TransUnion (TRU) Earnings Call Transcript & Summary

All right. Good morning, everybody, here from the U.S. Good afternoon to our U.K. and European clients dialing in as well. My name is Manav Patnaik. I'm Barclays' business and information services analyst, and thank you for attending this year's Americas Select Conference, which unfortunately is virtual again. Hopefully, next year, we'll be back in person and we'll get to connect face-to-face. But either way, we're happy to have a lot of our companies and C teams to present, and I'm especially happy to have today with us Chris Cartwright, who's the CEO of TransUnion. So Chris, firstly, thank you very much for being here.

My pleasure, Manav.

So Chris, maybe just to start off high level. Clearly, a lot has gone on in the last 15 months. But maybe just to set the stage, even at the beginning of this year, there was still a lot of uncertainty, hesitancy, and I think that was reflected in your initial guidance. And then last quarter, as vaccinations have increased and the economies they're opening, you've kind of come back to perhaps what people expected. So can you just talk about how -- the moving pieces and what went into your thinking when you formulated this latest guidance?

Yes. Certainly. So I think going back to the initial guide that we provided, which was 2% to 4% organic for the year and 2% in the first quarter organic revenue, that was really a guidance that did not anticipate any market recovery. Now we may have believed that there would be a market recovery over the course of the year, but we chose to not attempt to estimate it, right? And so we really projected from the volume trends that we were experiencing in the fourth quarter at the very beginning of '21. As you know -- and then, of course, we layer on a bit of conservatism as we typically do. As you know, we substantially outperformed that number, delivering 7% in the first quarter. We've raised the guide to 7% to 9% organic for the full year. And that's really on the strength that we're observing in our U.S. business. So U.S. Markets, in particular in the B2B side, is recovering nicely, really across all verticals with the exception of mortgage, which as we know is going to retreat in the coming quarters after nearly doubling these past couple of years. But consumer lending is starting to come back. The consumer lending space, in particular -- particularly the fintech space, is looking good and looking like it's stable and reemerging in terms of activity. Auto lending remains strong despite the shortage of new vehicles due to manufacturing delays and chip shortages and the like. Demand has pivoted to the used car market. And on average, there are more -- there's more credit pools to financing used car than there is in new car. So that's been helpful. And parts remains strong as well. We're also seeing some real strength across the, what we call, the Emerging Markets in the U.S. portfolio, and those have bounced back considerably. So it's really on the strength of the U.S. market recovery that we were able to raise our guidance. As you know, we only grew 3% in International in the first quarter. That is particularly low for us. But I think it reflects the fact that recovery in the international markets is likely a quarter or 2 behind where we are in the U.S. And then some of the markets in which we operate that are particularly important to us, like India and even Brazil, are currently very hard hit by the virus, and that has depressed the level of activity there. Also, our Healthcare business isn't back firing on all cylinders. The business itself is strong, but patient volumes across the U.S. health care system have been negatively impacted during the pandemic, and ours is a volume-driven business. Recently, some of those metrics started to improve. Patient entry and discharge levels have increased a lot in the recent quarter. So we're hopeful that's the beginning of a nice recovery in Healthcare. And then in our direct-to-consumer business, which is more than 50% driven by lead generation to the indirect markets, that has not recovered yet simply because most lenders, while their volumes are increasing, they're not back in progressive customer acquisition mode yet. But we expect that to change over the course of the year. So it's really that encouraging developments in the U.S. market that led us to raise guidance for '21 and make us very optimistic as we look forward into '22.

Okay. That makes sense. Maybe just on India particularly. It obviously makes sense that the overall macro market activity is subdued because of what's going on there. But specific to -- you have a lot of employees in India. Can you just talk about if productivity is an issue or if this kind of COVID situation, since everyone can go virtually, if that's created increased turnover? Just any kind of comments on that?

Yes. So India is a really important market to us for a couple of reasons. First, we operate the largest credit bureau in India. And we also have one of the largest commercial business information groups in India. And it's been one of the fastest-growing pieces of our portfolio. With the recent lockdowns, and certainly, there has been a negative impact on volumes, but we were confident that we can deliver despite that. India is also increasingly important through software development and business services delivery. We've got a big development center in Chennai, and we recently opened up a second one in Pune. And we have been closely involved with the situation there with our employees. We've been sending medical relief assistance into them, providing home health care kits and telemedicine and securing vaccinations and the like as best as we can from afar. Thus far, turnover has been quite low. We've been working at home -- or from home in India for the duration of the pandemic, right? So really since late March of last year. And speaking for software development productivity across the globe, we've seen our scrum teams produce more work from home than they did previously in the offices. I'm expecting, of course, in India, that's going to diminish as people either suffer from COVID directly or they're caring for family members who are, right? And we totally understand that, and our employees' health is #1. And we just view this as a difficult period in this pandemic that we've got to help our people get through, and we're trying to be as supportive as we can.

Okay. That makes sense. Another area, fintech, which was hard hit by COVID. It's obviously been a very important area for you guys. It was growing really nicely. I think we've all been impressed in terms of the overall survivability of the fintechs through this pandemic.

Yes.

But just I was hoping for some of your perspective on how you guys faced through that journey and what the outlook for fintech specifically looks like today.

Yes. I mean you raised a good point. It wasn't so long ago that the fintech space was on fire and really growing rapidly and very focused on acquiring new customers. And I think the question then that I got from investors was how the fintech space weather a downturn. And obviously, we've had a very pronounced downturn. And while there was a period of uncertainty around fintech funding, that resolved itself in the market fairly quickly. And the space has proven durable, right? And I think the business model and the way many fintechs use technology to reinvent the lending process has proven that it's here to stay, and it's highly growthful. Now you've got stability, you're seeing some improvement in lending volumes, but I don't think fintech lenders have gotten back in the customer acquisition mode just yet. And a lot of that is due to the supplemental employment payments that are coming from the U.S. government. The first quarter was kind of bookended by a payment at the beginning in the end from COVID relief actions by the government. And many fintechs just chose not to market in the face of that, knowing that their consumers were -- their needs were met, at least for that period. Again, I expect that to change quarter-by-quarter as the year progresses. And look, with the broadening reopening in the U.S. and the return to more normalcy as well as the diminishment of stimulus over the course of the year, I think it bodes well for a full recovery in fintech.

Got it. And just 1 area within fintech that's been all over the news and, in fact, I think the Affirm CFO is doing a fireside chat with my colleague as we speak. But buy now, pay later has been a big topic. Is that an area that you have very relevant solutions for?

Yes. I mean we really do. Many of those emerging competitors are very good TransUnion customers. And sometimes, there's a question about whether those lending transactions, because of their size, require traditional credit reporting. I'm happy to report that they do a lot of credit activity and credit analysis in a traditional way. And then we support them in other ways analytically, and it's all the major players that you would think of. And it's an important growing piece of our portfolio, both in the U.S. but also in the U.K.

Got it. And just broadly on -- last question on fintech. You've had a very strong share in that market. Can you just help us appreciate what the competitive differentiation there is from TransUnion's perspective? Or was it maybe a first-mover advantage that helped that too?

Yes. Look, certainly, first-mover advantage was important. Because as we said before, part of our growth formula is to hire people from the space to run our market verticals. And so the former consumer lenders that run our various Financial Services segments, they knew a lot of the people that were pairing up with technologists and getting funded and creating these fintechs. And they help them develop their initial marketing and lending models. They provided them with good terms. That also just developed like a real deep knowledge of the operating models of these businesses. And because we got a disproportionate market share in the space, our credit file, right, the consumer inquiries in our credit file, exceed our competitors. And so that's become a bit of a sustaining advantage, whereas the more people who reach out to the TransUnion credit file during the loan research or the loan marketing origination process, the richer the data farm becomes. And we see that in head to head tests, and that's been a big part of us maintaining our share advantage as these players grow.

Got it. Just a broad question on innovation, new product pipeline. It's been very critical to your impressive growth we've seen thus far. And I guess even your competitors talk a lot about it. But just wanted to understand your philosophy around how you track that, how you build that, how you foster that at TransUnion.

Sure. Listen, it's core to our culture. And as you know, earlier in the TransUnion turnaround story, new product initiatives, we reported that separately to The Street. But now it's just entirely ingrained in our culture, and it's something that we just do as a matter of course. It's what we do. And again, look, the model is informed by customer intimacy. And we organize our go-to-market around market verticals that are led by people from the industry. We've got a deep understanding of how credit is used, but also just the broader analytical and information needs of the space. And that forms that dialogue in that knowledge is the foundation for our product development. You add into that deep product knowledge across a broadening range of solutions that we provide to these segments, and of course, the technology know-how and you fuel it with an increasing level of investment, that's really the recipe for growth that we've developed and we applied successfully. So when you look at the portfolio and kind of the foundation for growth, we're always looking to expand the geographies in which we compete. Within those geographies, we're expanding the number of verticals that we serve. And within the verticals, we're expanding the solutions suites, if you will, that we're providing. And net-net, that's just more and more addressable market for us to compete in. And because we are doing it increasingly in a globally architected and intentional way, we're getting leverage because we're building solutions and capabilities, and we're sharing it across the global portfolio.

Got it. All right. That's super helpful. Just one area I wanted to touch on was the opportunity in fraud that everyone talks about. And it sounds like it's an extremely broad term and an extremely broad landscape. I was just hoping you could help us narrow down what parts of the market does TransUnion play in the fraud and how we should think of that opportunity.

Sure. You're right. Fraud's a massive term in a massive market, and it's rapidly growing with increasing e-commerce penetration, which tripled worldwide during the pandemic. Where we play is typically at the beginning of the relationship between consumers and e-commerce providers of various strikes because we're really good at identifying and authenticating consumers. And it's critical that a business know exactly who they're dealing with and be confident that it's a legitimate counterparty before they initiate a relationship. And then ongoing, when that consumer comes back to access services digitally, there's a reaffirmation, and also the devices that those consumers own and the family of devices we're maintaining or acquiring a reputational history for how those devices are interacting across our entire customer network, right? And that's another way to identify fraud or legitimacy. And so it's really this underlying capability to resolve identity, which, historically, the bureaus were really good in the off-line world. And we've invested a lot to bring and associate all these digital identifiers with the off-line personas so we can bring that capability to the e-commerce world.

Okay. And so I guess that then explains kind of these 2 new verticals of growth that you've been talking about, which is gaming and then the digital marketing and media stream to some extent. So maybe let's just take those separately. But just first, the gaming opportunity. Can you -- can we just talk about -- that's fairly new in the U.S. I know it's a small business in the U.K., but just how should we envision TransUnion's role in the gaming -- online gaming market, I guess?

Couple of levels. One, it's just an example of how we continue to leverage core capabilities in different verticals where the need applies. And with our acquisition of Callcredit, they had material revenues coming from consumer identity and authentication in the U.K. by gambling operators. In the U.S., the legislative environment has loosened and has become more supportive of those types of businesses operating in the U.S. And so we're bringing that capability over. So again, before a consumer enters, let's say, an online poker site or a blackjack table, the operator who is engaging in transactions with financial risks wants to make sure that these are, well, of-age consumers and they are legitimate consumers, because often fraudsters can ring these operations and game the system and extract profit. And so we're helping to validate the consumers and ensure the integrity of online gambling. What we're not doing is providing credit data that would allow the operators who gives them the credit to support gambling. What we may do in the future, depending on how legislation and regulation develops in markets, is provide kind of a gambling affordability solution, if you will, because there's some discussion amongst governments that, much like payday lending and in certain ideas around confirming that consumers will support the debt, that they're looking for some insights that consumers can afford to gamble.

Got it. And what does the competitive environment look like on the gaming side? Like how differentiated is this ability to have this online identity verification, I guess?

Well, look, there are any number of players that provide similar services to what we do. But we are one of the market leaders globally. Our acquisition of iovation, which was one of the more developed and regarded device-based authentication services and reputation services really established us as a leading player. And in fact, the history of iovation is initially the technologists that founded and built that business were online poker platform operators. That was their first business, and they sold it. But one of the problems that they solved from the operators late in the history of this first business was how to mitigate fall in -- on the poker sites by looking at the reputations of the devices and not the representations that individuals make when they register, right? And they realized they identified just a great need to bring integrity to e-commerce, and they found the new business around that. So I guess you'd say like our DNA in gambling goes back ways now.

Okay. That's interesting. Good to know. The -- maybe let's shift to the digital media and marketing side of things. Generally, media is always confusing to most people, and there's obviously a lot of evolution going on in that space. So maybe high level, if you could just let us know -- you've done a series of acquisitions, TruSignal, Tru Optik, et cetera. It sounds like even experienced down a couple there. Almost anybody media is putting out press releases on the next level of ID because cookies are gone. So just help us appreciate what's TransUnion's angle here.

Yes. Absolutely. So I mean you're right. It's a massive market. It's a growing market. And there's some incredibly sophisticated competitors. And we're not trying to displace. We're trying to complement with things that we're uniquely good at. So we have a surgical entry point into this universe of digital marketing services. And again, it's leveraging our capability to identify and authenticate consumers increasingly in the digital world, right? Because we've been, for one, through iovation we acquired, a very large repository of device information and device reputation. And that just was a complement to what we've been acquiring for many years to build out our ability to identify and enable ad targeting or prescribe unique customer experiences depending on the individual. One of the problems that we're solving is like -- well, for at least a decade now, we know that physical advertising has been migrating to digital. And they estimate like 80% of every dollar that goes digital goes to Google or Facebook, right? And that's because when consumers are operating in their walled gardens, they can precisely identify who they are and then associate -- and then access all the associated information of those consumers, right? Outside of the walled gardens, e-commerce is much more anonymous. And because we're very good now at identifying and resolving identity, we can provide that type of targeting and familiarity outside of the walled gardens in the open web, if you will, that marketers want so that they can optimize their targeting and businesses want so they can optimize their service experience. And that's at the core of what we're doing. On top of that, as you know, we're really good at managing data. We have a lot of data that describes consumers in a variety of ways. And advertisers want to access that data and slice and dice it so they can develop precise audience segments that they want to target with ads as they're traveling around the Internet. And so we brought together those 2 capabilities around increasingly sophisticated identity graphs that organize the PII and all the associated digital identifiers and the various other attributes that we've got credit, public records, demographics, psychographic, et cetera, in a way that's very accessible for marketers. And the good news is, I feel like we've -- through the acquisitions and internal development, we've now got a critical mass and product functionality. We're pulling it together. It's a coherent proposition. And it's doing pretty well in the marketplace. We're on or above our projections. So we're excited about it.

All right. That's great to hear. Maybe just around the media side up, who is the competition? Maybe that just helps bring this to life a little bit more. Like who's already out there doing it? And who do you think are your competitors?

Well, to a degree, it's Experian through their marketing arm. And certainly, it is LiveRamp, right, a market leader in -- at targeting and just consumer identification. Their strength relies on cookies. And as you know, cookies are challenged and going away. And I feel like that creates an opportunity for new players like us to enter the market and bring our traditional resolution capabilities, which are very powerful because of the precision that's required to deliver credit information where there's significant financial consequence if you get it wrong, right, because of the regulatory regimes that we operate with it. So those are a couple of good examples of competitors.

Okay. That's helpful. In terms of new verticals like gaming, media, marketing, you've put out an initial foray into the income verification side, which you can get to later. But what does that new vertical pipeline look like? Like I think you've been planning the media side and the gaming side for some time. So just trying to appreciate the pipeline you have of when we should start talking about new areas like we just did.

Yes. So in terms of vertical diversification in the particular market, the U.S. is furthest along because it's, in some ways, the largest and most advanced market that we compete in. But we want to export that know-how to various other countries. And we have varying degrees, like South Africa is very diverse. And our growth in Canada, which has been amazing over the past 7 or 8 years, is directly due to adding verticals and importing product capabilities from the center. So the first thing I would emphasize is that, that work of landing in a country and expanding across verticals is very much in the early stages of TransUnion. Now it's not a one-size-fits-all. We have to rely on our country knowledge to know what are the most attractive verticals to extend into. But insurance is increasingly becoming a global play. And in every market that we serve, there's an opportunity for our public sector business to develop. Direct-to-consumer is underdeveloped for us globally. It is an opportunity for growth. And there are a variety of others. So I would think more about the expansion or penetration opportunity than like how robust is the number of verticals that are in the pipeline.

Got it. All right. That makes complete sense. If I can shift gears a little bit to just your philosophy and views on M&A. One of your competitors has obviously gotten a lot more aggressive. If you look in the broader data space, there's been a lot of larger deals and a lot more activity. So just curious, these new verticals, these new areas, do you feel like there's still -- consolidation has to be part of your plans? Or how should we think about M&A in TransUnion?

It's an important part of how we grow. As you know, our leverage ratios are very solid right now, and without acquisition, we'll be down close to 2x levered by the end of the year, which is kind of low for us. The pipeline of activity is very robust. But as you know, valuations in the market are high, and we got to be smart about how we deploy our capital. That said, we're guided by really 2 principles. One, we want to expand the geographies in which we compete because we like bringing our growth playbook into a market that has not been fully developed. The U.K. was a great example of how we've done that, and there could be some other opportunities in the near future. And then, of course, acquiring capabilities that we need, right? And typically, we're going to acquire an adolescent-stage company that is mature enough to stand on it's own and it's proven the need for what it does in the marketplace. It has to complement the core of what we do, right? Because I really want a synergistic offering to our markets. And then we can scale it. And so we're -- as the product line gets broader, the number of areas where we're hunting for differentiated capabilities is growing as well. So look, I expect that we'll do more deals this year, and they'll be of that flavor. Typically, I've been cautious about the big deal, right, because I want to build coherent value propositions for the customer groups that we serve and propositions that we can take across our markets globally. I'm much less interested in building it in closer conglomerate.

Okay. That makes sense. I wanted to shift gears a little bit to technology. I think when you first came public, you surprised us all with the pretty impressive tech turnaround that you guys had undertaken. Since then, at least one of your competitors seems to have done a good job. The other one is getting closer to it. And I was just curious, how do you guys assess your tech stack to be versus competition or just versus anybody else you benchmark yourselves to?

Yes. Well, look, our tech stack and our tech foundation is strong and performant. We've invested a ton in cybersecurity. Our uptime is terrific. Our availability rather than response times are also very strong. And those are the metrics by which -- kind of the essential metrics by which customers judge you. On top of that, our product development velocity is pretty good. And that's because of the investments that we made to migrate off the mainframe to more flexible clusters of low-cost servers, distributed architecture, running open-source operating systems and a standardized data management software. And that type of consistency that we established in the U.S. and have begun to spread out globally did provide an advantage. One, we saved a good chunk of money, and you saw a structural improvement in our margins as a result. Now this is really getting revolved in mainframe licensing cost. And then we took a portion of the savings, and we ploughed it into product development ongoing, right? And because the tool set was better and more standardized, we increased developer velocity, if you will. Now the thing we know about technology is there's always a next gen, and it's often quite meaningful. And so now we're investing to move from what is essentially an internal cloud environment, one for our credit solution to one of our public records to taking advantage of the automation and economies of public cloud providers. We recently announced agreements with AWS, and we also have a substantial presence with Microsoft. And we're moving more of our applications in what will be a hybrid cloud architecture ultimately for TransUnion. We don't think every application goes to the cloud, but we think about 2/3 of our applications will. And so just this migration from internally owned and operated tech centers will provide some economy and also some flexibility. But I think equally important is the rationalizing we're doing of our software inventory or ecosystem globally. Our business is exiting a phase that was very multi-domestic, if you will. And we expanded across countries. And we would clone our tech stack, we shoot it out, and then they would develop it. And as a result, you end up with a lot of redundancy and eventually sprawl, right? Now we began rationalizing that with Spark, but the main thing Spark did is get us off of the expensive mainframes and introduced some software standards about where we store the data globally, the giant global data lake, today called data fabric and just the cloud partners and a common software platform for ingesting data and fulfilling data and analytic requests, right? So that's the foundation, but there's still a hell lot of software out there to be rationalized. So we will -- we reviewed every application. We're retiring certain things, we're rehabilitating and migrating others to the cloud. And when we do it, we're doing it on a global shared cloud foundation as well as an enterprise services and microservices library. And net-net, what that means is we've rationalized the subcomponents of the product line, and they're more global standard. And that's going to mean we're freeing up developer capacity to work on unique value-added stuff that we provide to our clients and not redundant systems plumbing. And we're going to be able to move much faster as a result.

Got it. That's super exciting. Well, we'll track those. We have a few minutes left. So the last kind of question I wanted to end with is a lot of our companies have also kind of shown the same sense of optimism that we talked about earlier in the call. And they're moving to what they refer to as the upturn playbooks, which basically means a lot more growth investments should they feel a lot more comfortable spending that in. Just curious if TransUnion is in the same spot. And just maybe to compare and contrast like what that downturn playbook was versus what you're getting back to now?

Yes. No, I'm glad you asked that question because the point I want to make is we started our upturn playbook -- or we implemented our upturn playbook last year. And that's different than a lot of companies, I would say. One thing, we have a good fortune of relative stability in our business model. So despite a really pronounced downturn in the second quarter last year, entirely due to lockdowns around the pandemic, we still grew 2% for the full year. Now we paused in the second quarter of last year in order to understand the severity of the impact on our particular business, right? But once we became confident that we would weather the storm, we actually accelerated our growth investment and accelerated our systems investment because we knew we had the stability and the financial capacity, and we didn't want to let the crisis go to waste. Plus, we've developed a pretty powerful vision around what is the next generation for TransUnion. And so we're pushing hard into this more globally intentional and engineered phase that I think there's going to be more efficiency. And as we free up dollars by doing things smarter, we're plowing those into top line growth.

Got it. That is -- yes, that's -- I think that's an important point. You guys had already started that up, and perhaps now is the time to accelerate. So Chris, we're almost out of time. So maybe this is a good place to end. So thank you so much for your insights. I really appreciate it.

Hey, always a pleasure, Manav.

All right. Thank you. Thank you, everybody.