Q1 2022 TransUnion Earnings Call
Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures today's call will be recorded and a replay will be available on our website.
We'll 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 of factors discussed in today's earnings release and 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 SEC we.
We do not undertake any duty to update any forward looking statement.
Don Let me turn the time over to Chris. Thank you, Eric and let me add my welcome.
To start let me outline the agenda for this morning's call.
First I'll discuss the mostly positive macro conditions that support our attractive full year guidance despite inflationary headwinds.
And then I will review, our strong first quarter performance, which has been driven by a favorable macro conditions and the resurgence of our growth oriented portfolio post pandemic.
The cumulative benefit of the strong sales performance over the pandemic and our successful innovations over time.
I'm pleased to report that our outperformance year to date and confidence in the remainder of the year allow us to raise revenue and EBITDA guidance for the full year.
And I'll provide an update on the impactful acquisitions that we've closed over the past four months for new star and <unk> in particular.
We've experienced early successes and going to market together with really encouraging interest from customers across a wide variety of end markets and then I'll pass the baton to Todd to discuss our first quarter results in detail along with the second quarter and full year guidance for 2022.
Now as I mentioned previously we expect market conditions in 2022 to support our strong organic revenue guidance, along with the post pandemic resurgence in our growth oriented portfolio, especially in consumer lending U S emerging verticals.
And the international markets.
Well a lot of the focus today is justifiably on rising inflation and the long term impacts of this.
I want to remind you that the U S consumer remains in a strong position with respect to credit markets household debt levels relative to income remain low by historical standards average credit card balances are well below pre pandemic levels and delinquency rates for most loans are near record low levels.
Additionally, the unemployment rate in March fell to three 6% and wages grew by five 6%.
Despite increasing inflation consumers remain well positioned to drive the economy.
We heard as much from many large financial institutions this quarter, who provided positive and pragmatic pragmatic guidance during their recent earnings noting the current strength in loan growth spending activity and credit performance, but also acknowledging the potential uncertainty ahead.
We continue to diligently monitor consumer health, particularly lower income households that have less ability to absorb rising costs.
As I said six to current inflation rising interest rates have become an important corollary discussion.
As such.
All in this section by addressing the impact that interest rates have on our various lines of business.
While rig certainly have an impact on the lending market. The overall health of the consumer which I've. Just described has greater influence on borrowing behavior and rates in most cases.
Mortgage refinance represents the one part of the lending market almost entirely driven by interest rates, the simple math dictates, whether or not it makes sense for a consumer to refinance the mortgage and <unk>.
Unsurprisingly rates have some impact on purchase originations, though consumers don't shop based solely on rates. They shop based on a monthly payment where rates are one part of the calculation.
Along with the purchase price the down payment and the long terms.
For auto and card lending rates have a very modest impact given the balances the average American Mercury for instance for every quarter point increase in rates.
That translates into an increase in the monthly payment on the average card balance by only one dollar.
So we tend to see far less impact from rising rates for these loan products.
Now shifting to our first quarter, we posted strong results that exceeded our guidance with broad based growth across our businesses as our regions and verticals and benefited from a P.
Positive momentum buoyed by the healthy consumer as well as business wins and ongoing innovations.
As Todd will discuss in detail, our first quarter outperformance and an improved view of our non mortgage business for the remainder of the year has allowed us to raise our full year guidance we.
We did that while also embedding.
A more aggressive assumption around mortgage declines, implying broad and significant acceleration in our non mortgage business.
We continue to drive above market performance by executing our growth playbook that focuses on repeatable differentiated go to market approaches industry, leading innovation and complementary expansion into adjacent markets.
Our extension into high growth and complementary credit fraud, and marketing solutions continues to resonate with customers across our business, while providing valuable diversification in our portfolio.
And U S markets, we delivered another quarter of double digit organic growth, excluding mortgage with strong performance in financial services insurance and media. This this highlights our very strong position in fintech and other fast growing market segments.
Internationally, we experienced robust growth in India, Latin America, and Asia Pacific, where we have leadership positions in these markets and they have strong underlying growth trends.
Tom will provide more details about the performance of each of these business here shortly.
Now, let me wrap up with a short summary on our ESG efforts. We recently published our 2021 diversity report, which highlights the steady improvement in the diversification of our workforce across under represented groups.
And last week, we published our 2021 sustainability report, which provides a broad picture of the progress we made last year, including issuing baseline carbon emissions data setting a net zero emissions goal improving workforce diversity.
Further enhancing our cyber security and data privacy oversight along with many other achievements.
I hope, you'll all take time to read these meaningful upticks.
Now I want to use the remainder of my time to share with you.
The performance of the three acquisitions that we've closed over the past four months.
But before I do that I want to highlight that the current market backdrop that I described a few minutes ago.
Really.
Essentially the value of our recent acquisitions, particularly with new star and <unk> financial services.
Now both of these can help lenders finding attractive segments.
Within the market and drive timely insights.
Amid the changing landscape.
With new Star in the acquisition substantially strengthens our identity resolution capability for a variety of online applications Neustar.
<unk> provides real time and it'd be a resolution through its one IV platform <unk>.
Powering solutions that currently serves three attractive markets marketing fraud mitigation and communications.
In the first quarter and you start generated $150 million of revenue up 9% in total.
With another quarter of double digit growth in marketing and in our margin.
Of nearly 25%.
During the quarter, we made meaningful progress integrating new star and have received some really encouraging feedback from the market and gain valuable learnings from customers.
That support the long term growth thesis.
Internally, we've completed our organizational design efforts quickly in order to provide clarity and to assure an insurer retention of.
Critical employees.
This has helped us retain nearly 100% of the top talent that we have identified thus far.
I want to note the very high caliber workforce that we've acquired with new Star and.
And we benefit from quickly and efficiently expanding our talent in critical areas like technology data science product development and many others in the current competitive environment, adding so many high quality employees would have been extremely difficult.
We've also brought together critical functions to fully benefit from our increased scale and capabilities.
For instance by standing up data and analytics as its own organization under the leadership of Venkat and shop that.
We brought further clarity and purpose to a critical area of our business.
He has extensive experience in data and analytics and most notably drove the development of new stores impressive one IV platform.
Our internal teams have already benefited from collaborating with each other as part of one newly formed org.
And setting the stage to better leverage the powerful assets and capabilities of both companies.
Now speaking of <unk> through the integration process, we've learned that the platform performs even better than we understood during our diligence, particularly the system's ability to rapidly adjust index and tag data to prepare it for analytic and solution development and deployment is more advanced.
And we understood.
This increases our ability to utilize data assets and put them into production rapidly.
From a commercial standpoint, we've begun to integrate our sales teams.
Including extensive training to drive cross selling activities across customers and solution types.
Now, let me share some of the early views and successes from the field.
More substantial and differentiated marketing solutions from Neustar combined with our true audience offerings have already opened the door to opportunities in our fast growing media vertical.
Our teams.
I've taken a coordinated approach to.
Were actively pursuing these opportunities and have early traction with key clients.
In financial services.
We secured our first cross sell contract of Neustar solutions to a mid tier lender.
And we've had extremely high interest levels as we continue to meet with other customers.
In the insurance markets New Star currently provides its sophisticated solutions to three of the top underwriters in the U S.
Our combined teams recently met with one of the largest insurers and heard how impactful new stores marketing solutions have been for that customer.
They spend billions of dollars of marketing each year.
Now they indicated that their return on their marketing investment has improved significantly as a result of the new star optimization solution.
And given the trade Union.
<unk> currently has relationships with 19 of the 20, the top 20 largest insurers in the U S and an array of other players. We think there is a sizeable opportunity to bring the same type of marketing capabilities to the rest of our client base, who also spent considerably on marketing and are consistently looking for ways to drive better.
Returns.
And the third party collections.
We send our first cross sell contract with an existing transunion customer.
We will now use new stores with phone based intelligence to identify the best time to call individuals to improve their hit rate on outbound collections calls.
But now integrated sales team has attended major trade collection shows recently and discuss similar solutions with the almost 50 existing transient new clients.
And let me invite reminding you about the financial expectations for this business in 2022, we expect new starts to deliver another year of high single digit organic revenue growth driven by strong performance in marketing and fraud.
We expect the business to deliver low double digit revenue growth beginning in 'twenty three and beyond.
And we're expecting roughly a $160 million of adjusted EBITDA in 'twenty, two which would which would imply a 25% margin.
Now supporting the improvement in 2022, and our path to deliver 40% margins by 2025, we have a clear line of sight to at least $70 million in cost synergies and it and it become increasingly confident as we've progressed through the integration process.
And part New store has begun its cost reduction program before we acquired them and that included activities like consolidating eight data centers and to co location sites at the same time, we are benefiting from working together for instance, we're leveraging datasets across organizations to produce.
Costs related to the name address phone and email and data that we collect millions of dollars and we've also begun to consolidate office locations in Chicago, and London, which will both happen this year.
Now turning to <unk>, which provides an entry point into the fast growing I need protection market.
That's been driven by <unk>.
Rapid E Commerce evolution.
In this environment consumers have heightened awareness.
Oh and are concerned about the risks of identity theft.
Sounds like allows us to access a considerably larger part of this market fueling strong long term growth.
In the first quarter, so I'll take generated roughly $23 million in revenue up approximately 13% at a margin of roughly 33%, which was slightly depressed by integration costs.
Also during the quarter.
We began our integration activities and has seen meaningful opportunities materialize.
Our teams are fully leveraging our global capabilities in areas, such as operations and solutions.
And expanding their go to market collaboration between our consumer interactive teams and their U S market counterparts, especially in financial services and insurance.
But also across our international teams as well.
For instance, we position ourselves to bid on a sizeable non financial services contract in the identity protection space.
<unk> on the addition of <unk>.
Expansive solution suite.
Which we believe will be the first of many such opportunities.
We're also off to an encouraging start selling <unk> solutions to our network.
Insurance underwriters insurance represents about a quarter of <unk> revenues today and.
And we see a clear path to expand that position on the strength of our relationships in this space.
We've identified similar opportunities across our U S markets portfolio, notably in financial services for customers are showing strong interest consolidates capabilities.
And based on the existing momentum in the business and the ongoing integration something is currently trending ahead of the plan.
And we expect mid teens revenue growth for 2022, excluding integration costs.
At a nearly 40% margin.
Now, let me wrap up with the acquisition of various financial services. We completed the transaction on April eight and have decided to retain Argos.
And commerce signals.
Marketing business and to classify the remainder of the portfolio as discontinued operations with an intention to sell these assets.
As a reminder, the business in total generated $143 million of revenue in 2021 with about $95 million coming from.
August in Congress signals.
The decision to divest these.
He's not the noncore assets, we will focus our energy on enhancing.
The core August asset, while also allowing the other businesses identify benefit from new ownership.
August brings differentiated card and deposit transaction data as well as.
The IP to link the personalized transaction data.
<unk> sources to create a consumer level full wallet view.
With this we'll be able to deliver enhanced insights to action to measurable outcomes for Argus is consortium members.
Rguest increases changing his thoughtful leadership and insights, helping our customers develop more refined strategies to target profitable consumers or to identify sophisticated patterns of card fraud.
We can help our customers take action on those insights with Transunion solutions, whether they are traditional credit based or non credit based through our new store capability.
And we'll be able to do this through a unified platform powered by promo and 190.
And we're happy to report that we're getting very positive feedback from the existing consortium members about our ownership and their desire for enhanced insights delivered using a modern technology enabled platform.
We've also heard from lenders do not participated in the consortium and many have expressed interest in joining in order to benefit from August is powerful data and insights.
As we integrate our Argus in 2022, we anticipate growth in the low single digits.
What are temporarily depressed margin as we absorbed the necessary integration cost.
In 'twenty three we expect growth to improved high single digits, and then reach low double digits in 2024.
With the margins expanding over this period as we trend toward our goal of 40% margins in 2026.
So that wraps up my update on our market backdrop and the <unk>.
First quarter performance and the integration of these three key acquisitions.
Now I will turn the time over to Todd to walk you through our first quarter financial results, our second quarter guidance and the full year guide as well Todd.
Thanks, Chris and let me add my welcome to everyone. This morning, I'll start off with our consolidated financial results first quarter consolidated revenue increased 32% on a reported and constant currency basis, new start and scientific added about 25 points to revenue and organic.
Constant currency growth was 8%.
Excluding mortgage from both the first quarter of 2021 and 2022, our business grew 13% on an organic constant currency basis.
On a trailing 12 month basis.
Mortgage represented about 10% of our revenue and that is expected to fall to 7% for full year 2022.
Adjusted EBITDA increased 20% on a reported and.
And 21% on a constant currency basis.
Our adjusted EBITDA margin was 36, 3% down 340 basis points compared with the year ago quarter, driven primarily by the lower margin profile of new star excluding.
Excluding both the new Star and scientific acquisition the margin would've been 38, 8%.
First quarter adjusted diluted EPS increased 11% driven by adjusted EBITDA growth.
Offset by higher interest expense and depreciation and amortization.
Now looking at segment financial performance for the quarter U S markets revenue was up 42% compared to the year ago quarter.
The New Star acquisition had about 35 points of impact on revenue growth.
Organic growth was 7% or 15% excluding mortgage.
Adjusted EBITDA for U S markets increased 23% on an as reported and 2% on an organic basis.
Adjusted EBITDA margin declined by 580 basis points.
380 basis points of the decline due to the acquisition of Neustar.
Diving into the results by vertical. Please note that at this time, we have included new starts financial results within emerging verticals.
As we evaluate our operating structure as a fully integrated business. We will provide you with any necessary updated financial information.
Financial services revenue grew 5% and was up 21% excluding mortgage.
Looking at the individual end markets consumer lending continues to be very strong with considerable investor demand focused on thoughtful expansion parts.
Similarly, as loan consolidation and personal loans for large purchases has become more mainstream.
Our NPL position also continues to grow on the strength of the market and share gain.
He said our discussions with many of the largest NPL lenders.
We are also confident that during 2022, we will enable them to furnish data.
This will enrich our credit data for all lenders, while promoting greater financial inclusion as consumers, who utilize NPL loans will get credit no pun intended for their activity.
We also had another strong quarter in our credit card business as issuers pursued incremental share of wallet, continuing a trend of historically strong origination and marketing activity.
Anticipate further good growth in 2022, and issuers remains focused on customer acquisition and portfolio review.
Our auto business delivered solid growth in the quarter as new business wins and on trend innovation.
Particularly related to digital retailing helped offset well publicized inventory issues for new and used cars, even as consumers demand remains high.
We're seeing traction with auto payment shopper.
Digital retailing platform that satisfies consumer desire for end to end online auto shopping.
We're also seeing greater interest in credit vision, wink to better assess consumers and drive greater financial inclusion by utilizing powerful alternative data.
And for mortgage.
Rates have moved to their highest level since 2018, which considerably shrinks the potential refinancing pool.
On the purchase side consumer demand remains solid but continues to be constrained by limited inventory, particularly in highly desirable locations and rising rates.
At this time, we expect our mortgage business revenue to decline about 25% for full year 2022.
We expect the mortgage market.
As measured by inquiries to be down 30%.
We expect our business to perform slightly better than the market as a result of volumetric pricing increases that partially offset the volume declines.
Let me now turn to our emerging verticals, which grew 104% on a reported basis and 10% excluding the revenue associated with new star.
Our media vertical continues to deliver very strong double digit growth and was up about 50% organically in the quarter as we signed new accounts and expanded existing relationships with our large media agency and several very large media companies focused on video.
And streaming platforms.
The true audience marketplace, which was built from the true optic acquisition continues to deliver substantial growth.
Notably these acquisitions don't reflect any of the anticipated upside from incorporating highly differentiated new star marketing capabilities.
Which we believe can drive further upside in the future.
Insurance also delivered double digit growth on the strength of key innovative solutions like driver risk national driving record solution T O.
Hello based investigative tools continued.
Continued traction in digital marketing enabled by the true audience platform and expanding opportunities in both the commercial and life market.
Public sector delivered another good quarter, driven by ongoing new business wins, particularly related to fraud mitigation.
Tenant and employment screening remains strong as employment screening has accelerated with increased employment levels and tenant screening continues to perform well.
So with moderation, it's movement has slowed due to the soaring rental prices and extended eviction moratoriums.
Consumer interactive, which includes scientific revenue increased 15% on a reported basis and declined 3% organically as we were down in both the direct and indirect channel adjusted.
Adjusted EBITDA was up 18%.
Revenue was impacted by moderating consumer demand for paid credit related solutions across both the indirect and direct channels, particularly with changing consumer spending habits coming out of Covid.
We expect this broad market seem to persist and for the segment revenue to be down slightly more in the second quarter and in the first quarter.
This trend further strengthens the case for expanding into the identity protection market via that seismic acquisition.
As those subscriptions are more durable over time.
Often provided to consumers by employers insurers and others.
My comments about international all comparisons will be in constant currency.
For the total segment revenue grew 18% as we saw underlying market improvement in most of our region.
Adjusted EBITDA for international increased 18% as a result of the strong revenue growth.
Let me dig into the specifics for each region.
In the U K revenue increased 15%.
We continue to benefit from a meaningful one time government contract.
Excluding that revenue our U K business would have grown about 3% in the quarter as the mortgage and auto market has been under pressure due to increasing rates and inventory constraints.
This 3% growth rate was also impacted by comparability with some onetime revenue seen in Q1 2021, so underlying performance with high single digits.
Also recall that the benefits of the government contract started in Q2 2021 and ramped through Q1 2022. So we expect reported growth to be impacted as we lap the contract starting next quarter.
Most importantly, we expect.
Underlying growth to remain healthy.
So moving back to the quarterly performance in the U K, we continue to see solid performance across our lending solutions, most notably in the fast growing be NPL space. In fact in February we became the first U K Bureau able to accept the NPL data into our credit file.
Yes.
Working closely with prominent the NPL providers, we can now incorporate this data into credit reports to support consumers that are using this type of point of sale finance.
While also ensuring lenders have a comprehensive picture of.
The borrowers financial position.
We also continue to see strength in our gaming and gambling vertical which is benefiting from our ability to employ open banking solutions to help online and physical casinos that are determined all participants capacity Tibet.
This solution helps the operator and the better set appropriate limits.
And it's highly encouraged by regulators.
Our Canadian business grew 1% in the first quarter, reflecting growth across the portfolio, partially offset by a comparison to significant breach remediation business in the year ago quarter, which I have mentioned on the past several calls.
Excluding the nonrecurring breach business revenue would have grown 4%.
We expect to see a similar breach impact in the second quarter and a less significant effect in the second half of the year.
We continue to see strength across the business with improving demand and growing pipeline from both traditional and non traditional lenders.
Setting us up well for stronger growth in the coming quarters.
Okay.
In India, we grew 37%, reflecting strong market trends and successful innovation and the benefits of our diversified portfolio.
Despite rising inflation, the Indian consumer remains healthy and continues to spend aggressively.
This is helping to drive an expected GDP of 7% along with 9% growth in the credit market in 2022 fueled by a resurgence in consumer lending and credit card issuance along with the continued rise of Fintech and NPL players.
We have outstanding positions across the entire lending spectrum, including with these players, allowing us to capture this meaningful market growth, while also outperforming performing the underlying market.
This outperformance is driven by our innovative approach to the market strong relationships and continued diversification into the fast growing businesses like commercial credit and direct to consumer.
In Latin America revenue was up 17% with broad based growth across our markets, including double digit growth in our largest markets, Colombia and Brazil.
It's very strong growth reflects good macro and consumer fundamentals, along with ongoing new business wins and share shifts in financial services.
And particularly with Fintech and neo banks.
And continued strong uptake of credit vision and fraud solutions.
In Asia Pacific, We grew 25% driven by continued good performance in Hong Kong and the start of recovery in the Philippines, which had been under lockdown longer than any of our other markets.
Finally Africa increased 9% on.
The continued strength of our insurance and retail businesses.
Well there is meaningful growth outside of our largest market South Africa.
We also continue to see additional adoption of credit vision true validate and our commercial credit solutions.
We ended the quarter with roughly 6 billion of debt and $1 3 billion of cash on the balance sheet and pro forma leverage of three five times.
Since quarter end, we have deployed $515 million of cash for the purchase of various financial services and associated team.
And also paid roughly $365 million in taxes associated with the sale of health care.
And these payments cash on the balance sheet would be closer to $400 million in line with our more typical cash balances.
Adding various financial services to the equation, but excluding those businesses classified as discontinued operations, we expect our pro forma leverage ratio to be approximately three nine times in the second quarter as a result of deploying the cash held for taxes and purchasing various financial service.
<unk>.
However, we expect to Delever to three six times by the end of 2022.
We expect to use the proceeds from the sale of the noncore various financial services business.
For general corporate purposes.
Before turning to guidance I'd like to quickly comment on free cash flow, you'll notice our cash flow statement.
That first quarter 2022 cash from operations was lower than last year.
It was primarily due to higher interest expense.
And increased usage of networking capital primarily related to higher incentive compensation.
That brings us to our outlook for the second quarter and the full year.
All of the guidance provided reflects the acquisition of various financial services, though notably only rguest and related business called Commerce signals as we are treating the noncore businesses as discontinued and <unk>.
Turn to divest them.
As a reminder for 2021 are this revenue was $95 million of the reported $143 million for various financial services.
The prorated amount contemplated in our 2022 guidance is $68 million based on the April 8th closing date.
Starting with the second quarter, we expect one point of headwind from FX on both revenue and adjusted EBITDA.
And for revenue, we anticipate a 27 point benefit from the acquisitions of New Star side.
Thick and arrogance.
Revenue is expected to come in between 958, and $968 million or a 32% to 33% increase on an as reported basis and.
And 6% to 7% on an organic constant currency basis.
Embedded in our revenue guidance is at approximately four and a half point headwind from mortgage.
Meaning that the remainder of our business will grow.
10, 5% to 11, 5%.
On an organic constant currency basis.
Adjusted EBITDA is expected to be between 347 $353 million, an increase of 17% to 20%.
Adjusted EBITDA margin is expected to decline 440 to 400 basis points.
Primarily as a result of incorporating new star in various financial services relatively lower margins.
On an organic basis, excluding the free acquisition margins are expected to decrease.
Approximately 50 basis points.
Adjusted diluted earnings per share is expected to be between 96 and 99.
An increase of 8% to 11%.
And for the full year, we expect immaterial FX impact to revenue.
And we also expect about 24 points of benefit from M&A.
Revenue is expected to be between $3 85 to $3 $9 billion.
Up 30% to 32%.
Our guidance includes four points of headwind from mortgage for the full year.
So full year revenue, excluding mortgage on an organic constant currency basis is expected to increase 10% to 12%.
A 100 basis point increase over the guidance that we provided during our February earnings call driven by the first quarter outperformance and our improving full year outlook.
For our business segments on an organic basis, we expect U S market to be up mid single digits, but up mid teens excluding mortgage.
Financial services is also expected to be up mid single digits.
But about 20% excluding mortgage.
We expect emerging verticals to be up low double digits.
We anticipate that international will grow low teens in constant currency terms.
Slight increase over the previous guidance of low double digits.
And we expect consumer interactive to decline low single digits on an organic basis as a result of challenging prior year comparison.
Adjusted EBITDA is expected to be between 1405 and $1 $44 billion up.
The 1% to 24%.
We expect our adjusted EBITDA margin to compress 260 to 220 basis points. This year, driven by the lower margin acquisitions and acquisition integration costs or scientific.
Compared to prior guidance slightly Greece greater margin decline is a result of adding the Argus business at a lower margin that it's further compressed by integration costs.
Without the Rguest addition.
Margin would remain in the same range. We provided previously 36, 9% to 37, 4%.
We also continue to expect the margins expand about 40 basis points on an organic basis.
Adjusted diluted earnings per share for the year is expected to be between $3 84.
And $3 98.
Up 11% to 16%.
Modest change in the top end of the range is most significantly a result of higher interest expense from rising LIBOR rates.
A slight increase in our expected tax rate also intake impacted adjusted diluted earnings per share.
Without these headwinds.
Adjusted earnings adjusted diluted earnings per share would be about seven cents per share higher due.
Due to our increased adjusted EBITDA expectation.
And to help you complete your modeling of 2022.
At this time, we expect our adjusted tax rate to be approximately 22, 5%.
Slightly from 22, 2%.
Depreciation and amortization is expected to be approximately $525 million.
And the portion excluding step up amortization from our 2012 change in control and subsequent acquisitions.
As expected to be about $220 million up from $215 million.
We anticipate that net interest expense will be about $220 million up from $205 million due to higher LIBOR and expectations of future LIBOR increases as in place implied by the forward curve.
As a reminder, about 68% of our debt is fixed using hedge instruments and 32% is floating.
Let me spend a moment to recap our hedging philosophy, we want to ensure we leave sufficient room to prepaid debt.
Which would lower leverage decreased interest expense in there for increased cash flow for other strategic purposes.
We also want to avoid the potential of being over hedged.
Which would place transunion is speculative hedging position.
And finally.
We expect capital expenditures to come in at about 8% of revenue.
I'll now turn the call back to Chris for some final comments.
Thank you Todd.
Well to conclude Transunion delivered another strong quarter, well also quickly integrating strategic acquisitions that further position us for long term differentiated growth.
We raised our guidance despite meaningfully de risking our.
Outlook with more aggressive expectations for mortgage declines.
This reflects the strength and diversity of our portfolio.
We expect another very good year in 2022, driven by the continuation of construction market conditions and the execution of our growth playbook.
And that concludes our prepared remarks for the Q&A, we ask that you.
Reach ask only one question. So that we can include more participants and now we'll be glad to take those questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time a question that's been addressed and we would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our own.
Yeah.
Our first question will come from Andrew Steinman with Jpmorgan. Please go ahead.
Hi.
Andrew I wanted to ask about margin expansion after 'twenty, two and I know that Scott highlighted that to be 100 basis points per year at analyst day, but you know I'm still reminded today that your margins will be down this year due to acquisition because I did I like slide 16, where you show operating margins to be up 40 basis.
At this point this year on organic basis, I'm, just asking that the basic question. You know how can we be assured that margins will expand in years I had passed 22, including potential acquisitions.
Good morning, Andrew This is Todd I'll take I'll take that question. So.
It pertains to our confidence in being able to expand margins beyond 2022, I think it is.
Constructive is just to remember the growth drivers that we anticipate first.
We expect to continue to deliver.
Very strong organic revenue growth of.
Which has a very significant flow through.
To the bottom line and so thinking about just the leading innovation.
That transunion has.
In many product categories, we're going to continue to deliver and that will also that will bolster the bottom line.
In addition to that.
You have to then shift to the inorganic piece.
So starting first with the acquisitions of New Star Frantic and now the recently closed various financial services on acquisitions.
New star and various financial services.
Currently carry a significantly lower margin profile than transunion.
<unk>.
Primarily does have a margin similar to trends unions, but right now it's being weighed down by.
Normal integration costs to make scientific part is part of the business as it continues to grow but if you go back to new Star.
And as Chris talked about his remarks out of the business generated 25% adjusted EBITDA margin.
And we've had that business continues to grow.
Which it did grow 9%.
In the quarter and we're expecting it to grow high single digits.
There is a nice flow through there, but don't forget also about the cost synergies that we committed to which.
Which are $70 million, which we believe by the end of 2023, we will have secured roughly about 80% or so of those of those synergies.
So the team has been working very hard as again, Chris talked about.
And being able to integrate the organizations, but also to find those cost savings and so we feel very confident about being able to deliver on that piece and then various financial services, which you know as you've seen this morning.
We have put in because of the close on April eight.
We put into our guide on the businesses of artists and Commerce signals.
And we will.
The divesting the remainder of the businesses.
Right now again similar to <unk> those businesses are carrying a lower margin and it's primarily this year due to the integration expenses on that I think you'd expect us to have to incur to make that business part of it part of Transunion, but again importantly, again as the future outlook for that business as we begin to ramp as it begins.
To be part of Transunion, and we're able to change the way we go to market with Argus as well as the way we deliver the product that will have a significant impact.
On the profitability and then the integration costs.
<unk> will eventually go away as well.
So Andrew those.
Those are all the right details and we have a lot of confidence that we're going to deliver the margins that we've outlined we reconfirm our full year guide you can see improving margins in the core with regard to new Star. We're ahead of the initial guide that we provided when we acquired the business. So we've got a lot of confidence that were execute.
Adding in a way that will deliver the margins we've guided to.
Thank you very much.
Our next question will come from Jeff Mueller with Baird. Please go ahead.
Yes. Thanks.
I want to acknowledge the good revenue performance before asking another question, but.
On Argus Onboarding, a lower margin I think you're implying that you're onboarding at a lower margin than you previously expected. So would love some detail on that is it that the integration cost on the lower acquired EBITDA base because of the planned divestitures has that dilutive effect is there anything on.
And how much you are planning to invest behind it or if the margins on the retained business were lower just any aspects like that and then just any comment on the Q1.
Margin I know that you had previously said that you took some of the.
Conservatism out of your old guidance methodology with this guidance, but normally when we see revenue upside it comes with pretty good incremental margins. So any comment on Q1 margins. Thanks.
So I'll.
I'll take that one I think I'm hearing kind of a couple of different questions in there.
Youre asking first just about what happened with Argus in.
And the expectations on margin, but then also you're asking about Q1, but why don't I, Let me start with Q1 first.
Well you just.
Where we came in with margins and so clearly you can see that we did have a strong revenue performance as you've already indicated.
<unk> were $7 million higher than the high end of our guide on revenue, but adjusted EBITDA.
334 was mid range on that on the guide that we provided back in February the drivers are really kind of fall into three buckets for us the first just simply being product mix.
With the increase in revenue cost go up but also that mix of revenue there are some variable costs.
That drive that so that that's number one component the second component of primarily relates to compensation related increases that we had within the quarter I think there's some incentive comp. There's also some items that were just simply timing related that we will capture them later in the year.
And then the third category.
With just the remediation efforts that we took pertaining to the data incident.
South Africa.
But I think what's most important to take away.
From the materials today is that yes, the margin was lower in Q1, but what we've committed to for the full year is to get the margin back to 37, 4% before the various financial services acquisition is included.
Yes, Q1 on the expenses were a little bit higher.
But we have we've manage that within the updated guidance, we've given to be able to stay flat the.
The flip over to your question pertaining to the <unk> margin.
Lots of moving pieces.
No.
Most of the participants on this call are familiar with various financial services and <unk> and the financial profile.
But you know and that's obviously, everybody starting point, but with us making the decision to hold the Argus in commerce signals.
Liam to divest the other core businesses.
There's a lot that there's lots of groups.
Within those within those numbers.
So that's kind of one thing the second thing then it is the M&A integration expense and we are not adding back.
For non-GAAP metrics.
Anything pertaining to the integration for various financial services. We are produced alright, just simply because of the time and the materiality. So.
And that sounds like as well too just to clarify.
What we're doing so various gets burden and our integration efforts or various I'd say, they're very aggressive.
So meaning that there is a significant amount of spend that's contemplated in 2022 for that business.
And just to be clear, we're right on track with Vera right. This is exactly what we expected right and it is our typical approach to not add back. We just made an exception with new store because of the size of the deal.
Got it thanks for the comprehensive answer to my multipart or thank you.
Our next question will come from Heather <unk> with Bank of America. Please go ahead.
Hi, Thank you I wanted to ask a question with regards to the consumer and how youre thinking about the macro environment and I. Appreciate your call I. Appreciate your color at the start of the call, but you talked about staying close to the lower income consumer and watching them can you just talk about how your business is.
Terrorists to that consumer in particular, and and what you're seeing right now.
Yes, sure I'm happy to start this.
Well look as we all know the consumer in the U S. Overall, whether it be high income or lower income is in very good shape from a balance sheet perspective.
Consumers and households has de Levered over the course of the pandemic and the lower end of the income spectrum. They were primary beneficiaries of that there was a lot of forbearance of of loan repayment.
During the pandemic as well as infusions of income from various government sources right.
On top of that the employment markets incredibly robust.
Three 2% unemployment theres, almost 5 million jobs in the U S that are unfilled currently wages are increasing.
And again, you know an abundance of employment opportunities. So we believe and if you followed the banks as they reported their results earlier. This season, you know they believe that the consumer is.
Pretty well positioned now of course, there is the intermediate concern about a rising inflation and the impact on consumers and particularly lower income consumers, but there are offsetting factors like rising household income high employment and relatively low credit card balances.
And leverage in general.
Consumers have the ability to earn more and continue to consume and theres still a lot of pent up consumption coming out of the pandemic period.
The ability also to increase their leverage right. So there's really a mix of issues that we think shades to the positive for 2022.
Great. Thank you very much.
Okay.
Our next question will come from Ashish <unk> with RBC. Please go ahead.
Hi, Thanks for taking my question I just wanted to focus on the Fintech can be Npls, you, obviously talked about the strength in the U S. But also the international market I was just wondering in your conversations with the Fintech have you.
Have they indicated any kind of slowdown in demand or our marketing activities, particularly going into the back half of the year and also maybe just to tag onto that.
You talked a lot about the new start and the cross selling can you also talk about any traction of new startup at their fintech customers as well.
Yeah, I'd be happy to so the short answer to your question is no. The Fintech don't believe there's going to be any slowdown and if you look at our results in the U S, where we grew over 20% in financial services in the first quarter. You know a lot of that is a resurgence amongst fintech and disproportionate.
Contribution from the B N P O a sector, where we also have nice share.
But overall the consumer is strong and lending is increasing and we're very optimistic about our financial services performance for the full year of independent of the deflation. We've got in the mortgage market you know because of.
Rising interest rates and again, you know what I would remind you of and we commented on this earlier in the pandemic, but you know our.
Palio is largely growth oriented and we are attacking.
Attacking and taking share in many of the markets in which we compete we've.
We've got a disproportionate share of the emerging Fintech N P. M. P. L markets we've got.
And international portfolio that skews toward higher growth economies with emerging middle classes and increasing borrowing rates and then if you look in the U S. B emerging markets Division we have.
You know kind of attacker positions in insurance and public sector in the investigative solutions realm, and we think as the as the economy economy is now firmly emerge from the pandemic period.
You know, we're going to return to that growth trajectory that we demonstrated through the years.
That's really helpful color and maybe I was just wondering if you could talk about the new starter our traction in the Fintech side, if you don't mind.
Yeah, well look a new star service to some of those kind of trades today.
With the partnership now with Trans Union, there's an enormous opportunity to cross sell.
Back and forth not just new store coming into Fintech, but truly.
Cross sell potential is very exciting.
Having spent a good deal of time.
Both the new star and its ontic.
Our investment thesis about the power of a cross sell about the complement between the two services has been completely confirmed.
We're really excited.
Focus on integration execution and delivering some good results in the coming quarters.
That's really helpful color. Thank you and congrats on the strong results.
Thank you.
Our next question will come from Toni Kaplan with Morgan Stanley . Please go ahead.
Thanks, So much I wanted to ask about the ex mortgage organic growth increase for.
For the year Sallie you raised it by about 100 basis points could.
Could you just give us some additional color on the main drivers there leading to sort of better expectation than what you were previously thinking of them, maybe just talk about sort of that which verticals are performing better than you. Originally thought and maybe also if you think about financial services.
You're expecting you know, 20% ex mortgage organic for the year, yes, you'll have some difficult comps coming up next quarter, particularly.
Just talk about the confidence and and so I guess, what what's changed.
You know that you have of hitting those numbers. Thanks.
Good morning, Tony that this is Todd I'll take your question, which is which is an important one for us to go through with you. So let me start first.
With with financial services, and you know just the confidence that we have in the updated guide on an organic basis ex the mortgage impact.
So within within their first date is goes back to the previous question.
The fin techs continue.
Continue to be a very very strong for us and in particular just to highlight a little bit more on what Christian said.
We have seen some very strong marketing activity from the syntax.
So that the physician that Transunion has built in that space over the last several years.
Is significantly benefiting us not only in the first quarter, but also in our expectations.
For Q2 through Q4.
In addition, smaller but that'd be NPL players as you know.
I highlighted in my remarks at the beginning and they continue to be strong and they are growing and we're benefiting from that in the U S.
We're also benefiting from in our international operations as well as as I said earlier.
Also within financial services.
Again on the customer acquisition side.
The credit card marketers that.
We have.
A strong stronger positions with we find them to be significantly more.
Aggressive on the marketing side.
So that's definitely another another driver for us and gives us the confidence.
They're in financial services to shift out of financial services.
Think about the other areas that are.
They're driving growth for us in.
In the emerging verticals insurance.
As I'm sure everyone can appreciate.
That's a big vertical.
For Transunion and continues to grow at a double digit pace. The team just continues to drive innovation.
Into the customer base to solve very sophisticated customer.
Customer needs. So that's a big part of it the media vertical.
We grew significantly based on the acquisitions that we had made.
Back in 2020 to build out our capabilities. So not only is that business performing well, but then you couple that with new star.
In the marketing business, there that grew 10%.
Or greater than 10% in the in the quarter.
We feel really good about the position that we have built in particular in media and then the international portfolio.
It's also where we have just a significant amount of conviction.
Conviction and I think what I would highlight of most importance is where that growth is coming from and it's coming predominantly from more emerging economies like India Latin America.
Asia Pacific and even our African business posted very strong results and we're expecting that to that to continue. So that's the that's what gives us the conviction in the overall guidance, yes. The good news is its very broad based at this point.
Yeah.
Very helpful. Thanks.
Okay.
Our next question will come from Manav Patnaik with Barclays. Please go ahead, Scott. Thank you good morning, Ed.
Like you guys gave us kind of the mix in assumptions in the mortgage side I was hoping you could talk a little bit about how that would look if he looked at kite and or two as well and maybe just a high level. Two is hoping you know those two verticals in a specific things like where are they with us pre COVID-19 levels today.
Well look it's all above pre COVID-19 levels and if you look at the piece parts of our financial services business and again U S focused here.
I'm very strong on consumer lending, which is a very material part of that group.
Card strong activity as well in auto are holding up well despite the ear frequently to discuss supply chain issues.
So again overall with the exception of mortgage which we've all talked a lot about and understand what's going on there.
<unk> is strong in financial services.
Yeah.
I mean, just curious any sense if the assumptions you've made on those two categories for the year, just kind of like how you laid it out some mortgage.
Yeah, Manav I don't think we would have anything more to say than what I had said earlier, so I could reiterate reiterate.
Reiterate that I mean, it's as you know and in.
In the card space we.
We continue to just see very aggressive marketing with the customers that we have strong relationships with.
That's a meaningful driver for US there and then in the auto space and you know, what we're experiencing and I and I said. This earlier just as you know there is demand the inventory issues that are holding things back.
So we're still able to grow in that space and a lot of it is again like what I. What I highlighted is just the innovation that we brought to the market.
That we're able to differentiate ourselves as the sale of cards goes more digital today.
Got it thank you.
Oh.
Our next question will come from Andrew Nicholas with William Blair. Please go ahead.
Hi, Good morning, Thank you for taking my question.
I just wanted to ask if you could expand on the addition of buy now pay later data to consumer credit profiles, just kind of interested in how much demand you're seeing from your client base for that information specifically in any sense for where your D. N. P. L datasets sits relative to your <unk>.
<unk> in terms of size and breadth in that sort of thing. Thank you.
Yes, sure. So let me just talk more generally about this I mean, it's an emerging area and the industry is figuring out the.
The best way to account for NPL activity on the credit Bureau files.
Each of us have an approach to doing at.
Transunion is accumulating that information from our providers and.
And we're going to put it on a partition spot on the the credit file as it is today and our clients will have the ability if they choose to incorporate that data that signal into their lending models. It is important to note though that.
It'll be impelled B M P L activity.
It's different from a traditional credit trade line. These are fairly small dollar purchases and they need to be consolidated in order.
They would need to be consolidated in order to appear as a trade lane on the credit report. So we can currently do that through partnership.
But you know the industry is still working out the best way to accommodate it I can't really.
Comment on the relative size of the data that we're accumulating versus our competitors I guess, what I will say is that we feel like we compete very well in Fintech NPL is no different so I imagine the size of our of our data repository is going to be.
Attractive with lenders, who are ready to incorporate that signal, but you have to be judicious because of.
The data is different than traditional trade lines and you can't just look bad.
Into conventional credit models.
Without kind of disrupting the results right. So we think accumulating the data and creating data attributes based on it that our clients can did incorporate into their origination models in their marketing propensity models and the like we think that's a very sound way to go about it.
Really helpful. Thank you.
Our next question will come from Hamzah <unk> with Jefferies. Please go ahead.
Hi, This is Mario <unk> on for Hamzah.
I guess prior to the Big three acquisitions you made you commented on how much of your portfolio is levered to the credit cycle could you just update us.
US on your thoughts there and then obviously several times throughout the call you mentioned, how bullish you guys are on the consumer and the health of the consumer I think he also commented a little about consumer about what your customer comments more specifically from banks, but maybe you could also comment on what youre hearing from your customers internationally.
On the credit cycle.
Yeah. So what I would say is and you know in recent years because of our innovation and our expansion into Adjacencies and also just adding new capabilities.
Diversified our total revenues.
Away considerably from direct correlation to origination activities.
And that's expansion into fraud mitigation services analytics services.
Consumer direct to consumer credit enablement.
As you know as well as marketing, where we made substantial investments.
The recent three acquisitions that you outlined that just continues the diversification.
But it's also you know, we're adding highly complementary capabilities to the mix.
So you're a trade unionist portfolio today relative to where we were five years ago, certainly 10 years ago.
During the last major downturn, it's been more than 10 years now.
We're considerably more diversified plus international markets.
Form a.
A significant proportion of total revenues and those have been you know very fast growing and resilient.
In all circumstances, except this recent anthemic right.
So we feel more diverse and you've been pretty positive.
And just finally on the customer comments just internationally on the credit cycle.
Yes.
So I think yeah, the customer commentary that I'm, referring to them. It's the way the banks were guiding the market.
During their recent.
Earnings calls right in consumer lending and in particular, the health of the consumer is strong area that they were citing right. So I think our guide and our experience frankly, the numbers that we've delivered are consistent with that positive outlook and I think it's much the same internationally I mean, we had really.
Strong performance in India, which has rebounded from a very difficult time with the pandemic and across Latin America, and our businesses in Asia. The Philippines has some of the most severe lockdowns that three emerging our direct to consumer business in Hong Kong is also reestablished itself.
So really looking around the portfolio globally.
Theres a lot of bright spots.
Thank you very much.
Our next question comes from Shlomo Rosenbaum with Stifel. Please go ahead.
Hi, Good morning, Thank you for taking my question.
Chris you talked a little bit about one I D platform being more powerful than initially anticipated udeid ingest and tag data faster can you talk a little bit about how you know this being better than you expected how should we think about this manifesting in terms of commercial potential should we see faster new product innovation is there a better ability to cross sell.
You just go through some specifics.
How is this being more powerful helps the company going forward on like a practical on the ground level.
Yeah. Good question. So obviously the speed at which you can ingest data.
And your ability to fuse that data with other related elements and incorporate it into your you know your data graphs and all of that that reduces or other accelerates.
The product development.
<unk> cycled speeds it up how would you get to market faster helps you do more powerful cutter.
Product engineering, so I see that as a benefit but in addition, we have a mini.
Any compliance and regulatory demands to meet globally.
Our new store has a great ability to tag the data.
Just on source and and permissible uses and the like which will make it easier for us to comply with a.
Can you sleep expanding realm of of both legislative and regulatory scrutiny. If you look across the global markets in which we compete.
Yeah, and then Theres just a lot of intelligence that we can incorporate in that core one IV platform that we can kind of access centrally in a greater scale and make changes more quickly than the central repository that been slow out all of our connected product offerings.
The offers that we will be conducting frequently over time.
Great.
It's Tuesday, youre seeing more potential commercial leap from what you saw beforehand. So we should think about that in terms of the context of of the ability to come out with more innovation now.
Well look I think we're gonna.
Quickly integrate them.
She use and in many cases to use superior data sources into the <unk> platform I think much of that will occur over the course of this year, which is very quick.
I can't tell you whether it's.
Faster than it was previously we always were very positive on the platform, but we're going to.
Quickly integrate our best in class data.
To relate it with the data elements.
The one I view platform and that will improve the ability to resolve identity and those benefits will flow through to all of the products that are created the one I'd platform in terms of improved match rates.
So you know look I wouldn't push it too much further and say Oh, we're raising our growth expectations across the different products just think of it as take it as you know.
An additional reason to feel confident in the numbers that we've provided the street.
And in the.
Interested in the inherent value of the technology that we acquired with new store.
Uh huh.
Okay, great. Thank you.
And this concludes our question and answer session I would like to turn the conference back over to Aaron Hoffman for any closing remarks.
Thanks, everyone for joining us today, we can wrap it up here I know, it's a busy day of earnings as usual. So we will make sure Anthony has time to transition over to other calls as we need to so.
So we hope you have a great day. Thank you for your time.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.