TransUnion (TRU) Earnings Call Transcript & Summary

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All right. Thank you, and welcome back, everybody. I'm Gary Bisbee, business and information services equity research analyst here at BofA Securities. And I'm pleased to have TransUnion with us here for the next segment, CEO, Chris Cartwright. Chris, thanks for joining us.

It's my pleasure. Good to see you, Gary.

So let me first start off the questioning here. A couple of questions that I've heard come in from a bunch of investors following your recent Q4 results, and then we'll move on to some of the more forward-looking growth opportunities that I'd like to discuss. But guidance for 2021 was a hot topic with investors after the call. And I know the company's history of being conservative and certainly not forecasting a best case scenario. On that note, I thought CFOs -- Todd's first line in framing the guidance was interesting. And what I heard him say is that the guidance is based on the current market conditions and doesn't incorporate the potential for a much stronger second half driven by the possibility of a more rapid economic recovery. And that was interesting to me to frame it that way, just given that the consensus and, certainly at BofA, our macro forecasters are looking for a pretty significant step-up in economic activity, certainly in the U.S. and in a bunch of emerging markets you operate in. Maybe somewhat less so in Europe. But against that backdrop, I guess, why such a cautious framework? Is it just lingering uncertainty around the pandemic? More challenging mortgage markets maybe? Or are there some other factors that you considered in framing the guidance that way?

Yes. Good question. And again, we answered a lot of that question directly ourselves. And look, I think the context is what's important, Gary. Because of the pandemic, a lot of uncertainty was introduced into the marketplace and that lingered through the end of the year. Although with each quarter, over the course of '20, we saw the economy and our business gaining momentum, right? It also kind of changed expectations around companies providing guidance. Many companies still aren't providing guidance. We wanted to give our investors some direction but without committing the guidance in the same way as we had previously. So that's, I think, why you saw us doing the scenarios that we did in '20. Coming into '21, we thought, well, the ground is firm, and we've got a better sense of direction, but let's not try and speculate around the timing or the intensity or the shape of recovery. Let's just say, per end of the year and a little bit of experience at the beginning of the year, if we were simply to extrapolate from there, where might we end up? And then we probably indexed it down a little bit because there were some material uncertainties around the adequacy of the vaccine, the speed of the rollout and the adoption among American citizens, certainly as well as whether there would be additional stimulus and the magnitude of the stimulus. And of course, a variety of perspectives on the stability and the duration of the mortgage boom, right? And so again, with that as context, I think it helps to -- hopefully helps you to understand why we came out at the 2% to 4% organic range. The other thing we're trying to do is we unpacked it for investors. We showed them per segment of our business what our growth expectations are. And if you neutralize before the difference in mortgage expectations, we actually provided a more bullish guide than our competitor did, right? And most of the businesses that we have in our portfolio, except mortgage, we're forecasting mid- to high single organic growth, which is a return to our previous growth rate. And then I should just mention, look, we've got a few months under our belt here. We're approaching the end of the quarter. I think a lot of the uncertainties that existed when we provided the guidance have resolved themselves and resolved themselves to the positive. So I'm feeling good. I feel like we're off to a good start. And I do feel like we are in the midst of a recovery.

Okay. Yes. No, that sounds good. So if we were to expect or think through a stronger economic rebound and how that impacts your business, I feel like there is some good cyclical rebound potential within your businesses. I wonder, from your perspective, where would be the places most likely to benefit? There's some obvious ones, fintech marketing could come back; consumer indirect partnerships, a similar thing. Some of the emerging markets that were most impacted, health care and collections, I guess, on a lag. But what would you -- is that the right set of assets? Or how would you have us think about where there's the most cyclical rebound potential in your portfolio?

Yes. So Gary, you know our business well. You rattled off a near complete list of the market segments that I feel were disproportionately impacted in the COVID downturn and that are really well positioned to come back as our economy strengthens and returns toward growth toward customer acquisition and expansion and all that. And again, based on what I'm seeing, I'm increasingly encouraged that that's where we are in this cycle, in the recovery process. In those segments that you rattled off, our international business overweighted toward emerging markets; direct-to-consumer, 60% around lead generation through indirect channels; online consumer lending, heck, consumer lending in general, the largest vertical for the mortgage boom; and health care business, which suffered surprisingly because people were frightened away from the health care system. I mean, you're talking over 50% of our revenues, materially over 50% of our revenues. So our portfolio, which was growing at low double digits through the first quarter of '20, right, is positioned to grow rapidly again as the economy returns to normal. And in fact, I would expect when that recovery begins in earnest and we start to climb that curve toward the positive, we're going to bounce off the bottom, and you're going to see a disproportionate growth.

Yes. Yes. No, I think some investors may be underappreciating the cyclical gearing here, if you will. So that's helpful. If I could transition to some discussion of some of the initiatives you put in place, Project Rise on the technology front and some of the -- I think, what you call the global operations, series of efficiencies. When I think back to TransUnion first technology transformation many years ago, there were 2 clear benefits, right? Accelerated innovation, and we saw that in your top line tremendously in the years after that. And then there was also cost savings and efficiency. When you framed Project Rise, the smaller but updated program to leverage the public cloud and modernize and, I guess, maybe simplify some of your technology and applications, you introduced this cost target of $20 million to $30 million when that's complete. What we didn't hear as much about, though, was, what to me, was the more important one, the first time through, which is accelerated innovation. So is there sort of a play here or an opportunity for this latest technology program to benefit revenue, either for further acceleration or sort of other benefits?

Yes, there absolutely is. I mean there's as attractive of enhanced revenue potential based on what we're doing is there is cost savings. I think that when you propose incremental spend to The Street, investors are confident if they know there are hard savings accompanying it because, so often, revenue forecasts aren't fulfilled, but we do have a pretty good track record of delivering on both our organic growth investments and the M&A that we've done. And I've kind of kept that in reserve because I feel like it buttresses the long-term growth of my business but it also gives me the optionality to take the profits from the growth and invest them in the long inventory of other growth ideas that I've got and we'd like to bring to market, right? One thing we learned over the past decade is you grow shareholder value best by compounding consistently on the top line, and there's just no substitute for growth. And if you do that, margin expansion takes care of itself.

Yes. All right. That sounds good. Maybe if we could shift to some of those investment areas and product potential. Fraud has, obviously, been a big one. You've, I think, said that that's a multi-hundred million dollar business at this point, all in. And I think pretty clearly, that's been growing faster than the corporate average in recent years. Your peers in the credit bureau space both have made acquisitions. It's an opportunity everybody is focused on, and there's also some other technology and other companies competing. How do you assess the competitive environment for the fraud in authentication markets today?

Well, look, it's a really large market. It's global and it's growing rapidly, and it probably doubled in size because of the adoption of e-commerce this past year due to the COVID, right, and being sequestered in all of that. So obviously, there are going to be a lot of players, both information and pure tech players, that are aiming to get a piece of that market. And there are a lot of ways to participate in fraud mitigation. I mean we have -- particularly with iovation, we've assembled a group of best-in-class assets around identifying and authenticating consumers. And recently, one of the specialist analysts that follow this space, job on consulting, they're reviewing the portfolios of all the main competitors, and they ranked us #1 as having the best breadth and quality and integration between our assets. So I feel good about what we've got. It is a space that tracks interest. And intensitive competition, no doubt, would increase. The good news is, though, that it is a rapidly growing market, kind of a mixed message there. It's unfortunate, but that is the reality. There are a lot of new ways to innovate, and our solution still isn't complete. We're going to continue to bring new point solutions within an overall portfolio of fraud mitigation tools that we've got. We're going to invest in building out our data management capabilities and our analytic capabilities that underpin all these fraud point solutions so that customers can take the inputs not only from our fraud mitigation tools but others that they may be using and even their internally developed ones and get all the signal they need in one place to assess the risk of these different transactions. It's a growthful market, and it's got a great potential.

And how do you think about your competitive differentiation? So you mentioned the market research firm ranking you first. That's great. But what -- is it just the breadth of data and the unique data you have? Or what are the keys? And as -- maybe as part of that, I think as you've talked about this business in the last 6 months or so, you've talked about really the opportunity to put all those assets together, innovate better as one and sort of run this as a combined business rather than a few assets. How does that play into competitive differentiation in the strategy here?

Yes, we are in the midst of building an integrated global fraud business on a common platform as we speak. And we've been working from the outside in with first organization and people and product offering and branding. And now we're pursuing the engineering and product map that makes it all possible. The reason we're highly rated is because there's a broad range of fraud mitigation solutions that we own and that have -- and that are configurable and are proven in the marketplace. We also have, through iovation, a huge contributory database of device reputation from 500 customers operating in 50 countries around the world, seeing almost 9 billion different devices at this point, right? So it's a rich and defensible data asset. And so it's really the breadth and the depth and the uniqueness as well as the scale of what we put together here that positions us well in the market and gives us a good platform to continue to build.

Yes. That makes sense. Do you view this as an opportunity for very large players to sell their entire suite? Or is this a market that is likely to remain very fragmented as it plays out in the next few years?

Yes. I think it will consolidate. I think it's going to run and is running a similar course to most of our experience in software markets, where a need emerges and a range of point solutions are created and brought to market to address varying aspects of this overall need. And then eventually, individual players in doing that start to M&A and consolidate and come up with progressively broader and deeper suites of solutions and then make them flexible and configurable and all that kind of stuff. And we're kind of in the middle as an industry of making that sausage, not just the bureaus but, more broadly, info tech and bringing together the solutions. That said, there's some -- fraud is such a multifaceted problem to address, but I still think you're going to see a lot of new-to-world solutions and particularly analytics using ML and AI to take all of the signal input and make sense of it in terms of assessing fraud risk and prescribing a treatment.

Okay. If I could shift to media, which is one of the newer verticals that you seem very excited about. You've discussed this a lot in the last 6 months. So creating a media vertical, leveraging several acquisitions with your own data and your own matching capabilities. You discussed the focus, that narrow focus you're going to have on audience segmentation and identity resolution. So I think investors understand that. We certainly feel like we do. What's a little less clear to me is who you compete with in that space, who's doing that. Are your offerings really more incremental to what people are already doing? Or are you needing to displace existing providers as you spin this thing up?

Yes. So our solution is a combination of underlying data that allow less audience segmentation. And of course, a tool set to access it and do it kind of easily. But also a lot of digital identifiers that can be mapped back to individual consumers that then unlock a lot more perspective as to who they are and what they want. And then, of course, we've got really good matching algorithms. In providing that, we're competing against LiveRamp, a faraway industry leader in the cookies world, but we're entering the post-cookie world. Experian is an important competitor in the market. So is Acxiom, so it's Neustar perhaps and other players like that. And again that's who -- so that's who we're kind of competing with day in and day out. There are other players as well. But our push into digital marketing and supporting media customers with those tools, it's also fueled by all of the digital device data that we've got in the hashed e-mails and the cell phone information and all those kind of identifiers of the digital age that also serve us in fraud and fraud mitigation. So that's the underlying data asset, the repository that's driving the use cases to serve preventing fraud and targeting consumers.

Okay. That's helpful. I know it's early days, right, and the build-out will take some time. But is it fair to frame the potential and how you're looking at this that it could ultimately grow into something like what you've done with insurance or health care being a multi-hundred million dollar business? Is that a long-term potential for this?

Yes, absolutely. You are correct. That's the aspiration. And look, with what we had built organically and the momentum we had plus 2 or 3 deals that we've done along the way, we've got critical mass, right? We've got a nice business that we're hammering together into this more -- a common management, a common value proposition. We're gaining traction in the marketplace proving our deals are ahead of forecast. I really feel like we're on the right path, and we're focused on scaling the things that we've invested in now. And it can be that big. That's what we're shooting for.

Yes. Okay. Great. Another one, even earlier stage, I guess, that I get a lot of investor questions on is entering the employment and income verification markets. And you've done a deal with a large payroll provider. You've got some partnerships with -- giving you access to consumer permission, banking data. And I know a long-term goal is to grow that coverage, obviously. But what you've done to date is do you have enough coverage that this business can really get off the ground and start winning business? Or do you need more coverage to start to really generate revenue and become an option for some players looking for this data?

Yes. We have a developing position in this space. We have enough critical mass of information where we can start generating revenue, and we're closing new business, right? Now we don't have the coverage to displace a mature incumbent as an exclusive solution, and we've got to continue to build at that. And of course, as we expand our coverage, as we improve our price points, as we do all of the things that one does in this business, there will be this -- will accelerate our revenue considerably. But the way you play the game is when your solution is not as complete as an incumbent, but the incumbent is entrenched in some situations highly priced, you insert yourself at the beginning of the process, and you give the client a cost-effective alternative. So they query your system first. If they get satisfaction, then they pay. If they don't get the data they need, they move on. And so this cascading waterfall approach is kind of just standard for the information business.

Okay. Yes, that makes sense. Do you think that the market is going to, in some segments, move towards combining credit data with income and employment or with verifications as a big opportunity? Obviously, Equifax has talked about creating offerings where they sell both together on either a single report or single data feed. And I guess do you see that -- is part of your going after this because you have to for that reason? Or do you think it's more likely to be each has separate use cases? And for you, this is about adding a compelling ancillary offering to go deeper with financial underwriting and other clients?

Yes. It's really a mix of both. I mean, the imperative is to continue to innovate and add value so that your data produces better predictions from your client models and then also to get the tools and the smart analysts who can help apply that and get better predictions, right? That's the name of our business. Input -- rather, income can be an important ingredient to that. Now of course, clients are always doing a cost benefit. Just because a data type is useful, right, doesn't mean it's worth the cost of consuming it, doesn't mean it's just necessary in order to appropriately evaluate risk and originate a loan, right? And I'd also just say, look, there's a lot of other information inputs beyond income that we want to get after. We firmly believe that regulators should encourage the expansion of alternative data collection because rental payment information and wireless and utilities and all -- a variety of others, there's important signal there, right? I think also lenders are going to increasingly allow consumers to provide their credentials during a loan application process, where they can cost-effectively tap in through an aggregator and get checking account information that players like us can parse and combine with credit and other alternative data and extract a score or signal as part of underwriting alone. So there's a lot going on. There's an expansion in the amount of data that's available to help lenders understand the market and take risks that they do. It's not just about income.

Yes. Yes. That makes good sense. If I could shift to health care, which I'd probably argue is maybe the one piece of the portfolio that struggled a little bit in recent years, certainly to achieve the growth the rest of your company has been delivering. And just taking a step back and thinking about it, it appears to me there's some differences versus some of your other assets. It's U.S.-centric I. Think there's -- maybe this is wrong, but it feels to me like it leverages some of your core credit data less than some of the other businesses. And so if those are fair critiques or just comments, how do you think about its place in the portfolio? And at some point, do you consider if there might be a better owner for the business?

Yes. Look, it's a good question and a fair observation. I mean every business of scale is looking for ways to apply its data and know-how to diversify it's revenue stream, through products, through verticals, through geographies, et cetera. And health care is an example of us doing so quite successfully. The nature of what we do in health care is a little bit different. On the credit side or on the origination side, be it for lending or insurance, players are taking in information and using it to understand risk and make a revenue-generating decision. On the health care side, you've got [ unreinvested ] care. This is a vehicle to enhance collections, if you will, right, through extensive knowledge of all of the insurance that's available in the lives that were covered at different points in time. It's a bit unfortunate -- well, listen, that's the understatement of the century. What I want to say is the business has done a tremendous job overcoming the revenue interruption due to some client consolidation. And we've reworked our sales force, and we've been closing, for at least 3 years now, a much higher level of new sales. And as a result, we hit 9% organic growth in the first quarter -- I mean, perhaps not 9%, maybe it was 8%. Maybe it was high single digits. We had returned to the target that we guided investors. And then COVID hit, which I don't think anybody saw coming, maybe Bill Gates, and it scared away the public from the health care system. And our business is driven by health care volumes, right? Now I don't think that's permanent, and we're already seeing improvements in a return, and I think that's going to accelerate. And it's the same business that it was before COVID. In fact, it's stronger. It's won more customers. It's integrated in search engines. It's improved its insurance coverage. It's just going to take some time to fully heal, if you will.

Okay. All right. That's fair. So if we add -- sort of aggregate all that we've talked about and other things we haven't, like still trended data, still a growth. India, obviously, was a huge growth market that would seem well positioned to bounce back strongly. I don't think you've delivered all that you wanted to from the U.K. since that acquisition. And if I think about all the opportunities in front of you, how would you characterize total TransUnion product momentum and sort of potential for the business looking forward over the next few years relative to the momentum the business has had over the last few years? Are the breadth of opportunities similar? Do you feel like you still have good runway in the key franchises? To your point earlier about the best way to create value over time is drive organic revenue growth. How are you feeling about the medium-term potential given all that you've got going on?

I feel really good, right? And again, I would just remind you, like a year ago to the day, we were in the process of delivering -- we were on the track to deliver a 13% organic growth rate in the quarter -- for the quarter. We ended up delivering 11%, and that was with 2 weeks-plus of shutdown. We are the same business now that we were then. I don't believe anything structural has happened. Internally, we're actually stronger. We've clarified strategies. We've invested more in product management. We've invested more in growth. Absolutely. We've done M&A. We've been stronger on our tech stack and operations, all of which is going to produce savings that we're using to invest in more top line. Investors ask a lot of times, when is TransUnion going to be that -- when are you going to return to your guidance of 7% compound growth top line over the intermediate period. And my belief is that's not too far away, that we, again, have that capability and more. And because we continue to increase our capacity to grow, every year, every new vintage of growth is larger in an absolute sense than the prior vintage of growth. And that we need that because we want to maintain a constant growth rate on a business that's approaching $3 billion. We got to have a bigger growth engine. And that's what we're focused on building.

Yes. Okay, good. And then we probably talked about some of them. But what would you say -- just off the top of your head, what do you see the largest 2, 3, 4 opportunities for TransUnion to drive that top line growth in the next few years?

Yes. So look, in the next few years, we're going to, at some point, at some point soon, I think, enjoy the benefit of a robust recovery in the economies we serve, where underlying transaction volumes from our customers and our existing products is going to buoy us. And on top of that, the portfolio of products, all the innovation that happened over the past decade is still in the early to mid innings of adoption, right? And so we're going to return to expanding share of wallet to gaining share through penetrating new markets and all the stuff that we did as part of our playbook. Third, we've been investing in new areas like digital marketing and doubling down on fraud and analytic ecosystems like Prama and rejuvenating our credit view asset so we've got a broader credit-based consumer engagement platform that we can sell. All of that means more vectors of growth for TU, and we're very active in the market, always looking for targets that advance our product strategies. And I think if you look at the combination of that, we will return, and I think in the near term and certainly in the intermediate term to the types of growth that investors have come to expect from us before we posted 2% organic growth in '20. But again, our portfolio, I think, just by its nature, was impacted by COVID, as everybody was. But we didn't have some of the offsets of being overweighted in mortgage or unemployment verification that buoy some of the market, but not us. That's the bad news. The good news is we won't face the same headwinds as that tide of demand for those products recedes in the coming years.

Yes. That makes a lot of sense. And maybe I'll close with 2 financial questions here. Given just all those opportunities we've talked about but also good operating leverage the business has demonstrated historically and, obviously, the savings from Project Rise and the global operations initiatives, how do you think about balancing margin expansion potential with this desire to drive the top line? And is there room to deliver both in the next few years?

Yes. Certainly, we want to serve both masters. But as we've said, we're more skewed toward for compounding the top line organically because I think investors realize that you grow value more that way over time than harvesting margin in the near term. But there is opportunity to improve our margins. At our last Investor Day, which is probably 2.5 years ago now, we committed to this 7% target and 50 bps of margin improvement. Despite the fact that we had a low growth over the year, we still maintain EBITDA and maintain margins around, well, about 38.5%. This year, we're forecasting a bit north of that. They are still best-in-class margins, right? And so I feel good about that, but I also think that we can grow the top line and continue to improve margins somewhat. But I am cautious of falling in the trap that I've seen some fall into of overcommitting the margins and compromising intermediate to longer-term investments that keep the top line compounded.

Yes. I mean, I agree completely with that. Drive the top line is the best way to create value. And then the last one. Your leverage last quarter is actually at its low point since the IPO in 2015, and you've had time certainly to digest the 2 significant transactions in 2018. And so it would appear to have a lot of capacity to pursue M&A if you found the right opportunities. And yet throughout 2020, TransUnion continued to repay debt every quarter, particularly a big amount, I think, in Q4. Certainly, I don't have a problem with that. There's nothing wrong with repaying debt. But should we read anything into that about either how you see the M&A pipeline or where valuations are today or your desire to pursue transactions?

Not really. I mean, remember, COVID was a shock to the system in 2020. The second quarter was all about getting your bearings right, and trying to understand how deeply your business was going to be impacted by the demand change. The second half of the year, we remained active. We did a couple of deals but nothing like when we did Callcredit and iovation and Rubixis in 1 year, but we did a couple of deals, and we're still active. As you know, valuations are super high. And as you also know, we're not buying stuff for scale. We're buying things that help us serve our clients better. It has to fit our strategy. And so I think we're probably a more surgical and judicious buyer at this point.

Okay. Great. Well, I think we're up against the time window. So let's leave it there. Chris, thanks a lot for your time. I appreciate all that commentary.

Always a pleasure. Thanks for the opportunity.

Thanks.