TransUnion (TRU) Earnings Call Transcript & Summary

Okay. Good morning again. We'll keep this on time here. So thank you for joining us this morning. My name is Manav Patnaik. I'm Barclays' business and information services analyst. But -- more importantly, we're happy to have with us the team from TransUnion here. To my immediate right, Chris Cartwright, CEO; Todd Cello, CFO; and then I think many of you know Aaron Hoffman, who heads IR as well. So thank you, gentlemen, for being here.

Chris, maybe I can start with you. Just we've been asking everyone at the conference just a broad macro view. There's obviously a lot of different moving pieces, a lot of debate on which way the economy might be heading. You have a unique perspective with all the data that you have, with the lending categories that you overlap, you've been marketing now. So just some broad takes on your view of where things are headed here?

Yes. Look, I'm not going to try to call a recession or anything or prognosticate too much about '23. But as we look over the course of this year, we began very strong in the first quarter, everything around the consumer was quite positive, high employment, wage increases, reduction in leverage on their balance sheet, high savings rates, and low inflation at that point. We began to see a change in the second quarter, and the Fed reacted by increasing rates, which is increasing the debt loads on the consumers or their borrowing costs and as well as the inflation, which started to constrain household P&Ls, if you will. Where we're getting now, I think, is that the consumer is still strong, employment is great. There's still wage growth in the economy. But the persistence of inflation and the level of inflation is causing, I think, a lot of concerns in the beginnings of a slowdown, right? And so we've seen certainly slower performance in the second quarter of this year than we experienced in the first. And I think a combination of higher interest rates on borrowing and then just higher prices on the goods and services that consumers need, over time is going to sap some of the vitality of consumers. Now what we've seen in our business is, of course, with higher borrowing costs, mortgage refinance went down quite a bit. And even new purchases are starting to decline. So the mortgage side of things got hit particularly hard. Consumer lending is still strong as is credit card lending. But we're seeing consumer debt balances begin to increase to where they were pre-pandemic, as well as their delinquency levels are increasing as well. Savings rates have returned to historic averages as well. So I think you're seeing the beginnings of stress on the consumer, which is leading businesses to be more cautious and starting to pull back on marketing activities. And so we're seeing some of that in our batch business. and some of that in some of the marketing services that we now offer through the acquisition of Neustar. That's not to say it's a negative environment because it's not. It's still quite a growthful environment and our guide for the year, excluding the reset in mortgage is still high single digit, low double-digit organic growth, which is terrific. But it does feel like a bit of a sea change. And as you look forward into '23, again, depending on the degree and persistence of inflation, it just increases the risk to performance economically there.

Got it. And just to quickly follow up, one category you didn't mention was auto. Just some thoughts there because it sounds like the demand is there, but it's just the supply constraints. So how is that playing out in your numbers?

Yes. I mean, typically, without supply chain constraints, we'd sell 17 million to 18 million new automobiles a year, right? And that's part of that is just the natural replacement rate of cars on the road. We're more like 14 million, 14.5 million units. And again, that's all supply chain-driven and chip constraints driven. So the auto business is growing mid-single digits, which is not bad considering but it could be growing much faster if we could ramp manufacturing. And I think a lot of folks believe that over the course of next year, the output of autos is going to increase particularly as the output of electric vehicles, which are the category and highest demand increases, and that bodes well for our auto lending business.

Got it. And a lot of this, I think, was U.S. specific comments. If you just looked internationally, maybe U.K. is the only other really developed country where you might be seeing some of the weaknesses. But is it the case for the rest of your regions that there's just so much penetration, if you call it a structural trends that you won't see much of the impact if there is a global slowdown?

Yes, I think that's right. Almost 25% of our revenues now are coming from the international portfolio. And at TU, that's overweighted toward emerging economies that have inherently higher GDP growth and rapidly expanding consumer credit. So think of the various countries that we serve in Latin America, and of course, India. And even Hong Kong and the Philippines have done very well this year. So overall, our international business is probably up roughly 15% organic for the year, which is great, and we think that it can persist at that type of a level going forward because of the structural growth drivers that you were alluding to. India, in particular, has a lot of potential for us. I think that can compound in the 20s for the foreseeable future.

Got it. So Chris, you pointed out, obviously, your current guidance is still a healthy number, despite all this. But Todd, maybe to you, the sequential deceleration that you saw in the second quarter did lead you guys to lower your guidance. So I just wanted to give you the opportunity just to clarify the moving pieces and how you've kind of reset that now just based on your view here?

Yes. For sure. Thanks, Manav. So when -- just really building upon the comments that Chris gave about the macro environment, needless to say, what we took into consideration when we refreshed our guidance. And in particular, I think we just saw less marketing or account acquisition activity from our customers in the latter half of the second quarter. So as a result of that, we decided to take a little bit more of a cautious approach with the guidance on a go-forward basis and factor in the potential uncertainty that we saw. But to Chris' point, ex-U.S. mortgage, we're still expecting at the high end of our guidance to be at a double-digit organic growth rate on a constant currency basis. So the growth is still very strong. It's just that we're trying to factor in our customers buying activities and that it's slowing a little bit from the levels that it was at before. We also took the Neustar guidance down as well. We were calling for high single-digit growth there. And initially -- so we brought that down to the mid-single digits. What I would say, though, is that we were right on the cusp of just continuing to call Neustar at a high single-digit growth rate. But again, just due to the uncertainty, we thought the most prudent thing to do was just call it, mid-single digits where we have a lot more visibility. So that's the other significant piece. The other is foreign exchange. I think you heard a lot of companies talk about FX as a driver. And then the last piece that we changed for -- was our Consumer Interactive business. So we have a slide in our earnings material that -- from July that outlines all of this. So you can see all the details, but it's specifically in Consumer Interactive. We're just seeing a shift more into the premium space where TransUnion plays a very significant role on the indirect side. So we're participating quite nicely on the indirect side. But on the direct side, we saw a little bit of a headwind in our business there. So all of those pieces together really resulted in what we changed with the guidance. And just one final point on the guidance that I also think is important is that when we released our Q1 results in April, we did beat our first quarter number by about $7 million. So we banked that, meaning we put it into the high end of our guidance for full year 2022. But we also closed on the acquisition of Verisk Financial Services, which we now refer to as Argus. So we overlaid the revenue expectations for -- on that acquisition into our guidance. And we're keeping Argus and another business called Commerce Signals and we're divesting 4 other businesses. So that's what's reflected in our guide. So we really didn't necessarily call our guide up significantly in the second quarter. It was primarily the Argus acquisition.

Got it. And just to that point, Todd, to follow up, you saw kind of the weakness in the lead in the second quarter. So the question is more around visibility and what kind of leading indicators you can track to prevent another kind of revision?

Yes. So the leading indicators for us, Chris already articulated, I mean it's all just about the customer account acquisition or marketing activity. So that's what we watch. So if our customers continue to be acquisitive, which Chris already said, we still see a healthy amount of activity just maybe at a slower rate. That's what we watch because there's a nice scale of activity then in our -- the rest of our business for credit polls and the like after that activity happen.

Got it. Chris, you called out India as a big opportunity, and we'll touch on that later, but the other one that was always part of your story was kind of the fintech market, you get strategically with the first-mover advantage in there, much bigger or better than your other 2 competitors. Can you just help set the stage on kind of your penetration coverage, what are the kind of services you're providing to all these fintechs that give you such a dominant position there?

Yes. The basis for the strength there again, was the first-mover advantage, recognizing the market trends and recognizing the talent that was being brought to bear into that market. And as a result of high penetration, we have a broader and more authoritative sense of the market because all of the marketing activity, all of the customer credit inquiries, we get those inquiries our competitors don't, right? And so having probably, I don't know, 2/3, 75% of the market share, it means that we've got a similar disproportionate amount of data about consumer engagement activity in that space. Therefore, when these players look to expand or they look to their data providers and they test the effectiveness of the different players' data in their lending models and their marketing propensity models, our data performs better. And so it becomes kind of a self-reinforcing type of position. But in addition to core credit and trended credit in financial tech was an early adopter of the trended credit product, CreditVision because they weren't burdened by legacy. We've sold into them a variety of our alternative data sources so that they can score more of the population we've sold in our payday lending-oriented credit data. In addition, we're providing marketing services and fraud mitigation services. A lot of those loans are originated online. The vast majority are, in the device-based intelligence. In general, our ability to identify consumers on the other end of the digital transaction to authenticate them when they are establishing a relationship with a lender is pretty broad and powerful at this point. And so we're bringing a series of services that we think are highly interrelated, the credit risk assessment, marketing for the acquisition and then the authentication at the beginning of the transaction to bring that trio of services to this sector, and it's allowed us to just continue to grow it nicely.

Yes. Clearly, you've seen that -- Todd, I think at Investor Day, you gave some parameters on how fast that business has been growing historically. Maybe just an update on -- the best you can, obviously, what that growth rate looks like, the size of the business maybe, and if you're seeing any slowdown there because there's a perception that those fintechs probably get hurt the first if we do go into that.

Yes. So the fintechs that Chris just went through, we recorded that in our Financial Services vertical. And in a sub vertical, we refer to it as consumer lending. So that's where the vast majority of that revenue is at. From a growth perspective, we continue to see a very healthy amount of growth. But again, it's consistent with the comments that we've already made that we're just seeing a slowing but these customers that we have, over 20 of the top 25 fintech customers are in a primary position with TransUnion. They continue to grow very nicely for us. But we're watching to just see what that marketing activity looks like.

Got it. Chris, one of the products you mentioned was fraud and ID. And it's one of the words that every data provider uses, like we help with fraud and ID. And like, literally, I can go down a list and they all say it. But -- can you just help from your perspective, layout a landscape? And then what's TransUnion specific niche, like why you in this marketplace should keep growing.

Right. So fraud is an enormous market and it's got many subsegments and we are focused on the front end of relationship establishment in as well. So we can authenticate consumers that are entering into a relationship with really any institution that has an e-commerce channel, right, that a lot of them are the lenders. And when those customers return to engage in e-commerce transactions, we again identify and authenticate them. Now we're not really focused on the internal transactional fraud mitigation, right? Those would be more like FICOs domain or players like that. So we're on the front end. And look, we've been there for 20 years with various solutions of increasing, I guess, sophistication, you would say. We started off by providing what the industry versus knowledge-based authenticators namely, we know a lot about what a consumer has in their wallet, and we can ask you questions that presumably only the consumer could answer, right? When we entered into the public records business almost 10 years ago, we gained another universe of information about consumers that allowed us to broaden the types of questions we could answer. Now that's historically been an effective way to authenticate consumers, but it has a higher level of friction than most companies want to subject their customers to, right? So they want to reserve that treatment perhaps for a second stage in a transaction if it's warranted. The market shifted to what's called device-based authentication some years ago. And we acquired one of the leaders in that space, a company called iovation, that's probably been in existence for just over 15-16 years now. And during that period, has seen close to 15 billion different devices around the world, so it's 1 billion a year. And the customers of iovation, they run the iovation software on their servers, they identify devices. And if those devices attempt to commit fraud or any anomalous activity that it's contributed back to us. And so the broader the network grows, the more devices we see, the more intelligence we have around the device fraud and behavioral characteristics. Now it's broadened from that, where we're also just doing on-site device behavioral diagnostics. But literally, when a device, be it a mobile phone or a laptop computer, when it presents itself at an e-commerce server, our software takes a couple of hundred -- a snapshot of a couple of hundred different characteristics of the device. And we can use that to triangulate and to provide a kind of definitive identifier to that device that helps us map all of the reputational data that we gather and that it's powerful for both mitigating fraud. But on the other side of the house for target marketing, right, because we can take the signal and the learnings we get about devices and their association to specific consumers and then later use that to help target those consumers in their travels around the web.

Got it. So I think that last part will lead us into Neustar a little bit. But -- just to ask the first question a little differently, like what is the competitive landscape in the fraud and ID space? And is it fair to say that it's just such a massive market as a client of that product, you probably want multiple solutions so everyone can benefit?

Yes. And what I would say is fraudsters are smart and persistent. And in a lot of countries, particularly former Soviet states in the East that have great engineering traditions, going to work for -- in these enterprises, these big fraud rings is a lot like taking a job as a developer in a big software company in Silicon Valley or on the West Coast, except you can make 5x as much as you can in the legitimate sector. So you've got a lot of brain power, constantly attacking the systems in the West that protect capital, and there's -- and that makes the market very vital and growthful. And there's no one way to protect yourself. So when I talked about the series of solutions that we've got probably have a dozen different point solutions that clients can choose from or choose a several of them and then configure them to protect themselves from fraud. Each of those devices is providing signal input that goes in our case, to a common database, where then we run analytics and AI and machine learning to look for patterns. And that's kind of the state of the art, right? The industry has evolved behind or from the startup that's got to the knockout solution. It's going to be device-based behavior or it's going to be biometric characteristics or it's going to be whatever. It's going to be all of those things. And those point solutions will continue to proliferate. But larger players like ourselves through organic development and M&A are going to pull together all the point solutions and then array them on a common repository and analytic platform that connects and finds the patterns that fraudsters use.

Got it. That's helpful. Chris, before I come back to you on kind of the strategic vision behind Neustar, Todd, maybe if you could just remind investors of the mix within Neustar. I'm talking about how much was the telephone, fraud, marketing? And also if you could just elaborate on why you had to lower the Neustar -- like, what were the reasons behind lowering the Neustar guidance this past quarter?

Yes, for sure. So as it pertains to Neustar, they operate in 3 product groups, one being marketing, another being risk or fraud and then the final being communication. For those of you who are familiar with Neustar, clearly, that's where they got their started -- their start was in the communications space. So that's roughly about $200 million or so of their annual revenue. Marketing is the largest at about $250 million or $230 million last year. $235 million and then the balance of that is in risk. As it pertains to marketing, the marketing business is almost 80% of the revenue is subscription based. And then that leaves the other 20%, obviously, is usage based. So getting to your question specifically about Neustar, again, consistent with what we've been talking about with marketing activity, you just saw lower usage levels in the marketing business at Neustar near the end of the second quarter. So as we were putting our guide together for the remainder of 2022, we factored that into consideration. The communications product line is performing quite well for us this year on a product called Trusted Call that's been doing really well for us, and we see a good future there with that. So again, like I talked about a little earlier, the indicators, just watching that activity there in the marketing.

Got it. Chris, maybe if you could just take these 3 different areas and help us out on how -- why this was such an important acquisition for you and how it fits into TransUnion? So I think we kind of touched on risk and fraud and marketing, but maybe if you need to elaborate, but also just that communication angle, is that just a separate line item? Or how does that help with the business?

Do you want me to start on the communications?

Yes, let's start with communications.

When we talk about communications, we're really talking about telephone data and telephony-based intelligence. And that's a core data asset at Neustar that's unique. Both, they're the single and authoritative provider of landline information and landline intelligence in U.S. and they've got a growing archive of mobile phone intelligence as well. And that was the kind of differentiated and defensible asset. And from that, they use that information to bridge into fraud because it helps them mitigate call center fraud by knowing the number that's calling in is a good number or not, we're being able to simultaneously place an outbound call to a number that has made an outbound call to prove that it's actually that number that's engaged in the transaction and then a fraudster isn't proofing it showing up to a call center as Chris Cartwright, when in fact not. So communications, the sector is really served by this core telephony-based capability. It's also now being used by marketers to cut through the robo call noise. Now there's been various legislative and regulatory attempts, STIR/SHAKEN framework and the like, that's designed to prevent the robo calling activity. That's a bit in place for over a year now, it has a very little impact. So Neustar innovated based on that data capability, and they're now selling on a subscription basis the right for marketers to place outbound calls and for the name of the company to show up, right, in a branded way. So if it's your bank calling, you'll pick up, whereas it's an anonymous number or a robo call number, you're not going to pick up. So those are called the trusted suite of solutions. That's growing even better than we expected early on, and we're having a lot of success cross-selling it because it is -- I think it's going to become a ubiquitous solution business, just going to need it to cut their old nonsense. So that's what we do in the communications space.

Got it. And maybe bridging into the other 2 areas, but you guys have talked a lot about the OneID platform or I think what it was called. Just can you elaborate on what that is? And why is that so critical to the assets?

So as part of its strategic repositioning and push toward identity as a core capability Neustar developed a next-generation cloud-based platform, which they branded OneID, one identifier. And they arrayed all of the rich information they had whether it be the telephony information or credit header licensed in or a variety of traditional marketing information, demographic, behavioral, psychographic information on consumers that is important for audience generation as well as hundreds of other data sources. This has all been consolidated in a single cloud-based repository in a common data underpinning or fabric, if you will, that collectively is called OneID. It also has a modern API layer. So it's very easy to implement or integrate the data into different customer environments. And so we looked at that and of course, we've got a massive amount of certainly, credit information. But putting that to the side for a minute, we've got a ton of noncredit, non-FCRA information. First of all, we've got all of that marketing data in spades. We've got a ton of device identity signals. We've got public record information, et cetera, et cetera. And our intention, and we're executing on this now is to consolidate and integrate all of our data and their data in this OneID platform and use it as both the engine for data acquisition and ingestion, which you can do in a fraction of the time that our credit platform can do, but also all the data as we see in the industry, pinning or appending around an individual consumer. So it becomes an authoritative place you can go and find the consumer whether that search starts with a name or social security number or an address, very straightforward or starts with a device ID that's derived from those several hundred characteristics that I talked about that our fraud software captures with each transaction. And as a result, we can help marketers find the consumers they're looking in e-commerce transactions outside of the walled gardens, right? And I think that's a pretty powerful and unifying capability to have in a foundational data platform. And so we use it to, one, help a marketer effectively plan their marketing campaign and then they execute the campaign, and then we can help them measure whether it's been successful and the degree to which it has been successful, and then we take that insight and bring it back into the front end and help them plan, let's say, maybe it's the next month or the next day's acquisition campaign.

Got it. And how much of the business today is to the marketers, the traditional marketers and the potential to cross-sell into your financial customer base perhaps?

Yes. Neustar has a very significant presence in Financial Services already. However, it's all kind of top of the market, right? Their focus has been on the top 200 advertisers in the U.S. We've got the opportunity based on our brand and the breadth of our selling resources, across the many verticals that we serve, to increase penetration, both at the top and in the middle, and come up with variations of the product that can help us push downstream. In addition to that, today, Neustar and their marketing capabilities has almost no revenue outside of the U.S. And we plan to take the OneID platform and capabilities once we are through this initial year of integration and take it to Canada and in India and all the markets that we serve around the world. So there's an entire kind of vector of revenue potential through international expansion that, frankly, was always additive to our business case. We built the case based on what we thought the combination of Neustar and TU can achieve just in the U.S. market.

Got it. And Todd, maybe if you can just wrap this up with -- you mentioned the quarterly revision was marginal. But if you could just remind us of the long-term revenue and margin targets, for the Neustar and if they've changed?

Yes. No, for sure. So as far as your expectations, I think it's got to start with the foundation, right? So when we acquired Neustar, business was growing high single-digit basis and had an adjusted EBITDA margin of roughly about 21%. For all the reasons Chris just talked about, we're excited about the asset because of the long-term growth potential that it has. So with that being said, we were very deliberate in building out our business case for Neustar, and not get too far ahead of ourselves with assuming revenue synergies or cross-sell revenues are going to come earlier than what is realistic. So as a result of that, we have expectations for the business. We were expecting high single this year, now we're expecting mid single. But the trajectory that we expect to get the business on is at a double-digit pace as we start to exit '23 and beyond. We'll focus initially on cross-sell, what Chris was just talking about with the customer base and the breadth of distribution that TransUnion has. But then it's -- the real opportunity is in the OneID platform and how we're able to create new products for that future of revenue growth. That will have a nice impact on the bottom line for us because there will be a high flow-through of that revenue. But the second component of that is just the expenses. So when we announced the Neustar acquisition about a year ago now, literally almost a day, we committed to $70 million plus of cost reductions with that -- with the acquisition. So -- and it's really coming from 2 different places. The first being that with Neustar having been a private equity-owned company, they had a cost management program, come in place, largely based on data center consolidation and moving onto the cloud their applications. Chris talks about already as well. So there's a big component of that, that we had to vet during due diligence to make certain that it was real and it is. So that program is in motion. And then just bringing together a large organization like Neustar that had 1,700 employees with TransUnion, needless to say there's a lot of cost synergies there. So when we look at EBITDA margin expectations, just this year alone, we're expecting to go from 21% up to about 26% on margins. And because of the progress that we're making on the cost side, we expect a meaningful increase in '23 and then beyond as well. Ultimately, we're targeting to have a 40% adjusted EBITDA margin for the business. So a TransUnion like adjusted EBITDA margin by the time we get out to 2026.

Yes. And we expect to complete the expense synergies in the first 3 years of the deal and really the majority of the first couple of years of the deal. And we're tracking well to that. We're confident we're going to be able to deliver on that $70 million. And then in the outer years, it's really the fall-through from the accelerated revenue growth that really gets us up to the 40%.

Got it. That's super helpful. I have a few more questions here, but I just wanted to see -- just pause and see if the audience has any questions. Go ahead, [indiscernible].

Is the opportunity dependent on the mix of market share from using basically some walled gardens and non-walled garden business? So if the value is targeting people outside the walled garden, you want more e-com activity happening there. Do we have to believe that help with the acceleration of the penetration?

Yes. Good question. I follow your question. The answer is no, right? I mean, I think that if the balance of power between the walled gardens and in the open web, if you divide it that way, were to remain the same, Neustar remains extremely well positioned because what it is, is it's a foundation of data in this platform, which happens to be OneID, along with analytic tools that help marketers plan their marketing campaigns based on really high-quality data, the great data hygiene and integrity and then measure the effect. Those campaigns are executed in multiple channels. A big part of marketing campaigns, of course, is through the walled gardens because of the massive audiences and the very high rates of precise identification. And that's why Neustar has industry-leading relationships across all the walled gardens to get intelligence out of the walled gardens as to which customers have been presented offers and the degree to which they engage with those offers. Now the state of those integrations in the industry today, I guess, in a minority of cases, you get the actual specifics on the consumer. But oftentimes now you get modeled data or you get representative cohort data out of the walled garden. So think of Neustar as a general marketing effectiveness, data and analytic provider of which the walled gardens are part of the universe, which they can measure. Now to the point you're making is that with the advent of certain privacy initiatives like IDFA and the demand of the third-party cookie, which is increasing, the ability of these walled gardens to precisely identify consumers and measure their engagement with the ad or the marketing is declining. And so it's helping the relative power of marketers in the open web, and it's also increasing the importance of players like TransUnion/Neustar, who have a lot of first-party data that we derive from our credit business, our fraud business, all of our data licensing activities as well as those data integrations with the walled gardens. So we can pull all of that together around our proprietary identity graph and help tell marketers exactly who they're dealing with and the degree to which they have engaged in their ad and their marketing campaigns and to track that over time because you have to think of this as a persistent effort against consumers in a life cycle, a funnel type of acquisition. So I guess that's a long way of saying, I think we can hit our numbers without this migration or this rebalancing. But the rebalancing is real, and it is one of the reasons that we've pushed into the space, right? One, we've always been in marketing to a degree. Now we're fully in with a pretty robust and special set of capabilities. But two, the trends were favorable outside of the walled gardens, and that's the first time we've been able to say that in a long time. So the walled gardens are fabulous. They're not going away. We're not trying to take them on, they're partners in the ecosystem.

Maybe one last quick one, and then we'll wrap it up.

Yes. Just 2 questions. First of all, can you tell us what you're finding in cyber insurance? And then second question, how do I stay out of [indiscernible]?

Excellent question. So I'm going to let Todd handle cyber insurance. Why don't you go first?

Well -- yes. So cyber insurance, I mean it stays an important coverage for us with good relationships with a whole power of insurers.

Is it publicly...

Yes. We've never -- it's not something that we publicly disclose the amount that we have. But I can tell you that we feel -- we and our Board feel that we've got the necessary protection in the event of some type of cyber event.

What I would say quickly is your question is simple and profound. And let me just draw a distinction. There is the universe of regulated information. And then there's the so-called data that comes out of the surveillance economy, where cookies are placed on browsing devices and the activity is let's say, surreptitiously, it's a bit of mature word, but the activity is tracked as the consumer goes around the web, right? We don't do the latter. We do the former, right? So we're an authoritative provider of regulated information from both the marketing world where the regulations are different. It might be -- it's generally Gramm-Leach-Bliley, regulates our data in the marketing world. But I'd say if you don't want to show up, you've got to go off the grid, so they don't transact digitally and don't take out a loan, right, because you actually physically sign documents that allow the lender to contribute your performance to a central repository like a bureau.

Yes. I guess that's probably a longer discussion. So we'll just end it there because we're out of time. So Chris, Todd, Aaron, thank you very much. And thank you, everybody, for being here.

Thanks, Manav.