TransUnion (TRU) Earnings Call Transcript & Summary

We'll get things started here. Welcome to Baird's 43rd Global Consumer Technology and Services Conference. We're thrilled to be back in person and here with all of you. My name is Clare Hasler, I'm a Managing Director from Baird's institutional equity sales office in London. Baird is a private, employee-owned company. We're committed to meeting and exceeding client needs and building long-term partnerships. Baird Equities has remained strong and nimble given the ever-changing environment and steadfast to our commitment to help create the best client outcomes. As you can see from this slide, Baird continues to receive high recognition from Greenwich for the quality of the platform and the value provided to our clients across research, sales, trading and corporate access. I'd now like to share a 30-second video that highlights the Baird difference that we think makes Baird the best middle-market partner for our clients. [Presentation]

Thank you for joining us today. Have a great day at the conference. And with that, I'd now like to hand it over to Baird senior analyst, Jeff Meuler, who will introduce TransUnion. Thank you, Jeff.

Yes. Thanks, Clare, and good morning to everyone for me. Thanks for joining us for the second day of the conference. I'm Jeff Meuler, Baird's information solutions analyst. Pleased to introduce TransUnion as the next presenting company in this room. For those that don't know, TransUnion is a leading global consumer information solution company with a broad array of identity, credit and industry-specific data and insights a wide range of end markets. With us from the company on stage is CFO, Todd Cello, who's been at the company since 1997. Held pretty much every major finance role culminating with being promoted to CFO 5 years ago. Also with us on stage is the Head of IR, Aaron Hoffman, joined by his IR teammate in the front row, Greg Bardi.

But with that, let's just maybe level set for investors that aren't familiar. You had an Investor Day this year where you refreshed your growth targets. But just so people know what kind of growth company you are, if you can recap what's the revenue growth targets? What's the margin growth targets? And what did you increase them from?

Okay. Great. Well, good morning, Jeff, and thank you for having us. It's great to be back in person. Back in March, we held our Investor Day. It had been 3 years since we had done an update with the market. At the Investor Day, we provided an outlook out to 2025 as far as what we expect TransUnion to look like from a revenue and earnings perspective. For revenue, we are looking to have top line of $5 billion. And from an EBITDA perspective, $2 billion-plus resulting in 40%-plus adjusted EBITDA margins with earnings per share of about $6. So what that implies roughly is from an earnings -- sorry, from a revenue perspective, we're expecting about 8% to 10% top line growth.

And then 100 basis points of margin. And on the 8% to 10%, that includes some mortgage headwind assumed, correct?

That's right. So we -- the majority of that mortgage headwind is happening right now in 2022. When we get out into 2023 and beyond, what we're seeing is that, that will somewhat stabilize at a significantly lower level. TransUnion's mortgage revenue, as a percentage of the overall revenue, historically has been in a 6% to 7% range. Through the first quarter of 2022, we were at about 10%. So we're still a little bit elevated from what would be our norm. So as we look forward out to 2025, mortgage revenue is not the growth driver for us. The emphasis for growth has really been the organic initiatives that we have going on in the company, which there's quite a few, but then needless to say all the inorganic opportunities as well with the recent acquisitions that we've made.

That's helpful. I just wanted to set the stage because I want to launch into some acquisition and cyclical sensitivity questions. But you gave us targets at Investor Day 3 years prior, and despite the COVID curveball, you actually hit them from a revenue growth perspective and you have these raised targets. I want to frame that up. So on the portfolio transformation, there were 3 relatively sizable acquisitions plus a divestiture. At the Investor Day, you've been talking about kind of an identity bureau with complementary use cases, fraud and risk, marketing, credit. It seems like those are all things that TransUnion has already been doing for some time. So it feels like a lot of portfolio transformation, but is this a transformation of the company? Is it about bolstering existing capabilities? Just how would you help investors understand who TransUnion is today?

Yes. So I think of the acquisitions that we've recently made is more of an evolution as opposed to a transformation. To your point, TransUnion has obviously always played in credit. But in addition to that, we've always played in fraud and marketing as well, too. Just what's happened, though, over the last several years and accelerated during the pandemic is just how digital our lives have gone. And we've seen a very meaningful place for TransUnion to play in fraud and marketing as our lives go digital. So we -- the assets that we've recently acquired at Neustar, in particular, really check a couple of really important boxes for us pertaining to bolstering marketing capabilities as well as our fraud capabilities. And they also bring a really nice communications business that we obviously have served that industry, but they're significantly larger because of their history in that marketplace.

Got it. And the accelerated digital transformation that the world has been going through, does that also impact your credit business beyond like providing marketing and fraud solutions to credit because you have a lot of, let's say, digital-first innovative clients on the credit side.

Yes. So as far as credit is concerned, many of our customers are digital. And I guess the best example that I can give you is just what's going on with banking. And if you think about the fintechs, in particular, it's a digital-first perspective. And that's an industry that we embraced very early on and have partnered with 24 of the top 25 fintechs where we have either the primary or a leading position. So that digital-first is important to us. And that's why, again, assets like in marketing and fraud are important to complement what we've historically led with in credit.

In that strong position that you have with the fintechs, can you just help us understand what's included in the fintech bucket as you use that description? And is BNPL a separate category, if you can comment on your presence in BNPL.

Yes. So fintech has been a meaningful growth driver for TransUnion. And as I've already alluded to, it's -- they are players that we embraced 8, 9 years ago. And we brought in -- by partnering with them, we gave them a depth of sophistication with products and services. So they were early adopters, for example, of our CreditVision suite of products. So that was obviously very important for us to gain that foothold. With that all being said though, the fintechs represent about $150 million of our roughly $1 billion in revenues in our Financial Services vertical. So the reason I mentioned that is, yes, it's a nice growing part of our overall portfolio, but there are other components, obviously, that are driving much of that growth. So you think about just outside -- within Financial Services, card and banking, auto and the innovation that we're able to drive into those markets, that has been a really important driver for us. And as far as -- back on the fintechs, your question about BNPL, yes, it's included in what we would consider to be in fintech. But again, a very small overall part of our revenues. We're not heavily dependent on it. So think of fintech again of just the players that you would expect to see in that roster of the consumer lending as they've branched out into other lines of lending as well, too.

Got it. Then you made a reference to CreditVision. CreditVision is your trended data product for those that aren't familiar. It's been a really innovative product for the industry. It shifted share in your favor. You gave us some revenue statistics for CreditVision a few years ago and it had scaled to like a sizable business and still growing well. I think more recently, you're saying, hey, there's still good runway for adoption. Can you just help us understand how much of a growth driver or at least qualitatively trended data still is for you?

Yes. Sure. Yes. So trended data, first of all, it's more than just about dumping a whole series of data on people. What's interesting about our CreditVision suite of products is really the algorithms and the scoring that we build that sits on top of all of that trended data. So that's really where the value comes in at. We gained our foothold with -- in trended data primarily, again, with the fintechs, as I already alluded to, but also in the mortgage space several years ago. From there, though, we've been able to take it into other industries such as card and banking. They were a little bit slower on the uptake because they have such -- they have very developed processes for their account origination and their account monitoring. So bringing that in took a little bit of time, but we've gained a significant amount of traction there. So there's a lot more runway there. CreditVision also though, is more than just about credit data. We have a product that's called CreditVision Link, where we're able to take what we refer to as alternative data. So think of it as noncredit data, right? It's things that don't come off the credit file. So CreditVision Link, in particular, has a really strong use case in the auto space where maybe there's a lot more subprime borrowers in that space that may not have as full of a credit file. So being able to get at alternative data to show that particular consumer is creditworthy because they've shown that they've been able to pay their financial responsibilities. So that's just one good example of where we see a lot of runway. Internationally as well, we've had a tremendous amount of success with CreditVision in markets like Canada as well as in Asia Pacific. But we've launched it in markets like the U.K. and South Africa and Latin America and there's still a tremendous amount of opportunity there with those products.

So I think you're pretty clearly best-in-class in terms of the trended data algorithms, and it's more complicated than it sounds because you've been able to defend your position. Is there opportunity to apply those capabilities to some of the data that you've been acquiring through the more recent acquisitions?

Yes. There definitely is. When you think about the acquisition of Neustar, what's powerful about that acquisition is, yes, it brings us data, a lot of really good telephone data and contact information for the consumer. And the OneID platform, which we were really impressed with as we got to know the product last year before the acquisition, but even more so now it's performing. And being able to bring the depth of the data that TransUnion has into the OneID platform is proving to be very powerful and will be beneficial to our customers.

You made a couple of positive comments on auto. I think there are some investors in the market that's been concerned about auto because of supply chain issues, but you referenced CV Link. You have another new, I think, auto shopper product. Just help us understand innovation in the auto space to offset some of the potential market headwinds.

Yes. So the market clearly is challenged for all the obvious reasons with the supply chain. But auto is a market that we focus on quite intently and we've been -- we think that leading with innovation to help our customers identify consumers that are a good credit risk to either help finance or lease a vehicle is important. So the innovation that we have with the digital -- in the digital channel, in particular, you really saw that take off during the pandemic as people were really starting to shop more for vehicles from the comfort of their home when they were in a lockdown situation. So we saw a tremendous amount of interest in those products. And I think that the market's changed going forward as far as how consumers will shop for a vehicle and ultimately how they'll look for financing for a vehicle. So we feel that we've got the innovation, but equally as important, the different data points to be able to assess the risk of a potential loan or a lease.

And this has been sprinkled throughout your commentary, but you hit on card and fintech and auto. I think investors -- there are some investors at least that are concerned about the macro outlook. You sounded pretty positive on your last earnings call on the consumer and current trends. Just help us understand what leading indicators do you look at either in your business or I know you have a credit like end market research group? What are you looking at that supports your confidence?

So we look at quite a bit and we listen to quite a few people as well, too. So let me take a minute to kind of go through all the details. So one of the indicators for TransUnion's business is just the level of marketing activity that our customers are undertaking. And right now, we see a very healthy amount of marketing going on. So that's number one. And as our customers are really looking for wallet share right now and they're fighting for that, so marketing is definitely an indicator for us. Another big indicator for us though, quite honestly, is just talking to our customers. We have -- we host a series of what we call advisory councils in different industries that we serve where we talk to our customers and we learn about the trends. But most importantly, what we learn about is their pain points and how we can work with them on that. So we're hearing quite a bit from our customers in regards to trends as well, too. Another area that we listen to, just the earnings calls from our customers as well, too. So if you just look at the most recent round of calls from the banks, overall optimism on the consumer. If we see any type of softening in the consumer space, it's obviously in the subprime category as inflationary pressures are definitely having an impact on that segment of the customer. With that being said, though, we release a quarterly report that we call a Credit Industry Insight Report that we put out in the middle of May, and I'd encourage everyone to go take a look at it. It's actually really interesting and it will break down mortgage, consumer lending, auto, card and banking. It will show the activity in those spaces, but then also the delinquency rates. And the source of that is our core credit reporting database. So it's a pretty solid source. So you can see where the activity is at, where we've seen an increase in loans, but then also how the consumer is performing. So needless to say, mortgage is challenged in a rising rate environment. But we have seen, just looking again at the data that we get in our core credit reporting file, a significant amount of strength in card and banking, consumer lending and auto as well, too. The other part of it that I alluded to is the delinquencies. By and large, consumers continue to meet their financial obligations. So we saw delinquencies go to an unusually low level during the pandemic because of all the different forbearance programs that were in effect. We've seen delinquencies tick up in the last -- within the last couple of quarters, but they're still below prepandemic levels. So it's an indicator to us that the consumer still remains healthy overall, but we continue to monitor data like that. We continue to talk to our customers. In this type of environment, we feel as much information as we can get is the prudent thing as we manage the business.

But it sounds like your customers are not like massively tightening the credit box or pulling back on marketing activity in reaction to those types of data points.

We have not seen that at this point.

Got it. When you gave us the revenue growth targets over the next 3 years, what types of -- what are macro risks to those? Or what type of macro environment did you assume? And if you can talk about what types of -- which of your large businesses you'd expect to perform well even if we were in a recession or grow even if we were in a recession?

Yes. So let's take a step back and maybe just look at TransUnion's business today, I think, and then I can talk to the longer term in regards to that. So if you start -- as you already said in the opening comments, I've been with TransUnion for couple of years. And I lived through the financial crisis in 2008 and 2009, and at that time, TransUnion was very heavy in U.S. Financial Services. Almost 40% of the company's total revenues at that time were coming from that space. So needless to say, we saw a very significant impact to our revenues at that point in time. The company, though, deliberately over the last 12, 13 years has been very deliberate in diversifying the portfolio away from U.S. markets Financial Services. So today, Financial Services is about 30% of the company's overall revenues. And the revenues, if you were to go back that far, we're talking from about $1 billion back in 2009 to what we're guiding this year about $3.9 billion. So clearly, Financial Services has gotten bigger, but it's a smaller piece of the overall pie. So what we've been successful in doing is expanding into adjacent markets, leading first with credit data, but into markets that maybe won't be as impacted as much by a recession. So good examples of that would be our Insurance vertical, our Public Sector vertical, our Media vertical and our tenant and employment screening. And each one of those has characteristics that could be countercyclical. In particular, in Insurance, there's a level of shopping activity when a consumer is under financial stress, they're looking to cut back on their financial commitments. They'll look for cheaper auto insurance. That shopping activity drives transactions for us. In the Public Sector space, just to give you another example, primarily what we're selling there is fraud products into the public sector. So it's just one example. So a government agency knows who might be employed -- they're employed with, right? So we see that, that would be a demand that would continue through a recession as well, too. In the rest of the portfolio, if you look geographically, we've significantly increased the size of our International business. We've -- since the great financial crisis, we've consolidated our business in India, which is obviously a really nice and growing part of our portfolio. We also made the acquisition of Callcredit in the U.K. and Colombia as well, too. So a business that as a percent of our overall revenue, still roughly about 20% of it, but it's a $700 million business where we have aspirations to take it to $1 billion in the financial commitments that we were talking about. So in a normal type of recession, not a global pandemic where everything goes down, we would expect those international geographies to have some countercyclicality. And we experienced that back in 2008, 2009 as well. And then, finally, I would just highlight the product innovation as well as just the evolution of the products in marketing and fraud, which you've asked me about. We're more sophisticated. We're focused on our customers' needs. And we feel that there's product -- those products will also be able to perform for different use cases in a downturn. So that brings then to the beginning of your question about like what's assumed in our guide for out to 2025. We've assumed just a stable economic environment. We didn't want to get into trying to predict the timing of a recession or any type of downturn. We just thought that, that was not necessarily useful because we don't know. And the thinking is if something significant happens, it would impact more than just TransUnion. So that was the logic that we put into it. So think of stable from March 2022 type of economic environment is what we assumed.

And maybe just to kind of put a bow on that is, typically, if there is a little bit of a downturn, normal type of recession Todd was talking about, this business comes back very strong coming out. So you're likely in that 4-year horizon, maybe see a dip here, but then outperformance when you see the other side of the downturn. So I think that's an important iteration like you get some smoothing most likely.

Right. And as part of the -- expanding into adjacent verticals that you referenced, you recently have done a few acquisitions. On Neustar and Verisk Financial Services, I think there's been some investor skepticism and maybe some of it's fading as they learn more. But part of it seems to be financial where you're assuming accelerated revenue growth and improved margins versus what those businesses were doing stand-alone. And part of it, I think, is just a blanket concern about, hey, is an ad tech a competitive space. How does Neustar fit into it or how do TransUnion marketing capabilities bundled together fit into it. If you could address those points.

Yes. That's a big question. A lot to talk about.

I know you've gotten it more than once though so...

I may have, yes. So but it's an important one to talk about this morning, for sure. So let me break them into the 2 pieces, and let's talk about Neustar first before we get into Verisk Financial Services. So on Neustar, I think many of you and just investors in general have a perception of a Neustar as a public company and that's fair. Back in 2017, before Neustar was taken private by a private equity firm, TransUnion spent a significant amount of time looking at Neustar. And the assets that they had pertaining to risk and fraud and marketing were very appealing to us back then. However, the business just needed time privately to prune the portfolio, I guess, so to speak, and to build out the capabilities of the business. So that's exactly what happened. Under private equity ownership, a couple of lines of businesses were divested. There was a big contract that was lost and the business was restructured. New leadership was brought in. They focused on innovation, built out the OneID platform and got it to a spot where last year, in 2021, the business grew 8% organically. So when we looked at the business, we had obviously a healthy amount of skepticism and wanted to understand where the growth was coming from. In 2020, during the pandemic, the business only declined 1% on a year-over-year basis. So relatively good performance, all things said. So we felt, as we got to know the business that we were catching Neustar at an inflection point. It felt a lot like TransUnion in 2015 right before the IPO that there were a lot of good organic initiatives that were taking root. There was good leadership there. So that was what really got us excited about that. So clearly, the margin is significantly lower. They did a 21% adjusted EBITDA margin in 2021. This year, we're expecting it to be about 25%. The combination, though, going forward of strong top line organic growth and this year we're expecting the business to grow at a very similar rate as last year at about 8% or high single digits and we're expecting the margins to expand, as I already said. And then as we get out, that's when we're expecting double-digit growth and more margin expansion from the top line, but also from different cost programs that are in place. So Neustar had a series of cost management initiatives that they were working on as we went through our due diligence process. So we fully vetted those programs, got comfortable that they were achievable. And then on top of that, there were just natural synergies that come with TransUnion and Neustar being together. So the combination of those two, that's the $70 million of cost synergies that we've committed to with this deal that we have a very clear line of sight into achieving. We didn't buy the business for the cost synergies, though. We're excited about the top line potential of the business. Verisk Financial is, to shift gears a little bit, it's a little bit different, the story there. First of all, it's significantly smaller than Neustar. And the asset that was most appealing to us was the Argus business. And that's -- as you've seen that, that's the focus, right? We're going to divest 4 of the 6 businesses and keep 2: Argus and a small business called Commerce Signals. And the information that Argus has on credit cards, transactions and behaviors is used by all the top issuers. They contribute the data, just a natural home within TransUnion for that data. So we see an opportunity there to leverage our Prama platform to dump the -- all that data into and give our customers almost like a sandbox to be able to look at different scenarios as opposed to currently the way that the data is delivered in a PDF report. So we think that there's a benefit to using Prama and having a more dynamic data set. And then the second opportunity for us with Argus is that we have, I already alluded to this earlier, we have a $1 billion Financial Services business. With that, we have a very large sales force. So we feel that we're going to be able to leverage that sales force to penetrate into more medium- to small-sized accounts. So the combination of those 2 things, we feel, will help us. But I think one of the most important parts with Argus though, is not -- we'll be able to show our customers the trends. But then we'll be able to help them after they see the trends with the Argus data and we'll be able to sell them additional products and services. And that's what was missing before in their previous home.

Makes a lot of sense to me, and I think it's a great financial asset. So unfortunately, we're going to have to wrap up in this room. I see the doors is. So please join me in thanking the TransUnion team for their presentation. They will be available for about 15 minutes for a breakout session in the Astor Suite B. The next -- there's no session in this room. The next presenting companies are Fiserv, Asana, Diversey and [indiscernible] C3 AI.