All right. Good morning, everyone. Thank you for joining us for the TransUnion presentation. My name's Andrew Nicholas, and I'm the research analyst covering the info services, consulting, and HR technology sectors here at William Blair. Before getting started, I am required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome TransUnion CEO, Christopher Cartwright, to the 44th annual William Blair Growth Stock Conference. Thanks, Chris, for being here. We're going to approach this as a fireside chat, but I do want to be cognizant of varying levels of familiarity with the story.
So maybe, Chris, if you could just kind of start with a high-level overview of the business, how you think about the company, the key markets where you compete, and then we can kind of move from there.
Okay. Terrific. Happy to. And as always, thanks for having me. Enjoy this conference every year. So TransUnion is a global data and analytics business. Our revenue should exceed $4 billion this year, EBITDA approaching $1.5 billion. We operate in 30 countries around the world. The revenue splits 75/25 between U.S.-generated revenues and rest of the world. The core data asset that the business was built on is credit information, consumer credit information that we gather based on broad partnerships in different countries or geographies with consumer lenders of all stripes who report to us the existence of consumer loans, the terms of those loans, and the consumer's performance in making payments against them. And we aggregate that information. We organize it against the right consumers, very important, and we can provide a current snapshot of the existence of the financial obligations and their performance against them.
We can show empirically, through deep analysis and lots of history, that a consumer's performance against these financial obligations is very predictive of their ability, one, to service debt and, two, behaviors of a variety of sorts. It gives insights into the risk of insuring a particular consumer, if you will. And so this data is used for insurance policy origination analysis and even has healthcare implications that perhaps we'll get into a little bit later. So that's the core around which the business developed, and it remains the largest product today. However, the data is also useful, first, in understanding the dynamics of the lending market, what's going on, and also it helps a lender understand where there are attractive segments that fit with their strategies that they may want to extend further credit to, acquire new customers.
We've always been the beginning of this marketing process, if you will, where we work with the lenders to produce the target list of customers to whom they would be willing to make a loan. They make the financial criteria. However, there's a lot more that goes into marketing to those customers and marketing and acquiring them in a cost-effective way, right, and then managing that relationship over the lifecycle. Another dimension of using credit data was really for authenticating consumers. So because credit is important, consumers tend to maintain their information in a very current and accurate way, right? Because if you move and you don't update your information, or if your email address changes and you're on some autopayment or whatever it may be, you could lose access to the credit. It could even lead to repossession.
So the personally identifying information for each consumer that sits on top of all these credit trade lines, if you will, tends to be very accurate, and we can use it to authenticate consumers as well as to target them for physical marketing campaigns. Now, I tell you this because it's a setup for some of the strategic actions that we've taken in recent years. So with that, maybe.
Yeah, maybe go right into that. What are some other areas where you've said, "Okay, we have all this information. There's other ways for us to use, whether it's the data or the technology that brought that data together into different verticals, different areas?" You could talk about marketing. You alluded to insurance. Just to level set a little bit further, and then we can talk about the technology itself.
Credit helps you understand lending market dynamics and prioritize consumer risk based on most attractive to least attractive against a bank's lending criteria. Going to actually get those customers is a separate marketing activity, and credit information is at the beginning of that activity. In late 2021, we acquired a company called Neustar, which is one of the leading providers of digital marketing services that was a natural extension and complement of the core credit business. Neustar was very good at, well, first, they have very accurate consumer information based on their marketing activities, as do we. Together, we became stronger. Any good marketing campaign begins with really clean and accurate and current consumer information. That hygiene is a valuable and ongoing service that we provide to lots of big brands throughout the U.S..
The next step is to enrich that information with a lot of useful things to know about a customer that you're trying to reach and market both physically and digitally, things like their basic demographic, geographic, psychographic, and behavioral profiles. And to the degree you can, you want to get some intent as to whether the consumer is currently in the market for services that you provide. So Neustar, their variety of ways, had all of that information, which is consumer marketing enrichment data that allows you to take the list of consumers you'd be interested in making a loan to or offering an insurance policy or actually whatever, and then segment it into over 250 different market segments.
The reason that's important is the next step in the marketing process is to, once you understand your customers and their kind of segment distribution, figure out what are the best vehicles, what's the best media spend to go reach customers of that type. And so we've got, again, an analytic foundation that helps our clients plan media campaigns. And then the final element of it is determining the effectiveness of the media spend. So you decided to spend a certain mix of media with your finite budget and individual media properties, and that could be conventional print, it could be walled garden, it could be streaming services or major publishing properties, etc.
We have digital integrations into hundreds of those, right, in the digital ecosystem where we can see which consumers, which targets are seeing which ads, how they're interacting with them, and how it's influencing their behavior. And so it's a way for marketers to understand whether they're truly spending effectively and advancing their target consumers in the revenue funnel. So again, our history has been great at credit, and credit is at the heart of this lending activity. But really, the broader intent of lenders is to grow the business by acquiring profitable customers and maintaining those relationships over a lifecycle.
Now, as a lender, if you succeed in understanding the market and you succeed in making proper offers to the right customers, if you're lucky, transactions result from it. If you sent them a piece of mail, they're going to call your call center.
If you presented a pop-up ad on a website or media property that they go to, they may click on it. And so what you want to make sure at that point in time is that you understand who is really or what is really on the other end of that transaction. That's how we bled into fraud mitigation. Now, Neustar is a leading provider of online fraud mitigation tools, and TU had made a variety of deals in that area as well. So with this acquisition, which we began integrating in 2022, we began to pull together three highly related, highly complementary markets: credit, risk evaluation, marketing, and fraud mitigation to consumers that would enhance lender workflows to go acquire and maintain customer relationships.
We do it around a unified consumer identity, meaning we know the name of the individual consumer, we've got a rich address and phone number history, and that's helpful for physical interactions with the consumer. More importantly, now we have a very rich history of what we call digital identifiers. Through interactions within this ecosystem of services, we're able to determine which devices, digital devices, phones, iPads, computers, etc., belong to which consumers, rather, and relate that all back into the consumer's identity, right? And again, whether you're marketing or you're trying to prevent fraud and online transactions, understanding definitively who's on the other end of the transaction is critical because it helps you optimize. If you're trying to market somebody and it goes from, "I don't know anything about the consumer behind the device," it's a very generic interaction.
But if you can determine it's Chris Cartwright and in milliseconds, access all the information that we know about that individual consumer, then you present a precisely tailored offer. The same is true of fraud mitigation. If you can determine it's Chris Cartwright because these devices have been associated with that individual, then you can prescribe an appropriate security treatment that ensures that the transaction is safe in which you minimize the risk of annoying and losing the consumer within a transaction. I'm going to pause.
No, that's perfect. And also on the fraud side, just limiting the friction to enable as much throughput as possible. So I think you did a really good job kind of explaining holistically how all the different pieces of data can work to be helpful for your customers. Can you talk about the technology itself that brings it all together? I mean, I think one of the major attractive pieces and maybe one that surprised you positively was just the quality of the Neustar technology that you brought along with it. I know you're replatforming a lot of that technology into your OneTru platform. So if you could talk a little bit about that, that'd be helpful.
Sure. So even before the Neustar acquisition and our expansion into fraud and marketing, as well as our roots in credit, having really strong technology platforms underpinning our products was enormously critical, right? So we've been investing in this area for a decade plus now. First, it was get off the mainframes and move to lower-cost distributed computing clusters, if you will, the precursors to public cloud. So running our applications on private clouds, which we did successfully in the mid-2000s and teens. We were on a journey to simplify the technology landscape that underpinned our business in these 30 different countries. So as you can imagine, TransUnion grew out of the U.S., one country at a time, and we would clone our technology stack, shift it to a new geography, hire engineers who would then be responsible for maintaining and evolving the applications.
You do that 30 times and you do it over decades, you end up with a lot of technology diversity and a lot of diversity and redundancy that doesn't necessarily add value to consumers, right? When we acquired and we were in the process of streamlining that as well as migrating much of it to public clouds like Amazon and Google, etc. When we acquired the Neustar business, one of the attractive elements was their core technology, which we realized was a generation ahead of ours. It was really where we were trying to go in that they had streamlined their product sprawl across different categories of products that they built or acquired and consolidated it in a next-generation platform for an information services and an analytics business. They called that OneID.
We took that platform and, working with their engineers, extended it so that it could support credit data and analytics and credit products as well as marketing and fraud. And that's become our OneTru platform, which we're currently in the process of migrating all of our U.S. credit products and all of our credit products in India onto that platform. Once we do that, we will, of course, continue country by country to consolidate the like-kind products on a single platform. And it's going to do a few things for us. One, obviously, when you're going to mini and sprawl to consolidation, you're going to save some dollars, right? So we will talk, I'm sure, about our technology modernization program we're investing in and we've committed to material savings in the intermediate future.
We're also improving our security posture because the two most important things you can do to become more cybersecure, well, first is to make sure you're in data centers like public clouds that have got layers of cyber protection, and we're doing that. But secondly, you got to reduce the amount of tech surface area that you've got to protect. So if you're operating 30 different credit applications in 30 different geographies and you can consolidate that to five globally, you have tidied things up considerably and you can focus your cybersecurity resources, right? So we're doing that.
But the ultimate benefit is going to be our ability to engineer a product once and leverage it across multiple marketplaces and to speed the time that it takes for us to create new stuff because the tech sprawl has been greatly reduced, and then we're now on a state-of-the-art cloud-native application that shares common services across our entire suite of products.
Perfect. Yeah. You alluded in your answer to the transformation program. Maybe that's a good segue to talk about what you're doing there with that program, the cost savings that are associated with that. I know that also includes usage or increased usage of your GCCs. So if you could talk through some of that for the crowd, that'd be helpful.
Sure. So four years ago, we embarked on the strategy to position the company for a next generation of growth, a transformation strategy. It's got two pillars. The first we've been talking about, which is expanding the number of things we can do for the markets that we serve, right? So moving from credit analytics alone to credit fraud, I'm sorry, to credit marketing and fraud around this core of identity. So in that extension, we're talking about being able to help clients across their broader workflows, but also tapping into new multi-billion dollar addressable markets, right, that are very complementary to the core.
The second element of the transformation was about changing how we do the work. Now, we have talked about the first component there, which is stop doing things on a country-by-country basis and architect the business globally, right?
Build a credit platform, a fraud platform, and leverage it across all of the markets and get that one-to-many economies of scale. So we've been doing that. The other thing we realized is we don't need to do the full stack of work to operate an information and analytics business in every country in which we operate. There are common functions, commonalities here that we should pull that work and those people out of individual countries and do them in centers of excellence that we position in different time zones around the world so we can centralize and standardize the work, bring common management to it, automate more of it, and then work 24/7 around the world. So we call those our GCCs. They are capability centers of excellence.
We've gone since, again, the mid-2000s and teens, if you will, from a contract with an outsourcer for maybe 600 headcount offshore to 4,000 toward the end of last year of our own employees in our own centers in India, South Africa, and Costa Rica. Now we're pushing to about 5,300 by the end of 2025. That shift is going to make us more efficient, right? We're spending some money to restructure the workforce and take those 1,200 or 1,300 jobs to the GCCs, but there will be a considerable run rate savings on our personnel cost, and we'll recoup that investment pretty quickly.
Yeah. I think part of that is also some pretty significant savings in terms of capital expenditures looking out beyond 2024 and 2025.
Yeah. That's right. And so the second component of this current kind of chapter of the transformation is all of this tech modernization that I've been talking about. So going from legacy applications to the new OneTru platform and retiring a lot of those applications and data centers is going to, well, first require some incremental upfront investment, but then produce a very material ongoing savings. So at the end of 2023, we announced the next phase of this program, which was part the next generation labor force and part tech modernization.
And essentially what we told investors is over a two-year period, we're going to spend an incremental roughly $300 million in capital, but at the end of the two-year period, we're going to create a savings annuity of about $200 million a year. Now, this is cash-basis kind of numbers.
Some of this is on the balance sheet and there's amortization and there's timing. But net-net, it's an extra incremental $300 million in cash spent over two years to save $200 million run rate costs, hopefully ad infinitum. And listen, it's not just like a one-time. The scope on the tech modernization, for example, is the U.S. and India, but we're in 30 markets. So once we achieve that and we prove that we can do it and operate in really our two largest and most challenging marketplaces, we're positioning us for continuous improvement on tech and labor by leveraging this franchise across all components or all geographies in which we operate.
Great. Thank you. So maybe we could pivot the conversation a little bit. We've talked all about kind of the business, some of the things that you're doing to make it a more efficient business, increase product innovation, all those things. Maybe we talk about some of the things that are maybe less under your control, some of the macroeconomic factors. Obviously, you have exposure to the consumer credit cycle. Can you talk about kind of the state of the consumer today and maybe how that's filtering through each one of your businesses?
Yeah. Well, sure. Yeah. So we'll start in the U.S., which again underpins 75% plus of our revenues. And probably the right place to start, right, with a generalist audience is the middle of 2021, where looking back now, you can see that that was probably the most robust market for consumer lending that had been experienced in a generation. Employment super low, inflation super low, money super cheap, and consumer balance sheets considerably rejuvenated because of all of the fiscal stimulus that the government put out, as well as some of the loan payment forbearance that had existed, right? You don't have to pay your mortgage during the pandemic, etc. So consumers were in incredible shape and loans were super cheap and our business was booming. I think we grew about 13% organically over the course of 2021.
But of course, the good times had to come to an end. There was an excess of consumption against a strained supply chain and suddenly, boom, we've got big inflation. And then the Fed acts really aggressively with 500 basis points increase. And that started a sea change in the marketplace where the combined pressures of higher prices for everyday goods and services, plus higher debt service costs, plus much more expensive credit products started to squeeze consumer or household finances on a quarter-by-quarter-by-quarter basis, right?
And from that period of, say, early 2022, I think it was like late first quarter when the Fed first started to raise rates aggressively to now, you have seen an increase in consumer delinquencies across all categories of consumer loans in the U.S. Now, again, for context, at the end of 2021, delinquencies were unrealistically low, historic lows, right?
So they've been deteriorating quarter-by-quarter since then, but the level of delinquency across all these categories is still very much within the normal range within the consumer lending cycle, but it has worsened considerably. Then on top of that, we had another factor kind of unanticipated in that as rates went up, money markets became more attractive relative to equities. So you had relative to equities and also payments on bank deposits. So you had a lot of money flow out of the stock market, but more importantly, out of the banking system. So from deposits in the money markets, where I think now there's $6.5 trillion, nearly $7 trillion, which is almost like 2x what it is on a normalized basis.
And so banks became concerned about, I don't want to say solvency, but they had to worry about their capital ratios because deposits fled the system. And then in the early part of 2023, we had some instability tremors with Silicon Valley Bank and others. And so money fled from kind of community financial institutions in the mid-market up to the largest and safest banks, at least on a perception basis.
You remember Bank of America and JP Morgan practically had to declare a moratorium on new deposits and new accounts. So the combination of deteriorating household finances and then deposit instability led loan volumes to really drop in the second half of 2023. And that hit us hard in the third quarter, early in September of the third quarter of last year. And we saw a volume fall off. We missed our guide.
But since then, things have started to trough, if you will, after a pretty material decline. So I think that's, I guess, the market macro dynamic. So net-net, I'd say the state of the consumer is still pretty strong because that consumer has a job and they've had some real wage growth and inflation is tempering. But it's certainly more stressed than it was two years ago, and consumers are a bit more levered than they were two years ago. And banks are less reluctant to make new loans, and consumers are less able to afford those loans because of higher rates.
So net-net, consumers are okay, but they're sweating harder than they were certainly two years ago. And it's brought some reluctance to create new lending. And you see that with just a consistent decline in loan origination across most categories.
I appreciate the context. But in the first quarter, and maybe to the extent that you're willing to share on what's happening so far in Q2, it does seem like things have still stabilized from what was a little bit of a shaky period in the third quarter. Well, there have been some headlines about kind of increased delinquency rates. Not sure if there's anything outsized or unique that you've seen there that's worth calling out.
Yeah. So Q3 of 2023 was a shock to the system. And then we were unsure whether that was the new floor or whether there would be further deterioration, right? So we were very conservative. It turned out to be that we were troughing, and those volumes kind of persisted into the first quarter of this year. And look, flat is enormously better than declining, right? And you saw that in our results right away. I mean, we can manage flat, particularly when we're selling a lot of new things and we've got annual price cycles and the like. So far in the second quarter, what I'd say is that the volumes we're experiencing are consistent with what we spoke to and guided to in the first quarter, right? So we're kind of encouraged with this environment.
Yeah. Maybe I think we only have a couple of minutes here. So I just want to squeeze one more in on the insurance market because obviously we've talked about the consumer credit market, the cycle, and the progression over the last couple of years. The insurance market, where you have a $100 million business, has had its own cycle. So maybe you could talk about where that sits today and maybe how you're thinking of that market thawing over the course of this year.
So we're one of the leaders in providing information products to help insurers understand risk and acquire customers. And it's a few $100 million a year. A couple of years ago, there was just a dislocation in the U.S. insurance market where, because of inflation, because of rising severity of claims and the like, there was a dislocation, meaning carriers didn't want to write new policies because they weren't getting high enough premiums to cover the risk that they were undertaking. So they stopped doing it.
And then they started exiting the riskiest parts of their portfolio, coastal regions, regions that had fire exposure like California. And I think we've all read a lot about that. And they started a multi-quarter, multi-year campaign to get state insurance regulators to allow them to charge more for the policies, charge more for the risks that they're undertaking.
Now, insurance regulators are often elected officials, and there's this tension between ensuring that the citizens of a state can access a broad range of insurance policies, but also that they don't have to pay too much for that coverage. So it was a bit of a wrestling match that took place. And again, it took some time before the carriers felt like they could charge enough for the risks that they were assuming. Coming into this year, we think the market, that balance, that dislocation has improved a lot, right?
Now, it's not back to the heydays of 2021, but we're seeing more carriers lean into acquiring new customers, and it's allowing us to grow better off of, honestly, the softer comparables of the past couple of years where our growth flattened or went to single digits, whereas typically it would compound at the high single, maybe even low double-digit level.
Great. Looks like we are out of time. Thanks to you, Chris, for joining us and everyone in the room. We are moving to Maher for a breakout session next. Feel free to join us in the commute over there. Thank you.
Yeah. Thank you.