Good morning. This is Heather Balsky, BofA's Business and Information Services analyst. I wanted to welcome you all to our fireside chat with TransUnion's President and CEO, Chris Cartwright, and Head of IR, Aaron Hoffman. It's a pleasure to have you both here. Before we start, for everyone in the audience, I'm gonna try to offer some Q&A. We have about 40 minutes scheduled, so I'll pause when we're about 15 minutes in to check in. If there aren't any questions, I have plenty. Let's get started. With that, Chris, I was looking back to my questions from last year, and my first question was on the operating environment as we're coming off the COVID recovery. A year later, a lot has changed.
There's a lot of uncertainty, and we're debating hard versus easy landing. Can you share your perspective on the current operating environment for your financial services business outside of mortgages? How is the consumer, and lenders, you know, what's their willingness to lend?
Yeah, well, good question. The way you phrased it, you've scoped it down to about the U.S. financial services non-mortgage, right? Which is about, let's say, $800 million out of our high three, roughly $4 billion in revenue. It's gonna be concentrated in consumer lending, card lending, and auto lending. If you compare it to a year ago, it's certainly a less robust environment than it was. If you remember in the first quarter of 2022, I think we grew about 8% organically enterprise-wide and probably in the low teens in the U.S. alone, right?
What we saw, you know, quarter by quarter in this piece of our business, from that first quarter to now is, I guess, increasing pressure on consumers, on household balance sheets, if you will, because of higher levels of inflation and the Federal Reserve combating that with increased interest rates. That said, again, going back to your starting point, the consumer was in, you know, historically fantastic condition at that point, emerging from the pandemic because there had been a lot of fiscal stimulus and also forbearance on loan payments and just difficulty traveling and consuming. All of those factors conspired to increase consumer credit scores, but also to really de-lever households in the U.S. Consumption, you know, has been fairly strong over this period. GDP growth, while it slowed, it's still, you know, substantially positive.
That gets us to a point today where while the consumer has been on a deteriorating trend, if you will, the starting point was this is a natural high. Today, the consumer is still in pretty good shape, by historic standards and certainly by the pre-pandemic standard, highly employed, some very modest real gain, real wage gains, although that's slowing, right? Household leverage has ticked up, particularly card balances are increasing, delinquencies are increasing, and I expect charge-offs will increase. That said, it's all still within the bounds of, say, normal.
That's helpful. Thank you. You know, amid recent events, I have to ask, can you just touch base or, you know, I wanna touch base and ask you about exposure to some of the regional banks recently that are kind of facing pretty severe challenges, Silicon Valley, Signature. What's TransUnion's exposure there?
Well, look, I think it's, I think it's still unfolding. Not our exposure, right? Our direct financial exposure is de minimis, right? I mean, we're talking like some $100,000 collectively with any of the banks that have been, I guess, making unfortunate headlines in this past week or so. The question is, you know, what's the broader implications on the consumer lending economy? I think that's a TBD, right? Certainly, some institutions may be subjected to higher levels of regulation or scrutiny or liquidity requirements. You're also, you know, we're seeing deposits move around as well.
If you think of consumers in a particular market who are seeking credit, you know, they're going to find it if it's available, even if the pools of available lending are shifting between institutions because of this kind of noise and disruption. Beyond that, I mean, I think, you know, my understanding of this is probably no better than anybody else's in the room. We'll just have to see and hope it's a fairly contained event.
Yeah. Thank you. Your outlook for this fiscal year factors in an ongoing, you know, relatively tough U.S. environment, but not a recession. In what areas do you expect pressure in your business, and where do you expect improvement or resiliency?
Yeah. A couple of levels to answer the question. you know, first, we didn't make a specific call, like this is when the recession's going to be, and this is gonna be the severity or the duration of it. That said, you know, I think we arguably have been operating in recession-like conditions in portions of our portfolio, certainly in the fourth quarter, where we saw a pretty material reduction in lending activity. Also in any of our markets that are driven by real property dynamics, whether it's mortgage or it's tenant screening or even employment screening.
tenant screening in particular, you know, there's just been an imbalance between. You know, the cost of an apartment and a renter's ability to service the lease, or the purchase price of a home and the underlying affordability, you know, because of mortgage rates. Transaction volumes drop to really low levels, right? That's a recession-like condition because when you've got that imbalance, you know, market activity kinda stalls. We only get paid on transactions, not expanding loan balances and the like, right?
We saw pretty tough conditions in the fourth quarter in the financial services portfolio, and we dipped a little bit to the negative, which is a big contrast to where we were four months ago and where we've been, I think since our IPO in the middle of 2015, where FS has been a consistent, you know, low to mid-teens grower in the U.S. Right? Again, I think that just reflects periods of market uncertainty where it takes some time for equilibrium to return and then for the trading volumes to improve regardless of the conditions.
Helpful. If the U.S. goes into recession, your message has been that TransUnion can grow through a downturn. Your team went into significant detail about this on the second quarter call.
Yeah.
Now that we've had a few tough but not... Well, you know, tough quarters, you kinda said 4Q was recessionary-like, but, you know, we're technically not in a recession right now. How's that impacted your view of the durability of the business?
Well, the point of comparison, you know, when we're asked this question about diversification and the ability to grow during difficult times, is, you know, to the TransUnion of 10 or 15 years ago. If you think of TU, when we were privately held and were living through the Great Recession, even during that period, which was a really pronounced financial crisis where consumer lending dramatically contracted, I think peak-to-trough revenues dropped 10% in total. We were highly focused on the U.S. at that point and almost entirely providing credit data to financial services institutions. If you compare that to TU today, you know, we've expanded a lot geographically. We get a material portion of our business coming outside of the U.S. in, you know, emerging markets with rapidly growing credit economies.
That's continued to perform extremely well in this most recent, you know, period of economic challenge. We also have a heck of a lot of business from different verticals and across a much broader range of product. Like in the U.S. today, our financial services business, inclusive mortgage, is roughly, let's say $1.1 billion-$1.2 billion. The non-mortgage aspects are just as large, and that's coming from marketing services, public records or investigative solutions, if you will, fraud mitigation. Those are pretty substantial businesses that are counterweights to the cyclicality of credit data to financial institutions.
Got it. You reaffirmed your 2025 targets on the fourth quarter call. Given all the uncertainty and the recent mortgage weakness, what gave you the confidence to reiterate that outlook?
Yeah, certainly. Well, I guess it was about a year ago where we had our investor day.
Yeah.
We put forth our, you know, long-term growth algorithm of 8%- 10% on average organic compounding, which would get us to 5% top and 2% in EBITDA, I think about $6 per share and EPS. You know, look, since then, a heck of a lot has changed in the economy. At that point in time, you know, we were assuming a different set of economic circumstances and the ability to kind of compound in the 8%- 9% range and comfortably get to that target. You know, as the environment has become more difficult and our growth rate has been lower, certainly, that aspiration, if you will, becomes more challenging. That said, look, we've got three years left.
We've got a lot of different paths of growth, some of which in areas like marketing and fraud, we're really just starting to hit our stride in, that should lift our overall average growth rate. As we've seen, when this business recovers, it can grow very quickly. In 2020, we were rolling along great organic growth. The pandemic shows up, because of that disruption, we grew 2% in the year. In 2021, we grew over 13% organically. Honestly, you know, I'm more focused at this point, given all of the transformational activities within TU, on just getting through the year, driving the acquisition integrations, securing accelerated growth, getting the cost synergies. At the end of 2023, you know, we'll lift up, survey the landscape.
Look, even if we're off that algorithm, we're still offering attractive compounding top-line growth and substantially improving margins and free cash flow over this period as we get through our 2 tough transformational years of 2022 and 2023.
Helpful. You know, I have to ask this because we get this question, which is that, you know, when you think of 2025, you know, how much does the mortgage market matter? Like, do you need a full recovery there?
You don't. Not really. I mean, we certainly need a recovery to say historically normal transaction levels. The level of mortgage activity from, say, the second quarter of 20 forward was 2x or beyond which you typically would have because rates got so cheap and it led to a massive refinancing boom. Now, you know, if we are successful in taming inflation and if at some point, maybe later this year, early next year, if rates do start to fall, you've got mortgages being originated during this period that'll be priced too high relative to the new rates. You'll have a surge in refinancing activity, but it won't be anything like what we had as a result of the pandemic, in the super low interest rates of the Fed.
Let's say we go into a recession. What are the levers you can control?
Well, look, if we go into a recession, I don't believe all of our markets will be in recession. Right now, in our portfolio, the international business is still growing in the low double digits. It grew mid-teens last year. I think the developed markets will continue to sprint ahead because they haven't been so impacted by elevated inflation levels or a lot of fiscal stimulus. They just didn't cope with the pandemic in the same way, right? Markets like fraud and marketing and sales to public sector or investigative solutions are largely not tied to credit cycles or GDP growth, if you will, at least where we play in marketing, right? Advertising, absolutely. Marketing, analytics and optimization, not so much. You're seeing that with Neustar performance today, which is holding up very well.
Look, we'll continue to fight and grow through those markets. It'll be tougher sledding in financial services directly. You know, when origination volumes drop, certainly that impacts revenue, but you begin to do more around understanding and mitigating risk within the existing loan portfolio. I also think delinquencies and charge-offs will increase finally, and our collections business is gonna return, or at least our collections support is gonna return to more normal levels. Those things, I mean, look, they don't get us back to the same level of growth that a robust expanding economy does, but it allows us to grow through difficult times.
Helpful. Thank you. When you look at emerging verticals, where do you see the most opportunity for growth there in 2023 and then, you know, also over the next few years over the midterm?
So emerging verticals, in our, in our parlance is, you know, the non-financial services components of U.S. B2B, right? Look, the first order opportunity for growth both there and in FS is leveraging, you know, marketing and fraud mitigation solutions fully through cross-selling, across all of those different verticals. The engine for doing that is really starting to gain traction, right? Within that, you know, I think there's a lot of opportunity for us to grow, in media because we've got a full suite now integrated of marketing analytics solutions. I think there's tremendous opportunity in insurance. You know, we're one of the larger players in providing data and analytics to P&C auto underwriters and home underwriters and a little bit to life now, you know, out there in the market.
That space has been artificially depressed this past year, but is starting to pick back up again as you saw in the fourth quarter results and should kind of get back to high single digits compounding. That's a great area. I think there's a lot of share to gain in public sector, and there's a lot more that we can do around identity resolution and fraud mitigation in that space. E-commerce is a big play. E-commerce and retail are two more markets now that we've got the analytics solutions and the like around marketing where I think we can get accelerated growth.
Talk about marketing. I'd be remiss if I didn't ask a question about Neustar. You're now over a year into that acquisition. What have been the biggest learnings about that business? What's the value it's brought to TransUnion? What do you think investors may not appreciate?
Well, yeah, you would be remiss if you didn't ask. I'd be disappointed.
I have to ask a Neustar question.
Only one.
I have two.
Oh, okay. Well...
Fire away. Well, look, you know, so far so good with the Neustar acquisition. I know, you know, I know we took our growth rate down to mid-single digits last year. It's because the overall e-commerce volume in the U.S. dropped coming out of the pandemic, and that impacted our communication solutions and our risk mitigation businesses. We ended up, you know, growing at 6% organic against a high single digits guide in 2022, and we exited the year with 8% organic. Now we've guided back to the high single digit guide for Neustar, the entire enterprise, the three lines of business for 2023.
You know, I feel pretty positive about that level of growth given some of the uncertainties economically and some of the distress that's starting to show up in the advertising market to which we have some modest exposure to in the marketing line of business. Net-net, I feel like we have validated the proposition that TransUnion can do more for the clients it serves, right? We've had a toehold in marketing within consumer lending and financial services for years. You know, we provide the data set that begins the marketing process for credit acquisition, for new customer acquisition through our Batch Prescreen services or our Batch Invitation to Apply services and the like.
Now we can extend fully and help those very same customers plan their media mix, engage in the market and then measure the effectiveness of it, as well as just being in charge of their general consumer data hygiene so that they're only advertising, you know, one time to the consumers that they're targeting. If those consumers engage from a fraud mitigation standpoint, they can be confident that it is indeed the consumer they were trying to reach, right? And not a fraudster stepping in or some type of a synthetic ID and the like. You know, that extension of our value proposition, you know, outside of the credit market into marketing, into fraud mitigation, I think has been cemented and proven during this period.
I think the other thing that's been proven are the ability to generate the financial returns from the acquisition that we laid out when we made the deal. I believe we're gonna get to the organic top-line growth, and we're demonstrating that we can do that, and we're taking out all the costs and a bit more that we expected to take out that gets, you know, the margins up to a satisfactory level for TU and also kind of the entry multiple on the deal down into the mid-teens, right? Which is much more, I think, palatable in line with expectations. In our first 13 months of ownership, margin went from 21% to about 26.5%. The fourth quarter, it was almost at 29%.
The guide for 2023 is 32% margin. We recently raised our target for cost takeout. At least $80 million, up from $70 million, and certainly aiming to do even more, right? We feel like we're on the path to get this to the, you know, the top-line compounding growth that we guided to, you know, the margins and the cash flow that we guided. I think the perhaps underappreciated benefit is just the power and sophistication of the Neustar technology platform, which is we're in the process of extending across TransUnion, and it'll become our kind of standardized data management and analytics platform worldwide.
You touched on this, but, you know, the original guidance, my understanding was sort of to get to low double-digit sales growth for Neustar.
Correct.
Do you still think you can get there based on-?
That's still the plan. That's still our expectation. You know, the only difference is really the macro environment has shifted since we initially gave that guidance. I think it'll take an extra year or so until we're executing at that level. I should point out, though, that, you know, marketing services within Neustar were one of the areas of misunderstanding or initial concern from part of the investor base, right? There's a lot of different types of marketing businesses. There's often confusion between marketing and ad tech, you know, and where exactly are you gonna play TransUnion? Well, throughout 21, and since we've owned the business, marketing's grown low double digits. When you combine it with the marketing deals that we've done at TransUnion, you're solidly in low double-digit growth already.
You've done other deals too in the past year. Argus, how's that business coming along? You know, you know, how is it enhancing TransUnion's business?
Sure. Well, look, Argus. We had to take some risk and suffer some inconvenience to get the Argus asset. It's an asset that's been coveted by bureaus for a long time now that traded to another information services company. You know, we would argue in the bureau space, and certainly I argue for TransUnion, that we're the natural owner of that asset because it's a clear, you know, complement and a double-click down from our credit card, the credit card portion of our credit database, if you will. You know, the difficulty was we had to purchase the division of assets out of Verisk. We did for $515. We've ended up selling those assets, at least the bulk of the value successfully for about $176 in consideration.
We paid our entry price down to $300 and change if you net out a couple of other small assets that we're, you know, in the process of disposing of. I think that gets our entry multiple down to sub, like, around 10x. If you look at the underlying data of Argus and the ability for us to, you know, add to that data, to create new consortiums, to take the model into different markets globally, where TransUnion operates and has relationships, deep relationships in the consumer lending sector, in time, we're gonna make that a nice grower. If you also look at, like, the state of delivery, you know, our data analytics and platform, if you like, is well advanced over what Argus has.
You know, we're in the process of starting to migrate the Argus data into what we call our Prama platform, which is like a collaborative data analytics sandbox that consumers can directly engage with the information, visualize it, and then create predictive models. All of that, I think, is gonna boost the value and the growth rate.
Let me just ask you a question about Argus. Can you help us understand just generally what the assets are? Like, what.
Sure.
What is Argus?
The major card issuers in the U.S. contribute all of their existing cards to this industry consortium and the underlying transactional activity per card, right? I was gonna personalize it, but I probably don't wanna say which credit cards I carry. Anyway, I have a Visa.
All of them.
All of them equally. You know, all 19. That comes in on an anonymized basis, right? We have the ability to, you know, through our identity resolution, to reattribute, if you will. The purpose of pulling all the information together is so card issuers can see what their relative market share is and what the impact of their different efforts, you know, competitively are yielding and just general dynamics in the marketplace, right? You can also create audience profiles based on the card consumption activities of different individuals, those audiences then translate over to the marketing solution side of the business as a nice complement, if you will.
Mm-hmm.
It's also a good way from a marketing standpoint to see if a marketing activity resulted in the outcome, you know, a retailer, for example, was hoping for in terms of the consumer's card activity. In a way, it closes the loop in marketing measurement. There was a real synergy between, you know, giving the financial services side of the business at TU, a valuable and deeper dataset and a level of relationships in lending institutions even more senior, because this is the data that the institutions use to figure out how they're performing and sometimes to reward management, right? As well as feeding the marketing side of the business.
Thank you. I think it's very helpful. We're at the 15-minute mark. Just wanted to see if any of you guys have any questions, we can pass around a mic. Otherwise, I can keep going. Let's see. Okay, if you do raise your hand, he'll come to you, and I'll keep an eye out. Going back to your 2025 financial targets, how important are your recent acquisitions success and growth to those sales targets? How they factor in?
Oh, they matter, right? You know, when we buy a business and we've got a business case that says, you know, we're gonna produce X top line, X bottom line, that's additive, you know, to the prior plans for the business. We need, you know, we need to deliver, we need to execute on these transactions. Not just Neustar, not just Argus, but we also acquired Sontiq, which is an identity protection business that is complementary to both our direct-to-consumer credit subscription business. Also it's a tool that we use on the B2B side. We're selling it directly to employers, we're selling it through, employment benefits companies and insurance companies are now starting to bundle identity protection as part of their coverage packages. That was part of the appeal.
75% of the revenues that come from Sontiq are subscription revenues, you know, through business buyers as opposed to the direct-to-consumer relationships. We thought that's more stable.
I wanted to actually throw something in 'cause it's come up a lot, and it just came up here, which is your broaden ID.
Sure.
efforts and opportunity. I mean, you touched on it throughout the time, but can you talk more broadly how that's coming along? You know, I guess sort of you wanna use innings or kinda where are you in the process, you think, in terms of the opportunity?
Well, let me offer some thoughts and then direct me-.
Yeah, yeah.
If you feel appropriate. You know, the, a secondary but important revenue stream from the traditional credit business is one of identity, if you will, because consumer credit records are meticulously maintained for a lot of reasons, right? You don't pay your card bill, it gets shut off. You don't pay your auto loan, it gets repossessed. You make sure that name, address, phone number, et cetera, all that terrestrial information is accurate. That credit header information, as we call it, is like an organizing object throughout the information services industry for other players. We license it out as an industry, right?
As the world became more digital, we needed to add a critical mass of digital identifiers, whether that's IP addresses or cookies and mobile ad IDs or email addresses or a variety of persistent device identifiers that could be mapped back to the individual consumer. That underpinning of identity, that database, and the ability to resolve identity is what drives success in one-to-one or targeted marketing campaigns, but also in fraud mitigation, because so much of commerce is e-commerce now, and it's important to know who's on the other end of a transaction or, you know, is it an Eastern European bot farm? You know, what's on the other end of a transaction? You need to resolve that in milliseconds.
If you can determine it's not fraud or some nefarious character based on your digital identifiers in this pool of identity information, then you can target your marketing or your service treatment of the customer. That's really like the fulfillment of this, you know, this multi-decade vision of one-to-one marketing offers that only you can only really now realize because of the precision with which you can determine who you're conducting business with online. We're building out that competency, and it's gonna fuel growth in our three big markets of credit, marketing, and fraud mitigation. Specifically, fraud mitigation, you know, we have a variety of different tools around the world that we're in the process of integrating and unifying in a single product or single code base that's gonna rest on the Neustar data and analytics platform.
Which today is called OneID, which we will rebrand and launch with greater fanfare, you know, later this year, right? It's gonna become a single unifying data layer across TransUnion, and we're in the process of doing all the integrations to make that happen. Made really good progress last year in enrolling. Bringing all of that intelligence together in this single underlying data layer and then leveraging it in our marketing and our fraud products, that's building a competitive moat and differentiation for the long term.
That's really helpful. I wanted to hit on international too, 'cause that has been an area of really strong growth. Where do you see the most opportunity there, and what are you most excited for 23?
Sure. International is probably a little over 20% of our portfolio. It grew about 15% last year. I think we guided to around 12%.
High, high single digits for this year on a data consent current.
High single digits this year. The most exciting piece of it, of course, is India. India is a crown jewel within our business. You know, it's critical mass, approaching $200 million in revenue. It grew over 30% last year. There's just a tremendous opportunity, you know, with our partnership with the lenders in the space and high share, as well as the coverage we've got across a variety of different product lines that can fuel growth in international for a lot of years to come. We're also excited that our business in Hong Kong has fully recovered, now that they've kind of exited all the pandemic era restrictions that were in place there. Latin America continues to look good. We're excited about the opportunity to organically enter in Brazil, given the new availability of positive data there.
We recently relaunched a new international platform that we're kind of first implementing in the Brazilian market. There's a lot of opportunity there. That said, we continue to gain share and perform extremely well in Canada and in the U.K. The U.K. is a business that I'm very excited that we're in 'cause it's a big market, arguably like the second-largest credit market. We've got a nice asset. It's just the U.K. is really having a tough time from a macro perspective. Results there are gonna be choppier in the near term, but over time, I think we're really well positioned to grow our business across a lot of verticals and a lot of different product categories in the U.K.
You mentioned entering Brazil organically. I don't know what you think. Can you share about what your...
Yeah.
Yeah. Can you share what's going on there?
Well, you know, as you know, it used to be a negative only type of bureau market. I guess in the past few years, from a regulatory standpoint, they created the ability to have positive data as well. We applied and were granted a license to operate a bureau there. We've gained access to the positive data. We've loaded it into our next generation international credit platform, and we're in the process of just building the depth of the data and building out all of the data attributes that lenders need in order to begin developing predictive models, you know, across their range, whether it's customer acquisition modeling or credit risk modeling or delinquency, et cetera, et cetera. So, look, you know, it's a great market, great growth potential.
There is a dominant player owned by Experian there called Serasa. Equifax is making moves, and we've got an organic entry as well. Over time, as we mature the data asset, we can bring all of our capabilities, fraud, marketing, and credit across the chain into Brazil. It's a longer-term, you know, growth acceleration play.
When you think about entering a new market, you know, how do you decide between going organically and going through M&A?
A lot of it's just the availability of the assets, right? In many markets around the world, there's either a government registry or maybe a single private player, or, you know, dynamics that are similar to the U.S., right? In Brazil, there are two principal players, and our competitors are... Well, one is fully owned and one is partially owned with an offer on the table, so to speak. Then there's a small bureau that's owned by a consortium of banks. I suspect that'll be like a transitional position, you know, in the fullness of time. The banks will build it to a certain point if they're successful and then exit to a player.
you know, we don't wanna wait 'cause the data is available and we've got the technology, and increasingly we can get into markets at a lower cost because we're building platforms once for use globally, right? We wanted to move quickly into Brazil. I guess in short, it's a market by market analysis around what's the best way to do it, build it or buy it.
I just wanna check one more time if anyone has a question?
Well, they either need more coffee or they're saving it for the one-on-ones.
It's definitely the coffee. It's always the coffee.
Always helps.
I wanna ask a balance sheet question.
Sure.
because I know you touched on balance sheet. You guys talked about prioritizing paying down debt on the call and kind of.
Yes.
not looking at M&A, in the near term. I guess sort of, what drove that decision, and how should we think about use of capital on sort of a longer term?
Yeah.
-basis?
Well, look, what drove the decision obviously is that we've got more leverage right now than we ideally would, and I think is appropriate given the level of interest expense, right, or interest rates. You know, we exited the year at about 3.8 times. We plan to pay down debt down to about 3.4 times this year, right? What's changed though is given that debt is more expensive now than it has been, let's say, over the past five years or so, we're taking our long-term target down to 3.0 from 3.5. Look, we'll be more prudent, I think, in managing in and around that as M&A opportunities present themselves. 2021 was a year of transformational M&A for us.
Neustar in particular was a really big deal to cement our extension into marketing and fraud. I don't see another one of those on the horizon in the intermediate term. I feel like with the moves we've made, we've got so much innovation fodder. We've got a generation's worth, and what we really need to do is pay down the debt because it's more costly than we expected, and get all the value that we can out of these acquisitions, and then take that value to all of our markets globally.
Yeah. Well, I think we'll stop here, and I really appreciate your time. Thank you for helping us kick-
Well, you're welcome.
-off the conference.
thank you.
All right. Thank you.