TransUnion (TRU) Earnings Call Transcript & Summary

Welcome, everybody, to the Ultimate Services Investor Conference. I'm your cost, Andrew Steinerman. I cohost with Tien-Tsin, who's running a payments track. Stephanie is the Vice President of my team. We're going to run two tracks today. This is the information services track where all the best information services companies are here today, sorry for TransUnion. Next door, business services track. I want everybody to know in the back, we have our updated information services data book, quarterly [ primer ] on the import services stocks and also grab one of these conference things. So without any further ado, we're pleased to kick off the conference. Chris Cartwright, Aaron Hoffman, representing TransUnion. It's about 30 minutes. I'm going to ask questions for about 25, leaving out maybe 8, 5 minutes at the end for audience questions. So get your questions ready. So we'll just sit down.

Sounds good.

Welcome back.

Thank you, Andrew.

Chris, you can imagine what's on people's minds is the U.S. consumer. So just give a little flavor of how you see the health currently of the U.S. consumer, particularly as it trades consumer credit applications, personal loans, fintech, card, auto loans, et cetera.

Right. So there's been a considerable focus on consumer health for the entirety of this year. And the way we see it is the consumer net-net is still in a relatively good shape. However, the consumer fortunes, if you will, have been diminishing a bit from an unrealistic peak coming into the year where over the course of '21, you had a lot of -- in '20 had a lot of government stimulus. You had a lot of debt forbearance, if you will. Consumers delevered considerably, and also the employment rate was still extremely high with even some real wage growth. So that was a fortunate confluence of factors that made the consumer incredibly strong. Then we roll into this year. First quarter was great, but we can see the gathering clouds of the storm that's coming. And I think most businesses felt like, "Hey, we're good for '22, this won't impact until '23." But I think the storm kind of has started to influence things earlier than expected. In our own results, we started to see some softening in demand from the '21 levels which, to be clear, we're extremely elevated with a lot of pent-up demand coming out of the 2020 year of the pandemic, the most intense period of the pandemic, if you will. And so look, consumer balance sheets, which represented considerable debt paydown, that leverage started to increase. They began to dissave, again. And while they were active in participating in all forms of personal credit, delinquencies started to rise. And so it has been a period of some deterioration, if you will, but back to really pre-pandemic levels. So nothing really to be concerned about. And again, I think it's worth mentioning that even the pre-pandemic levels were artificially good. They were very strong, years of expansion and high unemployment and very restrictive but also sensible lending practices. And it was almost only toward the end of this period of consistent growth and expansion that lenders started to go back into the subprime segments and lend again. So even at this point, while activities are less frothy, certainly than they were a year ago. We are still seeing good demand for cards, for auto loans, for consumer unsecured consumer loans, if you will. Now again, not nearly as strong as in the first quarter, but still high single digits kind of on average across those categories, which is good growth, but then largely offset by a really significant correction in mortgage market activity. And mortgage again, had ballooned unrealistically because the rates had gone so low to kind of stabilize the economy in 2020. And I mean if you look at the trend charts going back, it was unbelievable. Order of magnitude increase in refinance activity and some purchase activity. But now as there's this inflection point to the negative in the markets, you've got much higher interest rates, diminished affordability. But in the asset side of things, home prices and apartment rents have yet to correct, and we're starting to see them come down, but there's a disequilibrium so there's very low trading activity in both of those markets, which impacts our results.

Great. And maybe make a quick comment about fintech lenders like you mentioned unsecures, but you have fintech lenders take a look -- they're dependent on the market, right?

They're depending on borrowing from the market. Yes. And look, there have been several shocks. Since fintech emerged and began to disrupt, there have been several kind of economic shocks where it's taken some time for funding to come back into the space. We haven't really seen a material disruption in funding in that space just yet. And the fintech lenders continue to be active. Now look, I spent time at Money20/20 a talk to a lot of different people. Of course, there's a lot of concern and uncertainty about the consumer in the future. Some players are getting more cautious Others are thinking this is an opportunity because there's less marketing and so the response rates are higher, right? So they're acquiring. So it's not I'd say, increasing concern in the market, but not a pessimistic or an overly concerning situation at the moment.

We last sat together in September in the headquarters. And I asked you, if we went into a U.S. recession in '23, how would your business do? And I remember the answer was big that organic revenue growth would still be positive, margins would still move in the right direction. What gives you that confidence? And now you've had a little more time to think about that?

Sure. Andrew experienced it, right? So well, look, at the enterprise level, we have diversified a lot over the past decade. The international business is a nice diversification and offset to the slowdown that we're seeing in the U.S. markets and some of the larger and more mature markets like the U.K., like U.K. and Canada. And that is one support of our growth for the business in total. And in the U.S. now, we're roughly equally split between financial services in our emerging markets. And they are decoupled in terms of their performance. I mean, obviously, they're both impacted by overall economic activity, but the emerging markets are less cyclically influenced than...

The verticals, emerging markets.

The emerging vertical. Sorry. So we're talking U.S. focused, right? Then it's financial services. So I would expect that depending on the severity. But if we're talking about a more routine or mid-level type of slowdown that we can, even in the U.S., continue to post positive organic growth. Now some folks will say, "Hey, in the third quarter, the emerging verticals within the U.S. didn't grow that rapidly. There was a slowdown." And that is true. And on the earnings call, we talked about a variety of unique factors and anomalies that led to that. But as we guided into the fourth quarter, right, there's an assumption in there of a recovery in the emerging. And I think you'll have a chance to see that once we're through the fourth quarter and we report our results. So I mean, look, there's always a scenario, a disaster scenario where something terrible happens and growth is interrupted, but we're not expecting that...

[indiscernible]

Yes. Exactly.

You're not going to love this question. It's about where do we stand on the current guidance philosophy from IPO till this year, at the beginning of the year, like when you set your initial annual guide, there was always conservatism baked into that which allow room for either upside or challenges. This year, as you described, you entered the year with a lot of momentum on the consumer and in your book of business. And I would say that you took away that cushion because you were just giving a more realistic view of the world earlier this year. Then as the year went on, we had some softness, as you said, and then we had to adjust the guide. So I'm not asking about that. I'm asking going forward in the years ahead, are we rolling back to the previous guidance policy that we recognized at the beginning of the year that we don't know the whole year and there's room for upside and downside drivers.

Yes. I mean look, we always did try to set guidance at a level where we were aiming toward the high and hopefully positioned to overperform. You have to remember, though, the context, the period from 2012 forward was one of steady upward economic growth and low borrowing costs, right? So it was definitely economic policy set for expansion in the consumer lending sector was emerging from the wreckage of the Great Recession. And so beat and raise in that environment, certainly easier. But guidance always struggles with inflection points in the market. And if you go to '21, our guide was relatively conservative. It was very conservative in '21 compared to the actual performance of the business. And that's because we just come out of the 2020 pandemic year. And we guided based on what was in the rearview mirror more than making a bet about what the future would hold, right? And then I just felt that was too conservative because like it sends a full signal to the market that we're not optimistic about the business or confident, right? And so I think we've pushed to the point where -- and I think it's very appropriate given the uncertainty of the current environment where we're going to give a guide low to high, we may likely choose a wider range than we have because we're not in a stable economic circumstances. And then we're going to expect to perform somewhere within the range. Now hopefully, it will be toward the high end or overperformance, but we're not going out explicitly to say the range is going to be low, and we're going to plan to outperform it. We're going to plan more to be in the middle of the range.

Neustar. Neustar has been a controversial acquisition. I hope you think that's a fair assessment, controversial, with the investors, I guess, is probably the more appropriate word. Tell us about how your customers have seen Neustar merger, why you think that there are synergies here? And what gives you confidence overall at Neustar? And when do you think investors can start to see that?

Sure. Well, I think there were layers of questions when we first announced the Neustar acquisition, a lot of it had to do with just I think, information investors losing sight somewhat of Neustar and what it was. Previously, as a public company, it was very networks, telephony, Internet focused. There was a security business, Internet registry business. There was the number of portability exchange and all that went away. And what remained was the core phone intelligence business, which is a very good and proprietary data asset and a series of marketing intelligent services to help marketers understand the best places to divest channels to place their marketing dollars. And also to measure the effectiveness of that spend in a very quantitative way. And then the exhaust from those two businesses really seeded a data asset that allowed them to do e-commerce fraud mitigation. So those are three lines of business that are very synergistic with the growth direction of TransUnion. And they're also on a state-of-the-art cloud platform that was a generation ahead of where we were, right? So I feel like TransUnion had decided strategic.

[indiscernible] what you mean OneID, right?

The OneID platform, yes, a data management, analytics platform, cloud native and scaled to handle the larger data sets that marketing represents. Marketing has orders of magnitude more data than you can credit. And then information security and the Internet services, a level beyond even marketing. So Neustar used to ingesting and analyzing and organizing masses of information and the engineering in that platform reflected it, right? So we made the acquisition, and the first question was, is this the old new star or something different? And we said, think of this as a marketing services business, a fraud mitigation business. And then finally, with a differentiated asset and a really good technology that we're going to leverage across the company. Now we're into it. We're pulling together the respective goodness of TransUnion and its rich data, and Neustar with its superior platform and some really good organization curation, identity resolution capabilities. That combination is producing a much higher hit rate, just more effectiveness in all the services that we provide. And we're getting pretty reasonable underlying growth. Now earlier this year, we took the growth target down for this year for Neustar collectively to mid-single digits, even though we said it's close to high single, but we're growing mid-single digits. And as we've come to understand the business, it's really that '21 was a bit of an anomalous growth year for Neustar because it was positive, right? I mean, look, in 2020, the pandemic year, right? Neustar still grew 1% organic. Not so different from what the bureaus would have grown had we not had the mortgage bubble, right? So the downside is relatively the same. Then you went into '21, you had an explosion you had e-commerce activity. You had the economy returning a ton of call center volume, and the revenues were a bit inflated because of the resurgence in volume across these products, as it set back, the incremental growth wasn't enough to quite get us there. But we've had a heck of a year of selling. We've got good momentum. Neustar's hit its numbers month by month after we've...

Talking about what customers you are saying?

That's everything. A lot of the funds that long-term funds that invested in us did considerable market research on this. And I will tell you this in all sincerity, it always came back positive. The customers would say, "Oh, I get it. Oh, I understand why they would do that." And even some of the largest banks that you can think of use Neustar's marketing and analytics services and immediately were like we see the synergy between credit analytics and the type of data you have, which form a foundation of our customer acquisition activity. Now we can get both of these related services from one supplier. And oh, by the way, there's this other thing of prospect databases that fuel DirectMail, maybe you're going to bring that into the equation over time, which we will. So the customers got it before the investors got it. right? And I feel -- and I think that has been consistently true with all the market work that all of the funds that are invested in [indiscernible] EBITDA.

Right. I think it's definitely true from the customers that I have spoken to, including us, that they're very satisfied. But that doesn't exactly mean that they're going to accelerate spend with you. So like what will take satisfied customers to that next level to accelerate spend on Neustar and TransUnion and you start marketing together?

Yes. So look, here's the growth thesis about how we grow faster together. I mean, I think Neustar comfortably is mid-single to high single digits. Then we show up and we combine our superior data and the hit rates, the performance of the underlying assets go up. I mean we bring credit header information and a variety of other headers that have already been integrated that allows them to identify more and more individuals within the U.S. economy, right? So the hit rate improves. Then we...

It hasn't happen already [indiscernible].

Absolutely. Yes, because we're a long way down the road of integrating our data. Then we bring in telephone information. We bring in e-mail information. That's up 15% or 20%. It helps resolve identity overall. We're bringing in our public records information from our SRG asset, which again is going to round out customer profiles. And then -- so the product itself becomes more effective, more effectiveness, more hit rates means more dollars even from existing customers. right? It's a coverage issue. Then we move into cross-selling. We spent the whole year training and starting to build pipelines for cross-selling. And then there's new products, right? And there's a whole stream of innovation around shared analytic platforms, if you will, between the credit and the marketing side of the house. We have our Prama platform that is emerging and still developing. They have clean rooms. Under the hood, it's the same functionality, right? So we'll bring the two of them together. They'll cut across these domains with a broader data set, and I think we can drive incremental dollars there. And then on top of it, and what's not really contemplated in the numbers that we guided is taking this internationally. So we think it's got legs in the U.K. It's got legs in different markets are in different states of maturity with regard to their marketing analytics and intelligent services, right? But there's at least half a dozen markets that are ready for this service. This year, we're focused on integration. Next year, we'll be exporting these combined marketing capabilities around our positions globally.

Right. And if you think, customers will be able to see a combined plate development road map soon, right?

They can see it already. Now we just have to execute on it.

Do you still think that Neustar could collectively get up to low double digits? That is still part of the medium-term guide, right?

I do. And I don't think we'd be talking about mid-single digits, if not for inflation and a change in the inflection rate and, of course, building off of this elevated e-commerce foundation.

So let's go back to TransUnion overall. When you think about '23, what will be some of the key products that are revenue movers. And I really mean don't think about if we're in a recession or expansion. Think about what are your best products, which you think are going to get broader adoption. And you could imagine, I particularly want to hear is Prama going to be a revenue needle mover in '23 because we've been -- I've seen the product. It's amazing product, but I don't really think it's been a total TransUnion revenue mover needle yet.

So I'll get to Prama, but let me just sort of foundationally with -- as I look around our product growth globally, credit continues to grow rapidly, and it's some of the recent hits, if you will, trended data, right? And I see familiar faces here that have been hearing us talk about trended data for five years. And the adoption is still continuing, different lending verticals different aspects of their usage, whether it's marketing, origination, portfolio management, collections, we continue to sell what is the next generation. Plus over time, we build more and more analytic attributes, data attributes on the trended data set and so they can build better performing models, if you will. Then we've had a big push into alternative information, right? So there's CreditVision and there's CreditVision Link, right, where we bring in all of the payday credit information, some demand deposit, balance check activity, rental payments, utility, to the degree that we can get them, right? And still all the players in our space are searching and hovering up that information because it has predictive value, particularly with folks that are new to credit or underbanked, if you will. And that's happening around the world and credit growth is going to continue because there's a lot of penetration opportunity. Now after that, marketing is going to be a key critical mass grower within TransUnion. So we've always had batch marketing services, and I'll hold those aside. But beyond the batch, we made a series of acquisitions and internal development. We've got $50 million, $60 million, growing really rapidly. Now we're merging that all into -- would be a $400 million-plus global vertical in marketing and that I hope will compound nicely for the years ahead, right? That's the marketing portion of Neustar. Then fraud is kind of an equally, equally sized and equally attractive global opportunity. We're investing a lot in product right now to build our next-generation platform in fraud and consolidate the various point solutions that we have around TransUnion and in Neustar on a common data in the analytic layer, which is the OneID platform. And the idea is OneID will become an underpinning platform across Tru. And all of the intelligence we get from providing marketing and fraud services, the exhaust from that comes back into the core platform enriches those profiles and enables greater resolution, right? And so it becomes kind of a virtual flywheel. We also do a ton of corporate customer data hygiene. We've got over 100 big clients that come to us in the first step in their marketing to say, clean up my list, so I'm not sending duplicatives and wasting money in that way. And typically, we've got the rights to corroborate our data against their data, right? Now we don't get to use it maybe in some small cases, but we have to say, "Hey, this is what we think Chris Cartwright's address and phone number is, what do you think, Mr. retailer, what do you think Mr. bank?"

[indiscernible] don't forget Prama.

Yes. So getting the Prama. Look, Prama is still maturing in our mind, right? And we use Prama as a vehicle to cement share and sell more data at this point. We're also licensing it. But as it becomes more robust, as our data ingestion and organization capabilities increase and as our ability to provide data attribute and hard modeling within Prama, mature, you'll see more license revenues, right? But it will always be sold as part of a package of data and analytic services. And that one, what we call Prama, think of it as a broad data and analytics sandbox is going to be shared across marketing analytics and credit analytics and even in Argus.

And did you just say will it be a revenue needle mover in '23...?

Well, I think it will have growth in attractive growth in '23. But again, it's off of a we're almost [ $4 million ]. It takes a lot to truly move the needle.

Great. So a question from the audience. We only have room for one question. Come on. Someone ask that question. Go ahead. I will repeat his question.

Right. So we have -- so how will we take our marketing services globally, really, and in particular, in the EU, where privacy concerns are more pronounced and the regulatory framework, perhaps more restrictive. We'll start with the U.K. And in recent years, there's been a bit of a dispute between industry and the regulators about the use of certain PII for targeting, right? Those disputes are being resolved, I think, in the favor of industry. And so it's a good time for us to take this new and improved level of marketing services into the U.K. The other thing to understand is that we have privacy in permissioning management is a foundation of the platform. So I can take an instance of OneID, take it to Spain, Germany, wherever, and adapt it to the local regulations around data usage and keep that separate from the PII of citizens of other countries. And you've got to have that because there's a complex web of privacy regulation around the world, and you've always got to operate within the framework. So you have to be able to customize to tailor and adapt, and you can do that on the OneID platform. So that's how we'll do it.

And to make your algorithm work, do you need to be successful with Neustar internationally? Or is that upside to your aspect.

I think it's upside.

All right. Let's leave it there, Chris. Thank you so much. I appreciate everybody come in. If you want to stay for the other information services companies in this room, there is services next door, grab Primer. Thank you, and welcome to the Ultimate Services Investor Conference. Thanks, Chris.

Thanks, Andrew.

Thank you.