TransUnion (TRU) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us at our financials conference. Unfortunately, we are virtual again, but hopefully in-person next year. Let's see if that works out. My name is Manav Patnaik. I'm Barclays' Business and Information Services Analyst. And we're very pleased to kick off our day today with TransUnion, and we have with us CEO, Chris Cartwright; and the Head of the U.S. Business, Steve Chaouki. So thank you both for being here.

It's my pleasure, Manav.

Just for the audience, I mean, I will be doing a fireside chat with Steve and Chris, but there should be a Q&A box. If you have anything, feel free to type it in. If I catch it in my e-mail, I'll try and squeeze it in, or I'll be happy to follow up after that.

So Chris, we just met last week at our Credit Bureau Day. We kind of went through the normal course of updates, which maybe we'll get through as well towards the end of this session. But clearly, you had a big announcement yesterday, acquiring Neustar, your biggest acquisition to date. I was hoping you could just help maybe take a step backwards and set the stage a little bit. You did make those few tuck-in deals in media, but I think they were small, so people weren't necessarily too honed in on it. And so just help us set the stage, why media, why Neustar? And also just help distinguish that this is not kind of the Nielsen or the comScore or the media companies that have not fared too well in the public markets. Like what is the niche here?

Yes, good question. Look, let me start by providing some broader context about the business play or the overarching strategy that this acquisition accelerates for TransUnion. And the seeds of this deal really go back 5 years when Neustar was a publicly traded company, and there was a take-private transaction, and we were involved in that. We were looking hard at the asset because we really like the telephony information that underpin their communications business, which is kind of unique and proprietary as well as their fast-growing fraud mitigation and marketing businesses. However, as a lot of the investors on this call will know, there was a heck of a lot of noise in that portfolio. There was the national portability service that they provided that was at risk of going away and eventually did go away as well as an Internet registry business, the securities business and some other diversification efforts that for us were just noncore and a bit of a distraction from what we saw was an emerging pocket of value that they were creating. So we passed on the transaction at that point. But we went about continuing to develop our own capabilities around digital identity and being able to activate or action that identity in the context of targeted marketing as well as online fraud mitigation. So with that as a bit of background, you got to understand that the national credit bureaus have, for a long time, operated at the intersection of credit analysis, marketing and fraud mitigation. And if you think about our most basic process, go back 10 or 15 years, we'll engage with the risk management part of a consumer lender will help them understand the broader credit market. And then essentially, what we'll do is through our analytic partnership, we'll help them develop the audience that they want to market to. And we'll do that through our batch prescreen services or some analytic where we'll identify a segment of the overall credit population that they want to deliver an offer to. Traditionally, that offer would be direct mail, and they would rely on our header information, our PII, our terrestrial identity, if you will, because it was broad and authoritative and they could send that offer via direct mail to somebody's household. If the consumer engages, opens that envelope, they would then call the call center to activate the marketing offer. And during that process, they were likely to be authenticated using knowledge-based authenticators, if you were, if you will, essentially, questions derived from our credit information about what else they have in their wallet or where they live, what their address history is, things like that, right? So right there, that simple credit card, you see the interplay between the 3 types of functions. So several years ago, with e-commerce rapidly growing and the world going digital, we started thinking about what we needed to do to position ourselves for the digital economy. And the core question there is, what is identity in a digital economy? It's not your home address or your home address history. It's not your name. Certainly, those are important contributors. But it's things like your e-mail addresses in history, your cell numbers, your device IDs, advertising IDs, geolocations, URLs, cookies, et cetera. So we began aggregating that information and integrating it according to identity graphs and using it to help our clients enrich their customer lists with the digital information necessary to target them on the open web. And again, let's talk about the fundamental problem here is that outside of the big tech walled gardens, less than half of the time, a business doesn't know exactly who they're interacting with on the open web, right? If you have the digital identifiers like we do at TransUnion, and you've got the technology to organize that information and to deliver it in milliseconds, you can help answer the question of who am I dealing with. And with that, you can ensure that you target them with the appropriate offer that you treat them in the appropriate way, given their importance as a customer or that you prevent a fraudster, right? Now by acquiring Neustar, we get some incremental data. Certainly, there's a lot of overlap and therefore some synergy there. But we get incremental data, we marry it up with our authoritative people data. We can add to it our authoritative and comprehensive device data. And we can activate it within their OneID platform, which we believe is state of the art and allow -- and is going to allow us to serve up this identity information across the market in a whole myriad of use cases, right? So in essence, what we're doing here is we're -- we've created the foundation of the future identity bureau, if you will, and being able to resolve identity in a gazillion different context is incredibly important in e-commerce. And that's where we want to participate, right? We're not doing television audience measurement. We're not trying to rearchitect ad placement or ad buying. We're trying to provide broad authoritative data in digital identifying data and services in the context of a variety of online transactions. So let me pause there.

Yes. So maybe just a few follow-ups. So firstly, I think for information services investors, right, it's always about what's proprietary? What is that data? You referenced a bit about overlapping data, some proprietary. Can you just help flush that out? Like what do they bring? And then I had a follow-up on the platform, the OneID platform.

Yes, sure. Proprietary data is important and it's a differentiator. We're bringing together a really broad universe of data, right? And just the breadth and depth of the information of the combined enterprise is itself a form of differentiation. The other thing I would mention is that within that universe, the people information that we have, the device ID information, the telephony information, cellular in particular, is differentiated and unique. But in this modern world where there's so much information organizing it and having the AI and the algorithms, right, to distill and make it actionable, that is a differentiator. And that's with the combination of our breadth, our unique assets, the organization of these identity assets according to a people-based identity graph, a digital identifier identity graph and all of the house holding and geolocation information, that organization plus all of the algorithms to resolve identity in that context and fuel decisions, that's proprietary and differentiated, and that's what this combination is going to create.

Okay. That makes sense. And just on the OneID platform, I mean, it sounds like that's a key part of Neustar's offering as well. So just help explain that and perhaps what the competitive option is there.

Yes. Sure. Well, there's really -- yes, just choosing my words carefully here. I think that the combination of the data and the underlying technology in the OneID platform is going to create a very complete and a robust offering for the marketplace. The market is in -- is in earlier stages of formation. And I think we have a chance with our capabilities to do something that can become an authoritative standard for this type of information that can enrich the information that's used broadly in this advertising and marketing ecosystem. So the OneID platform is extremely scalable. We can stitch together within it all of that different identity information that I talked about, whether it's an individual's name and address and cell phone number, but that myriad of digital information, behavioral information, geo locating. So one, you can stitch it together. The central organizing objects are 3 identity graphs, about people, about digital identifiers that are associated with the people and about the house holding geo location information associated with both people and the devices. Where do these devices typically connect from, right? It's a way to identify fraud. So that's the guts of the platform. And then from that, you've had hundreds of data scientists and analysts writing proprietary analytics to deliver that information in the context of different marketing, fraud, corporate data hygiene use cases, right? So you have the beginnings of what is an identity bureau and a persistent identity service for the clients that subscribe to it.

Got it. Steve, maybe I can just bring you in here and you run the U.S. markets and a lot of the verticals. Maybe you could help -- just put this into some perspective, perhaps some case studies or examples of how this is going to help enhance your market areas.

Yes, thanks. I think it's a really -- it's a very complementary fit. As we look at the markets where they play, first off, we did a lot of diligence for some of their customers and the feedback from the customers has been outstanding across the markets about their capabilities and their ability to serve them. We were quite impressed across the verticals. Then as we looked at the verticals, while they are strong in financial services, for example, their reach into the space is much narrower than us. They're a smaller number of really good relationships so they did serve those customers well, at least in the short term, from a revenue synergy point of view, but the path is very visible. We can help them run down the long tail of financial services customers that they haven't been able to address due to their scale in the space. Still early in insurance. Then if you look at other verticals where we've been trying to grow, they have a well-established foothold in places like technology, retail, e-commerce, telco. These are places where we've been growing and building a presence. They augment that. They bring us scale in those spaces and help us cross-sell our solutions. And actually, in speed in our research with the customers, we found that in those places where they're strong, people are looking for more reasons to do business with them. They want them to bring more solutions. We actually help them do that because we have a toolkit that they don't have today. So if I look at the complementary basis of the markets and then the breadth of capabilities that we bring, it's a great fit. It's really outstanding. Then as you look prospectively to where the industries are going, so beyond the near term, the capabilities that Chris described allow us to build solutions to ride off the back of them that serve very specific needs. Targeting online is critical. And what you have now is a lot of, call it, just broad-based marketing. But direct marketing is the future. It's what people need. It's what consumers expect like broad-based marketing doesn't work. And it's what the marketers want. So very specifically in the regulated industries, how do you move that forward. And that has to be done with an affirmative knowledge of who the customer is because fraud and marketing are not discrete things. We talk about them discretely. People act like that their discrete, but they're all happening at the same time. Mitigating fraud and targeted customers are not mutually exclusive and they're not binding area activities. If you bring someone on the top of funnel, the more accurate they are at the top of the funnel, the better off you're going to be at the bottom. And in every stage of the funnel, depending on where you bring the consumer in, the nature of the fraud mitigation will change and you need the dynamic capability in order to prevent that fraud. So I don't see how a binary solution solves the problem here. You need that complementary solution. And once you have that ID network, you have the basis to do what you wouldn't need to do I think these are just a couple of examples of the things that we can do in the space and how we can serve the customers pretty quickly and then just for years and years to come.

Got it. And Steve, maybe if I can just follow up here. So I think I appreciate and understand the fraud aspect of the business and then the marketing that you just talked about. But the big communications, I guess, a breakup, the way you guys provided it, can you just help us understand what is communications and how is that valuable to you guys?

Yes. I think communications is valuable in 2 ways. One, as a source of data; and two, as a vertical in and of itself. So the data that they get from the communications business is -- certainly is, in our opinion at least, we found the best and the most authoritative data you have in the space. They bring the phone number verification capabilities that we need in multiple different ways. And the phone number is still a critical part of an individual's identity. So having that communications business provides you with those capabilities, which are very important to achieving the universal identity that Chris was talking about and kind of like we call identity bureau or we've had lots of different names for over the years, but that authoritative view of the consumer. Also, we've been building a good business in the telco space. Telco is not limited to the phone carriers. It's all the providers in that area, and we have been growing in that area pretty well to our diversified markets business. This gives us a foothold to continue to grow in this space and capture share with the traditional TU products, and then bring some of their solutions back to the customers where we have more strength than they do.

Got it. Chris, maybe just back to you, just to wrap up the discussion on Neustar here. One of the, I think, experiences in the past is anything with marketing, media, et cetera, can be pretty lumpy, can have in way. Can you just talk a little bit about the business model for Neustar? Is it volume-tied, subscription-tied and how you think about that potential volatility?

Yes. In terms of the nature of the revenue and the mix, they've actually got a higher proportion of subscription revenue that TransUnion does as a whole, although much of our revenue is transactional, but subscription like, if you will. So about 30% of Neustar's revenue overall is subscription. And then a very large part of the remainder of the work is relationships that they win to provide identity and communications data and other types of services that is transactional in nature and has been -- has had kind of low fluctuations over time, like they actually declined less in the second quarter of last year, materially less than we did in our space. And so there's a little bit less volatility in the demand. And again, this world that we live in, we've got to service our clients as they become increasingly digital. But the terrestrial and the call center capabilities are also extremely important now, right? So this gives us strength in both worlds. So the example that I use is with credit card activation and having a 20-year old son in college who keeps losing my credit card, I've gotten really familiar with how this process works. So I get the mail with the new card, I need to activate it. One way to activate it is go to the website, right? We're familiar with that. When I show up on the website on my device, right, and it could be the device or any of the half dozen that I've got. And hopefully, if they're using TransUnion products, they'll recognize the device, they'll relay it back to me. They won't impose a lot of security friction on the transaction and I activate. Other people might choose to call. That's an option. If they call, before that inbound call has dropped into the call center, there is a verification that takes place using Neustar technology. There will be an outbound call made to the cell phone number or the landline confirming that, that device is indeed engaged in the phone call. In that way, they mitigate against call spoofing and synthetic ID fraud and things like that. We can now go to these enterprises and say, we can serve you in this current hybrid world and all of the fraud and intelligence signal you get is going to flow into the underlying database and you can use that to continue to refine your fraud logs. That's pretty unique positioning in the market.

Got it. That's helpful. Chris, maybe just moving along. First, just on capital allocation. Obviously, you've done your largest acquisition. I know you can't comment, but there's talk that you might look to divest an asset. But we're clearly in this buy versus build world, and I think it makes sense with the world changing so fast. But can you just talk about, is this big enough where you're going to be on the side for a while in terms of deals? Or how we should think about capital allocation going forward?

Yes. No, I think we're going to -- look, we're going to continue to remain active. As we've been telling you and our investors, we've deleveraged from almost 5x in 2018 when we bought Callcredit and iovation and a health care asset. We've got great cash generation and good discipline, right? This deal will take us up to 4.2x. Regarding the rumors that you mentioned, I mean, look, we're always thinking about our portfolio and the right composition. We have a lot of interest in a lot of different assets, and we just don't comment on the rumors because they're always swirling. That said, we can handle 4.2x leverage quite comfortably. We can delever within 1 year. And we remain active in the marketplace. We're always looking to expand geographically, and we're looking to expand the scope of the solutions that we provide to the customers that we serve in these different vertical markets. And again, that was the rationale behind the Neustar deal. In addition to establishing this identity service online, it was to ensure that our marketing solutions and our fraud mitigation solutions were of the equivalent scope and quality of our underlying credit solutions because they're so tightly interrelated as I think we've shown in some of these examples. There's also the potential to take this global. I mean, certainly, we started off in the U.S. as a credit bureau. We're in 30 markets around the world. Neustar has a very limited presence outside the U.S., and they've been -- well, as you know, they used to be a bit of a chaotic portfolio. EE bought them, sold off, focused on this core, but they've been hungering for international assets. And all of that is upside revenue synergies to the business case and the metrics that we've been providing The Street. So while our entry multiple at 27x, what is almost a complete 21, it's consistent with what assets like this are trading in the market. Left on their own, we think EBITDA goes up to about $150 million in EBITDA next year, which makes it a 22x entry multiple, if you will, and then we get into the synergies that we've got across our combined enterprises, which are going to be quite material. You layer on top of that international growth potential, and I think you start seeing the economic logic in the deal.

Yes, that makes sense. Steve, since I have you, maybe I can loop you in on the next topic, which is fintech. We've done several of those booth tours at 2020 with you. And I think it's an area of interest with investors. Can you just help frame what the fintech industry in terms of your exposure looks like today and what the trends are? Because clearly, they seem to have held that better than we all thought, but just curious what it looks like today.

Yes. So fintech is a dynamic space, right? So it's constantly changing. It started off as a very narrow space, consumer lending to certain customers in certain segments. And now it's grown to encompass multiple loan categories, lots of innovation, full spectrum lending. And actually, there's no one fintech player who plays in any one area. It's a broad and large ecosystem. We've been very fortunate in that we were able to identify these trends early and establish our position in the space as pioneers when this opened up, which is a virtuous circle, right? So what happens with categories is as you -- as you serve those categories better, you get more inquires, which makes the quality of your data better and it just kind of keeps building on itself. So we are highly committed to remaining at the front end of the fintech ecosystem and looking to support the expansion of players into that space so that we're ready to help at the beginning. And we've been very dynamic in that regard. I think things like Spark several years ago and the changing of our model, maybe about 8 years ago, to be more vertically oriented have kept us at the tip of the spear. And I think we've been very lucky in that regard. The emergence of BNPL, POS lending this year, we've done very well in that space. That was a space we started betting on until several years ago. And then, of course, COVID accelerated that market. That market was going to grow anyway. COVID, I think, just sped up that whole process.

Got it. And Chris, from your perspective, I mean, that you're clear as your competitors, I mean, they talk about obviously coming into the fintech market, growing nicely as well. But is it just a case of it's a massive market and you all 3 can probably grow without -- at the expense of each other?

I think that's exactly the case. Foundationally, ton of transformation, ton of disruption, many new players. As you know, we have first-mover advantage. Steve is a large part of the reason we have first-mover advantage. The last several years as our competitors have targeted entry into this space, and I believe have grown their revenues from this space, we've continued to increase our market share, right? And of course, we've continued to scale our revenues. And that's simply because in a rapidly growing market and one as dynamic as this where players are emerging from start-ups to scale players who need redundant bureau coverage, there's a lot of opportunity for all.

Got it. The other topic that we get a lot of he said, she said with your competitors is just the technology. You guys have obviously led the way coming out of private equity with [ Project Ignite ] and so forth. Can you just talk about Project Rise and where you think you'll end up with that and how you'll stack your technology versus the rest?

Yes. I think our technology will be really strong. And I would think -- I think the best way to think about our technology investment is in the context of shifting from a multi-domestic operating model to a more globally architected and intentioned model, right? So Project Spark at the core was an effort to get off of mainframes in the U.S. to modern, open, distributed technology, which is really what underpins the public cloud service providers. And so we run both our U.S. credit and our U.S. public records businesses off of -- which you can consider internal cloud, right? With that said, we started to export the Spark data acquisition in project fulfillment or product fulfillment systems to our different global markets. But we haven't covered the globe, right? Well, now the technology has shifted where there's the opportunity to architect a solution one time and then establish it within a cloud service provider and service multiple markets, of course, limited by local privacy regulations and such, which adds some complexity. And we're in the process of going through that generational investment. But as you look across our applications portfolio, there are over 1,000 around the world, they're roughly split between 500 internally developed, 500 externally licensed, which is a hell of a lot of redundancy given our prior multi-domestic approach. And we're streamlining and rationalizing a lot of that stuff. And on the proprietary side, as we rebuild core applications to share globally, we're doing it based on this enterprise architecture and enterprise services orientation.

Got it. Steve, tech enables innovation and the U.S. market has led in that for TransUnion at least for a while. And quite frankly, all the bureau's innovation has been a key driver of growth. My question is more, very rarely, like we had transfer data, you get one of those singles that become more than a single. How should we think about what the pipeline of innovation looks like? And if there's any 1 or 2 that you want to call out for us to keep an eye out on?

No. Look, so we built our broad-based pipeline these days. So you're not doing a lot of games hoping for a grand slam every time. So you need a bunch of singles, doubles, you need some home runs, the whole thing, right? And we have a stack of capabilities now unlike we've had -- that than we've ever had. If you look at the breadth of our assets today, the breadth of our verticals, we're playing in more places, more solutions than ever Chris is a global operating model, which he stood up, I guess, a couple of years ago with a much broader focus on solutions, bringing our solutions families to a higher level, under my colleague, Tim Martin, are playing an enormous role in that. And our innovation and our ability to move products across the globe continues to help us build and expand our businesses. I'll give you an example. We're entering the U.S. gaming space, the gambling space as gambling becomes legal in the U.S. We're the leading provider of those services in the U.K. today. We are able to just lift and shift a lot of those capabilities and those relationships. I mean it's not just solutions, it's solutions and service and customers as we bring them to the U.S. Prior iterations of TransUnion, pre the TU U.K. acquisition, pre what Chris was talking about with Spark, we just wouldn't be able to do it, right? And now we're in a position to do that. So we have all of these different capabilities, but we have broad pipelines of solutions coming to bear. And then you layer in some of these acquisitions, whether it be the smaller ones, which are very valuable at a big potential, both immediately and in the long term, so it's throughout there or a larger one like Neustar once that comes to fruition. the OneID platform is going to be basis for a variety of different solutions that we're going to bring to all of our verticals in the B2B space in the U.S.

Got it. And Steve, maybe just in terms of the small acquisitions, like what are the areas of white spaces that you'll be looking to do those in?

Are you talking about the historic ones or for future ones?

No, just -- yes, just future ones, like what are the -- like I mean media sounds like you filled that out, right? So are there stuff and are they particular assets in gaming, et cetera, that we should be ready for?

Well, I don't know if Aaron wants me really talking about things like that broadly, but...

No, no, no. Hey, Steve, you don't have to name targets. But generally speaking, we're going to continue to invest in assets that enhance our fraud mitigation capabilities. You're right, we do have a really nice suite of marketing solutions now. So any deal there would likely be more about scale and consolidation and just those economics. We're interested in the analytic resources, analytic platforms and the like, and of course, proprietary data -- and largely, we're pursuing partnerships to gain access to both employment and income information as well as demand deposit information because that's a new frontier of [ Credit Desk ] alternative data that's extremely important, too. And we're pursuing it on a global basis.

Got it. Chris, let me end with you because we're almost out of time and probably where we started, right? So the size of the Neustar acquisition probably speaks to your confidence and comfort in it. But there's the view that your core credit business, your core business is already projected to probably grow very well. Did you need to do the Neustar deal? Just maybe some just final thoughts on the timing and the outlook going forward.

Look, do we need to do it because we're concerned about credit? Absolutely not. One of the amazing things about our business is how growthful the core markets are, right? And you know this because of all the alternative data types that we're pushing into that, if done properly, will produce better insight for our clients and help them manage their risk and marketing. What the Neustar deal does is scale and cement our capabilities in that very complementary kind of the trinity of credit, of marketing and fraud that we've been describing, right? And so we'll have a more complete and at scale, integrated value proposition to take to our customers, and we're going to be able to take it through a lot of different verticals. When I say our customers, I mean financial services but across the full range of our client base. Did we need to do it? We're here to grow, and we're here to grow high single-digits plus. That's how we've created enormous amount of shareholder value. And the struggle is never over one-off. So we're always looking to innovate and keep pushing.

Got it. All right. That's a great way to end then. Thank you so much, Chris and Steve, for your time. Really appreciate it.

Yes. Thanks. It's our pleasure. See you.

Thanks.

All right. Thank you, everybody.