TransUnion (TRU) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us today. My name is Kelsey Zhu. I'm the Financial Information Services Analyst at Autonomous. And with me on stage, we have Chris Cartwright, the CEO of TransUnion. Welcome back, Chris, for a second year at our conference.

Well, thank you. Good to be here.

So since last year at our conference, a lot has changed at TransUnion. You're expanding your Global Capability Center. You're migrating onto the OneTru technology platform. You're almost completing the entire cloud transformation process. I believe we have a lot to talk about today. And maybe for starters, just tell us a little bit more about these transformation initiatives and tell us what you're most excited about in the next 5 years.

Okay. Well, very good. Well, look, maybe I'll start with just a bit of an overview so everybody's grounded about TransUnion on what we do. We're one of the largest providers of credit information globally, one of the Big Three, if you will. We have diversified well beyond core credit into marketing information, in the fraud mitigation, into public records-based investigative solutions, in the direct-to-consumer credit enablement types of products. In total, we're comfortably over $4 billion in revenue this year and approaching roughly $1.5 billion in EBITDA, if you will. And since I've run the business for the past 5 years, we have been in the process of transforming it to take advantage of the next level of growth. That transformation has really had 2 components. The first is extending the range of services that we provide to our customers to reflect their broader work intention, if you will, beyond just credit and understanding the risk and opportunity with extending credit or insurance policies, et cetera, to different consumer segments. And the second component was changing how we get the work done. So focusing on extending our value proposition, the roots of the business and still today, far and away, the largest single area of revenue comes from selling credit data, scores, predictive models and analytics services to lenders and insurers and a variety of other market segments. There are over 14 segments that we compete in, in the U.S. market alone. Beyond the core credit, it would be background and employment screening. It would include insurance, which I mentioned. It includes telecommunications, customer acquisition, and contract origination. It is a very powerful and predictive data set. But the intention of those customers really is not just to understand the segments of the market that they would like to access. It's to actually go and get the customers in those segments and start a healthy, profitable long-term relationship. And that's led us to extend organically and through acquisition into a full range of marketing services, both the digital and the physical and the traditional, if you will. And combine that with very strong online device identity and authentication so that when a customer comes to transact with a business after successfully reaching them through our marketing services, you can authenticate that, that customer is who they're representing themselves as and mitigate the fraud that arises from the transactions. So expanding the range of services is really going from that. Focus on credit, credit marketing and fraud mitigation, all connected by a common identity -- a common consumer identity. And that's one of the strengths of our capabilities. Look, we've got very good data, high-quality data, but we have very sophisticated processes for matching that data around a consolidated consumer identity, both physical characteristics but also digital characteristics, their devices, their device families, et cetera. So what we hope to do is broaden this range of services and capture revenues from adjacent processes that are highly complementary to our core. Now the way we're doing it has changed quite considerably over the last several years. Previously, you could think of TransUnion as a series of independent businesses that were part of a common family. It was very much a multi-domestic, vertically integrated type of approach. But much of what we were selling across these 30 different markets in which we compete, more similar solutions, particularly in financial services. So we said, hey, let's have more of a global intention and architecture to our business. And as we create the next generation of our product offerings, let's build it once and leverage it in as many different markets as we can so that we get considerably better scale, and we're in the process of doing it. That meant adopting a global approach to product management on our common services, and there are 6 of them in credit, analytics, marketing, fraud, et cetera, the ones I've been talking about. The other thing was we recognized that not all the work that we are doing in each of these 30 markets could best be done there, and that a portion of it should be pulled out in concentrated pool in centers of excellence around the world, where we could standardize practices, leverage management and bring automation to bear and create scale efficiencies. And we've set up those capability centers in India, in South Africa, and most recently, we're scaling in Costa Rica. TU has over 13,000 employees around the world. And by the end of this year, we'll probably have 5,000, 5,200 of that 13,000 in the capability centers. And so we're getting roughly to the balance that we want between employees deployed in local markets, where they really get around with customers and understand the wants and needs of that marketplace and fulfill and folks that build analytics, develop software, provide operational customer support and corporate services at scale in the centers of excellence. So that's the fulsome story. We expect this year that our growth rates in total are going to accelerate to mid-single digits-plus, and we're off to a pretty good start in Q1.

That's great. I have several follow-up questions. But before we dive into kind of the key business verticals, and I do want to spend some time talking about identity and fraud, which is a very attractive end market for TU, just 1 quick macro question I want to get your thoughts on, Chris. Where do you think we are in the global consumer credit cycle? You've seen credit conditions stabilize in Q1, with Q1 basically the trough, and things which should start recovering from here onwards. What are some of the key conditions that you're watching for that would drive that recovery outside of rate cuts?

Sure. Well, credit conditions vary in the different markets in which we compete in the U.S. and say, the U.K. in recent years, the story has been one of contraction and retrenchment, if you will. And in India and across our Asia Pacific region, really significant growth and the same is true for Latin America. 75% of the revenues-plus still come out of the U.S. And I think we saw stability emerging in the fourth quarter of last year and the first quarter of this year. And that was after a pre-market decline in origination volumes from, say, the second quarter of '22 through the third quarter of '23, right? So there was a big step back, if you will, driven by very aggressive rate increases by the Fed and increasing pressure on household financials because of higher debt service costs, higher prices for goods and services, inflation, and just on fewer cost-effective options for refinancing the debt. So all of those factors came into play, plus a flight of deposits out of the banking sector into money markets chasing higher yield. And we saw a big step change reduction in origination volumes across all categories in the third quarter. I would say now we are in more steady trough-ish, up and down type of market conditions. It's still a weakening origination environment, but where some categories are up a bit and some are down a bit and kind of from a volume perspective, it kind of nets out there. And that's kind of our posture for running the business, our expectation for '24. We're not expecting rate cuts. We're not expecting dramatic change in those market conditions. The biggest risk that we see currently are geopolitical risks. And look, that's actually good news because over the past couple of years, we've grown 3% organic in very difficult market conditions where there was a material volume decline. Now that we're in kind of more steady and stable positions, we're getting the benefit of higher sales volumes that we've been achieving in the past couple of years based on our broader product suite and our expanded sales capabilities. And so we expect growth rates to tick up, which is why we've had more aggressive guide this year than our results in '22 and '23 would suggest.

Got it. What are some of the leading indicators or data you would track to kind of see the acceleration of growth again? Outside of rate cuts, I'm guessing it's employment trends, delinquency rates. Anything else I'm missing here?

Yes. Well, sure. Look, obviously, rate cuts will help a lot because that will reduce the debt burdens in consumer households so will mitigating inflation, right? Particularly in an environment where there still have been some decent real wage gains, particularly amongst working-class employees who have been left behind in recent decades, they're starting to post some nice gains. Beyond that, we look at unemployment levels. Unemployment is very low. And we know that behaviorally, if consumers have a job, they tend to service their debt unless they lose that job or they have some other financial disruption that prevents them from paying back their obligations, right? So when they're under pressure, their discretionary consumption comes down as they prioritize paying the debt and, of course, GDP growth in the economy slows. And as we all know, that's been part of the Fed's plan roughly a couple of years now. So we'll look at interest rates. Of course, we'll look at consumer employment trends and real wage gains, and we will look at bank deposits because you've got to have deposits available in requiring loan origination that cover their costs in order to feed the origination fee. And those have been the key variables. Now of course, there are individual line of business metrics like origination volumes and delinquency rates and charge-off and the like that you pay attention to, but those tend to be the metrics that result from the higher level macro lending metrics.

Got it. Super helpful, Chris. Let's dive into your biggest segment, which is U.S. market Financial Services. In the mortgage space, recently, the CFPB director have made public remarks that kind of highlighted the price increases that we've seen in credit reports and credit scores. In the last 2 years, we've seen outsized pricing growth in the mortgage and credit data space. Curious to get your thoughts on kind of pricing outlook for 2025 onwards, and if there is a pricing ceiling you would consider for credit files and credit data.

Yes, for sure. So let me unbundle the dynamics within the mortgage market. Well, certainly, the mortgage market has been hard hit by higher rate. We went from -- in a zero interest rate environment, it was probably the best environment ever to originate a mortgage into refinance and the industry benefited from that. With a 500-point increase -- basis point increase, that volume has been cut by more than 60%, I think, from peak to presumably trough, if you will, now 60%, 65%. So that's the first thing to understand. And then secondly, there have been multiple changes in kind of the price and volume dynamics around reports and scores, separate items within the mortgage market. TransUnion has maintained its mortgage pricing in this market. It hasn't been flat but our pricing practices have been very consistent with prior years. We charge for the credit reports themselves. And then we charge a fixed percentage fee for processing whichever score is used, the advantaged FICO or some internally developed score, if you will. And there's a whole variety, although FICO is certainly, far and away, the market leader on mortgage origination scores. Now as FICO and other products were to raise their prices, it benefits us because we're charging a fixed percentage fee but we're not really initiating the price increases. Our credit box are staying comparably priced. And you saw in the director's comments where he singled out, I think, a couple of players that provide verified income and employment and mortgage pricing, raised question on some of those pricing practices, and it'd be interesting to see how that plays out itself. With regard to where I think those prices go in '25, first of all, I don't have detailed knowledge of that because that's another company. It's not us. But I think those companies have provided guidance as what they feel they should realize as part of the broader bundle of report and pricing on an origination transaction. And so I think I would look to those prior comments and understand how close are we to that and then probably ask them about what their plans are for the future once they realize that kind of value ratio. The other thing that's changed in the market, and this is again kind of a quasi-regulatory change, is the early assessment program by the GSEs, where a mortgage originator and get a read from the GSEs, Fannie and Freddie, about whether they would purchase the mortgage based on a single credit report pull. Now that is a program that has been piloted for several years but is now being broadly adopted by the industry. And in our guidance, as we thought about '24, we were very conservative in our assumptions about the volumes that would actually materialize around this prequalification, if you will, under the early assessment program. The volumes and the unit pricing have proven a bit favorable to what we estimated, and that's kind of what we flowed through our guidance. But I think because that early assessment program is both a lower cost but also is only a soft credit pull, meaning you can access the file but that access isn't factored into a credit score negatively, it's leading to more consumer shopping, right? So there's been some volume compensation because consumers are more willing to shop because they know the shopping behavior won't deteriorate their scores. So again, that's just another one of the several dynamics that were at play in the mortgage market this year beyond price increase concerns and the scores or the verification area.

Got it. I have a couple of follow-up questions on that. We'll come back to prequalification in a second. But just on the price increases for credit files and credit scores. Are lenders concerned about these price hikes at all or they're not really concerned because they're passing the cost on to consumers? And could you confirm about the potential actions the regulators can take? Or are there any potential actions the regulators can take when it comes to pricing regulation for the industry?

Yes. Well, first of all, I do think the lenders care about pricing, right? And most of the services that we offer in mortgage and elsewhere are heavily negotiated by, particularly at the high end of the market, where you've got big sophisticated buyers. So they care about the pricing. That said, the price of a credit score -- a credit report and a credit score is a very small proportion of overall loan origination costs. And so there are other parts of the cost equation that will garner a lot of attention. That said, now in terms of what the government may do in their power, I think that's a bit of an open question. I know that the concerns are real. And I know that the CFPB is a powerful regulator and one that's willing to break with tradition and pursue different approaches to solve problems. And so I think we'll just have to see how that plays out. I do know from experience and it's a core belief that it's probably never a good idea to take relevant data out of the equation like this tri-merge to bi-merge proposal from the FHFA. And when we looked at that, having a third credit report increases the addressable market. It does promote financial inclusion as well as more accurate pricing. And when you go to 2 credit reports, the folks that are excluded tend to be financially underprivileged consumers who skew Black and Brown disproportionately. And we were able to show that to the industry. It has garnered a lot of interest on Capitol Hill. There's even regulation that was -- or there was legislation recently proposed to require the FHFA to disclose the analysis that they did before issuing their guidance to go to 2 credit reports from 3. Now that proposal, the implementation time frame has been materially extended as the FHFA is seeking broader input from industry and further analytics. So I think the earliest that they said it would be implemented, if it's implemented at all, would be late '25 or beyond. So again, that's another area of regulatory concern and we're going to have to see how that plays out.

Chris, I'm glad you brought up the regulatory update. So the FHFA has announced 2 parts regulatory changes. The first part is the tri-merge to bi-merge migration which you've highlighted. And the second part is the industry is migrating from the classic FICO score to a combination of FICO 10T and Vantage 4.0. So curious to get your thoughts around future pricing strategy for Vantage 4.0, are you thinking more pricing Vantage 4.0 at par with FICO since now it's FHFA Fannie and Freddie mandated credit score? Or are you more inclined to price it below FICO to Vantage fortune gain share in other verticals like credit cards and auto and others? Since in my understanding, it's the same score product across mortgage or auto for Vantage 4.0.

That's right. Well, look, it's probably premature to talk about the pricing philosophy on Vantage because the FHFA is still studying and considering the implementation path for scores on mortgage transaction. The VantageScore has different economics for the bureaus than third-party or the third scores where we would pay a royalty to. So we've got different and superior economics. And it's really going to be market competition, I think, ultimately that determines how we price this. But the Vantage 4.0 particular is an extremely accurate broad and inclusive score. And that's something we're very proud of because we're all about financial inclusion. It's good for consumers, it's good for banks, it's good for all of us. And I think it's smart that it's finally going to be utilized in the mortgage origination process.

Got it. Kind of coming back to the prequalification topic. I think previously, whenever we talk about tri-merge and bi-merge, the consensus from the industry is more lenders will likely stick to tri-merge instead of rerouting your model and now taking 2 files instead of 3. However, what we've seen in Q1 is that the FHFA has allowed lenders to use a single bureau file to assess preliminarily the creditworthiness...

Early assessment.

Early assessment of new potential borrower who walks in the door. So pricing pass-through and the volume trends we've seen with this new product is actually way above the industry expectations. Does that change your view when it comes to volume expectations if the tri-merge to bi-merge implementation does go through? Do you believe lenders will still stick to a tri-merge report instead of opting for a bi-merge option since it's cheaper potentially?

Yes. Well, look, again, I would just reinforce that there's a lot of uncertainty as to whether the bi-merge will ever come about. I think it's a difficult position for the regulator to take an action that is going to harm financial inclusion or disadvantaged consumers already, right? And I think many in Congress have spoken out and said, why are we doing this? It doesn't seem like that good an idea particularly since reports and scores are a very small part of overall origination cost. Now in terms of prequalification and the data and scores that are utilized there, you first have to understand that there were a variety -- there are and have been a variety of practices at the qualification stage. It wasn't like it was all tri-merge. Some originator certainly hold 3, some hold 2, and some hold none. So if you have an ongoing banking relationship, you can go to your bank and they'll probably start the qualification process because they know you, right? But with this early assessment program, they can get a nod from the GSEs as to whether they would purchase the loan or not. They may pull 1 or they may pull 2 because they don't want to not go forward originating a mortgage because 1 bureau score was too low to get approval by the GSEs. And then on top of that, I was mentioning because these are soft credit pulls at the qualification process, consumers are more willing to shop mortgage rate. So there's some further volume offset to this idea that it's all going to go to 1 score at origination.

Got it, got it. Maybe just 1 last question for the Financial Services vertical before we switch gears to talk about Emerging Verticals. So fintech and consumer lending has been a key growth driver for TransUnion historically. I was wondering if you could tell us a little bit more about your outlook for this sector and the segments in 2024 and 2025. And if we do see a macro recovery in the second half of the year, will fintech lenders basically be the first to recover?

I would expect so. I mean, look, fintech is hunkered down right now, and many fintech in the space generally is struggling to get funding, to get liquidity to originate, right? If we have a decline in rates, you're going to see that flow into fintechs and origination volumes will pick up substantially there. And that's good news, right? Because it's more competition, it's more access for consumers. Again, we're not running our business or communicating growth expectations, anticipating any rate cuts, right? We're in a higher for longer and no rate cut posture, right? So I wouldn't expect that kind of recovery. Although we are seeing some improvement in loan marketing generally, but it's very modest, right? This is more a kind of steady trough like which we were describing earlier environment.

Got it. Let's switch gears to talk about Emerging Verticals, and in that segment, the biggest sector is insurance. This is an area where I think a lot of investors are trying to dive in to understand a little bit better right now. And for this segment, I was wondering if you can first tell us a little bit more about how insurance companies use TransUnion's data and products and services. And what kind of competitors do you usually see in this space? Because as I understand, it's not the usual suspects. And what kind of growth rates should we expect in a more normalized environment?

Yes. So like in lending, but to a greater degree, insurance, credit information is one permitted type of information for evaluating the risk of a consumer and the desirability of issuing them a policy. And typically, what an underwriter will do is well, first, they'll look at their existing claims and coverage if they're not due to the market. They'll review any insurance claims that they filed over their history. And those 2 information sources are provided by either LexisNexis or Verisk typically. They'll look at credit because credit information is very predictive at driving behavior. Then they'll also look at their motor vehicle driving records. Now that information, the MVRs typically comes from a state-level report, and that state-level report aggregates all of the driving violations that happen in municipalities, if you will. We have a product that both provides the MVR but also directly sources the municipal-level information, which typically is more current and broader and richer than what gets to the MVR. Now in recent years, as states have been under revenue pressure, they've been increasing the prices of the MVR. So that means the underlying driver's risk information, that's the name of the product that we get, in the municipal level have favorable economics, and we've been rapidly growing. The other thing is if I were to get a violation in a local county or municipality, I can go to traffic court, maybe beat the wrap by hiring a smart lawyer, or I can maybe do a defensive driving course. And then that's no longer included on the information that goes up to the state level. It would be included in our policy, and it is permissible for an insurance company to rate and price their policy based on the existence of that violation. So it's also more complete data. So it's claims and coverage, it's credit and it's driving history, and we provide 2 of those 3 elements. Now all of the bureaus also provide credit information into this origination evaluation mix, if you will. We think we're the largest provider of that data.

Got it. And in terms of kind of medium-term growth rate expectations in a more normalized environment?

Historically, as you know, it's been a high-single and sometimes low double-digit grower. It struggled in the past couple of years because of the struggles in the insurance industry around originating new policies. They haven't been profitable. They needed to get price increases. They've succeeded in getting most of what they need. And so some of them -- some of the large carriers have talked about this recently are returning to customer acquisition and their marketing spend is going up. And so that's going to help our business. Now we support the full ecosystem, and we think it's going to be a couple of years until the ecosystem is back, stable and growing. But we're going to grow faster this year, probably mid-single digits or perhaps better than we did in the prior years, and this is step 1 in the recovery of growth in that segment.