TransUnion (TRU) Earnings Call Transcript & Summary

[indiscernible] factor a little break there, any time.

So Todd, maybe the first question I had was more around kind of the guidance philosophy and the approach you've taken over the years. If I had to summarize it, kind of pre COVID was the classic like conservative beat and raise almost every quarter. During COVID, of course, there was some anomalies because of the environment. And then it felt like the last couple of years, you had, I think in one of the sessions you said you had removed your traditional conservatism to a certain extent. So just talk to me about that journey on how you decided to switch. And then what version of that should we hold you to for this year's guidance?

Yes. Okay. Well, Good place to start. Yes. So thank you for that. So I would -- I think we made the comment about the change in the conservatism in our guidance in '22. I think it was at the beginning of 2022. And unfortunately, what we didn't foresee was that inflation was going to be stickier and higher and that interest rates were going to increase quite significantly for the last 2 years. So 2022 and 2023, I would say were -- they were a challenge for us. But nevertheless, TransUnion's portfolio overall has intentionally been built to have diversification. And despite the challenges that we've had over those last 2 years, where we didn't have the beats and the raises because we were navigating an uncertain environment, the business still grew 3% each year. Clearly, that's not what we're aspiring for, and that's not what we're planning for. But the diversification of the business, the portfolio overall was on full display for us, right? So I think the last 2 years is more of how do we persevere, right, and give meaningful guidance to the market that investors can use. Coming into 2024 and the guidance that we put out at the beginning of the year back in our February earnings call, at the time, we were looking at putting out a guide that we knew we had a good line of sight to being able to achieve. The challenge there, though, is that things were still continuing just to be uncertain overall. The narrative on interest rate changed so much just from the third quarter of last year up until the Federal Reserve meeting last week, just what was going to happen. So we put out what we thought was a prudent guide. Q1 results came out, and we exceeded the high end of the guidance quite significantly by $41 million on the top line and $27 million in adjusted EBITDA. A lot of the upside that we had in the quarter came from mortgage. And in mortgage, we did have a better pricing realization than what we had anticipated was going to happen. And there are some moving pieces there that maybe you'll have some questions on it, but that we guided, I think, conservatively on. But other parts of the business performed well as well. So in the quarter, we grew 8% overall. But we like to exclude mortgage, just to take some of that volatility out. And excluding mortgage, we still grew 5%, which is a good growth rate. We had guided 2% to 3%, so we exceeded the guidance. And what we saw was good continued momentum in our International business. And in the emerging verticals, the insurance business performed well. And in our Consumer Interactive business, we had some nice wins for our breach services that came from the Sontiq acquisition. But we took a step back and looked forward towards the remainder of 2024. We just didn't think that it was the right thing, because things still are uncertain, to get any more aggressive with the guidance. So the -- so what effectively we did is we took our beat from the first quarter, and we banked that and just said, "Okay, that's going to stick." And then the pricing realization that we have benefited from in mortgage, we have visibility into that. So that is purely what the raise was for, was for mortgage pricing from Q2 through Q4. We even tempered the volumes in mortgage a little bit as well. But even with the outperformance of the business outside of mortgage, we didn't feel it was the right thing to do, to get punchy with the guide. So we maintained at 3.5% growth. So if you take a step back then and you look at just the numbers, and the pieces are out there for the market to see because clearly, Q1's results are posted. We guided Q2, and you can see our full year results. So you could see what we're implying for the second half. If you just look at dollars sequentially, it's kind of flat at each quarter. TransUnion just had its first $1 billion quarter in its history in the first quarter, which was a big milestone for us. Q2 through Q4, we're assuming kind of a similar revenue [ around ]. So no big ramp coming. From a growth perspective, we're expecting our non-mortgage businesses to grow about 3% in Q2 but also in the second half as well, too. So not only are the revenues sequentially flat but also, the growth rates have the same characteristic as well, too. So back to your question then, the type of guide that we have, we feel that this is prudent because the market still just continues to be uncertain. Volatility, again, just last week, the Federal Reserve has their meeting, the 10-year treasury yield goes up significantly. Then the jobs report comes out on Friday, and the 10-year treasury goes down significantly, right? So it's that volatility that we're trying to manage. So we feel that we've put a guide out there that's achievable but yet prudent and reflecting what we're seeing. Is it 2018? Probably not to, get more specific to your question.

Okay. All right. Fair enough. That's some good color. Maybe if I can just ask a few follow-ups. So firstly, on the pricing component in mortgage, which was mostly the beat. I mean will ask as the big questions, if I could, tomorrow when we present. But in terms of the visibility you talked about, like when you guided in Feb, don't you already have that price in mind on Jan 1 to have that visibility? Or does it change only after you report the whole quarter?

Yes. So there were -- there's 2 factors that went into our thinking on mortgage. So yes, clearly, there's the third-party score increase. And yes, we had notice of that price increase in the fourth quarter. But remember that TransUnion has the relationship with FICO in this situation. Their cost is operating expense on our income statement. We then, in turn, charge our end customers for it, right? So we have the responsibility to go back and negotiate with our customers on the price. So when we put our initial guide out, we had maybe not as much optimism that price was going to be able to stick the way that it did. So nice job by our sales team to go out and prove the value proposition that TransUnion has. The second part, though, pertains to prequalification in the mortgage space. And the rules changed from the GSEs. And in the past, a tri-bureau report was required for prequalification. And now a single pull and a soft pull is okay. So the behavior change, we weren't so certain how that was going to happen. And we also weren't as certain about the pricing dynamics as well in that. So seeing one quarter gave us a little bit of traction, but clearly, it's one quarter. There's still more to go. But it was those pieces that came in to our guidance. And just to put numbers on it, if you go back to our February earnings call, we had guided for mortgage to be up 25% for the full year. And what we just guided on this April earnings call is for mortgage to be up 50%, so 25% increase, pretty big deal. But I think what's more important is when you peel it back a level and you look at the volume assumptions that we have at the -- in February, we were assuming for a 5% decline in volumes, and we're assuming the same thing. But what we've done is we've changed the mix from the first half to the second half. So back in February, we thought that our volumes were going to decline 15% in the first half, and now we're guiding that they're going to decline 10%. So volume is a little bit better. And what's important to note there is TransUnion counts the prequalification volumes in our overall mortgage numbers. So the -- maybe the moves that we're seeing there are showing up. The second half, and this is an important part, we were originally assuming that volumes were going to grow 10% in the second half. This goes back to our February call, had nothing to do with us banking on an interest rate cut, it was just based on our comparables. But based on the trends that we're seeing, we thought the prudent thing was to trim the expectations. So now we're calling for just flat instead of growing 10% on the volume in the second half of the year. So a lot of moving pieces there. But based on what we saw through the end of the first quarter into April before we reported, we felt that, that was the best guide out there.

Got it. Okay. Fair enough. The other 3 areas, I think you called out where you kind of outperformed in the first quarter were International, insurance, I guess, and then the breach contract. So of those 3, maybe the breach was more onetime-ish? Or how would you characterize the 3 in terms of it's -- it's got momentum, but you just didn't want to push it through?

Sure. Now so the -- our International business is performing exceptionally well. The first quarter was our 12th quarter in a row of double-digit growth in that business. We continue to see exceptional strength in India. Business grew in excess of 30% this last quarter. But our business in Canada grew 18% in the quarter. And as I'm sure you can appreciate, the market in Canada is not so great, the macro. So a lot of share gains there and product innovation that the team in Canada has done an outstanding job delivering on. So when we guided back in February, we were calling for the International business to be a high single-digit grower. The one tweak that we had in the guide is we're now calling for the International business to grow low double digits now because of just the good momentum that continues there. So that's the one tweak. Even though the guide that we have for the full company, excluding mortgage, kept exactly the same. It's all -- I just want to reinforce that. It's just that mortgage pricing realization. Insurance, we're starting -- our insurance business primarily caters to the auto property and casualty insurers. But we also have a business in life and commercial as well, too. In the auto space, though, many of our customers pulled back on marketing last year. And the reason for that is in late '22 going into '23, rising inflation had a significant impact on repair and replacement costs for our customers. And they couldn't get their premiums up high enough to compensate. So they pulled back on their marketing. And as you know, the premium increases have to be approved by the regulators. So marketing pulled back, but what we're seeing happen is some of the bigger players in insurance are back marketing. So that's good. But as you know we sort of a broader ecosystem in insurance. So not all of the insurers are back marketing. So that's been good. And then just the shopping activity, which is beneficial to TransUnion, has also been strong as well because when the insurers were able to pass their premium increases, it caused consumers to pause and kind of go, hey, I want to check to see what else is out there. And then, yes, the last one that you brought up was -- is our Sontiq, the breach services for that. So the Sontiq acquisition that we made in December '21, last year, we grew that business 20%. So really serve the need in TransUnion's portfolio in the consumer space. And continue to see good growth, but the breach business is not -- it's uneven, would be the way to say it. It's not terribly predictable. So we didn't want to get ahead of ourselves because of that unevenness. So that's why we tempered the expectations on that and just left the guide for the full company, as I said, at 3.5% for the full year.

Okay. Fair enough. I just want to touch on some of your other kind of areas. So the first one is on fintech. It's obviously been a great area for you over many years. Maybe last year, it was just a headwind. So maybe just to help the audience just frame the size of that. And it had a kind of bad year last year, let's call it. Where are we? Do you think we bottomed? Like are you seeing signs of recovery?

Yes. So the fintech space in the U.S., specifically, because we've built out nice positions in fintechs and our -- many of our international geographies like here in the U.K. as well as in Canada. But we were -- we embraced the industry going back 10 years ago when they were nascent start-ups and our team did a great job bringing products like trended data to them. And because they had nascent systems, they were more able to bring in trended data, right? So we want a significant amount of share just by embracing the industry and partnering with them. And then as they grew, we were able to offer them other services that we had to help them continue to expand their business. 2020 in the pandemic, they clearly slowed down. 2021, we saw a really significant bounce back as consumers were back out and looking to live their lives again after having been locked down. The impact of rising interest rates in '22 had an impact on their ability to fund their lending, so -- which was always a question that you were asking us before. Many of our customers, though, they persevered. They just needed to be more selective on the type of loans that they could underwrite. So that's the dynamic that we saw play out in '22 and then in '23. The business last year finished with about $140 million worth of revenue on TransUnion's $3.8 billion. It's significant, but it's not that significant piece, right? And we value the relationship. So I think the sizing is important. What we've seen happen in Q4 as well as in this most recent quarter, is we're starting to see a little bit more of marketing activity. We're starting to see them be a little bit more proactive in their approach towards acquiring new customers. By no means am I saying all is clear, but just as a proof point, the business did return to growth. It was 2% in the quarter, which was a positive trend for us. I think most importantly, we still see a tremendous amount of upside with this customer base and the partnerships that we've built with them over the longer term.

Got it. And then tied to fintech, I think you have a little bit more of small bank exposure, if that's the right phrase. I'm just going back to the third quarter of last year where you called out. So maybe just as a reminder, what was that -- the callouts you made in the third quarter? And how is that broader ecosystem looking like today?

Sure. Yes. So back in the third quarter, we saw a significant slowdown in our volumes, in particular in September. And it was right after the Federal Reserve had their -- one of their meetings, the Jackson Hole, Wyoming Symposium, and Chairman Powell spoke about interest rates being higher for longer. The 10-year treasury yield ticked up 50 basis points, and there was just a lot of uncertainty, right? Consumers were looking at higher borrowing costs, and our customers were also looking at like, hey, this is the time that we want to underwrite right now with interest rates moving the way that they are. TransUnion, as you know, because you've covered us for a long time, we've won a significant amount of market share over the last 10 years. And as part of winning that market share, we've won in the medium- and small-sized customer base as well. And I think it's well telegraphed with the failures of a couple of banks in the U.S. last March, April '23, there was a lot of churn in the small- and medium-sized financial institutions that we had won a significant amount of share in. In particular, what had happened is there was a flight of deposits to bigger banks as a perceived safety. So the medium- and small-sized banks needed to compete on interest rate, and it pressured their business. So we saw those customers, and it's corroborated by their earnings calls. You can hear how they talked about the dynamics that they've had. I'd say what we've seen, though, that was in Q3. Q4, I'd say we've seen a stability in the volumes from those customers, and that continued on into the first quarter as well. So what we're seeing is that deposit base is stable now where it was uncertain. So look, what gets me excited about what we have is, I will take our portfolio for the long run. It was definitely a hiccup in Q3 for us. But when I think about TransUnion in the future, having the diversification that we have across our financial services vertical, I think that's a strength for us.

Got it. We had Equifax in the morning, and we asked them their view on card and auto, the other areas. So maybe just from your vantage point, like anything or how would you characterize -- maybe card is more like the stable that you called out? And is there anything in auto you'd want to call out?

Yes. So card, I think we see continued stability. We see good underwriting. I think the callout and something to watch is just the delinquency levels, they're higher. They're higher than they were in 2019. But is it alarmingly high? No. Historical standards, it's probably okay. So card seems to be on an okay trajectory. We listen in on our customers what they have to say about the loan loss reserves that they put up, and it seems like it's okay from what we're hearing there. Auto, we grew in the quarter by about 2%. We're seeing -- cars are a lot more expensive than they were before the pandemic, right? So consumers that are below prime are definitely challenged in that type of market. So we're seeing that. But then on the positive side, a lot of the supply chain issues that we were dealing with, with new car sales seem to have subsided. So we're seeing good traction there in that space.

Got it. Maybe in the International portfolio, I mean, one of the success stories has been India. And it's kind of, I guess, been lost in the portfolio to a certain extent. And you guys obviously focused on this earnings call, which I think, brought it back to the spotlight. But maybe just to start with, if you can just size India in terms of the revenue, the growth, maybe even the margin profile just to start there.

Yes. So the India business this year will approach $300 million in revenue. If you went back to our Investor Day back in March of 2022, we were calling for that $300 million to come by the end of 2025. So the business has grown quite nicely for us. As far as margin is concerned, I mean, look, you can see our -- the International adjusted EBITDA margins well into the 40% range. We haven't specifically given India, but it's definitely in excess of that. It's a nicely profitable business, but one that in order for us to ensure that we continue to maintain the share that we have, it's one that we're relentless in investing back into to ensure that we maintain what we have. The slides that we included in our last earnings call just really speaks to the diversification that we have in that portfolio. In addition to core credit, we have a commercial business that's growing exceptionally well as well as a fraud business and the direct-to-consumer business. So we feel we're very bullish about the opportunities in this market on a go-forward basis. It's a business, just to kind of underscore this, that we've been around since its inception going back over 20 years ago. TransUnion was an initial shareholder with the leading banks in India. And what's been awesome about the story in India is just how we've partnered with them before we even had a majority ownership in the business to bring more sophisticated offerings to the market to help the customers solve problems that were emerging. It's actually fascinating to see the tools and the services that a business of that age has compared -- like I think about where TransUnion was at, it's pretty remarkable, the capabilities that, that business has. So lots of great runway for us in that market.

Yes. Because I guess maybe it's this history of -- maybe it's your relationship, your early-mover advantage, but Experian, Equifax, and I think there's even another player, CRIF, I think, in India. And I think even you add them all up and they're collectively not even close to your revenue, so what -- like what's the secret sauce with the CIBIL asset that you have?

Yes. Again, it goes back to the partnership. It goes back to 2000 -- like literally 2008, 2009, we took people from our business and moved them to India to work shoulder to shoulder with the team in India and understand what the customer needs were. And then we were able to help bring the innovation that we had globally at TransUnion to that marketplace. So just that type of focus and then continuing that. The one thing we don't do is we're not complacent about that market whatsoever. Like I said, it's an area of focus for us from an investment perspective. We want to make certain that we stay in good standing with the regulator, because as we continue to grow the relationship that we have with the Reserve Bank of India, is critical. And we have a good relationship with them. So maybe the less fun things about compliance, we focus on that to make the infrastructure as resilient as it possibly can be just because we see just a significant amount of opportunity. The demographics in the market with an emerging middle class and the government's mandate on financial inclusion, those play to our strengths, right?

Yes.

So it's definitely something, and we've got an absolutely amazing team out there.

And so maybe just one last question on India. I mean those demographics are pretty apparent. I mean you read it all the time, and India is a big investment focus area broadly speaking. But at $300 million of revenues, law of large numbers, like you've been growing 30% plus. Like what should we be holding you accountable to?

You're not going to give me to guide, but there's no reason for the business to have any significant slowdown though in its trajectory. Something pretty dramatic would have to change in the market. And it just seems like the Modi administration is very focused on financial inclusion. And we're tailoring our product offerings to that. Like we've got these awesome product that we partnered with a business in India that does satellite imagery to be able to do loans for agriculture. And as you know, so much of India is agricultural rural. So being able to partner with satellite imagery and credit data is just enabling loans to be made in that market that perhaps weren't being. So there's -- so the reason I bring that up is there's just market-specific things that we're able to do as well that we're really excited about.

Got it. Okay. Maybe we can shift gears a little bit to capital allocation.

Sure.