment.

Okay. Great. Happy to do so. So TransUnion is 1 of the 3 large consumer credit bureaus that operate globally. And the core business is aggregating information from financial institutions about the existence of different consumer credit obligations, if you will, loans of all stripes and the consumers' history regarding payment servicing of those loans, of those financial obligations. That's the origin of the business. That's the service that anchors our operations in the 30 countries that we operate globally. In recent years, I would say, the last 5 or 10 years, we've been actively diversifying around that core by entering or expanding with additional data sets, additional products that leverage this data and also moving into a variety of new geographies. So some of the additional data sets that we had added both extend and deepen the core credit position, which is used by lenders and insurers and a whole variety of different market segments in order to understand the dynamics of the market and the risks associated with doing business with individual consumers. So beyond traditional credit, we started acquiring what we call alternative data sets, alternative credit data sets for those consumers who can't participate in what I'd call mainstream credit, but may be buying assets and paying them all through rental payments, taking short-term unsecured loans online, title loans, traditional storefront payday lending, a variety of different services like that. They're high risk. They're high interest rates. But the vast majority of consumers actually pay those loans back and paying them back within the terms that are outlined and are really demonstrating responsible financial management behavior. So we view it as a way to promote financial inclusion and to give consumers credit for that good financial behavior and help them kind of climb the ladder, credit launch. In addition, we're looking at demand deposit information, rental information, rental payment information and really any data set that demonstrates that consumers honor their financial obligations is useful in shaping the core credit profile. So that's credit and how we've enhanced the core. We've also become one of the largest aggregators of public record information in the U.S., where we pull together a variety of different public data sources, and we fuse that around the individual, and it's used for understanding individuals and their relationships to other individuals, to assets and the businesses. And it serves the investigative needs of a variety of market segments, be it collections agencies, government, law enforcement, et cetera, et cetera. And it's been a great diversification for us and a real high growth area. We've also got a whole range of information that auto insurers use to underwrite policies and risk. And I guess the other area that's been an important part of our growth is information around -- of health insurance policies and who's insured and when they were insured in the U.S., and we use that to underpin a revenue cycle management vertical that we have that help hospitals and other health care providers select -- collect for services provided, typically their insurance coverage. So I think to give you a sense that a good portion of our business is now coming from areas outside of credit, the credit is still the core product and very important to what we do. So our history briefly is we were owned by the Pritzker family for the majority of our existence, a large industrial family here in Chicago, and we were the primary holding and then while they were good owners, the amount of capital that they were able and willing to invest in the business to support our growth was less than ideal. So in late 2012, we essentially LBO-ed out of the Pritzker family in partnership with Goldman Sachs and Advent Partners and began, I'd say, the modern era of the TransUnion. So after the LBO, which came, in the depths of the Great Recession, the private equity owners invested in bringing in a new management team. They started with the new CEO, a guy named Jim Peck, who had built the risk management division for LexisNexis. And then Jim brought in various other managers with information services backgrounds and then the private equity firms. They sponsored a period of aggressive investment in product innovation and also replatforming our core technology from the mainframes to a modern distributed clusters of servers operating on accommodation of open source and proprietary software, which lowered our operational price point for technology, but really improved the speed at which we could develop new products. And I think that was really critical. And since then, we've been able to lead the market in terms of product innovation. One great example of that is we pioneered the move from credit assessment at a point in time to credit assessment of individual consumers using 2.5 years of trended data. And just like the financial analyst, you'd rather have the trend in the perspective than you would simply the current month's financial statement, right? And that innovation is quickly becoming a new standard for credit assessment, certainly in the U.S., but then in many of the markets that we pushed it into around the world. I would have to say, a lot of people ask me, what accounts for the strong financial and stock price performance that TU's had over these past 6 or 7 years. And of course, I'm including the period before we went public in the summer of 2015 is -- this was really an undervalued and underappreciated asset within the Pritzker conglomerate because it wasn't a primary holding, but the dynamics of the industry were very favorable. We had great data. And the team at that time had the foresight to invest in trending data, but they hadn't commercialized the product yet. And they had at least a couple of years. They positioned the business to have at least a 2-year head start on the rest of the industry. And so the business gets LBO-ed, and we find good market position, good data asset, and a core of really dedicated, talented credit professionals who simply hadn't been the latitude to develop the business. And then on top of that, the CEO prior to Jim was himself a former consumer banker in the U.S., a guy named Bobby Mehta who ran the consumer bank for HSBC. HSBC exited the U.S. market during the Great Recession. And suddenly, a lot of really smart people who directly understood the wants and needs of lending customers were available and they joined Bobby at TransUnion. So you combine this talent that had a great history in the business and an understanding of credit products and scoring, with people who really understood the client side, how lenders use that information and what their needs are. And together, it was a really powerful combination once it was liberated and properly capitalized, if you will. So that's how I think about TU and the story. Together, as I mentioned, we're in 5 continents, 30 countries, major operations in the U.S., the U.K., Canada, terrific position in emerging markets like India and also a variety of operations in Latin America and Asia Pacific. And now we've really spread out from the financial services vertical into public sector, insurance, credit, telco, e-commerce, et cetera, et cetera. There are a lot of places we can go with our data and our analytic capabilities, which are very useful in understanding and predicting risk.

That's helpful. Great context to kind of launch from. I think a lot of people on the webcast would certainly like to move into some of the more current environment questions, and you issued an 8-K earlier this morning. I'm summarizing a bit, but trends continue to improve, particularly in the U.S. business. And you also said, I believe, that if current trends would persist throughout the remainder of the second quarter, you would expect to achieve revenue declines in line with the upside case outlook scenario you outlined on your first quarter earnings call. So just so that everyone's on the same page, would you mind drilling into the underlying drivers of that improved outlook a bit further? And then if you could speak to how you're thinking about the consumer credit markets more broadly and how you expect them to improve from here?

Okay. Yes. Yes, it feels like we've all lived a year in this second quarter, and it's not even done yet. But initially, and I guess the first quarter of the year started off very strong for us, and we were overperforming the guidance, the formal financial guidance that we had set in The Street. But in the middle of Feb -- March rather, it was clear we had challenges as did the world. And we went in to shelter in place, and it was an enormous shock to our -- to the economy in the U.S. and elsewhere. And so I thought we had to discontinue guidance, and instead, we started -- we presented a series of scenarios that we thought would be relevant for the business based on the current volume trends that we're seeing in the industry. What we've seen since then is a consistent improvement in business volumes, particularly in the U.S. across most of our product lines, I think nearly all of our product lines at this point, that led us a couple of weeks ago to come out and say that we had high confidence in achieving our median case, which we refer to as the base case. And since then, we began seeing a further improvement in market volumes. I think as consumer confidence has come back and states have begun to reopen and all of that, and so we communicated that we now had increasing confidence that we would achieve the best-case scenario, right, which would mean for the second quarter of this year, we expected to decline less than 10% than we had in 2019. And that improvement, the way I think about it is, initially, when we all were forced to shelter in place due to the pandemic, it was an enormous shock to economies and I think it took 2 to 4 weeks for businesses to transition to working productively at home in virtual settings like this one. And the focus was entirely on the transition and making sure that employees were safe. So commercial activity interrupted, our market volumes suffered, and it was during that stage that we issued our 3 scenarios. But markets are resilient, and businesses and consumers found a way to continue to transact. And I think that's when we're starting to see improving volumes. And then I think, most recently, with states moving to open more aggressively, particularly in geographies that have had a very limit -- COVID has had a very limited impact, we've seen another step-up in economic activity. And so kind of covering the various verticals, financial services, which we break into consumer loans, card, mortgage and in personal lending, online and other, we have seen material improvements and steady improvements across all those lending categories. In particular, mortgage has performed well above all expectations that we could have had at the beginning of the year, but then that's the silver lining in a distressed situation where the Fed was forced to really lower interest rates and inject a lot of liquidity into the economy to keep things going, but that created a great opportunity for consumers to refinance their mortgages and save money. And so as you've seen with all of the bureaus, that line of business, mortgage lending has been booming. But we've seen improvements in auto loans as things have loosened up and consumers can actually visit auto dealerships and walk the lots. Also, auto manufacturers have given some terrific financial incentives to keep volumes up. And even in the fintech space, which initially pulled back on all customer acquisition and origination activity, not exclusively, but the vast majority did and focused on risk management and liquidity, that part of the business has loosened up, and we're seeing those volumes improve. In our emerging verticals, insurance remains very solid. We always expected that to be -- to give us some diversification, something that's steady, growing in a downturn, collections, which really suffered, has started to rebound. Government is actually up and performing well because there's a lot of financial disbursements, it being administered in the economy that always heightens the risk for fraud. And we have developed a really strong line of business and online fraud mitigation. And there's been strong demand in -- for that. So that's performing well. On top of that, we've got a nice direct-to-consumer business for credit. Part of that business comes from just a direct subscription-based relationship between TransUnion and customers. And then the other part of it is TransUnion providing information in the analytics to marketing intermediaries that offer free credit reports in order to fuel lead generation. The first part of the business, the direct to subscription, consumer subscription has held up extremely well. In fact, it's growing faster than we anticipated. We're increasing our advertising spend to take advantage of that because consumers want financial protection during this downturn. The lead generation portion of it, however, has not performed as well. It's softened. But together, they pretty much cancel each other out. And it means the consumer part of the business has been steady. Health care is improving as well. We always believe that health care would be countercyclical for us. However, we never envisioned a global pandemic scenario where consumers would either be reluctant or would be unable to access health care for elected and preventative procedures. And we've seen that across the U.S. where health care providers have canceled all of those procedures in order to convert capacity over to COVID or infectious disease treatment. And so that line of business dropped. However, it's starting to improve, and we're seeing those health care providers also really focus on revenue recovery because they're struggling financially. And the last thing I'd leave you with is the international markets, and I think our portfolio, in particular, because it skews to emerging high-growth economies, it's been particularly impacted because often, those economies, they don't have the infrastructure for digital interaction and digital commerce that more developed countries have. They're relying on the brand's network and other in-person, consumer interactions to generate credit. And so the impact of shelter-in-place provisions has been more profound in the international markets. They've dropped further in the other parts of our business and I think they'll be slower to return. But if you follow TransUnion, for any period of time, you know that one of our differentiators is the fact that we -- our international business does skew toward emerging markets, and it's just got higher in year, growth typically. Last year grew 15% organically. And in time, we're confident it's going to return to that type of double-digit organic growth.

Great. That's helpful. And you answered a few of my follow-ups within that. So I appreciate that. Maybe one more on the current environment. Just -- and you alluded to it a little bit in your response earlier, but just given the experience you have managing through the past couple of months, I'm curious how you're thinking about the potential risk of second wave. Obviously, there are a bunch of different variables to consider. But I'm just wondering if you think the impact to consumer credit could be less severe, the second time through, just given the experience consumers and businesses have in dealing with a more unique pandemic-driven shelter-in-place type environment. And just kind of how you're thinking about that risk in the second half of the year.

Yes. That's a good question. I mean obviously, I hope we don't have a second wave of any sort. We had obviously a lot of suffering already. But I do think we've had in this first wave, great preparation for how we would deal with subsequent flare-ups in COVID. And as you see from the statistics, COVID continues to march across the U.S. and the rest of the world, although those cities, states, countries, et cetera that went aggressively shelter-in-place policies are -- have bent the curve and have reduced infections to more manageable levels. And now I'm hopeful that the combination of populations getting comfortable with working from home and sheltering in place, also wearing masks to mitigate the disease transition. And the increased availability in diagnostics can help prevent or mitigate a likely second wave. If it comes around, I think it's just more of what we've experienced in the latter half of the second quarter, right? I don't think we'll have the shock of that initial transition to working from home, working virtually that we experienced. So I think we're prepared. However -- and again, look, I read the same things that you read. I thought it was very encouraging yesterday when the WHO came out and said that they believe now that asymptomatic transition -- transmission rather, doesn't happen very often. It's actually quite rare. And transmission between children and their adults is also quite rare. Now I just saw this yesterday, obviously, there's a lot more to read and to understand, but if that's the case, I think that's going to have people to reengage societally and economically with more confidence, which just further fuels recovery.

Yes. Yes, absolutely. That's helpful. More broadly, I was hoping you could speak to the primary changes to customer behavior you've observed over the past couple of months. And maybe most importantly, as we move past the pandemic, which of those behavioral changes do you think are most likely to persist going forward? Do you think financial institutions demand for more frequent portfolio updates, as an example, could continue post-pandemic or any other color in terms of maybe the long-term ramifications of some of these evolving customer conversations?

Yes. That's an interesting question. When I think back to the Great Recession, one of the big changes in consumer behavior was in the hierarchy of payments within a consumer's wallet, if you will, a debt profile. And historically, consumers always pay their mortgages, that was the most important thing because the home is viewed as an appreciating asset. It wasn't the case with the massive real estate devaluation in the Great Recession. So auto payments and card payments, things that provide you mobility and financial flexibility, they became the priorities and people opt for mortgages. In the current situation, what I see happening is, one, I think mortgage refinancing is going to continue for a long time because the rates are very attractive, and that's a way to save money, which a lot of people are -- really everybody is concerned about. And so there's been a deluge in demand that's overwhelmed bank's refinancing capacity. So it will take some time for the banks to catch up with demand there. And it's also allowed banks to maintain pricing and not pass along all of those rate savings to consumers. So I think once they work through all of the consumers willing to refinance the current pricing, you could see an extension to this mortgage refi rally by a further lowering of rates. That's my hypothesis about the future. So I think that's one area of change. I think another in consumer behavior is, surprisingly, as we've spoken to many of our near-prime and subprime lenders, they expected delinquencies to begin at this point. But in fact, HELOC performance has held steady, if not improved. And I think there was an article about 3 weeks ago that talked about those segments of the market and how the government payments, the transfer payments, and there were -- and the various debt forbearance programs that have been in place, put in place had helped the consumers maintain the currency of their loans. So even if they may have diminished income or lost their jobs entirely, government payments have helped them maintain liquidity and they've continued to service the debt. And I think the other issue is that consumers are struggling to spend money, if you will, outside of the essentials because so much of the economy has been shut down. Travel and hospitality generally has been just decimated and it's very sad because folks, they can't take a trip, they can't go out to eat. In fact I was joking with Todd not too long ago, I couldn't even go down to the coffee shop and buy an overpriced cappuccino, right? Everything was shut down. So you had incomes being maintained, discretionary spending plummeting and a greater savings rate. Now a big question there is, with all of this reopening and all of the short-term stimulus that the government's providing consumers isn't enough to rekindle economic activity so that when those payments from the government invariably end, we've got our own economic momentum to continue the recovery. And I think there are a lot of people who are a lot smarter than I am, thinking about these issues and making bets. And the market certainly seems to feel that we are positioned for a stronger recovery than perhaps is anticipated initially, but of course, those rallies, they could be further benefiting from just the massive liquidity and kind of search for yield that's going on.

A lot of different dynamics in play, certainly. Maybe to try to squeeze one more in, maybe one for Todd on the expense front. The immediate priority was to prioritize the balance sheet and liquidity to ensure you are in as good a place as possible to weather the pandemic, obviously. Having started to see trends improve, are you closer to loosening the belt a bit in terms of investment spend? And maybe relatedly, what are some of the metrics you're monitoring to help guide that decision? And any comments on kind of the margin trajectory as we return to a more normalized environment?

Yes. Sure, Andrew. Thank you for the question. So yes, as we indicated on our second quarter -- I'm sorry, first quarter earnings call, we did put in a series of measures to manage our expenses accordingly, just because of the uncertainty that we were facing in April of -- early April. I think we, ourselves, just remained steadfast in certain investments, one in particular, Project Rise, which is our technology initiative to move many of our applications that are cloud-ready to a hybrid-type cloud structure. We announced this in our -- during our February earnings call. So we've been deliberate about maintaining those investments as well as other investments throughout the organization. So clearly, as the revenue begins to perform as we've outlined in the 8-K this morning that obviously gives us the chance to loosen up and to be a lot more aggressive than maybe we have been in the last 30 to 45 days. Specifically on the margin side of things, with -- and you could see in the cases that we laid out that there was a high degradation of margin just in the base case itself. But anticipating that when the revenues will be less than 10%, we do feel pretty good about hitting that upside case. I would expect that there would be a meaningful flow-through of that revenue to profit benefiting our adjusted EBITDA margins.

Great. I'm not sure if we have enough time. I'll try to squeeze one in and mind yet, need to be a short response. But just taking a bigger picture look, given TransUnion's track record in being the first mover in a lot of the faster-growing markets. Just wondering what you're investing in today. If you could pick one thing that would be the next big thing in the next 5 years, what would that be? And what are you most excited about?

So I'll answer it quickly and broadly. We're investing in our business today. And we have the good fortune of having weathered this pretty well even during the depths of the April downturn. Because of the expense management we did, we were still strongly profitable, didn't have liquidity issues. So innovation is ongoing and across the waterfront of share products that we have globally. Our technology migration, product Rise (sic) [ Project Rise ], where we're moving from our own hosted cloud to the public cloud and using the opportunity to implement a standardized tech architecture and simplify our application portfolio. That's ramping up speed there. That was something we announced earlier in the year. And we're now really turning to operational effectiveness through leaner processes and better automation and consolidation of similar functions throughout our global portfolio. We think that's going to help us serve customers better, ultimately extract more revenue yield through better retention and satisfaction and become more cost effective. So we're doing those 3 big things. Products that we're excited about, I mean, look, the arms race that we set off with -- by introducing trended data continues. There's a lot more innings for implementing trended data, and we continue to add new data types to it in our CreditVision Link product that's all those alternative things. And then a lot of innovation in the industry around checking account information around income products, around utility payments, et cetera, et cetera. There's a lot of opportunity to drive innovation through adding those products. And the last thing I would just mention is online fraud mitigation, digital fraud mitigation has become a really fast-growing business for us. We're integrating a series of acquisitions we made of market companies. That's a global business. We're going to migrate to a single product that we're going to sell globally, and we're investing a lot and working hard to make that happen during the pandemic. So for us, the pandemic is a chance really to focus and invest and come out stronger on the other side.

Great. Well, thank you, everyone, for joining today. I really appreciate all the color, and have a great rest of the day.

Thank you, Andrew. Thank you, everyone.

Thank you.

Bye.