TransUnion (TRU) Earnings Call Transcript & Summary

This is Andrew Steinerman, your business and information services analyst here at JPMorgan for over 20 years. And this is the Ultimate Services Investor Conference, which is our annual gathering of the best info services companies and investors. I hope everybody is well and safe. We'll be back to in-person on next November. This is the TransUnion fireside chat, so it will be a lively discussion. We're here with CEO, Chris Cartwright; Jason Laky, who's the EVP of Financial Services, the largest business; and Aaron Hoffman, who's our trusted IR wisdom provider.

So in any case, we're going to jump right into it. I was kind of going to get into the transactions and the portfolio review soon. So everyone could bear with me for a couple of questions before we kind of get into that. But just, Chris, look backwards to help us look forward. TransUnion has this incredible history of organic revenue growth and margin expansion, of course, shareholder value creation. And how would you convey to investors the confidence that, that momentum ahead of us is at least as good as what we've already earned?

Well, yes, good morning, Andrew. Thanks for having us. Always a pleasure to be at your conference. And yes, look, we've had a terrific run, as everybody knows. And I feel like we have positioned ourselves to continue to run through another generation through a variety of means. One is we have a pretty good handle on what it takes to produce consistent, repeatable organic growth in the geographies and across the verticals in which we serve, and it starts with having meaningful data that makes a difference in the quality of decisions that our clients are making. We add into that real expertise in the markets that we serve by hiring individuals from those market segments that, I think, has given us superior insights [indiscernible] to connect with clients and to bring not just products, but really answers to their business problems that help them become more profitable. Strategically, we focused on innovating in financial services. We've led in trended credit data. We've led in alternative credit data. And we've also expanded those capabilities into adjacent verticals that have increased the market opportunity that's available to us and allowed us to continue to grow. We've also selected verticals and market positions where we can enter as an attacker. Someone who's got great data, great capabilities, can take on incumbents and gain share. That's been particularly true in insurance services, in government, in public records. And look, as you know, the playbook extends globally pretty well. And we've got a super attractive and growthful geographic footprint. And all those basic core factors about the TransUnion story, they remain in place. And quarter-by-quarter, over the course of the year, you can see as our markets rebound, as we adjust to life in the pandemic, our organic growth is accelerating again to very attractive levels. On top of that, Andrew, we've expanded verticals. We've expanded products. We've really deepened our presence in marketing services through a series of acquisitions, even before we start and analytic products with our Prama suite and, importantly, online fraud mitigation, which is a really big market and a dynamic one. And so I feel like the investments that we've made before this recent round of acquisitions, that secures our growth rate for the intermediate term. And then, of course, with the moves that we've made recently to really go big in identity and marketing services [indiscernible] communications that extend from real identity capabilities, that's securing the franchise growth for the long term, if you will. I'm also super excited that we continue to enhance the range of offerings in direct-to-consumer with the Sontiq acquisition, which helps us play more effectively into identity protection online, with our investment in Monevo, which helps us bring prequalified consumers to lenders. So look, there's just a heck of a lot of things going on at TransUnion, in addition to the core growth playbook that has served us so well.

Right. And if I could just get this kind of like -- I'd like to see a visual learning. I'd like to kind of categorize it. You said a few things sort of separately as areas of innovation, ID -- consumer ID resolution, digital marketing and fraud mitigation, like, to me, is it that a pyramid where you have ID resolution is the key? Once you do ID resolution right on the consumers, then you could do better digital market and then you could do better fraud mitigation. Like is it IT resolution kind of the category and then the digital market and reform mitigation, the use cases?

Yes. There's no other way to term it than yes. And listen, my whole breath went off over 5 years ago. And we realized like, look, bureaus, through the accuracy and breadth of the credit header, we're one of the best resolvers of identity or marketing targeters, if you will, in the physical world. But we wanted to translate that capability fully to the digital world for all the obvious macro reasons, but we needed to build up a data asset on a platform with advanced resolution capabilities, right, data science and algorithms and all of that to take just a universe of data and distill it down and connect it in a very powerful way. That foundational data asset and capability is what's driving our ability to provide marketing services, fraud mitigation, data cleansing and hygiene, et cetera, which are all a related family of use cases that flow from that capability.

Perfect. So those sound surely like kind of lots of growth opportunities ahead, and some of which is real white space, not just to TransUnion, but to the broader industry. My question to you is, how do you quantitatively track if you are developing enough innovation? So the opportunity is that you just explain the opportunity. But how do you measure innovation at TransUnion to make sure that we have the right amount of energy to be realized?

Yes. Well, look, Andrew, you've been -- as you've mentioned, you've been in this business for 20 years. You've been following the TransUnion stock even during our LBF...

Yes.

And back then, we needed to demonstrate to the market that we were innovating again, catching up in certain areas and setting a new frontier in others. And we used to report on our new product innovation. We still measure it internally. But frankly, now it's just woven into the fabric of what we do, right? And it manifests itself in our organic growth rate. The single-most powerful indicator of the health of our business is if we're posting market-leading organic growth rates across the spectrum of geographies and products and verticals in which we compete. And actually, if you peel the onion on our results in this past quarter, in the quarter before, all the bureaus are doing really well, but we're especially pleased by the breadth of high performance that we're demonstrating from an organic perspective. And again, I think that just speaks to the resilience and the growth fullness of our market positions. But yes, look, we're still focused on innovation. There's a lot of organic innovation, new stuff. There's a lot of M&A-driven innovation, which, of course, you're very familiar with as most people are. And we're innovating in terms of the business model as we pivot from our historic kind of multi-domestic approach to more of a globally architected and intentioned way to run our product development, technology and operations.

Perfect. You can imagine, I'm about to talk about Neustar. And so I thought this would be a good time to pivot and ask Aaron to talk about the really kind of detailed information that the company decided to reveal at the Ultimate Services Investor Conference, not just about Neustar, but about the portfolio transformation. Obviously, I'm going to say something first. I took a cut at it. When you guys reported, I didn't have enough information to really model '22 correctly. Your communication was much more specific about '23. It sounds like, today, you want to be much more specific about '22. And maybe, Aaron, you should -- you kind of shared that, and you can imagine, I'm going to ask you a follow-up question to that.

By all means. Glad to do that, Andrew. So you're exactly right. You didn't have enough information at the time. And candidly, we didn't have enough certainty around certain parts of the calculation to be more specific previously. So what's changed during that time have fundamentally been 2 things. One is we basically come to the completion of the financing round debt-related to Sontiq and Neustar acquisitions. That is obviously a big variable. There's a number of moving pieces. Some were favorable to us, most notably our ability to use the proceeds from the health care transaction to pay off the highest cost debt in our portfolio as opposed to some of the lowest cost debt. And that obviously has quite a bit of variability and impact on the outcome of the dilution calculation. The second is to get more clarity around the depreciation and amortization, both associated with the 2 acquisitions as they come on to our books as well as a little better certainty on the dilution -- excuse me, the DNA related to health care going out the door. So we have those pieces now, which allowed us then to update. I would argue, favorably on Sontiq, which we had said would be neutral previously. We're now able to say we expected neutral to $0.02 accretive, to constrain the range a little bit on Neustar and make that neutral to minus $0.04 dilution. So I think that's probably modestly better than some had expected and what we had said previously, which was slightly dilutive. And then on health care, just to kind of frame that. And the way we did it was to use the proceeds from the transaction to offset the lost EBITDA, right? So we said we have $1.4 billion of proceeds coming in. We can use that to retire debt. That offsets the lost EBITDA in the transaction. And the net of that, we believe, is about $0.10 to $0.15 of dilution for 2022.

Okay. And tell me if you're comfortable. I added up to the low end and the high end of the range. And so in total, I got a minus $0.08 to minus $0.19. Again, that's kind of lining up all the best-case scenarios and the worst-case scenarios. Is that a fair way to aggregate off everything that you just said?

Your math is good, Andrew. I concur.

Okay. Okay. And then also, I think you mostly answered the question already, but this was and still my follow-up question. Relative to what I tried the piece together with third quarter reporting, it sounds to me that the health care divestiture is just a more profitable business. And I just didn't kind of appreciate that or maybe that has to do with the DNA part of the health care business. And then also, I think I got interest expense wrong also. And I might have gotten, let's call it, depreciation of Neustar wrong, too. Are those the areas you would point to? And I think those are right, but maybe you could just comment on it.

Yes. I mean that's clearly where the sort of black-box guidance that everybody on the Street had to solve for in bridging to an estimate for accretion or dilution, right? Because you had the EBITDA. You had the revenue for all the transactions. You can understand that component of it. We had talked about a significant lift in the EBITDA related to Neustar. I believe we talked about that right after the transaction, which is still valid. We're expecting a very strong year from them as a stand-alone next year. So there were a lot of pieces in place, but those 2 variables were really around the final computation or expectation of the DNA piece as well as what the interest in expense impact would be. And again, we had to go through the full debt financing on that. And there was -- there were definitely a lot of moving pieces on that.

Okay. I did my best, but thank you for clarifying. That really is helpful. We're going to talk about Neustar and Sontiq separately. So this is now on with launch again to the Neustar conversation. So Chris, the way we just played the category of ID resolution truly has been a core competency of a credit bureau and TransUnion for many, many years. And obviously, with the fraud business, you surely have already been building up use cases for kind of, let's call it, identity-based solutions. Now Neustar's still massive. It's really the kind of the first bigger acquisitions since Callcredit and iovation. That's kind of going back to 2019. My question is, why is now the time to bet big on ID-based solutions?

Yes. Well, I would say it's because our understanding of the opportunity and our confidence in our ability to execute it is high given the passive experimentation and expansion that we've been on the past 5 years. I mean Neustar is, in a way, a combination of a strategic shift that started 5 years ago, right? And 5 years ago, with this recognition, we began acquiring digital identifiers and appending them to look for credit record. And I'm talking about things like mobile ad IDs, device IDs, URLs, hash e-mails, phone numbers, et cetera, cellular phone and all the identifiers that you need in order to understand who you're dealing with in the digital transaction. And then from there, we began adding marketing capabilities that positioned us to help clients in the digital realm. And all of those have done well. Collectively, those 3 deals are at and above their M&A cases and providing with both more complete solution and some really nice growth. Neustar asset became available. As we've told before, we looked at it when it was a public company, considering a private transaction. Ultimately, our efforts then weren't successful, and Neustar was a very different business, right, at the benefit of both 4 years of retooling under new management and under private equity ownership and also a divestiture of assets that just didn't fit with TransUnion. But now the combination of knowledge and confidence and the availability of the asset made this the right time. And on top of that, look, we think the business is at an inflection point. We think the growth has turned around. They're on a path to grow 9% total this year, 8% organically. We expect them to continue and to accelerate that growth in the coming years, particularly once we have time to start achieving the revenue synergies. And that's a profit inflection point, too. The fall-through will be good. As we've said, we think there's good cost structure and cost synergy opportunities in all of the nongrowth areas of the business. So look, I think this repositions us strategically. It will be additive to our enterprise growth rate, and it's going to deliver some really nice shareholder value as we improve the margins in the coming years. We said that we think we can achieve about $70 million in cost improvements. Most of those are going to come in the next 1.5 years or 2, right? And as we get closer to the asset and closer to the management team, we're just getting more confident that we can deliver those here.

Okay. Perfect. Jason, maybe it's a good time for you to chime in here. When you think about Neustar in particular, talk about financial services vertical client. What has already been the receptivity to kind of both -- when I think about ID resolution, I think both fraud and digital marketing.

Soon after we announced the transaction, we spoke with many of our customers. And I see particularly, we have customer advisory boards in each of the segments. And the resounding feedback is that this acquisition makes sense. It's a great fit. We know who Neustar is. The marketing capabilities that Neustar will bring, like very much complement the work that we do on the -- I'll say, the core credit side. And our customers are very focused on moving into the digital space. So we've got the capabilities to help reach more consumers confidently through, again, complementary marketing capabilities, fraud resolution and a greater ability to understand who are -- who the consumer is no matter where they're engaging with our customers. They're all very exciting.

And indeed -- right. And just maybe be a little more specific about kind of which types of financial services clients are interested in Neustar solutions? Or is it really all?

I'd say across the board, there's a resounding interest. Many of our largest customers do business with both us and Neustar. And so when we talk about the synergies of bringing the capabilities together and augmenting each other, like they're excited about that. And I think more importantly, as we look down into our mid-market customers, ones were -- we believe we can bring the newer combined solutions together in ways where they can rely on us to help them do what would otherwise be the integration of several companies into their process.

Right. And Jason, as you spoke to clients that use both Neustar and TransUnion, were there any suggestions that clients gave to you to make the Neustar solution better? Meaning like things that they're like, "Hey, TransUnion should really jump into this because I know that's very TransUnion like."

Yes, they have the specifics of how we want to bring them together and what they recommended are. I'll say is that the view we take when we think of the identity piece, which is -- I think it enables us to help our customers go from, I'll say, optimizing individual marketing channels doing a better, say, prescreen marketing campaign or a better digital campaign, you're saying. Now we have the components together in one place to help identify the consumer it is that I want -- help me identify the consumer that I want to find. And then through the capabilities you have, through your core business, the Neustar help me determine the best way to reach them most effectively to get the product.

Right. And Aaron, can I circle back to you? When you were so specific about Neustar in '22 being neutral to minus $0.04 dilutive in '22, my question is how does that wrap back to the company's previous comment about, "Hey, if we left Neustar as a stand-alone business, there will be $150 million of '22 EBITDA?" So my question is, it's not a stand-alone business, and so if the EBITDA assumed to be higher or lower than that $150 million as it's getting integrated into TransUnion to make the EPS figures that you just mentioned today about '22.

Sure. So Chris had mentioned an approximately $150 million figure right after the transaction, which I sort of alluded to in my first dialogue with you. We still believe that, that is the right number. And so that's where we're at. At this point, we have embedded very modest initial cost synergies and virtually no revenue synergies, right? So we're with a lot of experience in doing acquisitions have to be reasonable about how quickly things can take hold. So to the extent any of that comes on any faster, that, I guess, is potentially upside. But we have a lot of confidence in that number that Chris had given previously. And that's what's baked into the calculations we provided this morning.

Okay. Perfect. So Chris, obviously, we're already towards the tail end of the year. I'm going to make a question about '23. Obviously, the long-term organic revenue growth algorithm for TransUnion has been 7% organic constant currency revenue growth. As you look into '22, the next year, and maybe even more, do you feel like there are some tailwinds here? Some of them might be cyclical consumer credit recovery, the consumer being in great shape, and then some of them being company specific, all the innovation that we can talk about here. Do you feel like we're heading into a year of perhaps above-average organic revenue growth?

Yes. Well, look, we're not -- we're going to guide formally in middle of February, when we deliver our fourth quarter and full year results. And I think, as you may know, we're hosting an Investor Day as well in the first quarter where we'll really get deeper into all of this. But what I'll tell you now is that, look, we're optimistic as we look forward to '22. You'd said '23, I think you probably mentioned...

I made a mistake. I meant '22, into next year, yes.

'22. Yes, '22 first. And I don't feel like our portfolio is fully recovered at this point. I mean if you look at the recovery in the international geographies and even in some of the verticals. Now we've had a nice bounce, right? So the comparables are tougher next year, but we were expecting -- we think there's more potential for recovery. That said, the mortgage business doubled from the pandemic to date, more or less in round numbers. And now we're seeing that go negative, right? So there is a material headwind. And one of the reasons why in the third quarter, we kind of break out our overall performance, and then we do it without mortgage, so our investors can really see the underlying piece parts of our growth. But I think there's more opportunity for organic growth. There's just some noise, I think, because of this mortgage factor that we're going to have to just work our way through it. Look, we're grateful for the mortgage boom. For the refi boom, it was a great offset in diversification. It just introduces a bit of noise as we kind of return to longer-term trends.

Yes. Maybe jump in here, Jason. So think about just financial services. When you think about those kind of 2 factors that Chris just brought up, mortgage, which is not a big portion of the total, but it is a big portion of financial services. Do you feel like the consumer credit recovery continuing forward is a bigger upside driver than the refi cycling down? Because the way I think of it is mortgage has 2 pieces, right, purchase and refi. So we're not really talking about purchase going down. And then nonmortgage is the recover. So when you think about financial services of TransUnion and you think about the confluence of what was just set up here, is this more of a tailwind? Is this more of a headwind? Or are these kind of what setting factors more of a mutual brand?

So let me frame it this way. As Chris said, we'll talk in February more about what we think last year is. But I'll point to our results in third quarter. Financial Services grew 11% year-over-year. And when you take out -- when we talk about the headwinds of mortgage, excluding that, Financial Services grew 31% year-over-year. And that on the heels of, I'd say, the playbook we've put in place, focusing very specifically on the industries that we serve. And that I think enables us to get ahead and stay connected with our customers and what they're trying to do. So they are returning to market with more prescreen campaigns, more consumer acquisitions, we're there. And we believe that, that playbook serves us well and will continue to serve us well into next year.

Okay. Perfect. We only have a couple of minutes left. And maybe, Chris, I'll kind of give you a little bit of an open-ended question. When we think about a year from now, and we're back at the Ultimate Services Investor Conference, November '22 in person, what do you think we'll be talking about that we haven't spoken about today? What really should we really kind of send people kind of longer thought forward? Again, we'll be thinking about '23 at that point.

Yes. Look, I think over the next year, we'll have greater clarity on how TU is set up for the different horizons of growth. In the near term, the combination of rebounding in our growthful positions in our playbook, we're going to deliver well against the market. In the medium term, you're really going to start to see the benefits of the diversification that we've made on the product side and even on the verticals, right? And we'll continue to launch new verticals. But I think a year from now, the combination of the two -- well, the several really big moves we've made, Neustar, of course, being the largest, you're going to see like it's opening up a new door for potential growth for us across the marketing, the fraud and the identity services dimensions that are really going to differentiate in the longer term. And then on top of that, you're going to have greater resolution around the benefits of this shift to a global organization. And that just means more product diffused across our geographies and verticals faster in a more cost-effective way of achieving that as we move from a lot of country-specific redundant technology stacks to global platforms that we're building once and leveraging across our positions.

Right. And that should drive margin expansion over the medium term, right?

Look, we remain committed to industry-leading margins with the acquisition of these 2 businesses. Particularly Neustar, we got some work to do. But yes, I mean improving our margins is part of our commitment to our shareholders.

Okay. Excellent. This is a great place to stop. Thank you for the dialogue. We look forward to our next time together. Thanks, all.

Thanks, Andrew.

Thank you.

My pleasure.

Pleasure.