TransUnion (TRU) Earnings Call Transcript & Summary

We'll get going. I'm Jeff Meuler, Baird's Information Solutions Analyst. Pleased to introduce TransUnion as the next presenting company in this room. For those that are not familiar, TransUnion is a leading global consumer information solution company with a broad array of credit, identity and industry-specific data and insights across a wide and expanding range of end markets. With us from the company today is CFO, Todd Cello, who has been at the company since 1997, held pretty much every major finance role at TransUnion, culminating with -- being promoted to CFO in 2017. And then also with us on stage is Greg Bardi from the IR team. We've seen a lot of investor interest recently in TransUnion. I think investors are trying to figure out if there's any structural change in the company's through-cycle organic growth or business quality with some of the portfolio changes? Or is this predominantly cyclical challenges? And if it's cyclical, like what's priced in or how bad can a recession be for you? So maybe help us like understand how you view it at a high level. Just first, maybe a quick company overview, anything you'd add to my brief description, but you recently had an Investor Day where you gave us some new intermediate-term growth targets. So what are the growth and margin targets for the company on an intermediate-term basis? And what's the cyclicality framework in terms of how cyclical it's been in prior cycles or how cyclical you'd expect it to be through this or the next recession?

Okay. Sounds good. Thanks for having us today, Jeff. And I think it's obviously an appropriate place to start. So when people think about TransUnion, I think the initial thing that comes to mind is credit and kind of the use of credit for lending, in particular. But TransUnion has significantly diversified its portfolio over the last several years. Jeff was nice enough to site my longevity with TransUnion. So thanks for that. But I was with the company in the great financial crisis back in the 2008, 2009 timeframe, and I was the CFO for our U.S. markets business at that point in time. And what I can tell you is, from a cyclical perspective, TransUnion then was heavily dependent on credit as well as the customer base, predominantly in U.S. financial services. The management team at that point in time realized this and deliberately changed the go-to-market strategy to be more focused on vertical markets. So what's happened over the last 14 to 15 years is a very thoughtful evolution of the business to be less dependent on core credit and more uses of data, so alternative types of data. And what that's enabled us to do is to branch into other vertical markets outside of financial services. And we refer to that as our emerging verticals. So within the emerging verticals in the U.S., we do business in verticals like insurance, telecommunications, media, rental screening, collections, is just some of the examples that we have there. And the whole idea of the emerging verticals is to be more of a countercyclical play to what may happen in the core financial services business. Throughout that time, and I'm talking just specifically about the U.S. is over that time, if we were to go back to the financial crisis, TransUnion's consolidated revenues were about $1 billion, 40% of that was U.S. Financial Services. You fast-forward to where we're at today, and we expect to do about $3.7 billion in revenue at the high end of our guidance, and only 30% of the financial -- of the revenue of TransUnion is Financial Services. So you could see that we've significantly diversified. So the structure of the business, to your question, is very different. Outside of the U.S., we've diversified significantly in markets, such as India as well as geographies like in Latin America, such as Colombia that provide some meaningful growth for us. We also have a really nice position in the U.K. But that's more talking about who we -- where we do business with, and who our customers are. But from a product perspective, we've also have gotten a lot more sophisticated over the years, again, depending heavily on credit in the past. What we've been able to build out over the last several years is capabilities in fraud as well as in marketing. So there is a countercyclical aspect in areas like marketing, in particular, especially as our lives have gone increasingly digital, the use of fraud to verify who a consumer is we just see a significant amount of growth. And then the last area to highlight would just be how we operate the business. We look at TransUnion for what it is, and it's a global enterprise. So we strive to centralize and standardize our work to have a TransUnion way of doing things, and how we service our customers, whether that's through technology, product development or just how we onboard customers and how we deliver our work. So there's a lot there. So I haven't seen much from a structure change. The long term -- at our Investor Day that we had in March of this year, in the long term, we're expecting TransUnion to grow to about $5 billion in revenue, $2 billion in EBITDA, which would be about a 40% margin, doing the math, and $6 of adjusted diluted EPS over that time. I think the important thing there, though, is that we didn't expect the growth to be linear from now until 2020 -- through 2025. So clearly, we've seen a little bit of a slowdown in our business. But we feel that the portfolio is balanced in that -- throughout a recession that we would be able to continue to grow.

So those targets remain in play, even though the growth thus far has maybe not been linear. And that would be about 8% to 10% CAGR from 20 -- organically from 2021 through 2025.

That's right.

So what are the current cyclical views? Like where are you seeing the most pronounced impact on your business beyond U.S. mortgage, which I think is pretty obvious to people. And then we've heard from some others, including relatively recently in the 2 weeks since you reported that things worsened for them. This is in the credit ecosystem, so players like Intuit's Credit Karma business. That things weakened for them in October. So just maybe give us the read that you were seeing as of 2 weeks ago when you reported earnings, like were things still worsening at that point in time? And what did you assume in your guidance?

Yes. So I would say that from where we were at 2 weeks ago, nothing has changed from what we've talked about. And what -- in response to your question, what I would refer to as a news release that TransUnion put out actually this morning, coincidentally. And we call it our Credit Industry Insights Report. In essence, what we do on a quarterly basis, as we look at our core credit reporting database and we're able to look at mortgage, auto, credit card and consumer lending, and see how the performance in each of those lines of businesses are -- how it's going. So specific, as far as like what we're seeing from a cyclical perspective, in credit card, through the end of September, we continued to see strong origination growth throughout the end of the quarter. We also see balances increasing as well. But the indicator that's important for us as well as for our customers is delinquencies. From a delinquency perspective, what we're seeing through the end of September is that the rate and credit card has returned to the pre-pandemic rate. And just in between, we had some anomalies because of some of the moratoriums as well as -- because of the stimulus money that the government had provided consumers, we're paying their credit card bill on time. So in essence, what we saw was delinquency rates went down significantly in 2020 and 2021. And now they're back at kind of a normalized level. So -- but card, nevertheless, it is -- it's slowing. And that gets to what we've provided in our guidance the last 2 quarters in that credit card continues to grow for us. In fact, in the third quarter, we posted 9% growth. All in all, a pretty good number, especially compared to where we were at last year, but it's at a lower level than what we had thought was going to be the case maybe about 6 months ago. If you move into another line like consumer lending, what we're seeing there is that many consumers are consolidating their debt and they are...

And sorry to cut you off, consumer lending for those in the room, it's a lot of personal loans, a lot of the fintechs or alternative lenders, right?

Yes, it's exactly right. Thanks. So in that space, what we're seeing is a lot of loan consolidation. And I think through the end of the third quarter, there's about 22 million Americans have a personal line or a personal loan that is being serviced. And what's interesting there is that is a space where we're seeing maybe below prime consumers interact in consolidating their bills and their obligations. This is where we're seeing an uptick in delinquencies. So we're -- what we saw at the end of the third quarter was a significant increase from where we were at last year, and higher than where we were at in 2019. So this is where we're seeing the inflationary impact, a below prime type of consumer. But nevertheless, though, still really -- the growth is strong, but the warning signals are there. TransUnion grew 10% in this line of business in the third quarter. Then you shift over to the auto business. In auto, we saw originations decline slightly from where it was at a year ago. A lot of the business that TransUnion has, though, in auto, it's primarily in the used vehicle market, not necessarily the new market. The new market obviously has publicized -- very well-publicized issues, pertaining to the chip shortages and the supply chain issues. TransUnion has been able to grow through that through some innovative products that we have pertaining to prequalification for retailers. And then, finally, you mentioned mortgage and -- but -- and we won't -- we don't have to belabor that, everyone knows, that it's down significantly. But somewhat related to mortgage, what we are seeing an uptick in our home equity lines of credit. So consumers with high values on their home price, have a significant amount of equity and they're tapping into that. So we've seen a meaningful amount of activity in that space.

And U.S. mortgage is down to less than 7% of your revenue in 2022, just to size it up, correct?

That -- we're expecting it. That's correct.

So I think you deserve some credit in the consumer lending or among the fintechs. Like you competed for that business, you pursued it, you won by being a good innovative partner to the industry. Now investors are concerned about the cyclicality of the business, just given where we are. So just how do you think about the cyclicality of that end market? And how much of it is the subprime or below prime consumers where you're seeing more challenges?

Yes. So from the fintech relationships that we have 24 of the top 25 fintechs have a primary position with TransUnion. They're customers that we embraced when they were at a very nascent stage in their development. So we forged a good partnership with many of them. And as they've grown and they've branched out in the many lines of businesses, we've been able to serve them. With that being said, I think it's important to size it. For TransUnion, the fintechs represent about $150 million worth of revenue. It's definitely a nice piece of our revenue, and it is growing significantly. I just want you to compare that to the $3.7 billion that we're guiding for the full year. So the way we would characterize the fintechs is, when a slowdown happens, they're probably quicker to pull back. But when the recovery comes, they're also quicker to start the marketing activity. So what we're seeing, though, in consumer lending is kind of that the caution, right, where the customers are slowing down. They're not as acquisitive on the new accounts. As I highlighted already, they're looking at those delinquency rates and just being a little bit more selective with who they ultimately want to do business with. Also, though, when we look forward, we do have some meaningful relationships with the BNPL players that when they really got some momentum during the pandemic, similar to what we have done with the fintechs, we built some good relationships there. We continue to see nice growth from that customer segment, especially going into the holiday season, we're expecting that, that customer base is going to continue to do well.

And just to give some further sizing, BNPL has been a nice growth business for us, but it's still relatively small in the scheme of things as well as sub-$15 million last year.

Got it. And when you're talking about the cyclicality of the business, you talked about diversifying into some emerging verticals in the United States, which investors would look to provide some balance. But it's not performing maybe as well right now as it typically does. Is there something unique about this cycle because it's stagflation or coming out of a pandemic instead of a traditional whatever current variety recession is. Just like what's the outlook for that business, or why is it not holding up as well as we otherwise may hope through a more difficult economic time?

Yes. In the most recent quarter, the emerging verticals posted 1% organic constant currency growth. Clearly, we expect higher growth than that. But you have to get under the covers on that to just understand some of the kind of the anomalies that we face. One of the leading verticals that we have in the emerging verticals is in insurance. And in insurance, we provide service to auto, property and casualty businesses as well as in life and in commercial. But specifically on the auto side, what we've seen happen with our customers as the insurers are faced with the high inflation for repair and replacement costs. And as a result of that, they need to pass on premium increases in order to make their business more profitable. And that is subject to regulator approval. So there's a little bit of a delay when they actually get the approval to be able to pass those premium increases on. So marketing activity has slowed down a little bit. The business still grew mid-single digits in the third quarter. But when you compare that to how we look at the U.S. financial services, excluding mortgage, that business grew 9%. So it was clearly at a lower growth rate than what we would expect. We expect that the price -- the premium increases will go through and there'll be a good level of marketing activity. What's also really nice about our -- the insurance business that we have is that as in a downturn, consumers will look to save money on many of their financial obligations, one being auto insurance. And what they'll do is they'll shop, and they look for the best rate. That shopping activity is beneficial for TransUnion because they're looking at the applicants background to make an underwriting decision. So we feel that, that's a business that's poised to return just kind of more of an anomaly. Also in the emerging verticals, I mean, highlight our rental screening business related somewhat to what's going on in real estate, but in particular, in rental screening, what we're seeing are very high rents. And as a result of that -- and low inventory. And as a result of that, consumers aren't moving. They're staying in the house, in the apartment that they're in. So as a result of that, there's less screen, and that's impacting our business. When we look out, we're encouraged to see that there's about 1 million rental units that are scheduled to come online in the very near future. So that should take some pressure off of the market. And hopefully, we'll see that start to take off. So those 2 are, with insurance and rental, are very unique market issues. Another one to highlight, though, is in our public sector space. This is where we serve many federal, state and local government agencies. And we provide products such as fraud, as an example, to make sure that like welfare payments go to the right person or insider threat type of products and to make certain that these agencies know who works for them. In the quarter -- this is a business that grows -- has been growing double digits for us. In the quarter, we had some timing on a job that's going to normalize when we get into the fourth quarter. So a little bit of timing on that. So all things being said, we expect these kind of idiosyncratic types of things that are happening there in that space, we expect the emerging verticals to return back.

Got it. And most of your business is B2B across many geographies and verticals, but you also have a B2B2C or B2C business or Consumer Interactive segment. Anyone that uses Credit Karma can see the TransUnion data in it. So it's pretty obvious that there's a partnership there. There were some news out of Intuit, Credit Karma a week ago that seemed fairly impactful for your stock. I asked about the broader implications for consumer credit earlier. But just on the partnerships that you have in that B2B2C business, are they typically based upon -- in terms of how you're paid, based upon membership or usage? Or is there a revenue tie just so people can think through what the impact on TransUnion could be?

Yes. There's not really 1 answer to that. It depends. Some of the customers are on fixed contracts where there's certainty. Others are just simply based on the usage. And it all really depends just on the depth and the breadth of the relationship that we have with the customers. So it varies.

Are you willing to comment on the Credit Karma contract structure or maybe I'll say it a different way, which is, when Credit Karma and Intuit were experiencing really significant growth, we didn't see the growth to the same extent in your Consumer Interactive business. So it doesn't look like there's a revenue share partnership. Just any color you can provide us, given the size of that potential relationship.

Yes. No, it's hard to get into the specific contract details. But Credit Karma -- what I can say is Credit Karma has been of an outstanding partner for TransUnion. I mean, we partnered with them at the very beginning. I think we go back to the late 2000s when we, in essence, fueled their product offering. And this is really how we got into what we refer to as the indirect space in Consumer Interactive. So the B2B2C that Jeff is referring to. So yes, there is -- I can't really get into the contract specifics.

So Okay. Let's move to international for a bit, which was our bright spot. So just maybe recap the Q3 results and the reason why, like why is it so strong right now? Is it differences in macro? Is it differences in structural growth? Just how sustainable is the strong growth you're seeing in international?

Yes. So as far as where we operate in, we're in several attractive emerging geographies. The first that we're really excited about is our position in India. So it's a business that we partnered with large Indian banks in the early 2000s to establish. And as a result of that early on kind of investment and partnership with the banks, we've been able to build what is the leading credit bureau in India. Just a significant amount of opportunity in that market with an emerging middle class that's aspiring for a higher quality of life, and TransUnion's products and services enable that. And the Indian marketplace is constantly changing. Their fintechs and -- just the way different -- the way payments are made. So we're at the forefront of that with our customers making certain that our offerings are -- continue to be highly relevant. They have a great business in consumer. We also have a commercial database there. We're in direct-to-consumer. We have insurance. A lot of the innovation that we have at TransUnion, we've exported into India. We see just a tremendous amount of opportunity as we go forward there. I would say, in Latin America, also very similar, but on a smaller scale. I alluded to the position that we have in Colombia. Similar dynamics in that marketplace that we expect to have some meaningful topline growth from. And in addition, we have nice businesses in Asia Pacific. Specifically, we operate in Hong Kong as well as in the Philippines. Both of those businesses, while relatively small in the whole scheme of things, contribute nicely to our overall portfolio. They're strong growers in each of their markets. Our business in South Africa has been relatively challenged more economically. It's been a bright spot for the last couple of quarters. We have a great collection of assets in that market, and the team is winning share. So we're really impressed with that. And the last 2 geographies that we operate in are more developed markets like in the U.S. -- like the U.S., so Canada and U.K. So a lot of the same economic challenges that we're faced with here with inflation and rising rates, we're dealing with in that market -- in those markets as well, too, but they perform well. In the third quarter, in Canada, we grew 10%, and in the U.K., we grew 4%, but we had a onetime contract in the prior year. So if you normalize that, we posted 9% growth. So it shows even in the face of the challenging economic times in those markets, we continue to post good growth. And a lot of that just has to do in Canada as well in the U.K., just the diversification of the business in areas like fraud as well as relationships that we have with the leading fintech players in those markets as well.

And then the other kind of industry news of late was the FHFA finally handing down along the way to decision on mortgage scoring. There was 2 major pieces to it, moving from tri-merge to bi-merger or pulling all 3 credit files, down to pulling 2, and then also including a VantageScore, which are a joint venture partner in, alongside FICO scores. It seems to me that bi-merge would be negative for you. The VantageScore piece would be positive for you. But just what's your assessment and kind of any offset on the move to bi-merge that maybe I'm not considering?

Well, first of all, I think we were very encouraged by the announcement that the FHFA made. First of all, just to make certain that homeownership is attainable for U.S. consumers, and it's going to be done in a safe and prudent manner. So the continuation, obviously, to use credit, but then to also incorporate the VantageScore 4.0 into the transaction is significant. We've got a partnership pertaining to VantageScore, and it's been a long road to get to this point. But we believe that the VantageScore is highly predictable, and it will include more consumers into the underwriting process for mortgage because it's able to pick up just more information on the consumer. So that was a positive for us. As it pertains to the announcement on the tri-merge, tri-merge means that TransUnion and it's 2 competing -- the 2 competitors, credit reports are pulled. That's what the tri is. The FHFA is talking about potentially moving to a bi-merge report. So what that means clearly is one of the reports won't be used. We are in discussions with -- we expect to be in discussions with the FHFA as well as with other players in the industry as everybody figures out exactly what that means. From our perspective, Jeff, you mentioned it earlier. At the end of this year, we're expecting mortgage to be less than 7% of our revenue. And as we look forward into maybe '24, '25, we're expecting mortgage to be about 5% or less than 5% of our revenue. But nevertheless, it's still an important part. And if we do end up in a situation where there are only 2 credit reports pulled, we'll compete like we always do and innovate and it will have a positive impact on the market.

Okay. And I got an e-mailed question from an investor. What's the game plan for the direct consumer business? Are you planning to invest behind it? And then maybe talk more broadly about your 2025 targets, assume accelerated growth in your Consumer Interactive business and '23, '24, '25. So what drives that?

Yes. So talk just about the Consumer Interactive business, in general. We have 2 channels, the direct channel and the indirect channel. You spoke about the indirect when I was talking about Credit Karma, but in the direct channel, we have seen declining revenue over the last several quarters. And it's primarily just due to a move to a freemium type of product offering. What we expect to happen though is that the market will find an equilibrium point at some point going into 2023 and to 2024. So that's one piece on the direct. We are looking at ways that we can participate more directly in the freemium space. And I say it that way for a reason because as we talked about with Credit Karma already, we do participate in the freemium space. We, in essence, are -- we have partnerships with all the leading providers in that space. So the indirect channel this year was -- it's been slightly down, but there's been some onetime events as well as some contract renegotiations. We're going to lap that, and we expect to see growth out of the indirect channel in 2023. And then the other piece of it is the acquisition of Sontiq, which provides identity protection services that we made in December of last year. That's going to turn organic, and that's a business that's growing in the mid-teens. So all in all, we expect the consumer business to get back on a growth trajectory in 2023.

Great. Unfortunately, that's all the time we're going to have for our questions in this room. Please join me in thanking Todd for his insights.