TransUnion (TRU) Earnings Call Transcript & Summary

All right. Good morning, everybody. Let's get this started. Thank you for being here. My name is Manav Patnaik. I'm Barclays' business and information services analyst, for those of you who don't know me. I'm glad to kick off day 2 here on our side of the universe with TransUnion, and we have Chris Cartwright, the CEO. So Chris, thank you for being here.

Thanks, Manav.

Maybe, Chris, just from your vantage point, since you have a unique kind of insight into the end markets and so forth, just a broader macro question. A lot of focus on rate cuts and jobs data and employment. But just from your vantage point, like what are you seeing? Let's start with the U.S. for now.

Sure. Well, I'd say for about 18 months now, we have characterized the macro conditions as still muted, but stable, muted because in the 4 subcomponents of financial services, the volumes and say mortgage and auto and card and consumer lending are below their historic trends, right, particularly in mortgage, as we know, which is still like 1995 levels. The volumes are muted, but there has been volume stability at these lower levels. And I would say this year, we had a little bit of a bump up, right? It's nice to see after the volatility of '22 and '23. In this environment, we've been able to return to high-single-digit growth, grew at about 8.5% in the first half of the year. And so far, the trends that we're seeing volume-wise in the third quarter are very consistent with that and consistent with what we need to achieve and hopefully surpass our guidance.

Okay. And when you think about over, let's just say, the next 12 months, rate cuts in isolation are obviously good for lending and for your business. But how do you balance -- what else do you look at in terms of projecting or thinking about what volumes might act like for you guys?

Yes. So what I'd say is, look, the banks reported a week or 2 ago. And those are all strong reports. And for the first time in a while, we're seeing personal loan volume growth, which is great, and delinquencies are at reasonable levels across all the categories. The concern now is that the labor market has deteriorated somewhat and that certain households will be distressed and will become less lendable. If that's accompanied by rate cuts, they're going to stabilize that their GDP growth, that's a terrific and probably net positive counterbalance to a certain level of unemployment increase. And the rate cuts help, not just in mortgage to spawn some refinancing activity but really across the board. Auto loans can be refinanced. There's still a considerable amount of revolving credit debt out there. And within the consumer lending category, which is back strongly this year, fintechs are well supplied to execute loan consolidation programs. So I think the rate cuts will be further net positive to market volumes.

Got it. We focused on volumes, obviously, thus far, but you guys have been outgrowing volumes for quite some time over the years. So maybe just by category, start with -- maybe since you mentioned fintech, let's just start there. Like, can you just remind us of the -- you guys have had the lead with the fintechs for a while. Like what is the value proposition there? And how do you grow above just their lending volumes?

Yes. So fintech is just another phase kind of a web enablement of consumer lending in the U.S. That's been part of personal lending for decades and most of those consumer lenders are not depositories, right? They're borrowing from the capital markets. Now the fintechs emerged a decade ago or more and in a really low rate environment, and they achieved nice market share amongst consumers, and they probably grew a lot faster than they would otherwise have grown because of a really low rate environment. But when rates were increased so much in 2022, they fell off quite aggressively. So it was a pretty volatile period that I think kind of taints the consumer space as being more volatile than it actually is historically, right? Now what you're seeing is that these lenders have survived a very difficult period. Their credit delinquencies have held up quite well and their capital has flowed back to the space that's allowed them to start lending pretty aggressively again. So we have a lot of market share there. We were a first mover in providing data and analytics to build their initial lending models and have supported them well along the way. We've only increased our market share. But now we're starting to penetrate that further with phone solutions with data enrichment and marketing flavored solutions. And so there's just more products being sold into the consumer lending/fintech category because we now have a broader portfolio of products.

Got it. And then similarly, if you touch on auto, for example, you guys have grown well above the volumes there. So what are some of the trends you're seeing in auto? And is that sustainable?

Yes. Well, the underlying trends in auto, there was, as we all know, some pull forward because of fears over the tariffs and that increased volumes in the early part of the second quarter. By June, that had kind of run its course. Now our performance has been above the volume dimension there because, one, we've been able to put through some price increases on our own data and then third-party score providers have also put price increases through there. In addition to that, though, we've just broadened the mix of products that we're selling in there. So they're using a lot of trusted call solutions. And again, some of our data enrichment solutions. We have further penetrated the portfolio management component of the business, not just the origination volumes. And so again, having more products and taking them to these different segments is benefiting our growth rate.

Got it. Maybe on mortgage as well, just to touch on that. I mean, I think there, there's been a lot more dynamic of the third-party scoring and the pricing and so forth. And maybe I'll come back to that question later, but just your thoughts on -- we've all been waiting for this mortgage market recovery. At some point, it's taken a whole lot longer. Do you think a rate cut is enough? Or what else do you see in the data that you guys track closely that's required for a more sustained recovery?

Well, there's still not a lot of refinance activity happening at this rate level. If we can get a rate cut or 2, I think you'll start to get to a threshold where it will be attractive to refinance some mortgages. I think there are 8.3 million mortgages in the U.S. that are 6% and above. And so if you can get 30-year fixed rates down, in the high 5s or the mid-5s, there becomes a nice refi opportunity. And if it's a slow decline in rates over a period of time, lenders are going to get multiple bites at the refinancing apple, so to speak, if that's where things go. Of course, we're also going to have to just to see what happens on the inflation front. Inflation is still plugging along with a 3 in it and it would be better if it were a little bit lower, but it may not transition to lower levels until after a year of full tariff program implementation, right? So that's another variable there. But I will say this, toward the end of the Biden administration, the 10-year fell to like 3.7%, 3.8%. And I don't know exactly what the mortgage rates were in the market, but we did see a turn on in the refinance cycle at that level. Now we're not that far. We're 0.5 point or so away from those levels. And if we get to that again, I would expect a perk up in foreclosure volumes. And it's a -- I'm sorry, refinancing volumes, not foreclosure volumes.

And just to clarify, in refinancing versus purchase like in terms of inquiries, a refi is pretty much one for one-- I mean not as many pools for origination, right, in terms of backing volumes and inquiries for you guys?

Yes. That is correct. Although you know from some earlier discussions that we were in together, that there are just a lot of dynamics in play. A lot of changes in the mortgage marketplace that are impacting the volume of inquiries relative to the volume of loans originated. And as credit pulls in the qualification process have gone from hard inquiries to soft inquiries, it's encouraging consumers to shop more. And that's an offset, I think, to some of the efficiencies that you're seeing in the GSE early access program where you no longer have to pull 3 bureau reports on qualification.

And this whole pre-qual dynamic, obviously, over the last year has really, I think, taken a hold. But why now? Like why weren't people doing pre-quals before? And then in terms of your comment on share dynamics, like is it really just going to 1 bureau or is it sometimes 2, some people still pulling 3 in the pre-qual process?

Well, the early access program in this pre-qual reform where you don't have to pull 3 bureaus is a relatively new development, right? So it's probably been a couple of years, maybe 18 months getting implemented across the market. So that's a relatively new dynamic that the market's digesting.

Okay. Maybe sticking to mortgage. There's been a lot of noise from the FHFA, the new leadership there. It sounds like the [ 3D ] is still staying as of today. But just your thoughts on the lenders' choice. You jointly, I guess, own the VantageScore with the other 2 bureaus. Just any change in strategy so far? Or how long do you think all the stakes?

Look, I think it's going to take some time. The mortgage industry is complex. The origination and ownership process has a lot of different players, they each play a role and sometimes they have competing incentives across the spectrum of origination to ultimate ownership. Director Pulte has said that the Tri-Merge is going to stay. I think that is a solid decision because it's almost axiomatic in data and analytics that more relevant data produces a better outcome. And there are still differences in the bureau files. S&P did an independent analysis of that, that showed just the shift from a 3 bureau pool to a 2 bureau pool resulted in millions of Americans not qualifying for a mortgage or qualifying for a mortgage, but at a higher rate. And given that these are long-duration credits, a relatively small difference in interest rates adds up to significant increased interest expense over the mortgage. In terms of what score is used upfront for qualifying a consumer for potentially getting a mortgage, I think the market is long overdue for a shift from a score that's based on a point-in-time credit information to trended credit information. So Vantage 4.0 is based on trended credit information and the lending market in the U.S. and in many developed markets around the world for a decade now has been pivoting to trended credit information because it's more predictive and the lenders pay price premiums for it around the world because it is more predictive. And in fact, the GSEs for probably 8 years now have required trended credit data in the U.S. for their own underwriting processes. So there's just no doubt that more data points around credit and even rental payment information and other alternative data sets maximizes the addressable market of potential mortgages, which is good for originators, but also improves safety and soundness throughout the process. So it's good that both the VantageScore and the FICO 10 T score, which is also based on trended data also includes rental information are now being pushed in the market, right? Because the FICO classic is 20 years old, and it's a point-in-time data. This is going to broaden the market and improve safety and soundness, whether it's FICO or Vantage. And then the time to transition and the ultimate pricing and all that, which I know is on everybody's mind, it's complicated. These things are going to take time. Some of the rules are going to have to be further clarified. I think pilots will be run in parallel for understanding, but net-net, I think it's good that qualification move to a more predictive data set. And I think competition is good because it's just going to fuel further innovation on multiple levels.

And just thinking ahead a little bit, like do you imagine -- it's been a 1 score market for so long. Do you imagine this could evolve into becoming like the rating agencies where you get 2 or 3 ratings per bond. Is that what the -- how you would think this can play out?

Yes. Look, there's definitely a spectrum of potential outcomes, right? What's not going to happen is that we're going to stay with the same score that we've had for the past 20 years. There's going to be a migration. And it's going to be a net good for all market participants, including data and score providers. And I don't know that there will be 1 uniform practice, right? Some lenders may want to pull multiple scores. They may want to pull multiple scores, particularly on mortgages that they want to hold on their own balance sheets. It could be that the capital markets come to value multiple score pools because they feel like the risk diligence that's being done upon origination is greater, and it will give them greater confidence in the bonds. But look, lots of different things, a lot of variables in play that are going to have to be worked out, right? And I don't know that anybody has 20/20 line of sight to what it looks like 5 years from now.

Got it. Fair enough. Let's shift gears a bit to India. Last week, at our Credit Bureau Day, we had the opportunity to talk to Todd Skinner. So he gave us a lot of the good background on how well it's going, how is the future, and we can talk about that a bit, too. But a lot of questions we've gotten around you had expected a reacceleration in India towards the back half of the year. 50% tariff on the country from the U.S.? Like how does that change the outlook? Does it change the outlook?

Yes. Well, look, we're going to have to see, right, because India was recovering. We went from flat in India in the second quarter or maybe it was 1%, excuse me, guys, I'm a little -- I have a little cold, to 8% growth in the second quarter, and we're doing a pretty good job of predicting the glide path toward the exit that you described. But look, having major powers fighting over the terms of trade is not a good thing, right? It creates uncertainty around trade, it could have an impact on the Indian economy because I think 20% of the GDP is exported to the U.S. We don't know how long this is going to persist. Is this a permanent state of affairs or is this negotiating leverage that's going to get resolved at some point. And it's all happening kind of real time, right? It's only been 3 weeks since this dispute kind of surfaced. So we're going to have to see.

Okay. And let's just put the last, let's call it, 6 to 7 quarters aside for a second. What are the main growth drivers in India? Like why is mid-20s the right growth rate there?

Yes. And look, I think that's the right question to ask because whether we fully recover by the end of this year or by the middle of next year is a far secondary concern to just the attractiveness of the market. So first, rapidly growing population and an enormous number of consumers that have become lendable through both their economic growth but also through the availability of a score and data. So we set up the first bureau in India 25 years ago. It took 5 years to get enough data and enough track record for lenders to be confident in the score. So they've had it for 20 years. And I can tell you, having spent a good deal of time in country this summer in meeting with probably 20 different bank CEOs at our conference, they all talk about when they were coming up in their careers, how difficult it was to make personal loans because there wasn't data transparency, and there wasn't trust. And so they used rules of thumb that really underperformed the potential of the marketplace. But the combination of economic growth and data has brought hundreds of millions of Indians into the mainstream lending market. I think there's the potential for dramatic ongoing growth in financial inclusion as India's GDP continues to clip along at 6%, 7%, 8% when it's -- when it's ginning fully and consumers benefit from that, plus financial products are underpenetrated in that marketplace. There's rapid digitization in the Indian marketplace. And the RBI is very progressive in looking for how to use other data sets that they've accumulated at the federal level to include more consumers in the mainstream lending economy. So India is tied together by the universal payment infrastructure, the UPI now. They can do cash flow-based types of lending there. They've got a wealth registry, they've got a real property registry. And again, they realize that there's a real symbiosis between providing data to improve financial inclusion and then making loans, which ultimately result in GDP growth, and they're highly focused on that. And that's just in the personal finance space before you get into the growth potential in our commercial lending business, marketing, fraud, analytics, direct-to-consumer products, all of which we're bringing to market through our global replatforming.

Got it. That makes sense. And maybe 1 last one in India. Like the experience in the Equifax is there, even CRIF is in there, but none of them are nearly the size of you or the growth rates you're showing. Was it just the first mover advantage? What is it about India, unlike the U.S. where the 3 of you are pretty equal?

Yes. There's definitely the benefit of a first-mover advantage. When you have high market share as we do in India, and it's north of 70% of consumer loans start with a query into our bureau, we see the preponderance of consumer shopping activity, which influences their credit risk assessment, right? And so therefore, we have a more complete and predictive body of data upon which to build lending models. And because the data produces better predictive outcomes, more people use our data and the more they use our data, the more predictive it becomes. So we've got a flywheel effect in India. That gives us an advantage and has allowed us to maintain share in this low 70% rate despite the best efforts of some quality competitors.

Got it. If you can shift gears a little bit to the data side that you talked about, a lot of questions in our universe broadly around AI and AI risks. So addressing that topic. I think we all appreciate the core credit data is pretty moated proprietary, but maybe can you help us walk through the spectrum of your other businesses in terms of where you see data has also been proprietary, which maybe we don't appreciate. And then the second part to that is there's a lot of questions around software being easily disrupted. So the point is all the analytics and software that you provide around your data, like how do you protect that moat?

Yes. I would parse a difference between software, general workflow software and analytics and predictions and the like, if you will, and decisioning software being more toward workflow software. But look, we have an industry contributory data model that has its roots in fraud mitigation, but also became a basis for objective lending and lending outside of local boundaries. That underpins the industry, and it underpins our markets -- all of our markets, we're in 30 globally, but all the bureaus are -- have vast global reach at this point. There are elements on perhaps the marketing side where it's not contributing and it's not as initially differentiated. But because we're in the media planning and measurement space, collecting signal from across the digital infrastructure, the publishing and the streaming infrastructure, we're getting a lot of unique and differentiated signal about how consumers are interacting with advertisements that flow into our database that improve its usefulness and productivity -- predictiveness beyond the base demographics, psychographics and perhaps the behavioral stuff. The same is true on the fraud side. We operate one of the largest contributory networks on device behavior and device signal globally, right? And again, that's the type of information that's not going to get disrupted by AI because it is more unique and more proprietary. And when you think about the bureaus, I mean, our goal ultimately is to have value-added data that helps better predictions, better decisions. And we've been using AI which is a broad and loosely used term at this point for a long time. Advanced analytics, various flavors of machine learning underpin all of our models in the TU and across the industry for a long time. But as we moved all of our data to a platform, and we have been consuming more and more data sources and we need to ingest and curate and associate them with the right identity in real time. We have applied more AI-infused algorithms to do that. And increasingly, we will build AI agents based on this corpus of data that we have accumulated and organized that will start to action based on the data in a similar way to what workflow software does today. But I think we're in the early stages of that. But I'm sure we're going to talk about our platform, OneTru. And OneTru is kind of fully AI-enabled today, and we're building out the agentic AI portion to execute a lot of the workflows that might previously have been done in orchestration software or decisioning software.

Okay. Two follow-ups from there. So on OneTru all the AI capabilities and stuff you're building out. I guess just a broader question from your seat, like -- is this hype real? How long -- is the hype real? This is the AI hype out there? Is it real from what you're implementing like and when can we see on our side of the creation, the real benefits, whether that shows up in revenue or cost or whatever it is?

Sure. I think AI is real, but also massively hyped. And nobody is better than the tech industry at building momentum around a new generation of technology, if you will. And so there is a degree of hype, if you will, but look, we're already utilizing AI to ingest in associate data. We're organizing our core data sets of credit, marketing, fraud, using the ontology of AI, to get greater semantic meaning out of the data so that we can move from just a straight identity graph to one that incorporates behavioral signals from around the web based on what the clients are doing to increase the power. But I think it's going to take time before these become meaningful line items in the P&L in either the revenue side, meaning don't look to next quarter, don't really look to next year. But in the coming years, in the intermediate period, these are going to become revenue realities. And I also think on the operations side, I have a lot of employees that focus on repetitive customer service and consumer dispute resolution tasks globally. And we've been moving that type of work onto a common internal operational platform for standardization and scale efficiencies. But now that the data is all there, we can increasingly apply AI for better customer service and better cost leverage.

So it sounds like you're not looking to necessarily reduce your employee footprint, but you can do more with the same. Is that -- that's what we're hearing from other companies, too, so just.

We can definitely do more with the same and I don't know ultimately what the impact is going to be on the employee footprint. I think often what gets lost in these productivity discussions in the corporate world is simply that there's inexorable pressure on costs to do more, right? And depending on the administration under -- depending on the administration and the nature of regulatory pressure we're facing, we'll be making investments in better servicing customers. And now that consumers are so aware of the importance of credit and want to actively engage in the management of their credit and that AI and other types of automation are going to give them new tools and ways to engage and optimize their personal finance, independent of underlying productivity improvements, you might have a lot more labor expansion than you will because we will be applying system standardization, centralization, offshoring and AI to minimize that investment.

Got it. Okay. Maybe this is a good time to then appreciate the OneTru platform. You said it's fully GenAI enabled, et cetera. So just I hand it over to you just to help us imagine the power of this. And if you need to add anything to it? Like is it more building? Or is it -- are you looking for tuck-in M&A deals or something? Just how should we think about that?

Sure. Let's just put M&A outside of the picture for now because I think it clouds it. And look, to a degree, AI clouds it, right? Let's just go back to the basis for a global platform. And look, when I became CEO, I had the benefit of 6 years running the U.S. during most of which I was also trying to orchestrate more product development globally because we recognize that across the 30 markets where we were providing credit risk analytics in some form of marketing and fraud mitigation there was just tremendous similarity in bank needs and insurance needs and telco needs, et cetera, all the different segments that consume. So you have largely similar needs, highly similar data sets, but all being run on independent tech stacks that were diverging over time because the tech organizations were independent. The equivalent would be if we were a company that produced spreadsheets like an excel spreadsheet, if we allowed every country to build their own spreadsheet, even though they started with some commonality in their DNA, you would be suboptimal from an efficiency standpoint. And also, it would make it extremely difficult to innovate to then diffuse that innovation across all of your markets. So we step back and said, look, it's time to rethink how we deliver our services and to try and do it 1 time in a way that can be configurable and delivered globally. But not just our credit services. We wanted to pull back the lens and say, what is the broader intention of a lender or an insurer. And we said, look, that intention is to understand the dynamic in their marketplace and identify who they're willing to do business with, who they will make a loan to, who they will underwrite for insurance, et cetera. And then to learn enough about this consumer to effectively go acquire them, whether it's through direct mail or through a pop-up ad on the Internet. So that took us from the credit domain to the marketing domain. And then once you engage that customer from a marketing perspective and that customer came to you to be able to authenticate that is indeed the targeted customer responding to the right offer. Now that engagement can be e-commerce. It can be like, hey, I saw your ad. I clicked through and here I am. It's really me. Or it could be I picked up the phone and I called you and it's important to then have associated that consumer's phone number with their identity and to be able to validate that the phone is engaged and engaged from a geo location that's familiar, right? So that's why we brought credit, marketing and fraud altogether and integrated the business logic on a single platform that is OneTru on top of this global unified body of data. So that was the thinking, right? So it took some time for us to build out the platform, which started off with the platform that we acquired from Neustar, where they had a very modern architecture and had done this type of unification, but within the marketing and the fraud realm. We extended it to credit, rebranded it OneTru. So now the platform has all the necessary credit marketing and fraud functionality to allow us to begin migrating our customers in the U.S. to it. The U.S. is probably 78% of our revenue globally. This year, by the end of the year, we'll have migrated the majority of our online and batch credit customers to OneTru that will probably take us another 1.5 quarters to get it completely done, so that will spill in a bit into '26. And then we'll have all of U.S. credit running on OneTru plus U.S. marketing and fraud customers will be in the process of migrating to OneTru. So we'll have proven out the platform and hardened it and then we'll take that platform and start migrations in Canada, the U.K., in the Philippines on the path to eventually migrating all 30 countries to this common platform. Now once they're on a common platform, there are engineering and tech stack efficiencies. There's product management efficiencies and so we will become structurally more efficient as we migrate this platform around the globe. Some of that will go to ongoing margin enhancements. But some of the savings will go to building bigger and broader selling and support organizations necessary to support new products like marketing and fraud and an analytics layer and analytic sandbox that we'll be introducing in the markets around the world. That's a lot. I'll pause for a second

No, no, no, that make sense. No, I think that's appreciated. But maybe just in the interest of time, let's touch on that capital allocation side of the question, in terms of your priorities there in terms of M&A, maybe just start with, obviously, you're going to be closing the Mexico deal soon which makes sense, but just your priorities on how we should think about capital?

Yes. So a couple of things to be clear on before we get to capital allocation that are all in financial world. The conversion time frame that I outlined, to OneTru for credit in the U.S. We are fully confident that by the end of this year, we're going to achieve all of the dollar savings that we outlined when we announced our restructuring program in the end of Q4 and it's going to be driven part by our technology modernization, but also the reconfiguration of our workforce around our global centers. So we're going to get the savings and then we're going to continue with the platform evolution and migration globally. Now in terms of capital allocation and just spend, 1 benefit of moving to the platform is we're going to have lower CapEx ongoing. We're committed to lowering our CapEx from high 7s to low 8s down to 6%. And that's what's going to create a persistent savings stream over time. Now M&A, we are still digesting all of the M&A. It's fully integrated and it's been deeply integrated on the OneTru platform, but we haven't fully commercialized it yet. And I think you're starting to see the benefits of the work, marketing sales have grown, there's been a sea change in the level of marketing sales, fraud is fast following. We're selling more data enrichment, more analytic sandboxes, that's all going to become very material in our overall financial profile, which is already high-single digits at this point. So with that, over time, I'm sure we will acquire our way into new countries. There may be product tuck-ins. I don't foresee the need to do anything transformational, right? And there's just a lot of leverage for us commercially yet to be manifested from all the work that we did in that late '21, '22 portfolio rejiggering phase. And of course, as our free cash flows improved from 50% last year, 70% this year, 90% next year, we're going to buy back more shares, we're going to retire more debt. If we get a break on the interest rate environment, we'll refinance the debt stack, all of which is going to allow us to deliver compounding high-single-digit organic revenue growth and great EPS flow through.

Got it. In the minute that we have left, maybe let's just use Mexico as the last question and just appreciate why these incremental geographies make sense as part of the overall strategy?

Well, Mexico has a nice bureau that's been run for years by the banks. The regulator for years is one of the banks to divest the bureau. We were a 26% owner for 20 years, and we took advantage of the timing to acquire the bureau. But it's a very basic bureau. And there's a tremendous amount of credit innovation, data innovation, trended credit data, alternative credit data, analytic sandboxes that we will bring to Mexico in short order plus the consumer engagement tools are lacking across the Mexican economy, and there's really not mature marketing or fraud mitigation solutions. So we'll replatform under OneTru and suddenly, all of that functional goodness becomes available to the Mexican market.

And last one here. Are there a bunch of other bureaus that aren't owned by the big 3 that would over the next, whatever, 10, 20 years, be something that could change hands?

I definitely think so. Look, all bureaus across the globe, build relationships, look for that opportunity to enter into those marketplaces. And yes, there's quite a few. There are even emerging countries and emerging economies that are licensing Bureau rights out currently. And we're all kind of participating in that kind of global growth because what a lot of these emerging companies see is that -- countries see is that having bureau data and bureaus at the core of the lending economy improves economic growth.

Got it. All right. Well, we're right on time there. So thank you, Chris, and thanks, everyone, for being here.

Thank you. Thanks, Manav.

Thank you.