TransUnion (TRU) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thank you for being here. For those of you who don't know me, my name is Manav Patnaik. I'm Barclays' information services analyst. And we're pleased to kick off our day, at least today, with TransUnion. And we have Chris Cartwright, who's the CEO; and I think many of you know Aaron Hoffman, who heads up the IR function. So thank you, both, for being here. Appreciate it.

Our pleasure.

Chris, we obviously had Steve and Todd at our Credit Bureau Day last week, and I think we got a pretty candid view on the macro picture there, but maybe I'd just love to get your perspective. We've heard from a lot of different banks, CEOs, card issuers, et cetera, on their take on the consumer. You guys have a unique view into your customers and [ thus at ] the market. So just any broad thoughts on the macro picture type specific, I guess, to your business, the consumer and the bureau environment?

Yes, sure. Well, certainly a more challenging environment than we had, say, 18 months ago. Complete macro sea change for all reasons that we're all very familiar with. I'd say in recent quarters, the surprise has been the durability of consumers. While they have spent down the excess savings that they accumulated during the pandemic and delinquencies are rising, it's more of a normalization at this point to typical industry trends at this point in our credit cycle, which is on the downside, of course. But consumers have held up pretty well. And I think it's largely because of they're very highly employed and enjoying some real wage gains, still demonstrating the confidence to spend, which has all been positive. But of course, as we pointed out in the last few quarters, over time, the pressures of higher cost of goods and services and higher debt services costs and even the resumption of student loan payments for some, those are pressures that are squeezing household finances and contributing to a relatively sluggish environment on the loan origination side. And there's a variety of other factors that have just disrupted longer-term market trends. I look to at insurance where the cost of inflation has kind of turned underwater, if you will, the economics around policy origination. So insurers have been more cautious as they've waited for rate increases to percolate through the system and get squared away on policy profitability, where we hope they will resume the level of marketing that we had seen for many years previously. So it's not a terrible environment, but it's a slower environment and there are sustained pressures on consumer finance.

Got it. And more of a personal opinion, I suppose, but like the market seems to be bipolar one day, soft landing, one day recession. Do you feel like we've done enough to escape any major recession from the consumer standpoint?

Yes. Well, listen, I'm an armchair quarterback. And you guys in the financial services industry have access to better intel, I'd say. We do see the consumer holding up, as I just described. But I don't see a real catalyst for improvement at this point. I think there's a broad consensus that central banks are going to keep rates higher for longer. I think that will depress origination volumes to a degree. And again, the burden of debt service will weigh on consumers over time. Of course, the positive and the counterbalance is unemployment is low. There is some real wage gains. And kind of their leverage ratios, the debt-to-income ratios, for individual households is still quite positive by historical standards. So it's a mixed story, which is probably why one day it's shaded to the negative and the next day to the positive.

Got it. Okay. Fair enough. Maybe if we can shift to businesses, maybe we can start with Neustar. First, just for some context. I mean, your guidance this year for the second half calls for a good 10%-plus growth rate. And I think you've cited line of visibility, pipeline, subscription base. Can you -- just for reference, like this year versus the prior year where you kind of fell short of the expectations, like what is the difference in the visibility from your standpoint or maybe just the mix of business?

Yes. Well, I would say, for context, in the first year or so when you own a business, you're learning a lot about what you've actually acquired. For the most part, our assumptions about Neustar were confirmed and there were even some nice upside surprises. Of course, the macro environment was the downside, right? We certainly had different economic conditions when we acquired the business late in '21 and different expectations for the operating environment from a macro perspective going forward there. We have gained confidence in our ability to sell the products and to sell them through the TransUnion sales force, so the cross-sell is building nicely. And fortunately, for the past several years, Neustar has been setting new high watermarks, new record sales. And now we have some additional insight as to how quickly those sales convert into revenue. And so in the second quarter, we guided to revenue acceleration in the second half to get to high single digits for the full year. And we have confidence in doing that because of just the amount that we sold last year that was converting in the way that we had forecast strong retention rates in the business and also a consistent level of utilization of our products where there is a volume element. And so that's how we arrived at the forecast for the second quarter and then raising the full year to single digits -- high single digits.

Got it. And so maybe just as a reminder in terms of the mix of Neustar today, how much is potentially economically sensitive versus more just pipeline-related?

Sure. Well, Neustar has 3 lines of business. There's marketing, there's risk and there's communications. The essence of the business is they're either marketing effectiveness services or e-commerce risk mitigation, if you will. The marketing business, in combination with the $50 million or so that TransUnion had prior to the acquisition, is now several hundred million. It's a number we've shared about before. The communications business, which is really telephony intelligence, is probably $250 million, $275 million.

About $250 million, yes.

$250 million, around that. And then we have probably $180 million or something in risk. If you -- and the [ third ] split?

Probably about $150 million. Yes. You're in the ballpark, yes, yes, yes. It's about 40%-40%-20%, yes.

So we classify the revenue largely as either highly recurring transactional revenue or subscription revenue. And the portion of the revenue mix that's most cyclical, if you will, is within the suite of marketing services where we provide consumer insight and intelligence to create audiences for targeting. And that's roughly 20% of the $300 million in revenue roughly. And that is the area that has been most impacted by this subdued marketing environment, if you will. But we think we've estimated the trajectory right in our numbers for the year. And then I think the other wild card is just in marketing and in risk services, there is an issue of the amount of volume that's flowing through the existing revenue base, right? And that's something that can be a little bit trickier to estimate. But in terms of new sales and conversions, it continues to be very positive.

Got it. And so maybe if you take those 3 segments and talk about just the synergies that they have with TransUnion. I think on the communications side, if I understand it, that's more on the call center side of the equation. It's a monopoly basically, right? But is -- what's the competitive...

I would not say it's a monopoly. There are -- however, we have a nice market position, but there are several that are competitors.

Fair enough. I guess the question is just if you look at the 3 pieces, you talked about marketing, risk and communication, what is the synergy that TransUnion is bringing to the equation? I guess, the strategy behind the merger in the first place?

Yes, for sure. So as you know, I've managed information services and software businesses for a long time at this point. And they typically begin with some strength in a particular part of the client's workflow, and you develop a point solution with some defensibility and differentiation there. And then you expand across the entirety of the customer's workflow or the life cycle of that relationship with the customer. It's very much how the bureau business has evolved, where all of our data came to bear first to help clients understand the market and then to select the subsegments of the market that they would be willing to offer a loan to, right? And since then, we've been expanding -- well, both deepening our intel and our sophistication around risk assessment. But that only tells you who you would like to make a loan to. It doesn't really describe the full characteristics of that consumer and it doesn't help you actually go acquire the consumer. So the Neustar deal was designed to help us move forward and own -- and to help banks with a full ability to identify the consumers they want to do business with and then actually acquire those customers and then manage their risk over their life cycle, whether it's as an active and performing part of the loan portfolio or a loan that's gone into delinquency that's then gone into collection. So the one area that we were not as strong in was in this ability to go actually acquire customers and to model and measure the effectiveness of the spend to acquire those customers. And that's the single largest spend within lenders or within insurers, which are big parts of our customer base, right? So the idea was to really complete the range of services that we can offer to our core customers in the related markets of risk assessment, marketing effectiveness and then of course mitigating the risk on the e-commerce and physical transactions that result from that.

Got it. And so when you think about that workflow that you've extended into, who is the competition? And then what did the -- your customers, banks, et cetera, do before? Or who did you partner with this who were involved already?

Sure. it depends on the segment, right, because there's a series of different competitors. So one of our other bureau competitors has been providing similar services to Neustar, helping their clients engage with customer acquisition, generate target audiences, activation and the like. We think this acquisition really positions us very well. But the traditional competitors you would look to, I guess, on the customer intelligence side, it would be players like Epsilon, Acxiom, Merkle and a variety of smaller players. On the activation side, it would be more LiveRamp and other players like that. And then there's a whole series of players on the media planning and the marketing effectiveness side, but they tend to be smaller players. What we've done is we've unified this range of marketing services, and all of the data in the intel and the analytics are consolidated into a single platform now. Whereas currently, the state of play in the industry is marketing has been primarily fragmented from the credit risk assessment. I mean, there's some intersection, if you think of the intersecting balls in a Venn diagram, but we're dramatically increasing that and we're allowing customers to do all the analytics they need to figure out who they want to market to, to plan the campaign, to initiate it and then to measure its effectiveness not just from did they accept the marketing offer or their propensity, but also how did those new credit vintages perform or insurance vintages perform. So now they can do full cycle platform analysis on a hosted and configurable platform as opposed to the more fragmented and subscale economics of the current players whose stand-up kit and like -- everything is one-off, everything is custom and it's more like tech outsourcer margins as opposed to tech platform operator economics.

Got it. And how should we think about it from a vertical perspective, meaning is this an effort just for your core credit customers? Because it sounds like what you've been talking about could be useful for almost any vertical. So maybe what's the mix today? What do you anticipate?

Sure. Everybody needs to acquire customers and manage them over their life cycle. So it is a broad-based value proposition in the U.S., which is still about 75% of our revenue worldwide. Half of it is lenders, very concentrated in that portion on financial services, although substantially less than it was, say, 10 years ago. Insurance is a big part, but we also support e-commerce and telecommunications and retail and, et cetera, et cetera. I mean you've covered the stock for a long time. Our growth playbook has been to take that confidence -- well, one, take the unique and proprietary data and the ability to get insights and to spread it across different vertical markets in a very custom-tailored way. So having on one integrated platform this range of solutions is going to allow us to serve the full spectrum of verticals that we serve in the U.S. and also to take it globally to markets, where while the regulations around marketing consumer financial products may be a little bit different, the generalized marketing needs are very similar. And this platform capability can be leveraged into different geographies over time.

Got it. And so far, what we've talked about, I think, is more of the marketing media side of Neustar. You also have the communication, the call center stuff that people think of it. But I just want to give you an opportunity like, I guess, if you think about call center more from a fraud perspective, it makes more value than calling it a call center-type business. So maybe just to help the audience, like what exactly is in that piece? And there's a lot of growth coming from there, this year at least, so what's going on in there?

Yes. Well, thank you for that. That's a good part of the value proposition. When we talk about Neustar, we do tend to talk about customer acquisition in the range of integrated services. Before I get to the communications piece, there's also the risk portion of it, which is very similar to the core device-based risk mitigation that we have at TransUnion in that we really cemented our position in through the acquisition of iovation. So between Neustar and between iovation, we service like the full range of e-commerce identity and authentication use cases. And we've been able to pool our data so our device reputational data -- network is much broader than it used to be. That matters because as an enterprise, if you know who or what is on the other end of a transaction, you can tailor the transaction, you can optimize it. Whether that's the security treatment or the specific offer or the personalization of the offer, knowing who's there is pretty critical. We think of the phone part, the communications business, as part and parcel of that e-commerce value proposition because even though phone is kind of old technology, call centers are still generating tons of revenue with outbound calls and being able to identify yourself and cut through the swirl of robo calls helps enterprises contact their customers, support their relationships, improve retention. And the same is true in reverse, where there's an increasing amount of fraud overall. But also in the call center, we're able to say that call that you're getting that identifies itself as Chris or Aaron or whomever, that number -- we know that individual's actual number and we can confirm that it is engaged at this point. So it's all part of the same package of marketing to customers and minimizing the fraud that results from -- on transactions from those marketing efforts.

Got it. Steve Chaouki last week talked about how -- a lot of this was what you talked about, the call center packaging, cross-selling, the media and marketing stuff that you're working on. But then he also alluded to these are kind of the initial synergies, I suppose, if I phrase it that way. But there's a bunch of next-gen products that you're working on. And not to announce any of them today, but just a flavor of what is that next-gen, what does that synergy look like?

Sure. So when we acquired Neustar, the first order of business was to leverage their technology platform, which they called OneID. we've now rebranded as OneTru and extend it. And the power of that platform is that Neustar, like TransUnion and most companies, had grown through a variety of acquisitions, particularly as they pivoted from their old lines of business into identity-based marketing and fraud mitigation. And they unified all of the data and all of the identity graphs, which are used to organize the data, into a single platform. They also invested in ML and AI to accelerate the ingestion of data and the association of that data around the right consumers, if you will. That capability was frankly a next generation for us. And we have been integrating all of our relevant data, whether it's terrestrial data, our credit header, our marketing file or all of our device intelligence into a common repository that has substantially increased the scope of the repository but in a lot of critical use cases like fraud detection and the reduction of false positive is giving us order of magnitude performance improvements. So the first thing was get all the relevant data into the platform and interconnect it around the identity graphs. Then take that -- those identity graphs and all that data and plug it back in to all of the applications in our ecosystem that drive revenue today so they perform better. Moving down the spectrum of innovation, bureaus for some time now have been pursuing broad innovation in the data and analytics landscape, whether it's our Prama initiative or Ignite or Ascend or whatever FICO calls their platform, right? There's this opportunity to deliver our data and our analytics out into the customer universe so that they can engage, import their own data, build their own proprietary models. Neustar had similar capabilities to serve the analytics needs of the marketing community. The data volumes in marketing are considerable, like 5x as much as credit, if you will. And they do very similar modeling capabilities. So we have been able to take their platform for data and clean room type of analysis and merge it with Prama and its unique kind of credit-oriented capabilities to create a broader and stronger solution that brings all of our data, all of our matching, all of our modeling and our rapid deployment capabilities together in a single platform. And that platform will rest on top of all of our marketing intelligence, consumer audience intelligence, credit information, public records, fraud histories, et cetera, et cetera. So the breadth of integration on that foundation of data, right, and all those analytic capabilities is a big step forward for us.

Got it. Okay. Maybe we can move on, one of the questions that we keep getting is more around the employment verification side because of your partnership with Truework. So maybe just, first, just so we're all clear, like the agreement with Truework, like how expansive -- what does it entail, I guess, is the first question?

Well, we have made a strong minority investment in Truework, and we have entered into an exclusive partnership to integrate their solution in into ours and our credit delivery and to distribute their product exclusively. And that's been underway for a couple of quarters now. What we like about Truework -- well, first of all, verified employment and income is a large, fast-growing important market. It has Equifax as a leading and dominant player in the market and their success has also bred a desire for competition. And we and others are pursuing avenues to enter the market and service different use cases. Truework has developed a capability, kind of an umbrella capability, for getting employment history and current income information through various means depending on what's available and what the consumer is -- will allow, right? So -- and it's a seamless interface into software that orchestrates the fulfillment of this data, whether the consumer wants to grant credentials to a checking account or their foundation of data that they've gathered from employers and payroll providers has that information or even supports a manual workflow when that's all that's available. So again, it's a seamless interface to an approach to fulfilling income and employment that gives you broad coverage as, of course, they continue to work to expand the number of records they've got in their repository for real-time access.

Got it. And I guess you guys had started this organically several years ago.

Right.

And so was this more that you saw the technology and that was the key to the partnership? Or what was it that you couldn't do on your own versus partnering with them?

Yes. I mean, I think -- well, look, the pace of innovation in our industry is pretty rapid, right? And as you know, we've been executing a pretty ambitious agenda to take our business to the next level. We admired their focus, their technology sophistication, the penetration they've gotten in the market. And of course, what they lacked was our breadth of distribution, our embedded customer base, all of our MSAs and digital integrations, if you like. And so we think we can help them scale revenue rapidly. And of course, we'll benefit, if that's successful, from shared economics. Our equity benefit will be there, too. And then as we develop the relationship, we'll decide how far to pursue that going forward.

Got it. And last question on this one. But -- so the distribution side seems pretty clear, like you can help them with that. How do you think about the ability to catch up to the data records that you talked about compared to Equifax, especially when they claim almost all of what they have is exclusive?

Yes. Well, look, it is certainly a high bar to meet, right? But I think increasingly, you find payroll providers that want to tap into the economics of the full market. One of the leading payroll providers is a good example, right? They've got exclusivity with Equifax across a range of use cases, but then they're also open for business for a variety of other approved players at different economics. And I think that's the type of dynamic you're going to see in the industry as the payroll providers want to maximize the revenue that they can get. But of course, I think increasingly, we'll have the wherewithal to compete for those exclusive relationships. And the more successful the Truework partnership is, the easier that will become.

Got it. If we move on to Consumer Interactive, that was one of the areas where obviously there was a little challenging period. And then I think there was -- initially, there was talk of you launching your own freemium/premium offering. Basically, the update there. I think Steve alluded to it last week a little bit, but we didn't have time to fully explore it. So what is the strategy in Consumer Interactive today?

Well, let's talk about the kind of current performance and expectations, right? So there are 3 parts to our consumer business, which is in and around $600 million. There's the direct-to-consumer credit-oriented subscription business, which is the one that has been distressed at this point. And the reason for that is because we have, well, one competition from freemium offerings and the adjustment of marketing practices and we have been working our way to a normalization where the new customers that we're bringing in offset whatever it is that's [ riding ] from the bottom of the funnel, if you will. I feel like we're making good progress there. And I feel like with the pullback of a lot of the freemium players in the market because of reduced advertising and financial services, our ability to acquire customers has improved and we've been increasing our spend there. So we remain on that trajectory to get to low single digits shrink to hopefully breakeven in that segment of the business in the near future. The largest piece of the business is our indirect, if you will, where we are providing data and scores to a variety of freemium and other types of players that want to engage an audience around that. We had a lot of contract restructurings and work there. That caused us to go slightly negative last year. We're back to growth this year, which is great. And then the last piece of the pie is identity protection, where we acquired a business called Sontiq. And that business has performed well. One, it was an important product for us to add in order to convert more of the consumer traffic that we're bringing in. And also, we -- increasingly, employers and payroll providers are offering identity protection services as a benefit on a subscription basis. So most of that revenue is subscription and it's continuing to grow in the low double digits, which has been great. But right now, we're participating in the freemium market as an intermediary by supporting others. But we continue to explore a variety of opportunities to directly participate.

Got it. Just to shift gears a little bit to just broader technology question. You guys had delayed your most recent investment phase, but that was to integrate Neustar. And I think you said they had...

Are you talking about Project Rise?

Yes, correct. And so just maybe just the latest update on where are you guys in that and how you see -- it's a classic -- you have to always upgrade technology. But where do you think we are in terms of what's available out there?

Yes. So good question. So probably 2.5 years ago, we announced Project Rise with an initial spend range. And then with the acquisition of Neustar plus Argus plus Sontiq and the divestment of health care, all of which had technology impacts, we added a year to our cloud migration, if you will, cloud migration and partial standardization of the application portfolio. So we added a year to it and we increased, I think, up to $245 million, $240 million or something as the upper limit of the spend. We continue to execute on that program. This year is a big year. We've targeted 100 applications going to the cloud, and we're on pace for that. What we -- the way we framed our tech evolution was always it was part migration to the cloud to benefit from cloud economics [ and ] security where appropriate for the applications. But we believe that in the longer term, there was more juice in the squeeze of consolidating disparate and redundant applications across our universe and really streamlining. One, there's a cost play and it increases your security posture but it allows faster innovation in an environment that really calls for it, right? With the acquisition of Neustar and their next-gen OneID technology, we have been both migrating but also starting to chart a course toward more rapid consolidation of our data worldwide on that platform. So we've done a variety of proof of concepts of credit data performing on the OneID platform. It works. It works well. It works whether it's the Google platform or the Amazon platform, we can do on both. And we're now starting to consolidate. And so I think that provides us with an opportunity to save some dollars in the coming years leveraging OneID.

Got it. One of the questions we often get is if anybody has the edge when it comes to technology. Or is it fair?

Yes. Well, I think the data and what you do with it is probably more important than how you deliver it. The how you deliver it, the technology side can help you do more with the data and the analytics faster and more cost effectively. And speed can translate into more products, and of course, costs can translate into better margin for doing it. Those are the main drivers. But for the most part, a client -- you can tell them you've got a state-of-the-art cloud infrastructure, but they really just care about how value-added your solution is, is it secure and is it highly reliable. And that could be delivered from the mainframe. In fact, some of our competitors are still delivering important applications through the mainframe. That's not a good or bad thing. It's just an is-thing, right? So it's really the data and the analytics more than I'm in this cloud or that cloud.

So I think the answer...

And the cloud is actually less critical than the configurability and the consolidation on individual applications. I mean, our course has been charted for every one of our core businesses, whether it's core credit or consumer or fraud or marketing, is to build single configurable applications that can be delivered across our 30 different markets around the world. That's where the efficiencies really come in.

Okay. Makes sense. So the answer might be somewhat similar, but it's a good segue into just the gen AI topic. Is that something that could end up differentiating you versus your competitors broadly if you or they do it better first or second or...

Look, there's always the opportunity to differentiate, I guess, if you apply a tool or technique better. Each of the bureaus and TransUnion, in particular, has been using machine learning of varying degrees of sophistication in both the models that we build for our clients but also our applications. So all of this data that flows in to our data and analytics repository, now OneTru, there is a lot of advanced machine learning and even some predictive AI that evaluates the data, ingest it and then associates it around the right individuals, right? So that's constantly being calculated and constantly improving based on the constant feedback that we're getting from offering fraud solutions into the market and the exhaust from that flows back in. The same thing with our marketing active -- audience activation and targeting and the success rate there as well as all the feedback that comes in from the hundreds of direct integrations we have with publishers and platforms and cloud providers across the marketing ecosystem. So that's already like a dynamic data ingestion engine that's driven by ML and advanced analytic techniques that's at the center of what we do, right? There's a variety of business applications for AI. We've got thousands of people that work on consumer dispute resolution. We have hundreds and hundreds of people that work on customer service and all of that. They can be made more effective with advanced models on our proprietary data, if you will. But one area that I think is kind of open for question is generative AI applied to data sets where there's a high degree of regulatory precision required and explainability to consumers. When a consumer is turned down for credit or a job or an apartment because of the data that we provide, they're entitled to know why, right? If the model is generating things from its own intel, from its own processes that we can't link back to the data, that's going to be a challenge, right? So we've got to figure that part out. But again, I think we've been on this continuum of increasing sophistication with these analytic techniques, but now there's been a step function change. And with regard to how we apply it on direct credit-based, FCRA-regulated use cases, there's some learning to be done.

Got it. Fair enough. Maybe we'll just end with the broad capital allocation question. I know this year you said no more M&A, focus on delevering. And that makes sense. But looking forward, should it be more of the same where we've had these 2 spurts of periods where you've just done a lot of M&A and then you've kind of settled down? Is M&A still the priority in terms of building out the workflow vision that you tried to articulate before?

Yes. Listen, honestly, organic growth is the priority. We're not trying to build -- we're building an integrated operating company that has a global scale that serves the full range of client needs. We don't want to become some type of diversified information conglomerate. I've been part of those organizations before, they're fine. It's not what we want to do. We want to have related services across complementary markets that can cut across the globe and the 30 positions that we've got. And so that's really where our energy is invested right now. We are in a period of digestion. Obviously, '21 and early '22 was a big leap forward. There was a lot of opportunities. It was a rich transactional environment, if you will. And in those deals, we've got like a generation of growth to process, right? And so we want to get the integration right. We're paying down our debt. We expect to continue to do so over the second half of this year and be at hopefully 3.5x by the end of the year and then take it to 3 next year. Now within that, we'll have the capacity to do deals that we think fit within the strategy, fit within the product suite and will complement organic growth. So those would be the guideposts going forward.

Got it. All right. I think we're just about out of time, so we'll leave it there. But thank you, Aaron and Chris, for being here. Appreciate it. Thank you, guys.

Thank you, Manav. Pleasure.