TransUnion (TRU) Earnings Call Transcript & Summary

All right. Great. We'll get started. Thank you to everyone for attending, and good morning to everybody. My name is Andrew Nicholas. I'm the research analyst covering the information services sector here at William Blair. Before getting started, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome to the stage TransUnion CEO, Chris Cartwright, here to the 43rd Annual William Blair Growth Stock Conference. Thanks for joining us here today, Chris, and I'll turn it over to you to kick us off with the presentation.

All right. Thank you, Andrew, and good morning, everybody. Good to see so many of you. And I saw the Equifax guys were here ahead of us, so that's a lot of credit reporting in one morning. So -- but I wanted to take a minute to provide an overview of TransUnion and our growth drivers. And then we may have time for some Q&A at the end. But just starting off with the highest levels, TransUnion is a global information and insights company. Our heritage is as a credit reporting agency. We operate in 30 markets around the world. In 24 of them, we are a recognized credit reporting agency. The revenue breakdown is roughly 75% of our revenues flow out of the U.S., a combination of B2B and direct-to-consumer revenues, and then 25% comes from the rest of world. While credit reporting is still at the core of the business and still anchors the business in all of our different markets, we've diversified considerably over the past 10 years into different types of information. In the U.S., we're one of the largest providers of information to the auto insurance and property insurance segment -- sector, rather. We're also one of the largest providers of public records based investigative solutions. We have auto data assets around the world. And so we really broadened out from this core capability of ingesting and analyzing and gaining insights from large sets of information. The U.S. has grown particularly well over the past decade, but we've grown even faster internationally, where our footprint is overweighted to emerging markets, large populations, rising middle classes increasing utilization of credit. I would point to markets like India, South Africa and different countries within Africa, the Philippines, Hong Kong. And of course, we've got a variety of positions in Latin America. Colombia and Brazil are particularly growthful. The growth playbook that we've employed really from the great financial crisis forward to both grow the business in a strategically coherent kind of way, but also to create diversification is kind of as follows. I mean, one, we've pushed geographically out into a variety of markets, and we have extended the number of vertical markets that we serve. If you looked at our business, say, in 2010, we probably were 90% weighted toward U.S. credit, and it was credit for U.S. financial services, and it was credit evaluation for a risk assessment, for loan making, but also for marketing, for identifying what was going on in the credit market more broadly and also what markets, in particular, which segments, did you wish to address. From that, we've taken the credit insight -- credit assets and the insights, and we've extended it across a variety of verticals. We compete in 14 different vertical markets within the U.S., and we've also broadened the range of our product solutions. Again, the origin of the business is around credit. It's still our largest product line, but we've also extended our capabilities into an array of digital marketing and data services, into online fraud mitigation, into direct-to-consumer solutions, into advanced analytic platforms like clean rooms for data collaboration and analysis and a whole variety of solutions. So the point is we've grown from probably $900 million at the beginning of the great financial crisis, $1.5 billion when we IPO-ed into 2015, to approaching $4 billion this year. And a lot of it has been steady organic growth, but we've also consistently acquired relevant capabilities and market positions along the way. Yes. So our M&A history, we have been a serial acquirer. It's always been within the context of a strategy for how we wanted to compete in the market and serve particular groups of customers. We've got a pretty successful track record. And in the past 5 years, I think we've been even more aggressive in acquiring assets that have strengthen the business and broaden the ways in which we could compete in the market. In 2018, I would point to the Callcredit acquisition. That is how we entered the U.K. market. We're the #2 player, arguably 2, 3 player in the U.K. market as a result of that acquisition. It's done well for us, despite the difficulties in the U.K. currently. We also bought a business called iovation. iovation was one of the leading fraud mitigation companies that hosted a worldwide device-based reputational network. So their solution allows clients to understand whether devices are legitimate and whether they have a reputation or history of fraud in a variety of dimensions. It was also our first move to begin developing a core data asset around digital identities and the ability to resolve those in real time. Between 2018 and '21, we began acquiring players in the digital marketing services space that provided additional consumer information and additional insights for more advanced segmentation and marketing planning. We bought TruSignal, TruOptik and Signal, and these 3 companies gave us the confidence to -- in '21, toward the end of the year, acquire Neustar. Neustar was one of the leading digital marketing, online fraud mitigation and communication solutions providers. And we are currently in the process of consolidating the iovation and those several marketing solutions into the Neustar platform and foundation and creating integrated product platforms and marketing and fraud. I'll talk more about that later. We also bought an online identity protection business to add to our consumer services. And then we bought a division of assets from Verisk, the Financial Services division, really, with the intent of only keeping Argus. And for those of you who are deep in the space, Argus has a unique and proprietary data set. They're the only provider that sees all of the credit cards in existence in the U.S., not all, but a very, very large preponderant market share of them and the underlying transactions associated with the card. So it's a helpful benchmarking and market insight tool for the various players to understand their share, the effectiveness of their campaigns and just the general consumer dynamics around card utilization. Now on to Neustar. Again, we closed on the Neustar transaction in December of '21. We felt it was highly resonant in reinforcing of our strategy to become a leader in digital identities and digital identity resolution to allow one-to-one marketing, more tailored marketing, if you will, online fraud mitigation and to also bring similar capabilities around call authentication, right? We viewed that -- the combination of knowing who or what is on the other end of a computer in an online transaction or being able to authenticate a phone call as 2 foundational pillars of e-commerce. And our goal is to become a market leader in this area. Last year, Neustar grew 6% organic, exited the year with an 8% growth rate organic in the fourth quarter. We grew on plan in the first quarter of this year, which was 3%, comping against 9% in the prior first quarter, and we're positioned to accelerate organic growth in the remaining quarters of the year based on the strong bookings from last year in their conversion to revenue. The growth across the 3 components of Neustar is fairly evenly balanced at the moment between marketing, risk mitigation and communication solutions. And because we integrated our sales forces very early on in the deal, we're, in this year, beginning to accelerate the cross-selling of Neustar solutions and TransUnion solutions into each other's unique customers. And so we can see momentum building there. The Neustar portfolio has been surprisingly resilient or encouragingly resilient. We weren't so surprised. Some of you may have been surprised. Last year, Neustar was the fastest-growing asset within TransUnion's portfolio in the U.S. And I think it's positioned to do so again this year. And again, the economic circumstances are very different right now than they were in mid- to late '21 when we were consummating this deal. And so we feel like the deal is not only bringing us incremental growth, strategically complementary capabilities, but some really useful diversification to the portfolio. And the underlying revenues are quite resilient. The vast majority of Neustar's revenues are either subscription or highly recurring transactional, much like TransUnion's core business, and it's only about 20% of the marketing business, which is roughly 40% of Neustar in total that can be called truly cyclical. Now we're often asked how is the integration going, and to talk about some of the synergies that we gain by acquiring the businesses and their underlying data, product and technology capabilities. So let me run you through like the 6 dimensions that we've been executing on since we closed the acquisition. The first was really related to achieving the cost synergies. Initially, we said $70 million or more in cost synergies. After about a year of executing, we raised that target to $80 million plus. And consolidating Neustar's underlying technology infrastructure was one of the key elements of that. They used to operate their platforms out of 9 different data centers around the country. We migrated them all to the Google Cloud. We've since demised all those data centers, all the kits, all the related people and are now operating fully in the GCP in a much more secure and highly performant way. That series of activities alone has saved us about $20 million. Also part of the deal premise was Neustar had an excellent and unified data management platform in a consolidated identity graph that underpinned all of their marketing and fraud applications, and TransUnion has got amazing data. And the combination has proven to provide a lot of performance lift to clients. We've been able to identify and resolve identity roughly 15% more consumers in the U.S. We've got more terrestrial information, e-mails, phone numbers, IP addresses and a whole range of digital device characteristics associated with these individuals that can help both target them for marketing or service transactions and ensure safe transactions when they do engage. We've been taking all of this TransUnion data, ingesting it into this underlying unified platform, which we call OneTru now, and appending it to the consumers' identity graphs. We're then taking those identity graphs and using it to not only power Neustar solutions, heritage Neustar, but every noncredit, so non-FCRA solution, across TransUnion. So we're evolving to a point where -- and we'll start with the U.S. where all non-FCRA data that we have for all of the various use cases and markets in which we compete will be in this single repository, arrayed in several dimensions of identity graphs and will be used to drive all of our products. And that right away produces more revenue because the success rate of finding customers and then being able to say, "Hey, it's a legitimate transaction," or, "Yes, it is the right person. Go ahead and make them this offer," is going to increase. And we've already seen that, and that's part of what's driving our revenue momentum. Product consolidation, as you saw from the graph about our M&A journey in recent years, we had bought several small digital marketing companies that provided us with a lot more consumer information. So beyond credit, we got demographic, psychographic, behavioral consumer insights that our clients can use to further segment their customer base and then generate audiences that reflect the segments that they want to market to, and then we can activate those for them. We've got multiple platforms. There were 2 at TransUnion. There was 1 at Neustar, and there turned out to be 1 at Verisk that was fueled largely by Verisk's unique credit card data insights. And over the course of this year, we're consolidating them into a single next-gen TruAudience platform, the first version of which has already been released. But much of that work will be complete by the end of this year. And then finally, I've talked about OneTru. It's a modern state-of-the-art data management platform that is a step function improvement over certainly what TransUnion had, and I believe what the industry operates with, and that is replacing our internal analytic data lake. So we're in the process of moving all of our data worldwide into this OneTru platform for all of our internal analysts to use. So we not only have the data being ingested into that platform and all of the governance around regulatory limitations, privacy limitations, contractual, et cetera, managed in the platform, but all of the advanced analytics that our data science use to build products for clients are all happening in the single platform. And by the end of the year, we'll have completed a client access interface to all the data in all of the analytics. Now to manage expectations, it's going to be very U.S. focused to begin with, right, but by -- but eventually, it will become a horizontal data management and analytic layer that underpins all of our information products around the world. Now building on top of this data platform, we've got different market-specific solutions, right? So we have a range of marketing solutions, again, fueled by the several deals that we made and then really solidified with the acquisition of Neustar, the first of which is TruAudience. So we have taken all of that consumer information and characteristics, combined with the power of our identity graphs, and integrated it into a common platform. So now our clients can come to TU for credit market insights and to identify those segments of the credit market that they would be willing to make a loan to, willing to originate an insurance policy with, right? But those typically are -- there are too many people. They need to differentiate further. So they can provide, from the 200 data sources that we have on consumers, additional richness, additional lenses to segment down to exactly who they want to market to. They can then activate those audiences, and then we have campaign planning and marketing effectiveness, marketing measurement tools. So we're bringing that all together in a package with the strategic intent of consolidating 2 parts of the information market that historically have been separate for reasons that are no longer necessary. So that underpins the thinking of the deal. It's one of our value premises. On the fraud side, because we're good at resolving identity and knowing who or what's on the other end of an online transaction, we're building the next-generation platform that consolidates all of our capabilities in this area, on this OneTru foundation. So all the consumers, all that we know about them, all of their digital device signals associated into families, connected to consumers are available for fraud modeling in one platform. We are going to beta launch this in the fourth quarter of this year. And by the end of the first quarter, we expect to be rolling it out with clients. And in the middle, communications, communications has been a really nice surprise for us in the acquisition. Neustar innovated, based on their foundation of telephony intelligence from both landlines and mobile, and they recognize that the problem in the market was spam and robo-calling and false texts, and all of these things that are based on phone numbers. And they've developed a suite of what they call Trusted Call solutions, trusted because in a call center, they can authenticate inbound phone calls and make sure that it's actually the consumer's number, and it's not a fraudster spoofing the number, trying to gain intelligence to later hack the account. And for marketers, they can brand the outbound call to cut through the noise of robo-calls, which we're all kind of deluged with all day. So as part of the integration of the deal, we're building next-generation platforms in these several areas. Marketing is pretty much done, although the innovation is never done, with the intention of bringing together all of our solutions in a way that we can then roll them out into different relevant markets around the world. And look, that's really what I wanted to share with you this morning. I'd be happy to answer any questions from you guys. Or perhaps, Andrew, you want to...

Sure, yes. And I hope that was helpful for those that are less familiar with TransUnion and the Neustar acquisition. I want to spend some time on maybe some of the high-level kind of most topical items for TransUnion right now. I think front of mind for most everyone is the health of the consumer -- or the U.S. consumer most specifically, so maybe we can start there. What -- you guys have a ton of data, a ton of insight into kind of economic happenings, and it's been a hectic past couple of months, at a minimum. Can you speak a little bit about kind of what you're seeing out there in terms of the market and the health of the consumer?

Yes. If you look -- or if you pay attention to the mass media, you've heard a consistent narrative of deteriorating consumer finances over the last 6 quarters, and there is truth to that. I think, though, the more meaningful insight is the starting point in this journey 6 quarters ago was a consumer that was artificially strong because of the amount of physical stimulus, the amount of loan forbearance and also just the difficulty during the COVID era, particularly in the earlier chapters, to spend money. And so households delevered substantially. And a large swath of lower income consumers actually had higher incomes based on the government stimulus than they did in their jobs previously. So it was an unrealistically positive starting point. It only took a quarter or 2 before the consumption that was unleashed after that led to inflation and led to higher interest rates. And those 2 forces have been squeezing consumer finances from then until now. That said, if you look at the consumer from a historical context from different credit market cycles, the consumer is in pretty darn good shape primarily because the consumer remains highly employed. We still have 3.5% unemployment in the U.S. Some decent job creation. And despite inflation, a lot of consumers are still eking out real wage gains. And we know that if the consumer stays employed, for the most part, they stay current on their debt obligations. And if you look at more specific credit market metrics, while it's true that mortgage balances and personal loans, et cetera, are at all-time highs, again, that's kind of a media negative narrative, consumer population and GDP is also at all-time highs. So you would expect that. But the percentage of delinquency is very manageable, pretty much at or slightly above the pre-pandemic rates. And then on top of that, the consumer's debt to disposable income ratio is very low relative to historic standards, not an all-time low, but still at the low end of the spectrum. So if inflation and rates persist, and so consumers are taking their fixed incomes and having to buy stuff that's more expensive and their debt is still more expensive, I think they're going to be okay for a while. Eventually, they'll crack, right? Or logic would lead you to believe that. But right now, they're pretty healthy. And even though the activity that we see from our Financial Services segments in the U.S., and we break it down into consumer lending, card, auto and mortgage, while that originations have diminished, they're still at very high levels, right, so very satisfactorily high levels. That's my perspective.

And that's a perfect segue into kind of the other dynamic I wanted to talk about. You talked about mortgage -- or you outlined mortgage, personal loans, cars, all the pieces of the U.S. business. There's a little bit of a unique dynamic going on in that all the things that you just said are true in terms of the strength of the U.S. consumer, but there are maybe idiosyncratic or end market-specific dynamics to maybe talk about on the auto side, on the insurance side within emerging markets. Can you talk a little bit about some of the things that were a bit choppier maybe over the past couple of quarters that you think will continue to improve based on kind of national...

Well, personal lending has had a step back over the past 12 months, but it's from really, really high levels. I mean, I think at the end of the first quarter of '22, the consumer lending part of our portfolio had grown 30% organic, and that was on top of 20% growth the prior year. So that had really taken off. So it's not surprising that some air has been let out of that balloon. Card originations have been far steadier. They're still at high levels. In balances, utilization is increasing. Auto is fairly steady. The problem there has been the demand for automobiles has exceeded the supply for some time now. And so we can continue to see growth there. And look, mortgage has had a tremendous reset. At this elevated level of interest rates, there's almost no refinance activity. And because of the elevated borrowing cost, affordability has dropped. Now home prices are dropping in a lot of different markets, as we can see, but we're going to need the asset prices to fall further until we see material transactional activity increased. But look, one of the idiosyncratic things is that their -- prices on scores in the mortgage segment have increased dramatically. And so we're able to pass those through on behalf of a third-party scoring company. And despite a decline in the volume of mortgage activity, we're seeing growth in that revenue, but it's exclusively price-based growth. I shouldn't say exclusively because we are also selling fraud and marketing solutions to mortgage providers now. They didn't have to market them before. Now they do have to market them, so they need these services. So those are kind of what I'd say are the idiosyncratic dynamics across our financial segments. Insurance has also -- the growth rate has declined in the past several quarters from its typical high-single digits level. And again, that's a result of inflation. The cost of repairing and replacing insured assets has gone up quite a bit. And so a lot of the policies out there are underwater, and carriers have been reluctant to issue new policies until they raise their pricing. And as you know, that's an exercise of going around to insurance commissions around the various states and negotiating a price increase, if you will. The carriers have had success in doing that. They've gotten some of what they think they need, but not all, right? So it may take a couple of bites of the apple, so to speak, until the pricing is right for them to return full force to marketing. So our growth rate in insurance declined because of the decline in marketing activity. What's compensating a bit for it now is consumers are getting sticker shock upon renewal for all the dynamics that we -- I just described, so they're shopping for. And as they go from carrier to carrier or aggregator site -- the aggregator site, that's more credit pools for us, and it's provided some compensation. So that's where we've gone from like a flat quarter on insurance growth to maybe mid-single digits and hopefully, over the next few quarters, returning to its previous levels of growth. The other thing I would mention about insurance is we continue to sell very effectively. We've got a great product suite. We've won some material share that's going to come online in the second half of this year. And we also have a solution that we've talked about previously called DriverRisk. That is an offset, a substitute for state motor vehicle records. And motor vehicle records, I mean, essentially, our driving histories are important to carriers when they're considering whether to insure us or not. As states have been under revenue pressure for a long time, the prices of those reports have been going up a lot. We have a substitute product where we certainly can provide access to the states, and we do. But we also have a database where we've gone to all the locales, where traffic violation information exists, some municipalities and various courthouses, and we've pulled that together nationwide. And it's not only more current, it's also more complete because it includes all the violations prior to the court dates or adjudication, right? So if you've got a speeding ticket, but you got it expunged from the record because of defensing driving, of course, you can still use that as a carrier to determine price. But you don't see that if you just rely on the state report. So it's had some advantage, and it's been a huge growth area for us the past 5 years.

All right. Great. Thank you very much for your time. Thanks to everyone in the room for attending. We will have a breakout session in Richardson. So for those interested in continuing with the conversation, we look forward to seeing you there. Thank you.

Thank you, sir.