TransUnion

Good morning and welcome to TransUnion's 2020 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. If you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, you'll be the opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the conference over to Mr. Aaron Hoffman, Vice President, 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 and 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 their 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 statements. Now with that, let me turn the time over to Chris.

Thanks, Aaron. 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. At TransUnion, we continue to prioritize the health and safety of our associates, our customers, and the wider communities in which we operate. Globally, almost every one of our 8,000 employees continues to work from home. A select number of associates have continued to work on site to ensure our technology infrastructure operates uninterrupted. I want to thank all of them for their dedication and commitment. Other than these critical employees, we see no need to rush back into our offices as our associates have demonstrated the flexibility to work remotely and run our business with virtually no interruption. In fact, during the third quarter, we conducted a company-wide survey of our associates and confirmed that they largely prefer to remain remote at this time and can work at very high levels while doing so. Now on our last call, I talked about my personal commitment to making TransUnion a more diverse and inclusive company. I want to give you an update on our progress. First, we've appointed Tidra Bernard as our first ever head of talent and diversity. In this role, Tidra's responsibilities include talent acquisition, employment branding, onboarding, associate and manager training, leadership development, career development, employee engagement, and employer relations. By aligning all of these functions under TDRS leadership, we'll ensure a diversity and inclusion lens is brought to all of our human capital management decisions. Secondly, we launched a task force, which we call Total Impact, which combines all our efforts to support racial equity and social justice and to connect these efforts through and for our associates, our culture, and our operating model. This task force will amplify our consumer advocacy and outreach by offering tools and support aimed at increasing access to economic opportunity. It will examine the role our data and products play in the financial ecosystem in order to promote greater financial inclusion. The task force has already made progress to ensure that customers use our data responsibly and in line with our mission. promote equal access to economic and other opportunities. And related to this work, we continue to engage with US regulators about how we can promote greater financial inclusion and participation. Finally, we remain committed to training our top leaders to increase their understanding and awareness of racial inequities. During the quarter, they participated in a session on getting comfortable talking about race and equity. We then asked all managers across the globe to attend a three-part series to learn more about race, bias, and how they build more inclusive teams. Nearly 2,000 managers have participated in these important sessions. It's important to note that these actions represent only a starting point, and we remain committed to making meaningful long-term changes at TransUnion. And we've also given our associates November 3rd off. to help them exercise their right to vote. Regardless of party affiliation and political views, we encourage our associates to get out and vote. Now, I'd like to lay out the agenda for this morning's call. First, I'll provide you with the details about our performance in the third quarter and the trends and dynamics that underpinned our ability to achieve our upside case outlook. I'll also discuss the current volume trends across our primary verticals and markets and how we continue to support our customers and consumers during this crisis. You will hear a consistent story of adapting our go-to-market approach, our product offerings and solutions to address the current market conditions. Then, I'll provide an update on the progress we've made with our global solutions, global operations and Project RISE. I'll also discuss our recent media acquisitions and how together they formed the foundation of another attractive vertical. Finally, I'll turn the time over to Todd to discuss our third quarter financial results in more detail. We've decided to reinstate formal guidance for the fourth quarter and the full year, albeit with a wider than normal range of expectations, and he'll provide those details as well. Despite our restored comfort in providing guidance, I want to stress that we continue to monitor the state of the pandemic and the macro environment across the U.S. and around the world in the markets in which we compete. We recognize that there is ongoing risk to the economic reopening based on the severity of the pandemic and also the degree of stimulus being provided to consumers in each of those markets. Shifting to financial services, let's look at the key trends in that market. I want to start by reviewing the online transaction volumes for financial services in the U.S., which is our largest vertical market. Volumes improved during the quarter with ongoing strength in mortgage and auto, with improvement in consumer lending, but offset by a very challenging comparison in our car business. I'll talk a little bit more about each of these on the next slide. Before I do, I want to emphasize the impact of our sales effectiveness programs and innovation. Using our U.S. Financial Services vertical as an example, our new sales pipeline has improved this year by 8%, reflecting robust sales activity and an engaged customer base. Our win rate has increased by 5 percentage points year over year, and this has led to an impressive 43% gain in win dollars compared to the same period in 2019. Now taken together, this reflects greater sales efficiency, a focused strategy, a larger average win sizes and of course strong execution across the board. We transitioned our teams to virtual selling supported by investments in a seller training program, new collaboration technologies, an increased improvement in our digital content, and the deployment of internal experts to operate more effectively in the current environment. And throughout my remarks, you'll hear about products across verticals and geographies that are meeting the needs of our customers in these current market conditions. Now let's spend some time on the key lending markets that comprise the vertical. So continuing with FS, I want to start by talking with the health of the U.S. consumer overall. Over the past six months, consumer balance sheets improved, and that should support the long-term health of the economy and our business. In fact, since the onset of COVID, bank deposits reached record levels and the personal savings rate doubled. At the same time, Delinquencies generally remain flat or even down for some lending products. A number of factors contributed to this. The significant government stimulus provided additional liquidity to consumers. At the same time, lender forbearance programs alleviated the need for many consumers to pay their mortgages, allowing them to stay current on other debts to pay down existing debts or simply save more money. And finally, The mortgage refinancing boom allows consumers to save hundreds of dollars each month, which again, they can save or use to stay current on their obligations. This demonstrates the importance of government support and the potential impact on consumers as it abates. So with that as a backdrop, let's turn to mortgage. Both refinancing and home purchase activity remain very strong throughout the third quarter, on the strength of our historically low interest rates. The cyclical strength in mortgage certainly helped our results, but we remain cognizant that the cycle will run its course in 2021 and create some challenging comparisons. The current MBA outlook calls for mortgage volumes to decline 23% next year, while Fannie Mae forecasts a 38% decline. In either case, We would expect the preponderance of the impact to occur later in the year. Now, auto financing held up well in the quarter as low rates and attractive financing offers stimulated shopping activity in both the new and the used car markets. As our customers shifted to more digital acquisition channels, we've won new business for our pre-qualification tools. Looking ahead, tight inventory levels of both new and used cars resulted in constrained industry volumes. Additional market growth will likely require increases in production as well as used vehicle supply from trade-in and auctions to meet the current heightened demand. And the credit card market improved slowly from the dramatic declines we saw between late March through July. Notably, insurers began to test marketing campaigns to determine how best to reach and market to consumers in the current environment. While marketing volumes remain down year over year, they have shown positive trends and we believe they will continue to improve. For our business, as noted on this chart, we're comparing against our participation in a highly successful launch of a new credit card in the third quarter of last year. Excluding that impact, our results would better reflect the underlying market. Finally, consumer lending continues continue to recover during the quarter as larger FinTech lenders slowly return to customer acquisition fueled by fallen levels of investor commitment to funding loans. In particular, we continue to see significant growth with point-of-sale lenders, both from their own success as well as share gains. We expect this subset of the FinTech space to benefit from a very strong holiday season with a likely dramatic increase in online shopping. Across our end markets, we've seen two themes emerge with lenders. The first relates to their ability to adapt their models to understand the impact of the pandemic on consumers, leading to new sales of credit vision acute relief attributes to help them better assess their current portfolios. And we're seeing meaningful traction in acquiring new users of both credit vision and credit vision link as a means to improve their models for future customer acquisition. The second trend builds on the accelerated transition to digital commerce, resulting in a heightened interest in online fraud mitigation solutions like Iovation. And this spurred a very substantial conversation around digital marketing, a topic I'm going to discuss a bit more later. Now onto our emerging verticals. Across most of our emerging verticals, we saw trends improve during the third quarter. Beginning with healthcare, our business continues to face headwinds as the pandemic has an idiosyncratic effect on our healthcare system. Performance played out largely as we expected during the quarter. Front-end patient volumes recovered as providers saw increases that continue to improve the trend toward pre-COVID levels. However, ongoing declines for inpatient care, particularly for elective procedures, as patients remain cautious about returning to healthcare facilities, partially offset the improvement in outpatient volumes. Similarly, emergency department visits remain depressed. The impact of reduced volumes negatively impact the back end of the business, resulting in a reduced number of potential coverage discovery opportunities. This all comes against the backdrop of increased financial pressure on most healthcare systems. As our business helps providers recover cash, we remain somewhat insulated from the full impact of weaker volumes in the healthcare system. And as we look forward, we see no structural change to this market such that we won't return to a more steady growth profile post-pandemic. Now shifting to insurance, This vertical return to modest growth in the third quarter. As industry volume stabilized, we continued to realize success with innovative products like our National Driving Record Solution, which combines driver's risk as a pre-screen for the presence of a motor vehicle violation with our ability to resell state-issued motor vehicle reports. This creates efficiencies for auto insurers. We also continue to benefit from diversification into commercial auto, life, and other aspects of property and casualty insurance. And our public sector market grew again as most government agencies continue to operate business as usual, providing necessary support for their constituents. Additionally, we gained some business related to the COVID pandemic in fraud mitigation and identification for individuals requesting support from governments. We also delivered growth in our screening business, which includes both tenant and employment screening. We saw solid performance in tenant screening as leasing companies remained active and our Smart Move screening product made additional inroads in the marketplace. Employment screening remains depressed as it mirrors employment trends. We offset some of the negative impact with a successful campaign focused on small business acquisitions which we provided our shareable for hires tool free for an introductory period. We're now seeing payoff as many new users have converted to the paid product. And the telco market continues to improve with the reopening of retail stores and as consumers resume a more normal purchasing cadence. Finally, while we believe collections is counter cyclical and will be over time, We don't expect to see any significant uptick until at least the beginning of 2021, as forbearance programs and state-imposed moratoriums on collections continue to delay activity. As I mentioned earlier, government subsidies delay some collections activities as they enable consumers to pay off debts or stay current, leading to lower delinquencies and defaults. Now turning to consumer interactive. We delivered solid revenue growth in this segment as consumers and customers 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 our partners. In the quarter, we saw direct channel revenue accelerate behind continued successful marketing to consumers focused on their credit health. On the other hand, Some of our indirect partners have curtailed their marketing programs, resulting in a decline in subscribers. This caused a slightly larger decline in this portion of our business compared to the second quarter, and we expect it to persist in future quarters. At the same time though, we continue to engage with potential indirect partners about new long-term opportunities. Now, moving on to our international segment, Let's look at revenue trends which illustrate the ongoing recovery across all reported regions and countries. Generally, successful reopenings have allowed economies to restart, leading to increased overall economic activity. I would note that the degree of reopening varies greatly across our markets. For example, Brazil has never shut down, while the Philippines recently started to emerge from a second complete closure. India took a more phased approach, and the entire country only recently fully reopened. And in the UK, we see the potential for isolated closures as COVID cases have spiked in certain areas. And of course, we continue to monitor all these situations closely. Now, let's spend a few minutes on each region where you'll see a common theme of partnering with our customers to help them navigate the pandemic, often by leveraging our innovation in credit vision, credit view, ID vision and other of our solutions. In the UK thus far, government stimulus helped consumers manage through the crisis. However, the salary protection provided by the government will diminish from 80% coverage to about 67% coverage and only for areas with local lockdown at the end of October, shifting the burden to employers who may reduce their workforces. And during the fourth quarter, the payment holidays for mortgage and other loans will wind down. These actions may impact the already soft lending market. For our business, we continue to see an exaggerated weakness in the alternative lending market where we hold sizable market share. We also divested a small business earlier in the year which negatively impacted our growth rate. Todd will provide more information about this later. Successful COVID mitigation business helped offset some of the weakness in the market. That included business with the UK government, the rollout of a TruVizion transitional risk index to help lenders identify consumers who pose a risk of default in the future, as well as a number of wins for credit view, including with NatWest, one of the largest lenders in the UK. Our fraud mitigation business continues to deliver solid results, and we've seen a recovery in our online gaming and gambling vertical as sports resumed around the world. Our Canadian business grew in the third quarter despite generally weak lending markets. At this time, various aspects of government stimulus are expected to continue. Our good performance reflects the meaningful portfolio diversification that we've intentionally developed. We saw a double-digit growth in insurance and direct-to-consumer as well as a strong performance in the nascent fintech markets. At the same time, we successfully introduced the Canadian version of Credit Vision Acute Relief and a Vulnerability Index, both to assist lenders in better understanding the state of their consumers. In India, the country slowly reopened and our volumes have mirrored that. We continue to benefit from our diverse product portfolio as well as specific programs to address critical pandemic-driven issues. For instance, we supported the Indian government's efforts to provide stimulus to small businesses by sizing the market and helping them identify who should receive the support. The Indian government also turned to us to help understand how individual lenders handled forbearance arrangements. We successfully launched a simplified version of our scores and algorithms using credit vision for fintech lenders, who in India tend to provide small ticket, very short duration loans. and we continue to deliver valuable insights to our customers. We recently began a weekly thought leadership session called TGIF or TransUnion's Great Insights Friday where we can bring our customers together virtually and help them work through the impacts of the pandemic. Now in Latin America, we serve a variety of markets and most improved from the second quarter. Chile performed relatively well on the strength of its modern, highly digitized economy. Colombia also delivered improved performance as our customers increased their digital product consumption to meet consumer needs during the shutdown. Other markets saw more modest improvement, reflecting the limited level of government stimulus in some markets. And in Hong Kong, the market is stabilized. Recently, we won new business for our fraud mitigation tools related to digital onboarding. We saw improvement in our relaunched direct-to-consumer portal, as well as some new opportunities for our credit view platform. Rounding out APAC, the Philippines continue to face significant headwinds as the country just recently began to reopen from a second complete shutdown. We expect a slow recovery there. and the South African economy remains challenged with GDP expected to climb 9% and consumers and small businesses strained despite the influx of nearly 3 billion of government stimulus. We generated momentum in our business behind credit vision tools for portfolio review, as well as ID vision and seamless onboarding to support our customers transition to more digital consumption. Even as our businesses maintained a sharp focus on serving our customers, and delivering good results in the quarter, we also continue to invest for our future with differentiated programs and approaches to sustain our industry leadership. On our last earnings call, I detailed our global operations and global solutions organizations as well as our investment in Project RISE. I'll update each of those areas today and I'll also highlight our investments to build out our media vertical. Now moving to global operations, This area allows us to expand our core capabilities through centralization, optimizing processes, and automating them, leading to a better customer experience as well as cost savings that we will reinvest in new growth projects. I wanted to highlight our progress in this area over the past three months. First, in global procurement, we've renegotiated a number of our largest supplier agreements to better focus our spend and leverage that to achieve more favorable terms. We've already realized some initial savings and cost avoidance and I expect that to increase over time. Our negotiations also included adding new features or services to facilitate growth across the enterprise. Second, we intend to replicate the success of our Global Capability Center in Chennai, India. which was recently named one of the 50 best workplaces for women in India by the Great Place to Work Institute. While we continue to add seats in Chennai, by the end of this year we will open a second location in India in Pune. This location will focus primarily on Project RISE and other significant technology initiatives. Finally, we continue to make progress on reengineering the customer experience through implementing new tools that allow us to better understand our customers and to make training easier to do business with. We remain confident that global operations will deliver significant efficiency and cost benefits that we will both reinvest and return to shareholders while also furthering our market leadership through improved customer engagement. Now let me update you on the progress in global solutions, which allows us to strategically develop and diffuse Innovative products across the more than 30 geographies in which we compete. In recent months, we made significant progress on two partnerships to develop a more comprehensive view of consumers that we can leverage to help our customers make smarter decisions about customer acquisition and risk management. First, we partnered with MX. Let me say that again. It's M like Mike and X like Xerox. to avoid any confusion with the large card issuer. We partnered with MX to incorporate consumer-contributed data into our solutions. MX aggregates financial information through customer permission connectivity with banks and credit unions and fintech innovators on more than 30 million consumers. Through this partnership in both the US and Canada, Trained Union will enable consumers to enrich their credit profiles help lenders make better, more informed decisions. And ultimately, consumers will benefit from access to better products and services. For lenders, the near-term use cases we will explore include income verification and the creation of new account-derived attributes that will offer visibility into a consumer's ability to pay. In the spirit of leveraging our global capabilities, The solutions team already began coordinating with our UK business, where we provide the industry-leading affordability suite of solutions and a dusting-class open banking platform. Both of these capabilities lend themselves to the work with MX and our entrance into consumer permission data. And we've identified similar solutions in other international markets, allowing us to coalesce around this opportunity on a global basis. and we've made a minor equity investment and formed a commercial partnership agreement with Finlocker which allows consumers to collect and permission their financial information needed to secure a mortgage among other loan types. Consumers maintain control of their information throughout the process and can utilize educational resources to help prepare them for the mortgage application process as well as take advantage of a personalized financial health dashboard, something that first-time homebuyers find appealing. Importantly, Finlocker utilizes banking industry multi-layer security like data encryption and application protections to safeguard consumer information. Finlocker also helps lenders better service their existing customers by finding the right products to offer based on the individual's unique needs while supporting their financial journey to help drive a stronger relationship and reduce the lender's costs. Lenders can also leverage Finlocker for lead nurturing and conversion by gaining deeper insights into consumers' actions and behaviors, making smarter risk decisions and uncovering new opportunities to drive growth. Through this partnership, we will offer our marketing and portfolio review solutions to mortgage originators and services, providing them with an end-to-end offering. We will also have distribution rights to sell Finlocker and we'll explore expanding beyond the mortgage vertical. Now, both of these partnerships provide valuable new avenues for growth. And by thoughtfully putting together these pieces, we position ourselves to begin to offer a broader view of consumers, helping our customers make better decisions through superior insights. At the same time, we can help consumers experience a more seamless credit journey. We're still in the early stages of this strategy, but you can see a clear and attractive path in front of us as we fully anticipate identifying additional opportunities for these technologies and data in the future. Now to the media vertical. As we've explained in the past, our vertical strategy provides us with a valuable source of sustained differentiated growth. In recent years, we've built out our capabilities organically and through acquisitions to fuel public sector, telecommunications, and our screening verticals, for example. Over a longer-term horizon, we did the same thing to build our nearly $200 million healthcare vertical and our similarly-sized insurance vertical. Most recently, we've applied with Playbook to build a media vertical focused primarily on digital marketing-related solutions. We recognized that we had foundational pieces necessary to compete successfully in audience segmentation and identity resolution, two growing categories within the larger digital marketing ecosystem. Most notably, we possess a large array of data and world-class data linking and matching logic. As such, we identified the intersection of the media industry and Digital Marketing as a market for our expansion. We moved purposely to acquire the capabilities needed to offer a robust portfolio of solutions over these past 18 months that can enable people-based and identity-enabled marketing. The first acquisition, Crew Signal, brought a modern cloud-based platform that marketers and media companies use to build and distribute precisely defined audience segments. Users can access this platform directly or through an integrated API within other technology platforms. The second acquisition, Signal, which we completed earlier this summer, added two key offerings. First, it brought products that allow us to work with our clients to structure and activate their own audience intelligence. Second, it provided a platform for real-time data collection and distribution to connected and complementary advertising and marketing technologies. And earlier this month, we acquired TruOptic to round out our market position. TruOptic deepens our understanding of connected consumers via what they call a household identity graph, essentially a virtual map of the streaming video and audio devices within a home. This understanding of the connected home adds yet another dimension to our ability to match an individual to a broad array of data as well as persistent digital identifiers. TrueObject, with their focus on understanding the connected home and providing solutions for connected TV as well as streaming audio, has gotten ahead of the curve related to the adoption of streaming media services and the future of TV advertising investments. Marketers turn to TrueOptic to select the homes they want to target for either a streaming video or a streaming audio campaign. The streaming media providers leverage TrueOptic to enable the precision targeting that marketers expect. Marrying all of the capabilities from these three acquisitions gives us an industry-leading position within a clearly defined part of the media market, and we believe we can now deliver meaningful, sustained growth. Additionally, to fully leverage this opportunity, we will port these digitally focused marketing capabilities across the U.S. markets and vertical portfolio. In fact, in just a few weeks since we announced the acquisition, we have already engaged with a number of large financial institutions about using TruOptic. And over time, we will also identify how best to extend these capabilities outside of the U.S. And finally, I'd like to provide an update on Project RISE. I'll start with a broad point, namely that effectively all roads in TransUnion lead back to technology as a core enabler. A lot of the work that we're doing in operations relies on technology. In the fourth quarter, we will migrate our consumer call center to the cloud, resulting in a better consumer experience and greater efficiency. The partnership I described in solutions benefit from the modern technology stack and data architecture that we've nurtured over the past five years, and future progress relies on the evolved technology foundation that Project RISE will deliver. And the media vertical and digital solutions build out depends on the cloud capabilities we're developing. Beyond that, we remain on track with our timeline, our anticipated investment, and effectiveness targets. In fact, in the fourth quarter, our first proof of concept applications go live using the first set of RISE capabilities we developed as planned. We continue to see clear operational benefits in security, reliability, performance, and efficiency as we progress through this transition to the cloud. As I wrap up my review of the business, I will reiterate the solid improvements we've seen in trends across our market. Aided by outstanding sales and product development efforts. And at the same time, we continue to aggressively invest to maintain our industry leadership and our attractive growth profile. And with that, I'll pass it over to our CFO, Todd.