TransUnion (TRU) Earnings Call Transcript & Summary

Well, you got to make hay when the sun is in right? And we've been trying to acquire Mexico since '96 because we think it's a great and growthful market with a large and growing population and also underpenetrated on the financial products. So it's got all the characteristics that you want when you enter into a new marketplace. And it also has just a very basic bureau. This is like the Bureau 1.0. And I think more developed countries are on to the 3.0 version of a credit reporting agency. . We think we can infuse all of that innovation and goodness into Mexico in short order, and that will be very good for the Mexican market and for Mexican consumers. So -- the banks were ready to exit and we had to write a first refusal. And we also had a lot of experience in that marketplace and we're [indiscernible] to be there.

Got it. And then maybe just a broader question on international geographies generally. I mean you are in a bunch of others, but is it just whenever kind of the dominant bank-owned bureaus up for sale, you'd be interested in that? Or how should we think about where you want to be globally. .

Yes. Absolutely. And I mean then you get down to just what are the growth characteristics of a given market, how well is it being serviced can we buy our way in at an appropriate price? And do we believe that our platform or know-how, our innovation can give us an upside to the growth and profit that's currently being produced.

Maybe begin to switch to the 1 true migration and the platform and everything. So maybe first question, where are we in terms of that migration. I think in your last call, you said by year-end, you have all the U.S. batch completed, so just a quick update SP1 There in the time line?

Right. So we are currently in the of migrating all of our credit customers in the U.S. are batch API credit customers on to the One True platform. It's going well. We're more than halfway there now, and we will complete the migration in full by the end of this year. And the U.S. -- the U.S. credit alone is almost 40% of global revenues. So high confidence that that's going to be done by the end of the year. and a lot of benefits to running on the 1 true platform versus the heritage platform. It will probably take another couple of quarters into 27 and how all of the U.S. marketing customers and fraud have been converted fully on to One True. And even if we don't get like perfect 100% conversion, we're able to compress and consolidate the legacy tech stack substantially to minimize the spend and allow all of our engineers to focus on 1 true and the go forward.

Got it. And then I'm guessing international will be after that or in consuming...

Yes. So the next 4 countries that we're rolling out is Canada Mexico, the U.K. and India, and then we're also going to do the Philippines, so it's 5 countries. But putting the Philippines aside, once we do those next 4 countries, that's 95% of the revenue of TransUnion. Now we've already stood up instances of One Tru in each of the next 4 countries, and we're working with the local tech teams to understand the fit gap and to plan the migration. And so I would say, within 27 and 28 time frame, we'll have the 5 countries that constitute 95% of our global volume running on 1 tree. And look, the benefit of doing that is once you're running on 1 true, not only do you get a substantially better credit platform, but you get a whole series of products that you can launch in the market, relevant products that they don't have the day. So we can really lean into the analytics suite to fraud, which we call true validate marketing, which is a true audience and push all of that into build it once and then push it into the major markets around the world.

Got it. And then from a customer standpoint, once the 1 true migration is done, what is the largest improvement that they will notice?

Yes, a couple of things to say about kind of the customer experience. Well, first of all, -- when I talk about the migration, some folks ask, is that going to be difficult like an ERP software migration. It's not like that. We don't have license installed software for the most part. We're a service bureau that runs on a sophisticated tech stack. So to convert a client requires the client simply to code to a different API and then, of course, monitor traffic and make sure everything is calibrated and appropriate. So that conversion is not that difficult. But in terms of what the client gets, they get vastly -- they get 5 ml availability. They get a dramatic increase in response time. And they get a whole bunch of integrated analytic identity and product functionality that all rest on top of the One True platform. So it's much easier for them to consume products beyond the traditional scope of credit. And it's much easier for us to show them the value and to cross-sell all of those products into the marketplace. Rather into their demand.

Yes. Yes. Okay. So from a revenue perspective, it sounds like it's NPI, it's cross-sell, it's cut coffee piece into other countries -- from a margin perspective for yourselves? Like how should we think about once 1 True's done? How much of an incremental margin benefit is it?

Look, 1 true is an important enabler of increasing scale within the organization. The starting point before went through 30 countries, 30 independent tech stacks fully vertically integrated management teams. As we have created this data as a service platform, if you will, as 1 true we can build things once and then rapidly deploy them around the world. We'll save a ton on infrastructure. We'll be able to free engineering capacity up from maintaining all these 30 legacy systems to concentrating on innovation on the 1 true platform and all the products that rest on the platform. And there will be efficiencies that we can push the margin. as you know, we've committed over the next 3 years to enhancing margin 50 to 75 bps per year. This is an important way in which we can do that in addition to just steady, high single digit or beyond revenue compounding and the natural fall through to profit.

Got it. And maybe this can be a broad answer, but how important is AI, AI , the new technologies to 1 true and to these margin targets that you've set out?

Yes. Look, applying AI is, for us, additive to our financial targets, both on the revenue and on the cost side. Now I would expect we're already kind of a rapid adopter of AI. You've seen the analytics orchestrator framework, the agentic framework that we've created to take our data and do to rapidly develop all of the predictive models that are built over the lending cycle on that data. I think that's going to give us a productivity boost, but it's also going to help us drive more analytic revenues across our customer base. The software development organization, the data science organization, they're between 1/4 to 1/3 more productive right now. And then we're working across the entire landscape of corporate services, particularly where we've got a lot of employee concentration, whether it's customer operations or consumer dispute management operations to apply AI to drive productivity. So I think there will be material net savings as we roll AI across the entirety of our organization. Some will take the margin. Some will reinvest to further accelerate revenue.

Got it. Okay. Let's shift gears to some of the regulatory noise out there by 1 count, direct ability over the last few weeks. -- has treated almost 40-plus times now. Just your understanding of what's going on at the FHFA, what direct polities trying to achieve I know you talked to his teams a lot, but just curious how you would kind of assess broadly what's going on here?

Yes. A lot of communication from the director on a lot of topics. -- some directly related to bureaus and Bureau data, some related to scoring and really the full landscape of mortgage services and mortgage data, right? I would say, look, broadly, the director is intent on modernizing the FHFA and the GSEs and has been an advocate for change, including competition, price competition and scoring, if you will. Our engagement with the FHFA and the GSEs is frequent and it is productive, and it's expanding. And look, it's a different world, right, where regulators and politicians are frequently tweeting these things. Sometimes it's helpful sometimes it can confuse. What I will say is just first principles, you have to tip your hat to the director for having the courage to take on score competition, right? The Vantage score has existed for 20 years. And he's the first regulator that said we're going to shake things up in the market, and we're going to push the market to accommodate different scores. And recently, 1 of the we signaled that the GSEs may begin publishing their own credit scores, which I think is a great idea. I mean let's have a lot of competition in the credit scoring market and the GSE scores are certainly authoritative, and we would be happy to partner with that. So I think all of this is, look, it's net good because the scores first needed to be modernized using trended data and alternative data. Vantage does that. FICO 10T will do that. And that's a net benefit to the market. And if the GSEs start publishing and commercializing their own scoring logic, that's very positive. Now on some of the other issues, Tri-Merge versus BioMerge versus single pool, I think there are a couple of ways to think about this. from a policy perspective and then from a TransUnion impact perspective. My sense of Washington is that the Tri-Merge is still appreciated by many parts of the political establishment and the industry and is viewed as the gold standard. And we know analytically from work that we have done and that our competitors have done that S&P did factoring the bind administration that there are material differences in the coverage of the 3 bureau credit files. If you exclude one, a proportion of the population would not qualify for a mortgage or would be materially impacted in terms of their pricing. S&P sides that at a couple of million of mortgage applicants each year, right? And even a small variation in the interest rate over time can mean thousands of dollars of increased interest against the savings of $11.50 on a bureau report, right? So you have to be very careful about that. But again, the context is it's tough out there for mortgage lenders. Volumes are at 20-year lows. The supply of housing is far short of what the nation needs and borrowing costs are growing up. So it's hard to meaningfully impact affordability unless you do something about those 2 foundational elements of affordability. From a policy perspective, though, more data works better than less data and they can see that empirically. As we look at our own economics, look, I expect to finish the year at about $5.25 billion in revenue our headline mortgage revenue is about $750 million. 3/4 of that is the FICO score upon which there's no margin. Another good chunk of that is non-Trimerge-related credit data consumption. And so you're left with maybe $260 million of revenue. That's the tri-merge universe that's going into resellers. Of that 260, about 37% goes to Fannie and Freddie. The rest is going to the FHFA, the VA, the Department of Agriculture, other government entities providing mortgage partnerships, jumbo loans, portfolio activities, et cetera. So maybe we have $100 million, maybe a bit north of $100 million in revenue that's tied to GSE Tri-Merge. If 1/3 of that goes away or maybe half of it goes away I don't know that you'll notice it in the context of an overall business that's growing at 7% or 8% organically. Maybe it costs us net 1 point in a year, but then it's gone, and it's in the normal baseline. And it will be very much like the early assessment program, which changed prequalification requirements before early assessment, the GSEs required you to pull 3 credit reports. Three years ago, when this went into effect, they said you could only pull 1 credit report and they would give you the indication of whether the GSEs would buy the mortgage. After 3 years, the markets kind of settled down on 2-plus credit pools, per mortgage transaction. And so I think you'd probably see something similar like that happen if we went to a buy merge. Net-net, the best policy for the U.S. mortgage market and U.S. consumers is preserve the Tri-Merge from a profit impact to TransUnion, we could easily absorb that in a given year and continue to grow.

Got it. And the prior FHAP administration had considered biomerge as well and it was an optional. So to your point, if the industry believes in primers, they'll do that. But the question is Direct has also been trading a lot about a single file pool. That sounds a lot more draconian type scenario? Like is that even something the industry would do you think support there?

Well, I don't think so. I mean, again, there's a lot of economic pressure because volumes are low. And there are certain advocates for by merge or single pole -- but even the MBA did a recent analysis, their own analysis, and they are a principal advocate for the single pool. And it showed that 1/3 of the time is you will pull a single credit report you're going to misclassify consumers, and that's going to impact their interest rates, but also what the lender would realize via the LLPAs in selling. I mean in the analytic universe, only getting it right out of 3x is not very good. So when I saw that, I kind of didn't know whether they were advocating our position or their position. I think a single pool is not responsible policy. .

Got it. Fair enough. The 40 to 60-point difference you talked about between the -- which have a combination of 2 reports you pull creates like the gaming opportunity. And I think your point is the industry will still keep in 3 reports. So kind of a similar question on the Scores side. I mean there are some big differences in some of the scores you get from VICOAdVantage. So do you think in order -- I mean it sounds like there will be some gaming in some corners, but do you think that will also be a 2 score market like people will pull boat scores?

Well, it could, particularly during this transition period. And look, as you know, in 2016, this transition, there's a lot of 2 scores being pulled. And I think that's good, and that's kind of expected given the magnitude of the change in the number of different mortgage ecosystem participants that are on this learning curve. Net-net, once to pursue the transition period in the market is enjoying the benefits of scores built with modern techniques on trended data and incorporating alternative data sets when they're available. I wouldn't worry too much about the gaming because the status quo is a score that really hasn't evolved in 30 years. Now we're moving to competing scores, FICO and Vantage that are modern and much more performance -- and I don't worry too much about the gaming risk there. Not from an inclusion perspective or a safety and sounds perspective.

Got it. You narrowed down the exposure of TransUnion to Biomer pretty nicely. The 1 thing you didn't factor in, of course, was that you say we do move to a biomerger or a single pool, your ability to take share, so that it's not like you lose 1/3 simply. -- what are some of those things you can do to differentiate in that scenario to not lose a 1/3, I guess?

Yes. I think what you're saying is what's unique and special about our credit relative to our competitors. each of the 3 bureaus puts forth a high-quality predictive product. our advantage has been -- we've been the first mover in terms of time series credit reports, trended data. And we go back the furthest in time. We go back for 2.5 years. And because we were first to the market by 3 years, we've had more time to develop the analytic attributes that sit on top of the core credit data that make our data very predictive and perform very well. We also acquired and expanded our coverage in the payday lending market in the unsecured lending market. And so we've got a great complement of trade lines there that makes -- that provides us with an advantage. Our fintech market share and coverage is considerable. It's best in class. It's well above 50%. And 70% by some estimates, that's a differentiator as well. We've got good rental coverage, improving utility coverage. There's a lot, right? And so again, each of the bureaus I know can tell they're own story about the uniqueness of their proprietary bundle. We've got a good story, and we've competed very well in the mortgage market for a long time.

Got it. Okay. In the last few minutes we have left, maybe let's touch on capital allocation. You guys have -- the capital allocation has transformed a lot over the years, and now it's become a much more balanced policy. So just what's changed? And what is -- how do you think about capital allocation today?

Well, look, over this period of transformation over the past 4 years, where, first, we allocated a lot of capital to acquisition, acquiring and broadening our value proposition and then some capital to technology modernization and modernizing our org and our workforce. That spend is largely behind us. So our leverage ratio was 2.6x, even with the acquisition of Mexico at the end of the second quarter. And we're very confident we'll be at our 2.5x target or better by the end of this year, right? So that gets the balance sheet in very good shape. . Our free cash flow is growing and our conversion is well above 90% again. So if you look forward to the next 3 years, we're going to generate a lot of cash -- in my opinion, in the opinion of many people in the room, our shares are materially undervalued for a number of reasons. I regulatory tweeting and uncertainty and certainly the macro environment. So buying back shares is a really good use of this of the free cash flow that we've got. We'll continue to acquire relevant innovation when we think it's smart and we can get it at a reasonable shareholder-friendly valuation, we'll do that. We don't see any need to do anything really big or transformative -- we did that. We're still digesting and realizing the benefits from a lot of that. One true is a real manifestation of that. So I don't think shareholders should worry or think about any of that type of activity. So the prudent balance between acquiring shares, managing the debt load and the occasional strategic acquisition for innovation's sake or maybe entering an attractive country that's the capital allocation landscape we see.

Okay. And just maybe 1 follow-up on the -- you talked about potential AI risks hitting your stock. In terms of the software components of your business -- your U.K. peer has been suffering because they have a huge software business that they talk about it and people think that could be at risk. Just help us appreciate how much of your software business is tied to that contributory data sets that you have that's hard to replicate versus sitting alone and could be at risk of by coding?

Yes, sure. Look, Five coating is not a risk for us. We are a data and analytics business, and we have low single-digit revenue coming from annuity-based analytics solutions today. That said, when you think of our overall value proposition, the stack, it's very concentrated in data and attributes and scores and basic analytics today. We call that the intelligence layer. We've taken that intelligence and brought it to market in some point solution software and some integrated suite software, but it's really all about delivering the data functionality. But in this era of agent commerce and AI, we've got the opportunity to start doing a lot more work for our clients and displacing spend and work that they're doing with their own people with third-party software with outside consultants, that's why we created the analytics orchestrator framework -- and that's why I think we can really accelerate the growth through forward consulting of our analytics revenue despite vibe coating and other threats. I mean it's still -- you have a lot of domain knowledge, you've got to bring a lot of proprietary data and know-how and we think we can scale up that aspect, and that is additive to our business.

Okay. All right. Well, that's a good place to leave it be out of time. So thank you, Chris, for being here, and thanks, everybody as well.

Thank you.

All right. Thank you.