Q3 2022 TransUnion Earnings Call
Good day and welcome to the Transunion 2022 third 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.
Good morning, everyone and thank you for attending today joining me on the call are Chris Cartwright, President and Chief Executive Officer, and Todd Cello, Executive Vice President and Chief Financial Officer.
Posted our earnings release and slides to accompany this call on the Transunion Investor Relations website. This morning.
Earnings release in the accompanying slides include various schedules, which contain more detailed information about revenue operating expenses and other items as well as certain non-GAAP disclosures and financial measures along with the corresponding 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 will also be making statements. During this call that are forward. Looking these statements are based on current expectations and assumptions and are subject to risks and uncertainties actual results could differ materially from those described in the forward looking statements because 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 do not undertake any duty to update any forward looking statement.
With that let me turn the time over to Chris.
Thank you Erin and let me add my welcome to ensure our agenda for the call. This morning.
First discuss the economic conditions in <unk> markets around the World and then provide an overview of our solid in range financial results for the third quarter I'll.
I'll also review the encouraging performance of our recent acquisitions and the strong progress we've made to deliver our targeted savings revenue acceleration and sharing of their market leading technologies across the enterprise.
Tom will then take the reins and review in detail, our third quarter results and our full year guidance.
Thus far in 2022 consumer financial Health has remained positive versus pre pandemic conditions supporting growth across screen junior, especially in our emerging markets consumer.
Consumer employment incomes spending balance sheets and credit performance have been strong year to date.
However, the dramatic increase in inflation globally, especially in our developed markets of the U S. The UK and Canada have begun to pressure household finances, leading to a reduction in savings rates.
Increasing credit balances and modestly higher credit delinquencies.
As a result businesses have adopted a more cautious outlook given rising market uncertainties.
Yeah.
In the U S. The UK and Canada year to date soaring inflation and higher interest rates have primarily impacted below prime consumers.
Emerging markets, such as India, and South Africa have been adjusted higher inflation and other challenges and still delivered strong growth.
We expect this positive performance to continue in the foreseeable future.
In the U S higher inflation and interest rates have negatively impacted several of our businesses.
Increased borrowing costs due to higher rates has decimated mortgage refinance volumes and slowed new purchases due to an imbalance between historically high home prices and dramatically decreased affordability.
And as we discussed last quarter, our shortage of multifamily housing along with higher homeownership costs.
As far as rental rates to skyrocket and move volumes to decline precipitously negatively impacting our tenant screening business.
Yeah.
And although performance in our credit card and consumer lending verticals remained strong lenders have reduced new customer acquisition in response to growing pressure on house.
<unk>.
And prioritize customer retention and portfolio risk assessments.
Growth in the auto market also remains positive, albeit constrained by the well publicized supply chain challenges.
And our large bank customers during their recent earnings calls indicated that while the U S. Consumer remains strong they are preparing their balance sheets for the material economic headwinds we anticipate in 2023.
Our inflation has similarly, dampened marketing activity in the insurance industry with carriers prioritizing rate increases over customer acquisition due to rising repair and replacement costs.
Given the complexity insurers face obtaining a rate increase approvals for the policies they offer in each state in which they operate it.
It will take some time before they secure the necessary price increases to resume their full marketing activity.
We believe the carriers will succeed in obtaining higher coverage rates and once they do our insurance vertical will return to its typical high single digit to low double digit growth rate as carriers resume marketing and consumer shop for the best coverage and price.
And finally activity remained brisk for our marketing services products in the quarter, Although we anticipate that as economic uncertainty grows brand owners media companies and AD agencies will reduce volumes in certain end markets with the greatest risk coming in 2023.
And now turning to our third quarter performance, we posted solid results within our guidance range, despite increasingly difficult conditions due to the economic pressures I previously discussed.
Our strength in the quarter came from several verticals in the U S and our international segment overall.
U S financial services grew 9%, excluding mortgage on top of healthy 31% growth.
In the year ago quarter.
Our media vertical grew double digits and insurance also posted mid single digit growth despite the carrier marketing slowdown.
And international grew by 16% on a constant currency basis with five of our six regions growing double digits led by 39% growth in India, 24% growth in Asia Pacific.
An 18% growth in Africa.
We also delivered adjusted EBITDA margins at the high end of our range, reflecting our high flow through margins cost savings from the <unk> acquisition.
And prudent expense management overall.
And as I will discuss in a moment our acquisitions performed ahead of our expectations for the quarter as we continue to build revenue momentum and achieve our cost synergies.
Given the increasingly challenging market conditions, we have reduced our fourth quarter and full year guidance to reflect the impact of higher inflation across the markets. We serve we've also broadened our guidance range given the economic uncertainties.
First FX headwinds worsened in the quarter and we now estimate an incremental $12 million reduction in the fourth quarter as a result.
We expect the unusually strong U S dollar to persist throughout 2023 and tempered the impact of the strong performance of our international segment.
Second for the fourth quarter, we reduced U S mortgage revenues by a further 7 million still within our prior range of 30% to 35% down but now trending to the lower end of the range third we reduced revenue expectations across the non mortgage U S markets portfolio by 33.
<unk>.
Across the base of approximately $2 1 billion due to softening market conditions.
And finally I want to emphasize that we did not reduce our outlook for international given the strong performance year to date and continuing positive conditions in our emerging markets.
We continue to monitor our performance closely and our 30, plus non U S markets and our management teams continue to perform well, despite higher inflation and interest rates and even rolling electrical blackouts in South Africa.
We also maintained our estimates in consumer interactive as it remains on track to achieve the targets, we outlined last quarter.
So now turning to our three acquisitions, we've made substantial progress integrating them and Transunion this year each.
Each acquisition is on track against our business cases, and the expectations, we set on prior calls.
Importantly, we believe our results thus far in the market feedback we've received proves the rationales for the deals and the power of combining them into transunion.
Starting with New Star revenue grew mid single digits in the quarter in line with our full year expectations across marketing brought and communications.
In our increasingly integrated Transunion and Neustar marketing solutions grew high single digits year to date.
As we continue to execute against our growth pipeline, we announced meaningful new marketing sales during the quarter to IR at radio to Arista and info some as well it was a partnership with snowflake.
Despite industry cautioned about future advertising levels, we see strong interest in the full family of new store marketing solutions, which provide benefits throughout market cycles.
In a tighter advertising environment marketers seek to optimize their spending and demonstrate the impact of their campaigns with reliable quantitative measures.
With the decline in digital identifiers marketing platform providers also need to prove the impact of advertising within their walls.
New store is well positioned to provide these objective metrics on marketing on the marketing performance of these sites.
In communications, we signed new business with live box and transaction network services during the quarter.
We also continue to see meaningful growth from our innovative family of trust and call solutions, which include branded call display and color name optimization.
Both of our businesses authoritatively identified themselves and reestablished trust and phone based outreach to consumers as 88% of all business calls going answered due to the proliferation of ruble calling.
Scam calls.
And block or unknown numbers.
Companies across a wide spectrum of markets, including financial services insurance collections healthcare and utilities use trusted call solutions to double or even triple call pickup rates sales and conversion rates.
We have almost 1000 customers using the solution.
And were added to the T Mobile network last year and the AT&T network this year.
At this stage, we estimate that we've tapped under 10% of the potential U S market setting us up for significant future growth.
Going forward, we expect that our growth will accelerate through successful cross selling between the new Star Transunion.
We continue to sign new insurance collections and financial services accounts for trustee call solutions.
And converted several material opportunities in quarter.
And are building our sales pipeline for next year.
We also continued to successfully integrate transunion superior data assets into new stars that state of the art data management platform one I'd.
And to realize cost savings and performance improvements.
Our combined data assets have increased our phone coverage by 15% E mail coverage by 10%.
And improve the robust linking and matching capabilities across our non credit solutions.
And as part of our planned cost synergies, we expect to close seven data centers this year, reducing new starts physical footprint by over 90%.
We've also migrated almost 90% of their products and data management services.
To a new lower cost public cloud provider.
To wrap up new stores adjusted EBITA margins margin was about 29% in the third quarter, driven by revenue growth and our cost reduction initiatives.
We expect our full year margin to also be 26% up 500 basis points from 2021.
We also have line of sight to achieving our commitment of 70 million plus in cost savings.
Through integrating new star, which we expect will provide a meaningful offset to potential margin compression during an economic slowdown.
A full blown recession.
Now turning to <unk> revenue grew in the mid teens.
With a low <unk> margin in.
In line with our full year expectations, we continue to see strong traction with insurance customers, both domestically and abroad.
With more than 40% of newly identified opportunities coming internationally.
We also have a growing pipeline of opportunities in financial services.
And as we mentioned last quarter in consumer interactive we can now win business, we would not have been previously able to transunion in context combined strength.
This combination has resulted.
In an eight figure win for our indirect business that we expect to monetize in 2023.
Finally August revenue grew 4% in the quarter at a margin of 19% for the full year, we expect revenue growth in the low single digits with a 20% margin or 34% excluding integration costs, we have already seen strong levels of customer interest both from consortium members and non members interested in joining.
And finding new ways to use the Argus data and insights.
<unk> the delivery of Argus data entree ingenious digital platforms as well as infusing our thought leadership will be key to realizing higher sales levels.
That wraps up my update on our market backdrop third quarter performance and the integration of our three acquisitions now Tom will walk you through our third quarter and full year 2022 guidance.
Todd.
Thanks, Chris and let me add my welcome to everyone I'll start off with our consolidated financial results.
Third quarter consolidated revenue increased 26% on a reported and 29% on a constant currency basis, New star <unk> added about 27 points to revenue and organic constant currency growth was 1% are.
Our business grew 5% on an organic constant currency basis.
Excluding mortgage from both the third quarter of 2021 and 2022.
On a trailing 12 month basis mortgage represented about seven 5% of our revenue and we expect that to fall to below 7% for the full year.
Adjusted EBITDA increased 13% on a reported and 15% on a constant currency basis.
Our adjusted EBITDA margin was 36, 3% down 430 basis points compared to the year ago quarter, driven primarily by new stars lower margin profile.
Excluding the new Star Sonic and <unk> acquisitions, the margin would have been 38, 6% down about 200 basis points compared to the year ago third quarter.
Third quarter adjusted diluted.
<unk> increased 2% driven by adjusted EBITDA growth offset by higher interest expense.
Now looking at segment financial performance for the third quarter.
U S markets revenue was up 38% compared to the year ago quarter.
Organic revenue declined 2%.
But was up 5% excluding mortgage.
Adjusted EBITDA for U S markets increased 18% on an as reported and declined 9% on an organic basis.
Adjusted EBITDA margin declined by 610 basis points.
They have been down 300 basis points, excluding the new star and <unk> acquisitions.
Diving into the results by vertical. Please note that to date, 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% as reported and was down 4% excluding Argus.
Excluding mortgage organic constant currency revenue growth was 9% disc.
Despite 31% growth in the third quarter of 2021, implying a 20% two year growth CAGR.
Looking at the individual end markets consumer lending continues to be strong as high levels of activity persisted throughout the quarter, leading to 10% growth on top of almost 60% in.
In the year ago quarter.
While lower marketing activity reveal some softness emerging and below prime credit tiers, we are seeing fintech lenders recalibrate their activity from customer acquisition to retention.
We're also seeing incremental activity around debt consolidation.
Which had slowed considerably in 2020 and 2021 when consumer balance sheets reached their peak.
At the same time, we continue to see growth from our strong <unk> position.
Similarly, our credit card business had another good quarter growing 9% after growth of nearly 30% in the year ago quarter.
Issuers continue to fight for top of wallet position driving all channel marketing spend as well as incremental use of alternative data and more sophisticated tools for prequalification and origination.
While we haven't seen pullback in this activity yet we are taking a cautious stance regarding fourth quarter activity.
Our auto business delivered high single digit growth in the quarter as new business wins and on trend innovation, particularly related to digital retailing helped to offset lingering inventory issues for new and used vehicles.
While demand remains relatively strong we are beginning to see some softening caused by consumer affordability challenges driven by elevated vehicle prices and interest rates to this point.
Average new vehicle price in the U S is expected to rise to about $45000. This year, a staggering increase of $10000 over the past two years.
For mortgage.
Rates have continued to rise with the average 30 year fixed rate mortgage up more than a point from the end of the second quarter and more than double what it was a year ago.
This is substantially affected the total inquiry market, especially refinances for.
For the full year, we continue to expect the inquiry market to be down 40% to 45% in our revenue to fall 30% to 35%.
We designed our late July outlook to be conservative and to anticipate further headwinds, including higher rates and inflation without much if any reduction in home prices.
Backdrop has largely played out as we expected and therefore, we are not altering our full year outlook.
As a reminder, we expect our business to perform better than the market as a result of volumetric pricing increases increased demand for a targeted marketing solutions as the market tightens and increased interest in home equity lending products like <unk> as a result of substantial.
Home equity increases.
Let me now turn to our emerging verticals, which grew 91% on a reported basis and 1% excluding the revenue associated with new star.
Insurance delivered another good quarter with mid single digit growth despite the slowdown in marketing.
Kris described and building on a very strong year ago quarter, when revenue was up more than 20%.
We continue to see strength from our innovative solutions and commercial and life applications as well as driver risk in our traditional private auto market.
As Chris mentioned in addition to these organic opportunities are.
Our recent acquisitions are driving significant incremental growth opportunities.
Our public sector vertical declined in the quarter due to the timing of several deals.
Remain confident that this business will return to growth in the fourth quarter.
Tenant and employment screening grew slightly as a result, as a result continued softness in the tenant market driven by fewer renters moving as inventory levels have tightened and rental rates have risen sharply.
Employment screening the smaller portion of this vertical continues to deliver attractive growth, though we've seen signs of softness as employers take a more cautious approach to hiring.
Our media vertical grew double digits again in the quarter and we continue to sign to expand contracts with leading social platforms and media companies that serve a broad range of categories.
Consumer interactive revenue, which includes <unk> increased 9% on a reported basis and declined 9% organically due to decreases in both the direct and indirect channels.
<unk> EBITDA was up 5%, but down 6% excluding <unk>.
Similar to the second quarter moderating consumer demand for paid credit related solutions across both the indirect and direct channels and challenging multiyear comparisons to exceptionally strong performance in the direct channel in both 2020 in 2020 one.
Adversely impacted revenue.
This is largely a result of a marketplace shift towards premium offerings for credit monitoring.
Partially offsetting this is continued strength in identity protection and area, where our <unk> acquisition enhances our capabilities.
On the indirect side the restructuring of one of our key partnerships last year and some nonrecurring breach revenue have created an unfavorable year over year comparison.
For my comments about international all comparisons will be in constant currency.
For the total segment revenue grew 16% with five of our six reported markets growing by double digits adjust.
Adjusted EBITDA for international increased 18%.
As a result of our strong revenue growth.
Now, let's dig into the specifics for each region.
In the U K revenue increased 4%.
Excluding the revenue related to the onetime contracts, including with the UK government, we would have grown about 9% in the quarter, despite a challenging macro environment.
Notably higher inflation and political transition have weighed on customer activity and confidence.
However, offsetting these four forces we are seeing an acceleration in true vision, our trended credit offering in the UK along with strength in direct to consumer.
Three of the four largest lenders now use our credit view platform.
And we're also seeing increased traction in our insurance vertical.
Our Canadian business grew 10% in the third quarter, reflecting growth across the portfolio.
While we see macro indicators softening a bit our core business in the third quarter remained strong as we continue to garner new business ranging from large banks to one of the largest the NPL players.
We expect these moves once fully executed in 2023 will position us as the leader in the Canadian financial service market and the NPL sector.
Also driving growth, we continued to benefit from customers ordering incremental batch data and analytics to recalibrate their post COVID-19 models in order to be recession ready.
In India, we grew 39%, reflecting strong market trends successful innovation and the benefits of our diversified portfolio.
Despite rising inflation Indian consumer remains healthy and continues to spend aggressively as.
As a result, we benefit from a risk in consumer lending and credit card issuance.
Long with the continued rise of Fintech.
And the NPL players all markets, where we hold very strong share positions.
In Latin America revenue was up 13% with broad based growth across our markets, including double digit growth in many of our key markets.
This strong growth reflects good macro and consumer fundamentals.
New business wins share shifts in financial services, particularly with Fintech and Neil Thanks.
And continued uptake of credit vision and fraud solutions.
In Asia Pacific, We grew 24% from continued good performance in Hong Kong, driven by credit visions growth and new business with Fintech players.
We expect revenue from the Philippines to double for the full year and to exceed pre COVID-19 levels as the economy is now fully reemerged from Covid.
And resumed its strong growth trajectory.
Finally Africa increased 18% based on broadly strong performance across the portfolio and the region. Despite the challenging environment that includes rolling electrical blackouts in consecutive quarters of contracting real GDP and our largest market.
Africa.
Notably, we won meaningful new business and secured important contract renewals in South Africa.
Outside outside of South Africa, we have spent years, establishing valuable footholds in emerging countries like Kenya in Zambia.
We are now seeing the fruits of these investments with meaningful growth in these countries.
Particularly with micro in Fintech lenders further validating our global IP strategy.
Now shifting to leverage and liquidity, we ended the quarter with roughly $5 $9 billion of debt $596 million of cash on the balance sheet and pro forma leverage of three nine times.
We expect to Delever to three eight times by the end of 2022.
We also intend to use a portion of our cash to prepay debt in the fourth quarter.
That brings us to our outlook for the fourth quarter and the full year.
All of the guidance provided reflects new starts ontic and Rguest.
Starting with the fourth quarter, we expect about three points of headwind from FX on revenue and four points of headwind from FX on adjusted EBITDA.
For revenue, we anticipate about a 19 point benefit from the acquisitions of New Star Sonic and Argus.
We expect revenue to come in between 896, and $916 million or a 13% to 16% increase on an as reported basis.
And flat to down 3% on an organic constant currency basis.
Our revenue guidance includes an approximate four point headwind from mortgage.
Meaning that we expect the remainder of our business.
We will grow 2% to 4% on an organic constant currency basis.
We expect adjusted EBITDA to be between 318 and $333 million.
An increase of 13% to 18%.
We expect adjusted EBIT margin to fall in a range of down 30 to up 50 basis points, primarily as a result of incorporating new star in Argus is relatively lower margins.
On an organic basis, excluding the three acquisitions, we anticipate our margins to increase by more than 150 basis points.
We also expect our adjusted diluted earnings per share to be between 80 and 86.
A range of down 2% to up 6% net.
Negatively impacted by the effect of rising rates on the approximately 30% of our debt that is floating.
For the full year, we expect FX to impact revenue by about two points.
Based on this recent dollar strengthening at current rates, we expect FX to have a negative impact on revenues for the next several quarters.
Also anticipate about 24 points of benefit from M&A.
We expect revenue to be between 3704 to three $7 billion to $4 billion.
Up 25% to 26%.
Our guidance includes approximately four points of headwind for mortgage for the full year.
<unk>, excluding mortgage on an organic constant currency basis.
Anticipate revenue will increase about 7%.
For our business segments on an organic basis, we expect U S markets to grow low single digits, but up high single digits, excluding mortgage we.
We anticipate financial services to be down low single digits, but up low double digits, excluding mortgage we expect emerging verticals to be up.
Mid single digits.
We anticipate that international will grow in the mid teens in constant currency terms, and we expect consumer interactive to decline in the high single digits on an organic basis.
Both international and consumer interactive are unchanged from our previous guidance.
We.
Adjusted EBITDA to be between one three for three and 135 8 billion up 16% to 17% we.
We expect a two point headwind from foreign exchange. Additionally.
Additionally, we expect our adjusted EBITDA margin to compress 280 to 260 basis points. This year, driven by the lower margin acquisitions and acquisition integration costs for <unk> and Argus.
We anticipate the margin will decline about 25 basis points on an organic basis.
We expect adjusted diluted earnings per share for the year to be between $3 63.
And $3 69 up 6% to 7%.
And to help you complete your modeling of 2022 at this time, we expect our adjusted tax rate to be approximately 22%.
Slightly lower than our previous guidance.
Depreciation and amortization will still be approximately $520 million.
And we still expect the portion excluding step up amortization from our 2012 change in control and subsequent acquisitions to.
To be about $210 million.
Continue to anticipate net interest expense will be about $225 million for the full year. This.
This implies our interest expense to be roughly $65 million in the fourth quarter.
And as you think about interest expense modeling roughly 68% of our debt is currently swapped from floating to fixed.
We have $1 4 billion notional swaps that are expiring at the end of the year.
Which fixed the variable rate on that notional at two 7%.
We expect to renew that swap before the end of the year, but it is likely to come at a higher swap rate given higher and rising rates.
As I noted, we will continue to focus unexpected debt prepayment in the coming quarters.
Which will effectively reduce our floating rate exposure over time.
Finally, we still expect capital expenditures to come in at about 8% of revenue.
Looking ahead to 2023 as usual we will provide you with guidance when we report our full year results next February .
However, I think it's valuable to summarize some important considerations as we head into next year, assuming these macroeconomic challenges persist.
First and most important we expect to deliver organic constant currency revenue growth and an attractive margin.
That point right now we believe that mortgage inquiry volumes will decline again in 2023 with comparisons easing as we go through the year.
The next two points relate back to Chris's commentary.
One the consumer in the U S remains relatively healthy and that bodes well for our financial services vertical excluding mortgage though we are diligently watching for any material changes in.
<unk> some of the headwinds we are experiencing in our emerging verticals are temporal and should resolve themselves next year.
We continue to expect strong performance in our international business building on an impressive 2022.
And in consumer interactive, we believe that business performance will improve as we lap the contract renegotiations and some of the headwinds indirect while also benefiting from the new business wins, we've discussed.
As Chris also mentioned, we're seeing a very nice new business pipeline develop across all three of our acquisitions.
Specific to new Star, we have a very successful cost reduction program that is running ahead of our $70 million.
At this point.
And we expect we will continue to deliver meaningful savings next year.
And finally, my current expectation is that free cash flow will be directed to debt prepayment, helping reduce our exposure to interest rate increases.
At the same time, assuming we deliver more adjusted EBIT dollars that will help further reduce our leverage ratio.
Now pivoting to some thoughts about a more severe downturn on our last earnings call. I spent time detailing some puts and takes relative to how our business might respond in a recession.
Comprehensively review that story today as you can revisit the transcript at your convenience. However, I do want to reiterate the conclusion of that discussion.
First and Thats somewhat normal recession.
We still expect our business to deliver revenue growth and we would prioritize protecting our margins without sacrificing important investments and our commitments to integrate our recent acquisitions.
This was possible because of our expansive diversified portfolio of relevant solutions and our deep partnerships built on thought leadership and innovation.
In a downturn, we would keep our focus on integrating our recent strategic acquisitions to ensure they deliver against our long term expectations.
And we would manage our cost structure to ensure it aligns the directory.
Revenue growth in order to deliver strong margin performance.
I want to wrap up with a slide we showed you at our Investor day in March of this year.
Some of the market cyclicality, we are seeing and anticipating we still expect to deliver against these targets in 2025 clear.
Clearly, we don't expect the growth to be linear, but our attractive end markets and geographic footprint differentiated and complementary solution offerings.
And innovation pipeline give us line of sight to fulfilling our long term commitment.
I'll now turn the call back to Chris for some final comments.
Thanks Todd.
So to conclude Transunion delivered another good quarter of growth at an attractive margin.
We also continue to make meaningful progress integrating our recent acquisitions.
<unk> top and bottom line benefits of our merger.
We have appropriately recalibrated, our guidance to reflect current market conditions.
And while the broader environment remains uncertain.
<unk> continues to execute at a high level, giving us confidence that we can lever whether whatever economic uncertainty lies ahead.
Even as we continue to make growth oriented investments.
And before I conclude my remarks.
I also wanted to take a moment.
To acknowledge yesterday's announcement by the Federal housing Finance Agency director Sandra Thompson.
Turning evolutions in the mortgage underwriting space.
We were pleased by director at Thompsons announcement to share the Fhfa's perspective that safety and soundness and expanding homeownership are the twin objectives for any reform efforts.
<unk> got the requirement of vantage scores 4.0 score.
Use by mortgage lenders will responsibly and sustainably.
Spanned credit access for consumers and also in time increased competition and innovation in the space.
We are also equally focused on the announcement that the FHA FHFA and the Gse's will launch a multi year program.
To adopt requirements that lenders use two rather than three credit report for mortgage originations.
We anticipate that we will play a leading role engaging with the stakeholders across the mortgage industry in the coming years, especially.
Especially the FHFA as we work on appropriate implementation timelines and details.
And so taken together.
The adoption of vantage score of 4.0, and then the migration over time from a tri merge to a buy merge requirement.
Reshaped the mortgage landscape.
And present, new opportunities for <unk> to sell both existing solutions, but.
I'd also encourage the development of new and novel customer data products.
So with that I'm going to turn it over to Aaron.
Thanks, Chris that concludes our prepared remarks for the Q&A as always we ask that unique ask only one question. So that we can include more participants now operator, we can begin the Q&A now.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Andrew Steinman with Jpmorgan. Please go ahead.
Hi, I understand your slide 17.
No recession.
Kind of assumption on slide 18.
As you know what if a recession assumptions so I want to focus on slide 17, and the <unk> team is suggesting that 'twenty. Three we will have solid organic revenue growth, but below the long term, 8% to 10% target. So I just wanted to know when you say solid organic revenue growth does that mean mid single digit.
Organic revenue growth and what your macro assumption kind of underlying that.
Hey, good morning, Andrew.
Thanks for the question. This is Todd I'll take that.
As far as slide 17 is concerned.
Really what we're trying to get across is that just.
Our initial thinking as we are exiting 2022 and going into the new year.
As you can probably fully appreciate we are not in a position at this point in time to provide guidance clearly we're going to see how the macro environment plays out for the rest of the year and even into the new year before we provide.
Any guidance so.
As far as to your question about are we going to guidance are we talking about a specific percentage of 7% to 8% we didn't put that on the slide because we're not we're not certain right now as far as how things are going to play out.
What we felt was important was to give the market and our investors and perspective.
What it is that we're feeling right now and based on the current trajectory that we were experiencing in the economy. We feel that we are going to deliver organic growth at growth rate still to be determined.
Could potentially be in line with our long term growth rate, but we don't know yet.
I'm sure many companies don't and we've provided the <unk>.
Just to give a directional sense as to what we're seeing so just to kind of go through that again.
Mortgage we're expecting that to continue to decline next year, and we just see no inflation pressures.
Continuing to be very elevated and as a result of that interest rates will respond accordingly.
And.
Im pertains to the rest of the U S.
Our financial services business.
I'd say arguably in.
In the third quarter still had a strong performance on the.
Growth rates, we're still we're still very good they were lower than clearly what we had outlined but nevertheless, I'm still strong performance and especially when you compare that to the growth.
Growth rates that we lapped last year.
I think I think it was really strong quarter, there, but we're cautiously watching the U S consumer.
See how they how they react to this.
Say the emerging verticals.
Growth rate that we experienced in.
In the quarter being at about one <unk>.
A lot of.
As we see on the slide idiosyncratic issues that are impacting that and fully expect that to normalize.
In 'twenty, three and I would just say on that.
Our international business continues.
To be very.
He used to be very strong.
And resilience on at this point, but again, we're watching more of the developed markets like Canada, and the U K and then finally.
I think the big positive and Chris highlighted this in his comments is that the.
The acquisitions are performing very well for us in the third quarter.
Star Wars on our revenue expectations.
The integration is well on track and.
We've been able to secure the cost synergies that we can.
Going into a year ago, when we announced the deal.
Isn't there.
Confidence is achieved.
At least the $70 million.
Got it.
Strong quarter.
Integration going well and Argus as well the business has rebounded.
Nicely, so we feel that the momentum even there on the M&A side.
It's definitely in our paper as well.
Great. Thanks, Todd.
Good morning.
Our next question comes from <unk> with Jefferies. Please go ahead.
Yeah.
Thank you.
In terms of the as a follow up to the earlier question in terms of the weather.
Whether it's the <unk> outlook through 2023 can you just talk about the level of visibility or comfort that you have currently versus maybe under more normalized times when I look back over the last two quarters. It seems it's been quite challenging to even predict the quarterly numbers and so things seem to be changing faster than anticipated.
Any color there.
Sure. Thanks for the thanks for the question on that and I think it's more of a more of a question pertaining.
To our to our guidance.
For the fourth quarter and.
<unk>.
Have revised down from where we were at just 90 days ago roughly in our July call and I think it's the read from our from our customers and what they.
They are telling us right now so just.
Just get into a little bit of detail. If you look at the bridge that we provided.
Where we showed.
The reduction we're showing in the U S markets.
Ex mortgage that we're going to be down about $33 million roughly half of that is coming.
Financial services, including consumer lending card and auto, but even with us taking those numbers sound like.
And my response to Andrew's question.
We're still expecting good growth rates out of those lines of business the.
The remainder is just more about.
The other verticals and our emerging verticals like tenant.
Tenant screening Lynch, which Chris talked about in his prepared remarks.
What about the pressures that we're seeing there.
But also just a little maybe a little bit slowing in the in the media as well as in the insurance spaces, but still growing.
Number nevertheless, so what we've done.
<unk> taken our outlook based on the activity were seeing from our customers, but also just in regards to what they are telling us.
We want to.
The reason for the rig.
The reduction that we took in our guide but.
Things are uncertain.
Would you that when we met with you in July and we have a wider than normal range for our guidance in the fourth quarter similar to like what we had done in the third quarter and you can see that we delivered and range in the third quarter.
So we feel that we.
We've captured market sentiment as well as de risked.
The guidance by crude by having a wider range.
Yes, so I would just add.
Thing to that which is.
You did you started by saying its more difficult environment to forecast and we agree with that and taking you through the mechanics of how we've tried to be prudent in our fourth quarter guidance and anticipate some of those trends in circumstances like these it's easy to focus on the negatives the deceleration against.
Prior year performance higher performance that was absolutely very high by the way worth reinforcing but theyre also some positives as you look forward into next year, one mortgage will be less.
The drag if a drag at all television to be determined.
And it was this year international will continue to be strong we expect a material improvement in the performance of our consumer business. We think the tenant screening market will become unstuck. So there are a variety of positives that will happen as the market works towards an equilibrium and again I would say.
Ed.
We're laser focused on what's going on in the market, we're going to use the fourth quarter will be instructional and then we will provide our guidance in the early part of next year and a more robust discussion.
A discussion around what we're anticipating.
Thank you that's helpful.
Next question comes from Jeff Mueller with Baird. Please go ahead.
Yes, Thanks, Chris would love your perspective as competition could play out for sure and <unk> emerge.
<unk>.
What's the pitch for wide trends Union should be included as one of the two I'd imagine the industry, leading trended product is a big part of it but just what else.
And then is this also a catalyst for bringing additional alternative data products to the mortgage underwriting process from your perspective.
<unk>.
Yes.
Well look it's kind of early days based on the announcement that we just received yesterday I think the win for consumers and the wind for the mortgage industry and the economy as that will now be using the score that we know scores more consumers in the U S and scores the more accurately so.
It is a win for financial inclusion and mortgage origination generally.
We also like the emphasis on safety and soundness by the FHFA and the Gse's.
The two factors that go into that it's one scoring accuracy, which I feel like they have addressed by requiring.
The vantage score, but also just the volume and breadth of information now they've indicated that they're going to suggest or recommend to change.
And.
In the.
Mortgage credit report market.
I think we need time to better understand what exactly that means the agency Hasnt released its details nor an implementation plan.
In an environment, where there is more competition be it around score or credit we do have a great trended credit product, we are an industry neutral player.
And we've got a wide range of data.
And I think this will net net just set off a period of innovation.
That could be quite helpful to the space and the consumers and the bureaus alike, but I think it's a little early now.
Given some of these uncertainties and unknowns to kind of declare what the future's going to look like.
Fair enough I appreciate your perspective, thank you.
Yes.
The next question comes from like healthy issue with Autonomous Research. Please go ahead.
Hey, Chris and Todd.
India now 5% of total revenues and you add mortgages basically expected to be less than 7%, maybe we can switch gears, a little bit and talk about what capital.
Obviously this is mark this quarter, you're still 39% constant currency crowd could you just break that down a little bit in trends how much of that is driven by market growth market share gains.
Cross selling additional services.
Yes.
Okay.
Just got back from.
And extended.
In India, we spend time, not only in Mumbai with our leading credit franchise, but also in Chennai and other parts, where we've got.
A lot of our employees, our development talent and PPO as well.
Always very invigorating experience two to spend time in India, particularly with our business and he is very much emerging on the global stage economically for sure and even politically and you sense a tremendous optimism when you're over there.
We have certainly benefited from.
The underlying.
Positive growth drivers in that market hundreds of millions of Indian citizens have.
The middle class there is equal equal tranches, along the way the government there is committed to.
Aggressive economic growth by taking advantage of.
Kind of a year of of intellectual product.
And India's.
And India is very kind of progressive approach to digitizing their economy. So we're benefiting from market trends. We also think we have reinforced our gain share along the way and we're also diversifying our product line.
Of course, we're bringing them a full complement of products around consumer credit and analytics.
We expect considerable growth through the broadening of the product line there.
A similar play in commercial where we really improved the competitiveness of our commercial credit Bureau.
And we continue to innovate.
We've launched a score that will help commercial lenders evaluate small to medium businesses.
Very fast growing and dynamic segment of the Indian economy and also.
A suite of products for agricultural lending, which again is an underpenetrated part Indian market. So the.
Combination of natural market growth plus broadening our product line across segments and Adjacencies I think really positions us for strong growth.
Three years ahead.
Thanks really appreciate that.
The next question comes from Steve <unk>.
With Deutsche Bank. Please go ahead, yes.
Yes, hi, good morning.
I wanted to talk a little bit more about the credit card and consumer lending piece of the business because it feels like there can be quite a lot of volatility there. So maybe help us help us think through as.
As we look ahead to 2023 potential recession sort of what are the what are the range of outcomes, there and what type of metrics should we be watching.
Sure.
Our financial services businesses breaks down into the four sub sub segments.
[noise] cards consumer loans auto and of course mortgage.
Mortgage is far and away the most volatile.
Component of that mortgage was a great counterbalance.
During the downturn related to Covid.
And it more than doubled in a couple of years because of the lower interest rates now that rates have reversed themselves, it's being have to get so thats, where the real volatility is autos growth currently is constrained demand far exceeds supply currently we would expect supply condition.
To improve over time, and so we're expecting relative stability on the auto side and look credit cards and consumer loans, while the growth rate has.
Has declined it is still growing nicely.
And card originations are healthy although hard marketing activity has tapered somewhat the same is true on consumer loans and the fintech.
<unk> strong and fast growing and we expect them to grow throughout the cycle because they are.
Disrupting the space they are in aggressive growth mode. They continue to market.
They continue to have secure funding sources.
And so.
Well I think we're entering a period of likely slower growth at least until we find an equilibrium with inflation and interest rates.
We do.
The space financial services that is to remain a positive grower.
Thank you.
The next question comes from Manav Patnaik with Barclays. Please go ahead.
Thank you.
Chris maybe just a follow up on that let's just say the macro is more than just soft historically how has.
Credit card performed or held back maybe if you could just give us something similarly around a new study as well in that scenario.
Well, let me handle new Star and then Todd the question was.
<unk>.
There is a slowdown scenario and then perhaps scenario of deep recession, if you will and we're not making a guess as to which one it is at this point, but I was trying to understand how far credit card can drop in a recession scenario and just given your experience helping to manage the business through 2008 any perspective.
Sure, Yes, sure so as.
Far as I think it was an important.
When you think about Transunion has to think about the breadth of offerings that we have for our customers, So where credit card marketing could potentially slow down in a recessionary environment and that clearly would have an impact on our pre screen.
Marketing.
<unk>.
Produce.
Do have a whole host of services on our portfolio review basis.
Meaning how do we help our clients.
Their existing book of business.
We find that incredibly beneficial during it during a downturn maybe not completely countercyclical.
It definitely is an offsetting element of it because our customers first I'll look at their existing book just to understand the risk potentially have and we'll also look at it and how to manage lines of credit and also look at it.
We have cross sell.
Have a certain.
Yes.
Certain subset of the portfolio, that's performing well I'll look for opportunities within their own portfolio too.
And their services.
Recent example of that.
And in early two pandemics.
All of our customers.
Shifted like almost overnight from an acquisition perspective to more of a portfolio view and our sales team was extremely proactive in bringing those offerings.
To the market and Thats, an important plan youre asking about credit card, but I want to go back.
Question just in regards to that.
<unk> lending in the Fintech space.
Chris already said, we are we are.
We tend to see very healthy amounts of marketing for the same reason that I just talked about in <unk>.
Don't forget that Trans Union Hasnt been shifts 24 of the top 25 impacts and we have deep partnerships with them. So when they are marketing it if it does slow down.
That seems set.
Products that were going to offer to that and so.
Mission shifts that we have with.
The clients are outstanding so fully boom.
Yes.
And our manage their business.
At the time.
Yeah, and just on the card side Manav I would say that while we're definitely in a slowdown period.
We are selling very effectively 21 was a record level of sales for us and we are poised to exceed it materially in 'twenty two on the financial services side. So what we're doing in the market is resonating and adding new customers and the like.
Standing share within customers and somewhat of an offset.
Yes to the downturn you also asked about new store I break that down.
If you look back to the pandemic year of 2012.
Our line by 1% across its three lines of business.
Marketing.
Was flat.
And we remember the second quarter was quite a shock to the system and then we had to.
Slow rebound in the third quarter and then we started to approach something like normalcy in the fourth quarter. So I think thats a good test case for how the business would perform if it's really really really bad as it was in 2020.
I don't think Ive, just mentioned is that new store marketing solutions have value across the business cycle. The vast majority of it is subscription nurses <unk> like.
And the components are cleansing data height data hygiene, so thats your only mailing one time or targeting digitally.
One time for consumer rights. So you eliminate waste extremely important in a downturn as is the media mix that you're planning in the measurement of the effectiveness of your marketing efforts if anything those things become more important.
In a more constrained environment right now 20% of the marketing portfolio.
He is more volume influenced that's the audience generation and utilization.
We are already you've already seen that a bit on the <unk> side and we've talked about that it was a portion of the year when.
Let me try engineering side of the house, but we also have similar data, but some unique things were growing pretty rapidly.
And if you look at marketing together and increasingly we have to as we integrate <unk>.
Our operating part of Transunion is growing double digits right. So that is encouraging.
Anyway. So that's what I can offer you on those two topics.
Thank you.
Okay.
Your next question comes from Heather <unk> with Bank of America. Please go ahead.
Hi, Thank you for your questions.
My question.
You talked about some of the idiosyncratic.
Hey, I guess challenges or headwinds youre facing right now in your emerging vertical segment.
And do you have to understand kind of what's driving that.
I guess I'd love to kind of hear more about what gives you confidence in.
And <unk>.
Into next year.
And a little bit more.
When when should those things start to inflect and kind of how long it takes to work themselves out that'd be really helpful. Thanks.
And I'll start off and I'll focus on the first part of your question because.
The timing of these things.
That may be a degree of precision.
<unk>.
That's just tough at this point, but look the largest component of emerging verticals is the insurance.
Business.
And it grew mid single digits, that's off of a call from a year ago period, a 20% growth right and the main reason why it slowed from its typical high single low double digit pace.
Is because of inflation impacting or increasing the cost of repairing and replacing damages right. So claims expenses on policies are up and carriers need to charge more for those policies, but the mechanisms by which they can raise prices or accomplish.
In the U S insurance is regulated product and all 50 jurisdictions product by product. So they are they are currently implementing the rate increase filings.
Across the competitive landscape it will take some time.
For those.
Increases to be ratified and once they are they will resume new policy origination in full force and so we expect that to recover and we have seen this.
Period and the insurance.
As the cycle.
People times before the other unusual element is the degree of slowdown around tenant screening and frankly there is just.
There's kind of a boycott in the market and youre starting to read about it in the mainstream press.
Price increases.
Pieces on apartment rentals in the multifamily space in particular.
Then really considerable and compounding and and now tenants are just not able to were not willing to move and.
Whenever there is a supply demand imbalance it takes a little bit of time to work it out where we start transacting again I'm confident we are going to find that equilibrium. We are going to start transacting again and the one bright spot in new home construction. If you will is multifamily rental units. It will take some time for that supply to come online.
But that's going to be helpful.
Intermediate term to increasing the transactional volume public sector is truly an anomaly we had some big one time work in the third quarter of last year, and we also had a new sale that pushed to the fourth quarter.
And those two things led to a down quarter, we don't expect the down quarter in the fourth quarter and we expect this area to continue to grow nicely for us.
And communications look we had two major communications clients.
Big fraud.
Client users merge.
And as they digested the merger they have recalibrated their need for the product at a lower levels. We maintain the exclusive supplier relationships. So we've had to reduce our transaction volume that happens with M&A.
Good news is they are still our client.
But they're all our volume fell a bit.
Last component is collections collections.
Has been a very difficult area for many years here.
Im more encouraged about our ability to grow collections, because the amount of stimulus or support being provided by the government.
<unk> is kind of running its course.
<unk>.
And deferral.
More corium and the like on deck Coinsurance, evictions, our ending and so in 'twenty three I think returning to page and entering a more normal environment, where we're going to get some growth in the collections area. So that's the various puts and takes that made I think Q3 anomalous and our emerging markets.
Hopefully that helps you understand it better and Chris and I would just add onto it.
Hard to believe.
A year and 2023.
Our business will be considered organic.
At that point in time for the reasons, Chris gave pertaining to marketing.
Sure.
I think it's also important to highlight that.
It's kind of broad business that we have Alan.
Now in conjunction with start bringing that together with them.
Capabilities that Transunion already had but also the communications business as well those are two businesses that you own.
Should perform relatively okay.
In a town buyer.
And that also should be a contributing factor to the grocery yes. That's a good add so my commentary was focused early on here at Transunion and the new store stuff has been.
But those are solid growers and as you saw in the third quarter, we had.
Solid performance across our portfolio.
Next year, that's been up average up performance.
Great. Thank you.
Next question comes from Toni Kaplan with Morgan Stanley . Please go ahead.
Perfect. Thanks.
Historically, <unk> had really a beat and raise strategy when providing guidance.
This quarter it seem like it's driven by a reduction in organic growth as opposed to FX and markets like last quarter.
And I know at the beginning of the year, you talked about incorporating less conservative tourism into the guide, but just trying to get sort of an update on where we are now is is this a.
Conservative Guide a realistic guide is it you know there's so much uncertainty in the macro right now so.
No you mentioned its wider because of that so just wanted to get an update on that.
Sure sure Tony I'd be happy to I think it's a fair question.
It into.
As I said earlier.
The the reduction that we took in the fourth quarter is really.
Just a combination of what we're seeing on a daily basis with the work that our clients are giving us.
But also more instructive Lee what our clients are telling us and our U S business.
Does a great job networking through our various advisory board. So they can hear directly from our buyers.
As to what to what they're expecting and what their sentiment is higher so we think those two factors together and that's in essence how.
Forecast.
Comes together for us.
Hi.
And I think I'd say that all of our guidance has always been in.
Rooted in reality.
So and that goes back to when we were in a beat and raise.
<unk>.
Despite the macro has changed.
So significantly.
On us if I were to think about two or three years ago, when we werent, beating and raising.
We ran a very different macro environment, where today, obviously, we're dealing with high inflation rates were all trying to gauge.
Consumer sentiment and watching their savings rates in their spending patterns. So we're trying to figure out all of that and so where we ended up with us.
We did based on all of those.
<unk>.
I'd Love to tell you that it's conservative and that we got another beat and raise but I don't have that assurance and I think thats again, why quite as said earlier why we widened the range as well too.
It was something that we did in the third quarter as I said earlier.
Enabled us to deliver revenue.
Yes.
And the range and I think.
About the third quarter.
<unk> became a significant headwind.
Something about $4 million.
Of an impact so just widening the range accounting for that.
We are all in parts of the dollar.
Strengthened.
Good.
In the.
I think a lot of companies talking about that.
Yes, so net net realistic guidance, perhaps some additional downside sentiment this quarter.
But we're dealing with a C change in macroeconomic conditions.
So.
Certainly.
Super Thank you.
Yeah.
The next question comes from Andrew Nicholas with William Blair. Please go ahead.
Hi, Good morning, Thanks for taking my question I wanted to ask a question on the international outlook, specifically as it relates to your considerations for 'twenty. Three obviously you expect another strong year.
Seems to be a bit more optimistic than maybe the financial services business ex mortgage can you just dive into that a little bit more what gives you confidence in maybe the disparate growth assumptions for next year is it is it more about the economic backdrop in those regions is it new product development is it.
Maybe some some lag there in terms of how those economies are progressing relative to the U S. Any any additional color on why it seems like international is youre going to be a bit more resilient or at least stronger next year than what youre expecting in the U S. Ex mortgage thank you.
Yes, so when we think about our international division in terms of emerging markets and developed markets as well starting with the emerging India, Latin America, South Africa, and even across the Asia Pacific portfolio.
They they are digesting well first of all the level of inflation increase is lower in those markets and particularly India.
In part because there wasn't the amount of <unk>.
Stimulus.
<unk> into those economies right. So they are not.
<unk> from higher inflation as a result of those actions as a result, GDP growth and just.
Vibrancy is higher there.
India is fueled by all of the things I talked about favorable demographics great.
Business in digitally friendly.
Government posture and then we are diversifying our product lines and so we're enjoying rapid growth in new areas and theres more to come but Latin America is a very similar story to India, but on a smaller scale population wise.
South Africa, we've invested a lot in improving our effectiveness in that market and I think it's starting to bear fruit, we are growing well.
Well in South Africa, and very rapidly in the countries across the continent, we compete in and we've been winning new business nicely.
And in Asia Pacific, It's a similar story as well Hong Kong is performing exceptionally well the Philippines or back.
There's also some element in our emerging markets of the rebound from the Covid chapter right.
These economies these countries emerge a little later from the pandemic than did the U S.
But overall I just think it's a more favorable mix of growth drivers now in Canada, and the U K and both of these markets.
Underlying is high.
High single digit organic growth.
Its tempered somewhat in each market, Canada had some.
Some one time revenue that it had to lap but in Canada, we continue.
To win new customers and Thats positioning us well for next year and in the UK the growth headline growth number is lowered by the very large contract we had with the government.
Over there.
In that contract, but as the pandemic has eased so of the revenues associated with that contract.
So next year, we would expect given all of this.
Strong growth in international.
That's.
Element about Acacia effectively.
Recently material Trenching unit Raul.
Great.
He will wrap it up there I think thats a great question to end on actually.
Citing story in international.
So a very busy earnings day as Brent mentioned in the earning season. So we're going to give you guys a little bit of time to or something by the time here.
Thank you all for joining us today, and we hope you have it.
Thank you.
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