TransUnion (TRU) Earnings Call Transcript & Summary

Good morning. I'm Andrew Steinerman, your business information services analyst, and welcome to the Ultimate Services Investor Conference. I don't know if people are counting, but 2024 is our 15th annual conference, and there's already a save the date for next year. So you'll see it on the screen, not here, but out there, you'll see the save the date for November 25. This is our first fireside chat. This is the info services track. Obviously, we have business services, info services, payment and tech services, and I'll be between business services, infoservices. Today this is the TransUnion dialogue, this is fireside chat. We have 30 minutes. I'll be asking about 20 minutes of questions, and then I'm going to open it up to you, so start thinking about your questions. Chris Cartwright, CEO, is with us again today. We very much appreciate. Greg Bardi next to him, Head of IR. And we're just going to kind of jump in here.

So post election, when you think about running a diversified Info Services business with a credit bureau kind of at its core, does that change anything with a kind of Republican sweep?

Well, Good morning Andrew, and as always, thanks for having me, and I love the morning energy, so I'm going to try and keep pace. Obviously, a lot going on politically in the U.S. and a lot of speculation about what it means for the economy and for our business in particular. I think we should probably start by just breaking down the current and focusing on the health of consumer households as well as the health of the lending industry. As you know, we've been describing market volumes as muted, but stable over these past several quarters, and that's been good. That's been a significant improvement over what we faced for probably 8 quarters prior to the beginning of this year. Households remain in pretty good shape. And unemployment is extremely low. There has been some real wage gains. Inflation has largely abated. And consumer household debt levels are relatively low by historic standards, part of the deleveraging that happened because of all the stimulus provided during the COVID era. I would say that lower income consumers and subprime consumers are struggling, and struggling under increased debt loads, particularly on their cards, where balances are revolving at a pretty high level. So they need lower rates, and they need some real wage growth to kind of dig out from those pressures. But overall, the consumer situation is relatively stable. I think lenders are in pretty good shape as well. We had some disruption last year. A combination of deposits flowing out of the banking system into money markets and fixed incomes with increasing rates. It took some -- and there were some bank instability as we all know, that led to a migration of deposits out of the mid-tier and the small tier banks, kind of a flight to safety. As a result of that, the amount of capital available for these banks to loan against these households was diminished. And the good news is, though, that they've been able to attract deposits back into the banking system, deposits are replenished against prior levels. And so I think things are fairly stable there. And the delinquency environment seems kind of manageable, right? We know that delinquencies were rising against pre-pandemic levels. They were artificially low during the COVID period. They've now kind of returned to historic norms in their highest again at the subprime risk tiers. So overall, I think those conditions lead to muted, but stable lending volumes. I think when you look at the possible changes in economic policy under the Republicans, I think we're expecting a lighter touch regulatory environment, perhaps some reengineering or repeal of different regulations. I think the hope is that growth will accelerate, which will be good for lenders and households alike. I think some of the more onerous provisions around Basel III, namely banks having to maintain a higher deposit base are going to be relaxed. That means banks will have more capital to lend and provided that consumers remain lendable and attractive, that could be a volume upside for the industry. Now, of course, on the negative side, there's concern about potential spending deficits and reigniting inflation with tariffs. I think that's all a big TBD. I mean, understanding is there's what is said on the campaign trail and what is actually attempted once you have office and then what can actually be affected given the branches of government and the like. And I think we're just going to have to see how these net out, right?

Okay, just with what we know now, does that seem like more conducive on a net basis, even though we still have to see the details on how it plays out and we don't know about tariffs. But right now, this moment where we are before -- now versus before election, does it seem net more conducive for your customers and your business?

Yes. I would say it's a net -- I'm kind of net neutral at this point. Clearly, I'm a little bit greedy after a couple of years of difficult economic conditions. And so I'd love to see interest rates as low as they can go. The Fed's cut rates by 3/4 of a point, but that hasn't really translated into a lower 10-year treasury rate, which underpins the mortgage market, which is the most sensitive of the markets that we compete in. Now rates at this level are comfortable in consumer lending or car lending or even auto. But a lower rate environment that's ultimately going to be determined by inflation is conducive to an increase in lending volumes across the various loan categories, right? So we're very focused on that. In fact, in late -- I'd say in late September, we experienced a bit of a pickup, a bump upward, I would say, in mortgage volumes when the tenure was down around 3.8% or something like that. That has abated to a degree in October with the tick up. Again, that is -- that's almost like a heart monitor. The relationship between volumes and interest rates in mortgage and mortgage refinance. So I'd say it's kind of a net positive -- I'm sorry, a net neutral at this point, and we're going to have to see how it develops.

I understand. One group of lenders, you didn't mention yet, are the fintech lenders. You can remind us how important they are to you. Obviously, TransUnion has a great position with fintech lenders. And when you look at the earnings season for the fintech lenders, there's all sorts of like positive glimmers, securitizations, like they surely seem revving up.

Yes, I would agree with that. In our discussions with fintechs, they have become more focused on acquisition and...

Acquisition of customers, yes?

Yes. Sorry -- clarification. They want to grow again. And there's been kind of a long cold winter in fintech as rates increased, and there was a lot of uncertainty about the health of the subprime markets. Fintech is about $140 million, $150 million in revenue for TransUnion. It has been declining materially over the past couple of years. But our market share in fintech remains very high, and we still have a lot of ways in which we can expand our services, particularly in the marketing area amongst fintechs. So I'm encouraged by what I see. I think, again, they feel like they've survived the worst of it and that they're positioned to expand and they're going to rev up the acquisition engines but proceed responsibly.

Okay. That's great. Okay. Think about your organic revenue growth now versus where you want to get to, which is high single digits, what needs to happen? Is it simply consumer lending needs to pick up? Is that the answer? Like what needs to happen to get from here to there?

Yes. Well, certainly, market volumes are helpful, but I think we've invested in a whole variety of areas to improve the structural growth rates and the profitability of the portfolio over time. So it's probably worth talking about it on a couple of dimensions. First, a level set in '22 and '23, our growth rates fell to 3% organic in both years, below the long-term growth algorithm, of course, but in the context of a pretty difficult reset in lending volumes and marketing spend. That said, that growth rate put us in kind of the middle of the pack amongst the competitors and did demonstrate a lot of portfolio resiliency that's come from the diversification that we've achieved geographically and across product lines over the past decade. This year, we're trending more towards 9% organic growth. And again, in that, through the first 3 quarters, we really haven't benefited from any volume upticks. And in our guidance, we haven't assumed any rate-related volume benefits, right? And so I think what you're starting to see is the growthfulness of the underlying portfolio even in an environment where there's no volume expansion and where lending conditions continue to be a little bit muted. Now on the execution side, with our transformational strategy in the middle to late innings of delivery, if you will, I believe that we will substantially increase our inherent growth rates of the business by integrating the various products and point solutions that we have built over time and acquired in credit, analytics, marketing and fraud, into integrated product suites, onto a common data acquisition, management and analytics platform, which is one true, and deploying all of that platform and product goodness across the 30 different markets or however -- many markets we compete in that are -- those solutions are relevant in. On top of that, this integration and modernization of our technology and products is not only letting us accelerate our rate of innovation, rather. But we're also consolidating our underlying technologies. We're taking material amounts of cost on the business -- out of the business. And with our global operating model, we've increasingly shift the work that we do to support our markets into processing centers and technology centers around the world, again, lowering our cost structure. So with the combination of better market conditions and then executing on all of the investments that we have been deep into and steadfastly focused on during difficult times, I think the inherent growth rates of the portfolio go up and margins expand.

I think you said there's things you could do to accelerate growth even without consumer credit activity picking up, right?

For sure.

Okay. Great. Thinking forward into next year, what are the product areas? I know you're very clear about your product suites, but which product areas do you think could really be needle movers next year, fraud, identity, analytics?

And marketing. So I would -- I would...

So that was yes to all.

And direct-to-consumer.

Wait till we get to that one.

Is that's a question on your list?

It is. It is. Let's get to direct-to-consumer, go ahead, fraud, analytics, ID and marketing. Why is...

So listen, just to be clear, and to bridge it back to your question about growth rates in the portfolio and growth independent of market volumes and gyrations, the purpose of acquiring Neustar and some of the other assets that we acquired like Sontiq, which put us in deeper into identity protection and breach mitigation, we simply felt we had the opportunity to do more for the customers in the markets that we serve. Obviously, we had a very evolved and mature position in credit, but we had spilled over into fraud and marketing adjacencies, and we wanted to bring the full complement of capabilities to compete in those areas and Neustar helped us do it. And they helped us do it on this foundation of consumer identity where we could relate all of the data and services back to individual consumers. It's taken some time to integrate all of those products into integrated suites and to bring together all of the data on a common platform. We have largely done that at this point. And in recent quarters, you've seen us announce new innovation in credit with FactorTrust's re-platforming. The launch of an integrated marketing suite called TruAudience, an integrated fraud suite, TruValidate and our TruIQ family of analytics solutions. So I expect that you will see accelerating revenues across all of those categories next year.

That's pretty awesome. Okay. Now you wanted to jump into Consumer Interactive. You'll -- correct me if you think this is unfair, but it just seems like it's taken a little while longer than I would have guessed for TransUnion to kind of get all its playbook together in Consumer Interactive. I used to say, I love the indirect business because of just increasing channel partners, but some of those channel partners are now kind of muted in their marketing and lead gen initiatives. And so I want to start by saying like, is the indirect business, the -- a good business and how are you going to thrive into it? And then the direct channel, how is your position going to change in the direct channel? Let's start with indirect.

Well, sure. Well, look, the consumer business in total, which is a little under $600 million in the portfolio, has been in decline for roughly 2 years. The consumer business is made up of three parts. And the decline is really largely attributable to a mid-teens negative growth rate in our direct-to-consumer business, that was a function of two things. One, some marketing repositioning that we needed to do and have done, which means we're spending less to acquire customers, but we are acquiring smaller tranches, smaller vintages of customers each month, and not quite enough to offset the natural rate of attrition in that business. And so we needed some time to reach kind of an equilibrium level and we are approaching that in the fourth quarter of this year, and I suspect on into the first quarter of next year. But the more fundamental thing to understand is that the things that made us successful in direct-to-consumer say, 4 years ago, are not the things that we needed to go forward to be successful. So we need several things. One, we needed to broaden our product offerings. The combination of a well-known brand and some marketing efforts generates a good deal of consumer traffic to TransUnion -- transunion.com. Previously, we could only monetize that through credit education and monitoring-oriented subscription services. Subscription services became less attractive with the rise of freemium players in the marketplace. So now look, there's still a segment of the market that wants a subscription, and we're able to provide that. We also needed to provide identity protection and breach mitigation services. We acquired Sontiq. Sontiq has done very well. It's ahead of all of its financial measures and has been a key ingredient in returning the consumer business to growth this year overall. And so we're pleased by adding that second product. The third missing ingredient, though, was an inventory -- a broad inventory of lending offers, right? And we have been investing and working to pull that panel of offers together, and offers engine. And those three components is what's required in order to fully monetize consumer traffic. In addition to that, we needed to build an elegant and user-friendly front end in the direct-to-consumer business to bring this broader suite of products to them in a way that will allow us to monetize it effectively. And so in the early part of next year, you will hear us talk about the new and improved direct-to-consumer interface and the broader product offering in that marketplace. And I think in the coming quarters, you will see an improvement in the growth rate, a material improvement in the growth rate, in the direct portion of the overall consumer business. Now the indirect part of the business has returned to growth. It's plugging along at low single digits. And again, we have leading market share in that space, although our competitors are there as well now. So what we needed to do to better support our market share is, again, broaden our value proposition. I don't want to just bring one product to the indirect market space. Credit information and analytics, and we were the first mover there, which is how we gained all of that share. I want to provide an offers engine for the industry. I want to provide the breach and identity -- remediation services to the industry. And the work that we've done to rehabilitate and reposition our direct-to-consumer business will directly translate into a better offering to the indirect and drive revenues there.

And is that from cross-selling more into your current indirect? Or is it new indirect clients?

Both.

And so when we look into next year, we're going to have indirect revenues accelerating, and we're going to have direct revenues inflect positively?

Yes. And what you should take from this is that the direct-to-consumer business, which has been negative for a couple of years, we think will return to positive. And it's also a highly profitable part of our business, right? So we needed to make these foundational investments and reset the business to compete at this era and most of those investments are behind us, and we'll be bringing them to market over the course of '25.

And just for further context setting in terms of the sizing here, right, over 2/3 of the revenues within Consumer Interactive are in the indirect channel, right? And some of the -- we still had flat to some growth in that channel. Some of the pressure has been the same thing that our financial services customers are seeing, right? They're not acquiring consumers as quickly and that impacts a lot of those customers. So to the extent you see -- or recovery there that's a beneficiary in that indirect channel as well.

Are you counting on that? Were you counting on the indirect, Credit Karma's of the world returning to growth when you made those comments? It just sounded like there's still a lot of self-help that you could do in terms of accelerating our growth in CIs now that the investments have been made.

Yes. Listen, I've been very focused on, in my comments, on the structural improvements we're making to our business, the self-help. If you will, independent of market benefits assuming that lenders become more front-footed on client acquisition.

Right. So you sort of -- you do need a more conducive environment too?

It's helpful. But what I'm saying is we can return to positive growth, independent improvements in the macro environment.

Okay. Perfect. Big picture, talk about where you are in terms of proprietary data? I think one of the underappreciated things is just your core data sets. People say, oh, there's three places to get consumer credit data. I would say there's only three places to get consumer credit data. But please talk about -- more about where you think your strengths are in proprietary data and where your coverage is in those proprietary data sets?

Well, sure. Let's start off with the core of credit, and we're extremely well positioned there. We were the first mover in the market with trended credit. We've got the deepest coverage. We go back 30 months. And we have, arguably, the largest set of credit-related data attributes. And so the credit data itself is the most granular form of information. The attributes are abstractions, aggregations of underlying credit data that data scientists and modelers use to build their predictive models, right? So having an advantage in attributes and having meaningful attributes is really making your data more useful and actionable to consumers. So we're in great shape there. We've been a leader in alternative data for a long time through L2C, which we acquired some years ago and also through FactorTrust, which was a short-term unsecured or payday lending oriented bureau, right? And then again, we are ingesting rent information and utility and other types of complementary data. It's not as good as it would be if we had a little legislative and regulatory support. And I think it's a hugely important and missing element in the financial inclusion picture in the U.S. right. And so we're going to continue to lobby for that because that would be a great way to increase participation in the mainstream lending segment.

Right. So just to give everyone the context there. What Chris is saying is there's a lot of use cases for our credit report that are proven statistically. And there's been resistance, again from Congress, of what use cases there could be. And so like if you're -- if you're trying -- if you're a consumer, you're trying to take out an apartment, should a decisioning factor for the landlord be a credit report? And of course, Chris would say, look, we'll show you the statistical value of this. And then consumer advocates would say like, oh my god, he has a bad consumer credit report and now he can't get an apartment also. Is that right?

Well, you've definitely touched on an important issue in the industry. The point that I was trying to make is that if you want to include the most people possible in the mainstream lending economy and some proportion of the adult population doesn't have credit already, you need to look at their history of rental payment.

I'm sorry, you were talking about the value of data?

Yes, because they're really predictive and we always want to include more of that. So when you asked about the coverage, I have coverage, but it's not that good. But you make a fair point as well, and perhaps we'll get to that later in the conversation. So look...

But you brought up legislators. That's why -- that's why my head went in that direction.

We're always encouraging legislators and regulators to enact rules that encourage or require the contribution of more alternative data.

I see. Yes, yes.

Because that will expand the pie.

Right, right. You're looking for both. You want more use cases out of the credit data and you want more allowance of alternative data?

For sure.

I got you.

Right. So with that kind of covered, when I get to the marketing side of things, we have a lot of proprietary data because of all of our integrations across the digital marketing ecosystem, right? So we have we have proprietary but not necessarily exclusive relationships with hundreds of players, walled garden streaming providers, big publishers, et cetera, where we share information around which consumer or consumer cohorts are seeing, what adds, how they're interacting with them and what they do thereafter. And that underpins a data set that allows us to measure the performance of marketing campaigns. And that information, which I think, we're quite advantaged in, sits on top of all of the market segment information you would expect, demographic, psychographic, behavioral and just thousands and thousands of consumer audiences. So part of our play is to marry that trove of marketing information with the underlying credit information around a single consumer and allow both risk management as well as customer acquisition activities to happen on the OneTru platform. And then, of course, when you get to fraud, we've got great device coverage and device coverage globally, courtesy the iovation acquisition, and now all of that data in those transactions and the reputation that devices get through their interactions...

Can you please give the number of devices. Like what percentage coverage do you think you have of devices in the U.S. Is it like a really high number -- like I just don't know the number of total devices and you give device -- how many devices...

Yes, we've seen billions and billions of devices globally. It's concentrated in the U.S. I can't really speak to the proportion of devices covered, but I would suspect that we have seen a lot -- most of the digital devices in the U.S., a majority.

A question in the audience?

Anyway, that gives you a flavor of some of the proprietary data assets within the U.S.

Yes. Okay. Questions. Go ahead.

Chris, maybe a specific question for you on credit reports in the mortgage origination process. I think we've seen a trend to 1B and soft -- to 1 bureau pulls and soft pulls and prequal. Do you think that extends through hard pulls and the rest of the mortgage origination process?

I think the mortgage process is having the beginning in the ending phase, the prequalification and then the origination phase. And origination still requires a tri-merge and so the dynamics and economics there aren't changed. What changed is the qualification phase where the GSEs through the FHFA have said that you can only pull on bureau if you want to, right? Now in our guidance for this year, we assumed that, that would be adopted with some material penetration. And what we saw is that it has not been adopted. And to the degree that we modeled, which is why in the first quarter, we materially outperformed mortgage revenue expectations and raised the guide for the remainder of the year. And so when consuming information to understand a risk, there's always a tension between spending as little as possible, right, to minimize your acquisition cost but also making sure you get all of the information you need to monetize the opportunity. So if you only pull on bureau, that consumer, which you've attracted to your business may not qualify. You pull a second bureau that has a different score, suddenly they may qualify. If you pull a third, there's again an incremental benefit, but perhaps not enough to justify pulling three on the front end. What we're seeing is a lot of 2 bureau behavior in the adoption. And I think that's been a positive for volumes and adoption at this point.

And I'd say at the point of origination, there are some nice studies that we've put out on this -- on the 3 to 2 and the potential unintended consequences in terms of data comprehensiveness and that the impact on consumers -- there's like 25% of consumers that can have their score impacted by 25 points, it over skews to underrepresented populations, populations within file. So there is still quite a bit of value in pulling all 3 for large portions of the population.

Last question. I appreciate that you're here every year with me. So thinking forward to next November. What do you think we'll be talking about in TransUnion that's not fully appreciated today and will be revealed and important as the next 12 months go through?

Yes. So first of all, it's always great to be here. It's a great conference. So kudos to you, Andrew. But what I would say is, look, for 4 years, we've been talking about transforming our business, both in terms of the products that we're offering customers, but also the manner in which we get the work done, whether that's the underlying technology or the operational support. And we've invested heavily and consistently to raise the business to a higher level of structural growth and higher profitability. And I think you're going to see increasingly, those investments proving out in the coming year. I think you're already seeing plenty of evidence of that with the acceleration in the launch of new products. So more innovation, more consolidation in a common product tech platform and more leverage for the organization out of a common operations tech platform, but also common operations themselves out of our global operating centers in India, South Africa and Costa Rica. So you'll start to see the full realization of the business benefit of that.

Excellent. Thank you, Chris and Greg.

Thank you.

Thank you.

Thanks, everyone. Also our information services data book is up here. If you want to grab it. It's our quarterly primer that we just published for the conference.