TransUnion (TRU) Earnings Call Transcript & Summary

Okay. Good morning. This is Heather Balsky, BofA's business and information services analyst. I wanted to welcome you all to our fireside chat with TransUnion's President and CEO, Chris Cartwright; and Head of IR, Aaron Hoffman. It's a pleasure to have you both here. Before we start, for everyone in the audience, I'm going to try to offer some Q&A. We have about 40 minutes scheduled, so I'll pause when we're about 15 minutes in, to check in. But if there are any questions, I have plenty. So let's get started.

So with that, Chris, I was looking back to my questions from last year. And my first question was on the operating environment as we're coming off the COVID recovery. A year later, a lot has changed. There's a lot of uncertainty, and we're debating hard versus easy landing. Can you share your perspective on the current operating environment for your Financial Services business outside of mortgages? And how is the consumer and lenders, how are -- what's their willingness to lend?

Yes. Well, good question. So the way you phrased it, you've scoped it down to about the U.S. Financial Services nonmortgage, right, which is about, let's say, $800 million out of our high $3 billion, roughly $4 billion in revenue. And it's going to be concentrated in consumer lending, card lending and auto lending. And if you compare it to a year ago, it's certainly a less robust environment than it was. If you remember, in the first quarter of '22, I think we grew about 8% organically enterprise-wide and probably in the low teens in the U.S. alone, right? And what we saw quarter-by-quarter in this piece of our business from that first quarter to now is, I guess, increasing pressure on consumers, on household balance sheets, if you will, because of higher levels of inflation and the Federal Reserve combating that with increased interest rates. That said, again, going back to your starting point, the consumer was in historically fantastic condition at that point, emerging from the pandemic because there have been a lot of fiscal stimulus and also forbearance on loan payments and just difficulty traveling and consuming. And all of those factors conspired to increase consumer credit scores but also to really delever households in the U.S. Consumption has been fairly strong over this period. GDP growth, while it slowed, it's still substantially positive. That gets us to a point today where while the consumer has been on a deteriorating trend, if you will, the starting point was this is a natural high. And today, the consumer is still in pretty good shape by historic standards and certainly by the pre-pandemic standard, highly employed, some very modest real wage gains although that's slowing, right? But household leverage has ticked up. Particularly, card balances are increasing. Delinquencies are increasing. And I expect charge-offs will increase. That said, it's all still within the bounds of, say, normal.

That's helpful. And amid recent events, I have to ask, can you just touch base or I want to touch base and ask you about exposure to some of the regional banks recently that kind of -- they're seeing pretty severe challenges, Silicon Valley, Signature. What's TransUnion's exposure there?

Yes. Well, look, I think it's still unfolding, not our exposure, right? Our direct financial exposure is de minimis, right? I mean, we're talking like sub-$100,000 collectively with any of the banks that have been, I guess, making unfortunate headlines in this past week or so. The question is what's the broader implications on the consumer lending economy? I think that's a TBD, right? Certainly, some institutions may be subjected to higher levels of regulation or scrutiny or liquidity requirements. You're also -- we're seeing deposits move around as well. But if you think of consumers in a particular market who are seeking credit, they're going to find it, if it's available, even if the pools of available lending are shifting between institutions because of this kind of noise and disruption. Beyond that, I mean, I think my understanding of this is probably no better than anybody else's in the room. So we'll just have to see and hope it's a fairly contained event.

Yes. And so your outlook for this fiscal year factors in an ongoing relatively tough U.S. environment but not a recession. In what areas do you expect pressure in your business? And where do you expect improvement or resiliency?

So yes, look, so a couple of levels to answer the question. First, we didn't make a specific call, like this is when the recession is going to be and this is going to be the severity or the duration of it. That said, I think we arguably have been operating in recession-like conditions in portions of our portfolio, certainly in the fourth quarter, where we saw a pretty material reduction in lending activity. And then also in any of our markets that are driven by real property dynamics, whether it's mortgage or it's tenant screening or even employment screening. Tenant screening in particular, there's just been an imbalance between the cost of an apartment and a renter's ability to service the lease or the purchase price of a home and the underlying affordability because of mortgage rates. And so transaction volumes dropped to really low levels, right? And so that's a recession-like condition because when you've got that imbalance, market activity kind of stalls. And we only get paid on transactions, not expanding loan balances and the like, right? So we saw pretty tough conditions in the fourth quarter. In the Financial Services portfolio, we dipped a little bit to the negative, which is a big contrast to where we were 4 months ago and where we've been -- I think since our IPO in the middle of 2015, where FS has been a consistent low to mid-teens grower in the U.S., right? But again, I think that just reflects periods of market uncertainty where it takes some time for equilibrium to return and then for the trading volumes to improve regardless of the conditions.

Helpful. And if the U.S. goes into recession, your message has been that TransUnion can grow through a downturn. Your team went into significant detail about this on the second quarter call.

Yes.

Now that we've had a few tough but not -- well, tough quarters. You kind of said 4Q was recessionary-like, but we're technically not in a recession right now. How has that impacted your view of the durability of the business?

Well, the point of comparison when we're asked this question about diversification and the ability to grow during difficult times is to the TransUnion of 10 or 15 years ago. And if you think of TU when we were privately held and we're living through the Great Recession, even during that period, which was a really pronounced financial crisis where consumer lending dramatically contracted, I think peak to trough revenues dropped 10% in total. We were highly focused on the U.S. at that point and almost entirely providing credit data to financial services institutions. Now if you compare that to TU today, we've expanded a lot geographically. Now we get a material portion of our business coming outside of the U.S. in emerging markets with rapidly growing credit economies. That's continued to perform extremely well in this most recent period of economic challenge. We also have a heck of a lot of business from different verticals and across a much broader range of products. Like in the U.S. today, our Financial Services business inclusive of mortgage is roughly, let's say, $1.1 billion to $1.2 billion. The nonmortgage aspects are just as large. And that's coming from marketing services, public records, our investigative solutions, if you will, fraud mitigation. Those are pretty substantial businesses that are counterweights to the cyclicality of credit data to financial institutions.

Got it, got it. You reaffirmed your 2025 targets on the fourth quarter call. Given all the uncertainty and the recent mortgage weakness, what gave you the confidence to reiterate that outlook?

Yes, certainly. Well, I guess it was about a year ago where we had our Investor Day and we put forth our long-term growth algorithm of 8% to 10% on average, organic compounding, which would get us to [ 5 ] top and [ 2 ] in EBITDA, I think about $6 per share in EPS. And look, since then, a heck of a lot has changed in the economy. At that point in time, we were assuming a different set of economic circumstances and the ability to kind of compound in the 8% to 9% range and comfortably get to that target. Now as the environment has become more difficult and our growth rate has been lower, certainly that aspiration, if you will, becomes more challenging. That said, look, we got 3 years left. We've got a lot of different paths of growth, some of which in areas like marketing and fraud, we're really just starting to hit our stride in and that should lift our overall average growth rate. And as we've seen, when this business recovers, it can grow very quickly. So in 2020, we were rolling along great organic growth, the pandemic shows up, and because of that disruption we grew 2% in the year. In '21, we grew over 13% organically. So honestly, I'm more focused at this point, given all of the transformational activities within TU, on just getting through the year, driving the acquisition integrations and securing accelerated growth, getting the cost synergies. At the end of '13 -- I mean, at the end of '23, we'll lift up, survey the landscape. But look, even if we're off that algorithm, we're still offering attractive compounding top line growth and substantially improving margins and free cash flow over this period as we get through our 2 tough transformational years of '22 and '23.

Helpful. And I have to ask this because we get this question, which is that when you think of 2025, how much does the mortgage market matter? Like do you need a full recovery there?

You don't -- not really. I mean, we certainly need a recovery to, say, historically normal transaction levels. But the level of mortgage activity from, say, the second quarter of '20 forward was 2x or beyond which you typically would have because rates got so cheap and it led to a massive refinancing boom. Now if we are successful in taming inflation. and if at some point, maybe later this year, early next year, if rates do start to fall, you've got mortgages being originated during this period that will be priced too high relative to the new rates. You'll have a surge in refinancing activity. But it won't be anything like what we had as a result of the pandemic in the super low interest rates with the Fed.

Let's say, we go into a recession. What are the levers you can control?

Well, look, if we go into a recession, I don't believe all of our markets will be in recession. Right now, in our portfolio, the international business is still growing in the low double digits. It grew mid-teens last year. And I think the developed markets will continue to sprint ahead because they haven't been so impacted by elevated inflation levels or a lot of fiscal stimulus. They just didn't cope with the pandemic in the same way, right? And then markets like fraud and marketing and sales to public sector or investigative solutions are largely not tied to credit cycles or GDP growth, if you will, at least where we play in marketing, right? Advertising, absolutely; marketing analytics and optimization, not so much. You're seeing that with Neustar performance today which is holding up very well. And so look, we'll continue to fight and grow through those markets. It will be tougher sledding in Financial Services directly. But when origination volumes drop, certainly, that impacts revenue but you begin to do more around understanding and mitigating risk within the existing loan portfolio. I also think delinquencies and charge-offs will increase finally and our collections business is going to return, at least our collection support is going to return to more normal levels. And those things, I mean, look, they don't get us back to the same level of growth that a robust expanding economy does, but it allows us to grow through difficult times.

Helpful. So when you look at emerging verticals, where do you see the most opportunity for growth there in 2023 and then also over the next few years, over the midterm?

Right and look, the first order opportunity for growth both there and in FS is leveraging marketing and fraud mitigation solutions fully, with cross-selling across all of those different verticals. And the engine for doing that is really starting to gain traction, right? Within that, I think there's a lot of opportunity for us to grow in media because we've got a full suite now integrated of marketing analytics solutions. I think there's tremendous opportunity in insurance. We're one of the larger players in providing data and analytics to P&C, auto underwriters and home underwriters and a little bit to life now out there in the market. And that space has been artificially depressed this past year but it's starting to pick back up again. As you saw in the fourth quarter results, it should kind of get back to high single digits compounding. So that's a great area. I think there's a lot of share to gain in public sector and there's a lot more that we can do around identity resolution and fraud mitigation in that space. And then e-commerce is a big play -- e-commerce and retail are 2 more markets now that we've got the analytics solutions and the like around marketing, where I think we can get accelerated growth.

Well. You talked about marketing. I'd be remiss if I didn't ask a question about Neustar. So you're now over a year into that acquisition. What have been the biggest learnings about that business? What's the value it's brought to TransUnion? And what do you think investors may not appreciate?

Well, yes, you would be remiss if you didn't ask. I'd be disappointed.

I have to ask this kind of question.

But only 1.

I hope 2.

Okay.

Fire away. Well, look, so far, so good with the Neustar acquisition. I know we took our growth rate down to mid-single digits last year, and it's because the overall e-commerce volume in the U.S. dropped coming out of the pandemic, and that impacted our communication solutions and our risk mitigation businesses. We ended up growing at 6% organic against a high single-digit guide in 2022, and we exited the year with 8% organic. And now we've guided back to the high single-digit guide for Neustar, the entire enterprise, the 3 lines of business for '23. And I feel pretty positive about that level of growth given some of the uncertainties economically and some of the distress that's starting to show up in the advertising market, which we have some modest exposure to in the marketing line of business. Net-net, I feel like we have validated the proposition that TransUnion can do more for the clients it serves, right? We've had a toehold in marketing within consumer lending and financial services for years. We provide the data set that begins the marketing process for credit acquisition, for new customer acquisition through our batch prescreen services or our batch IT [indiscernible] to apply services and the like. Now we can extend fully and help those very same customers plan their media mix, engage in the market and then measure the effectiveness of it as well as just being in charge of their general consumer data hygiene so that they're only advertising one time to the consumers that they're targeting. And if those consumers engage, from a fraud mitigation standpoint, they can be confident that it is indeed the consumer they were trying to reach, right, and not a fraudster stepping in or some type of a synthetic ID and the like. So that extension of our value proposition outside of the credit market, into marketing, into fraud mitigation, I think, has been cemented and proven during this period. I think the other thing that's been proven are the ability to generate the financial returns from the acquisition that we laid out when we made the deal. I believe we're going to get to the organic top line growth and we're demonstrating that we can do that. And we're taking out all the costs and a bit more than we expected to take out that gets the margins up to a satisfactory level for TU and also the kind of the entry multiple on the deal down into the mid-teens, right, which is much more, I think, palatable in line with expectations. So in our first 13 months of ownership, margin went from 21% to about 26.5%. The fourth quarter, it was almost at 29%. The guide for '23 is 32% margin, and we recently raised our target for cost takeout, by at least $80 million, up from $70 million, and certainly aiming to do even more, right? So we feel like we're on the path to get this to the top line compounding growth that we guided to, the margins and the cash flow that we guided. And then I think the perhaps underappreciated benefit is just the power and sophistication of the Neustar technology platform, which is, we're in the process of extending across TransUnion. And it will become more kind of standardized data management and analytics platform worldwide.

You touched on this. But the original guidance, my understanding was sort of to get to low double-digit sales growth for Neustar.

Correct.

You still think you can get there based on...

That's still the plan. That's still our expectation. The only difference is really the macro environment has shifted since we initially gave that guidance. And so I think it will take an extra year or so until we're executing at that level. I should point out, though, that marketing services within Neustar were one of the areas of misunderstanding or initial concern from part of the investor base, right, because there's a lot of different types of marketing businesses. There's often confusion between marketing and adtech and where exactly are you going to play TransUnion? Well, throughout '21 and since we've owned the business, marketing has grown low double digits. And when you combine it with the marketing deals that we've done at TransUnion, you're solidly in low double-digit growth already.

Well. And you've done other deals, too, in the past year. So Argus, how is that business coming along? And how is it enhancing TransUnion's business?

Sure. Well, look, Argus, we had to take some risk and suffer some inconvenience to get the Argus asset. And it's an asset that's been coveted by bureaus for a long time now that traded to another information services company. We would argue in the bureau space, and certainly, I argue for TransUnion, that we're the natural owner of that asset because it's a clear complement and a double-click down from our credit card -- the credit card portion of our credit database, if you will. The difficulty was we had to purchase the division of assets out of Verisk. And we did for $515 million. We've ended up selling those assets, at least the bulk of the value, successfully for about [ 1 76 ] in consideration. So we paid our entry price down to [ 300 ] and change if you net out a couple of other small assets that we're in the process of disposing of. And I think that gets our entry multiple down to sub -- like around 10x. If you look at the underlying data of Argus and the ability for us to add to that data, to create new consortiums, to take the model into different markets globally where TransUnion operates and has relationships -- deep relationships in the consumer lending sector, in time, we're going to make that a nice grower. If you also look at like the state of delivery, our data analytics and platform, if you like, is well advanced over what Argus has. And so we're in the process of starting to migrate the Argus data into what we called our Prama platform, which is like a collaborative data analytics sandbox that consumers can directly engage with the information, visualize it and then create predictive models. All of that, I think, is going to boost the value in the growth rate.

Let me just ask a question about Argus. Can you help us understand just generally what the assets are, like what is Argus?

Sure. So the major card issuers in the U.S. contribute all of their existing cards to this industry consortium and the underlying transactional activity per card, right? So -- I was going to personalize it, but I probably don't want to say which credit cards I carry. Anyway I have a Visa.

All of them that's out there.

All of them equally, all 19. Anyway, now that comes in on an anonymized basis, right? Now we have the ability to -- through our identity resolution to reattribute, if you will, with the purpose of pulling all the information together. And so card issuers can see what their relative market share is and what the impact of their different efforts competitively are yielding and just general dynamics in the marketplace, right? You can also create audience profiles based on the card consumption activities of different individuals, and those audiences then translate over to the marketing solutions side of the business as a nice complement, if you will. And it's also a good way from a marketing standpoint to see if a marketing activity resulted in the outcome, a retailer, for example, was hoping for in terms of the consumer's card activity. So in a way, it closes the loop in marketing measurement. So there's real synergy between giving the financial services side of the business at TU a valuable and deeper data set and a level of relationships and lending institutions even more senior because this is the data that the institutions use to figure out how they're performing and sometimes to reward management, right, as well as feeding the marketing side of the business.

I think that's very helpful. We're at the 15-minute mark. Just wanted to see if anyone -- any of you guys have any questions. We can pass around a mic. Otherwise, I can keep going. Let's see. Okay. If you do, raise your hand, he'll come to you, and I'll keep an eye out. So going back to your 2025 financial targets, how important are your recent acquisition success and growth to those sales targets? How they factor in?

Oh, they matter, right? And so when we buy a business, and we've got a business case that says we're going to produce x top line, x bottom line, that's additive into the prior plans for the business. And so we need to deliver, we need to execute on these transactions, not just Neustar, not just Argus, but we also acquired Sontiq, which is an identity protection business that is complementary to both our direct-to-consumer credit subscription business. But also, it's a tool that we use on the B2B side. We're selling it directly to employers. We're selling it through employment benefits companies. And insurance companies are now starting to bundle identity protection as part of their coverage packages. That is part of the appeal. Like 75% of the revenues that come from Sontiq are subscription revenues through business buyers as opposed to the direct-to-consumer relationships. And we thought that's more stable.

I wanted to actually throw something in because it's come up a lot, and it just came up here, which is your fraud and ID efforts and opportunity. Can you -- I mean, you touched on it throughout this time. But can you talk more broadly how that's coming along? I guess, sort of, you want to use innings or kind of where are you in the process in terms of the opportunity?

Well, let me offer some thoughts and then direct me if you feel appropriate. But a secondary but important revenue stream from the traditional credit business is one of identity, if you will, because consumer credit records are meticulously maintained for a lot of reasons, right? You don't pay your card bill, it gets shut off. You don't pay your auto loan, it gets repossessed. So you make sure that name, address, phone number, et cetera, all that terrestrial information is accurate. And that credit header information, as we call it, is like an organizing object throughout the information services industry for other players. We license it out as an industry, right? As the world became more digital, you needed to -- we needed to add a critical mass of digital identifiers, whether that's IP addresses or cookies and mobile ad IDs or e-mail addresses or a variety of persistent device identifiers that could be mapped back to the individual consumer. And that underpinning of identity, that database and the ability to resolve identity, is what drives success in one-to-one or targeted marketing campaigns but also in fraud mitigation because so much of commerce is e-commerce now and it's important to know who's on the other end of a transaction. Or is it an Eastern European bot farm? What's on the other end of a transaction? And you need to resolve that in milliseconds. If you can determine it's not fraud or some nefarious character based on your digital identifiers in this pool of identity information, then you can target your marketing or your service treatment of the customer. And that's really like the fulfillment of this multi-decade vision of one-to-one marketing offers that only -- you can only really now realize because of the precision with which you can determine who you're conducting business with online. So we're building out that competency, and it's going to fuel growth in our 3 big markets of credit marketing and fraud mitigation. Now specifically, fraud mitigation, we have a variety of different tools around the world that we're in the process of integrating and unifying in a single product or single code base that's going to rest on the Neustar data and analytics platform, which today is called OneID, which we will rebrand and launch with greater fanfare later this year, right? Because it's going to become a single unifying data layer across TransUnion, and we're in the process of doing all the integrations to make that happen. Made really good progress last year in enrolling. So bringing all of that intelligence together in the single underlying data layer and then leveraging it in our marketing and our fraud products, that's building a competitive moat and differentiation for the long term.

That's really helpful. I wanted to hit on international too, because that has been an area of really strong growth. Where do you see the most opportunity there? And what are you most excited for, for '23.

Sure. So international is probably a little over 20% of our portfolio. It grew about 15% last year. I think we guided to around 12%?

No. High single digits for this year in constant currency.

Okay. So high single digits this year. The most exciting piece of it of course is India. India is a crown jewel within our business. It's critical mass, approaching a couple of hundred million in revenue. It grew over 30% last year. And there's just a tremendous opportunity with our partnership with the lenders in the space and high share as well as the coverage we've got across a variety of different product lines that can fuel growth in international for a lot of years to come. We're also excited that our business in Hong Kong has fully recovered, now that they've kind of exited all the pandemic era restrictions that were in place there. Latin America continues to look good. We're excited about the opportunity to organically enter in Brazil, given the new availability of positive data there. And then we recently relaunched a new international platform that we're kind of first implementing in the Brazilian market. So there's a lot of opportunity there. That said, we continue to gain share and perform extremely well in Canada. And in the U.K., the U.K. is a business that I'm very excited that we're in because it's a big market, arguably like the second largest credit market. We've got a nice asset. It's just the U.K. is really having a tough time from a macro perspective. So results there are going to be choppier in the near term. But over time, I think we're really well positioned to grow our business across a lot of verticals and a lot of different product categories in the U.K.

You mentioned entering Brazil organically. I don't know what can -- can you share about what your -- yes, can you share what your -- what's going on there?

Well, as you know, it used to be a negative-only type of bureau market. And I guess in the past few years, from a regulatory standpoint, they created the ability to have positive data as well. And we applied and were granted a license to operate a bureau there. We've gained access to the positive data. We've loaded it into our next-generation international credit platform, and we're in the process of just building the depth of the data and building out all of the data attributes that lenders need in order to begin developing predictive models across their range, whether it's customer acquisition modeling or credit risk modeling or delinquency, et cetera, et cetera. And so look, it's a great market, great growth potential. There is a dominant player owned by Experian there called Serasa. Equifax is making moves and we've got an organic entry as well. And over time, as we mature the data asset, we can bring all of our capabilities, fraud, marketing and credit, across the chain into Brazil. So it's a longer-term growth acceleration play.

When you think about entering a new market, how do you decide between going organically and going through M&A?

A lot of it is just the availability of the assets, right? A lot of -- in many markets around the world, there's either a government registry or maybe a single private player or dynamics that are similar to the U.S., right? In Brazil, there are 2 principal players, and our competitors are -- well, one is fully owned and one is partially owned with an offer on the table, so to speak. And then there's a small bureau that's owned by a consortium of banks. And I suspect that will be like a transitional position. In the fullness of time, the banks will build it to a certain point, if they're successful and then exit to a player. We don't want to wait because the data is available and we've got the technology. And increasingly, we can get into markets at a lower cost because we're building platforms once for use globally, right? So we wanted to move quickly into Brazil. But I guess in short, it's a market-by-market analysis around what's the best way to do it, build it or buy it.

And I just want to check one more time if anyone has a question?

Well, they either need more coffee or they're saving it for the one-on-ones.

It's probably -- it's definitely the coffee. It's always the coffee. I want to ask a balance sheet question because I didn't touch on balance sheet. You guys talked about prioritizing paying down debt on the call and kind of not looking at M&A in the near term. I guess, sort of what drove that decision? And how should we think about use of capital on sort of a longer-term basis?

Yes. Well, look, what drove the decision obviously is that we've got more leverage right now than we ideally would, and I think is appropriate given the level of interest expense, right, or interest rates. And so we exited the year to about 3.8x. We plan to pay that debt down to about 3.4x this year, right? What's changed though, is given that debt is more expensive now than it has been, let's say, over the past 5 years or so, we're taking our long-term target down to 3.0x from 3.5x. And look, we'll be more prudent, I think, in managing in and around that as M&A opportunities present themselves. But '21 was a year of transformational M&A for us. Neustar, in particular, was a really big deal to cement our extension into marketing and fraud. I don't see another one of those on the horizon in the intermediate term. And I feel like with the moves we've made we've got so much innovation fodder, we've got a generation's worth. And what we really need to do is pay down the debt because it's more costly than we expected and get all the value that we can out of these acquisitions and then take that value to all of our markets globally.

Helpful. I think we'll stop here, and I really appreciate your time, and thank you for helping us kick off the conference.

Well, you're welcome and thank you.

Thank you.

Thank you.