Q2 2022 TransUnion Earnings Call
[music].
Good day and welcome to the Trans Union 2022 second quarter earnings Conference call.
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I would now like to turn the conference over to Aaron Hoffman Senior Vice President Investor Relations. Please go ahead.
Morning, everyone and thank you for joining US today, joining me on the call are Chris Cartwright, President and Chief Executive Officer, and Todd Cello, Executive Vice President and Chief Financial Officer.
Oh is that our earnings release and slides to accompany this call on the change you need Investor Relations website. This morning.
Our earnings release and accompanying slides include various schedules, which contain more detailed information about revenue operating expenses and other items as well.
Certain non-GAAP disclosures and financial measures along with the corresponding reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures today's call will be reported and a replay will be available on our website if.
We will also be making statements. During this call that are forward looking.
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.
C C.
We do not undertake any duty to update any forward looking statement.
Let me now turn the call over to Chris.
Thank you Erin and let me add my welcome and share our agenda for the call. This morning.
I'll begin with an overview of our financial results along with commentary on the economic conditions in our markets around the globe.
I also would like to share highlights on the performance of our acquisitions and the progress we've made to integrate them and realize their full potential.
Todd will then review in detail, our second quarter results, our revised full year guidance and the changes to our business over recent years that should improve its performance during economic downturns.
Throughout the first half of this year economic conditions have been positive across our portfolio.
Consumer employment incomes balance sheets spending savings rates and credit performance have been strong in most of the markets that we serve globally.
We expect this favorable environment to continue over the balance of the year.
That said there are macroeconomic concerns emerging globally that could pressure consumer spending and growth over the intermediate term.
Materially higher interest rates and inflation worsened by supply chain constraints and geopolitical uncertainties could negatively affect economic conditions in 2023.
These factors are more visible today than our developed markets such as the U S, Canada and the U K.
We will continue to watch.
Economic factors and overall consumer health across our global portfolio and react appropriately to changing conditions.
Now we also believe that we're well positioned to withstand an economic downturn due to our increased diversification across geographies vertical markets and solutions.
Demand should remain strong during a slowdown across our emerging markets, where economic growth is inherently higher and credit utilization is expanding in the developing middle classes.
Also verticals, such as insurance telecom collections and professional services legal and law enforcement in the public sector run either neutral to our counter to economic cycles.
And many of our solutions should perform well during slowdowns, including credit portfolio management fraud mitigation investigative solutions.
Formats analytics and others.
<unk> supplied further perspective on our portfolio resiliency later on this call.
Now as you can see from our earnings release, we posted strong results for the second quarter and reissued solid guidance for the full year based on the strength of our core business and the positive contributions of our recent acquisitions.
In the second quarter trade Union trade unions organic constant currency revenue growth was 5% overall and 9% excluding U S mortgage revenues.
U S markets grew 13%, excluding mortgage international grew 15% and consumer interactive declined 9% due to a series of market and Trans Union specific challenges, which I will discuss below.
Our results again.
On an organic constant currency basis.
In the U S markets in the second quarter financial services, excluding mortgage grew a robust 18% on the strength of consumer lending, which grew 29% card and banking, which grew 17% and auto which managed to grow 5% despite inventory shortages.
Also.
Our insurance media and public sector verticals grew by double digits organically.
Our international segment grew 15% on an organic constant currency basis behind the surge in growth in our emerging markets in India, Latam APAC in Africa, and attractive growth in Canada, and the U K after adjusting for nonrecurring revenues from the prior year.
Also sales momentum is accelerating across our international markets as shown by increased pipelines and win rates that should propel growth throughout the second half of the year and beyond.
Now our consumer segment declined 9% in the quarter due to a confluence of factors.
Direct business declined materially in the quarter against the challenging comparisons of low double digit growth in the prior year also we observed a slowdown in demand for paid credit services across the industry in the first half of <unk>.
Especially compared to the higher growth of freemium offerings.
<unk> today has a small freemium service and this represents an opportunity for our future growth.
Our indirect business also slowed although not as much as correct due to the industry industry wide slowdown we observed.
Results also were affected by several contract restructurings last year as we secured longer term commitments for increased volumes.
We expect to grow through this revenue compression over the course of this year.
Originally sales of identity protection and breach services are exceeding expectations, we secured multiple new material deals in the quarter, which would not have been possible prior to the acquisition of Sonic.
We have therefore shifted more of our consumer advertising spend to identity protection services given their strong performance.
We expect that it will take several quarters to work through the current challenges in our consumer business related to contract restructurings and optimal product and marketing strategies.
And now turning to our revised full year guidance for 2022, we have reduced enterprise organic growth expectations, excluding U S mortgage from 11% to nine 5% at the guidance midpoint.
As the growth the organic growth bridge shows our revised guidance reflects adjustments and several factors, including the shortfall in second quarter results, a lower mortgage forecast given the rapid increase in rates and falling volumes.
Modestly lower growth in U S markets, excluding mortgage as we reduce our forecast in financial services to the mid teens versus our earlier guide of approximately 20%.
The near term retrenchment in consumer interactive as we adjust our marketing strategies absorbed compression from restructurings and accelerate our sales of identity and breach services and finally foreign exchange headwinds from the from the strong U S dollar.
Overall, our revenue guidance for 2022 is still very compelling on the strength of rebounding economic activity from pandemic reopening.
Positive consumer financial health.
Unions attractive market positions and our strong execution of our growth playbook.
In addition to strong organic revenue growth, we expect to deliver on organic adjusted EBITA margin of about 40%.
Now turning to our three acquisitions, we made substantial progress integrating them into transunion over the first half of this year.
Each of the acquisitions is performing in line with our acquisition cases, and the expectations we communicated previously.
Importantly, the feedback and results in our early days of owning these assets are pruning the rationales for their acquisition and the power of combining them into transunion.
In the quarter Neustar revenues grew mid single digits as we expected against a difficult comparison to Q2 of 2021, where growth surged over the pandemic lockdown in 2020.
We now expect revenue growth for the full year in the mid single digits based on the implementation of record sales wins from last year, which included a fortune one fortune 10 enterprise and accelerating adoption of branded entrust call solutions in the communications vertical now this is tempered some.
What a market volume uncertainty and the timing of new customer Onboarding.
The business delivered 24% adjusted EBITDA margin due to the revenue fall through and ahead of target execution of our cost reduction programs.
We're confident that we will.
Migrate new starts technology assets to a new provider with more favorable rates by the end of this year and closed eight day data centers as well.
Additionally, we are realizing the cost synergies that we expected through combining our general and administrative functions.
Given our progress achieving our cost reduction goals.
We expect to reach a 26% adjusted EBITDA margin by year end, and importantly, we will keep or accelerate our investment in areas that drive revenue growth and product innovation.
Which are proving to be considerable.
The market feedback has been positive on the benefits of combining transunion and new starts credit marketing and fraud prevention capabilities there.
Therefore, we have accelerated the integration of our marketing and fraud solutions and key functions, such as analytics technology and sales.
A top priority is to incorporate transunion troves of data into new stores, one I'd platform to enhance its effectiveness.
The bulk of this program will be completed by the end of this year.
We also are integrating our joint audience data and functionality, including commerce signals data from Argus into a single platform and creating common identity capabilities to support Transunion solutions enterprise wide.
In this quarter, we launched an innovative marketing clean room that integrates client in Teu data in a single compliant and privacy enabled environment to enhance audience building performance analytics and collaboration generally.
As clean room solution will be offered directly to customers and through most of the major marketing technology platform providers.
Within our newly integrated fraud business, we are executing a unified product strategy that integrates our various knowledge based device behavioral and telephonic solutions into a common interface with a single orchestration layer on a common analytic platform.
We expect the beta version of this next generation solution to be available early next year.
Finally, our efforts to cross sell this expanded suite of solutions are building momentum as we experienced growing pipelines with a strong level of conversion occur.
Across all solutions cross selling we have more than 150 deals in various stages of our sales pipeline, including about half in the later stages.
And in the first half of 2022 are increasingly integrated marketing solutions grew double digits.
Now turning to Sonic and generating almost $24 million in revenue in the second quarter.
One slightly versus expectations as it compared to a quarter last year with revenues from a large breach.
We have fully integrated the sale of credit access and monitoring with identity protection and breach remediation and built a robust pipeline with significant new sales, including a major competitive take away that would not have impossible without public solutions.
We expect that our increased level of new sales will result in accelerated growth starting in 2023.
Overall.
<unk> revenues for the full year are trending slightly ahead of plan and our cost integration efforts are continuing the pace.
We expect mid teens revenue growth this year and almost a 40% margin excluding integration costs.
And I'll conclude my deal updates with the acquisition of the businesses that were previously part of the various financial services group.
As a reminder, there are six businesses in this portfolio and we've decided to keep our guest insights and Tom are signals and to divest the remaining companies due to a lack of strategic fit with transunion.
The retained businesses generated revenue of about $95 million in 2020 one we.
We've moved the other companies to discontinued operations and are currently marketing them to prospective buyers. Thus.
Thus far we have received robust interest and we'll keep you apprised as the sale process develops.
Now in the quarter, we realized revenue from Argos and Congress signals of $22 million up 4% and in a margin of 20% or 25%, excluding the integration costs.
You've already seen strong levels of customer interest in finding new ways to use the Argus data and insights, which have led to many requests for joint discovery engagements.
As we integrate Argos over the year, we expect revenue growth in the low single digits with a 31% margin excluding integration costs.
Next year, our plan is for growth to increase to the high single digits, and then reach low double digits in 2024 with the margin expanding in these years as we trend toward our enterprise school of a 40% margin in 2020 six now.
Now revitalizing the delivery of Argus data on trains Union's digital platforms as well as infusing our thought leadership will be key to realizing these higher sales levels.
And before I turn the time over to Todd I wanted to take a moment to welcome two new board members to Transunion Homonym, Dia and Ravi Kumar.
How many who is the vice president and global head of solutions Engineering at Google Cloud, where he leads the global solution Engineering organization.
His expertise in both cloud architecture, and digital transformation will guide us as we continue to build out our state of the art technology infrastructure.
Ravi as the president of Infosys, a global it consulting and services country company, where he leaves the emphasis global services organization across all industry segments.
He brings extensive experience and re imagining and reinventing technology services that will help shape the solutions and products we develop.
About wraps my update on our market backdrop second quarter performance and the integration of our recent acquisitions.
Now I'll turn the time over to Todd to walk you through our second quarter financial results and our third quarter and full year guidance. So Todd overview.
Okay, Thanks, Chris and let me add my welcome to everyone.
I'll start off with our consolidated financial results.
Second quarter consolidated revenue increased 30% on a reported and 32% on a constant currency basis.
New Star <unk>, and Rguest added about 27 points revenue and organic constant currency growth.
It was 5%.
Our business grew 9% on an organic constant currency basis, excluding mortgage from both the second quarter of 2021 and 2022.
On a trailing 12 month basis mortgage represented about 9% of our revenue and we expect that to fall below 7% for the full year.
Adjusted EBITDA increased 19% on a reported and 20% on a constant currency basis.
Our adjusted EBIT margin was 36, 9% down 360 basis points compared to the year ago quarter, driven primarily by the lower margin profile from Neustar.
Excluding the new star scientific and Rguest.
Our margin would've been 42% down about 30 basis points compared to the year ago second quarter.
Second quarter, adjusted diluted EPS increased 11% driven by adjusted EBITDA growth.
Set by higher interest expense.
Now looking at segment financial performance for the second quarter U S markets revenue was up 44% compared to the year ago quarter.
<unk> growth was 5% or 13% excluding mortgage.
Adjusted EBITDA for U S markets increased 25% on an as reported and 3% on an organic basis.
Adjusted EBITDA margin declined by 560 basis points, but would have only been down 60 basis points, excluding the new star in Rguest acquisitions.
Diving into the results by vertical. Please note that at this time, we've included new stars financial results within emerging verticals.
We evaluate our operating structure as a fully integrated business, we will provide you with any necessary updated financial information.
So starting with financial services revenue grew 11% as reported and 3% excluding Argus.
Excluding mortgage organic constant currency revenue growth was 18%.
Looking at the individual end markets consumer lending continues to be very strong at historically high levels of marketing activity persisted throughout the second quarter.
At this time, we don't have any indication that these lenders intend to pull back on their activity or that there is any appreciable diminishment of available investor capital.
Similarly, our credit card business also had another strong quarter.
Issuers continue to fight for top of wallet position driving marketing spend as well as incremental use of alternative data.
And more sophisticated tools for origination.
Again, we have no indication this heightened activity level is slowing.
Our auto business delivered solid growth in the quarter as new business wins and on trend innovation, particularly related to digital retailing.
The offset well publicized inventory issues for new and used vehicles, you've been as consumer demand remains high.
New vehicle sales expectations for 2022 recently fell by roughly 1 million vehicles. This will place additional pressure on our business in the second half of the year.
For mortgage rates have continued to rise substantially impacting the total inquiry market, especially refinancings.
The first half of the year inquiries declined almost 25%.
For the full year, we expect inquiry market to be down, 40% to 45% and our revenue to fall 30% to 35%.
We expect our business to perform better than the market.
As a result of volumetric pricing increases incur.
Increased demand for targeted marketing solutions to help lenders attract customers as the market tightens.
And increased interest in HELOC products as consumers have seen substantial increases in their home equity.
Let me now turn to our emerging verticals.
Which grew 98% on a reported basis and 8% excluding the revenue associated with new Star.
Every vertical grew in the quarter.
Insurance delivered another quarter of double digit growth on the strength of innovative solutions like driver risk in our traditional passenger auto market and increasingly so in commercial and life applications.
Additionally, these organic opportunities our recent acquisitions are driving significant incremental growth opportunities.
Public sector delivered another good quarter, driven by ongoing new business wins, particularly related to fraud mitigation.
And at an employment screening grew despite a softening tenant market in which fewer renters are moving and inventory levels have tightened to 98% occupancy up from a more normal 91% level earlier in this year.
Employment screening remains solid.
Our media vertical was up strong double digits in the quarter and we continue to sign meaningful multi year contracts for identity resolution and other services that are embedded in our customers' workflows.
One a large contract with freewheel.
Arm of Comcast and a leading provider of video and search AD serving technology. We also expanded our relationship adding services via a new contract with one of the largest terrestrial radio and digital audio companies. It's.
As Chris mentioned, we are increasingly able to go to market with the combined capabilities of Trans Union and New Star.
Consumer interactive revenue, which includes <unk> increased 8% on a reported basis and declined 9% organically due to decreases in both the direct and indirect channels adjusted.
Adjusted EBITDA was up 5%.
A few factors influenced this quarter's results overall revenue was adversely impacted by moderating consumer demand for paid credit related solutions across both indirect and direct channels and challenging multi year comparisons to exceptionally strong performance in the direct channel in both 2020 and 2012.
We want it.
This is largely a result of a marketplace shift towards premium offerings for credit monitoring.
Offsetting this is continued strength in identity protection area, where science Disartic acquisition brings enhanced capabilities.
And on the indirect side.
The restructuring of one of our key partnerships last year and some nonrecurring breach revenue have created a.
Favorable year over year comparison.
These factors are offsetting the benefits of a number of new and expanded contract wins.
And we recently signed two new significant partnerships that we cant name yet that we expect to begin to fully monetize in 2023.
For my comments about international all comparisons will be in constant currency for.
For the total segment revenue grew 15% at the end.
You're lying market improved in most of our regions adjusted EBITDA for international increased 19% as a result of our strong revenue growth.
Now, let's dig into the specifics for each region.
In the U K revenue increased 3% excluding the.
Our revenue related to one time contracts.
Clothing with the UK government, our U K business would have grown about 8% in the quarter as our core financial services business continues to show a solid mid single digit growth.
From a macro standpoint, the combination of political turmoil, the Russian conflict in Ukraine, and rising inflation and slow GDP growth is creating a uniquely challenging economic environment.
That said, we continue to expect large banks to remain focused on issuing credit as rising rates improve their margins. We also see continued activity in unsecured lending, particularly credit cards and personal loans.
We are seeing is steadily weaker mortgage market offset this activity the impact is different than what we have experienced in the U S.
The UK mortgage market didn't reach the same historically high levels, and therefore has less room to compress.
And on surprisingly, while auto demand remains strong supply side issues have depressed the U K market and that impact is a slightly reduced growth expectation for 2022.
Our Canadian business grew 1% in the second quarter, reflecting growth across the portfolio.
This was partially offset by a comparison to a significant breach remediation business in the year ago quarter, which I have mentioned on the past several calls excluding.
Excluding the non recurring for each business revenue would have grown 6%.
As breach comparison moderates starting in the third quarter.
While we see macro indicators softening a bit our core business in the second quarter remains strong for two reasons.
First we have several large customers purchasing significant amount significant amounts of data to shift our or expand their business with transunion.
We expect to monetize these new contracts in early 2023.
Second many customers are recalibrating their lending models with Transunion data soon.
We anticipate potential further economic softness.
In India, we grew 51%, reflecting strong market trends successful innovation the benefits of our diversified portfolio and an easier year over year comparison, driven by a second wave of COVID-19 in the year ago quarter.
Despite rising inflation Indian consumer remains healthy and continues to spend aggressively.
As a result, we benefit from a resurgence in consumer lending and credit card issuance.
With the continued rise in Fintech.
And B N P. L players all markets, where we hold a very strong share positions.
In Latin America revenue was up 14% with broad based growth across our markets, including double digit growth in our largest markets, Colombia and Brazil.
Strong growth reflects good macro and consumer fundamentals ongoing new business wins share shifts in financial services, particularly with Fintech and neo banks.
And continued uptake of credit vision and fraud solutions.
In Asia Pacific, We grew 22% from continued good performance in Hong Kong, driven by credit visions growth and new business with Fintech players.
Along with continued recovery in the Philippines, which had been under lockdown longer.
And any of our other markets.
And finally Africa increased 12% based on the strength of our insurance and retail businesses as well as meaningful growth outside of our largest market of South Africa.
Across the region, we continue to see adoption of credit vision true validate and our commercial credit solutions.
We ended the quarter with roughly $6 billion of debt.
$522 million of cash on the balance sheet and pro forma leverage of 4.0 times.
We continue to expect to Delever to three seven times by the end of 2020 to.
Here I'll remind you that we expect to use proceeds from the sale of the noncore businesses, we acquired from Paris for general corporate purposes, including debt prepayments.
Before turning to guidance I'd like to quickly comment on free cash flow you will notice on our cash flow statement that cash from operations for the six months of the year was a net use of cash.
Primarily due to the $355 million tax payment we made in April related to the gain on the sale of the health care business as well as higher interest expense and increased usage of net working capital primarily related to higher incentive compensation.
Also we used $508 million of cash on hand to fund the acquisition of ferrous financial services.
So that brings us to our outlook for the third quarter and the full year.
All of the guidance provided reflects neustar static and the businesses we acquired from Paris.
So for the ladder only Argus and a related business called Commerce signals are included as we are treating the noncore businesses as discontinued and intend to divest that.
Starting with the third quarter, we expect about two points of headwind from FX on both revenue and adjusted EBITDA.
For revenue, we anticipate about a 27 point benefit from the acquisitions of New Star Sonic and Argus.
Specced revenue to come in between 935, 955 million or a 26% to 28% increase on an as reported basis and a 2% to 3% increase.
Increase on an organic constant currency basis.
Our revenue guidance includes an approximate five point headwind from mortgage.
Meaning that we expect the remainder of our business will grow 7% to 8% on an organic constant currency basis.
Adjusted EBITDA is expected to be between 334 M $348 million, an increase of 11% to 15%.
Adjusted EBITDA margin is expected to decline 490 to 415 basis points, primarily as a result of incorporating new star in the businesses, we acquired from barrick's relatively lower margins.
On an organic basis, excluding the three acquisitions margins are expected to decrease approximately 120 basis points.
Adjusted diluted earnings per share is expected to be between 89 and 95 cents.
A range of down 3% to up 4%.
Primary reason for a sequential slowdown in adjusted diluted EPS.
Is the impact of rising rates on the approximately 30% of our debt is floating.
For the full year, we expect FX to impact revenue by about one point.
We also expect about 24 points of benefit from M&A.
We expect revenue to be between three seven and four eight to $3 $798 billion.
Up 27% to 28%.
Guidance includes five points of headwind from mortgage for the full year.
So excluding mortgage on an organic constant currency basis revenue is expected to increase 9% to 10%.
For our business segments on an organic basis, we expect U S market to be mid single digits.
But up low double digits, excluding mortgage.
Financial services is also expected to be up low single digits.
What about mid teens, excluding mortgage.
We expect emerging verticals to be up high single digits.
Anticipate that international will grow low teens in constant currency terms, and we expect consumer interactive to decline high single digits on an organic basis.
We expect adjusted EBITDA to be between 1.362, and $1 $399 billion up 18% to 21%. Additionally.
Additionally, we expect our adjusted EBIT margin to compress 270 to 220 basis points. This year, driven by the lower margin acquisitions and acquisition integration costs for scientific and Rguest.
Anticipate the margin will expand about 20 basis points on an organic basis.
We expect adjusted diluted earnings per share for the year to be between $3 70, and $3 85 up 7% to 12%.
And help you complete your modeling of 2022 at this time, we continue to expect our adjusted tax rate to be approximately 22, 5%.
Depreciation and amortization will be approximately $520 million.
And we expect the portion excluding step up amortization from our 2012 change in control and subsequent acquisitions to be about $210 million.
Down from $220 million due to lower than anticipated depreciation and amortization from recent acquisitions.
Anticipate that net interest expense will be about $225 million up from $220 million due to higher LIBOR and expectations of future LIBOR increases as implied by the forward curve.
Finally, we expect capital expenditures to still come in at about 8% of revenue.
Yeah.
As Chris discussed there is a level of uncertainty about market conditions for the remainder of 2022 and 2023 with many economists calling for some type of recession over the next 18 months.
Hope you put this in context for us I'd like to walk you through high level view of our business and how we would expect various parts to behave in a recession.
Where I do that I want to lead with the conclusion.
And a somewhat normal recession, we expect our total business to still deliver revenue growth and you would place great emphasis on protecting our margins without sacrificing sacrificing important investments and our commitments to integrate our recent acquisitions.
So let's start with financial services, which currently represents a much smaller portion of our much larger company than in 2008.
And.
Revenue was less than $1 billion and about 40% was tied to U S financial services.
They were just under $4 billion with only 30% tied to U S financial services.
And importantly, we have a more diversified product offering than in 2008 highlighted by significantly more fraud collections alternative data and analytic solutions.
All of these are likely to be a cyclical or even countercyclical.
In total they represent more than 10% of our financial services vertical.
Additionally, even in our credit oriented solutions in tougher economic times customers often shift their spending from origination related activity the portfolio review activity.
Our capabilities in this space over the last several years.
Further bolstered by our acquisition of Argus.
Beyond that as we lap the massive decline in mortgage activity a recession would likely result in lower interest rates lower home prices and potentially some level of rebound in both purchase and refi activity.
We would also expect some level of buoyancy in consumer lending from that consolidation short term lending activity.
Hard as consumers cope.
With financial challenges through additional revolving lines of credit.
Turning to international we believe there are unique dynamics in each market that will largely behave independently from the U S. In a moderate recessionary environment.
As we're already seeing we may face some headwinds in our developed markets, while emerging markets appear to be more able and used to coping with volatile economic situations.
Consumer interactive, we would expect headwinds to largely persist as consumers scrutinize their spending and as lenders reduce marketing with wind generators.
I'll close out this review with some comments on our recent acquisitions.
With new Star.
We would expect both the communications and fraud businesses to be largely unaffected in a downturn.
The marketing business is roughly 80% subscription revenue and helps customers more efficiently resolve consumer identities as well as execute and measure marketing campaigns.
That we believe will retain its value throughout the cycle.
Notably the new start marketing business only declined 1% in 2020, despite a sharp reduction in marketing spending that year.
<unk> should also hold up relative relatively well at 75% of their revenue is b to b.
To see largely sold through benefits brokers and insurance companies.
And Rguest would continue to provide significant value across the cycle based on unique portfolio analytics to card issuers.
So.
Net net we believe that our portfolio would weather a downturn well on a relative basis and still be capable of generating revenue growth at attractive margins.
This is possible because of our expansive diversified portfolio of relevant solutions and our deep partnerships built on thought leadership.
In a downturn, we would keep our focus on integrating recent strategic acquisitions to ensure they deliver against our long term expectations.
Like we did in the second quarter of this year.
Manage our cost structure to ensure it aligns with the trajectory of revenue growth in order to deliver strong margin performance.
I'll now turn the call back to Chris for some final comments.
Thank you Todd to conclude Transunion delivered another good quarter, and we're set up for a strong full year with 9% to 10% organic constant currency revenue growth, excluding mortgage and with an organic EBITDA margin of about 40%.
And we continue to successfully integrate our recent acquisitions and to find additional confirmation of the investment thesis for each deal.
Now, let me turn the time back over there. Thanks.
Thanks, Chris and that concludes our prepared remarks.
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Now operator, we can begin the Q&A.
Yeah.
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Our first question comes from Andrew Steinman with J P. Morgan. Please go ahead.
Hi, It's Andrew I wanted to ask you a question about slide number six which is the current 22 guide.
If you could give us more color about the 25 million a bar, which is the organic revenue growth reduction for second half of the year as it refers to U S markets ex mortgage like give us a sense. How does this include that assumption about a slowing consumer lending environment or any vertical within emerging vertical.
Those that have had a kind of tempered expectations for the second half.
Hey, good morning, Andrew and thanks. Thanks for the question I'm going to give you a response that Chris will add on and I think it's it's an important one to hit off from the onset.
This morning, So I think what is probably most instructive to think about that $25 million ex mortgage. It's just simply the growth rates that we had anticipated in our financial services business.
For our consumer lending and for a card and banking, we expected to be higher than what I would consider to be already really strong growth rates in consumer lending as Chris already said.
We grew 29% and tired in banking, we were up 17%.
Our original guidance contemplated something on consumer lending you know greater than 30%.
And for card and banking, obviously, then you know plus 20% so.
When we set the guide in April .
The signal that we were getting from the business at that point in time.
Things where things.
Things are going to continue to be very very strong.
For us.
Throughout the in the quarter, so with that being said that she's asking on financial services.
If you go if you go to other parts of the business Auto also is a is a challenge for us.
That's pretty well documented just due to the vehicle shortage.
So, but nevertheless, we still were able to grow that business about 5% in the quarter. So overall really good but another you know another part of the non financial services that I'd call out would be our our tenant screening business and.
In essence, what we're seeing our consumers are there they are staying put and they're not moving so when that move activity dwindles that means less activity for transunion on our screening product yeah.
Yeah, and just to provide some further context, starting with the tenant screening.
We still had strong growth in that vertical, which just as interest rates increase.
And as.
Home prices increase a lot of consumers, who get priced out of a purchase market. They look to the repo market that demand has led to a spike in rent prices.
Which leads to a consumer's getting priced out of that so as a result move velocity decreases in our volume decreases.
But again I think the broader context here is really important when we guided 20% that reflected significant outperformance.
Outperformance relative to the market.
Now that we're guiding in the mid teens, that's still reflects significant outperformance in the market.
So you know look it's unfortunate that we dropped the guide a little bit and core U S markets, but we do feel very strong about how we're competing in the market.
Can you too.
Broaden and deepen our relationships with those clients.
And again as I said I think we're doing very well relatively.
Well thank you.
Yeah.
Our next question comes from Jeff Mueller with Baird. Please go ahead.
Yeah. Thank you good morning all.
Ill tackle I guess the CIP so.
You've previously talked about the tough comps in.
In the direct or paid business and you've told us about the contract restructurings in the past so I guess I'm trying to understand like what's worse did the attrition rate pick up is it.
The attraction of new consumers and if you could just help us understand what worsened and then on the indirect channel how much of that is paid.
You're seeing the weakness versus other parts, including the AD supported premium partners.
Yeah.
Yeah look I'll break it down for you Jeff look are we expected some softness this year as we guided.
We came in the second quarter, a little bit softer.
That said.
You know going back to the basics and the dynamics, our consumer business is 40% indirect rather 40% direct 60% indirect on the direct side.
You know going back for more than a year, we have been growing low teens sometime mid teens.
What we experienced this quarter, though it really in the first half of the year was.
Just diminished performance in our acquisition efforts.
As we look across the industry and we've got a good industry perspective, because you've got relationships with all the players we see an industry wide slowdown in demand for for paid credit subscriptions and a strong shift to the freemium model.
So that drove a reduction in the direct performance.
And we're recalibrating, our marketing efforts to compensate for that.
We will also place a greater emphasis on our own freemium offerings.
On the indirect side again, yeah, we had some contract restructurings that are going to cause revenue compression.
Over the course of this year, but the tradeoff was extending the duration and winning higher volume commitments over time. So we would expect that to return to growth. After we lap this year of a compression in addition to that and particularly with the addition of something now.
We have had some really.
Good new sales are you know we have some.
Really boosted our ability to compete for a breach and identity with that addition, and we're bringing on a couple of major partners.
That reflect our competitiveness and the sales pipeline and the closes I've never been bigger so the combination on the indirect side of.
Lapping the price compression from contract restructuring and the built the sales pipeline into new wins and their ramp I think that positions us well for 'twenty three.
The direct side, we will have to continue to work on our marketing strategies and you don't turn that around.
In subsequent quarters as well.
Okay. Thank you.
Our next question comes from.
With Bank of America. Please go ahead.
Hi, Thanks for taking my question.
You know.
On in terms of.
Your customers and consumer.
There's a lot of questions out there in terms of the macro and what you're seeing and you know Walmart reporting this morning, and having a little bit more cautious humor.
Curious if you're starting to see any signs of a downturn any caution on the lending side any caution on the demand side in terms of credit.
That's kind of what you're looking for.
Before that Sigma all potential downtime.
Yeah sure Heather will like all of you I mean, we're looking at.
We're looking at a lot of data we're looking at you know overall market data and the countries in which we compete we're looking at consumer health and we're looking at current demand across our various lines of business.
You know, obviously, we're concerned by rising inflation and we know them.
You know over time, it's going to SAP consumer discretionary spending and it could challenge.
Credit performance in certain categories.
We have been clear, though that we haven't seen that materialize in our financials, thus far although it certainly present in our developed markets. We see in the U S. We see it particularly in the U K and Theres been a diminishment in consumer spending in the U K recently and some of that in Canada. So you know clearly store clouds.
Out in and that's kind of where you said you know the.
The economic environment is less certain in 2023, but currently if you look at our lenders' marketing activity remains strong.
You know the fin techs.
Are particularly aggressive in client acquisition and they have got.
You know adequate funding to continue to originate a card volume is really strong and again as we pointed out.
Despite a diminishment in auto supply, we still manage to grow 5% now of course, we have tempered mortgage expectations.
We've reduced our inquiry, our expectations down 40% to 45% from year translating in revenue fall off.
The low thirties.
And again, we're doing our best to estimate that and we are facing an interest rate increase coming up but overall marketing and origination volumes remained strong delinquencies remained quite modest.
And so the consumer's healthy, but again, we can't we can't ignore the impact of higher rates.
And and inflation and what that might bring over time.
Thank you for the color.
Yes.
Our next question comes from Ashish.
Yes.
Hi, Joe with RBC capital markets. Please go ahead.
Thanks for taking my question I, just wanted to focus on the new Star <unk>.
The momentum there and you talked about new wins as well, but one of the key concerns. The key here is all about the AD spending slowing down as well as some of the challenges which are faced by the social media companies. I was wondering if you can talk about that as the enc of new start and the visibility that you have when you start to deliver mid single digit for this year, but also.
Momentum going into 2023.
Yes. Thanks for your question this season and and look we've.
Obviously, we've we've watched the performance of the major AD Tech players.
We've seen a drop there and their revenue trajectories.
Equity values and alike.
And you know certainly I guess some of that reflects diminished levels of advertising.
It's hard to separate though from the impact that.
You know certain privacy measures like the elimination of idea Fei and the diminishment of third party cookies is having on their ability.
To target consumers into articulate their performance and so that's a structural shift that's happening in their side of the business drawing a distinction to train junior new star in our marketing capabilities.
You know as we've explained before.
We resolve identity based on a broad range of factors of which those mobile AD Ids and identifiers or just one of a range.
And we have a very high proportion of our identity resolved based on first party data relationships, which not diminishing right. So I feel like were fairly well protected against that structural performance decline.
Now looking at new Star this year and into next.
I think let's start with 'twenty. One performance 21 was a very strong year for new star It grew 8% plus.
And.
And it reflected.
Both their strongest year of new sales and their history and it was really it.
Across several product lines.
But also a surge in the volumes that reflected a just the economic reopening and a rebound in activity and marketing and also in call Center and just economic engagement broadly.
So we built our projections off of that volume Foundation, what we're seeing across our communications business and a bit in the marketing as well as summit.
Somewhat of a diminishment of volume.
We're not getting the same pounds coming out of.
The pandemic reopening so as we did last year, but it is being largely offset by ramping revenue from the sales success that we had last year and that's why we're comfortable guiding in the mid single digits and again, we're trying to be.
Prudent here in our guidance in the early days of our ownership.
Really get to understand the.
The factors that drive volume across these three business lines.
We're also really pleased with the sales pipeline that we've developed in 'twenty, two and the close rates and you know.
Our goal for the year is to equal or exceed last year's record level of sales and I believe that we can believe we can do it I mean, we don't guide across pipelines, but things are looking.
Quite solid.
The second half of the year is important for us in new store, though because.
We have to onboard a lot of the clients that we won last year one of those clients I said, a top 10 auction enterprise, it's really one of the largest companies in the world. They bought the entire suite of new start marketing solutions, just reinforcing the value and the interconnection between these products and we're spending a lot.
A lot of time on boarding that they're going to be a major source of new revenue for us going forward. So it's just an example of you know kind of intensive heads down a new win Onboarding, that's taking place this year that in my opinion.
Ultimately reflects the health of the business, we're competing well, we're winning we're gaining share and look the volumes are going to be what we're gonna have to see what they're going to be over the course of you know these first couple of years and just the uncertainties in the market.
Going into 2023.
That's very helpful. Thanks, Thanks, guys.
Our next question comes from Toni Kaplan with Morgan Stanley . Please go ahead.
Thank you very much.
This is sort of asked in a couple of different ways, so far but I just want to make sure that I'm understanding that.
Doctors.
What's going on with the U.
U S.
The U S business basically so.
It sounds like you're seeing still some strong lending in the market.
I never heard of vertical wells or so.
And there.
You know it is a little bit slower.
Now versus previously and slower than what your initial expectations were and it sounds like from your comments.
Strong, but maybe just a little bit slower and just wanted to understand if I'm I.
Confirm that I'm understanding that correctly.
I think.
A few other companies that have reported basically said they havent really been seeing a slowdown at this point so just wanted to.
Understand what's maybe different here versus others.
Others have been talking about.
Yeah, I think what I would say is Oh look some of your characterization I do agree with.
And we have reduced our growth expectations for U S markets for the year, if you focus on the financial services component.
We had a.
And ambitious goals around 20% obviously it was founded in the trajectory of the business at the time now were guiding into the mid teens range. If you will some of that diminishment as mortgage, which I think everybody's familiar with and the other parts of it reflect.
Not growing as fast as the exceptionally strong growth that we experience that we projected but Tony what I want to be clear is if you compare the <unk>.
Both rates that we outlined our guide it was materially higher than the market and our performance thus far as well as our guide for the full year reflects material outperformance.
So we're really positive on the business and very positive on the guide.
And at this point, we haven't seen any diminishment in lender performance.
Or consumer strength right.
Right. So it would be really clear on that the other part is the emerging markets business.
Which is an increasing proportion we're forecasting you know roughly 8% growth organic over the course of the year.
We have many components that are growing double digits like insurance and media and tenant employment screening the whole diversified markets portfolio and public strapped sector. So while the guide is down a bit.
Growing low double digits is terrific and I think you can if you just step back and look at us and abroad, you could only characterize our U S markets performance is exceptionally strong.
Thank you.
Our next question comes from Faiza <unk>.
With Deutsche Bank. Please go ahead.
Yeah, Hi, good morning, Thank you.
Just wanted to talk about.
Emerging markets.
It sounds like you're expecting those countries to be pretty resilient and just wanted more color around that and I'm curious if that's you know how you are you expecting sort of the macro situation in those markets to remain resilient or do you think that your products and you do.
You have idiosyncratic drivers in those markets.
Continuing to grow to.
To the extent there is that there is sort of disappointing macro activity.
Yes, So look our international division is performing exceptionally well with mid teens organic and within that the emerging components.
Really really strong growth.
What I need to point out, though is well first of all overall and certainly in the international portfolio.
There is some increased challenge in forecasting results because we have got to.
We're modeling the degree of rebound due to pandemic reopening in the emerging markets. The shutdowns were particularly severe a year ago in India and in the Philippines and in Hong Kong of those economies are considerably more open it's not wide open right now and so economic active.
He is returning to a more normal level.
The normal level is.
Higher inherent economic growth.
Then the developed markets. So GDP growth you would expect just to be higher and that's true even during a downturn.
On top of that you've got a rising middle classes that are expanding their use of traditional credit and so you've got the additional growth element. There. So that's why we believe our emerging market structurally will produce higher growth now in the quarter, India grew 51%.
I would not advise you to update the CAG or for India to 51%.
But India is going to remain a dramatic grow or as is most of our emerging portfolio and.
We look at our international.
National business in particular emerging markets and our core U S markets B to B business as key pillars of our outperformance.
Okay. Thank you.
Our next question comes from Seth Weber with Wells Fargo Securities. Please go ahead.
Hi, Thanks, and good morning.
I just wanted to go back to the margin performance in the quarter, which was very good and you.
Your comment about cost management and synergy initiatives as the cost management.
Are you proactively reducing costs here ahead of what you see is a slow down or is all our all of those cost adjustments just related to the acquisitions. Thanks.
Yeah, well look I'm a good portion of it.
It relates to the execution of our cost programs.
The acquisitions and you guys will recall that with the new store acquisition in particular.
They were executing a pretty dramatic cost restructuring on the technology side, which consisted of changing cloud providers.
It also.
Shuttering a lot of the data centers as a result.
And we have been able to confirm that we can deliver all of those savings and we are well down the path toward executing that over the course of the year the.
The other component was the natural synergies that we would expect in general administrative expenses as we combined them.
Neustar into Transunion.
Those are proceeding ahead of plan and that's one of the reasons why our adjusted EBITDA margins for the year are going to be at 26% on that deal. So we're very pleased about.
About the progress in driving the EBITDA from our acquisitions and we're confident that we can deliver on that dimension now in the broad though of course, we are looking at our overall spending as most companies are doing and we're prioritizing where we invest.
However, we're remaining.
Highly investment focus the way to get shareholder value out of these deals.
And out of the transformational efforts that we've got our operations and technology and around our centers of excellence.
Through execution, we got to get the work done to deliver the economic benefit and I feel like we're tracking extremely well now of course, we're gonna be smart, where we travel where we entertain where we add incremental heads et cetera, but again, we are leaning in to Aqua.
<unk> integration product innovation and business restructuring.
Very helpful. Thank you.
Our next question comes from Manav Patnaik with Barclays. Please go ahead.
Yeah. Thank you good morning, So I guess I just wanted to follow up on you know it sounded like in April when you had those expectations of greater than 30% of consumer lending 24 o'clock and banking et cetera, I guess, perhaps that turned out to be too optimistic. So just just to get a gauge of what you're assuming for this year could you just let us know.
What does she advises options in those two categories and I think you called out or two independent of the other areas. This slowdown.
Well, we provided the detailed breakdown in Q2, because it demonstrates the strength of our performance in financial services.
And the overall guide for U S markets for the year, we haven't broken it down now.
But I think you know independent of the breakdown you should assume that.
Growth is going to continue to be very strong in those categories over the course of 'twenty two we've tried to be.
<unk> and our mortgage forecasts.
As you can see we are probably at the top of the market and reducing them.
The inquiry volume that we expect and the revenue flowed through so we've really tried to derisk on the mortgage side.
As you know Manav, that's tricky business and we're facing another three quarter point increase we'll have to see how the market reacts, but we've tried to model that and model led to the conservative side.
Okay got it.
Our next question comes from Andrew Nicholas with William Blair. Please go ahead.
Hi, good morning, Thanks for taking my question.
It's a smaller piece of the business, but I wanted to ask another question on consumer interactive and specifically as it relates to the freemium shift what do you think is driving that is it is it economic conditions at the lower end of the consumer market as it enhanced marketing from other players in that space that it sounds like you're.
Planning to catch up on or there's something more structural just wondering if you have any any thoughts on on what's driving that.
Yeah.
I should emphasize that.
A big portion of our revenues from this division comes from supporting freemium players through the indirect that's been our largest.
Avenue of participation and some of those agreements have been restructured.
To offer some let's say relief in the near term in exchange for duration and volume increases over time. So we're going to continue to benefit from premium because we have kind of a.
Industry supportive industry neutral relationship if you will and that has been a unique attribute of trans Union for a long time.
We also have our own premium offering it's relatively modest and you know as we reformulate.
Our marketing strategies.
Based on our current read of customer needs, we're probably going to increase the emphasis there.
Now does this suggest some economic distress.
No I wouldn't I wouldn't put my finger on that I think it probably just reflects the prevalence of freemium offering you know the wide availability.
And the need to kind of embrace that model, where the basic credit report will be free, but then there's the opportunity to sell a value added.
Services like identity protection and scores Hum.
And of course lead generation to lenders as upside.
Great and.
That's going to bring us to the end of the call. This morning, we know it's an extraordinarily busy morning with Moody's MSCI Fiserv also all reporting among others in the space. So thank you very much for taking the time with us and we look forward to speaking with.
Many of you over the course of the quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.