TransUnion (TRU) Earnings Call Transcript & Summary

Good morning. This is Heather Balsky, BofA's business and information services analyst. I want to welcome you all to our fireside chat with TransUnion's CEO, Chris Cartwright; and CFO, Todd Cello. The team is fresh -- very fresh off their Investor Day from Tuesday. So this is a very timely time to be speaking to them, and it is a pleasure to have you all here.

So to kick things off, I wanted to ask more of a broad macro question. Can you help assess the U.S. operating environment for your business right now outside of mortgages, especially as we come out of COVID? Are you seeing some tailwinds still from the recovery? Are we in a more normalized consumer lending environment? And what do you think about the health of consumer and borrowing appetite amidst inflation and likely higher rates?

Yes. Well, thank you, Heather. Thanks for having us. We appreciate the opportunity, as always. And I think overall, this is a good time for the U.S. consumer and a positive environment for our business. You mentioned mortgage, and I think we've talked about the issues there. But overall, the other lines of lending are relatively strong. We've seen a return to what I would call a more normal appetite to both -- manage the book of existing loans for risk and opportunities, but shift heavily to customer acquisition. And focusing on the customer a bit, the customer is strong -- the consumer rather. The consumer delevered during the recession -- I'm sorry, the pandemic, in part due to forbearance. Also, a lot of folks maintained employment throughout, the vast majority, and then there was ample government assistance. So consumer balance sheets are the strongest we've seen in a generation, unemployment is very low, wages are rising and there's pent-up appetite for consumption as we're seeing. And that plus supply chain difficulties, that's what was exacerbating the inflation initially before the recent geopolitical instability. So the consumer is in great shape, and they want to get back out there and enjoy life again. And so they're willing to spend and I think they're willing to borrow. And you're seeing that based on the resurgence of our business. Last year, '21, we had a great year. It was a strong rebound off of the pandemic shock of 2020. And I think there's still some rebound left in consumers in the U.S. at this point. I think the majority of the rebound is already in the business, but we're not -- we haven't hit our stride fully. And then if you look at the emerging part, what we classify as the emerging portion of the U.S. B2B portfolio, which is now equally large -- as large as our credit, I think there's probably a bit more rebound ahead of us because a lot of the products we sell there are targeted to smaller businesses. I think smaller businesses were impacted more severely during the downturn, and we're seeing a nicer bounce back there. There's more bounce remaining. Internationally, I think the story is much the same. Our international markets, particularly our emerging markets, were even harder hit by the COVID pandemic than in the U.S. market. And so the decline was more pronounced, and the bounce back has been more dramatic. But we posted really strong growth last year internationally. I think we'll do really well this year. In big markets like the U.K., larger, more developed markets, the conditions are more similar to the U.S. Parts of the market like fintech and BNPL and gaming are in full growth mode. Other parts of the market like mortgage are flattish or lower growth. And auto is starting with supply constraints. But overall, I think, positive macro trends internationally, especially positive in the emerging economies where they're really enjoying nice bounce back.

That's very helpful. Before I go to my next question, I neglected to mention to the audience, if you do have a question, we will be doing Q&A. I'll be checking in 20 minutes in, roughly. So if you want to submit a question into the system that is where I'll be checking. So I'll be looking out for that. So moving to the next question. As I mentioned your Investor Day was this past Tuesday. And you upped your organic sales target to 8% to 10% from 7% that you provided in 2019. Can you -- at a high level, can you walk through the main drivers of the acceleration? And what gives you confidence in this new outlook?

Yes. Well, look, like I said, we're fresh off Investor Day. Todd, why don't you guide us through that question?

Yes. Sure. Good morning, Heather, and thank you for having us today. It's a pleasure to be able to speak with everybody, especially just 2 days after the Investor Day. So I think your question is a good one pertaining to the confidence that we have to increase our organic constant currency growth rate from 7% on average that we had guided in 2019 to right now 8% to 10% through 2025. I would start first just with the guide that we provided for 2022 because I think that's -- it's such a good baseline for us. And just to kind of reiterate that, what we called for organic constant currency revenue to grow 4 -- grow 5.5% to 7.5%. However, that included a significant headwind from U.S. markets mortgage of about 3.5 points. So the underlying business is expected to grow 9% to 11% in 2022. For many of the reasons that you already heard Chris speak to, both in the U.S. as well as in our international businesses. And I think what's also important is as we go forward, and we are in a rising rate environment, mortgage as a percentage of revenue is going to decline. This year, it will be less than 7% of our total revenues, and it will just continue to decline as we go forward. We clearly benefited from mortgage in 2020 and maybe into the first half of 2021 due to the exceptionally low rate environment. But what's more instructive is going forward. And the 8% to 10% starts with kind of how I outlined the '22 baseline. And when we think about where we start from, we always start with a very meaningful play in areas like credit. But as we've spoken about recently, and in particular, during our Investor Day a couple of days ago, it's the areas that have a higher growth opportunity for us, particularly in marketing and fraud where those markets are growing significantly in TransUnion with the data assets that it has as well as with the recent acquisitions that we made, specifically Neustar. We feel that we're going to be able to meaningfully play due to the capabilities that we have. So that's one of the areas that we just feel strongly about that credit is going to be good and it's going to continue to grow for us, but it's these newer areas where we see growth opportunity, particularly in marketing and fraud that we feel that we're going to offer some very compelling identity resolution capabilities for our customers. The second area I'd highlight in the 8% to 10% guide for the -- throughout 2025 is our International business. We expect that business to grow faster than TransUnion overall in the double-digit range. And with the attractive positions that we have in India as well as the U.K., but also in geographies in Asia Pacific, Latin America and Africa, we feel confident that the international business is going to be able to leverage the enabling platforms that we have to drive growth. And then finally, there's our Consumer Interactive business, which we believe that the Sontiq acquisition that we made at the end of 2021 enables us to have a more comprehensive offering to that -- before, we were just offering credit monitoring services. Now we can bring identity protection services into play. And we believe that we'll be able to now take the Consumer Interactive business from a mid-single-digit grower up to a high single-digit grower. So there's a lot of good things ahead for us to be able to achieve this 8% to 10%.

Yes. And so, Heather, if I could add to that. I'd just say simply, when you think about our strategy and how we architect for growth, we want to increase our exposure to markets that are at or above our growth rates and are large, have substantial TAMs. And then it's also important that we've got a core competency that we're leveraging into those markets that gives us an advantage, a right to play and to be successful and that we can weave kind of a complementary and horizontal offering between the different markets for our customers. And that's what guided us to expand further into marketing and underpinned by digital identity resolution for both marketing and fraud mitigation. So with this collection now, I think we've kind of averaged up in terms of market size and growth rate. And that underpinned our enthusiasm of our guidance.

It's really helpful. Digging a little bit in one of your segments, which -- you're talking about double-digit growth in emerging verticals through 2025. Can you break that bucket down a little bit more? What are the big components of that segment today? And what are the segments that are leading your growth?

Sure. That's a good one. Todd?

Okay. Chris, happy to take that one. So yes, as far as the emerging verticals are concerned, the largest vertical continues to be Insurance, which is a business that TransUnion has been in for a number of years, starting off primarily serving auto, property and casualty insurers. And as their sophistication with using credit and analytics to underwrite insurance policies has grown over the years, we've grown alongside them by bringing new capabilities to them to just enhance their overall workflows and make the underwriting process just simpler overall. We've since branched into other areas of Insurance such as commercial and life, which are growing really well for us. So we expect the emerging -- Insurance within the emerging verticals to grow double digits as we look out into the future. And that's on top of how the business already has been growing at that pace for quite some time. Another area to highlight is our Public Sector vertical as well as Media. And both of those verticals have significantly gained traction organically in TransUnion. Look at them separately, first with the Public Sector, it's an area that we've really started to focus on probably about 6, 7 years ago. It was an area that TransUnion traditionally did not participate in, and we just saw an opportunity to be able to bring our products and services to help Public Sector primarily around knowing who the consumer is, fraud -- different fraud applications. In addition then to that, we started focusing on Media with our digital marketing capabilities. And we started that organically because we saw a path that where marketing was heading several years ago. As opposed to being mail-based, obviously, things we were anticipating to go fully digital. And that's happened, and the pandemic definitely accelerated that. So we did a series of acquisitions, smaller ones, that build up our presence in digital marketing, specifically to serve the Media vertical. Well, we've gained significant traction. Our business grew very nicely organically as a result of the acquisitions that we made such as TruOptik and Signal -- and TruSignal in that space. But then we acquired Neustar in late 2021. And both the Public Sector and the Media verticals will significantly benefit from having the capabilities of Neustar. And Neustar, in particular, has a very large marketing business that is I'm sure everyone can appreciate. So that's complementary to the assets that we had already built up there. So we feel good that the combination of what we had organically as well as what Neustar brings will enable us to really deliver strong growth going out into the future. And when you think about it then from a product offering capability, and as I said in my previous response, marketing and fraud are areas of importance and focus for us. And we see applicability to take the marketing and fraud capabilities that we have and that we're going to continue to build out but take them across all the emerging verticals that we serve today. So that also -- just that product set itself will be a differentiator for us as we drive growth in the emerging verticals.

Yes. And I think overall, strategically, you've got to remember that we are -- at least relative to our credit lending, we're new entrants into a lot of these emerging verticals where we've either identified white space or we think we can attack and take share from incumbents. And we're growing off of smaller bases and we're attacking. And so we expect to grow faster than the portfolio on average, and we've been able to deliver that. And then now, as Todd's saying, we're bringing even more capabilities because of the recent acquisitions in marketing and fraud that should further accelerate our growth rates. Heather, for some reason, I'm not -- yes.

I'm muted. There you go. So I want to make sure that you guys get what you have to say in. So I -- we do have one question that I'm going to ask coming from investors, but -- and then after that, I'll -- we'll talk about your recent M&A and the marketing business. But the question that we got is, outside of mortgages, what are you seeing in terms of consumer's appetite to take on more consumer credit?

Yes. The consumer -- well, look, as I said, the consumers are in good shape from a balance sheet perspective. And again, that's the combination of being able to defer payment obligations, but also maintaining income. That said, there's still an appetite to consume, and we see really good levels of volume across lending categories right now. And look, the banks came out with their year-end earnings, and all of the major banks felt like consumer lending would be a strong area of growth within their overall portfolios, right? So they're kind of deemphasizing investment banking a bit in sales and trading, and they've pointed to consumer lending as the area for growth in the current period. And so far, we're pleased with the activity level we see.

Helpful. And there's another question, which is actually on the marketing -- on the M&A side. So I'm going to blend my question with the question that I got. So your focus on marketing, I think it was unexpected by a fair number of your investors. Can you talk about what attracted you to that business, and why it's a good fit for TransUnion? And then I'm going to layer in the question that we got, which is that who are you competing against in that market? And what are the differences in your capabilities versus the competitors that are out there?

Okay. Yes. So a couple of parts and let me start with what attracted us to it. Well, first, we've been in marketing to a large and important extent for almost the entirety of our existence. Typically, the loan origination process or the customer acquisition process starts with a credit-based analysis of the marketplace and then a focus on a particular segment that has the characteristics that a lender is interested in, fits their mission, it fits their portfolio. And then we would produce that initial audience segment. And so look, first, to market, you got to understand the market, you got to understand who you want to make an offer to, then you have to go find them and present that offer. And then if they engage, you got to make sure it's actually them, and you're not going defrauded. And that's been the core of our business models. But in the off-line world, the terrestrial world is forever. Increasingly, though, e-commerce is how banks are acquiring new customers. And so we wanted to extend formally into marketing and beef up our digital customer acquisition capabilities. And we started doing that several years ago, both organically and through a series of smaller acquisitions that helped us get into audience creation as a complement to the credit audience creation and identifying those customers in the digital world, if you will. And then, of course, confirming digitally when those customers engage, the subset who do that it actually is the person you intended to interact with, and it's not a device or an IP address that's associated with fraud. Now Neustar is a marketing business that's very focused on effective audience -- well, first, data cleansing and optimizing your data before you go and you market, appending the digital identifiers that are necessary to target and authenticate and then also creating the audiences, and then finally, analyzing the -- well, planning effective marketing campaigns through a variety of database tools and then measuring the effectiveness. So if you think of those capabilities, that's exactly what we do in credit where we have a deep understanding of the credit landscape. We can identify an audience. We then work with the banks to plan an activity, to plan an acquisition campaign and we develop marketing response model and a credit propensity model and the like. And then we actually now through Neustar can help them go present those offers in the market, whether it's a direct mail or it's a cyber campaign, and then mitigate any fraud around the activation of that. And so it was a natural extension into an area where we always played a role, and increasingly, we wanted to make sure we could serve customer needs in this e-commerce-driven world. So that's why we liked it. The other advantage is that Neustar has got a state-of-the-art technology platform for aggregating both digital and off-line information about consumers that helps you determine exactly who you're dealing with or what you're dealing with on the other end of a marketing effort, a service interaction or potentially a fraud attempt. And again, that's an area that we pushed into deeply. And we've been in authentication of consumers for a long time. We've got -- we know a lot about consumers, and we use that as a foundation for asking them questions, knowledge-based authenticators. Now we operate one of the largest device-based reputational networks in the world. And so it's a natural complement to the OneID identity management platform that Neustar had created. So we'll be merging our really advanced broad and sophisticated data into this best-in-class ID resolution platform. It will make us really effective in marketing, even more effective in fraud. And Identity-as-a-Service is a rapidly growing category, and there's a whole industry that's pursuing that because it's at the core of effective e-commerce.

That was helpful. And can you talk about -- you're doing 3 sizable M&A deals in a short window of time. How are you -- I guess what's your comfort level on integrating the 3 deals? And how are you managing through it? And yes, just would love to get some color on that.

Sure. A lot of investors ask, why did you do 3, or 4 actually with the divestment of Healthcare, big transactions in 1 year? And does this represent like the new normal in TransUnion? And the answer is no, it's not a new normal. And M&A is episodic. You got to take advantage of the opportunities when they present themselves. And so last year was an unusually busy year that allowed us to gather up assets that we have been working on for a long period of time, that was a direct expression of the strategy we've been pursuing for multiple years but helped cement our extension and give us scale in these new markets. That said, we have a lot of work to do, and we're busy. But frankly, we've been pushing hard for a long time at TransUnion and I think accelerated our push in 2019 when we started to morph the business into a more global organization, which I'm happy to discuss as well. But these deals -- the work to integrate these deals is going to be done by different parts of the organization, and the deals themselves are very complementary. So they tuck in to our management and our organization quite nicely. Sontiq is a perfect combination with our credit enablement and credit monitoring business. And we already provide a degree of ID protection service. Currently, Sontiq now replaces that with a much more robust product. So we're plugging that together. And behind the scenes, we're working on the technical integration so we can offer a one-stop product for our clients. Verisk Financial Services, which we hope to close in the second quarter, 2/3 of that business is Argus. Argus is a perfect extension from our credit card vertical market business and just gives us a deeper level of analysis -- of analytics, rather, and thought leadership in the space. And also because of that very granular card spend data we're going to get from Argus, we're going to be able now to show consumers the outcome of their marketing efforts -- I'm sorry, not consumers, customers, the outcome of their marketing efforts. And so we will close the loop between analyzing the market and identifying an opportunity, planning an action to affect something, revenue generation and then determining whether it actually worked, right? And I think that unique -- that we're going to be unique in being able to provide that level of complete insight in the market. So that's an easy fit into our card marketing business. And Neustar, interestingly -- I don't really think of Neustar as an acquisition. I think of it as a merger of our marketing and fraud businesses with another organization that had actually greater scale in marketing, roughly equal scale, and fraud, a lot of capabilities, and it's a mature business that operates at scale. It's very much like TransUnion. The cultural fit has been excellent. We've migrated leadership in a lot of these areas over to Neustar executives. And again, there's -- because it's so synergistic and complementary, this isn't a big cost consolidation play on the people side. We want all of that talent. However, there are a lot of attractive cost synergy opportunities that we're pursuing because of the similarity in what we do.

That is very helpful. I wanted to make sure we chatted about fraud and ID. I mean you've talked about it to a certain degree throughout this conversation. But Sears is growing rapidly for you. There seems to be a lot of opportunity. It'd be interesting here, with all the M&A you've been doing, the investment, sort of how you're ensuring you remain competitive in the space? Sort of what you're offering into versus your competitors? And how big is this business to -- for you today in aggregate?

Yes. Well, first, the sizing thing -- the sizing question. As I mentioned earlier, in U.S. B2B, we're now roughly equally split in dollar size between the credit and the non-FCRA aspects of the business. And in the noncredit portion, fraud and marketing services are the largest 2 product lines that we have. So we're talking large, meaningful contributors that have a lot of opportunity as you described in the markets that we have to take advantage of. And the way we stay current is like, look, fraud is a large and dynamic and persistent problem. And there's only going to be more e-commerce and more financial services being digitized as we go forward. And so it's important to be very effective at mitigating fraud. And there's no one solution for the problem, right? So we had -- so there were 2 strategic imperatives for us: one, to be as good at identifying and authenticating consumers in the digital world as we were in the off-line world, right; and two, evolving from a series of effective point solutions that we developed over time, whether it was knowledge-based authenticators or fraud propensity models and scores or biometric authentication, right, or visual ID or device-based reputation. We've got all of these capabilities that are the spines of an umbrella under the TU TruValidate brand. We had needed to integrate them all on a product on a single, as we call it, orchestration layer, which is like an integrated data layer that takes the fraud signal from these different point solutions and gives the customer a holistic view upon which they can build and we can help them build their own fraud scores. They can integrate Signal from their own fraud inputs. And then with our decisioning software, they can prescribe the actions they want to take based on the fraud scores of different interactions with consumers. So that's where we're headed, right? So we -- you got to stay relevant by being as good digitally as you are off-line, and then you have to be a broad integrated provider of the relevant stuff. And I feel like we are now. Heather, you're back on mute.

Yes. I'm going to get this eventually. COVID -- post-COVID thing. So we have 2 minutes left. I'm going to squeeze in a capital allocation question for you guys. As your free cash flow starts to grow going forward, what are your priorities? And especially, how do you think of M&A as you're integrating the 3 recent acquisitions?

Yes. So Todd, why don't you wrap this up?

Okay. That sounds good. Thanks, Chris. So yes, as far as our capital allocation priorities, I think they remain largely the same, but I just want to take a minute, just emphasize our expectations going forward about the cash generation for the business. Last year, TransUnion generated free cash flow, which we describe as cash from operations less CapEx, of about 80% of our adjusted net income. And in 2022, we're expecting that to be about 70% as we're working on integration on the M&A as well as Project Rise. When we get to 2023 to 2025, we're expecting to generate almost $2.7 billion of free cash flow over that time frame. And the conversion is about 90% of that to adjusted net income. So it clearly gives us a significant amount of firepower, if you will. And with that, the priorities that we've articulated in the past remain largely the same. We are committed to pay our dividend of 10% to 15% of our adjusted net income. We've talked a lot about M&A, but now it's about the integration of that M&A. But there's also a lot of good ideas at TransUnion, a lot of good organic ideas, and we're going to continue to fund those. So that's the second priority for us. As Chris already said, M&A is episodic. We do have a lot of digestion, but we're not out of the market from an M&A perspective. We will continue to look at deals with a focus again on digestion. And then with anything that's left there, we'll look to prepay debt or repurchase shares. And I think over the last several years, we've shown that we will prepay debt rather aggressively. And as a reminder, just in the first quarter, we did pay $400 million down, and then that was also after we paid down the second-lien debt on the Sontiq acquisition almost immediately after we closed on it because we had the proceeds from the Healthcare divestiture. So debt paydown will definitely be a priority after we make certain that we've positioned the business for future growth.

Heather, mute.

Man, I'll get this by the end of the day. I'll get this. I just want to thank you both, Todd and Chris, for joining us. We appreciate it. And we'll be speaking to you soon again, I'm sure. All right. Take care. Bye.

Thank you. Take care.

Thanks, Heather.