TransUnion (TRU) Earnings Call Transcript & Summary

Well, some of this is to be determined. It's been discussed in a way that it will be at the lender's discretion, right? And it's also been positioned by the FHFA as a cost savings initiative. Well, we know that the average closing cost is around $11,000 on a mortgage. And the omitted credit report saves about $4, right? And I think just again, given the number of consumers that will get excluded from the process and the increase in underwriting risk, it's probably not sound policy, right? But at this point, there is the stated intent. But I think now we're only getting into a point of a serious dialogue around the implications. So it's hard to know if this is going to be implemented, when it's going to be implemented or exactly how.

Chris, if you don't mind, can we just place scenario analysis for a little bit, assuming the bi-merge is strictly implemented? Just now you talked about the difference in credit data in your credit files with the other bureaus. I was wondering if you can tell us a little bit more about where those differences are -- and what are some of the key competitive advantages of TransUnion's data file, knowing that Equifax, Experian now also have trended data and alternative data?

Well, each of the bureaus still have an advantage in the geographies where they originated, right? So Experian was on the West Coast, Equifax in the Southeast, TransUnion, Midwest and East Coast. Over time, those differences have converged. But as I mentioned, with all of the new entrants over the past decade, there's different reporting footprints amongst those players. TransUnion has a very large share, but they don't typically report to all three bureaus at this point, right? So I think we have a disproportionate share of fintech. Our competitors would have varying strengths and weaknesses just as we do across the portfolio. But the point is the files have diverged a little bit, which is going to lead to more differences in scoring depending on who you pull. Now in terms of data strength, we were first to market with trended data. parts are not parts, so to speak. Everybody has a different approach, both time frame. We go back the furthest in terms of 30 months of trended information. We've also had the longest period of time to develop and mature a library of supporting data attributes to our trended data. And it's at the attribute level that the bank, the lenders build their models. And so we believe that we continue to perform well. It's why we continue to grow well in the core of the business. And so I feel like we still have an advantage in a product innovation that is still being adopted fully in the U.S. and is in the early days of adoption in the various markets around the world.

Got it. So the upcoming regulatory change also implicates credit scores. We're migrating from the classic cycle to a dual score system that incorporates both FICO 10T and VantageScore 4.0. So my understanding is the pricing for VantageScore is actually being set at the bureaus. I was wondering, it's still kind of early, but can you tell us a little bit more about how you think about pricing for VantageScore?

Well, look, the vantage score performs very well in terms of accuracy and inclusiveness because it's based on three bureau data being integrated in level. And so that's a powerful advantage. The ultimate pricing of it is still an open question, right? But I think the more basic point you make is -- it is going to be required. So two scores will now be required. So the benefit is, I guess, comprehensiveness how that plays out will depend on a variety of components. -- right? Because the score will ride or be calc based on a foundation of data, could be trended credit data, there could be alternative credit data sources that are included in that bundle. It could be variance of income, and there is competitive dynamics. I do think it's interesting because the adoption of two scores is the result of some legislation that was passed 5-plus years ago in Congress to bring competition into scores. And like so many things in government, we've now have a mandate for two instead of competition between two. So it's kind of ironic, but it is what it is.

Got it. Got it. Maybe switching gears a little bit. Let's talk about Neustar. From where I see it, I think that Neustar is one of the key debates for TransUnion for a while now. I was wondering, from your perspective, what do you think is the most misunderstood by the investment community on Neustar?

Well, it's interesting. Neustar was a public company, and then it was taken over or taken private in, I think, the 2016 time frame. When we acquired it in late '21, it had been off of investors' radar for quite some time. And when they heard the name Neustar, I think initially, they thought of a company that specialized in telephone number portability and kind of Internet infrastructure stuff, right, an Internet registry, Internet security and things like that. In the 2015 time frame, Neustar began to pivot away from those areas and acquire high-quality assets in marketing effectiveness and measurement and fraud mitigation. And when we looked at the business back then, those are the assets that fit with our strategy, that fits the things that we wanted to do for consumers, right? However, when it was taken private, it kind of went dark for a period. And so the first question investors had was Neustar is that the company that has those Internet security and the like? Well, the answer was no. and it took some time to get that message across. And then the second question was, okay, marketing. Well, first, a fear that marketing meant ad tech, it does not, not in our case. And secondly, what specific services, where were we playing in marketing? And then how did it fit with our strategy to serve customers, right? And since then, and I guess at our last Investor Day, which amazingly, it was only 15 months ago, I mean, it's truly been a dog year. We outlined our belief that there is a high degree -- the high interrelationship between credit market analysis to understand the dynamics in the market and identify those addressable segments of opportunity and then marketing services to cleanse your marketing list and then to plan effect and measure a marketing campaign and then we're successful where a marketing offer is taken to authenticate the digital transaction, either through unique device identity characteristics or even telephony intelligence, all of which we get with Neustar and is particularly powerful in combination with TU's data. So I think explaining the business that we actually bought in explaining how it fit with our strategy to compete in credit marketing and fraud mitigation has been critical. The other critical thing was largely macro. And I would say more than half of this the consternation or concern where it existed, came from the fact that we had a sea change in kind of the economic dynamics that we faced, right? We went from growing to growth challenge, inflation return, rates went up, a lot of money flowed out of the equity markets, as everybody here is familiar with. And I think investors just said, okay, let me see how this is going to work out. TransUnion has made an aggressive bet to transform the business. And it's going to take some time to see how that plays out. So about 15 months have passed since then, and I think investors are starting to see the potential and the value that we can create through the combination of the assets. The Neustar assets have been the fastest-growing component of our U.S. portfolio over this period. Now I'll acknowledge that they haven't grown quite as fast as we thought they would. But again, that growth forecast was made in stronger economic times, but 6% growth in '22 and headed towards high single-digit growth in '23 is quite strong given current economic conditions. And we're also maturing the margins as we expected. I mean when we bought Neustar, it was 23% stand-alone EBITDA margins, we're at 32% for '22 -- sorry, for '23, we're going to improve to 32%. We're taking out all the costs that we expected and more. We raised the guide from highly confident of the $70 million takeout highly confident of $80 million, and we'll continue to grind away and take out every sensible cost that we can. There's a lot of overlap. And then again, the combination of their technology, which was very advanced and quite sophisticated and all of our data assets create something unique and differentiated in the marketplace. Neustar because they've dealt with such massive data sets over time. I mean credit is a big data set, but it's not as big as device-based marketing information and the signal that comes from that, and it's not as big as Internet security data, it's not even close, right? Internet security data is 20x larger than credit, marketing is 5x larger. So they had to engineer their applications in such a way that they could really handle the ingest of data, the data management and governance, the creation of identity grafts to organize all of this information around an individual or a device at a much greater scale and effectiveness than we did. So we're taking that underlying technology, which they called OneID, we've changed it to OneTru. And it's going to become the horizontal data management layer across our business globally. And there's just a ton of tech value in doing that. And that's something we recognized in the deal, and it's allowed us to kind of accelerate maturing our products in a way that would have taken a lot more cost and time if we've done it internally.

Got it. Super helpful. We'll come back to the $80 million cost synergy in a second. But just on the revenue opportunity side, you had a record booking level for Neustar at the end 2022. I was wondering if you can tell us a little bit more about where are you seeing the strongest cross-selling momentum. And I realize on Neustar, most of the time we talk about cost synergies. But on the revenue side, how do you think -- or how do you think about quantifying the total revenue synergy for this acquisition 15 months ago?

Well look, we've certainly -- we guided for 2 years of high single-digit growth coming out of the acquisition and then accelerating that growth to get to low double digits and then sustaining it at that level. With that initial assumption, marketing was expected to be the fastest-growing piece in fraud, pretty close, but a little bit behind. And then the communications assets or the telephony intelligence that comes out of the communications vertical would be the slowest growing, probably mid-single digits, if you will. So far, while the growth has been a little bit less than that, again, unsurprising, given that we're in a softer economy, marketing has still grown well, just at double digits on its own. And when you combine it with the businesses that TU had bought in marketing effectiveness and audience generation, marketing for TU today globally is growing double digits and has been since the point of acquisition. Fraud remains strong and will get even stronger as we complete our next-generation fraud platform, which we call Orion, which unifies all of our varying fraud point solution capabilities, so knowledge-based authenticators device footprints, fraud device predictive models, et cetera, et cetera, on one platform, one orchestration layer, one data warehouse where fraud analysts can do advanced analytics. So we expect fraud to continue to grow well and faster as a result of that. The communications piece has been a real upside. And Neustar touted it during the diligence. We were just unsure, but these trusted call solutions that we've talked about are doing extremely well. And they're just solving the basic problem that we all experience. We get a lot of phone calls from a lot of places. We don't necessarily recognize them. Many of us just don't answer them. And most of the time, that works, but sometimes we miss important calls that if we knew who exactly was calling and why, we would -- we take the call, and we would interact. The flip side is businesses are wasting a ton of money. One, they're being defrauded and two, they're marketing outreach, the effectiveness is diluted. So having these branded call displays and authenticated or trusted call, I think, is going to become table stakes for businesses of scale, in from now going forward, but also could have consumer applications where it becomes a feature that we market as part of a bundle of our direct-to-consumer services to have all their -- all inbound calls authenticated to the degree possible. And we've got the best phone data. And if you think about it. While we're certainly in the age of e-commerce and the digital age, and we think of that as purely device-based, it's really device and phones, right? Because the authentication, the validation piece of an e-commerce transaction typically takes place with a phone call or a text or even an e-mail, right? And we are a leading provider of that type of authentication. So I think that's going to allow us to really grow well in Neustar across that mix.

Got it. And kind of coming back to that $70 million -- first $70 million and then now $80 million cost synergy. I was wondering where did the additional $10 million come from? Are there any incremental avenues for cost savings that we could see down the road?

Sure. Well, look, the -- we were always working to a higher number. But because there are a lot of unknowns, we guided to $70-plus million. As we've done a considerable amount of the work, we can see that we're going to get to $80 million. And of course, we're working to a higher number. And when we get a high degree of confidence on that, we'll update the market. But they're coming from several areas, the savings. The first is, when we bought Neustar, it's -- they've done more of the product repositioning than they had the cost takeout. So they went from an operational and technology platform to support, say, seven different products to needing one that supported three different products. So there was a ton of takeout that was ongoing. Part of that takeout was migrating their applications to the cloud, to the next-generation OneID platform and their other various solutions that connect to that platform. Last year, we saved over $20 million run rate by completing that migration to the cloud and closing seven or eight different data centers. And we're very close to closing the last data center in this quarter and that part of the work will be complete. We're also able to rationalize data acquisition costs because we were both buying similar data for marketing audiences or fraud signal in addition to all the stuff we generate internally. And then there are a lot of business synergies. You don't need two CEOs. You don't need two CFOs, et cetera, et cetera. And as we went down the organization, there was a lot of sensible consolidation that could take place, real estate rationalization, the list goes on, right? So the good news is the cost takeout has all been from the G&A lines, right? No salespeople, product people, technologists, data scientists have been let go. In fact, given the high level of talent at Neustar, a lot of those folks have graduated to leadership positions in the combined organization, which has been terrific for retention. And in fact, I think over the past couple of weeks, some of you may have noticed that the TransUnion's CTO, a guy named Abhi Dhar has elected to leave and pursue some commercial opportunities on his own. And we were able to promote Venkat Achanta who came from Neustar and before that Capital One and Walmart and Experian. So he's got a lot of relevant experience. We were able to promote him to be the combined CTO and data and analytics leader. And I think it's just a good example of -- there's some great talent that we acquired, I think it's going to help raise our game. And look, we really have not experienced much turnover because the fit is so good.

Got it. Got it. I also feel that a lot of the discussions have been focused on Neustar. And I was wondering if you can give us a quick update on how Sontiq and Argus are performing?

Sure. Well, look, our -- look, we have a number of challenges in our direct-to-consumer business. And those of you who've followed us over the past couple of years have experienced that, right? There are three parts to the business now. There's the Sontiq piece, which was more recently acquired. There is a data and analytics resell piece, which we call the indirect layer, where we are the primary provider of credit information and analytics to freemium players across the industry. And then there's our own direct-to-consumer business, which has been challenged because of the effectiveness of our marketing spend declined. And part of that was -- part of that was just consumer preference for freemium. And part of that was us adjusting our order workflow to ensure that it was entirely consumer-friendly and clear at every step in the process. So we cut back on our marketing spend. And as a result, that business has been declining, but we expect that by the fourth quarter of this year, it's going to be in and around flat, right, maybe a little negative, maybe a little positive single digits and will again flatten and begin to grow going into next year, which is going to help the total consumer space accelerate its growth. Now we expect our direct-to-consumer revenues in total this year to be positive, right? And we reiterated that on the last call, and we remain confident. But I think once we clear this step down period in our direct subscription business, the growth will resume. Now the reason we bought Neustar is because, look, we're a marketer of these services. And up until now, we've only been able to offer credit access and education, right? Now we can offer identity protection, both direct-to-consumer, which is about 25% of Sontiq revenues, but also directly to employees and insurance companies and benefit providers on a subscription basis. And as a result, we've continued to grow low single digits to mid-single digits over the period that we've owned Neustar -- I'm sorry, Sontiq. It's doing well. The margins are very attractive. They are right there with TUs, total enterprise margins a little bit better. And I think we can continue to compound low single-digit growth for the asset. So the deal is working out well in short. In Argus' too, Argus is -- look, we had to take a risk to get the Argus asset. Verisk was divesting itself of noninsurance assets as we all know. And TU's advantages that we were willing to transact on the full division. So we paid $515 million for it. But many of the assets, we were just warehousing. And over the next 12 months, we were able to sell off all the things, except for Argus and Commerce Signals, and Commerce Signal is really consumer audience information derived from underlying Argus purchase information. So because Argus is an authoritative repository of credit card transaction data, we can see who's buying what. And that's some additional helpful segmentation for our marketing effectiveness business. So Argus is performing well in keeping with what we expected. We're doing a lot of foundational investments in data accuracy and extension. And also, we've built a nice pipeline of customers that now either want to buy the Argus products as they stand or want to contribute to either the card or the deposit studies. And I think that was the advantage of TransUnion. We -- bureaus live in this space, the space where Argus data is relevant. And I feel Argus should have been part of the bureau all along. It wasn't. Now it's in a home where it's got a lot of complementary data and a lot of know-how and great penetration into the markets where the data is most relevant. And so I think over time, we're going to sort it out and really get it compounded nicely.

Got it. We have a few minutes left. I do want to touch on India. Obviously, you've done a really good job in that market, the #1 player, really high margin. I was wondering in your view, what were the biggest contributing factors to your success in that market and kind of how would you envision TransUnion CIBIL to grow in India over the next 5 years?

Well, we had the benefit of being the first mover, TransUnion partnered with the leading banks, consumer lenders in India in this consortium created something called the CIBIL Score decades ago. And it is a household name, very powerful brand, great recognition. We have over 70% market share. And the other players that have share were later entrants into the market, right? And again, there is -- if you have a disproportionate share in the market, there's a bit of a network effect because you've got broader data. So when banks test your data in their models, it performs better. And because you've got more bank utilization, you get to see more of the consumer shopping behavior because the inquiries are hitting your file. So again, it reinforces your file completeness and quality advantage. And so we very much have that dynamic in India. It's important to understand, though, in India, we're not just about consumer data. We're also one of the leading business information providers. So in the U.S., that market would be dominated by DNB and there -- the other bureaus participated in that in the U.S. We're a leading player there in India. Obviously, India, large population, arguably the largest great GDP growth. Lots of consumers entering the middle class and being introduced to credit, a highly digitized economy and increasingly so. And I think we're positioned to provide the full range of our services in India over time and really to fuel ongoing growth there, not just by riding their economic renaissance, but by providing a full spectrum of services to lenders and different vertical players. We'll run the same playbook, right? We're in the country. We've got a tremendous beachhead there, that beachhead alone can compound comfortably in the [ 20's ]for a long time, but we think we have a right to compete in almost every information product category and to bring our marketing and our fraud mitigation services. And so we're seeding that market with those solutions now.

So -- got it. Got it. That's super helpful. So first to market, scale advantage and more products, basically?

More products and just a tremendous brand to sell behind.

Got it. Well, that's all of my questions. Thank you so much, Chris, for sharing with us your insights. And thank you, everyone, for coming to this session.

Much appreciate it. Thank you, Kelsey.

Thank you.