TransUnion (TRU) Earnings Call Transcript & Summary

I'm Heather Balsky, BofA's business and information services analyst. And I'm pleased to be here with Todd Cello, TransUnion's Chief Financial Officer. Todd, thank you for joining us.

Heather, thanks for having me here.

Yes. So we're just going to kick things off.

Okay. Sounds good.

I have to say a lot can happen in a year. At our 2023 conference, we were navigating a banks' crisis, rising rates and recession fears. Today, we're talking about soft landing and eventual rate cuts. Can you give us your perspective on the current operating environment for your Financial Services business outside of mortgages or if you want to talk about mortgage, you can. Where are we in terms of consumer -- the consumer and the lending environment?

Okay. I think that's an appropriate place to start, for sure. So I think that maybe where we do start at though is let's go back to the third quarter of 2023. And it was -- it's a good starting point, just to kind of give you a lay of the land. And what we saw happen was a pretty significant slowdown in lending volumes, in particular, in September, primarily related to our Financial Services -- our core Financial Services customers. The event that really had happened was the Federal Reserve had met at the end of April and talked about interest rates being higher for longer. And unfortunately, that just drove a lot of uncertainty with our customers because the 10-year treasury yield increased quite significantly, went up, spiked. And so there was a combination of cautiousness on the part of our customers, but then also demand from consumers slowed down pretty significantly as well because the cost was meaningfully higher. So unfortunately, we had a challenging quarter in the third quarter. So when we put the guide out for the fourth quarter, we assumed that there would be further deterioration. We had only seen a couple of -- if you think about it, we had only seen September and maybe a week or 2 into October before we provided the updated guide. So as a result of that, we painted an overly pessimistic view of the fourth quarter because we wanted to make certain that we delivered on the commitments that we put out. So we accounted for further deterioration. So what we ended up seeing in the fourth quarter was a stabilization that happened. And we were -- obviously, we exceeded the expectations that we had obviously lowered. And we saw stability. And we saw our customers gain more and more confidence in the ability to underwrite loans profitably, and that carried into the new year. And if you think about when we put our guide out in mid-February, we had the advantage before putting that guide out because we go later at year-end, we were able to actually see how January came in. And so you're able to see the stability that I talk about in the fourth quarter continued into the January time frame and as well into the first couple of weeks of February as well, too. So in general, what we're seeing is we're still seeing a very healthy consumer in the U.S. They still have -- the consumer has -- they're employed, they're seeing real wage growth that's offsetting the inflationary pressures. So all -- and they're living up to their financial obligations. Delinquencies have ticked up above pre-pandemic levels. But as a result of that, though, we're still not seeing anything that's troubling with the consumers as well. So it's that type of stability that we're seeing a healthy overall consumer. If there's any consumer that's under pressure, it's those that are below prime, where the inflationary impact is having a sizable challenge on everyday expenses like food, as an example, right? There's definitely an impact there. So when we think about the full year as result of that, we just -- the guide that we put out, we just assumed that same stability. We didn't assume any further uptick in -- or any benefit, I should say, from any rate reductions that may come.

That's helpful. And what are you hearing from your Financial Services customers for 2024 with regards to lending standards and their willingness to lend? And you talked about stability, but kind of how does that factor into your outlook?

Yes, for sure. Our team definitely has extensive conversations with our customers. It's not just us looking at their activity. We're all -- we have what we refer to as customer advisory boards where our team is proactively meeting with customers in mortgage, in card and banking, financial, consumer lending and auto. And I would say that the customers, again, like I was saying earlier, more -- maybe a little bit more conviction because there's certainty that interest rates aren't going to go higher, the uncertainty feels for the moment about if rates are going to go lower, right? But we're not counting on that. So we're starting to see some of our customers get back a little bit more into acquisition or growth mode and -- but on a smaller scale. Best example of that would be in consumer lending with the fintechs. In the fourth quarter, we started to see that customer base start to market a little bit more but -- which gives us some optimism that things are potentially on the mend. But all in all, again, the approach is conservatism in our guidance, no uptick. And that's just consistent with how our customers are seeing it too, specific to your question.

Yes. That's helpful. And when you look back to -- you've been navigating uncertainty. When you look back to kind of the challenges you faced in the environment over the past few years or last 2 years, what do you think that your learning, the management team's learnings are from both how you operate and plan the business and how -- again, like how does that inform your thoughts on 2024?

For sure. Great question to ask. So the first thing, in 2023, TransUnion grew 3%. And while that was lower than what we had expected, what you really saw was the portfolio effect of our business. So core Financial Services was clearly under pressure, and some of our Emerging Verticals were as well. But we did see some good -- we still saw some good growth rates there. And the International business in particular continues to perform exceptionally well. The business in India grew over 30%. Business overall has grown double digits for the last 11 quarters. So the resiliency and the design of the portfolio was on effect. Clearly, the management team wants to grow more than 3%, though, right? But that is fulfilling for us because it's so intentional and the investments that we make into how we go to market but also the products that we bring to market, being able to see the growth there was -- is important. The second thing, though, that we're really focused on is delivering on our commitments. Obviously, in the third quarter, we missed our expectations. So restoring the credibility with investors to deliver what we said we were going to deliver is critical for us. And I would say the third thing and more specific to your question about operating and planning the business, it really goes back to the announcement that we made in November of 2023 about our transformation program. And there's a significant amount of focus that we have on that program. So I just wanted to spend a minute on that to make certain everyone appreciates the undertaking that we're working on. So -- and this is something that we had been working on for several years and really started to pick up momentum in late '22 going into 2023. And what -- since Chris Cartwright has been our CEO for 5 years now, we've been on a deliberate mission to centralize and standardize our work across the economies that we operate in. And today, we're in 30-plus countries. So if you can imagine, we have disparate processes across all of those geographies. So the intention is to bring like functions together, to have a common way to service our customer so there's a more efficient and practical way. And needless to say, you also get cost benefits related to that. So the transformation program has 2 planks to it. The first one is just on our organization and optimizing where our people are at. For several years, TransUnion has worked in what we refer to as our Global Capability Centers. And this is where we have centers in India, South Africa and Costa Rica, where we're able to do this centralization and standardization of work, leveraging these deep talent pools that reside in those markets. Our primary focus was on software development when we established these capability centers, going back to 2018. We since have moved into call center capabilities. And now we're working on capabilities across all the functional areas at TransUnion. So that's the next leg of this journey is to drive those efficiencies. The second part of the transformation is our tech modernization initiative. And this is where we're leveraging the technology that we acquired from Neustar to bring our data assets together on one platform, and we refer to that as OneTru. And ironically, we put out a press release yesterday officially launching OneTru. So if you want some more information, and I swear it has nothing to do with me being here today, it's pure coincidence. But in essence, at the highest level, what it is, is it's about bringing TransUnion's data assets together on a common platform and then ensuring that we're using that data in a compliant manner. Our data assets have different use cases, and we always have to make certain that we're adhering to regulation. But what's important about bringing all these data assets together is we're able to innovate a lot quicker then, right, by having all the data together. So that's a big component of it. And on the technology side, we're going to finish our Project Rise program, which is the cloud transformation. But with that, we're going to have an initiative where we're going to standardize the technology infrastructure that we put in the cloud to drive a consistent and common approach. This is a pretty big deal for us. So why this all matters is we're committing to $120 million to $140 million of operating expense reductions beginning in -- and that full amount will be in 2025 and beyond. We're going to get about half of that benefit in 2024. And then the second component of that is we're going to spend significantly less on capital expenditures because we're going to be able to leverage the cloud environment so don't have to spend as much on purchasing hardware and software. And then as part of the tech initiative, we're rationalizing many of the applications that we maintain. So we're going to be a heck of a lot more efficient. So we're expecting to get about $60 million of CapEx efficiencies. So the net of it is $200 million of free cash flow savings from 2026 and beyond. So the investment is $355 million to $375 million. Through the end of this year, we'll have spent about $280 million. So a lot of it's going to get done this year. But what's really -- so we're excited about this, and it's a transformative agenda. But this is something that has been carefully planned for and thought out, and it was something that we were -- we launched with an eye towards, well, what if volumes potentially don't pick back up? We needed to make certain that we had a way that we were able to protect and grow margin. And then when volumes do pick back up, obviously, we have a nice benefit there because the volumes will drive incremental margin. So it's a big focus from an operating perspective for us, for sure.

That's really helpful. And just on OneTru -- well, really on the transformation program broadly. You talked about the cost side. So I mean one of the things, when you think about what it does for your organization, are there sales benefits from this? And what does this do for your organization from like an innovation and productivity perspective?

Oh yes. Yes, from -- that's what really this is all about, right, as OneTru is about bringing the best of TransUnion all together. And today, we have tremendous data assets, but they can be in different parts of the organization. And we're able to bring the pieces together, but the whole idea here is to do it as efficiently and compliantly as possible, right? And so this will be the engine for us for product innovation. And I think what's -- specific to like where is this going to come from today, our fraud and our marketing capabilities run on OneTru right now. And the big lift for us will be to move our credit products to this platform. And that's what we'll be working on for 2024 and into 2025. So with the data in one spot in a more robust technical environment, the expectation is, is that the product innovation should be significantly easier to achieve.

That's really helpful. Sounds very exciting.

It is, yes.

Going back a little bit here, there's been a lot of focus on your fintech performance and your fintech business. Can you put in perspective the size of that business? What's happened in the business over the last 2 years? And where do you think we go from here?

Sure. Yes. So the TransUnion's fintech business last year finished at about $140 million, so about 3.5% of TransUnion's overall revenues. Over the last 10 years, we have built a very meaningful position with the fintechs. And we embrace them like they were big customers, going back to the onset. And obviously, there are disruptors in the financial services arena. The business got as high as $175 million at the end of 2022. So you can clearly see that there was about a 20% decline in revenues last year. And it really does get back to the macro environment, the uncertainty about how high interest rates were going to go. And the fintechs have -- they don't have a deposit base necessarily, not all of them, that they can rely upon. So they're dependent upon the capital markets to be able to raise funding. So that became a little bit more selective, so they had to be more selective last year. But I would say that overall, our clients have persevered and we've taken that as an opportunity to get further entrenched with them, to provide them more products and services, especially to help them navigate through a challenging environment. The expectation is, is that in the longer term, these are customers, as they've demonstrated before in the past, to be very valuable growers for us. We expect that to be the case again. And just as kind of a proof point of that, in the fourth quarter of last year, we did start to see, if you want to refer to it as green shoots, some marketing activity start to pick up where they were being a little bit more acquisitive with the new account acquisition. That doesn't mean we're declaring everything is great, but it was an encouraging sign to see.

If I can just real quickly from like a big-picture perspective, nondepository lending institutions have been around forever, right? Fintechs are a newer flavor on this, but it's been part of the ecosystem forever. They've added a better user experience and taken a bunch of share. But it's always been part of it. And so we expect that to be -- continue to be part of the ecosystem, and we have a unique position there. And they're transacting where customers want to transact, which is online. So over the long term, we're still really bullish about that opportunity.

That's really helpful, Greg. Just want to squeeze this in because we get this question sometimes, just in terms of -- we talked about fintech, but you also sell to buy now, pay later. Is that in the fintech bucket? Or is that separate? And what does that business look like?

Yes. So it's not included in the numbers that I just provided for fintech. But to size it, it's about a $20 million line of business for us through the end of 2023, and that piece is continuing to grow over the last few years, off a small base.

That's helpful. Yes. We have to clarify that sometimes. So that's really, really helpful. So rate cuts, you've talked about how rate cuts could be a positive for your business. Can you help us think that through, though? What's a direct benefit you could see? And then are there second derivative benefits as well?

Sure. Yes. So I think that it's about what parts of our business are most interest rate-sensitive. I think it probably goes without saying that mortgage is the most rate-sensitive, right? So with that being said, when you see mortgage rates were over 7% last year and then early this year, we saw them get into the mid-6s, you definitely see some higher activity. And then when they snap back up over 7%, you see the volumes slow down. So there's -- if you do see -- if we do see rate cuts, we definitely would expect the mortgage business to benefit from that. Just it feels like there's a demand there for consumers. It's obviously all well publicized, right, with all the refinancing that happened and even the purchasing with unusually low interest rates in 2020 and '21 and into early '22. And people have low rates, they don't want to move because they don't want to take -- go from a 3% rate to a 7% rate. So there's the shortage of supply in the market. But we believe that eventually, though, people do have to get on with their lives and they're going to have to move, and rate cuts would help that, right? So that is obviously the most rate-sensitive part of our business. I'd say if you talk about Financial Services, the next one down would be auto. So the auto business, obviously, was impacted by the supply chain issues during the pandemic. And where in the U.S., we were -- we'd experienced over 17 million vehicles sold annually. Last year, we were at 15.5 million, so still down. I believe that, that will increase based on what the industry is saying. But when you think about that monthly payment that consumers have, you think about the interest rate environment, right? So a little bit more, not as much as mortgage but definitely rate-sensitive. And then if you go down the continuum, consumer lending would be there. So personal loans, also more rate-sensitive. But when you get into credit cards, probably not as rate-sensitive, right, because of how high the APRs are already. That's not necessarily a make-or-break decision for a consumer on that. So the assumption that we've put in place, again, is that stability. And we're just assuming that things stay the way that they are. And if we get rate reductions, obviously, what I just described, there would be some uptick to that.

That's helpful perspective. I want to shift to Emerging Verticals, your guidance for mid-single-digit growth this year in that segment. And it sounds like there's kind of like a part of your business that's very strong right now, 40% of the revenue you talked about, it's insurance, services and collection, public sector. What's driving the strength in that 40%?

Yes, for sure. So yes, and it's important to break this apart, right? So that 40% from those 3 areas that you just described is obviously growing higher than what we've guided for the emerging...

Which is low single.

Which is low single digits is what...

Yes.

Oh. I apologize, low...

Yes. So that's why I was -- so it's low. No problem. Just wanted to make certain we clarify that. So growing low, that's what we're guiding for this year. So in insurance, we have a great business in insurance and we have for many years. It represents about 25% of the Emerging Vertical revenue, just to size it. So think about $300 million. So it's a meaningful vertical market for us. Over the last couple of years, the inflationary impact had an adverse impact, I should say, on insurers because of high repair and replacement costs were impacting them. And they couldn't increase their premiums fast enough because they needed regulatory approval for that. So the result is they were getting their profit in line and getting the premium increases as they pulled back on their marketing and their new account acquisition activity. We started to see that start to stabilize. And we're not assuming a big uptick in 2024 in insurance, but the business still grew single -- mid-single digits, 4% last year. So we had a good growth rate there, considering the backdrop of the industry, right? So we feel pretty good that, that business is going to continue on that type of trajectory, and there could be upside if insurers get back into market. Services and collections in public sector are benefiting from our Trusted Call Solutions, which is a capability that we acquired with the Neustar business. And in essence, what that product does is it notifies you when your phone rings if it's a legitimate business or not. So think about how many times are -- we get a call and who picks up. I know I don't, right, because you're concerned it's a robo call or it's some type of spam. What Trusted Call Solutions does is it brings the certainty. It's able to put the name of the business on the display of the phone. We're introducing logos. So if we're -- if it's Bank of America, and it's someone calling from Bank of America, that you'd be able to see a logo. And what we're seeing is some significant growth because it's important for businesses to be able to reach their customers, and giving the customer the certainty that they know who it is that's calling, the pickup rates are pretty significant. So there's a lot of value being driven. So that's what -- those are the 2 primary drivers in those verticals.

That's really helpful. And so then moving to the 60% and kind of how that plays into your low single-digit growth for Emerging Verticals. What's going on there? And can you break it -- just break it down further?

Yes, for sure. Yes. So within the other 60% of the Emerging Verticals, the biggest -- one of the bigger components of it is our communications vertical. Now this isn't Trusted Call, so I know that gets confusing. Trusted Call is a product, but we also have a business where we serve the telecommunication industry. And this is the business that we acquired through Neustar, and this is where Neustar's history is at. That business is flattish. And so think about products like caller ID or order management, that's what we're providing in that space. And as people are dropping their landlines, as an example, there's less revenue there. This business, though, is incredibly valuable to us because the relationships we have with the telco providers provide us with an invaluable source of all data that we put into our OneTru platform to provide greater signal in our products. So while it's a flattish business, it's important to note the significant benefit that we get from the data that comes off of that. So that's -- so again, if you think about growth rates and the first 3 I talked about within insurance services, collections and public sector are greater than that low single digits. Now you overlay something that's relatively large, and it's flat. That's a drag on the growth rate. And then a couple of other areas to highlight would be our tenant and employment screening business. We had an agreement with the CFPB that we announced in October of last year that we agreed to recalibrate our products in that space. And we've done that successfully. And recently, the playing field has been leveled across all the competitors in that space. But the recalibration period for that is a drag on our revenues. So that's something that's a negative, but in the short term only. In the long term, we feel that we'll get that business back to growth. And then the final area would be our media vertical, where right now, we're not assuming any significant increase in marketing or advertising. So we've assumed a muted growth trajectory for the media vertical. And this gets back to just kind of rolling through 2024's guidance consistency with what we're seeing. So there could be upside in these areas.

Okay. That's really helpful. I feel like I would be remiss to have you up here and not ask a capital structure question and allocation. So you exited the year around 3.6x net leverage. You're also targeting net leverage in the low 3x range by the end of the year. And you said in your 4Q call that you view debt prepayments as the best incremental use of your cash over the medium term. So where do you want to get leverage over the medium term? Is there a leverage level where you would be open to share buybacks or even going back to M&A on either tuck-in side or larger deals? Just how are you thinking about that?

Yes. No, it's an important question to address. So at the beginning of last -- in 2023, we changed our target leverage ratio. So since TransUnion has been a public company going back to 2015, we had targeted 3.5x as our leverage ratio. And we just thought it was prudent based on the overall maturity of the business and the size as well to bring that target down to 3x or lower. So the lower is an important part, right? We don't look at 3 as necessarily an endpoint. We believe that we can further delever the business. And -- but that doesn't mean that M&A can't be part of our growth objectives. It's just that over the last 3 years, we've been quite acquisitive. And we're very happy with the assets that we've acquired, and we have confidence that they're going to work and they're going to drive, importantly, top line growth for us. So in the near term, I've obviously been very explicit in our earnings call that we don't have any near-term M&A on the horizon, and that continues to be our posture. But that does not mean that we've taken our eye off the market. We continue to evaluate businesses. But we want to make certain that businesses that we bring into the fold are going to be accretive and they're going to not be a drag on leverage. So right now, though, task at hand is to focus on the continuing the integration of what we've acquired, leveraging -- hopefully, with what I've discussed already, leveraging the capabilities we've acquired for OneTru to be able to enhance our product innovation.

I think -- just quickly, I'm glad you caught on the comments we gave, which was it's 3x or under, right? So we don't view like you hit 3x from a deleveraging standpoint and you just stop. But I think we continue to believe that there's opportunity to continue delevering and paying down debt even if -- when we get to the 3x range.

That's helpful. And I'm -- we have 2 minutes, and you touched on the deals you've done. So just maybe a check in on how you feel about the M&A that you did over the past few years and kind of where you are.

Yes. So as far as Neustar is concerned, I mean, hopefully, what you've taken away from my earlier comments is how heavily we are relying upon the technology. We knew we -- what we had acquired was strong, right, that -- and highly predictive. And it's really exciting where we're going to be able to take the company and streamlining where data's at and just how our technology overall runs. So that's been a -- that's a big positive, and that's going to really be a big thing for us. The Sontiq acquisition filled a gap in our capabilities with identity protection. Last year, it grew double digits. Revenue is pretty much tracking to our expectations. So we've been very, very pleased with that one. And the Argus acquisition, we always felt that Argus belonged with a credit bureau. So we feel that there's just a tremendous amount of opportunity there, but we're still early in the integration with that one.

That's really helpful. Thank you, Todd, for your time.

Thank you, Heather.

Thank you, Greg, also. We appreciate you being here very much.

Yes. Thank you. Thanks.

Thank you. Excellent.