TransUnion (TRU) Earnings Call Transcript & Summary

All right. Good morning, or good afternoon. I'm Jeff Meuler, Baird's Information Solutions Analyst. Pleased to introduce TransUnion as the next presenting company. TransUnion is a leading global consumer information solution company with a broad array of credit, identity and industry-specific data and insights across a wide seasonally a constant standing range of end markets. With us from the company today, a couple of familiar faces, CFO, Todd Cello, who has been at the company since 1997 and has held pretty much every major finance role culminating with being promoted to CFO in 2017; and Head of IR, Aaron Hoffman, also with us today. Tim Martin, who may be less familiar to investors, but is currently chief Global Solutions Officer, another company veteran having joined TransUnion in 2009, previously running some of its industry vertical teams, including its Specialized Risk Group before being promoted to his current role in 2019 to execute one of its newer CEO's key initiatives. And with that, we'll launch into the questions.

And I guess, a little bit for an overview. But I want to start with a question on the company's culture. And I guess from my perspective, information solutions businesses, they typically talk about benefits of scale. And I think overall, TransUnion is very scaled. But you often highlight your attacker position in markets, which has, obviously, served you really well, but it's a bit counterintuitive, at least to me. So why do you like the attacker position? And I guess, how do you sustain the edge that comes with it after you have a period of success like you've had that's moved you into leadership positions in some of your markets?

All right, Jeff, I'll take that question. So first, thank you for having us, I guess, at the end of the morning here in Chicago. So pleasure to be at this conference. And I think it's a good place to start for sure. And you're definitely right about feeling maybe a little bit counterintuitive. But it definitely is something that is part of our culture, and it has been for quite some time. We take a very deliberate, concerted effort to identify opportunities that we think we'll be successful in and then build vertical markets around them. And I think one of the most important things that we do is that we bring people in from outside the organization that have that industry expertise. And we give them P&L responsibility and tell them to grow the business. So in a sense, we're giving them kind of an entrepreneurial type of perspective on that. And just to talk a little bit about it. From a history perspective, a couple of points. In financial services, we definitely caused quite a bit of disruption with incumbents with the first-mover advantage that we had with a product like CreditVision and bringing that to market. And then that also just enabled us to move into the fintech space, which we have a leading position with because of that product offering. But there's other verticals as well, too, that we took a similar approach. Insurance is one, growing up from legacy credit solutions into a whole different range of other opportunities. But we did the same thing in health care and public sector as well, too. Currently, the areas that are of interest to us would be the media vertical. And you've seen us identify that as an opportunity as a place that TransUnion could play in, and as a result of that, we've made some acquisitions over the last 2 years to further build out the breadth and the capabilities of our offerings. And then recently, we also announced that we're going to extend our presence into the online gaming and gambling market in the U.S. And effectively, what we're doing is just building upon the success that we've had in that business in the U.K., something that we acquired back in 2018 with the Callcredit acquisition. And we're excited about that because, first of all, we have the know-how in-house through our U.K. colleagues, but we also know that we have the capabilities like the identity and the fraud capabilities to play in that space. And just to clarify that, we're not entering that vertical market and online gaming to offer credit to gamblers. This is all about making certain that people are transacting with who they think that they are transacting with. So we see an opening, and we're excited about that well, too. And the last one I'd highlight, and we continue to have a good presence in, is in the consumer interactive space. And what we did specifically in the indirect channel, so not our subscription product, but where we partnered across a variety of industries. And you know is mainly with like lead generation or aggregators, but we've also played in financial services and ID protection as well, too.

It's a good summary, and we're going to get into some of those verticals in a moment. I guess, just first, how do you rate your recent relative performance? As I said earlier, over a long period of time, TransUnion's got a really great track record. But there's a lot of mix effects that went into 2020, and, frankly, are always involved in the business. So you see much more granular data than we do. At the highest level, 2021, the growth rate guidance is pretty similar across the bureaus, and I know you compete with other Information Solutions companies as well. But how do you -- how do you view like recent win rates? And I guess, how do you track if TransUnion is continuing to get as much growth from innovation and from being in some of these adjacencies as you've historically gotten?

Yes for sure so. It is kind of ironic when you do look at the guidance for 2021 to see TransUnion as well as its most direct competitors having a similar type of growth rate. But it is quite fascinating how different each of the businesses are and kind of where that growth is coming from. So I guess the first place that I would start with that is, we continue to see a significant amount of new business wins just across all of our vertical and geographic markets that we operate in. CreditVision and CreditVision Link has been a story that we've talked about for quite some time, but there's still significant runway with both of those products, both here in the U.S., but also in our global business as well, too. In addition to that, we're also seeing some significant wins in the fintech space. And in particular, the buy now pay later space has been something of significance for TransUnion. Last year, in particular, right, as so much commerce went digital, we definitely were able to cater to that, but not just in the U.S., we also did it in the U.K. as well, too. And speaking of the U.K., it's another example of part of the playbook that we laid out for that business when we acquired it 3 years ago, was wanting to introduce diffuse IP from the U.S. market. So we now have 3 of the 4 largest U.K. lenders using our CreditView direct-to-consumer platform. So really, really excited about that. And just don't really underscore that the sales pipeline that I get to take a look at is very robust and so a lot going on. But I think to your point about mix, the there's kind of an important nuance that I just want to make certain we understand, and maybe you've kind of picked it up in what i have said already, but sure, there's some share shift that's happening as we compete in many of the markets that you know about already, but a lot of the new opportunities are us just getting into new spaces where we're not necessarily taking share. And that's to the point about how the industry is kind of branched out, and TransUnion has definitely made its bets as well, too, which I'm sure we'll talk about as we get going.

Awesome. And Tim, since investors don't always get to hear from you. I want to make sure to bring you into the conversation. One of the CEO's key initiatives has been standing up operations and solutions groups. You're the Chief Global Solutions Officer. So what are the goals of the division? And from the outside, like where should investors see payback on the initiative? Or anything you want to say how the solutions group or the hybrid cloud initiative project rise kind of impact product development and innovation at TransUnion?

Yes, great. Thanks for the question. First of all, it's just a simple construct for everybody. I think you can think of global solutions as the product management layer at TU. And product management isn't a new concept in the world, but it's relatively new in the TU. And even the product managers, we did have in the past were largely siloed into their country or their vertical of expertise. And that history kind of makes sense for us because until about a decade or so ago, TU was very concentrated and selling credit reports to lenders in the U.S., and that doesn't require too much product management. But we're much more diversified than that now, more verticals, more countries, more products, and importantly, more products that don't just look like flavors of credit, things like fraud and digital marketing and whatnot. So it was simply time for us to manage this product dimension of the business as intently and professionally as we've already been managing the vertical and regional dimensions, and that's why the CEO did make it an initiative. So we're organized around 5 global solution families. We're augmented with some commercial success type teams. And we're basically rerunning a familiar TU playbook for growth that Todd kind of alluded to. And so by that, I mean, he talked about our playbook has been in the past about hiring experienced operators from specific industry verticals, having them join TU and then build a lead expansion into the vertical or a country. We're basically doing the same thing, but this time, bringing in folks with deep domain expertise in a product area and asking them to help us build and/or improve our products in that area. So it's basically our job to make my counterparts in the vertical and regional teams as successful as possible through product innovation and commercialization. And this ranges from -- everything from the north star kind of product strategy and feature functionality road map through the go-to-market plans and pricing discipline. And I find that most people, when they think about us, they want to gravitate towards thinking about all the innovation-related areas where we can help, and that's true, and we're excited about that. But I also think we can have a big impact on helping TU you better scale the things that we already have. So you asked, Jeff, about payback. Well, if you thought that we were innovative and growthfull in the past, well, I'd just say get ready because global solutions is going to help keep that going. And if I have anything to say about it. Accelerate that growth.

It looks like Todd's ready to revise guidance up after that statement. So Todd, in the early conversation, you talked about the media vertical and I guess, to me, TransUnion has a horizontal expertise around marketing so is this applying that expertise to the media vertical? And I guess, just how do you view the expertise across TransUnion? And maybe this is a question for Tim as well, but like what other verticals does it apply to? Where are you with international markets with marketing?

Jeff, I'm going to let Tom take that question.

I'm happy to. Yes. So a couple of things that I set there, I guess, our traditional marketing products have been very credit centric, focused on financial services and insurance and the older kind of marketing, if you will, think of things like prescreen list for credit card offers done through direct mail or email. And that's a nice business. It's decent size. It's probably under some pressure from things like direct mails becoming less important. But I'm not sure it's a we're likely to fully go away because there's still benefit from this omnichannel kind of marketing. So we'll continue to nurture that business, and that's great. But the emerging and faster-growing and more exciting space that I think you're asking about is more on the digital marketing side. It's primarily, but not completely, noncredit focused and that's where the area where our investment has been. So we've hired great leaders from the space, deep domain expertise. We've done some acquisitions to plug our product gaps. We've increased the internal development capacity as well. And the basic premise for us is that there are some significant changes taking place in the people-based marketing space that creates opportunity for us. And most notably, that's the deprecation of the third party cookie, which has historically been the identity key for digital advertising, and the rise of this kind of convergent TV, connected home, streaming media thing where you don't actually get traditional PII with it. You're not sure who's on the other end of it. And then the effect of that is that the current leaders in marketing-focused, identity resolution and data enrichment, I think they find themselves under pressure to evolve. And we think that TU has the necessary capabilities to be a leader in this new way of doing marketing as much of a chance as any of the current players provided we move kind of quickly and smartly. And that's why you've seen us do some acquisitions in this space to help accelerate our road map and help us establish a bigger presence quicker. And yes, to your question, these kind of future forward marketing efforts started in the media vertical, and it's still where we have a lot of traction and will continue to be a big area for us going forward. What we fully expect and have actually already begun to expand this into our more traditional verticals like financial services, insurance, even telco and some of the other diverse markets that we're in. We've had some high-profile wins. We call proof points, I guess, including notable named customers and channel partners who have recently chosen us over legacy incumbents to help in this new kind of non-cookie-connected home world. And quite frankly, if you were to ask me where the biggest contributions for TU growth is in the future, outside of the opportunity in core credit because it's massive and there's lots we can still do there. But outside of that, if you were to ask me, it's either this digital marketing play I've been describing or our fraud business. One of those 2 or both are going to be the big near-term growth engines for me in my view, I should say.

And then TransUnion has this great track record of while you're layering on these new growth drivers, you have businesses that have been around for a long time, but they continue to grow, and you're layering on new growth drivers within those verticals as well. So insurance is a scaled vertical that's done really well. I guess it sounds like it's continuing to do well. Where is the growth coming from? And is it the real estate opportunities? Or just like -- what new subsectors maybe are you getting into?

Yes. We're very happy with the insurance business, and it's had meaningful contributions over many, many years. And it started off primarily just offering credit solutions to personal auto underwriters. And then, over time, as our customer needs got more and more sophisticated, we evolved along with them and introduced new offerings like data prefills, underwriting assessments, helping with policy renewals, doing some claims investigation type of work. So what that really did is it helped us get embedded into the carriers' workflows. Because of the success that we've had on the personal auto side, we saw meaningful opportunities to enter into adjacencies within insurance. One, there's really 3 that I would talk about. The first being just an entrance into commercial auto. The second, launching a life insurance underwriting score, which is 1 of my favorites because I definitely don't like the doctor sitting at my -- or the technicians sitting at my kitchen table drawing blood. And that's really what we're trying to help the industry with by using the predictive nature of our scores and our analytics. And then the third area is just the risk assessment of commercial. So think about apartments and condo buildings. So for a commercial insurer, how can we help them assess the risk that they're taking on. But then in addition to -- okay, so there's the adjacencies, but then we also continue to win share in the personal auto space with products like driver's risk as well as the National Driver Record Solution. Trended data plays here. And then you just heard Tim talk about marketing. I mean, we definitely think that there's a significant opportunity in insurance as well. And I guess the last thing I'd leave you with on this is, much like the financial services industry that got disrupted with fintechs, we see that on the horizon in insurance as well, too. So we've been very proactive in making relationships and establishing positions with what you refer to as insure tech players. So again, looking back at where we've been successful in our U.S. business, in the core, we think there's applicability going forward as well in insurance.

Okay. When you described the growth opportunities earlier, you said a lot of the new growth opportunities, you're not really competing with your historical competitors. But I think a big potential opportunity is the income and employment verification solution that you rolled out, and your founding partner was a very large payroll provider, which is about as good of a founding partners you can have, probably the best one. But you do go against an incumbent, and they have a great business, so maybe it's a big enough prize that it's worth going after. But help me understand how you're going to make inroads? And is it about going head to head? And if so, do you win? Or are there adjacencies or vectors that are not being served by them? Just help me understand how you make inroads against, say, incumbent with a data advantage today?

Yes. Maybe, Todd, I'll take this. Early start it, yes? Look, definitely an active topic of conversation around TransUnion and in the industry. Look, first, I'll recognize that one of our competitors has a tremendous well-established business in this space. It's been a very nice annuity for them, particularly the past year. But I do think our B2B customers have always wanted more choice of providers, but the barriers to entry for us or anyone else for that matter, had always been kind of high. But 2 things changed about that recently. The first is that at least some of the payroll providers have become more open to sharing this type of data with just more than 1 competitor. And then second is the rise of the start-ups, the tech companies, some call them data aggregators, if you will, but who they're building connections into similar types of data that can access, with the consumer's credentials and consent, the same kind of information. So that opens the door for us a bit. And in the first case, as you mentioned, we now have a partnership with a very large payroll provider. And I think your description as a founding partner is spot on. They won't be the only one. And then the second, you've also spoken publicly in the past about a new commercial relationship we have with MX Data, and they're not the only ones that we're working with or talking to. So where are we on the journey? Like do we have a minimum viable product? I'd say, yes, we're very close, but let me be clear on kind of how I think about it. We're not trying to compete right now by having as much coverage as the incumbent. I mean, let's face it. They've been working on this for a decade or more. Nor are we really approaching it by trying to tell our customers to dump the other guy and use us exclusively instead. However, we do think that as long as we have good coverage with quality data, and it's easy for our consumers to consume at a competitive price, well, then why not put at the top of the waterfall and let us help you too, and that's kind of been our approach. So this isn't going to be material revenue overnight. I do want to temper that expectation a bit. We're only in the early adopter phase. Small number of friendly customers in a couple of verticals helping us work out the kinks. We haven't even actually added in the MX Data part yet that's going to happen later this year. But we are in market. We do have paying customers. We're learning and improving, and we do think that this can be an area of growth for us. It won't be this year. It might not even be too noticeable next year. But soon enough, we think that we can serve this market pretty well. We can help our customers get the data they need to help their own consumers, and we can grab a share of this large, well-established revenue pool.

And I guess you're building it on a modern technology. You made the point easy to consume. So it's -- you build it in a way that a client can do system-to-system integration with both providers and you make that easy, and therefore, you can drive that waterfall effect?

Yes. I think that's certainly true, but I'll take it even a step further. The elegance of it is, we're just adding it on to the credit report, and that isn't the way the other guys do it. So it is just another variable. You can get through a pipe, you already have long-established with TU, that's already part of your workflow with a very small tweak to your statement of work.

Awesome. And then the business has done well generally. There were 2 businesses where there's been some COVID impacts that might be masking some behind-the-scenes progress. I think you referred a bit to this already, but in the U.K., you said you're seeing good uptake of CreditView. I guess, maybe if you can broadly talk about how the U.K. is doing, like how is the uptake of the trended data product? How was the uptick of some of the other TransUnion or heritage TransUnion intellectual property? Because it looked like you had some kind of initial fits post-acquisition as you did the integration. It was accelerating into COVID. And then the COVID impacts took hold, and it's maybe harder for us to see in your numbers what's going on behind the scenes?

Jeff, that's exactly right. And I guess I'd start, first of all, just to talk about how very pleased we are with our business in the U.K. and much of what we talked about when we made the acquisition of Callcredit in 2018 was coming to fruition based -- just on the financial results that we were posting in late 2019 and even into Q1 of 2020. That playbook that we talked about, we deployed it. It is just the impact last year of lending volumes coming down as much as they did. With that being said, though, lending volumes down, what was impressive about the business was just, first, a couple of areas where we continue to see nice growth. And in particular, it was in our fraud and ID business continued to remain very strong. So think about the buy now pay later space, but we also were able to win some meaningful business with the U.K. government to help them support their COVID-19 mitigation type of efforts. The other area that highlight would be gaming. So yes, things shutdown for a little bit. But once sports did open up, of course, in front of an empty stadium, it's good to see that, that's starting to loosen up again. Our gaming and gambling vertical continued to perform quite well. So where are we at today? I already did talk about CreditView and one of your other questions, so we're really pleased with the traction we've made there. The other area importance to us is trended data and CreditVision, in the U.K., we call it TrueVision. And it's doing well. We're still working with the customers to show what the benefits are. The interest is definitely there. So -- and we've been doing all of this, while significantly also improving the operating profile of the business. So the margin is much better. You talked about, it was a little bumpy to start, but we did a lot. We integrated the business into our global operating or matrix model. And we also divested 5 businesses at the time of the acquisition, and it soon became a sixth in 2019. So there's a lot of disruption. So I was just really impressed with how that management team just really kind of rallied around the potential. And these guys are poised to really start to show meaningful growth once conditions warranted, which we feel are right around the corner.

Awesome. And then we're running on time. I do want to hit on consumer interactive, and you talked earlier about your indirect market strength. It's been an interesting market and that indirect, over the last 5 years, has been the place to be. That market was softer in 2020. The direct channel picked up in the market, including for TransUnion, I think the best growth that you've had there in a while. I guess, just any general comments on the business, but the 2 specific ones that I'm interested in are, you have a management change. How do you expect that to impact the business? And I know it's triggered by a retirement, but there is a change in terms of the reporting structure. And then second, just high level, can the direct business and the indirect business performed well at the same time?

Yes. Let me take that part first. The answer to that is yes. And that was where the business was at is that the direct and the indirect businesses were good performers. Last year, the direct business performed as well as it did just simply because the consumer interest was so high during the pandemic and wanting to take control of their finances and monitoring credit, monitoring their ID. So we took advantage of that. We advertised in a really smart way to attract good quality consumers in that space. The indirect channel, yes, it was hit last year just simply because many of the lead aggregators, their customers pulled back on account acquisition activity, and they were more interested in serving their existing book of business. So that -- we think that, that's going to change. And I think a key indicator for our business is, once you start to see our customers want to acquire customers, again, which we talked about us seeing near the end of the first quarter, that's a good sign for the business. As far as the change in leadership is concerned, so John Danaher announced his retirement. He successfully led the consumer interactive business for a number of years. And John set up with his team in the indirect channel. And there was a lot of overlap with the U.S. markets customers as we were launching CreditView and quite honestly, being successful with that. Chris Cart and I just saw an opportunity to even make that grew closer with John's retirement. So the decision was to put the consumer interactive business under the purview of Steve Chaouki, who runs our U.S. market business. But for all intents and purposes, these teams were working close together anyways. But I think as with anything, once people are joined together in a more definitive way, we're definitely expecting some good things to come on that.

Awesome. And unfortunately, we're out of time. So thank you, Todd and Tim. And for investors that are on, there's a breakout session immediately following this or in a few minutes. If you want to follow us over, would love to get your questions answered. But thank you, everyone, for attending. Special thanks to Todd and Tim, really appreciate it, guys.

Jeff, thanks for having us. This is great.