Q4 2019 Earnings Call
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Good morning, and welcome to the Trans Union.
Fourth quarter 2019 earnings conference call, all participants will be in listen only mode should you need assistance. Please signally conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you made press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to Aaron Hoffman, Vice President of Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us today on the call today, we have Chris car right, President and Chief Executive Officer, and tighten Cielo Executive Vice President and Chief Financial Officer, We posted our earnings release and slides to accompany this call on the trend Union Investor Relations website <unk>.
Our earnings release includes schedules, which contain more detailed information about revenue operating expenses and other items, including certain non-GAAP financial measures reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures are also included in these schedules.
Today's call will be recorded an a replay will be available on our website.
We will also be making statements. During this call that are forward. Looking these statements are based on current expectations and assumptions and are subject to risks and uncertainties.
Actual results could differ materially from those described in the forward looking statements because the factors discussed in todays earnings release in the comments made during this conference call and in our most recent form 10-K forms 10-Q, and other reports and filings with the FCC, we do not undertake any duty to update any forward looking statement that out of the.
Away, let me now turn it over to Chris.
Well, thanks, Aaron and welcome everyone to our call.
We've got a lot of ground to cover today. So let me quickly review the highlights of what we will discuss first I'll walk you through our strong performance in the fourth quarter and also for the full year Todd will follow me and provide you with Fuller details.
Second I will share the reasons for our confidence that 2020 will be another year of solid growth and organizational progress and Transunion again, Todd will cover cover further specifics in his section.
And third our reinforce our longer term ambitions for cranes Union and confidence that we can continue to deliver superior financial results.
Finally.
I'll review, our strong and differentiated portfolio and proven approach to growth.
We're excited about our businesses and solutions globally and believe that they provide a terrific foundation for our continued success.
So with that overview, let's get into our financial performance.
For the fourth quarter and the full year 2019, Transunion again generated very positive financial results, our revenue EBITDA and EPS for both periods grew double digits on an organic constant currency adjusted basis.
This strong performance is the result of broad based innovation led growth across our portfolio.
So now let's review some of the highlights.
So in the U.S. markets financial services, our largest vertical delivered a very strong year. Despite a slow start in the first quarter.
Our insurance in public sector verticals also grew rapidly in healthcare position itself are returned to high single digit organic revenue growth with a year or strong new sales and implementations and a robust sales pipeline going into 2020.
International results were almost uniformly strong over the year, we remain extremely bullish on our diversified end market leading position in India. We saw our UK business accelerate to double digit top line organic growth and with EBITDA margins above 40%.
And we also continued to deliver good performance in consumer interactive driven by balance growth between our direct to consumer and indirect channels.
We also evolve our organization structure seeming a global solutions and operations functions in order to accelerate product development and increase operational effectiveness to better meet the needs of our customers.
Additionally, we used our excess cash flow to substantially reduce our debt will also refinancing yet to linked the maturities and reduce interest expense.
So we accomplished a lot of trade Union in 2090, continuing our track record of strong performance since going public in 2015.
Since our IPO, we've delivered compound annual adjusted growth.
15% revenue.
90%, EBITDA and 26% earnings per share.
Now looking forward to 2020.
While those results since IPO have been very satisfying for trends Union and our shareholders were very aware that we need to continue to deliver strong performance.
I believe that 2020 is setting up to be another very positive here.
I will take you through the specifics of our guidance and you'll see forecast another solid year of top and bottom line performance was strong EPS growth and robust cash generation.
As always we want to guide you to financial results to which we have good line of sight and that have some potential upside, but limited downside. We prefer this more certain approach to guidance and believe that our long term shareholders do as well.
Our optimism for this year is based on our industry, leading solutions and capabilities, resulting from years of consistent internal innovation and strategic acquisitions.
Our product development and sales pipelines continue to expand immature providing visibility into the growth we anticipate in 2020 and beyond.
Second the markets in which we operate remain positioned for growth in.
In the us the consumers healthy and overall lending activity continues to grow more specifically across the financial markets. We expect strong consumer lending growth to continue wall credit card and auto lending will remain flat or grow modestly.
There's more uncertainty in mortgage lending as it's driven by macro factors such as interest rates and even new housing supply and we frankly account for this and our outlook.
We also continue to benefit from a highly competitive lending environment, our lenders need differentiated data and analytic solutions that help them better understand consumers and manage credit marketing and collections risk. This creates opportunity ongoing for our industry, leading solutions such as credit vision Creditvision link.
I'd vision with innovation in trauma.
And our emerging vertical markets, both insurance and healthcare remains strong.
And customers are eager for the valuable solutions that we provide.
Gaining traction in the attractive public sector market at the federal state and local levels.
We have considerable opportunity to further penetrate many of our diversified markets such as telco retail and E commerce utility and energy gaming gambling as well as tenant in employment backgrounds.
Each of these markets represent an attractive growth opportunity for our solutions, especially our investigative offering TLO XP.
The direct to consumer space is also healthy as consumers remain focused on their credit scores and identity monitoring.
Internationally, we have attractive positions in emerging economies like India, Colombia in Brazil.
These are fast growing markets with outside opportunities for us to diversify our offerings and provide value declines.
In developed markets like the UK in Canada, we're well position to capitalize on consumer trends addressed by our capabilities such as fraud mitigation direct to consumer services.
Rented and alternative data in others.
So the bottom line is that we're providing well conceived achievable guidance underpinned by tangible internal momentum as well as solid market dynamics.
As we go through the year, we will calibrate our outlook to reflect any changes we experienced in our markets ensure that with you.
So we're well positioned for 2020 and committed to delivering industry, leading performance as we have since the IPO.
Now I'll talk about our broader ambitions for developing our business in the coming years.
As we've talked about previously we feel we have an effective platform for innovation and that there are many incremental growth opportunities that we want to pursue.
Last year at our Investor day, we outline many of these opportunities including value added solutions like trended data.
Online fraud mitigation.
And entering fast growing verticals, such as insurance international growth and expansion and further investments in our technology and infrastructure.
We believe that we are well positioned at the intersection of big data and technology and have the opportunity to further build our market position and create shareholder value.
This means that from time to time, we're going to invest at elevated levels against these strategic priorities.
That allow us to develop further our diversified and innovation led portfolio.
We will be highly transparent about our plans progress and outcomes, making these important investments will allow us to continue to deliver industry, leading organic growth at an attractive growing margin.
For instance, in a few minutes I'll discuss and accelerating technology investments first though.
Wanted to spend a few minutes on our unique market physicians and approach, which will help to provide context on the areas that we have and will invest in.
So when we look across the different geographies in markets that we serve.
We are strong innovators in a given market and our disrupting and taking share or we have an introductory attacker position in an attractive related market, where we can leverage our capabilities that's true to us.
In our direct to consumer business and internationally as well.
So for example in the U.S.
We've seen rapid growth in our financial services vertical in part due to our first mover advantage with trended in alternative data, which generated new credit insights for lenders that innovation and disruption has helped us grow at a much faster rate than the markets as a whole.
And our insurance vertical we took an attacker physician expanding from our legacy credit solutions to a range of differentiated data and analytic products take share from our largest competitor.
Stories, the same in healthcare and public sector and across the long tail of diversified markets.
Internationally, we've executed with similar tactics, so often in markets that have higher underlying growth rates as I mentioned earlier.
And in our consumer Interactive segment, we were the first to empower consumers at scale to the indirect channel leveraging key strategic partnerships across a variety of industries, including personal financial management lead generation.
Financial services.
And identity protection.
And we continue to explore new attractive markets to extend our reach.
We recognize that this was an attractive model and partnered with market leaders in their respective segment and it benefited from their growth.
On top of our attractive market positions, we have an enterprise growth playbook that weve proven around the world in our various vertical markets at its core it's driven by consumer and customer insights.
And we have a successful approach along three dimensions deep client engagement ongoing product innovation and expansion into related adjacent fees.
Proof of our success is our ability to grow in excess often significantly above the underlying market growth rates.
Whether it is a vertical like financial services or insurance or geographic market like in the year, Canada, we're able to deliver outperformance by diligently executing along these three dimensions.
Critical to successfully executing this playbook is the powerful proprietary and third party data asset that we access.
In addition to our traditional attractive positions in consumer credit data. We've added an array of alternative information, including trended credit payday and on term online short term loans retail loans certain demand deposit utility and other data.
This extended data coverage enables us to provide behavior insights on millions of consumers that previously we could not.
We've also diversified our portfolio overall with important expansions into insurance healthcare public sector consumer identity digital services and other verticals and categories.
While we internally developed much of our data and analytics capabilities over these last seven years. We've also executed 18 acquisitions and a host of strategic partnerships and have meaningfully augmented our data asset and creating value for our shareholders.
Underpinning everything we do is a culture that emphasizes customer focus individual accountability and performance. We've built a company that understands the needs of its customers and can deliver best in class solutions to meet those needs our talented experienced leadership team has.
Proven track record of winning in the marketplace and delivering great results and our success in growth has allowed us to higher extremely high caliber talent across the organization.
We're also proud to build the culture that understands the value of sound financial management and being good stewards of our shareholders' capital.
This extends from our board of directors to senior leadership and down to frontline associates across the organization.
Finally, I want to talk about our industry, leading technology stack, which is proving to be competitive advantage and we'll continue to be.
Further extend our leading technology today, we're announcing plans to accelerate our investment over the next three years.
Let's start with a short history, and then look forward to our vision of how our technology infrastructure is going to evolve.
Beginning in early 2013 trend Union develop a flexible and effective technology platform through consistent focus and investment.
Our efforts began with project spark assistance migration from costly complicated mainframe technology to a modern flexible cloud compatible architecture based on high performance distributed clusters running both proprietary and open source software.
Spark, providing cost savings improve development speed and created a cloud ready platform, allowing us to standardize.
A lot of our underlying data ingestion and product fulfillment technology in a way that we can share globally to deploy products to market much more quickly.
At the same time, we proactively improve or information security along multiple dimensions, including personnel procedures hardware software reporting in the use of independent security experts.
Since moving fully off mainframes and 2016, we stayed aggressive and evolve this new technologies and tools have become available.
We've enhanced functionality for clients reduced complexity internally improve systems reliability and security.
Implemented agile in Dev ops, and began utilizing service architectures and apiay layers as well as developing proof of concepts for new cloud architecture.
Well as technology advances in overseas, we continue to rationally evolve our infrastructure and our capabilities to efficiently interface with our clients in the business ecosystems in which we participate.
The opportunity to take an expanded and further evolve enterprise approached technology.
Has become more significant as trend gene has become increasingly global company.
To that end.
We're announcing today that we're going to accelerate our technology investments to ensure that across transunion.
By design, we're even more effective efficient secure reliable in performance.
Our investment will be concentrated in streamlining processes increasing automation.
And rapidly adopting a hybrid public and private cloud approach globally.
By leveraging automation and how we work to most efficiently use technology tools and infrastructure, we're going to realize a number of critical benefits.
First like many tech enabled companies.
Opportunity to further streamline our application ecosystem.
So we've developed a number of great applications that create value for us and that can and will be re factored in optimized into a more modern CPI based in micro services oriented architecture.
Doing so allows us to simplify the delivery of IP on a global basis, reducing costs and increasing our speed to market. Even further beyond the significant benefits we achieved spar.
Such as international Rollouts of Creditvision credit view revision among other solutions.
Our further streamlining our application universe and implementing a hybrid infrastructure approach, we can more easily push IP into the public cloud and then pull it down for use in a given market.
This approach.
Will help us to continue our rapid international expansion as well as more easily deploy solutions across our markets.
Second.
We'll implement a hybrid infrastructure to create scale economies road computing and distribution.
Through an infrastructure is code approach, we can automatically provision infrastructure real time, when new product features are developed doing so eliminates the time consuming manual provisioning process and replaces it with auto provisioning from either the private cloud or a public cloud provider, allowing us to.
Quickly acquire the necessary infrastructure.
At the same time will layer policy is code on top of the infrastructure, which is built into the provisioning of our capacity. So it becomes online fully loaded with a necessary compliance model governance and security as well as our operational and development standards in place.
Combining these two approaches with our agile approach to software development.
We will rapidly auto provision reliable high performance and regulatory compliant infrastructure from selected public cloud providers and our private cloud to best meet the needs of our customers.
And third.
And we'll fully utilized readily available innovative tools from these providers instead of developing them ourselves that will enable faster product development.
Samples include new compliance tools model training machine learning and other cutting edge technologies.
Employing these types of tools in a more highly automated way along with auto provisioning infrastructure.
Our developers can focus on value added revenue generating work free of traditional prep and enablement activities.
And finally this approach.
We will help us to gain access to the many new business models being built on the public cloud.
And to capitalize more fully on these competitive opportunities.
For example, public cloud providers have started building application and data marketplaces, and we're already participating in some like needed to be lessons in marketplace.
By doing so we're future proofing ourselves to ensure that no matter how data and application applications are delivered to customers, whether it's a public cloud marketplace, our own prama data hub.
We'll be able to participate.
The only is very attractive benefits, our plans deliver a meaningful financial venison.
We expect to realize a savings by 2023 of between 20 and $30 million per year.
Todd will provide you with additional detail shortly.
We have deep confidence that we will successfully execute on time and on plan, while maximizing the benefits to you and our customers. We have the distinct benefit of operating what is already the best in class technology stack in our industry and we have the in house experience of delivering spark.
This is real value to trends Union and is underpinned much of our seamlessly executed post spark technology evolution.
In recent years, you've already moved toward hybrid infrastructure approach with the development of trauma in the acquisitions of call credit.
In addition to true signal all of which leveraged public cloud various ways.
We can now leveraged valuable learnings to quickly and reliably execute our some of these plans.
And our in house experience olds require new Chief information Technology Officer beat our 20 year ago.
I'll be has broad ranging experience.
Against technology to build disruptive consumer and customer facing solutions.
We also recently added Oxy Kumar for our key SVP of global technology in architecture.
Good morning joins us from discover financial where he was chief data officer.
And let the migration of discovers data analytics ecosystem public cloud prior to this served as chief data officer.
Are you established for data science practice, along with the development of a 20 plus had a bite private cloud based analytics platform.
He's also held technology leadership roles with CBS investment Bank M&A and American Express.
So many ways trends Union as a technology company as much as we are patients require.
These next steps are critical to maintaining our long standing tech leadership and for supporting our strong marketplace.
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And so to recap Transunion had a very strong year 2019, and is well positioned to deliver again in 2020.
We're also going to increase the technology spending over these next several years to accelerate our platform evolution to reduce costs and the maintain or technology leadership.
When taken together all of these factors and still confidence that trade Union is positioned to deliver long term success for our associates customers consumers as well as shareholders.
That concludes my discussion of our business.
I'll now turn the time over to Todd who will walk you through our financial results and outlook.
Todd.
Thanks, Chris Let me start with our consolidated results and for the sake. Its simplicity all of the comparisons I discussed today will be against the fourth quarter of 2018, unless noted otherwise and all revenue discussions related to adjusted revenue.
Starting with the income statement.
Fourth quarter consolidated revenue increased 10% on a reported basis and in constant currency revenue from acquisitions contributed slightly less than half a point of growth in the quarter related to the May 2019 acquisition of true signal.
And one other reminder, the impact of lapping incremental credit monitoring from the breach and a competitor was again about a one point headwind in the quarter.
As we've discussed previously we received an immaterial amount of revenue in 2019 compared to 2018 as the offering is now handled by another provider and serve significantly fewer subscribers.
Excluding the comparability impact from this revenue organic revenue in constant currency would have grown 11%.
Adjusted EBITDA increased 11% on a reported basis and in constant currency.
Our adjusted EBITDA margin was 40.2% up about 30 basis points from the fourth quarter of 2018.
For the full year adjusted EBITDA margin was 39.8% up about 70 basis points and slightly better than the high end of our guidance provided in October.
Fourth quarter adjusted diluted EPS grew 13% with a 26% adjusted tax rate.
The rate in the quarter and the full year were slightly lower than our full year expectation of 27% as a result of realizing the benefits of certain tax planning initiatives.
Ill wrap up my comments on our consolidated results with some good news about our cash flow and balance sheet.
During the fourth quarter, we voluntarily prepaid another $75 million of debt after prepaying $265 million earlier in the air and $60 million in the fourth quarter of 2018.
This brings our prepayment total to $400 million over the past 13 months and further demonstrates the very strong cash generation of our business model.
Going forward will likely continue to voluntarily prepaid additional debt in the absence of any significant investments.
During the quarter, we also refinanced our debt initially we launched a refinancing of $1.75 billion of our view loans as the offerings significantly oversubscribed, we were able to upsize to $2.6 billion, allowing us to pay off all of our be loans reduced the.
Interest rate by a quarter point and extend maturities to November 2026.
We then refinanced all $1.1 billion of our and loans extending their maturity to December of 2024.
This is our second highly successful refinancing over the past three years in between the refinancings, we issued $1.8 billion of debt with very attractive terms in mid 2018 to fund the acquisitions a call credit and innovation.
We've consistently seen strong market demand for our debt, reflecting the stability and consistency of our business and our cash flows.
And our track record, we feel very confident in our ability to access the debt markets again in the future if necessary.
At the same time, our leverage ratio has continued to decline and was 3.2 times net debt to adjusted EBITDA at the end of the fourth quarter.
The deleveraging has come from our fast growing adjusted EBITDA in good cash conversion.
Our preference is generally to stay below three and a half times, providing good financial flexibility to participate in strategic M&A.
Positive organic opportunities.
Hey, our dividend and prepaid that.
I would add that we would be comfortable moving back above three and a half times for the right acquisition that aligns with our strategy and has strong top and bottomline characteristics supporting a clear path to deleveraging that under three and a half times.
Now looking at segment financial performance US markets grew 12%, excluding the impact to the true signal acquisition organic revenue would have been up 11%.
Our financial services vertical revenue grew 16% on a reported and organic basis.
Chris mentioned, despite a slow start to the error the vertical built momentum each quarter behind the continued strength of our innovation some share shift deeper penetration with certain customers and an improving macro backdrop.
In the fourth quarter, we saw growth and all of our lending end markets.
Emerging verticals combined grew 7% and 6% on an organic basis.
Insurance delivered another strong quarter and posted high teens organic revenue growth for the full year.
Continue to benefit from successful innovation market share gains.
Expansion of our property and casualty offerings and the diversification of our portfolio into the life market as well as overall constructive market conditions for underwriting activity.
The public sector continues to deliver strong results in the future looks promising as we are winning new business and growing our sales pipeline.
Health care had another solid quarter as you continue to key earlier contract signings begin to monetize.
As our recent acquisitions are progressing as expected we are starting to realize cross sell synergies between them and our core back end business.
The vertical delivered organic mid single digit growth for the full year inline with the guidance that we've maintained throughout 2019.
Given the meaningful improvements we've made recently and the pace of business wins, we're confident that the vertical will return to high single digit growth since 2020.
The diversified markets, we have made inroads into the fast growing telco industry with line of sight to additional attractive opportunities.
Overall, our overall for our emerging verticals, you'll note a slight deceleration on the last several quarters on 8% organic growth 6%.
This is the result of the timing certain revenue and continued declines in our collection vertical.
Additionally.
Over the course of year.
Proactively reshaped our media vertical so better leverage our unique ability to understand the connected consumer and develop people based marketing technology.
The acquisition a true signal supports the strategy by expanding our access to all of these data and providing a flexible platform for real time audience creation.
At the same time as we adapted to evolving industry dynamics, we moved away from some legacy business and that resulted in a drag on revenue in 2019.
Adjusted EBITDA for Us markets increased 17% I'm also reported and organic basis.
From my comments about international all comparisons will be in constant currency.
For the total segment revenue grew 11%.
Regional results were generally quite strong highlighted by 25% growth and India. Our Indian business continues to benefit from a positive overall macro environment as well as our diversified portfolio.
We continue to see broad based growth in our core consumer lending business, a fast growing commercial lending offering.
Direct to consumer fraud, as well as analytic and Decisioning tools.
Our UK business grew 12% again, driven in large part by our strong fraud mitigation business and our fast growing gaming vertical.
Canada continues to consistently deliver outstanding results. Despite a very slow growth lending market with revenue up 12% in the quarter you can see the benefits of our strategy to rapidly to choose IP and capabilities into this market.
We are held by innovations like Creditvision credit, you and I'd vision as well as deploying our vertical market strategies and insurance and public sector.
Our Asia Pacific region grew 8% as we lap the shutdown of our DTC platform in early December and saw continued strength in the Philippines.
Without the impact to the D to C platform shutdown revenue would have grown in the mid teens.
And Latin America growth slowed a bit 4% in the fourth quarter largely due to the timing of some onetime items in the fourth quarter in 2018, as what short term weaker results and one of our larger markets.
Full year growth for the region was 9%.
And we expect to get back to high single digit constant currency growth in the first quarter of homes.
African grew 5% during the quarter with particular strength in our auto eight of business and our insurance vertical.
Adjusted EBITDA for international grew 14%.
Consumer interactive revenue increased 2% driven by balanced growth excuse me indirect and direct channels as I noted earlier. This result includes the headwind of Comping against the impact of lapping last year's incremental credit monitoring from a breach had a competitor so normalizing for this impact.
Segment would have gone approximately 6% inline with our general expectations for the sites.
Our results continue to reflect solid consumer interest to credit management and identity protection.
And our analytics driven marketing strategy as address these favorable market trends.
We continue to focus marketing efforts in areas that deliver sufficient returns and these efforts have proven effective recalling revenue and the directs.
Adjusted EBITDA for consumer interactive was up slightly in the quarter well it would've been up more excluding the impact lapping the incremental credit.
Turning now to our guidance for 2020.
Let me start with some revenue and adjusted EBITDA assumptions how quickly models.
For the full year to true signal acquisition should handle heavy negligible impact adjusted revenue fell.
The recent dispositions small business in the UK called Cipro will have an immaterial impact on total transunion revenue.
In the UK and we'll have enforcement and effect so excluding the impact of the divestiture our business, we still expect delivered double digit constant currency growth in 2020.
Back to the total company or FX, we expect to see about 60 basis points tailwind impact people just revenue.
And adjusted.
We expect adjusted revenue to come in between $2.857 billion to $2.872 billion up 7% to 8%.
So on an organic constant currency basis, adjusted revenue should be up 7% to 7.5%.
And it's worth pointing out that given the accelerating growth rates for the total company over the course of 2019, particularly our largest vertical financial services, we would expect comparison, if and as we move through 2020.
Meaning this will be a front end loaded year in all likelihood.
Reflecting on some of Chris his comments about guidance, we're taking a prudent view around our financial services vertical, particularly with mortgage which may end up into headwind in 2020.
Also we'll likely see a slight deceleration international from the very strong 15% for the full year.
Finally, consumer interactive was slightly stronger in 2019 than our long term expectations and we are modeling more modest growth in 2020.
Adjusted EBITDA is expected to be between 1.1 for one and $1.151 billion up 8% to 9%.
At the high end of our guidance adjusted EBITDA margin is expected to be up about 30 basis points from 39.8% in 2019, pushing the margin north of 40% for the first time.
Adjusted diluted earnings per share for the year are expected to be between $3 in 14 cents and $3, an 18 cents up 13% to 14%.
This is particularly strong outlook is a combination of our adjusted EBITDA growth combined with the benefits of the debt refinancing and prepayment I discussed earlier as well as the implementation of global tax planning initiatives.
For our accelerated technology initiatives.
Our current expectations are that will incur between 150 in $175 million of investments over the three year period.
Based on our current forecast, we anticipate that the investments will ramp over the three years.
These investments are largely for outside project management and consulting expertise.
The migration cost new software purchases and hiring of additional internal resources.
We should see modest benefits begin to accrue in 2021 and 2022.
And beginning in 2023, we expect to realize $20 million to $30 million of annual benefits from these initiatives. In addition to the operational improvements Chris outlined.
That gives us the opportunity to reinvest the benefits, let them flow to the bottom line or do some of goal.
Finally, we expect it to absorb the capital expenditures related to these initiatives in our normal spend of about 8% of revenue each year.
Capital expenditures associated with our technology initiatives are largely related to internally developed software.
I also want to preview that we intend to adjust out the $150 million to $175 million of operating expenses related to the accelerated technology initiatives, when we calculate our non-GAAP metrics.
Although certainly part of our anticipated evolution given the pace in magnitude of the investment we believe it is appropriate should adjust the costs out.
At the same time this provides valuable transparency to our investors about the cost and timing of our actions.
To update you on some other modeling assumptions, we expect our tax rate to fall to 25.5% compared to 26.7% in 2019.
This is the result of the good tax planning learnt that I referenced earlier, offsetting our rapid but profitable growth and higher rate jurisdictions like India, Canada in Colombia.
As we continue to grow internationally, which of course is a very good thing to do.
We do have a growing need to address the tax rate impact through other planning initiatives and we're actively working on those.
Total depreciation and amortization is expected to be approximately $375 million.
Excluding the step up in subsequent M&A portion depreciation and amortization should be about $180 million in net interest expense should be about $140 million.
Down compared to 2019, as a result of prepaying debt and refinancing last year.
And as I, just mentioned, we anticipate that capital expenditures will be about 8% of revenue share inline with our long term expectation.
Turning now to the first quarter of 2020, let me provide our assumptions.
Adjusted revenue, we expect an immaterial M&A contribution from true signal there is no material impact on either adjusted revenue or adjusted EBITDA from apps.
Adjusted revenue should come in between 681, and $685 million, an increase of 9% to 10%.
On an organic constant currency basis.
Adjusted revenue should be up 9% to 9.5%.
The slight difference in the high end is the result of rounding that combined modest M&A and FX impact.
Adjusted EBITDA is expected to be between 261 and $264 million, an increase of 9% to 10%.
Adjusted diluted earnings per share expected to be 69 cents to 70 cents, an increase of 15% to 17%.
In the spare to further transparency, let me offer a few thoughts about a couple of puts and takes that will impact our first quarter performance.
First us markets overall in particularly our financial services vertical and favorable comparisons to the first quarter of 2019, which should result in strong reported results in the first quarter of 2020.
Second it's also worth reminding you that the first quarter of 2019 results in India or unusually strong as a result of some onetime business and the timing of the launch of our revamped industry, leading commercial credit score.
With that in mind, you should expect a challenging comparison in the first quarter of 2020 that will slow indias percentage growth rate to mid teens.
However, full year 2000, twentys growth rate will be significantly stronger than that.
So that concludes my review of our financial results I'll return the call back to Chris for some final comments.
Well, thanks, Todd and to conclude Transunion continues to be on the strong growth trajectory with a very good during 2019 and very solid guidance for 2020.
As we discussed today, our ambitions are clear and we'll continue to invest aggressively and our world class.
Unique market positions and growth approach to ensure relative outperformance over the longer term.
Before them to Cuba.
I want to take a moment to think wheel Mullen.
We previously announced is retiring as the chairman of our board dismay.
We also had a tremendous contribution transunion over these past six years.
We're pleased to have also announced that Pam Joseph.
Has been on the board for the past four to half years will succeed Leo.
We've already greatly benefited from premium service.
Including having here as a highly engaged audit chair and we look forward to her continued contributions with that I'll turn the time back to air. Thanks, Chris So that concludes our prepared remarks today for the Q and as always we ask that you. Each ask only one question. So that we can include more participants that will be glad to take those questions.
We will now begin the question and answer session to ask a question you made press Star then one under Touchtone phone.
If you're using these speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too as reminder, please ask only one question.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Manav Patnaik of Barclays. Please go ahead.
Thank you. Good morning, gentlemen, my question is more on the incremental Tech investments you call that I was wondering.
Simplify that for acetate is there a lot of catching up.
Technology.
Ill.
Sentiment is trying to be one step ahead of the competition catch up you know just maybe fans around the with bank of in terms of what's exactly going on there would be accelerated spend.
Okay, Great Monovisc.
This is Chris happy to elaborate a bit on that.
I mean, let's start with the.
As you know we've been making.
Continuous investments in our tech stack.
In recent years.
After we completed the migration off the mainframe that was project spark.
Post project spark allowed us to.
Implementable I'd characterize the big data architecture.
And technology stack.
Removed from the mainframe too.
Distributed low cost.
Clusters of servers supporting both our credit operations and our public record.
And essentially that architecture runs and would you could consider a public cloud.
So if you look at where we're at today I'd characterize it as a cloud ready architecture, but operated internally at our data centers, which we have consolidated over this period to.
And since we achieve that milestone we've continued to invest in systems reliability.
Information security and of course innovation, we've got a lot of functionality over that period.
On the stability front for about 18 months, though we've had almost fivenines reliability, which is hugely important to our clients and and we made a lot of investments further investments in our information security and as you guys know that work is never done.
Where we stand now though is we look at how the public cloud has evolved and the.
The amount of functionality that you can now procure with code and we think it makes sense for certain of our applications to migrate to the public cloud, which will require some adaptation and rewrite of the underlying code base to take advantage of the cloud providers.
Full utility of services.
So part of this tech investment isn't too just simply enable that migration and take advantage of public cloud economics infrastructure and security.
The other part though is.
As we take a more global perspective for operating our business.
We have an opportunity to rationalize certain aspects of our tech stacks on a global.
Basis.
And so in recent years, we have developed.
A and enterprise architecture of services level architecture, and there are certain applications Decisioning. For example, when there are others, where we have some redundancy an overlap in our implementations globally. This is a chance for us to redevelop next year.
Duration application.
That is more functional and more math configurable.
In the public cloud and becomes a destination to which we will over time migrate the various instances that exist.
In our different operations around the globe, So think of a tech investment.
Enabling just the next step in our evolution, which is one leveraging the good news of the public cloud and getting some savings.
And to.
Implementing the next Gen services and Microservices architecture.
In key parts of our tech portfolio.
So I'll pause there.
The next question comes from Andrew Steinerman of JP Morgan. Please go ahead.
Hi, Andrew I.
Surely I understand me additional stack investment getting added back here for 2020 guide.
I look at the underlying implied margin of the 2020 guide it looks like it's only up modestly maybe 2020 basis points.
That right and why is that the case.
Hey, Good morning, Andrew This is Todd I'll take that question so.
Yes, I think you're looking at sea adjusted EBITDA guidance correctly, I guess, what I would point out first first of all.
Is that said the high end of the guide is contemplating.
That transunion will be over a 40% adjusted EBITDA margin meal for for the full year three view as very strong in.
Leading amongst our peer group and I think what that guide also contemplates is a significant amount of investment.
Back into trends Union in two in 2020, and also setting us up beyond Chris talked about the tech investment already.
And yes, we're adding we're adding that back to is due to the size and the magnitude of that and we want to make certain on as I've already said that our shareholders have an appreciation for the milestones that we're going to deliver but on top of that we have a very aggressive agenda ahead of us to continue our topic.
Line growth rate in particular, if you think about the changes that Chris made last year to the to his leadership team in the emphasis.
That you put on solutions to help find those next big ideas.
To drive organic growth and as well as operations.
Putting someone in charge of that to find the on efficiencies throughout the organization, whether that just be and the simple things like just doing business with trends Union and try and make.
Make that easier, we're we're putting a significant amount of effort on against that so I think the way I hope you take away. Those guide is that we're going to let some of the goodness of our revenue flow through but at the same time, we are still taking a very aggressive approach towards investing back into the business for.
Or future returns.
Andrew This yeah. This is Chris I, just want to reinforce what Todd said because.
Mail on ahead.
I mean, certainly we could post higher margins, but as you and I've talked about previously we think we create degrees shareholder value over time.
Through very strong topline organic revenue growth.
We continue to have a lot of ideas to grow the business, we're investing in them, but increasingly we see opportunities to become more efficient and effective in our customer service at our customer operations and we're investing in those.
Great. Thank you.
The next question comes from Jeff Mueller of Baird. Please go ahead.
Yes. Thank you so Chris I would love your response to kind of the thought that.
I understand that the tech spend is outsize for the next three years, but is it outsized on a semi permanent basis going forward and I'm asking from the perspective. It seems like project spark was created.
Not or was finished not too long ago. So is it going to be the case that every five or seven years, you're going to go through this two or three year period, where you're going to have this elevated type of.
Of spend or is there some reason why.
Theres kind of a unique set of circumstances, right now and I'm kind of king offer.
The investment that's been made sense, but just how relatively recent projects markwest. Thanks.
Hey, Jeff I definitely understand the sentiment behind your your question and I would say.
Affirmatively I don't expect to have to declare an incremental tech investment.
You know every three or four years.
Some other companies do outside of the space.
It's ironic when we were going through the spark migration.
Our goal is to establish.
A big data architecture and get off of the mainframe we didn't realize that we were actually.
Commencing the journey of migrating to this thing called the cloud, which really wasn't.
People arrived in mature at that point in time.
Now it is no does offer us the potential to become.
But more efficient.
And also to liberate our programmers from doing some of its routine stuff in a far more of those resources around innovation.
I actually think that this kind of seed investment or bubble investment, where we have to spend to build out the future. While we maintain the present right I think thats going to position us for dynamic where we've got ongoing.
Savings and ongoing.
Development productivity improvements, which can drive the top line, which I think will be sufficient to enable us to continue to re factor application stacks move things to the cloud.
It's cetera, I also expect that overtime will start to generate benefit from our operations program and again that will give us the option of either delivering more margin shareholders.
More likely a balance between margin improvement in accelerated investments in new markets or additional product functionality or even go to market resources right. So think of this is a seed investment to get the flywheel spending in the positive direction.
And grow shareholder value through that dynamic.
Thanks, Chris.
The next question comes from Toni Kaplan of Morgan Stanley. Please go ahead.
Thank you.
Just thinking about credit for second you had a really strong year in 19, and a solid fourth quarter as well so just looking at the deceleration.
Planned growth embedded in the guidance I understand you're going to have achievable guidance.
But I guess, you're hearing about 70 basis, it's 75 basis points below where the guidance was at the beginning of last year. So I'm just hoping you could talk about is there something that you're feeling as worsen 2020 outside of maybe mortgage and then if you can maybe talk about that pipeline for growth like how that compares to.
Last year as well just trying to think about topline dynamics. Thanks.
Hey, Tony This is Todd. Thank you for the question and let me let me provide some more specifics around that so yes last year.
At this time, we guided our organic constant currency to be between seven and a half and half percent in this year on were at 7% to 7.5% I think the first thing that I would call out is that when we look across our three segments.
Were relatively consistent with what we've talked about being the targets for growth across those businesses. So for instance in the U.S. markets, we're still expecting a high single digit growth rate international low double digits and then in consumer interactive mid single digit so that's still.
We'll kind of our expectations I think the thing that you really is to call out is you've got to go back and look at the performance of our businesses throughout 2019, and we did see some pretty outsize significant outsized growth.
Throughout the year so in particular.
India on had a had a very strong year and look we expect the business to continue to perform well.
In 2020 as well.
But maybe not at the same on growth rate.
In excess of 30% right and I covered that earlier on the call that we're expecting it to still be in the in the 20%. So the business is bigger.
It's a bigger base now still really excited about it on the innovation that we've driven on there is really just starting to take hold so thats one area. Another area I'd call out would be on insurance, we talked about this as well earlier on insurance vertical posted an exceptionally strong.
Year ons again, we're expecting another good year from.
But probably not as strong on a growth basis.
The other other thing too is you've already alluded to this in your question.
Mortgage on the right now or I should say, let's go back to the fourth quarter.
Yes, we definitely had a little bit of a tailwind on with mortgage and that we're still experiencing that into into the first quarter, but as we look further out into the year.
We just don't have the same on visibility in it we didn't feel as appropriate.
On that I'm happening.
Mortgage as we've talked about before is roughly been between 7% to 8% of Transunions total revenue on so it's not a huge piece, but when we think about guidance, it's something that we want to make certain that we hit on so it's I think that those are the kind of the differences.
I would call out the last part of your question that was it's more about.
The quality of the pipeline.
Chris and I do monthly reviews with each of our lines of businesses and they go through their pipelines with US I would say that these the pipelines are just as good if not better than where we were at on a year ago. So it's really just about the guidance right. Now is just about what we will we have that line of sight too.
And then understanding these little subtleties that I went through.
So my add to that Tony would be the in terms of pipelines, we know worldwide.
Our sales closes in 2019.
Were excellent right. So we had a good selling year end pipelines of continues to grow.
That does position us well for 2020.
Good point I'd make those quarter by quarter over 20, our comps will become more difficult.
We get to the third and fourth quarter of 20 will be comping off of really robust Q3 in Q4 performance from 19 now the business in 19 has been quite solid as you can see from our results.
However, the comps for 19 third and fourth quarter, we're actually soft because of the downturn we experienced at the end of 80 right. So that's factored into our thinking that we are climbing hill in terms of comps over the course of the year.
But.
We do feel well position and where we're kind of excited at the condition of the consumer and the various markets, which we compete.
Thank you.
The next question comes from Gary Bisbee of Bank of America. Please go ahead.
Hey, good morning.
So I guess just on you continue to talk about investing heavily in innovation and product development and now also with the the continued evolution here Tech technology infrastructure, I guess sort of a two parter.
Do you feel like there was any issue around internal capacity to manage all of that this year over the next couple of years and maybe could you just give us a couple of high level thoughts on where the areas you're seeing the most opportunity in terms of innovation product development at the moment. Thank you.
Okay.
Yes, good question.
Well.
Let me start by answering it it at a high level as part of our business planning, we are reaffirming our enterprise strategy and our strategy for the different divisions each year and then from that we developed.
Very detailed tactical plans.
You know in recent years, we've done an increasingly sophisticated approach of mirroring our ambitions for the business to our actual execution capacity and all roads that lead to technology in this business, it's easy to oversubscribed the Tech organization.
Given that the number one focus is of course security a number to focus is systems reliability and availability and then and then we have to invest in.
Innovation, and then of course structural changes like.
The development of the services oriented architecture or the migration to a public cloud.
We've been pretty detailed and thoughtful about you know.
Whether we have the resources.
To execute against this latest evolution in our tech stack I.
I believe that we do I think we have kind of a measured and systematic approach to evolving would is already.
A highly performing a cost effective tech stack and again, we're doing it with a tech organization that really proved its capabilities and extended its capabilities.
With the project spark migration and into subsequent years of architectural refinements security improvements and reliability investments. So we've got a battle hardened tech core and most of this migration I mean, essentially will entirely be done with our internal resources.
Which is one of the reason we can accomplish this.
For the price tag that we have outlined.
So we're feeling pretty good about that.
On the operational areas.
Exploring various opportunities.
And you know again.
In my experience around operational excellence is once you make that a focus and you start to examine.
Your business you find opportunities and you find quick wins in savings that back and then become the raw material for further resource investment an acceleration of.
And effectiveness program, I think you're going to see that dynamic on lease each year and tranches.
In terms of areas that we're excited about I mean look.
Globally, there's an appetite to extend our go to market right. When we hire as sales executive in any particular segment. There is an upfront investment period of about a year, maybe 18 months until its breakeven.
We also have different verticals.
We're extending.
Merging portfolio and Thats true the U.S. and also.
Internationally, there maybe some opportunities to start over bureau in a given geography or two certainly extend or bring in.
Our product suite into other areas.
The portfolio, we're doing that actively.
Yes. So those are some of the highlights I don't know if.
I think Cogs goods, so we'll leave it at that.
Thank you.
The next question comes from George Mihalos of Cowen. Please go ahead.
Hey, guys. Thanks, Thanks for taking my questions touches just wanted to ask on the emerging vertical that 6% growth that you saw there it sounds like given the momentum in health care. The continued strength in insurance and the like that.
We said from this level sort of see an acceleration.
Going into 2020 that is that correct and then secondly, I think you had mentioned core going.
Voluntarily some some revenue within that vertical again, how much of an impact did that have on the on the quarterly growth rate. Thank you.
Hey, George Good morning, and thanks. Thanks for the question, Yes, we look at the emerging verticals I think.
First thing to think about rate is emerging verticals contained several different vertical markets.
That we see an opportunity to be able to.
Take transunions core data assets and analytical capabilities into so think of it we talk about collections, we talk about tenant screening diversified markets insurance public sector media healthcare is a whole collection of verticals on that are in there that anyone point in time ROI.
Going to.
Some are going to perform well in some of them.
Maybe a little bit of a drag on the overall growth rate. So when we look you when you look at emerging verticals.
As we've already spoken about insurance.
Had a particularly strong quarter.
As well as what we've done in public sector. So that continues to do quite well.
The healthcare business, we've talked about this over the last couple of years that this is a business that tends to be lumpy from quarter could be from quarter to quarter. So I think first thing that call out there is on a year over year basis, the comparable was a little bit tougher.
For the healthcare business I think the most important point to make about that is what I have already addressed earlier is that the business did exactly what we said it was going to do on being that it grew in.
Hi, its high single in the mid single digits in 2019, and we're expecting it to ramp to the high fee.
Is still there for us.
Collections continue to be soft for us and I think thats again, just to kind of a testament to the state of the consumer in the US delinquency rates in general are flat or is there ticking up.
Not not too much and then you have the other part of this business is our media business and yes I.
I did talk about that this was an area that we repositioned to reshape to better understand what we referred to as the connected consumer on what we're focused on there is developing people based marketing technology and we made the acquisition a true signal those smaller acquisition, but it gave us.
Access to data.
For real time audience creation right. So what we're doing is we're an essence pivoting on this business and we moved on from our original entre into.
On this space and we've kind of Sunsetted some of our legacy products. So there's a little bit of a little bit of a drag on there on the media, but we continue to be I'm excited about the investments.
We made there were excited about the leader that we have run in the space. So theres. Some theres. Some good runway ahead for us in the emerging verticals. So as we look forward to kind of those last point of your your question I would expect.
A similar type of performance as we go forward because there are so many different puts and takes.
Because we operate in so many different verticals.
So that that's really probably the best way to think about it.
The next question comes from Andrew Nicholas of William Blair. Please go ahead.
Hi, good morning.
In response to the last question you alluded to your success in the public sector of late and it certainly seems like it's one of the bigger.
Kind of opportunities for transient in.
I was hoping you can provide a little bit more detail on inside that business, what's realistic for that business in terms of a near term growth rate and then maybe what you consider to be the key areas of opportunity in that business over the next 12 to 18 months. Thanks.
Okay, well wasn't happy to elaborate on that.
We don't disclose the size of.
The sub segments within.
Emerging on the quarterly calls.
But I would say that.
Public sector has attained a critical mass for us.
And in terms of the nature, we're doing there.
Everything from assisting with.
Employment screening to ongoing.
Active.
Monitoring for security purposes.
There's a lot of we leverage our fraud mitigation suite to.
Then identify and authenticate consumers as they access.
Different government agencies in order to secure.
Benefits provided.
It's a very broad powerful need.
We insist that we assess the government and.
And various ways with our data two to two.
To various analyses really to mitigate risk and to optimize operations.
We also have a nice.
Component of the business from our public records based investigated product, which is called Tilo XP.
And that's sold to.
Enforcement agencies.
At all levels of government really federal state and local.
So.
Yes, I think those are the highlights of the revenue components within the public sector.
The next question comes from David Togut of Evercore ISI. Please go ahead.
Thank you good morning embedded in your low double digit revenue growth guide for international can you talk about your expectations for the UK.
From a growth perspective, and in particular, how was your product set evolving for open banking.
Is there a number of companies that have introduced new applications. There in the last six to 12 months.
Okay. Good morning, and thanks for the question.
We're expecting to have a good year in the UK based on the revenue momentum that we've established in the third and fourth quarter of this year.
We reached double digits.
In terms of topline organic growth.
That is an expectation.
For 2020 as well, it's a combination of.
Good momentum from a more effective selling operation on all dimensions.
We have confidence based on the business that we closed in 19.
Robustness of the pipeline for 20, and the fact that a lot of the complimentary products.
Around our credit products that we've migrated to the UK.
Our end market and we're demo ing them and we're building pipeline and that's true whether its.
Our trended credit data product, which we called true vision in the UK or our credit view solution or.
Our fraud mitigation solution. So in terms of open banking, we've been in market with an open banking product for.
Many quarters now.
And.
We.
We're making good progress there one of the more exciting use cases that we've established with the products in various financial institutions want to use our categorization logic from our own banking solutions to to apply to their own customers and their own transactions to better understand.
Those consumers and those relationships. So we're running a lot of business.
Helping provide that insight for our financial customers.
Hey, David I'd, just add one other thing just to emphasize the point that I made.
When I went through the 2020 guidance and don't lose sight of the fact that.
We did.
Divest of a small business in the UK that whats called for Cibro.
Overall trends Union I'm not material and so we weren't able to classified as discontinued operations. So meeting we'll have to deal with the comparable in the prior year. So when we talk about the UK threw out 2020.
We will talk to have access that divestiture and consistent with what Chris just said when you exclude that we do expect the business to grow double digits on that basis.
Understood. Thank you very much.
And the last question today due to time constraints comes from Andrew Jeffrey of Suntrust. Please go ahead.
Hey, Thanks for squeezing me and I appreciate it.
I realize the comps get tougher in the financial services vertical as the year progresses, but Chris I Wonder if you can comment on just sort of generally.
How much of.
Outsized growth you're seeing there is driven specifically by Fintech and we saw fees and making to acquire Plaid for example, and I just wonder if there is sort of an intrinsic share shift that's taking place that's fueling some of that growth.
Transunion today, given your strong position.
Okay, well, putting aside the question of share shift for a moment.
Good growth across the different segments of the financial landscape be Fintech overall consumer lending card auto mortgage is it's pretty diversified and strong.
In a couple of those categories, namely auto and mortgage we talked about being.
Kind of market peaks in previous calls certainly true auto where the challenge has been.
Affordability.
As well as just the volume of vehicles being sold.
However, we experienced nice growth in all these categories, we've got an extra boost to mortgage because the rate environment is favorable to refinancing.
As we think about 2020.
We're not sure how long that is going to continue.
And we've attempted to model a conservative posture into our overall guidance.
That said so far so good in the year, but we'll just have to see how that develops.
But we're not overly reliant on any.
Some vertical within the financial services landscape.
To attain our our goals for 2020.
This concludes my question and answer session I would like to turn the conference back over to Aaron Hoffman for any closing remarks.
Alright. Thank you very much we appreciate everyone's time today and we'll look forward to speaking with you all very soon have a wonderful day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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