TransUnion (TRU) Earnings Call Transcript & Summary

We are really excited to host Todd Cello, CFO of TransUnion; and Aaron Hoffman, Head of IR. Given it's a financial conference, we'll start off the conversation on consumer lending.

And I was wondering, Todd, if you could discuss the current trends on consumer lending, cards and autos. What do you see out there?

Sure. Okay. Well, good morning, and welcome, everybody. Ashish, appreciate the opportunity to be able to present this morning. So I think your first question is a good place to start because it's definitely a question that we get quite a bit just in regards to the U.S. markets Financial Services business. And so let me break it down into the 3 areas that Ashish just listed out. So first, in our credit card business what we are seeing, I'd say, is a resiliency of our -- the large credit card marketers to continue to market, albeit maybe things softened a little bit in the second half of 2022, the customers still remain wanting -- remained acquisitive because they're fighting for top-of-wallet share. And so the dynamics that we're seeing just by looking at our database is we're seeing consumers with increased utilization of their credit cards, which we think is definitely a relationship to the high inflationary market that we're living through right now. But we're also seeing card balances increase as well. So there's opportunities then for TransUnion as that happens for us to help our customers be able to manage their book of business and to mitigate risk there. There's about 166 million consumers in the U.S. have a credit card which is pretty significant. And what -- I think one of the most important things to look at in credit card is just the delinquency rates. People -- so if utilization is up and balances are higher, what's going on with delinquencies. And we're seeing delinquencies back at a pre-pandemic level. So they got unusually low during the pandemic and through the recovery, and now they're -- they've ticked back up. So all in all, credit card is performing okay at this time. If you move over to our consumer lending business within consumer lending, this is where our fintech customers are as well. And I'd say that the dynamic that we're seeing there is we're continuing to see the fintech players continue to grow their book of business. They're not as acquisitive as they were in the recovery. And if anything, what they are doing right now is they're being more selective about who they engage with. So -- and what we're seeing there is I think there's about 22.5 million consumers have a consumer loan, which is up significantly. And probably no surprise, again, like I was just talking about with credit card, from a delinquency perspective, there's a clear dichotomy that we're seeing. Subprime consumers are showing a lot of delinquency, but the super-prime are actually paying better. So there's definitely a big difference there in that market. And just to spend a minute on the fintechs themselves. I mean for TransUnion, we've sized -- there's a question we get quite a bit about the size of the fintech space and our exposure to it. We have relationships with 24 of the top 25 fintechs, and it represents about $175 million of our revenue. So if last year, we did about $3.7 billion, $175 million came from the fintechs. We're not necessarily concentrated with 1 customer. But I think what's most important about the fintechs is that the business isn't just growing because of volumes. If you were to go back to 2019, it was a $100 million business right? So we've grown it from $100 million to $175 million from 2019 to 2022, really as us being able to offer a full breadth of our offerings to the fintech customers. And so like the acquisition of Neustar and even Argus to a certain extent, enables us to continue on that. So it's not just a pure volume play. And what we're hearing from our fintech customers is that there's still demand for the loans that they get to run their business. It's just that the investors, needless to say, they're more selective right now in who they want, the book of business that they want to acquire. But all in all, there's definitely a resiliency there. And then as far as auto is concerned, last year, we obviously, the new car sales was well documented throughout the press because of the supply chain challenges. The greater majority of TransUnion's revenues in the auto space do come from used car financing. So not saying that new car sales are not important to us, they are. And what we're seeing is that the new car -- their supply chain has eased. I think the industry is calling for 7% growth in 2023. So we'll clearly be able to play meaningful role there in that space. And even in the used car market, a nice portion of our business is transactional and it's based on shopping. So if you're looking for a loan and you check for a loan with one lender and then go to another, that's typically good for us. So I think overall, the trends in auto are positive right now.

That's great. That's very helpful color. Maybe switching gears, let's talk about Neustar. Neustar revenue growth accelerated in the fourth quarter, and you guided to a pretty strong momentum going forward. And in particular, you called out pretty strong sales momentum. Can you just talk about like what's driving the sales momentum? And have you already started to see some of the synergies by either cross-selling or the improved quality of the data? Any color on that?

Yes, no, for sure. So the Neustar business throughout 2022, the revenue growth rate was increasingly better. And needless to say, we were very pleased with the exit of Neustar in the fourth quarter, being able to post 8% growth for the whole business, and with the marketing business up -- almost up to 10% in a challenging market. So that was obviously very reassuring to us because this is the conviction that we had when we made the acquisition, that we knew that the growth potential would be there even in a softer type of market, which clearly is what we're operating in right now. What I would -- when we think about Neustar last year, it was all about integration. So we spent a significant amount of time just simply getting the teams to work together in one Oregon. We recast our revenues for Neustar at the end of the year. And while it might seem like it's a reporting or an accounting type of issue, from an operational perspective, that was a big deal. Because what that enables us now to do is to push the targets for Neustar into all of our vertical P&Ls. So there's a joint accountability in 2023. And that's really where the focus is at, is on cross-sell opportunities this year. So where last year, we were focused on integration and Neustar was kind of carrying the momentum that they had at the end of '21 into '22, this year is about being deliberate with accountability across our U.S. markets business in driving cross-sell revenue. And as we get into '24, the focus will then be more on new products that we bring to market. So we've spent a significant amount of time last year taking Neustar's OneID platform and taking what we consider to be superior technology with good data, but bringing TransUnion noncredit data into the OneID platform is giving just better signal and overall stronger performance. So we're excited about the product capabilities that will come from that. And I guess the last thing I'd say on Neustar is the growth is coming across all 3 major product lines. So I already talked about marketing but the risk of the fraud business also performed very well and has got a good trajectory as we're heading into -- as we're in '23 right now. But also the communications business had a very strong 2022. The business has something that's called a Trusted Call Solutions capability that is something that they launched in 2018 before TransUnion acquired the business. Last year, it generated $50 million of revenue. So just think about getting a mobile call and if it's not a contact in your phone, odds are you're not going to pick it up. So what this capability does is it verifies that the call is legitimate, and it has the opportunity to put a logo and better branding and appropriate name, so you're more apt to pick up the call. So we see a tremendous amount of opportunity there. So that's what gives us the conviction on the high single-digit guide, is that all the businesses are performing well and focus on cross-sell and the accountability.

That's very helpful color. That's great. And maybe just building on the Neustar, but also the other 2 acquisitions that TransUnion closed in -- closed last year. Can you just talk about as we think about over the next 3 to 5 years over the next midterm, how do these acquisitions either help you with increasing your wallet share with your existing customers or improving the moat within your existing customers? Or does it also help you go -- expand your addressable market and go after customers, which may not have been possible as a stand-alone TransUnion? So on those 3 fronts over the midterm.

Yes. So clearly, the acquisitions that we made of Neustar, Sontiq and Argus were to build out our data capabilities, first and foremost, when you think about what Neustar has the capability of as well as with Argus. Then we bought these businesses, we talked about Neustar a lot and the cost synergies and the margins, but we bought Neustar because of the growth potential that we saw for many years. Identity had been a focus within TransUnion as well as fraud. And when -- what we saw with Neustar is that they kind of checked both of those boxes for us in that they had superior capabilities and being able to resolve identity, whether that's for marketing purposes or fraud purposes. So we see a tremendous amount of opportunity as I was just mentioning in your previous question, just as the data comes together, that we're going to be able to be more -- provide our customers with a clearer picture of the consumer to tailor offerings to make certain that they know who they're transacting with, right, and have that certainty. From Argus' perspective, being able to have the credit card benchmarking data is just a natural fit with our Financial Services customers. So the first question you asked me, you talked about -- we talked about credit card and being able to complement already a robust set of capabilities that TransUnion has with being able to help our customers know where they stand in the credit card ecosystem is incredibly powerful. And we're going to replatform Argus onto TransUnion's Prama application and make it a lot easier for our customers to be able to benchmark and see how they're performing. The business performed relatively okay, in line with our expectations in '22. This is more about the future play and how we're able to bring on those offerings together. And then with Sontiq, the identity protection capability is something that TransUnion didn't have. We had a good capability with free bureau credit monitoring, but we felt it was important to be able to complement that with identity protection services. And what's great about Sontiq is the revenues aren't just from a direct-to-consumer or a B2C point of view, the relationships that Sontiq has go with the Financial Services customers as well as insurance and employee benefit customers as well. So those relationships are longer lasting, they're not month-to-month. So there's just some nice certainty with the revenue there. So being able to bring the Sontiq capabilities together, even from a B2B perspective with our Financial Services customers is very powerful growth potential for us.

That's great. Maybe switching gears now and talking about the cloud migration. So you've talked about a Project Rise. I was wondering if you could discuss where you are in terms of Project Rise? And particularly, if you can talk about what you're doing on the cloud distribution front. On the recent call, you talked about how Neustar is using Snowflake application APIs, native APIs. I was wondering if you can elaborate on that front, and where do you see -- or how does Project Rise really transform the business?

Okay. Yes, so Project Rise is our technology transformation initiative that we launched back in 2020. So -- and we've committed to having that completed by the end of 2024. And the end result of that will be a hybrid type of tech environment. We'll have some of our tech on-prem and then we'll also have the other portion of it, needless to say, in the cloud, right? So we made a tremendous amount of progress in 2022 with this tech transformation. The highlights, I'd say, first is specific to Neustar because we -- when we acquired Neustar, we put Neustar into this tech transformation program. Clearly, we didn't know that, that was going to happen when we launched it in 2020, right? So we -- but it caused us to reprioritize there. But we were able to close 8 data centers last year at Neustar. And that was a huge accomplishment for us in getting their work in the cloud. In addition, last year, we moved 3 of our applications to the cloud. So that was a big accomplishment for us. And when we look ahead to 2023, we're expecting to move another 100 applications to the cloud. And so we've got a lot of good momentum that's going forward. We committed to spend up to $240 million through the end of 2024. I think we spent $110 million so far. This year in 2023 will probably be our biggest spend, goes hand-in-hand with all those applications that I'm talking about that are going to migrate. But I think what's most important, though, about the tech transformation is, yes, there's definitely efficiency gains, and we're definitely enjoying some cost benefits that are happening now in the program that we're able to either redeploy or save and push down to the bottom line. But really, what this tech transformation is enabling us is to have efficiency with how we deliver our products and services. So for example, if you were to think about in the past, when we would stand up a new product, it would be a pretty significant technology endeavor for us. We'd have to set up a completely different physical environment to enable the product capabilities. So a good example of that is what we've done in Brazil. So we -- about a year ago, we got a license from the government in Brazil to operate a credit bureau. And so we're now in the process of enabling that business. But what we were able to do is we were able to build a credit reporting application in the cloud that we just simply deployed to the Brazil region. Like I said, if this was 3 or 4 years ago, we would have been having significant discussions around the expense of building another data center and all the infrastructure. So being able to deploy that quickly is a tremendous benefit for us.

That's very helpful color. Again, we all know how successful Project Spark was, so we're really excited to see how Project Rise will repeat that success as well. And maybe just following up on the comment on Brazil, which is going -- looking at international markets in general. Obviously, India has been a huge growth area for you. Can you talk about the sustainability of growth there? And also, you recently introduced a new product in the Indian market. I was wondering if you could briefly touch on that as well.

Yes, sure. Yes. So the India business is exciting, would be the way that I would describe it. It's a business that TransUnion has been around for over 20 years. We helped establish it with the banks in India. In 2014, we acquired enough of the business to be able to consolidate it all the way to today that we own 92% of it. And the opportunity there and what we thought 20 years ago was just the dynamics in that market with the emerging middle class, and people aspiring for higher quality of life, we felt that TransUnion plays perfectly into that, enabling people to be able to transact with confidence with their banks and vice versa, with the banks, with consumers. So early on, we -- before we even consolidated the business, we enabled the business to have some sophisticated tools for a business of that maturity, and we're talking maybe 10 years old, by bringing analytic and decisioning capabilities to that business. And what it's just grown to over the last several years is just truly remarkable. I mean besides the core credit business, which is -- its legacy is called CIBIL. The brand is so strong in India that people refer to the score as -- did you get your CIBIL score, kind of like the way we would talk about like Kleenex or something for tissue, right? I mean it's that it's that well known. So core credit is where the origins are at, but the business also has got a great commercial database as well as capabilities in direct-to-consumer fraud and then even some of our vertical markets in insurance as well too, that we've been able to bring the know-how of these verticals that we've experienced in our global business, not just in the U.S. but in other parts of our portfolio to India. So the opportunity there, as the middle class continues to expand, is just tremendous and by us being able to bring more and more sophisticated offerings, we say entrenched with the customer base there. And a good example of that is in a partnership that we have, to the last part of your question, with an agri lender. I mean obviously, the economy in India is heavy on agriculture and being able to provide loans to the farmers is a nice growth opportunity for us. So we've partnered with a business that uses satellite imagery to be able to look at the land that the farmers are on and be able to determine the right underwriting criteria to get into a loan. So just a really -- it's just a great example of how we're even adapting to more local needs in that market.

And also innovation because it requires you to get a lot of alternate data like crop intelligence which you talked about.

Exactly.

Switching gears, talking about Consumer Interactive. So you briefly spoke about Sontiq acquisition. But just, if you can talk about some of the challenges with the direct business there, and the inflection that's expected in the second half. How should we -- what's the driver for that inflection in the growth profile?

Yes, sure. So the Consumer Interactive business, we operate in 2 primary channels: the direct business is where TransUnion sells directly to consumers like us; and in the indirect channel is where we work with providers like lead aggregators and premium players. So an area that we've been heavily involved with for more than 10 years. The direct business performed very nicely in 2020 and into 2021, had some really good growth profiles as consumers were concerned about monitoring their credit and their identity during the pandemic. But what was happening at the same time is the prevalence of freemium offerings really started to take hold. So that took a little bit of a hit on our revenues in the direct business. We still see a meaningful place for TransUnion to play in the direct business because there are consumers who are very interested in 3-bureau monitoring products when they have a life event, like buying a house or buying a car, consumers are apt to come to TransUnion to monitor credit, use our simulators and dashboards to get their score in a good spot for them to get an advantageous loan. But with that being said, because the market dynamics have changed and they've shifted towards freemium, it's caused us to have to shift our advertising strategy and how we -- the consumers that we target and how we do that. And all in all, we've refined that quite well in that the consumers, now that we are attracting to our services are having a higher retention or less churn, would be to say that. And you can see that reflected in the adjusted EBITDA margin. The profitability for the business is around a 50% margin. So still pretty strong overall. The indirect business, that's where TransUnion plays meaningfully, as I said, in the indirect -- in the freemium space in the indirect channel. And in that market, we expect that to come back to growth in 2023. We had some contract renegotiations that provided revenue certainty for TransUnion that were a headwind in 2022, and those have since resolved themselves. And the other part of it is Sontiq becomes organic, right? And now it's embedded in our business. So we're guiding the overall business to be down low single digits, but what we're seeing is the direct channel will probably hit an equilibrium point at some point later in the second half of the year, and the indirect business will show some nice growth, and Sontiq is just adding on top of that.

That's great color. Now talking about margins. You've guided to margins being flat to up this year. Can you just talk about some of the puts and takes there? On the core or organic side, you're seeing some margin pressure. Can you talk about some of the headwinds there, but obviously, the tailwinds from acquisition synergies?

Sure. So from a margin perspective, we're guiding our margins to be flat to up 30 basis points in 2023. One of the positives is Neustar, which with the margin expanding from last year at 26.5%, we're expecting it to get to 32% this year. That, obviously, is providing a nice uplift in our margins. Counter to that, though, the acquisition of Argus didn't close until April 2022. So as a result, we have 1 quarter of a lower margin business when you do the comparison of '23 back to '22. So that's a drag. Neustar provides about 100 basis points of margin and Argus is about a 25 basis point drag on the margin, which pretty much leaves everything else, and that gets back to the organic margin. And the drivers there, first, is compensation related. One of them is resetting our variable compensation targets back to a target amount or back to plan. So that's one driver of it. In addition, we also provided for merit and promotion increases for our very talented workforce. So that -- those are the 2 things on a compensation perspective. Another driver impacting us is higher data and royalty costs from our partners that impacted our margin in the year. So -- but when we think about the uncertainty that lies ahead, we feel pretty good about the 3% to 5% revenue growth, and we feel that being able to potentially expand margin by 30 basis points this year is a pretty solid outcome. But this is a long game for us, right? So when we think about uncertainty and going forward, the one thing that we feel very strongly about is that we control expenses. We might not have the control over revenue, but the expense side of things, we definitely control. So as we look forward beyond '23, we continue to expect to scale Neustar to a 40% adjusted EBITDA margin. So -- and the conviction there is we committed to $70 million of cost synergies. When we announced the deal, we just increased it to $80 million. And we've, I think, in the third quarter, we said that we had line of sight in the $50 million that we...

We actually realized...

Realized the $50 million...

On an annualized basis...

Yes, exactly. So that's positive. And then when you think about '23 is the second year of Argus and Sontiq, there's onetime integration costs there that are going to drop off when we go into '24. So that will provide a nice tailwind. So the acquisitions themselves are going to kind of help out when you get into '24. But I think most importantly, it's what we're doing with TransUnion's global operating model and how we're -- we've been on a mission for the last several years to centralize and standardize our work or have a TransUnion way of interacting with our customers as opposed to disparate globally. So that is where the big opportunity with margin resides for us, is being able to drive the efficiencies through our day-to-day processes through our global capability centers that we have. So there's a lot of exciting things on the margin front that gives us the conviction that we should be back to the 40% margin by the time we get into 2025.

Yes, that's a great segue into -- I know we only have 30 seconds left, but the 2025 target, you reiterated that again on the recent earnings call. That implies a steep increase in earnings over the next few years. I know you've talked about margins, but anything else that you would also like to flag?

Yes. I think that at this point, we did the Investor Day in March of '22, so almost a year ago. And like literally within the next 2 weeks, the Fed started raising rates, right? So the macro environment changed quite a bit. So we could debate the revenue because, trust me, we debate it internally. We just didn't feel like it was appropriate at this point in time to pull back on it. The targets are only -- they were less than a year old, and we never thought that it was going to be linear. We always knew that there would be some type of macro environment, maybe not to the extreme that we saw. But the thing -- I've been around the business for a long time and the thing -- the characteristic about TransUnion that's most striking is how quickly this business rebounds after a period of slowdown. Look no further than what we experienced in 2021. I go back longer than that, and I can tell you like what we experienced in 2012, '13 as we were coming out of the great financial crisis, this business has got those same characteristics. But with that being said, if we feel that we need to change that, we will at the appropriate time. But right now, the organization is still focused on those targets.

That's very helpful color. Thank you, everyone. Thanks, Todd. Thanks, Aaron.

All right. Thank you.