TransUnion (TRU) Earnings Call Transcript & Summary

All right. I think we can go ahead. I'm Jeff Meuler, Baird's Information Solutions analyst. Very pleased to be hosting TransUnion, which is one of the big 3 global credit bureaus. More broadly, one of the leading providers of consumer information solutions. For those that aren't as familiar, I want to give a couple of financial metrics because relative to a lot of companies at the conference, I think it's a positive outlier on margins, about a 40% EBITDA margin business, and it has grown at some of the strongest organic rates of any of the publicly traded information solutions companies consistently in the low double digits before COVID hit. With us from the company is its CFO, Todd Cello. Todd has been CFO since 2017. He's been with the company since 1997 and previously held most of the other key finance roles before becoming CFO. And then also with us from the company is its IR team of Aaron Hoffman and Ryan Rendino.

So with that, we'll kick it off. Maybe just to level set a bit. I'll ask one of the most common questions that we get from investors that are new to your company, but it's also something that I think helps explain the comparative performance between you and your peers at different points in time. So with that preamble, how does TransUnion differ from your 2 bureau peers? So like what are your most important businesses or data assets or something about the operations of the company that differentiate TransUnion? And as part of the answer, if you just want to call out, any big markets or geographies that you over-index to or under-index to?

Okay. Sounds good. Jeff, thanks again for hosting us this afternoon. I appreciate the opportunity to talk with you and everybody else that's joined us. So thank you. So -- and I think your question is a very good one. Just to start with -- just to give the appropriate backdrop on why is TransUnion different. So I think first, what comes to mind for me over the last several years is just the meaningful run on product innovation that TransUnion has had over the years. So examples of that would consist of things like CreditVision and CreditVision Link, which is, in essence, our trended data solution. We were first to market with that. And we've continued to innovate. The second product that I talked about CreditVision Link actually takes alternative data and over 100 different types of alternative data. So when I talk about alternative data, noncredit, which is obviously the core of what TransUnion has. In addition to that, I want to highlight other product areas where we've had some significant success like in fraud mitigation. So in particular, our IDVision, suite of products as well as within acquisition that we've recently made a company called iovation a couple of years ago, which gives us a device-based reputational information. And then finally, in the direct-to-consumer space, our CreditView platform has been a success, providing what we call a white label solution to our customers, such as financial institutions, to be able to communicate and provide different types of offers, educational tools on the credit. So a lot going on, on the innovation side, everything is different. In addition to that, we've also made some very deliberate decisions on vertical markets that we want to participate in to diversify our business outside of our core financial services customers. And in particular, we've built up 2 verticals, 1 in insurance and another in healthcare that are close to $200 million worth of revenue for us. So they're meaningful. And to that point, we've had success moving into these adjacencies. So a couple of other areas I'd highlight would be what we've done with public sector and supporting government, but then also recently, on digital marketing, we've made a couple of acquisitions there. From a geographic standpoint, I think our portfolio is different just because of a couple of faster-growing economies that we're exposed to, in particular, India as well as in Colombia. But we've also had some really good success in more developed markets like the U.K. and Canada as well as we have a fairly decent-sized business in Hong Kong. And the key to the success here is just our ability to diffuse our intellectual property. So think of the first point I made about our innovation that's been really successful. And then I guess, Jeff, the last thing I'd highlight is the differentiator has been technology for us. We completed a project way back in 2016, 4 years ago, called Project Spark. Which really -- it moved us off the mainframe into a distributed server network, but it put us into a leadership position on technology. And we've continued to evolve on that to the point that earlier this year, just a little bit over 3 years after we completed a major technology initiative, we launched another one called Project Rise, which will make another significant shift forward on our technology, in particular, better leveraging the cloud.

It's a good perspective. And I also always like to say being in a business where there's at most 3 players is also a really good starting point. And then I guess, just with that perspective, I wanted to get into some of the recent trends. So you recently reinstated 2020 guidance calls for 2% to 3% organic constant currency revenue growth. To me, that's relative resilience. But I guess there's maybe some timing benefit in there, and that Q1 was so good for most of the quarter. Maybe the U.S. mortgage market is better right now than you typically expect in a recession. But how do you assess your 2020 performance relative to what you typically expect in a recession? And any kind of other positive call-outs or maybe some negative call-outs of things that performed worse because of some of the unique pandemic effects?

Okay. Well, since you -- we're trying not to point my longevity with the company, at the onset, I can actually talk -- I've seen some cycles, I guess, is the reason that I bring and operate. First starting just back in 2000, 2001, the recession that we entered. I was the business unit CFO for our U.S. markets business way back in 2008, 2009 when we lived through the great financial crisis. And arguably some slower growth even coming out of that and now this more recently. I think it goes without saying that I don't think anyone ever thought about a pandemic when we think about a recessionary type of impact. I mean, like I already alluded to a couple of other recessions. 2008, 2009, clearly, there was a global impact to that, but we just didn't see entire sectors of the economy just shut down and not just on a U.S. basis, but globally, in particular, as shelter-in-place orders were put in and consumers weren't leaving on their homes. So when we have thought about entering into a recession in the past, we always -- and we were deliberate strategically in building out our portfolio from the point in time when we entered the Great Recession, I was like we need to have less exposure to U.S. financial services. So we've deliberately made investments in vertical markets like everybody spoke to in some of our international businesses as well too to be countercyclical, who, again, would have thought that the whole world was going to be impacted. And a lot of these emerging markets that we operate in, like, in particular, India, the shutdown was so dramatic and the volumes that we saw. But I think the thing that it's unprecedented and things clearly didn't behave in what we would consider to be a normal recession. But I think the thing that really resonates with me is just the resiliency overall of our business. And I remember the onsite of the pandemic in March, waking up going, oh my God, if everybody is going to be living at home, where is revenue going to come from, right? I mean, it was literally those types of discussions and thoughts that we were having. But even with that, I think what we saw is still a tremendous amount of activity from the consumer while they were sheltered-in-place more so in the U.S. internationally, a lot less, right? And I think you can see that in our results in the second quarter. But I think what's been most encouraging to me is just the way that as governments have reopened and economies or markets have reopened, we've just seen that resilience. We've seen the businesses bounce back pretty well for us.

So what does the recovery look like for TransUnion? At the 2019 Investor Day, you gave us a 3-year kind of 7% average revenue growth rate. I guess I think that contemplated a recession, and you were still planning on averaging 7%. So do you expect better than 7% growth during the expansionary years? Can we just start there?

Yes. No, I think that's a great place to go. So yes, back in March of 2019, we held our first Investor Day as a public company, and it gave us the opportunity to refresh our long-term growth algorithm. And to your point, Jeff, we did commit to 7% annual organic constant currency revenue growth over a 3-year period, but the key term was on average. And when we got into 2019, there was a significant amount of talk about the U.S. entering a recession at that point in time. So much of our modeling, kind of, to the point I was making previously, we were contemplating that normal type of recession, right? Like what we had experienced in other cycles, where maybe you saw our core financial services business slowdown but those countercyclical businesses would offset in the international or adjacencies like healthcare and insurance. So I think if you factored in a normal recession, and you assumed that there was a period of correction, that, okay, like this year, you're under 7%. Sure. The math would work out that you'd have to have a year greater than 7% in order to hit the average that I spoke to. I just think the dynamics are so different right now, right?

Sure. But 2% to 3% growth is not that bad for a bad year. So can you still get to 7% on a 3-year average even with, I guess, some unique pandemic effects?

Yes. So 2% to 3% is actually pleasantly surprised. Again, if I went back to March, April, we were not thinking that way. I think what we saw, in particular, was the favorable trends in mortgage. So with historically low interest rates, we saw first a refinance boom, which is still going right now. But as the shelter-in-place orders kind of stayed in effect, many consumers have said, why am I living in an urban area, suburbs suddenly look good, more space, a backyard, maybe a basement as opposed to maybe 800 square feet in the city somewhere, right? So we started to see a significant amount of purchase activity. And those trends have persisted for us throughout the year. But as you know, Jeff, the mortgage business, we're very deliberate in making sure that we serve it, the customers there with products like CreditVision but it's very cyclical. And again, having seen many, many cycles, we don't count on it. We look at more of the areas where we're deliberate and placing bets and more strategic in our other vertical markets, like I've already talked about insurance and healthcare and maybe our tenant business, our diversified business where we're -- e-commerce and retail, telecommunications, just to name a few. And then also our international portfolio and making certain that we have that. So with the dynamic that's going on this year is we're getting outsized performance on mortgage and we're seeing a recovery in other businesses. And what we're expecting to happen is, at some point, in 2021, there's going to be an inflection, where mortgage will come back down, but the rest of our portfolio will continue to grow as -- a good proof point for that is just the materials we've put out in our earnings calls. But you'll kind of have a potentially a mixed bag next year because of the outsized impact that mortgages had. So I think what's kind of most important for us and Chris Cartwright, our CEO and myself and the rest of the leadership team, once we felt a little bit more firmer about things in, say, the May or June timeframe, we continue to be very aggressive in making investments in our technology, which I already alluded to, but also areas like solutions and operations to continue to drive that product innovation that I spoke to, but also just to make TransUnion an easier place to do business. So those are areas that we put in -- we had in motion. We paused a little bit at the beginning of the second quarter and then went in full force to continue the investment pace, and we'll continue that into '21.

Okay. And then any other kind of -- so that's an operating difference. Can you just maybe refresh for those that are not familiar kind of your views of the bank -- the selling environment into banks and how your new sales are trending right now? And if you can give us some historical perspective of how does that compare to prior downturns?

Yes. So I think the normal playbook that we deploy in downturns is, first of all, our customers want to protect what they have. So they want to look at their book of business or their portfolio and understand the risk that they have in there. But then they also look for opportunities to cross-sell. And there are the ways that they could monetize a particular situation. So through each cycle that I've experienced that -- at TransUnion, that has definitely been the playbook is to bring products and services that are relevant to the need of the customer at the time. So if you were to look at our pipeline back in February before the onset of the pandemic, it was heavily weighted towards more account acquisition type of work because that's what our customers were doing. And when they retrenched, we quickly reverted and offered them something different. So I think what's different now, if we were to go back and the last time we saw a big decrease with TransUnion would be probably 2009 time frame. And we saw our revenues decline 9% back down, a significant contraction in our adjusted EBITDA as well too. The difference now, though, from then is TransUnion is just a completely different company from a product innovation standpoint. So that goes really kind of the first thing that we spoke about. So in particular, like what I would highlight, we quickly leveraged our capabilities with CreditVision and trended data. And we came out with what we call the -- our acute relief set of attributes for CreditVision. What that did is that enabled our customers to be able to better understand their customers if they were in any type of forbearance program or if they had a better capacity to take on more debt. So we quickly launched that in the market with quite a bit of success. If I were to think back 11 years ago, we didn't have anything like that. So it was just kind of the basic. There's other examples like that. So that is the innovation and really understanding the needs of the customer. We've been deliberate about being closer to the customer overall those years. So I talk a lot about vertical markets. We've been deliberate, and we hire people for our vertical markets. We're hiring from the customer side. So the great thing is, when they come in and work with us, they tell us how bad we were to work with than they were a customer, right? And we do that on purpose because we want to hear that, right? We want to hear, like, okay, well, what -- why was it difficult to work with TransUnion? What could we do better? That's really what we're leveraging right now. It's that expertise that we have in-house that have -- know what the customers are looking for right now.

Okay. And I just wanted to address a couple of the common questions we've gotten coming out of the quarter. Probably the most common one was on USIS margins. You called out a legal reserve, but you didn't quantify it on the call and then your 10-Q came out, I think, later that day or the next day. There's a couple of different pieces, I think, to it, but it looks like a $14 million negative impact on USIS profitability. That's about 200 basis points to the company. Just -- is that the right number to pull from the 10-Q?