TransUnion (TRU) Earnings Call Transcript & Summary

Welcome, everyone. I'm Andrew Steinerman, your business information services analyst, and this is the 14th Annual Ultimate Services Investor Conference. I'm also going to -- if you don't mind, I'm actually going to even put something on your calendar, just so that you're ready for a year from now, our conference next year, Ultimate Services '24, our 15th Annual Conference will be November 14, Thursday. And also make sure you grab one of these information services data book. Our Stephanie Yee is in the audience. She's the Vice President of my team. Stephanie and I worked over the weekend for these things, so grab one there. You could get it in the digital conference book as well. So this is the info services track. This is the TransUnion management team. I will be rotating with Stephanie between B&A, between business services and info services. We're so thrilled to have Chris Cartwright, CEO of TransUnion with us; Aaron Hoffman, Greg Bardi of IR. Obviously, this is a great time and important time to be engaged with the TransUnion management team. These are all fireside chats. So you could see that I prepared a list of questions. You can watch the clock too. We have 30 minutes together or only 28 and 20 seconds now. I'm going to ask questions, but just if you want to ask your question, just raise your hand, and I will point to you and you could engage in this conversation. Okay. Welcome, Chris. Thanks for being here.

Always a pleasure.

So I just want to talk about the stock. I hope you don't mind. It's just abruptly under $60. The stock hit $60 years ago, and here we are. You must be thinking that something is not being understood by the marketplace. So I just wanted to kind of open it up to you of what do you think the market is missing when you see today's TransUnion's stock?

Well, it's a good question, and we're here to talk about the business and talk about the stock. So I thank you for it. Well, first of all, we're fortunate that we've got a group of core long-term shareholders that understands our transformation and how we're building value. I think perhaps, in the near term, the growth momentum, the revenue growth momentum in the portfolio is being underappreciated in the market. And really for a few reasons. Now we came in a little short of our guide for the third quarter. And we were purposefully very conservative in how we guided for the fourth quarter. The idea was to fully derisk that estimate, but also create a reasonable opportunity for overperformance. I think that's been interpreted in different ways. Some in the market have extrapolated perhaps from that and have assumed perhaps a worsening revenue situation. As we look at the momentum in the portfolio, we believe that we can continue to grow and grow at a good rate. We've got various positions in the portfolio like the international business that continue to compound in the low double digits, and that's a little over 20% of the business. Additionally, in the U.S. markets, the B2B section, which is about $2.5 billion, well, half of that, the emerging verticals are growing in the mid-single digits, and we expect that to continue. Now in the third quarter, there was some volatility in part of financial services. And as a result, U.S. Financial Services was flat. But we don't expect it to remain that. We feel that if you look across the several lines within financial services, a couple are down because of known pressures in the market on subprime lending and card origination. We think that from those floors, there is upside opportunity, but we also expect continued growth in auto, continued growth in mortgages, largely through hitting a volume floor, if you will, and some strong pricing actions. So the first thing I would say is we have growthful positions with momentum across the portfolio. We've also been supported by growth from various vertical markets. On top of that, we will realize the revenue benefits of another year of strong sales next year, and we expect further sales momentum in revenue conversion in the course of the year. And then there are a host of the typical pricing actions, both our own and third parties, which provide further revenue momentum in the portfolio. So I think perhaps that's the first area of market disconnect. The second would be, naturally when there are concerns about revenue growth rates, there are knock-on concerns about profitability of the business, right? And as we have described, we have been -- since the second quarter of '22 when the slowdown really started to happen, we have been managing our cost growth downward. And most recently, we took some actions early in the fourth quarter even before we released earnings. And you would expect, and we will continue to do that type of belt-tightening in response to market volumes. The more important actions that we've been planning for a long time are structural, and we announced those yesterday. And it's a combination of workforce productivity by further leveraging our GCCs, which we've been investing in for...

Say what GCC is.

Global Capability Center. And again, those of you who have been following the stock and the story since the middle of 2019 when I took over, we made a commitment to reorganize how we worked, right? And we were going to do more of our work in centers of excellence in talent-rich geographies like India or South Africa and most recently in Costa Rica. And we would end up migrating a good deal of the work there, but then keeping in market those functions that have to be in market in order to be connected to customers and to drive innovation. What we announced yesterday is really just the next step in that journey, but it's a material step, and we think it gets us to the right balance between working in market and then working in a centralized, standardized and highly automated way in our GCCs. The other exciting thing, which we announced is that we're now highly confident we can leverage the Neustar technology platform to become the central data ingestion, data management, identity resolution, analytics and deployment platform across TransUnion globally. And with that as our destination platform, we are able to now migrate and consolidate our various applications around the world, be it credit applications, marketing, public record-based investigative solutions onto this common core. As we do that, we're going to achieve really significant economies of scale. The cost return on that program and these two initiatives overall is very attractive. But more importantly, we're going to be able to innovate much faster than we've been able to historically, and we've done pretty well historically. So I think perhaps the growth momentum in the portfolio and our ability to control and improve margins and drive profits is not fully understood.

Okay. That's great. Maybe I'll start by jumping into the announcements yesterday, the cost initiatives, which will take out cost savings of $120 million to $140 million. This is in '26, half of which will be realized in the current coming year, '24. You talked about Project Rise and you talk about the Global Centers of Excellence, GCCs. My question is, when you add up that -- kind of that $60 million to $70 million for '24, you get out about $0.25 of EPS. Like should I be raising my '24 estimate by $0.25? In other words, Project Rise is not new. Like we've been hearing about core savings coming in Project Rise for years, and they are coming in. Is this all incremental savings when you talk about these numbers together? And you can imagine, I would love if you could separate the incremental savings between -- incremental savings and Project Rise versus the increased use of GCCs.

Yes, sure. So let me characterize the financial dynamics of the restructuring programs and then we can talk about '24 later. The way you should think about this is, again, twofold. One is a technology consolidation, modernization called OneTru, which is going to save costs and speed innovation. And then also a rework of TU personnel to capitalize on the GCCs. Collectively, on a cash basis, the way I think about it is we're spending, over the next 2 years, an incremental $300 million, so incremental to Rise. It will take a couple of years to fully execute on these initiatives. And at the end of which we will deliver, ongoing, an additional $200 million in EBITDA. So it's a $300 million investment with a 2-year execution period to produce $200 million more in EBITDA ongoing. And all of that is incremental to Project Rise.

I would just -- so it's $120 million to $140 million of incremental EBITDA and then a reduction in the CapEx, which makes up the remainder up to the $200 million. And I think what's important about the CapEx piece is if you go off the '23 base, that gives you $70 million to $80 million of reduced capital expenditure. So that's cash that we can deploy, shareholder-friendly ways, presumably, but it's a gift that keeps on giving, right? If we take that long-term structurally to 6% of revenue, then that should grow over time. That reduction in capital is actually a bigger number as we have a larger revenue base, right? We're continuously generating saving capital that we would have spent.

Right. And also, Aaron, I asked if we could break out, let's take the middle, the $130 million, could you break it out between, let's say, a higher savings than expected originally from Project Rise versus increased moves to the GCC locations?

Yes. So none of the $120 million to $140 million is associated with Project Rise. $120 million to $140 million is entirely incremental...

GCC.

It's either related to the further -- the evolution of the technology program or the organizational optimization largely with the GCCs. So $120 million to $140 million is above and beyond anything contemplated in Rise, which the savings for Rise were always fairly modest. We had guided to $20 million to $30 million. Much of that has been realized over the past several years. So there's not like there's a big Rise not sitting out there...

Right. This is not about the cloud. This is about technology rationalization plus GCC?

Exactly. Look, again, those of you who have followed, we've been outlining this vision for our tech evolution for a long time. Part of it was getting those applications that we felt should run in the public cloud to the public cloud on a common software foundation. But across 30 different markets, we operate a lot of redundant software. It's just a function of any business' rapid growth. Now there's a chance to consolidate it on a proven functioning next-generation platform, which is OneTru and take a lot of economics but also improve product development velocity. And look, one thing I would stress is that this is not a theoretical undertaking, right? We're not building OneTru. OneTru exists right now. It's a consolidation of our credit, our marketing and our fraud signal, those 3 addressable markets that we moved into, that we outlined on Investor Day on March 15, 2022. It's real. We can demonstrate it. It's running. And now the question is, how do we start moving things into it. So it becomes more of a consolidation, not a build-out effort. And yes, it is one of the reasons we acquired Neustar.

Okay. When you look back over the last 2 years, Chris, are you reassured that the amount of innovative growth investments that needed to be made have been made?

Look, I'm really confident, right? These are two sides of the same coin. Sometimes investors will say, you did a lot of M&A and you increased your debt. And unfortunately, we went into a market slowdown. But the benefit of all of that was a bunch of acquired innovation to complement the internal innovation that we had already been on the journey for. And today, we think we can set a standard as the player that has the most evolved credit, marketing and fraud assets running on a common platform and available across a series of interrelated products. And with this, as we complete the consolidation, our innovation pace is going to increase considerably. So yes, I feel like we have -- between our acquisitions and our internal development, we have enough for a generation of growth, right? The challenge has been digesting at all and doing it in a market that is slowing down, but we're pulling that off. We're continuing to grow despite volume retreats in parts of the credit market, in parts of advertising and marketing services. And we think as we get through this, we're going to top line compound and deliver a lot of profit.

So obviously, TransUnion doesn't exist in a vacuum. There's two other publicly traded companies in the consumer credit bureau and adjacencies market. We heard from Experian yesterday. My question is now that you look at your guide and just a moment ago, you called it a reasonable opportunity for outperformance and very conservative. My question is, is this like -- I don't remember those type of quotes on the conference call when I go back to TransUnion. Is this that some time has passed since the TransUnion conference call and now you realize that consumer credit isn't decaying like you assumed in the guide?

Well, what I would say is, and I think we have said publicly, and I believe we did emphasize on the call.

We're public now.

Yes, is that because of the downturn we saw in September in portions of the U.S. lending market, we were purposely conservative in how we guided the fourth quarter. And we took from September, we extrapolated. We put margin for error around that. What I can tell you is after 1 month plus of experience, we're pleased with how the quarter is developing, right? And we...

And not just for you, but for like the backdrop, right?

Yes, I would say for the backdrop as well, right? And look, there's been much discussion about our market positions or the composition of our portfolio versus others. I think what you can see is because of all the share that we've gained in the U.S. over the past decade, in other markets as well, like Canada, like India, et cetera, our share is broadly reflective of U.S. financial services. However, we've had particular success in financial services. We still estimate -- excuse me, in fintech. We still estimate that we've got 75% market share. And after almost 70 basis points of rate increase over the course of the year, fintech paused in the third quarter. They're getting their legs underneath them, but there's no reason to believe that they won't return to growth with stability and especially with rate easing. If it happens, we should all knock wood on that, in the coming year, right?

I agree. So let me ask you a portfolio mix question. So obviously, you've had big success in fintech lending. As of '22, it was about 14% of U.S. markets financial services for TransUnion. So it's a market that they do dominate. My question is, we know that mix is different than your peers. And right now, it's bad. In the future, it's going to be better and outperform your peers. But my question is, when you look at your portfolio out -- within financial services U.S., outside of fintech lending, do you think that TransUnion has a larger mix of, let's call it, lenders that have subprime consumers, like I believe your auto lending is more skewed towards used car and also smaller banks, which is not necessarily subprime consumers, but you can imagine JPMorgan is taking away their deposits. And so my question is, do you feel like there are meaningful mixes, differences between TransUnion, Equifax and Experian that lends itself to a different observation about the consumer credit market currently?

I would say not really and not so much. I mean, other than what I mentioned, which is we are overweight in fintech and I think we've explained why that is and how this is a bit of a network effect given the richness of our file and the number of inquiries that we see the activity in that marketplace. We estimate at this point that we're roughly tied for first in U.S. market share. That's a big shift. And you're right, the larger banks, where we have our fair share of the business, have weathered this downturn better than the smaller banks, right? And there was this upper [ migration ] of deposits. However, that's reached an equilibrium. There'll probably be some downward migration given higher rates being offered further down than in the larger institutions. But if you examine the third quarter performance of the 3 bureaus and their projections for the full year, and you remove the dissimilar elements, right, because...

What are the dissimilar elements for size for fintech?

Well, for example, TransUnion does not have a corporate credit reporting business. And we include our batch business and our core financial services, somebody else includes batch elsewhere. We separate direct-to-consumer. Some people include direct-to-consumer.

Right. Right. You're talking about the segmentation? Yes, I understand.

Right. If you pull out all those piece parts and do a like-kind comparison, which, of course, we do, all the bureaus are performing in a relatively consistent way in terms of growth, right? And I think, again, that perhaps is something that not all of the market understands because it requires a bit more knowledge to really parse that out.

And what about my comment about auto lending, right? You guys skew more towards used car...

Yes, I don't think we really skew more towards used car. What I think is because of a shortage during the COVID times of new cars, the market consumption skewed towards used cars, right, and then also boosted used car prices and all of that, but now that manufacturing has come back online, there's more of a balance between those.

Okay. Looking at your auto insurers and your tenant screeners, what sort of needs to happen in those end markets for them to kind of improve going forward in your revenue base?

Yes. Well, those are two important components within the emerging verticals in the U.S. markets, which is half of U.S. B2B. And I think both of those present attractive upside opportunity over the long term. Look, in the insurance industry, it's very clear that marketing activity has fallen dramatically, and it's because policy-level economics have not been positive and they're working hard to get those positive. They're getting rate increases. And now with some decline in the rate of inflation, which was driving their risk and replacement costs and all of that, we're going to get back to a point where large carriers can resume their marketing volumes. So a large business for us, insurance, which is roughly 1/4 of the emerging verticals, has been growing low single digits when it's on -- really on a long-term trajectory to grow high single digits and sometimes even a bit more. So that's just a market dislocation due to inflation and also rates that will get sorted out in time and is likely at a bottom. I think the rental screening market will become more robust in the near future. There's a ton of new apartment units coming on. With that availability, you'll start to get resident movement and momentum and that will increase the velocity of screenings. Now for TU in particular, we've gone negative in this segment because we were completing a negotiation with the CFPB around the types of information that we could offer to tenant screeners in the future. And so we have had to stop providing certain types of information like there are several states that we can no longer provide criminal records because they don't meet the accuracy in the currency standards that the CFPB has now guided through this resolution with TransUnion. But remember, these are not unique requirements to TransUnion. This is the CFPB issuing guidance or policy through enforcement. And the FTC was very clear in our settlement where they said, this settlement reflects guidance for the rest of the industry. So if TransUnion has to pull back from providing certain categories of information because they don't meet this new CFPB standard, that's an industry-wide issue. So both the other suppliers in the industry, but also the main customers will be at legal and compliance peril if they don't adopt similar practices.

Okay. And did you say state by state? Because like if it is CFPB, it would be the whole country.

It is, but every state has a different standard for their criminal records, their court adjudications for whatever it may be. Sometimes it's a case where...

I got you. It really depends on what records are...

Look, there's a maze of complexity that underpins the information that we provide to landlords, right? The good news is having just come out of our annual rental screeners conference and talk to some of the largest property managers in the country, credit information continues to be the most predictive element of their screening set.

Totally agree. I know it's sort of silly to talk about recession because our economists say, we're not going into a recession. But surely, over the many years, we've talked about TransUnion's portfolio be able to weather recession. And I forgot if you guys call it revenues could be flattish in recession or maybe I think you say positive in a recession. And so my question is from this base that we're at right now of growth, if there was a recession along the way, maybe next year or the year after, do you still stand by that the portfolio will weather a recession well and resiliently to the top line organically?

Yes. What I would say is -- look, I don't -- I mean I understand recession and soft landing and the varying perspectives over the past 18 months of what we were going to experience and where we're at. But for a material number of our markets, volumes have been going negative for almost 2 years now. And the diversification in the portfolio has allowed us to continue to grow low single digits and expand profits, right? So arguably, we've been weathering the recession and the portfolio has been performing as intended during a clear market slowdown, right? So the U.S. growth softened materially after being a growth engine for a decade, but the international business has been booming. In addition to that, the direct-to-consumer business, for reasons that we've discussed a lot, is troughing. And instead of being a drag on the portfolio, we expect in '24, it's going to make positive contributions to portfolio growth.

Do you mean that they'll grow or they'll grow as much as the portfolio?

I mean, it will contribute to growth, not necessarily as much as the portfolio.

Back to positive..

Yes, exactly. They will be contributing instead of dragging. And look, in the U.S. markets, which the two big pieces are U.S. financial services and emerging verticals, again, almost 50-50, while the growth rate has been slowing in financial services, there are still a couple of lines that will remain positive, a couple of lines that will be positive to perhaps declining, depend on what we experienced. Then the emerging portion is positioned to grow and offset that. So the diversification is happening real time and has been happening for many quarters now.

Okay. So I have more questions, but we can take a question from the audience, if you want. Go ahead, Palmer.

You can't bring a microphone over if...

No, let him just repeat the question. Go ahead.

[indiscernible].

Repeat the question.

Yes. The question was really about pricing. And to the earlier comment that part of the portfolio momentum that we've got is both our consistent annual price actions, which are positive each year and will remain positive this year, in part given the inflationary pressures, which make our customers more understanding of the need to raise some rates. And then third-party service providers of scores and other services are also increasing their prices. And often, we benefit from that as well.

And when you say that will raise prices this year, did you mean '24?

Sure. Yes. Just as we did in '23 and in '22, and perhaps even more so given the inflationary environment.

Other questions? Go ahead.

How meaningful would rate cuts by the Fed be to your business next year, assuming they happen, let's say, midyear, not in the context of a recession?

I'm sorry, would you say that again?

Yes. Rate cuts by the Fed, how meaningful will that be to your business in '24, let's say, if that happened midyear next year, not in the context of recession, more in a soft landing scenario?

In the U.S., really since the second half of '21, there's been volume declines across all loan origination categories, right? But despite that, there's still been a fairly robust level of lending activity because consumers have remained healthy and highly employed. My point is that over this period, a lot of loans have been issued that have a fairly high interest rate. And if the Fed takes meaningful rate cut actions, many of those loans become eligible for repricing, whether it's mortgages that get refinanced or increased revolving card balances that get consolidated. And that is typically an area where the fintechs have been very aggressive in pursuing that opportunity. So rate cuts will yield material origination benefits and volume benefits for TransUnion and the industry.

We have about 30 seconds left. Okay. So why don't we turn it back to Chris, like we've asked you a lot of questions. You probably anticipated some questions that we didn't ask. What should we be asking you about that we haven't? And in particular, as you answer questions, just what products do you think will be a good revenue movers as we head into '24?

Look, I'm optimistic across the portfolio, both geographically, but also in the product solutions. And I think OneTru is a really important step forward in the industry. Having realized this, I believe we are the only player that is offering services across this portfolio of credit marketing in fraud, data and analytics. And that, that is going to become the next generation that all other bureaus and players are going to try and pursue. And the good news is we've been able to create it using this acquisition as a vehicle, while also driving material growth and material improvements in the profitability of the acquisition Neustar itself. And so I think that's going to be good for the overall competitiveness of our business and the return we're going to get on our deal making.

Awesome. Chris, Aaron, Greg, thank you so much. We appreciate it.

Thank you.

My pleasure.