TransUnion (TRU) Earnings Call Transcript & Summary

I'm Jeff Meuler, Baird's information solutions analyst. Thanks for joining. The next company in this room is TransUnion, which is a leading consumer information solution company. They have a breadth of solutions addressing credit and risk, fraud solutions and marketing, about $4 billion or almost $4 billion of revenue, over 36% EBITDA margins. With me on stage is Todd Cello. He's been TransUnion's CFO since 2017. He's been at the company since '97, so wins the award for the longest tenure of any of the execs I get to introduce this week. But makes him a terrific resource having seen several cycles, especially right now when that's on people's minds. Also with us from the company, Greg Bardi, the Senior Director of IR. Not sure where he went to, but we're off.

So we'll get going. Information solutions companies, they tend to outgrow their end markets. TransUnion has done that. It has a good track record of head-to-head performance versus your closest peers as well. It's harder to see that right now because of the macro. But talk about like what drives the market outgrowth. And then specifically, what are the meaningful new innovations, new markets, further penetration opportunities that can give investors confidence that, that structural market outgrowth is still there. And then when the macro gets more accommodative, we're going to increasingly see it.

Good morning to everybody. And thank you, Jeff, for having me. And I think that's a great place to start, just to talk about how TransUnion is structured for success. So with that, I think we like to think about it as a 3-dimensional approach towards how we drive growth. And those dimensions are across our vertical markets, the regions that we operate in and then the products or the solutions that we bring to those vertical markets and regions. And just to dive a little bit further into that. From a vertical market perspective, we -- TransUnion's operated through vertical markets for a good 15, 16 years. And the whole premise of that is to be able to understand the issues of the customers and how we can bring relevant solutions to them to be able to solve their business challenges. So what we've done is we started, obviously, heavily ingrained into financial services. But what we've been able to do is to move into adjacent markets by leveraging the core credit that we've had and then augmenting that with alternative data and then move into adjacent markets outside of financial services, such as in insurance, tenant screening, collections, media, public sector, e-commerce, retail, the list goes on. And we have dedicated teams of people that are focused to that. What I think differentiates us is that we hire people from the industry. So they understand what the customer needs are, and they're able to talk their talk, so to speak. So that's definitely a really big differentiator for us. The best example I can give you of that would be our insurance vertical, started just simply using credit to help auto, property, casualty insurers underwrite risk. And what we found is that -- a long time ago, is that credit is very indicative as to how a consumer will perform as an insured driver. We've built that capability up pretty significantly over the years and brought additional products and services to that space. But what's really more exciting about it is then we've branched out of just the auto side of it, and we now have capabilities in life insurance as well as in commercial, just to give you an example. So I just want to use that one as one example. That's generally what we do with the vertical markets. From a region perspective, internationally, we have a very attractive portfolio of geographies that we operate in, heavily skewed more towards emerging markets, though. So we operate in markets like India, where we have a leading -- a significant leading market share. But in addition to that, nice positions in Latin America, Asia Pacific, in Africa and even the developed markets that we operate in, such as Canada and the U.K., continue to perform quite well for us even in this challenging backdrop. So that also -- the mix of the portfolio of international also helps us to really drive a higher growth. And then the last area is just on the product side of things. TransUnion has always been very good at credit, and we've continued to innovate over -- on credit. CreditVision, our trended product, is something that we've had a tremendous amount of success with that we've deployed globally. But what we've identified several years ago is next areas to go after are in marketing as well as in fraud. And we've recently built out those capabilities through M&A, most recently through Neustar. So those fraud marketing capabilities, they in essence cut across all the vertical and regions that we operate in.

So for instance, within like CreditView -- or I'm sorry...

CreditVision.

CreditVision and CreditVision Link, the alternative data version of the trended product, can you give us a sense of like is there further penetration opportunity? Is it still growing well? Is that still meaningful?

It's definitely still meaningful for us. We had a -- it's hard to believe it's been 10 years since we launched the product. And we had a lot of success in the U.S., in particular in mortgage as well as then that's how we built out our leading position with the fintechs in the U.S. We then took it globally, as I already referred to, and we were able to bring that to pretty much all the geographies that I covered. So I would say that in the U.S., we're probably more middle innings, where in the international areas, we're probably a little bit more early still. And it depends on the geography that we operate in, but we still see a significant amount of runway. And it's not just about -- CreditVision isn't just about bringing the data. It's not like we're dropping all this trended data on our customers. It's really about the analytics that we build that look at all that data. And that's where we try to differentiate ourselves through the analytics and helping our customers be able to understand the risk that they could be potentially underwriting.

Okay. I want to start with the structural growth but obviously, cyclical's on people's minds as well. I think your results and guidance reviewed as like good and better than feared after the bank stressing became -- or bank stresses started to get the headlines in mid-March. Just in terms of end-market behavior, was there a meaningful change? Or what was different kind of post mid-March versus prior to that?

Yes. So we came into 2023 and I would say that our customers continue to remain cautious in how they were operating, and predominantly in the U.S. in our credit card and consumer lending spaces. I mean if you think about where we were at in 2021 and 2022 as economies reopened, we saw a significant surge in volumes, right? So when the Federal Reserve began raising interest rates last year, it brought some uncertainty to our customers. And that uncertainty, it caused them to slow down on the account acquisition activity. So they slowed and they took a more cautious posture. I think as we're getting closer to the end of potentially the Fed rate increases and that there's more certainty. That certainty on where rates will be will provide our customers with certainty to know the type of environment they're going to operate in. But in the first quarter, it was still uncertain. Then on top -- and so there was cautiousness in those areas. And as a result of that, while we maintained our full year guide on our latest earnings call, we did take a very prudent approach and we lowered the expectations for consumer lending and for credit card. And then Silicon Valley Bank and Signature Bank had their -- the failures happened there in the middle of the quarter. Chris Cartwright, our CEO, characterized it as a wobble that we experienced. We saw maybe a little bit of a downturn in the middle of the month. But by the time we were exiting, we saw things start to stabilize from that. And neither of those banks were significant customers of TransUnion. So it really didn't have more of -- it didn't have a direct impact on us. But the way to think about it is it was more of an indirect impact because that caution that I was talking about with the credit card lenders and consumer lending really caused the customers to even kind of rethink. So that was why we just thought it was best to take those numbers down. We brought our mortgage number up, though, and we're seeing a stabilization in -- on the mortgage side of things. Refinancing activity, obviously, has dried up based on where interest rates are at, but we have seen purchase activity at a stable level.

Okay. And I'll keep going, but if anyone from the audience -- I should have mentioned this earlier, has a question, you can e-mail at [email protected]. So you referenced this. There was a slowdown in consumer credit, marketing and origination activity in like card and P loans starting at some point in like 2022. The mortgage market has gone through a hard reset. It's starting to stabilize. A lot of times people ask, well, "How will TransUnion perform in a recession?" And it's going to like, "Well, what's the recession going to look like and what's the sequencing?" In this current environment, I think it's particularly relevant. You've already cycled through a lot of end-market downturns. So characterize like where else have you already kind of gone through the downturn and things are stabilizing. What's still doing well? If we can just kind of get a sense of like where we've already gone through the cyclical reset.

Yes. No, for sure. So yes, we talked about mortgage, where -- mortgage is still expected in the U.S. to have volumes down 20% this year. So I mean it's still a meaningful downtick. Auto is another area that -- I would say that we had some negative impact last year, and it was primarily due to the supply chain issues in that there just weren't as many new cars that were out there. Now that those issues have subsided, we're seeing a good pickup in volumes and generating revenue there. Our insurance vertical, which I just alluded to in the previous question. Last year, they were faced -- our customers were faced with high repair and replacement costs because of inflation. And they were not able to pass on premium increases quick enough. So what they did is they pulled back on acquiring new customers. So that had an impact on us. But we anticipated that they would be able to get the premium increases in by the end of the year or early 2023, and that proved to be true. So what we're seeing in the insurance business is that the marketing activity is slowly starting to come back. The nice thing about TransUnion's Insurance business is a lot of it is based on shopping activity. And what I mean by that is as consumers are looking for insurance, the insurance carrier is going to look and check credit to understand the type of risk a consumer might have as an insured driver. That shopping activity is positive for us. And then -- so if premiums are going up, the shopping activity will pick up, and that will benefit TransUnion and then also the marketing activity will probably get better as well, too. Another area that we kind of went through the negativity would be our tenant screening business. In 2022, people stopped moving. Rents got very high, and it was difficult for people to get a more attractive rent. There also wasn't enough supply of rental units as well. But we knew and the industry knows that the supply was -- there was going to be several -- a lot of supply coming in 2023. And that's proven to be true. So what we've seen, where in the second half of last year, we saw this slowdown in move rates. As units have come online, we have seen people begin to move. Another area that we saw a pretty significant slowdown is in our Consumer Interactive business. Business grew quite strongly in 2020 and 2021. As consumers were hunkering down during the pandemic, they were very focused on managing their finances. And beginning in the second quarter of last year, we started to see those revenues decline from an elevated base. We also saw a pretty meaningful shift towards a freemium model as well, too, impacted the business. So we feel pretty good that we're getting the Consumer Interactive business back more to an equilibrium type of point. We operate in 2 channels: a direct channel, where we're selling directly to consumers; and then indirectly, where we're pretty much the -- we work with all the major credit offer aggregators and provide data to them, and we've seen those markets' recovery -- recover. So that's been pretty good as well. So those are kind of the negative things, right? On the positive, our international business continues to perform quite well. We saw a really good growth, double-digit growth, in the first quarter. That gave us the conviction to raise our full year expectations for the international business from high single digits to double digits for the full year. So countries like India continue to perform exceptionally well. I went through the list of the emerging geographies already in the previous question, but Asia Pacific, Africa, Latin America, all performing quite well for us. And the more developed markets are holding their own, as I already said. And the areas that we're watching is really what we were just talking about. We continue to closely watch what's going on in consumer lending as well as credit card. And then I would say, our media vertical as well, too, is we're watching just the levels of advertising activity.

And your guidance implies improving organic constant currency year-over-year trends later in the year, and it implies a step-up in margins. I think a lot of that is comps and sequencing of when the market downturns occurred. But just anything else you'd add to complete that answer as to why you're assuming that in what seems like a choppy macro?

Yes, for sure. Q1 of 2022 feels like a long time ago, but we grew 8% on an organic constant currency basis. And then in Q2 of '22, we grew 5%, then the growth rate went down to 1% in Q3, and then it was a negative 2% in Q4. So to your point about the comparable, that's definitely what we're looking at as we go forward. In many of the issues that I just spoke about that we're -- that we've been through the cycle, so to speak, when I talk about insurance and we talked about mortgage and tenants and all those things, we believe, have subsided. Auto is the other one. We believe that they're on a stable trajectory going forward.

You had an Investor Day in, I think, March of 2022, which you're two for two now on timing Investor Days and the pandemics and market downturns. But you gave us some pretty attractive targets, 8% to 10%, revenue compounding and then 2025 targets: $5 billion revenue; $2 billion-plus EBITDA; $6 EPS where your stock is trading today. Are those '25 targets still achievable in your mind? Like what needs to happen? And maybe just anything else on like why the 8% to 10% is a good target for revenue growth?

Yes. Sure, yes. So we did our second Investor Day as a public company in March of 2022, and we updated our long-term growth algorithm at that meeting. Little did we know a couple of weeks later that the Fed would begin the rate hikes literally just a couple of weeks later. So it changed the macro pretty significantly. And I just spoke about the uncertainty that, that brought to our customers throughout the second half of last year and even into this year. So it's definitely had an impact. With all that being said though, the organization is still focused on achieving those targets. The $5 billion in revenue, $2 billion in EBITDA and the $6 of adjusted diluted EPS. We go through an annual 3-year planning process every year in the fall. And we'll update that and take it to our Board in the fourth quarter, and we'll talk about where the targets are at. But because it's such an important almost like rallying cry for us, it just didn't make sense just a year later to take the revenue number down at this point. The reason for that is TransUnion has got a history of being able to snap back pretty quickly from downturns. And you just look no further than 2020 and 2021. I mean in 2020, we actually grew 2% in the portfolio effect. Going back to your first question, Jeff, right, it was a full display. We were able to still eke out some growth. Going into '21, things still felt a little tepid at the beginning of the year. And we grew double digits for the full year as economies reopened. So a level of certainty for our customers to know what type of market that they're going to operate in will have a pretty -- could have a pretty big impact. So that's another reason why we just thought it was way too early just to give our investors in the market a target and pull back on it so quickly because the business does have characteristics to be able to snap back quite quickly. So that's the revenue side. I mean we have an update, we'll give you the appropriate update at that time. But right now, we're holding firm to that. With all that being said on the revenue side, on the margin side, that is where we obviously feel like we have a lot more control. And there's things that we can do during this type of market that we can invest in TransUnion. But also be able to scale the business and make it more efficient and, in essence, take some costs out. So we look at what we can do on the margin perspective is something we entirely own. So being able to drive margin improvement is an imperative for us. And just some examples of that. I mean just good organic revenue growth has a really nice flow-through to the bottom line for our business. But don't lose sight of the fact that we have the Neustar cost synergies. We initially came out when we announced the acquisition and said we had line of sight to $70 million of cost synergies. On our February earnings call, we increased that number up to $80 million just because we had realized about $50 million of that already. And our teams have done a tremendous job in handling integrations. But one of the bigger things was the demise of the Neustar data centers and moving to a cloud infrastructure. And we saved tens of millions of dollars with that. So those benefits are in front of us, plus the Sontiq and Argus acquisitions, relatively smaller compared to Neustar, but those businesses right now are being burdened by onetime integration costs that by the time we get to the end of 2023, those costs are going to go away as well, too. And then it really comes down to just where we do our work. And TransUnion has built a global network in India, in cities like Chennai and Pune, but also in areas like Costa Rica and Johannesburg, South Africa, where we have what we refer to as our global capability centers. So think of these as people that are doing software development and managing our call center operations to doing accounts payable for us, just to give you kind of 3 examples. So that's a strategy that we're going to continue to pursue that we know. We're striving to make TransUnion an easier place to do business with through these initiatives, but also at the same time, there's a significant amount of cost and efficiency that we can gain by having a centralized and a standardized way of doing our work. So we're really excited actually about what we've got as far as capabilities are concerned. And we feel good about -- while we're not giving up on that revenue target, we feel that the recent M&A is going to position us well as we go forward, coupled with all these costs and things I just talked about.

And on the acquisitions, you talked Neustar margin. Talk about Neustar bookings and revenue trends. That was another area where there was like a little wobble in 2022, to use Chris' word. And then Q1 growth was slower. So just talk about bookings and help us understand like the growth objective for the year in the context of slower Q1 revenue growth.

Yes. So in 2022 and what we had modeled in our acquisition case for Neustar, it was predominantly in the risk business. And the risk business works with digital commerce players. And if you think in '21, our lives have, obviously, gone increasingly digital. Think back in '21 how much activity was going on in those channels, our team assumed that, that was the new normal. And what happened in '22, as people got back out and started to engage in more normal ways, we saw the digital activity start to slow down. So it was another one of those kind of bumps that we really hadn't had the experience in being able to see that happen in the market. So that was, I would say, probably the biggest challenge that we had with Neustar in '21, and we reset the expectations for the business. You come to the first quarter of 2023, we grew 3% in the first quarter but we were comping against an 8% or 9% growth rate in the first quarter. It was Neustar's strongest quarter the year before in '22. So what -- and we expected that. So if you looked at our internal plan, Neustar pretty much was right on target as far as what we had expected. So it really gets to your question then about the bookings, right, and the visibility that we see. And the team has built a good pipeline. We're seeing a good conversion of that pipeline. It's obviously, in my role, I like to see pipeline actually turn into revenue. So we're seeing that happen. And right now, it's good visibility, but we watch it cautiously, though as well.

Let's try to rapid fire through a few. So free cash flow conversion and leverage, I think, have been some overhangs on the stock. Just talk through the next couple of years on where you can get free cash flow up to, what drives it and the deleveraging target.

Yes. So from a free cash flow perspective, at our Investor Day, we committed to a free cash flow conversion of 90%, and that's the target. We're not there today. We never expected to be there today. That was the target at the end state. From a free cash flow perspective, you do have to keep in mind, from our non-GAAP adjustments, we are adjusting out a Project RISE, which is our tech transformation. So that has a drag on free cash flows. It's not in adjusted EBITDA, but it's definitely a use of cash as well as the Neustar integration. So like the RISE program, we committed to spend $240 million through 2024. Through the end of 2022, we spent about $110 million. So we still have about $130 million to go over on these 2 years. And then Neustar will be between -- around $60 million of integration costs. So those are obviously all drags on the free cash flow conversion. But those will subside and then that's what gives us the confidence. And then we get back to that more high single-digit growth in a more normal time. There's -- the nice thing about our business is there's a really good flow-through to the bottom line. From a leverage perspective, back in our February earnings call, we put a new target out for leverage, and that we're targeting to be 3x or below by the end of 2024. Our policy, since we've been a public company going back to 2015, is that we were targeting 3.5x. So we just thought based on the overall maturity of the business, the size, that it was the right time for us to target a lower leverage ratio. This year, we're expecting to be at around 3.5x by the end of 2023.

So I know you've talked about India before, but we didn't do it justice today. I think it might be the best multi-decade call option within any of the companies that we cover. So give us like a 1-minute pitch for how good the India business is or could be.

Yes. The India business is multifaceted, right? And if you think about starting just with the core of a credit bureau, the name CIBIL is synonymous kind of like with Xerox or Kleenex, right? People in India know CIBIL and they think, "Oh, that's my credit score." So it's got powerful brand recognition. So consumers are more and more aware of their credit. The attractive thing is just more of the demographics, the rising middle class. They're just people aspiring for a higher quality of life is really driving a significant amount of volumes. And then what we've done with the business is we've diversified it significantly in areas like commercial and direct-to-consumer, just a tremendous amount of growth opportunity going forward.

And it's been growing above 30% organically and it -- you don't report country margins, but it's a good margin business as well?

It's a really high-margin business. It's higher than our overall margin, I can tell you that much. So yes, really exciting market to be in for us for sure.

Unfortunately, that's all the time we have for questions in this room. Todd and Greg will be available for follow-up sessions in a breakout in Astor Suite B now. The next presenting company in this room is Fiserv. There's also Keysight, UniFirst, Krispy Kreme, Leggett & Platt and ON24. Thank you.

Thank you.