TransUnion (TRU) Earnings Call Transcript & Summary

Hi. It's Andrew Steinerman, your business information service out here at JPMorgan. This is the Ultimate Services Investor Conference, and this is TransUnion section. So we really appreciate everybody joining us, particularly CEO, Chris Cartwright. Chris and I know each other for a long time, even going before his TransUnion days. But he's been an influence services executive for a long time. He's 7 years of TransUnion. He's 1.5 years into being CEO here at TransUnion. So it's a great opportunity to speak with him. Obviously, Aaron Hoffman and if facilitated all this. So we thank Aaron for that. Everybody knows probably by now, we've been here all day with all the information services company. It's going to be just a 30-minute fireside chat. I'm just going to launch a way. And Chris, if that's okay, I'm going to jump into it.

That's brilliant.

So Chris, if I've been listed in carefully since you've become CEO, they're sort of 2 terms that you keep on breaking up. You don't make it like a big pronouncement, but you surely use them a lot. Global solutions and global operations. And I've heard you bring them up multiple times, you just remind people of it. But I thought, is this right -- is this going to be a signature of your CEO ship? Is this of that important? Are you going to make your mark in the organization, obviously, through innovation? But are these brand-new to the organization? What exactly do they mean? And when do you think that customers, B2B customers, will see the benefits of these 2 initiatives?

Okay. Well, first of all, it's great to see you, Andrew, and great to participate in this conference, as always. It's a good one. And look, I think it's a great question and well-timed, because indeed, evolving TransUnion's org structure was one of the first things that I did. And it was really based on my experience running the U.S., and then having certain components of my responsibility running the U.S. with TransUnion, manly product development, begin to support the global markets, right? And where I view TransUnion is, this is an opportunity for us to seek greater scale and effectiveness by -- at this particular juncture, since we are migrating to the new technology standard in the cloud. But to find greater scale and effectiveness by operating our business on a more global basis. So first, just let me give you some perspective. We've grown a lot of TransUnion, and we've diversified as most investors, who followed us, know, but U.S. financial services is still roughly 1/3 of the business. And when you look at the international portfolio, which spans 30 geographies and is over $600 million now, in a COVID pandemic environment, the vast majority of that revenue, again, is targeted toward lenders or financial service with the various strikers, right? So there's a tremendous amount of commonality of need across this global financial services marketplace, particularly centered around half a dozen or so core solutions that we provide. So it's a great opportunity for us to engineer the next-generation of solutions and cement kind of a one-to-mini approach for product development and even market development, right, as we share ideas in IT about how to best enlighten service, engage and support the customers around the marketplace. The starting point for TransUnion, and look, like all of the bureaus, we developed over a period of time. Our concentration was here in the U.S. We then progressed out into various markets. And at each point in time, we kind of reinvented the infrastructure necessary to run the business. It's a bit like an auto manufacturer that started out in one country and then built a different chassis to deliver transportation in every market in which they serve. Well, now there's the opportunity to do it once, to do it better, to do it in a way that is more economically and flexible and functional, right? And so that's why I established a global solutions and a global operations and, of course, kind of double down on the global nature of our technology organization. It was to support that type of efficiency. And the first thing you have to understand is what are the products that can cut across geographies or be shared across verticals? Kind of what are the horizontal solutions in a market that is verticalized and is also spread across geographies? That's what the solutions group does. You can think of them as our product management player across those global solutions. Operationally, similar opportunity, right?

Yes.

We're supporting similar businesses, but we're doing so with different locations, different business processes, different underlying technologies. There's a chance as we invest in the upgrade to a new common standard to do it once and to do it better. And that's what we're doing operationally. It is kind of like the internal parallel to what we're doing through solutions for the external marketplace. And then finally, on the technology side, we've talked about our technological evolution over time, which we brought in the spot, where we got off of mainframes, and we built a standard technology for ingesting credit data and deploying it across the various markets that we serve. Well, now as you migrate to the cloud, we have an opportunity to further refine and consolidate our portfolio of applications. So we've analyzed every piece of software we have running in our business in every geography. We think postmigration to the cloud, we'll retire about 1/3 to 40% of those applications. And for those common products that I talked about, we won't have products. We'll have configurable platforms for delivering these services with our chosen cloud providers across the various markets that we support. And in the process of redeveloping these apps to move to the cloud, we're leveraging a common architecture and a common set of application interfaces to make it easier for clients to integrate into our services and for us to connect to the broader financial ecosystems that we participate in. Well, okay, I covered a lot there. But the change in the org is the catalyst for a change in an internal operating mindset, right, that's channeling -- we're channeling our investment to. And I think, ultimately, we'll have a very profound impact and benefit for TransUnion.

Okay. How do you track and measure innovation at TransUnion?

Well, look, in a variety of ways. As you know, covering the stock for a while. New product development has been an important part of how we've grown. We've also grown through expanding into new countries and new adjacencies, right? And I view those as all types of innovation. So we measure it in a dollar and cent standpoint. And any material investment we have in product development is going to call it supporting business base. Typically, we'll give somebody -- we'll give a new product like a 3- to 7-year horizon before. Sometimes, it takes quite a while to get to a commercially viable version of the product where you can start to win business, and then it takes time to sell and implement, right? So these aren't 1 or 2 years' efforts. It's really a question for us of being very close to the specific markets that we serve and really understanding their needs and then articulating those into common product development requirements that we can then build product, push it into the market and then working in penetration. And that takes time, right? So we're measuring every -- all these activities centrally and explicitly in a financial sense over time, and we have a sense of how much they're contributing to our accelerated growth in -- over the past 7 years.

That makes a lot of sense to me. So I was recently at a lender conference, and one of the big themes of COVID is that the lenders themselves have digitized and digitally enabled more. As your lender or customers are more digital, meaning your traditional lender customers are more digital, is this good for TransUnion?

Yes. Look, I think so. Well, first, I think it's good for the broader marketplace because typically, digital processes imply faster decisions and smooth user interface, right? And in certain categories like mortgage origination, there's just a tremendous amount of tech-led innovation going in to streamline those processes and just creating entirely new user experience. I think that -- those types of processes benefit from information and analytics and automated decisioning, right? And that's at the heart of what we do. Historically, it's -- the credit files that we provide in our various geographies that have evolved to trended data that are now evolving into this accelerated universe of complementary information that the industry refers to as alternative data collectively. And so online automated decisioning really benefits from that expansive data and analytics that can bring clarity and insight to that information and then enable rapid decision-making, which, again, that touches on our decisioning software, which we've got several different versions within the portfolio. So I think it's a net good for demand for information. I also think it's good for our fraud mitigation. We had several generations of product development in online fraud mitigations. It began with just being able to authenticate customers by asking them questions that they should only know the answers to. That's historically been a good process. However, it does introduce some friction into the commerce equation, if you will. And with the proliferation of this information, it's easier fraudsters to defeat it. So that led us to invest both organically and through M&A and device-based authentication and working with our customers to accumulate histories of device behavior on their e-commerce sites, right? And we developed a very large portfolio of of data around that, approaching 14 billion devices team around the world that really speak to device reputation, and that can prescribe appropriate security breach. And then moving beyond that, there's always innovation there, whether it's algorithms that evaluate a consumer's behavior on the site and compare it to past legitimate consumer behavior and past the fraudster's behavior. It's geo location, tracking, it's confirming various representations that an individual might make on the site. All of these things come into play and have really driven demand for our fraud solutions. And I still think we're kind of in the early inning of fraud, right, because again, as we build up this global perspective on how to engineer solutions to meet broader requirements, worldwide requirements, we're merging in fraud capabilities that have been developed over time in the U.S., in the U.K., in India, and then melding the knowledge-based authenticators with the device-based history, right, as well as the behaviors and the behavioral analytics in an integrated solution that that really meets a full range of clients.

You said something very interested just now with your broad ray, fraud and identity products, iovation, IDVision, is that you think you're in the early innings of fraud solutions and the revenues you guys can generate from it. My question is, do you think that perhaps with COVID and the increased occurrences of fraud and synthetic fraud during COVID, it might have like hided vendors, I mean, lenders awareness and need for additional solutions? Or do you think this is like a wake-up call? This is going to be a permanent change with lenders that they need to use more fraud solutions, even postvaccine.

Yes. Listen, Andrew, it's a little bit of both or maybe a lot of both because, I mean, obviously, e-commerce penetration has been increasing for a long time. The pandemic accelerated, right? You got a bit of a snapshot, if you will. I don't think that we're going to regress. I think that just really accelerated the trend that we were on already. Also, fraudsters, there's a lot of fraud in the world. Arguably, it's increasing in scope and in sophistication. It's very persistent and innovate. And today, companies are probably spending more and are more effective in their fraud mitigation efforts than they've ever been, but yet they're still suffering very material losses because the other side, the fraudsters are difficult to defeat and very persistent. So I think clients have to pay a lot of attention to this because e-commerce is only going to increase further, and the fraudsters are just going to keep at it.

Okay. Makes sense. So I'm going to ask you about -- thinking about '21, which product areas -- and I assume you're going to say fraud and identity is one of them, but which product areas, if you can name a couple or a few, will move the revenue needles into next year? And I mean product areas.

Yes. Well, look, I expect '21, I expect to be even better than the '20, and part of that is broad-based recovery, right? And I can share some thoughts later about the timing of that. So I think it's an improvement, not necessarily a rapid return to prior conditions. With that said, some of the needle movers, it will continue to be core credit offering. Going back to the conversations that we all had prior to COVID, what inning are we in CreditVision adoption in the various market world? Well, we're still in the early-to-middle innings, so there's a lot of opportunity to increase sales by just focusing on that. As you know, we were first to market during this crises with what we call our COVID-19 CreditVision attributes, which was a series of attributes clients could use to help identify near-term distress in the client base, right, and reach out proactively for treatment or moderate credit lines. That sold very well. There's a ton of need for account management and portfolio risk assessment, that's continuing. So I expect to get a lot of benefit there. Fraud, of course, as you mentioned, is going to be important. I think we're going to begin to scale our digital marketing efforts that will be a nice incremental grower. Hopefully, over the course of the year, as we productize our recent announcements of income verification and check-in-account access relationships as we begin to productize those, we're going to start to generate revenue. It will be the beginning, not a needle mover, but an exciting addition to the portfolio, given how complementary it is and how big that addressable market is. And I also expect to see a resurgence in our investigative solutions business that we acquired and we entered in 2013, that has been a very rapid grower. Now a big part of that growth historically has been a long tail of customer segments that are very small. They're dominated by small business on the top businesses that need access to this information. They've been hurt considerably in this downturn, and we've seen that segment -- those segments on track. I expect them to improvement there. And then I also think the market will slowly begin to turn toward growth again, probably more in the second half of next year after we get through some of the uncertainties that we're facing currently. And you'll see our batch marketing activities. And again, I'm saying improved off of a diminished base not returned to their former levels, that will take more time. But also in our direct-to-consumer business, of which a large portion, the preponderance actually, is supporting lead generation businesses. Those have been hard-hit in this downturn. They've found a bottom and stabilized. They're starting to improve, and I think that will continue and will benefit us disproportionally.

Okay. That's great. So I'm going to ask you about your medium-term algorithm. You haven't spoke about it. Since COVID started, 7% organic revenue growth per year or 50 basis points of margin expansion annually. So my first question is just, Chris, it's a crazy basic question. Does your medium-term algorithm still stand? That's question number one. And then when we think about '21, might this be a year on the organic revenue growth side to be above average because of that rebounding marketplace that you described? Or might it be below that kind of -- that below that 7% benchmark because there's going to be headwinds from your mortgage business, which is 11% of revenues. And so if it's not to early too ask you what are the kind of drivers up? And what are the drivers back relative to the 7% standard, which I think is still holding?