TransUnion

Good morning and welcome to the TransUnion first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. and also please limit yourself to one question to help include more participants. I would now like to turn the conference over to Aaron Hoffman, Vice President of Investor Relations. Please go ahead.

Good morning everyone and thank you for joining us today. I hope that all of you are safe and healthy. On the call today we have Chris Cartwright, President and Chief Executive Officer and Todd Cello, Executive Vice President and Chief Financial Officer. We've posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website. Our earnings release includes schedules which contain more detailed information about revenue, operating expenses, and other items, including certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures for their most directly comparable GAAP measures are also included in these schedules. 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 statements. With that, let me now turn it over to Chris.

Thanks, Erin. I want to welcome all of you to our call and extend our most sincere hope that you and your loved ones are healthy and safe. Nothing is more important. From the earliest days of the COVID pandemic, our primary focus has been the health and safety of our associates, our customers, and the wider communities in which we operate. In each of the markets we serve, We've seamlessly moved to working from home, allowing us to protect our associates and the broader population while continuing to serve businesses and consumers. We appreciate the work of legislators and regulators around the world for taking decisive, significant actions to support consumers, businesses, and the economies in these unprecedented times. We especially appreciate and respect the heroic efforts of healthcare professionals and other essential workers on the front lines combating COVID-19 and supporting their communities around the world. Let's begin this morning with an overview of how our first quarter unfolded. From January through the middle of March, TransUnion tracked well ahead of its prior year volumes and meaningfully ahead of the revenue guidance provided in February. We saw strength in the financial services, insurance, and public sector verticals in the US, as well as robust results in India, Canada, and the UK. In mid-March, most of the countries in which we operate implemented shelter-in-place policies in order to slow the spread of coronavirus. While absolutely necessary to protect public health, this approach caused a dramatic reduction in economic activity Curtailed consumer lending and triggered job losses unprecedented in their speed and scale. The rapid increase in unemployment in the US and many other markets has introduced uncertainty into consumer lending well beyond what was experienced in the Great Recession of 2008 and 2009. Many lenders have pivoted from client acquisition and overall growth strategies to risk management across their existing portfolios and assisting consumers through temporary forbearance arrangements. Despite the sea change in economic activity that began in the second half of March, the strength of the first two and a half months of the first quarter resulted in revenue and adjusted EPS for TransUnion above the high end of our guidance and adjusted EBITDA in the middle of the range. That said, the sharp downturn in transaction volumes experienced in mid-March has continued through April to date and presents materially different business conditions across our portfolio than we expected in 2020. Given this, we're not able to maintain our previous financial guidance for 2020 or provide new full-year guidance. Instead, we will focus today on the second quarter and the volume trends we are currently experiencing in key verticals and markets around the world, as well as our approach for managing TransUnion through what we expect will be a prolonged and significant downturn before resuming TransUnion's previous trends for strong organic revenue growth, EBITDA growth, and margin expansion. While the nature of this economic downturn is very different than what we experienced over 10 years ago, Entrant Union is a very different company. I believe that the continuity of our management with demonstrated crisis leadership in this industry will allow us to successfully navigate this challenging time. We intend to balance expense actions as required with ongoing investments in innovation and Our technology operations and business portfolio. We're implementing across our markets globally a consistent playbook to help clients manage through this downturn. We also expect to maintain our program to accelerate our technology evolution, albeit at a pace calibrated to the current uncertain environment and our financial forecasts. This investment is important to maintain our technological advantage and to support a return to the strong growth and relative outperformance we've enjoyed these last six years. Despite the near-term impacts of this COVID-19-driven economic crisis, TransUnion's business model and product and portfolio strengths remain intact. I'll discuss the current volume trends across our primary verticals and markets and our quick transition to support the change needs of our clients and consumers in this downturn. Although current market conditions present us from providing our usual financial guidance, the following slides illustrate the magnitude of the impact on our transaction volumes resulting from shelter-in-place policies and the global economic reset. My commentary and any forward-looking statements must be cautious, measured, and taken as directional given the recency of the downturn and resulting uncertainty across our markets. Once I cover the current market dynamics, I'll hand over to Todd to discuss our detailed first quarter results, balance sheet strength, and several financial scenarios for the second quarter based on the trends I will describe. Let's first review the overall transaction volumes year-to-date for U.S. Financial Services, our largest vertical market. As you can see, performance was strong relative to 2019 through the middle of March when shelter-in-place guidelines made their impact. We continued to penetrate the market with our broad and leading data solutions and lending volumes remained healthy. Since then, we've suffered a considerable downturn against first quarter trends and prior year results. Over the two weeks prior to this call, volumes have stabilized, perhaps as lenders adjust to working from home and look to support their clients beyond implementing the initial round of forbearance arrangements. Now let's review the components of U.S. financial services in detail. Beginning with mortgage. Refinancing activity was very strong throughout the first quarter on the strength of low interest rates and further accelerated as the Fed lowered rates in anticipation of a virus-led slowdown. While the surge has abated somewhat, refinancing demand exceeds lenders' underwriting capacity, especially in this work-from-home environment, and is above last year's volumes. Strong demand for refinancing has kept mortgage rates slightly higher than they might otherwise be, and we expect these conditions to continue in the coming months. For monitoring the potential negative impact of increasing unemployment and payment deferral programs, which could lead to a smaller pool of consumers eligible for refinancing. And despite the overall growth of mortgage activity, new purchase mortgage activity has nearly halted due to quarantining provisions which prevent consumers from visiting properties for sale. We expect this trend to continue until the lockdowns are lifted and consumers are willing to socially interact. This could create pent-up demand for home buying depending on broader economic conditions and create future upside opportunity. Similar to new mortgage activity, auto financing has fallen off as dealerships are closed in about half of the United States or only operating online and consumers postpone vehicle purchases. As this chart shows, in recent weeks, we've seen these trends improve as dealers have rapidly accelerated the move to online selling and lending-based initiatives. Vehicle lease expirations and general vehicle replacement needs also create continued minimum demand levels. Based on our experience in the Great Recession, we expect a recovery in demand once consumers are able to return to dealerships and other normal activity resumes. Credit card lending also slowed considerably in March, but appears to have stabilized in recent weeks. The decline in card volume results from issuers reducing new client acquisition to focus on serving the needs of existing customers. Some clients are reducing originations until they better understand the evolving risk or converting acquisition programs to lower cost channels like digital in order to save money on direct mail costs. I would note that TransUnion supports all card marketing channels and approaches. Clients also are expanding their card portfolio reviews given increasing consumer risk and need. Portfolio reviews and event triggers using trended and alternative data are a critical part of risk and account management efforts, and we are increasing our focus on providing these services. Finally, consumer lending has also experienced a material decline in volume, including within the fintech space. However, not all of the FinTech segments are reacting in the same manner. Many of the traditional FinTechs have focused on their direct customer acquisition channels while limiting partner channel volume. A few have ceased most lending until the crisis improves. The retail point of sale FinTechs are experiencing a significant volume boom from increased online sales. Short-term lending volumes have declined substantially while lenders wait for more clarity regarding the U.S. employment situation. However, as we saw after Operation Chokepoint ended, they are generally able to quickly ramp up volume when markets expand. Overall, we expect the financial services vertical to remain at lower volume levels until shelter in place orders are eased, allowing consumers to return to work and other normal activities. This could take several quarters. However, there are a few mitigating factors to highlight. First, mortgage refinancing should continue to be strong, with most banks experiencing backlogs, as I mentioned previously. Second, we expect fraud mitigation solutions, like ID Vision with IOvation, to perform well in this environment. We have experienced minimal impact to our fraud business thus far, and are having very constructive conversations with a wide range of lenders. As customers rapidly migrate homebound consumers to digital channels, lenders are concerned about and experiencing substantially increased incidences of fraud for login and verification. While U.S. Financial Services is the largest in-market for our fraud products, the story is the same in many international markets, which I will discuss shortly. Third, we expect increased account management demand to continue as lenders look to more effectively service their existing customers. This will drive continued demand for our more advanced solutions, including event triggers, trended data, and alternative data. Finally, most of our contracts include volume minimums, and while they tend to be fairly low, they are a valuable buffer. Contracts are also priced volumetrically, such as that as volume fall, the price per transaction rises. While this doesn't fully offset the lower volume, it does help. Now turning to our healthcare vertical, which helps healthcare providers navigate the revenue cycle to help improve the patient financial experience and maximize reimbursements for uncompensated care. The front end of the cycle represents about one-third of the revenue of the vertical and includes insurance eligibility checks, identity screens, and payment estimation. As providers have shifted their focus to creating capacity in the healthcare system to prepare for the surge of COVID-related patients, they've canceled and delayed non-critical procedures. Although COVID cases will surge in hotspot areas, The overall impact on the healthcare system is a net decline in patient volumes. This started to impact the front-end business in late March, and we expect to see that decline persist through the second quarter. The other two-thirds of this vertical is the back end of the revenue cycle, where we help providers identify opportunities to recover lost reimbursement through various revenue recovery products and services. Some examples include finding missing insurance information, resolving claim denials, and identifying Medicare bad debt disbursement reimbursement opportunities. By helping providers increase their revenue, reduce uncompensated care, and avoid bad debt write-offs, we provide a critical source of cash flow, and in some cases provide essential products and services to assist providers in maintaining financial solvency. This is particularly important now as the reduction in elective and preventative care is severely impacting providers' profitability. And while government stimulus programs are designed to help offset some of this impact, many providers are having to lay off and furlough staff. Writers may see additional pressure depending on how long the elective patient volumes are delayed and how successful the reopening process is. Our current view is that consumer sentiment around comfort and safety are mixed at best regarding resuming normal healthcare elective treatments. Given the financial stress on healthcare providers, it's not surprising that the backend of our healthcare vertical has held up well thus far and provides providers and most providers continue to be motivated and incented to continue their focus in this area to ensure they're optimizing their billing processes and recovering the greatest amount of reimbursement possible. The potential longer term risk, however, is that there are fewer overall patients in the coming months in healthcare system, which could result in less overall opportunity for recovery of uncompensated care. In any scenario, our solutions continue to represent a valuable and essential part of the revenue cycle, helping providers reduce risk and increase their cash flow. Our insurance vertical serves property and casualty, life, and commercial insurers with marketing and underwriting solutions, as well as analytics and investigative tools for claims. Thus far, and in line with our expectations, insurance has seen a less severe impact than many other parts of our business. Unlike many other industries, insurers continue to provide services to their customers and to underwrite new business regardless of the broader economic conditions, particularly in auto insurance, which is the largest part of our vertical. This consistent activity level is driven by expiring policies when consumers typically renew or shop for a new policy. In either case, customers use our data and solutions. Only when the consumer chooses to let their policy lapse and not replace it does the industry see volume contraction. That is clearly a risk given the rising number of unemployed Americans in idle vehicles. However, we have seen many of the market leaders assisting their policyholders during this time through rebate programs. Core underwriting activity took an initial dip in mid-March when shopping activity declined as consumers processed the changes we've all experienced. However, in the recent weeks, that trend has stabilized. Customer marketing programs thus far have continued as planned, are all likely to help consumers understand the potential financial benefits of changing to a lower cost plan. In these economic conditions, consumers shop for lower rates to reduce their expenses. Furthermore, the desire to reduce costs and improve efficiency at our insurance customers is leading to increased interest in our driver's risk solutions. This solution helps to reduce the cost of motor vehicle reports while providing more timely insights. Our team has stayed in close contact with our more than 300 insurance customers with heightened interaction with our top tier accounts. Our customer counterparts remain accessible and willing to engage in conversation about in motion and new opportunities. We continue to leverage our market leading capabilities to serve our insurance customers' evolving needs. To round out my discussion of the U.S. market segment, I want to touch on a few other verticals, starting with collections. While we certainly see this vertical as counter-cyclical over time, the initial negative impact has been quite severe for three reasons. First, many collections customers were not equipped to have their collectors work from home. This resulted in an immediate decline for several weeks while collections firms developed capabilities to enable their workforce to work remotely. Second, many states like New York and Nevada halted all collections activities for 30-day periods, and several other creditors have instructed agencies to suspend collection of their debt. And third, as part of the federal COVID legislation, certain consumers are being provided payment holidays. While we absolutely agree with and support the second two items as they provide relief to embattled consumers, these actions do create an air pocket in our business and push out resumption of normal collections activity by a few quarters. After that, delinquent cases will be placed with collectors and activity should pick up over a three to six month period. In shifting to our public sector vertical, which provides a variety of data-driven solutions for federal, state and local governments. At this point, we have seen very modest impact. Government agencies continue to operate unabated in support of their constituents. Employees are largely able to work from home and are still engaged in ongoing business opportunities and open to new projects. We already provide fraud mitigation and identification solutions to certain agencies and we are in active discussions with them more broadly around the trillions of dollars in dispersals announced by the federal government. We are also talking to various agencies about heightened insider threat monitoring capabilities as that risk increases when employees are homebound and might be facing financial hardships. Specific to combating COVID-19, We're also having productive conversations about providing federal agencies with right party contact information to support contact tracing. This is a process to identify and alert people who have been in close contact with an infected individual. By contacting and monitoring those with a higher potential to become infected, public health officials can reduce the spread of the virus by keeping them from infecting others. having highly accurate right party contact data is critical for these efforts to be successful. Through TLO XP, we are well positioned to support these efforts. Conversely, we've seen a slowdown in some programs we support at the state level, though we've identified areas of potential upside where we can further support our customers and their COVID related mitigation work. As the preponderance of on the ground COVID Thank you for joining us. Once the crisis has passed and states search for much needed revenue. At the same time, we do see an opportunity to support COVID relief efforts with our background screening solutions. It is critically important that volunteers across all fields are properly vetted before engaging in these activities, as we've seen in previous large crises like Hurricane Katrina. Tenant screening is an area where we've seen a sharp slowdown as consumers are not actively seeking to move, often resigning with their current landlord instead of taking the risk of moving into a new location. Similarly, with a stark reversal in employment trends, we're seeing employment screening slow substantially. We expect both of these areas to present opportunities as economic conditions improve and both moving and hiring increase. Finally, in telecom, we've also seen meaningful slowdown as more than 80% of cellular retail locations are closed, resulting in far fewer new plan and device sales, along with the attendant credit checks that we provide. We expect this trend to persist, though it may rebound very quickly as there's likely pent-up consumer demand that will need to be satisfied when the lockdowns are lifted. Now turning to Consumer Interactive, consumers continue to recognize the value of credit and identity protection, credit monitoring, and related financial education tools like those that we offer both directly and indirectly through partners. Even as consumers are facing economic uncertainty and hardship, they are still demonstrating an interest in the tools and resources that help them manage their credit health and drive informed decisions. As a result, today we've seen only a modest negative impact to our direct subscriber base. We continue to tune our marketing efforts to maximize acquisition and retention of high-quality subscribers. On the other hand, some of our indirect partners have curtailed their marketing programs, likely resulting in decline in subscribers, which is the basis of our revenue model. Positively, We've had a number of substantive discussions with potential new partners that have expressed interest in building more robust consumer-facing offerings like financial education and modeling tools for their clients who may be facing difficult personal financial situations. Across our international markets, we have seen a pronounced slowdown as lockdowns have been implemented in varying degrees of severity in all of our geographies. We're pleased to see that across all of our major markets, though, governments and lenders are providing relief for distressed consumers as well as certain types of businesses. Our international team has mobilized a swift response by providing customers with actionable insights that highlight differentiated solutions that we didn't have during the 2008 and 2009 crisis. These include Credit Vision Trended Data, Credit View, Market Leading Portfolio Management Insights, and Fraud Solutions. This approach has positioned our business at the forefront of enabling our clients to shift from originations to portfolio and risk management. In broad terms, we've seen developed markets like Canada, the UK, and Hong Kong behave more like the US, with meaningful declines across each country or region's portfolio. In the UK, lending markets are under similar stress as in the US, and that has and will weigh on our results. On a positive note, we've seen strong performance in several parts of our diversified portfolio. Fraud solutions, which are about one-third of our UK business, are up significantly as consumers are accessing online services from government agencies that require authentication and identification. This trend will likely continue into the second quarter, but will eventually taper off as all eligible consumers gain access to these sites. during the COVID crisis. In Canada thus far, it's looked more like the US with a weak underlying lending market that we expect to continue while lockdowns remain in place. However, our first quarter results benefited from a number of breach remediation contracts that are not based on transactional inquiry volumes and thus are largely unaffected by COVID. This benefit will also continue into the second quarter. We also benefit from portfolio diversification that includes fraud solutions, direct to consumer offerings, and insurance and government verticals. In particular, we've seen a heightened interest in our direct to consumer solutions as our customers seek to strengthen their relationships with their customers. In emerging markets, the impact has been worse as consumers rely more on branch and other in-person channels. Across almost all of these markets, we see a pronounced lack of digitization along with more aggressive government lockdown restrictions. In these geographies, more aggressive tactics have resulted in a greater impact on our business. In India, we have a fairly diversified portfolio that includes credit reports and scores, but also analytic and decisioning tools, fraud solutions, direct-to-consumer offerings, and a commercial credit business. Our broader portfolio provides a buffer to the dramatic declines we've seen in lending inquiry volumes. The stark drop in activity is a result of the challenges Indian consumers have in transacting online and the severity of their lockdown restrictions. In LATAM, we serve a variety of markets, and in general, we've seen consumers challenged to transact remotely, while lockdowns have largely not been as strict as in some of our other markets. Notably, in Brazil, we do not operate a credit bureau, but rather a data analytics business that largely serves the insurance industry and that provides a modest buffer against declining lending activity there. The South African economy was challenged prior to COVID and is now projected to be down low to mid single digits. Lockdown actions are less severe than countries like India and the Philippines. Our business in South Africa is diverse and has a large component that serves the insurance industry. In Hong Kong, where we saw the impact of COVID the earliest, has stabilized at lower revenue run rate. We're encouraged to see that leveling off as the economy is slowly reopened. Our business has benefited from an increased focus on portfolio and risk management tools, fraud mitigation solutions, and should be further aided over time by the resumption of our direct to consumer channel in early April. Rounding out APAC, the Philippines is facing significant headwinds, much like India, with a very aggressive lockdown program that has shuttered much of the economy. As we contemplate a recovery, we expect developed markets to have a faster rebound as these governments tend to have more capability and capacity to implement stimulus to drive economic growth. In light of the current situation, our new reality is that many of our markets are likely to face extended periods of lockdown or other social distancing. I will walk you through our new downturn playbook that proactively addresses the issues our customers face through a three-phased approach. This is grounded in our understanding of these markets and our experience from past crises. Phase one is focused on understanding and serving our customers' needs in the midst of the COVID crisis through our close partnership and engagement. We've increased our customer engagement to accurately identify and segment needs that drive tangible, easy to implement packages to support them. Given the immediacy of the needs, the packages use mostly existing capabilities assembled to directly address the current circumstances. Examples of this include advanced portfolio management that leverages our newest data assets, driver's gross solutions that reduce cost and offer broader data to insurers, e-commerce fraud mitigation tools using both IOvation and IDVision, and income and spending reviews in some of our global markets. In the spirit, along with others in the industry, we have advocated for a continuation of clear and effective reporting of data so that customers and consumers remain confident in the data and are able to make well-informed decisions in the future. We've also come together as an industry to uniformly increase consumers access to their credit reports at no charge from once per year to once per week during the COVID crisis. Phase two of this program is focused on helping customers emerge from the COVID crisis even as the timing will vary between markets and industries. In this phase, we will build new products to address specific industry and geographic needs. Some examples may include new models that incorporate post-COVID trended and alternative data attributes, integrated fraud and digital marketing solutions, and new underwriting frameworks. In both phases, we'll leverage our latest tools to support customers. For example, We can leverage our unique innovation lab to help customers work through their own specific projects using our data and our industry experts. In fact, we've already conducted virtual innovation labs with excellent customer feedback. In the past, those occurred at our headquarters. These activities will all be coordinated on a global level so that we best leverage new practices and approaches throughout the company. In phase three, we will address whatever new normal emerges from this crisis, and we will ensure that our long-term planning reflects the new challenges and opportunities. While we believe that our long-term strategy is more relevant than ever, we will revisit it based on what we learn from phases one and two of this downturn playbook. Our comprehensive approach addresses both The near-term reality that we and our customers face while keeping TransUnion well positioned for future success. The next element of our downturn playbook involves managing our cost structure to adapt to both the changing macro landscape and the impact it's having on our business. Like most companies, our travel and entertainment expenses will drop substantially as we shelter in place. We're also maintaining our headcount, We have some additional opportunities to address costs, and Todd will talk to you about these in a moment. We have quickly and prudently taken appropriate cost actions that are helping mitigate the impact on our margin, even as revenues expected to decline sharply in the second quarter. Just as our downturn playbook addresses our cost structure, we've also prioritized our investments to focus on innovation, operational efficiencies, and our accelerated technology investment, which we renamed Project Rise. And we discussed in great detail during our last earnings call. We will continue to invest appropriately under the circumstances to support our customers as they deal with unprecedented market challenges while also taking steps to bolster our long term growth prospects. The takeaway from these comments is that we are proactively working with customers and consumers to help them manage through the current environment while we manage our costs and prioritize our investments. This gives us confidence that we will successfully navigate the current situation and the company will be well positioned when markets rebound. Our strategy and portfolio positioning remain intact, allowing us to continue to deliver industry-leading long-term top and bottom line growth. More specifically, we will still benefit from being innovators with attractive market positions across key geographies and strategic verticals. We will still leverage our enterprise growth playbook to engage with clients to offer value-added solutions. We will still possess the same powerful and proprietary and third-party data assets. And we will still operate an industry-leading technology platform that is only going to get stronger through Project RISE. TransUnion's culture will remain the same, focused on customers with individual accountability and performance. and we will continue to practice sound financial management and be good stewards of shareholder capital. That point marks a good transition for me to turn the call over to Todd, who will talk more about our strong balance sheet and cash flow position, our first quarter performance and our scenario-based view of the second quarter. Over to you, Todd.