Hi, I am Heather Balsky, B of A's Business and Information Services Analyst, and I'm pleased to be here with Todd Cello, TransUnion's Chief Financial Officer. Todd, thank you for joining us.
Heather, thanks for having me.
Yeah.
Appreciate it.
We're just gonna kick things off.
Okay, sounds good.
I have to say a lot can happen in our year. At our 2023 conference, we were navigating a bank's crisis, rising rates, and recession fears. Today we're talking about a soft landing and eventual rate cuts. Can you give us your perspective on the current operating environment for your financial services business outside of mortgages, or if you wanna talk more mortgages you can?
Sure.
Where are we in terms of the consumer and the lending environment?
Okay. I think that's an appropriate place to start.
Yeah.
For sure. So I think that maybe where we do start at, though, is let's go back to the third quarter of 2023. And it was, you know, it was a good starting point just to kinda give you a lay of the land. And, you know, what we saw happen was a pretty significant slowdown in lending volumes, in particular, in September, primarily, related to our financial services, our core financial services customers. The event that really had happened was the Federal Reserve had met at the end of April and talked about interest rates being higher for longer. And unfortunately, that just drove a lot of uncertainty with our customers, because, you know, the 10-year Treasury yield increased quite significantly, went up, spiked.
And so there was a combination of cautiousness on the part of our customers, but then also demand, you know, from consumers, you know, slowed down, you know, pretty significantly as well because the cost was meaningfully higher. So, you know, unfortunately, you know, we had a challenging quarter in the third quarter. So when we put the guide out for the fourth quarter, we assumed that there would be further deterioration. You know, we had only seen a couple of, you know, if you think about it, we had only seen September and maybe a week or two into October before we.
Yeah.
Provided the updated guide. So as a result of that, we painted an overly pessimistic view of the fourth quarter because we wanted to make certain that we delivered on the commitments that we put out. So we accounted for further deterioration. So, what we ended up seeing in the fourth quarter was a stabilization, you know, that happened. And we obviously exceeded the expectations that, you know, we had obviously lowered. And, we saw stability, and we saw, you know, our customers gain more and more confidence in the ability to underwrite loans profitably. And, you know, that carried into the new year.
And if you think about, you know, when we put our guide out in February in mid-February, we had the advantage, before putting that guide out 'cause we go later at year-end, we were able to actually see how January, you know, came in. And so you're able to see the stability that I talk about in the fourth quarter continued, you know, into the January timeframe and then as well into the first couple of weeks of February as well too. So in general, what we're seeing is we're still seeing a very healthy consumer in the U.S. They still have, you know, the consumer has, they're employed. They're seeing real wage growth, you know, that's offsetting the inflationary pressures. So all and they're living up to their financial obligations. Delinquencies have ticked up above pre-pandemic levels.
But as you know, as a result of that, though, you know, we're still not seeing anything that's troubling, you know, with the consumers as well. So it's that type of stability, you know, that we're seeing a healthy, you know, overall consumer. If there's any consumer that's under pressure, it's those that are, you know, below prime, where the inflationary impact is having a sizable challenge on, you know, everyday expenses like, you know, food, as an example, right, that there's definitely an impact, you know, there. So, you know, when we think about the full year as a result of that, we just, you know, the guide that we put out, we just assumed that same stability.
We didn't assume any further, you know, uptick in or any benefit, I should say, from any rate reductions that may come.
That's helpful. And, you know, what are you hearing from your financial services customers for 2024 with regards to lending standards and their willingness to lend? And you talked about stability, but kind of how does that factor into your outlook?
Yeah, for sure. You know, our team definitely has extensive conversations with our customers. It's not just us looking at their activity. We're all, you know, we have what we refer to as customer advisory boards, where our team is proactively meeting with customers in mortgage and, you know, card and banking, financial, consumer lending, and auto. And, you know, I would say that the customers, again, like I was saying earlier, more, you know, maybe a little bit more conviction, you know, because there's certainty that interest rates aren't gonna go higher. The uncertainty feels for the moment about if, you know, rates are going to go lower, right? But we're not counting on that.
Mm-hmm.
So, you know, we're starting to see some of our customers, you know, get back a little bit more into, you know, acquisition or growth mode, and but on a smaller scale. Best example of that would be in consumer lending, you know, with the fintechs. In the fourth quarter, we started to see, you know, that customer base start to market a little bit more, but which gives us some optimism, you know, that things are, you know, potentially, you know, on demand. But all in all, you know, again, the approach is, you know, conservatism in our guidance, no, no uptick. And that's, you know, just consistent with how our customers are seeing it too, you know, specific to your question.
Yeah, that's helpful. And when you look back, you know, you've been navigating uncertainty. When you look back to kind of the challenges you faced in the environment over the past few years or last two years, what do you think, man, you know, your learning, the management team's learnings are from both how you operate and plan the business and how you know, again, like, how does that inform your thoughts on 2024?
For sure. Great question to ask. You know, so the first thing, you know, in 2023, TransUnion grew 3%. While that was lower than what we had expected, what you really saw was the portfolio effect of, you know, of our business. You know, so core financial services was clearly under pressure, and some of our emerging verticals were as well. But we still saw some good growth rates there. The international business in particular continues to perform exceptionally well. The business in India, you know, grew over 30%. Business overall has grown double digits for the last 11 quarters. So, you know, the resiliency and the design of the portfolio was in effect. Clearly, you know, the management team wants to grow more than 3%, though, right?
But that is fulfilling for us because it's so intentional in the investments that we make into how we go to market, but also the products that we bring to market. You know, being able to see the growth there is important. The second thing, though, you know, that we're really focused on is, you know, delivering on our commitments. Obviously, in the third quarter, we missed our expectations. You know, so restoring the credibility with investors, you know, to, you know, deliver what we said we were going to deliver is critical for us. And I would say the third thing, you know, more specific to your question about operating and planning the business, it really goes back to the announcement that we made in November of 2023 about our transformation program.
There's a significant amount of focus that we have on that program. So I just wanted to spend a minute, you know, on that to make certain everyone appreciates, you know, the undertaking that we're working on. So this is, you know, something that we had been working on for several years and really started to pick up momentum in late 2022 going into 2023. And since Chris Cartwright has been our CEO for five years now, we've been on a deliberate mission to centralize and standardize our work across the economies that we operate in. And today, we're in 30+ countries. So as you can imagine, we have disparate processes across all of those geographies.
So the intention is to bring like functions together, to have a common way to service our customer, so there's a, you know, a more efficient and practical way. And needless to say, you know, you also get cost benefits, you know, related to that. So the transformation program has two planks to it. The first one is just on our organization and optimizing where our people are at. For several years, TransUnion has worked in what we refer to as our Global Capability Centers. And this is where we have centers in India, South Africa, and Costa Rica where we're able to, you know, do this centralization and standardization of work, leveraging these deep talent pools that reside, you know, in those markets. Our primary focus was on software development when we established these Global Capability Centers, going back to 2018.
We've since moved into call center capabilities. And now we're working on capabilities across all the functional areas, you know, at TransUnion. So that's the next leg of this journey, is to drive, you know, those efficiencies. The second part of the transformation is our tech modernization initiative. And this is where, you know, we're leveraging the technology that we acquired from Neustar to bring our data assets together on one platform. And we refer to that as OneTru. And ironically, we put out a press release yesterday officially launching OneTru. So if you want some more information.
Yeah.
I swear it has nothing to do with me being here today. It's a pure, pure coincidence. But, you know, in essence, at the highest level, what it is is it's about bringing TransUnion's data assets together on a common platform, and then ensuring that we're using that data in a compliant manner. You know, our data assets have different use cases, and we always have to make certain that we're adhering to, you know, regulation. But what's important about bringing all these data assets together is we're able to innovate a lot quicker than, right, by having all the data together. So that's a, you know, a big component of it. And then on the technology side, we're gonna finish our Project Rise program, which is the cloud transformation.
But with that, we're going to have an initiative where we're gonna standardize the technology infrastructure that we put in the cloud, to drive a consistent and common approach. This is a pretty big deal for us. So why this all matters is, you know, we're committing to $120 million-$140 million of operating expense reductions, beginning in that full amount will be in 2025 and beyond. We're gonna get about half of that benefit in 2024. And then the second component of that is we're gonna spend significantly less on capital expenditures because we're gonna be able to, you know, leverage the cloud environment so we don't have to spend as much on purchasing hardware and software. And then, you know, as part of the tech initiative, we're rationalizing many of the applications that we maintain.
So we're going to be a heck of a lot more efficient. So we're expecting to get about $60 million of CapEx efficiencies. So the net of it is $200 million of free cash flow savings from 2026 and beyond. So the investment is $355 million-$375 million through the end of this year. We'll have spent about $280 million. So a lot of it's gonna get done this year. But what's really and so we're excited about this, and it's a transformative agenda. But this is something that has been carefully planned for and thought out. And it was something that you know we launched with an eye towards well what if you know volumes potentially don't pick back up? We needed to make certain that we had a way that you know we were able to protect and grow margin.
Then when volumes do pick back up, obviously, we have a nice benefit there because the, you know, the volumes will drive incremental margin. So that's a big focus, from an operating perspective for us this year.
That's really helpful. And just on OneTru, well, really on the transformation program broadly, you know, you talked about the cost side. So, you know, one of the things you know, when you think about what it does for your organization, you know, are there sales benefits from this? And what does this do for your organization from, like, an innovation and productivity perspective?
Oh, yeah. Yeah, that's what really this is all about, right? You know, as, you know, OneTru is, you know, about, you know, bringing the best of TransUnion all together. And, you know, today, we have tremendous data assets, but, you know, they can be in different parts of the organization. And we're able to bring the pieces together. But the whole idea here is to do it as efficiently and compliantly as possible, right? And so this will be the engine for us for product innovation. And I think what's, you know, you know, specific to, like, where this is gonna come from today, our fraud and our marketing capabilities run on OneTru right now. And, you know, the big lift for us will be to move our credit products to this platform.
That's what we'll be working on for 2024 and into 2025. So, you know, with the data in one spot and a more robust, you know, technical environment, the expectation is that, you know, the product innovation should be significantly easier to achieve.
That's really helpful. Sounds very exciting.
It is. Yeah.
Going back a little bit here, there's, there's been a lot of focus on your fintech performance and your fintech business. Can you put in perspective the size of that business? You know, what's happened in the business over the last two years? And, and where do you think we go from here?
Sure. Yeah. So the TransUnion's fintech business, it last year finished at about $140 million. So about 3.5% of TransUnion's overall revenues. Over the last 10 years, we have built a very meaningful position, you know, with the fintechs. And, you know, we embrace them, like they were big customers, you know, going back, you know, to the onset. And, you know, obviously, they're disruptors in the financial services arena. The business got as high as $175 million, at the end of 2022. So you can clearly see that there was about a 20%, you know, decline in revenues, last year. And it really does get back to the macro environment, the uncertainty about how high interest rates were going to go.
The fintechs, you know, have a they don't have a deposit base necessarily, not all of them, that they can rely upon. So they're dependent upon the capital markets, to be able to, you know, raise funding. So that became a little bit more selective. So they had to be more, you know, selective, last year. But I would say that, you know, overall, you know, our clients have persevered. And we've taken that as an opportunity, you know, to get further, entrenched, you know, with them, to provide them more products and services, especially to help them navigate, you know, through, you know, a challenging environment. So the expectation is that in the longer term, these are customers, as they've demonstrated before in the past, to be very valuable growers for us. We expect that, you know, to be the case, again.
Just as kind of a proof point of that, in the fourth quarter of last year, we did start to see if you wanna refer to it as green shoots, some marketing activity, you know, start to pick up where they were being a little bit more acquisitive with the new customer acquisition. That doesn't mean we're declaring everything's great, but it was an encouraging sign, you know, to see.
And just real quickly from, like, a big picture perspective, you know, non-depository lending institutions have been around forever, right? Fintechs are a newer flavor on this, but it's been part of the ecosystem forever. They've added a better user experience and taken a bunch of share. But it's always been part of it. And so, you know, we expect that to be continue to be part of the ecosystem. And we have a unique position there. And they're transacting where customers wanna transact, which is online. So over the long term, we're still really bullish about that opportunity.
That's really helpful, Greg. Thank you. Just wanna squeeze this in 'cause we get this question so sometimes just in terms of, you know, we talked about fintech, but you also sell to buy now, pay later. Is that in the fintech bucket, or is that separate? And what does that business look like?
Yeah. So it's not included in the numbers that I just provided for fintech, but to size it, it's about a $20 million line of business for us through the end of 2023.
Okay. Okay.
That piece has continued to grow over the last few years.
That's helpful.
Off a small base.
Yeah. We have to clarify that sometimes. So that's really, really helpful. So rate cuts, you know, you've talked about how rate cuts could be a positive for your business. Can you help us think that through, though? You know, what's a direct benefit you could see? And then are there secondary benefits as well?
Sure. Yeah. So I think that it's about what parts of our business are most interest rate sensitive. I think it probably goes without saying that mortgage is the most rate sensitive, right? So, you know, so with that, you know, being said, you know, when you see mortgage rates, you know, we're over 7% last year. And then early this year, we saw them get into the mid-sixes. You definitely see, you know, some higher activity. And then when they snap back up over 7%, you see the volume slow down. So if we do see rate cuts, we definitely would expect the mortgage, you know, business, to benefit from that. It just feels like there's a demand there for consumers.
It's all obviously all well-publicized, right, with, you know, all the refinancing that happened and even the purchasing with unusually low interest rates in 2020 and 2021 into early 2022. People have low rates. They don't wanna move because they don't wanna take, you know, go from a 3% rate to a 7% rate. So there's the, the shortage of, you know, supply, you know, in the market. But we, we believe that, you know, eventually, though, you know, people do have to get on with their lives, and they're gonna you know, they're gonna have to, you know, move. And rate cuts would help that, right? So that, that is the obviously the most rate, sensitive part of our business. I'd say, you know, if you talk about financial services, the next one down would be auto.
So the auto business, you know, obviously, was impacted by the supply chain issues during the pandemic. And, you know, in the U.S., we were, you know, we'd experienced over 17 million vehicles sold annually. Last year, we were at 15 and 15.5 million. So, you know, still down. I believe that will, you know, increase based on what the industry is saying. But, you know, when you think about that monthly payment that consumers have, you think about the interest rate environment, right? So, you know, a little bit more, not as much as mortgage, but definitely rate sensitive. And then if you go down the continuum, consumer lending, you know, would be there. So personal loans, also, you know, more rate sensitive.
But when you get into credit cards, probably not as rate sensitive, right, because, you know, of how high the APRs are already. That's not necessarily a make-or-break decision for a consumer, you know, on that. So, you know, the assumption that, you know, we've put in place, again, is that stability. And we're just assuming that, you know, things stay the way that they are. And, you know, if, you know, you get rate reductions, you know, obviously, what I just described, there would be, you know, some uptick to that.
That's helpful perspective. Thank you. I wanna shift to emerging verticals.
Sure.
You've guidance for mid-single-digit growth this year in that segment. And it sounds like there's kind of like a, you know, part of your business that's very strong right now, 40% of the revenue you talked about. It's insurance, services and collection, public sector. What's driving the strength in that 40%?
Yeah. For sure. So, yeah. It's important to break this apart, right? So that that 40% from those three areas that you just described is, you know, obviously growing higher than what we guided for the emerging.
Which is low.
Which is low single digits, is what? Yeah.
Oh, I apologize. Low.
That's why I was.
Oh, gosh. Yes, thank you.
So it's, it's low.
Thank you.
Oh, no problem. Just wanted to expertly clarify that. So growing low, that's what we're guiding for this year. So, in insurance, we have a great business in insurance, and we have for many years. It represents about 25% of the emerging vertical revenue, just to size it. So think about $300 million. So it's a meaningful vertical market for us. Over the last couple of years, the inflationary impact had, you know, an adverse impact, I should say, on insurers because high repair and replacement costs were impacting them, and they couldn't increase their premiums fast enough because they needed regulatory approval for that. So the result is they were getting their profits in line and getting the premium increases as they pulled back, you know, on their marketing and their, you know, new account acquisition activity. We started to see that start to stabilize.
We're not assuming a big uptick in 2024 in insurance, but the business still grew single, you know, mid-single digits, 4% last year. So we had a good growth rate there considering the backdrop of the industry, right? So we feel pretty good that that business is, you know, gonna continue on that type of trajectory. And there could be upside if insurers get back into market. Services and collections in public sector are benefiting from our Trusted Call Solution, which is a capability that we acquired with the Neustar business. And in essence, what that product does is it notifies you when your phone rings if it's a legitimate business or not. So think about, you know, how many times are we get a call, and, you know, who picks up?
No, I know I don't, right, 'cause you're concerned it's a robo call or it's some type of spam. What Trusted Call Solutions does is it brings the certainty. It's able to put the name of the business, you know, on the display of the phone. We're introducing logos. So if, you know, if it's Bank of America, and, you know, it's someone calling from Bank of America, you know, you'd be able to see the logo. And what we're seeing is some significant growth because it's important for businesses to be able to reach their customers. And giving the customer the certainty that they know who it is that's calling, you know, the pickup rates are pretty significant. So there's a lot of value being driven.
So that's what, you know, those are the two primary drivers, you know, in those verticals.
That's really helpful. And so then moving to the 60%.
Yep.
Kind of how that plays into your low single digit growth for emerging verticals here. What's going on there? And can you break it down for us?
Yeah, for sure. Yeah. So, within the other 60% of the emerging verticals, the biggest, you know, one of the bigger components of it is our communications vertical. Now, this isn't Trusted Call, so I know that gets confusing. Trusted Call's a product. But we also have a business where we serve the telecommunication industry. And this is the business that we acquired through Neustar. And this is, you know, where, you know, Neustar's history is at. That business is flat-ish. And so, you know, think about, you know, products like caller ID or order management. That's what we're, you know, providing in that space. And, you know, as people are dropping their landlines, as an example, you know, there's less revenue there.
This business, though, is incredibly valuable to us because the relationships we have with the telco providers provide us with an invaluable source of call data that we put into our OneTru platform to provide greater signal, you know, in our products. So while, you know, it's a flat-ish business, it's important to note the significant benefit that we get from the data, you know, that comes off of that. So that's so again, if you think about, you know, growth rates and if the first three I talked about with the insurance services, collections, and public sector are greater than that low single digits, now you overlay something that's relatively large, and it's flat, you know, that's a drag on the growth rate. And then, you know, the a couple other areas to highlight would be our tenant and employment screening business.
We had an agreement with the CFPB that we announced in October of last year, that we agreed to recalibrate our products in that space. And we've done that successfully. And recently, the playing field has been leveled across all the competitors in that space. But the recalibration period for that is a drag, you know, on our revenues. So that's something, you know, that's a negative, but in the short term only. In the long term, you know, we feel that we'll get that business, you know, back to growth. And then, the final area would be our media vertical, where right now, we're not assuming any significant increase in marketing or advertising. So we've assumed a muted, you know, growth trajectory for the media vertical.
This gets back to, you know, kinda just kinda rolling, you know, through 2024's guidance, consistency with what we're seeing. So there could be upside, you know, in these areas.
Okay. That's really helpful. I feel like I would be remiss to have you up here and not ask a capital structure.
Sure.
Question and allocation. So you ended the year around 3.6 times net leverage. You're also targeting net leverage in the low 3 times range by the end of the year. And you said in your 4Q call that you view debt prepayments as the best incremental use of your cash over the medium term. So, you know, where do you wanna get leverage over the medium term? You know, is there a leverage level where you would be open to share buybacks or even going back to M&A on either tuck-in or larger deals? Just how are you thinking about that?
Yeah. No, it's an important question to address. So, at the beginning of last year in 2023, we changed our target leverage ratio. So since TransUnion's been a public company going back to 2015, we had targeted 3.5x as our leverage ratio. And we just thought it was prudent based on the overall maturity of the business and, you know, the size, as well, you know, to bring that target down to 3x or lower. So the lower is an important part, right? We don't look at 3x as necessarily, you know, an endpoint. We believe that we can further, you know, delever the business. And but that doesn't mean that, you know, M&A can't be, you know, part of our growth objectives. It's just that over the last 3 years, we've been quite acquisitive.
And we're very happy with the assets that we've acquired. And, you know, we have confidence that they're gonna work, and they're gonna drive, importantly, top-line growth for us. So in the near term, you know, I've obviously been very explicit in our earnings call that we don't have any, you know, near-term, you know, M&A on the horizon. And that continues, you know, to be our posture. But that does not mean that, you know, we've taken our eye off the market. We continue to evaluate businesses. But we wanna make certain that, you know, businesses that, you know, we bring into the fold, you know, are gonna be accretive. And they're gonna, you know, not, you know, be a drag, you know, on leverage.
So, right now, though, the task at hand is to focus on continuing the integration of what we've acquired, leveraging hopefully with what I've discussed already, leveraging, you know, the capabilities we've acquired for OneTru, you know, to be able to, you know, enhance our product innovation.
Good to know.
I think just quickly.
Yeah.
I'm glad you caught on the, the comments we gave, which was it's 3x or under, right? So we don't view like you hit 3x from a deleveraging standpoint, and you just stopped. But I think we, we continue to believe that there's opportunity to continue delevering and paying down debt even if you know, when we get to the 3x range.
That's helpful. And we have two minutes. You touched on the deals you've done. So just maybe a check-in on how you feel about, you know, the M&A that you did over the past few years and kinda where you are.
Yeah. So as far as, you know, Neustar is concerned, I mean, hopefully, what you've taken away from my earlier comments is how heavily we are relying upon the technology. You know, we knew what we had acquired was strong, right, that, you know, and highly predictive. And, you know, it's really exciting, you know, where we're gonna be able to take the company and, you know, streamlining where data's at and just how our technology overall runs. So, that's been a big positive. And that's gonna really be a big thing for us. The Sontiq acquisition filled a, you know, a gap in our capabilities with identity protection. Last year, it grew double digits. You know, revenue's, you know, pretty much tracking to, you know, our expectations.
So, you know, we've been very, very pleased with that one. And, you know, the Argus acquisition, we always felt that Argus belonged with a credit bureau. So, you know, we feel that there's just a tremendous amount of opportunity there. But, you know, we're still early in on the integration with that one.
That's really helpful. Thank you, Todd, for your time.
Thank you, Heather.
Thank you, Greg. Also, we appreciate you being here very much.
Yep. Thank you.
Thank you. Thanks, everyone.