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spk06: Good morning, and welcome to the TransUnion 4th Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key 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. Please note this event is being recorded. I would now like to turn the conference over to Erin Hoffman, Senior Vice President of President of Investor Relations. Please go ahead.
spk03: Good morning, everyone, and thank you for joining us today. I hope that all of you remain safe and healthy. On the call today, we have Chris Cartwright, President and Chief Executive Officer, and Todd Sello, 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 the corresponding conciliations 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 uncertainty. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, in 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 out of the way, let me now turn the time over to Chris.
spk09: Thank you, Aaron. And let me add my welcome and best wishes that you and your families are healthy and doing well in the new year. To start, I'd like to lay out the agenda for this morning's call. First, I'll highlight our ongoing commitment to critical sustainability issues. Then I'll review our strong fourth quarter performance and the underlying market trends that position us for continued attractive growth in 2022. I'll also provide an update on the very positive performance of our Sontic and NuStar acquisitions of late last year, as well as details on the exciting deal for Verisk's financial services division, which we announced this morning. And then I'll cover our progress in executing on our global technology platform initiative. Finally, I'll pass the baton to Todd to discuss our fourth quarter results in detail, along with the first quarter, and full year guidance for 2022. So across StrangeUnion in 2021, it was a productive year as we focused on delivering to our customers while also making bold and impactful strategic moves. Across the company, we adjusted to a new normal as the pandemic persisted and we felt the effects of the Omicron surge. Despite this challenge, TU associates have remained completely engaged and connected across the enterprise. I want to thank them for their perseverance and commitment. Now, during the year, we also continue to make important progress around diversity, equity, and inclusion, as well as on our environmental impact. Our DE&I journey, we continue to strengthen our company culture, evolving intentionally so all our associates feel informed and empowered to succeed. our Racial Equity Task Force, and CEO Action for Racial Equity Fellow, advanced equity interests in company policies, and our recruiting, hiring, and development protocols. Our associates engaged in learning and dialogue on inclusion and understanding, and we supported numerous racial justice organizations in an innovative way. We also strengthened our commitment to financial inclusion with an explicit emphasis in our corporate strategy and goals. And we recently earned a perfect score from the Human Rights Campaign Foundation's 2022 Corporate Equality Index, a leading national benchmarking tool on corporate policies, practices, and benefits pertaining to LGBTQ employees. I'm proud that our inclusive and welcoming culture has been recognized by such a prestigious organization. We've driven all this change, and yet our journey is not complete. We continue to push to reach our gender parity goals globally and our representation goals, and to foster even greater equity and inclusion from our associates. Finally, on our environmental stewardship, we publicly announced our commitment to achieve net zero Scope 1 and 2 emissions by 2025 and a 30% reduction in Scope 3 emissions related to leased facilities by 2030. You can read about these topics and many others in detail in our next sustainability and diversity report, which we expect to publish this spring. So let me start with the fourth quarter. We posted very strong results with broad-based growth across our businesses as our regions and end-user markets benefited from continued positive momentum as well as new wins and successful innovation. We continue to drive above-market performance by executing our growth playbook that focuses on repeatable, differentiated go-to-market approaches, industry-leading innovation, and complementary expansion into adjacent markets. In U.S. markets, we delivered another quarter of double-digit organic growth, with strong performance in financial services, insurance, media, and tenant and employment screening. Internationally, we saw very strong results in India and Latin America, where we hold leadership positions in markets with strong growth trends. Todd will provide more details about the performance of our businesses shortly. Now, I want to spend a minute on the market backdrop that has fueled 2021 results and sets the stage for our strong growth in 2022 and organic revenue guidance. On an organic basis, we expect to grow 5.5% to 7.5% in total. Those growth rates increase to 9% to 11%. excluding the declining mortgage segment. Although the mortgage market began to decline last year from its record levels, most of our other markets have bounced back strongly from the depth of the COVID crisis in 2020. Overall, our markets have proven resilient and continued their return to more typical levels. And while the surge in COVID infections temporarily inhibited a full recovery, Our markets and our customers have become effective at operating under pandemic conditions, enabled in part by their ongoing digital transformation. In most markets, we saw and continue to see robust consumer spending. In the U.S., consumer balance sheets have strengthened during the pandemic due to government benefits, repayment moratoriums, and restricted consumer mobility. Internationally, we see similar trends along with meaningful pent-up consumer demand. Our markets also benefited from renewed marketing activity as clients resume their efforts to grow their businesses. We've seen historically strong customer acquisition programs from consumer lenders and credit card issuers in the U.S., Canada, and the U.K., and we expect this broad strength to continue into 2022. Also, and importantly, consumers remain well positioned to fully re-engage economically. In recent earnings commentary, some of the largest U.S. financial institutions have referenced the health of U.S. consumers and forecast robust lending growth in 2022. Now, as we consider our long-term growth prospects, we believe that the increasing digitization of economic activity provides opportunities to serve customer needs in marketing and fraud mitigation. This premise motivated our acquisitions of NuStar and Sontic, and our investments in Minivo and iDefi. Most recently, we've invested in India-based online PFB Loans, an online lending platform that enables borrowers, primarily micro, small, and medium enterprises and individuals, to apply for loans online and receive in-principle approval in under one hour. So these strategic moves, in particular NuSTAR and SONTIC, bolster our portfolio of solutions to improve identity verification and targeting precision to enable safe, tailored online consumer experiences. Now I'd like to discuss our intent to acquire Verisk Financial Services Division from Verisk. This is a well-known collection of assets which can enhance our positions in financial services, analytics, fraud, and marketing. The division generated $143 million in revenue in 2021, and 65% of which came from Argus, the primary business in the portfolio, with which we've enjoyed a longstanding strategic partnership. Argus provides unique and authoritative data on credit and debit card spending behavior, as well as for demand deposit accounts, or DDAs. This data complements our credit card vertical and analytics capabilities generally. In the US, Argus covers 90% of all credit cards and 45% of all DDAs through contributions from a broad consortium of banks and card issuers. It also has coverage of large portions of card activity in the UK, Canada, and Australia. Argus offers solutions to help these consortium members increase financial inclusion, acquire new accounts, make risk decisions, mitigate fraud, and deliver relevant consumer experiences by leveraging their unique data and the associated behavioral insights. Argus is a powerful data asset that fits with TransUnion's expansive set of alternative data and serves our core financial services customers. We will also take the necessary time to fully understand each of the businesses within this portfolio and their potential fit with existing trade union assets. With that said, we see a clear path to deliver an enhanced value proposition to our customers, resulting in improved revenue growth and margin performance, which I'll detail in a minute. We intend to pursue four primary growth opportunities that will benefit consortium members. We will better utilize the full wallet view of the consumer that Argus currently offers by leveraging the analytics derived from the Argus data and combining that with our robust market insights. The full wallet view provides insight into consumer behavior from an initial transaction or deposit through card usage and loan payment. This is critical for financial services customers to make better risk, fraud, and marketing decisions. Second, We will modernize the delivery of Argus' data and insights by leveraging our technology capability. Currently, customers receive static reports from Argus that don't allow them to visualize, augment, model, or manage the data. We plan to deliver a highly interactive product using the Prama platform, which is already used by many lenders as a visualization and analytics tool. Third, we see the opportunity to expand Argus' data coverage and addressable market. We can leverage our relationships with banks in the US to grow the deposit database well beyond the current 45% penetration and increase benchmarking value for consortium participants. And although Argus data is anonymized, we believe we can derive valuable signal to identify lending fraud to make superior risk decisions and to better target consumers for consortium participants. These behavioral insights will improve the predictive power of solutions such as our credit vision and credit vision link products, which in turn will create more value and stickiness for those solutions with our banking customers. Now let me wrap up with the deal terms in a discussion of the financial impact of executing these growth strategies. The purchase price for the division is $515 million, which is a 12.5 times adjusted EBITDA, an attractive price for such a unique data asset. We expect the transaction to close in the second quarter of this year. Now, as I noted, the business had revenue of $143 million in 21, and while revenues have declined in recent years, We believe that TransUnion brings the financial market focus, the data and analytic capabilities, the sales resources, and a host of complimentary assets to reverse this decline and resume growth. And as we integrate Argus in 2022, we anticipate growth in the low single digits. In 2023, we expect growth to improve to the high single digits and then reach the low double-digit range by 2024. In 2021, the business delivered roughly 41 million of adjusted EBITDA, or about a 29% margin. Now, for those of you who follow Verisk, you'll notice that the adjusted EBITDA figure is higher than in Verisk's previous public disclosures. This is because Verisk allocates certain corporate costs to the financial services division that TransUnion will not require. Therefore, the portfolio will generate more profit than previously disclosed. And even as we increase investment in these businesses, we'll improve the margin over the next four years through revenue growth and cost savings actions. We expect to achieve 40% margins by 2026, further reducing our acquisition multiple. And finally, as we're able to fund this transaction with cash, it will be immediately accretive in 2022 after we close. Data assets of the quality of Argus are rare, and so we're pleased to add it to our portfolio and to strengthen our core business for the long run. Now let me turn to our Sontic acquisition, which leverages a cloud-based technology infrastructure to provide solutions to help consumers and businesses protect against identity theft and cybercrime, including identity monitoring, restoration, and breach response solutions. The acquisition creates an entry point into the fast-growing ID protection market that has been driven by rapid digitization and the evolution of online commerce. In this environment, consumers have a heightened awareness and concern over the risks of identity theft. Santec allows us to access a considerably larger part of this market, fueling long-term growth. Santec also helps us transition from a credit education and monitoring provider to a fuller provider of sophisticated identity protection, augmenting both our direct and indirect-to-consumer businesses. It provides us access to new attractive end markets, like employee benefits, while expanding our position in current markets, such as insurance. And Sontic provides incremental capabilities, including dark web monitoring, transaction and child monitoring, and proprietary capabilities for breach risk assessment. Now we closed this acquisition on December 1st, and our team has begun a smooth integration. We have transitioned key Sontic employees into senior leadership positions to ensure the continuity and retention of their valuable market and product knowledge. This has also allowed us to quickly bring together both sales and product development teams. We believe this influx of talent and innovation capabilities will accelerate the long-term revenue growth of our consumer interactive business. And finally, on a pro forma basis in 2021, Sontag revenue was approximately 87 million, an increase of 18% compared to 2020. with an adjusted EBITDA margin of 35%, but it would have been about 40% absent one-time deal-related expenses. And going forward, we expect the business to grow low double digits at an approximately 40% margin in 2022 on the strength of the underlying digital protection market and the benefits of the combination with TransUnion Solutions. Now turning to NuSTAR, this acquisition substantially strengthens our identity resolution capabilities for a variety of online applications. NuSTAR provides real-time identity resolution through its state-of-the-art OneID platform, powering solutions that currently serve three attractive markets, marketing, fraud mitigation, and communications. As we bring these capabilities together within TransUnion, We bolster our already strong identity resolution capabilities with accurate and authoritative PII, generating incremental scale and scope in the three complementary markets that NuSTAR serves. As we expand in these high-growth non-credit markets, we further diversify our portfolio, which contributes to our ability to consistently outperform our underlying markets. We close the acquisition on December 1st, and began the integration immediately while also giving the NuSTAR team space to conclude a very strong year, which they did. For 2021, the pro forma organic revenue was 585 million, which is up 8% and with double digit growth in the marketing business. This coincides with about 40% organic growth for TU's marketing solutions in 2021. Now, New Star's adjusted EBITDA margin was 21%, which is better than our expectations. In 2022, we expect the business to deliver another year of high single-digit organic revenue growth driven by strong performance in marketing and fraud. Approximately 90% of the New Star business is based on previous year bookings, which lends further confidence to our growth expectations. And along with the strong results, we have pulled forward some cost synergies. We now anticipate generating roughly 160 million in adjusted EBITDA in 2022, which would produce a 25% margin. Now, all of these financial metrics have come in stronger than our initial expectations when we announced the transaction in September, and it reinforces our confidence that the business can deliver low double-digit revenue growth beginning in 2023 and that margins can progress adjusted EBITDA margins to approximately 40% by 2026. In the short time we've owned the business, we found Neustar employees to be very engaged and enthusiastic about joining TransUnion. They too can see the opportunities created by the combination. We've also identified roles for the senior executives from NuSTAR, bringing clarity to both organizations and ensuring consistency as we go forward. Notably, we created a new functional area within TU, global data and analytics, that will be headed by Venkat Achanta, the former chief data and chief technology officer of NuSTAR. Now, Venkat was the principal executive driving the development of NuSTAR's OneID platform. And this new organization will bring further focus to the data and analytics growth enabling TransUnion. And finally, NuSTAR's CEO, Charlie Gattiner, joined our board in January. Charlie has decade-long experience in leading information services and technology companies, driving innovation and scaling operations. And together with his experience at NuSTAR, this makes him a tremendous addition to our board. Now, all of that presents a good segue to an update on the development of our global technology platform, or Project Rise. Project Rise is a cloud-based global engineering effort that makes Transgenium's technology more efficient, scalable, secure, and effective by streamlining processes and increasing automation. Our ongoing investment enables us to further streamline our application ecosystem and transition to a more modern API-based and services-oriented software architecture. As part of this investment, we've assessed and rationalized our applications globally to reduce sprawl with a plan to ultimately shift over 50% of these applications to the public cloud. We recently received approval to operate a credit bureau in Brazil and have deployed on our AWS technology a new cloud-based credit bureau platform to establish our position in that attractive market. Now, this platform will enable us to deploy existing and enhanced bureau services, including real-time streaming data ingestion and delivery in a flexible, scalable infrastructure. Additionally, we are layering policy as code. which is built into the provisioning of our AWS capacity. So as it comes online, it is fully loaded with the necessary compliance, model governance, and security, as well as our operational and development standards. And we're delivering these benefits through our continuous improvement and deployment pipeline. To date, 90% of our applications that are targeted for migration to the cloud are utilizing these infrastructure and policy code pipelines. These shifts allow us to reduce our data center footprint by as much as 60%, creating tremendous efficiencies. Now all of this work is being completed largely by our internal talent and our expertise, including the almost 1,500 associates globally that are now certified in cloud technologies. Building this internal capability will benefit us in the long run as we are creating a cloud-native workforce with an efficient way to build IP in a sustained manner. Which brings us to NuStar. NuStar has been on a similar path with Google Cloud for a consistent architecture, security, and governance, and improved operational efficiency. With the acquisition, we have a unique opportunity to enhance and to complement our technology by leveraging NuStar's OneID platform and their established cloud competence to support all of our non-credit-based solutions. Now, this will result in a scalable and a secure and an effective environment while being a cloud provider agnostic with an upskilled technology workforce. Given the expanded vision and the integration activities of the multiple acquisitions, along with the divestiture of our healthcare business, we're extending the timeline for this technology work through 2024. And to support our aspirations to become a best in class technology organization, we're increasing our planned investment to 215 million to 240 versus the original range of 150 to 175 million. Now since the start of our technology transformation, we have realized savings that we anticipated and we've opportunistically reinvested them in technology, in solutions, and expanded operations. As we continue to deliver on our technology transformation and to generate future savings, we'll either continue to reinvest them or we'll let them fall through to the bottom line. Now with that, let me turn the time over to Todd to walk you through our fourth quarter financial results in detail. and our first quarter and full year 22 guidance. Over to you, Todd.
spk04: Thanks, Chris. And let me add my welcome to everyone as well. As Chris pointed out, a lot happened in the fourth quarter, most notably completing the acquisitions of NuStar and Sontag while divesting our healthcare business. In order to make clear the impact of the sale of healthcare, we have recast results for TransUnion, U.S. markets as well as emerging verticals for the past three years, along with quarterly recasting for 2021. They are available as exhibits to the 8K we filed this morning and can be downloaded as an Excel file from the investor relations section of our website. We believe this will allow you to properly assess our ongoing business. In that vein, I want to start by bridging our fourth quarter 2021 results off a rebased fourth quarter 2020, which is laid out in detail on this slide. For the sake of simplicity, from this point on, all of the comparisons I discuss today will be against the fourth quarter or full year of 2020, unless noted otherwise. Fourth quarter consolidated revenue increased 21% on a reported and constant currency basis. New Star Incentic added about nine points to revenue, which means that organic constant currency growth was 12% and above our rebase guidance range. Excluding mortgage from both the fourth quarter of 2020 and 2021, our business grew 16% on an organic constant currency basis. Adjusted EBITDA increased 14% on a reported and constant currency basis. and within our rebase guidance. Our adjusted EBITDA margin was 35.8%, down 210 basis points compared with the year-ago quarter, driven primarily by the lower margins of NewSTAR. Excluding both the NewSTAR and SACONTIC acquisitions, the margin would have been 37.5%. Fourth quarter adjusted diluted earnings per share increased 13%, driven by adjusted EBITDA growth offset by higher interest expense. Again, we delivered within our rebase guidance. Let me now take you through our full year performance. Full year 2021 consolidated revenue increased 17% on a reported basis and 16% in constant currency. Four acquisitions, NuStar, Sontic, TrueOptic, and Signal, contributed three points of revenue growth, resulting in organic constant currency growth of 13%, which was above our rebase guidance range. Excluding mortgage, which was 11.5% of our total revenue in 2021, from both the full year 2020 and 2021, our business grew 15% on an organic constant currency basis. Adjusted EBITDA increased 21% on a reported and 20% on a constant currency basis, placing us within our rebased guidance range. Our adjusted EBITDA margin was 39.1%, up 140 basis points compared with the year ago, driven primarily by the strong revenue performance. The full year adjusted diluted earnings per share increased 29%, also within our rebased guidance range. This was largely driven by strong adjusted EBITDA growth and the benefit from reduced interest expense, debt prepayments, and lower LIBOR. Now, looking at the segment financial performance for the fourth quarter, U.S. markets revenue was up 25% compared to the year-ago quarter. The New Star acquisition had about 13 points of impact on revenue growth. Excluding mortgage, organic revenue grew 19%. Adjusted EBITDA for U.S. markets increased 18% on an as reported and 12% on an organic basis. Adjusted EBITDA margin declined by 205 basis points, largely because of the acquisition of New Star. Diving into the results by vertical, Please note that at this time, we have included NewSTAR's 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 12% and was up 27%, excluding mortgage. Looking at the individual end markets, consumer lending remains strong across fintechs, short-term, and point-of-sale lenders, particularly throughout the seasonally strong holiday period. We expect this market to continue its strong performance in 2022 as participants continued rebuilding their books buoyed by significant inflows of investor capital along with a steady stream of new entrants. We also had another strong quarter in our credit card business as issuers pursued incremental share of wallets. even with the strength we saw in 2021 we see significant runway for further growth in 2022 as issuers remain keenly focused on customer acquisition our auto business delivered solid growth in the quarter as new business wins and on-trend innovation particularly related to digital retailing helped offset well-publicized inventory issues for new and used cars nonetheless consumer demand remains high, and as such, we would expect a nice rebound when inventory issues are resolved, though there is no certainty in the market about when that might happen. And for mortgage, we remain at historically very high levels of activity, but saw declines throughout most of the year, including the fourth quarter, as interest rates have crept up, the available refinance pool has slowly been depleted, and new home prices remain high, while inventory remains low. Looking ahead to 2022 for the full year, assuming a continuation of these trends and expectations of further increases in interest rates, we expect our mortgage revenues to decline roughly 19%. Let me now turn to our emerging verticals, which grew 44% on a reported basis and 10% excluding the revenue associated with NuSTAR. We saw double digit growth in most of our major verticals. Public sector delivered another strong quarter driven by ongoing new business wins, particularly related to fraud mitigation. We were also named one of three companies able to participate in a significant Department of Labor blanket purchase agreement presenting another avenue for incremental growth in the years to come. Tenant employment screening remained strong, particularly in tenant screening where we have continued to win new business with large multifamily property management firms. As we look into 2022, we expect another good year driven by the rollout of recent wins across our customers' property portfolios. And our media vertical continues to deliver strong double-digit growth as we sign new accounts and expanded existing relationships with a large media agency and several very large media companies focused on video, and streaming platforms. The true audience marketplace, which was built from the true optic acquisition, has delivered substantial growth, which is expected to continue into 2022. Insurance also delivered double-digit growth on the strength of new business wins in 2020 and 2021, along with another year of significant growth in our new product portfolio, including the most significant traction we've ever seen in insurance for digital marketing on the strength of the true audience platform. Consumer Interactive, which includes Sontic, revenue increased 14% on a reported basis and 8% organically. Adjusted EBITDA was up 14%. We grew in both the direct and indirect channels again this quarter with particular strength in indirect driven by some one-time breach-related revenue. Chris already discussed the meaningful strategic impact of the SONSIC acquisition, which we expect to help drive strong, consistent revenue growth in the future. For my comments about international, all comparisons will be in constant currency. For the total segment, revenue grew 15% as we saw underlying market improvement in most of our regions. Adjusted EBITDA for international increased 20% as a result of the strong revenue growth. Let me dig into the specifics for each region. In the UK, revenue increased 12%. We continue to benefit from a meaningful one-time government contract. Excluding that revenue, our UK business would have grown about 4% in the quarter. Our growth was negatively impacted by the significant Omicron surge in December, along with the soft mortgage and auto lending market as the UK faced some of the same pressures I described for the U.S. Positively, though, we are seeing similar strength in unsecured lending and card issuance to what we're seeing here. Our Canadian business grew 5% in the fourth quarter as we saw growth across our portfolio, partially offset by a comparison to significant breach remediation business in the year-ago quarter that I've mentioned on the past several calls. Excluding the non-recurring breach business, revenue would have grown 7%. We continue to see strength across our portfolio with good balance between traditional financial services and emerging fintech customers, particularly in the BNPL space. And we expect those trends to persist into 2022. In India, we grew 35%, reflecting strong market trends despite a surge in Omicron infections. Government authorities have not imposed any restrictions related to Omicron, so consumer trends have held up remarkably well. Our above market growth was driven by the increasingly broad nature of our portfolio that builds on our very strong consumer credit foundation. For instance, our commercial credit business had another very good year and now represents about 20% of our revenue in India. Similarly, we saw continued strong growth in our relatively new direct to consumer offerings. As we look ahead to 2022, we expect continued strength against a healthy macro backdrop, with GDP projected to be almost 8% supported by significant pent-up consumer demand. In Latin America, revenue is up 17% with broad-based growth across our markets, including double-digit growth in our largest markets, Colombia and Brazil. This strong growth reflects ongoing strength in financial services, and particularly with fintechs and neobanks, and continued strong uptake of credit vision and fraud solutions. We also continue to see good performance in our government and insurance verticals in a number of countries. In Asia Pacific, we grew 6%, driven by positive momentum with our relaunch direct to consumer offering in Hong Kong and business wins with lending customers there. The Philippines returned to growth and we are cautiously optimistic that the country will start to emerge from COVID related challenges. And finally, Africa increased 13% on the continued strength of our auto and retail businesses, as well as meaningful growth outside of our largest market, South Africa. In 2022, we expected business to deliver another good year driven by new business wins, our leading innovation, and additional growth outside of South Africa. As this chart shows, we both increased debt during the fourth quarter to fund the New Star Insantic acquisition and then paid down a portion of it. Once we received the proceeds from the sale of the healthcare business, We immediately paid off the entire $640 million second lien loan associated with the purchase of Sontag. We ended the year with $1.8 billion of cash on the balance sheet. Almost $350 million of that amount is earmarked for taxes associated with the sale of healthcare. Then we prepaid another $400 million of debt in January. We also reserve cash to cover the $515 million purchase price of Verisk Financial Services, which will be funded with cash on hand. Adding Verisk Financial Services to the equation, we expect our pro forma leverage to be approximately 3.5 times by the end of 2022, driven by the expected growth in our adjusted EBITDA. That brings us to our outlook for the first quarter and the full year. All the guidance provided reflects the divestiture of healthcare from the prior results and our outlook. And to be clear, various financial services is not included in current guidance. I would also note that differently from previous initial annual and first quarter guides, we have attempted to capture more of the potential upside in our outlook, resulting in the particularly strong figures I'll walk you through. Starting with first quarter, we expect minimal impact from FX on both revenue and adjusted EBITDA. And for revenue, we anticipate a 24-point benefit from the acquisitions of New Star and Sontag. Revenue is expected to come in between $906 and $914 million, or a 30% to 31% increase on an as-reported basis, and 6% to 7% on an organic constant currency basis. Embedded in our revenue guidance is an approximate five-point headwind for mortgage, meaning that the business would grow 11% to 12%, excluding mortgage, on an organic constant currency basis. Adjusted EBITDA is expected to be between $330 and $337 million, an increase of 19% to 21%. Adjusted EBITDA margin is expected to decline 330 to 290 basis points, primarily as a result of incorporating New Star's lower margin. On an organic basis, excluding the two acquisitions, margins are expected to increase approximately 10 basis points. Adjusted diluted earnings per share is expected to be between $0.91 and $0.94, an increase of 10% to 13%. And for the full year, we expect 50 basis points of headwind to revenue from FX And we also expect about 22 points of benefit from M&A. Revenue is expected to be between 3.752 to 3.81 billion dollars, up 27 to 29 percent. Our guidance includes three and a half points of headwind for mortgage for the full year. So, full year revenue excluding mortgage on an organic constant currency basis is expected to increase 9% to 11%. For our business segments, on an organic basis, we expect U.S. markets to be up mid-single digits, but up low teens, excluding mortgage. Financial services is also expected to be up mid-single digits, but mid-teens, excluding mortgage. We expect emerging verticals to be up low double digits. We anticipate that international will grow low double digits in constant currency terms, and we expect consumer interactive to decline low single digits on an organic basis as a result of challenging comparisons in the direct channel, which has slowed in recent months. Adjusted EBITDA is expected to be between $1.386 and $1.424 billion, up 20% to 23%. We expect our adjusted EBITDA margin to compress 210 to 170 basis points this year, driven by the lower margins of NewSTAR and acquisition integration costs for SONTIC. However, we expect the margin to expand about 40 basis points on an organic basis. Adjusted diluted earnings per share for the year is expected to be between $3.84 and $4, up 12 to 16%. And to help you complete your modeling of 2022, at this time, we expect our adjusted tax rate to be similar to 2021's adjusted tax rate of 22.2%. Depreciation and amortization is expected to be approximately $515 million, and the portion excluding the step-up amortization from our 2012 change in control and subsequent acquisitions thereafter should be about $215 million. We anticipate that net interest expense will be about $205 million. And finally, capital expenditure should come in at about 8% of revenue. I'll now turn the call back to Chris for some final comments.
spk09: Thank you, Todd. And to conclude, TU delivered another strong quarter in full year, while also making strategic acquisitions and investments that will better position us for long-term differentiated growth. We expect to have another very good year in 2022, driven by a continuation of strong market conditions and executing our growth playbook. And looking ahead, we will hold our first investor day in three years on March 15th. At the event, we'll introduce our next generation strategic framework and provide an updated multi-year financial outlook. I'll be joined by a dozen TransUnion leaders who will cover a broad range of important topics, including our vertical and geographic markets, global solutions, operations, technology and talent, and diversity and inclusion strategies. We're excited to share the next chapter in our story, particularly on the heels of our recent transformative M&A. And with that, let me turn it back to Aaron.
spk03: Great. Thanks, Chris. And that concludes our prepared remarks today. For the Q&A, as always, we ask that you each ask only one question so that we can include more participants. And now we'll be glad to take those questions.
spk06: We will now begin the question and answer session. To ask a question, you may press start then wind your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time, If your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jeff Moeller with Baird. You may now go ahead.
spk07: Jeff Moeller Yeah, thank you. I want to ask about marketing. If I heard you correctly, I think you said marketing revenue at TransUnion organically was up like 40%. Can you just break it down for us if that was the case and just how much is this in financial services? To what extent is the entrant into media really adding? I think there was a call out on insurance, digital marketing, and then would just love any update on current thinking on new star revenue synergy potential to kind of sync with that strong growth that you're seeing at TU.
spk09: Okay, good morning, Jeff. This is Chris, and thanks for the question. You talk about, you know, marketing revenues and the marketing business. First, you know, these are revenues that are derived outside of credit business, right? So these are the diversification investments and acquisitions that we've made, both at TU, but also that we anchored with the large New Star acquisition last year. So the app that's independent of New Star at TU, you know, grew about roughly 40%. And we have expectations for continued strong growth going into 22. Now, as Todd mentioned, the NuStar business in total, through 9%, 8% of that was organic. But the marketing component within NuStar was low double digits. So as you think about 22, as we have combined organizationally, our marketing vertical leadership and product development and our sellers, and we start to combine our data sets and capabilities, you're talking about a marketing business that is positioned to grow low double digits at least. So we're really excited about what we're seeing, and frankly we feel like with NuStar and with our marketing business, we're running well ahead of schedule. I think the other thing that I would point out is that the profitability of the business is scaling rapidly, as we expected when we made the acquisition and we conveyed to the market. So, you know, our profitability from New Star for this year, the expectation is about $160 million, which was above our initial expectations of roughly, you know, $145, $150-ish. So I'll pause there and see if Todd wants to add anything.
spk04: No, the only thing I would add is to remind everyone that the NewSTAR acquisition is validly accreted to TransUnion's EPS in 2022. And I think that's just important to remind everybody because initially when we announced the transaction in September of last year, we talked about the transaction being slightly dilutive potentially. The significant performance that the business had through the end of 21 carried into 22 gave us the confidence to raise the revenue number meaningfully without very high flow through to adjust as well as to adjust the diluted EPS. So we are expecting a very strong year from New Star in 2022. Thank you.
spk06: Our next question comes from Andrew Steinerman with J.P. Morgan. You may now go ahead.
spk05: Hi there. A lot going on with this year. So kind of adding Argus, the TransUnion will have, you know, really two major transformations going on in 2022, both New Star and Argus. How are you going to stay focused on both, and do you have to meaningfully change the Argus product roadmap to achieve the growth target that you're looking for for August in 23 and 24? And can we also get mortgage revenue as a percentage of total for 21?
spk09: Sure, Andrew. We can do all of that. So, you know, obviously there's a lot going on within TransUnion as we execute on, you know, transformative strategy and really expand our product capabilities. You know, in terms of whether we can handle it, I would ask you to look at our results from the core business for both the third quarter and this fourth quarter, you know, where on a comparable basis we continue to perform at the high end of the market. The core is very strong. I'd also ask for you to look at the performance of, you know, the NuStar acquisition and the Sontag acquisition in the early days. These are growthful assets. The growth rates are accelerating, and the profitability is scaling. So we feel like we are ahead of all of our expectations, and we're really comfortable with the way things are going. Now, when you get to the Argus portfolio, I think it's important to remember that 65% of the $143 million comes from the Argus asset itself, and that asset is entirely complementary with TransUnion's focus on financial services, which remains a high proportion of our revenues globally, right? And in fact, you know, in our specialized market approach, we have a dedicated credit card marketing vertical. It's one of the largest single verticals within TransUnion. And this gives us a very special asset and analytic capability that is unique amongst the bureaus. As the market has long noted, the Argus data asset is highly differentiated, and many in the sell side have speculated that it was an asset better owned by one of the bureaus. So we believe that's the case, that we bring the appropriate market focus, not only in the U.S., but across all the geographies that we operate in. Additionally, you have to remember that One of our largest product investments in recent years has been in the Proma platform. The Proma platform is designed to deliver data to clients and analytic capabilities that allows them to visualize and interact and model with the data in a very powerful way, but also a very user-friendly way. You know, the Argus product, I think given the lack of of scale or potentially fit has not evolved similar capabilities. It is still largely a PDF or paper-based delivery of benchmarking and analytic services and then a subsequent iteration with the consortium clients. We're going to be able to migrate the data and the delivery to the Prama platform in relatively short order. And create a step change in value add for consortium members on top of that because we live in this space We think we're going to be able to to create new products based on The existing data set that will add more value to the consortium that will be able to grow coverage on the demand deposit side given our expansive relationships with the banking sector and and that there's even potential to extend, if not to reinforce, the Argus franchise in various other markets that we have strong positions in, such as the U.K., but just can't. So, I mean, I realize there's a lot going on, but you should think of this acquisition of the financial services division, one, of giving us a unique asset in greater scale in analytics, beefing up our analytics product capabilities, but also giving us a unique asset to support our card marketing, our card business. And also, the remainder of the assets have nice overlap. I mean, we're a big player in fraud. They have nice fraud mitigation assets. Obviously, we're doing well with our marketing investments. They've got some marketing assets that complement. So we think we are a very good owner of this asset in that it's a fit with our various market positions and our growth plans. Well said. And mortgage?
spk04: Yeah, mortgage is 11.5% of 2021 revenues. Thank you very much.
spk06: Our next question comes from Matt and Mike with Barclays. You may now go ahead.
spk12: Thank you. Good morning. I just want to follow up on this as well and maybe just a broader question. Apologies if it's two parts. So first, again, there's a lot of acquisitions in there to be integrated. Two of them seem like you need to. you know, almost turn them around. You know, just talk to us a little bit about the bandwidth that you guys have to manage this, you know, all at once. And just a quick follow-up on our interest was, you know, we've obviously underperformed for, like, five-plus years now. So just, you know, what in your diligence gave you comfort that, you know, you guys can fix it?
spk09: Yeah, Manav, I think we got the majority of your question. Your voice was a little faint there. But... you know, let me start with the acquisition workload. I mean, obviously, that was a very important consideration before we went forward. And, you know, we thought about it and came to the conclusion that, you know, we're well positioned to take on this incremental work, in part because, you know, different parts of the organization are engaged in different aspects of integrating our various acquisitions. So Sontic is primarily a direct-to-consumer play. And NuStar is the integration and the growth is being led by the combination of our marketing product folks and our fraud folks, and then we're adding this complementary communications vertical. And then on top of that, NuStar and Sontic have very capable technology organizations And in the case of New Star, I mean, it's an of-scale, mature business that functions well that had just reached a growth and an efficiency inflection point. And I think you can see that in that, you know, profits are scaling from, you know, roughly $115 million in 21 to an expected $160 in 22, right? Now, Argus will be driven... primarily by the subvertical within financial services overall. You know, Argus operated largely separate from Verisk and has an independent technology organization that's really going to benefit from an influx of financial services data and analytics know-how. I just spoke extensively to Andrew's question about the capabilities that Prama brings to modernize the delivery of that technology. Now, Argus, as you said, has been lower growth in recent years, and there have been a combination of factors. I mean, one, I think we bring the focus, as I've said. Two, the delivery of the service has needed to be digitized for some time. And, again, I'll point you to Prama. We've spent a considerable amount developing the facility now. have a substantial pool of recurring revenue that's going to anchor that technology. And it gives us a foundation for continued use case innovation, for growing the data, and for delivering additional kind of analytics tools within its overall sandbox that will add a lot of value for consortium members. And then also, look, as we looked at the asset, we realized that In recent years, in particular this past year, the pandemic has had the most profound impact on the portfolio. In the early phases of the pandemic, card marketers were less aggressive. They pulled back, and that in part reduced their need for the discretionary analyses that they would undertake with Argus. Also, a big contributor to the overall decline is the LCI bankruptcy data business. Now look, we're a consumer of bankruptcy data, and as you may know, Mila, the level of bankruptcies in the U.S. is off by over 50% these past two years, and that's because of all the government intervention and the repayment forbearances across the economy. Well, we're exiting that period, and as bankruptcies return to a normal level, you're going to see an appreciation in some of these related aspects. And again, in our diligence, and particularly with the focus on Argus, we could see in the second half the pipeline building, sales increasing, and we feel like we're coming into 22 with some momentum. Thank you.
spk06: Our next question comes from Hamza Mazzari. You may now go ahead.
spk11: Good morning. Thank you. You know, you touched on a lot of detail around the top line as it relates to these acquisitions, but you also mentioned sort of increased tech spend through 2024. Maybe if you could touch on, you know, what your free cash flow conversion looks like post sort of integrating all of these deals. Does that look a lot better than what you had pre sort of business transformation, if you will? Thank you.
spk04: Hey, Hamza. This is Todd. Let me take that question. You know, from a free cash flow perspective, historically, TransUnion has, you know, ran in the high teens. And, you know, I would describe that, just so we're aligned on the definition, it's adjusted EBIT to less CapEx. So that's, you know, we've been in that range. I think the expectation for us in the longer term is to be solidly in the same spot. The tech transformation is going to provide significant benefits for us. When we initially launched Project Rise back in February of 2020 and we told the market about it, we talked about the savings that Rise would generate. And the savings actually came quicker. And we were able to start to redeploy some of those dollars last year into valuable investments to support our products, as well as our security infrastructure. So that's how I would think about the tech part of this. The other part of it, though, is the M&A itself. And if you think about New Star, Shantik, and now Varus Financial Services, New Star and various financial services are coming into TransUnion with a lower adjusted EBITDA margin than what TransUnion has. But you've heard that our plans are to significantly scale those businesses, to bring the margin more in line to the margin that you appreciate as a holder of TransUnion's shares, so meaning in that 40% range. That's our objective is to scale New Star and Barris Financial Services to those levels, and we've been consistent in that messaging. So taking the combination of the investments that we're making in TransUnion along with the acquisitions we've made and our intentions to fully integrate and then also scale the businesses, the net result is an attractive free cash flow margin. Now, is that going to happen? This year, probably not because there's going to be investment in this year, probably next. But longer term, you'll be back to the levels that you've come to appreciate from TransUnion.
spk09: Yeah, and if I can weigh in just a little bit here, I just want to point out that we are ahead of the initial guide, if you will, for the profitability of these acquisitions. And so our confidence is higher and the execution is going well. And as for the increase in the overall cost to complete, you know, the development of our global engineering platform in the cloud, it's really proportional to the increased size of our business, right? The M&A has given us considerably more revenues. You know, we're on pace to be a little bit under $4 billion this year. But, again, round numbers, not guide. Don't, you know, get excited. But we're a substantially larger organization, but there's also more technology that we want to harmonize, that we want to share a common foundation and a common set of engineering services and security approaches, if you will. And so we increased the budget to achieve that. Now, I do have to point out that NuSTAR is a very strong technology organization. They've been operating in the cloud. for over six years now, and that in fact, their experience in cloud operations and the foundation that they have built is really informing and accelerating some of the work that we're doing around here. And in the end, I think the combination of, or rather having a mature tech foundation in both the Amazon cloud and the Google cloud is a good kind of competitive position with these key vendors And so we like this multi-cloud approach that we're able to evolve to given NuSTAR's capabilities. Thank you.
spk06: Our next question comes from Tony Kaplan with Morgan Stanley. You may now go ahead.
spk00: Thank you. You reported another strong quarter of non-mortgage financial services growth at 27%. Just hoping you could talk about what you're seeing in terms of competitive landscape because it seems like you're taking share. So I just want to understand where you think your best position now relative to competition. Thanks.
spk09: Yeah, it's a good question, Tony, and I appreciate it. And, again, you know, the core business is performing extremely well, and the growth rates are top of market. And I think it's really – I mean, look, we're leveraging the momentum that we've built since the LBO forward. And, you know, our growth is based on really deep understanding and insights of customer needs. It's why we invest so much in our vertical market capabilities. For example, we don't just have a financial services vertical. We have a mortgage vertical, and we have, you know, a card vertical, an auto lending vertical, a consumer vertical, etc., Because these are all different flavors of lending that have meaningfully different needs. And we've got people who come from those industries who connect well at the C level there that, you know, market through thought leadership. And then we backed it up with a, you know, innovative and increasingly broad suite of interrelated products. If you think of that strategy, you can see how the Argus data asset fits nicely into that because an important part of our value add is managing the data and creating the tools and the platform to yield important analyses that help our clients make better decisions and take more effective actions. So, you know, what we're seeing is a robust market, right? We think things are looking good in terms of an expansion of lending volume in 22. Now, of course, The mortgage bubble is unwinding. We saw a deceleration in the fourth quarter, and we're forecasting further contraction. But despite that, we're able to post some pretty attractive organic growth. And again, when you think about the 22 guide and you pull out mortgage, the remainder of the business is we're guiding at 9% to 11% organic, which is pretty tremendous top of the comps that we've posted in the third and fourth quarter of 21 which again are at the top of market so my overall messaging is look the core is proving as strong and performant as it ever has and the acquisitions that we made albeit there were some initial concerns there they're performing well in excess of the expectations we set on multiple financial metrics so we think You know, we're successfully broadening the number of things we can do for our clients, and we're executing, you know, quite well in the early days.
spk02: Thank you.
spk06: Our next question comes from Andrew Nicholas with William Blair. You may now go ahead.
spk08: Hi. Good morning. Thanks for taking my question. I just wanted to ask maybe another follow-up on the various financial services deal. I think you mentioned an opportunity to increase penetration with demand deposit accounts. And so I was just hoping you could expand on that a little bit, help us understand why there's such a large penetration opportunity there going from 45% to potentially higher, and maybe what the implications might be to getting more DDA data, whether it be increased financial inclusion, whether it's helpful for employment or income verification opportunities. Any additional color there would be great. Thanks.
spk09: Yeah, Andrew. Thanks for the question. Yeah, so the consortium of lenders that contribute the card transaction information on an a depersonalized basis. You know, the 18-member strong consortium gives us over 90% coverage of card transactions in the U.S., and then we've got majority market coverage in Canada, the U.K., and Australia, right? And, of course, with TransUnion, we feel like we've got the ability to take this model to other countries where it doesn't exist because we are focused on the financial services sector in all the countries in which we operate. Now, in the US, the consortium also decided to contribute demand deposit information. Demand deposit accounts are less concentrated than credit cards accounts, so the current coverage is about 45%. And that data is used to do a variety of performance benchmarking between the consortium members that inform their management practices. Well, TransUnion covers the entirety of the financial services market in the U.S., and we think that there is appetite for that type of benchmarking and other analytics that we can provide from that data as you go down market, and that having broader coverage would enrich the value of the asset overall. So we believe that we can leverage our selling and our business relationships generally to increase their contributions of demand deposit activity. Now, as to your question about verified income or other insights, you know, I want to be clear that this asset is not used for those purposes currently. It is an analytic tool and it's a benchmarking tool. That said, it is both the card data and the DDA data are extremely unique and valuable data assets that can fuel, I think, a generation of innovation at TransUnion, right? But that's where our focus is today. And again, look, I understand that there's a lot going on here. That's by design. This is a period where we can really increase our product coverage and lay a foundation of data and capabilities for another generation of growth. But we feel like, you know, this is a great asset for us for all the reasons we've mentioned. We feel like the acquisition price is fair and attractive in that, you know, it's 12.5 times EBITDA for a differentiated data asset, and that's exclusive of the revenue and the cost synergies that we believe that we have because of our intense focus on financial services.
spk12: Great. Thank you.
spk06: Our next question is coming from George Tong with Goldman Sachs. You may now go ahead.
spk10: Hi. Thanks. Good morning. You expect revenue growth from Verisk's financial services business to accelerate from low single digits in 2022 to high single digits in 2023 and low double digits by 2024. As you know, this business has declined in recent years. You talked about modernizing data visualization and the products that go to market. I guess, can you elaborate a bit about how much of the growth improvement you're expecting from price realization and from new logo growth and from cross-sell and up-sell into existing customers as you implement these various initiatives?
spk09: Yeah, I can in general terms, George. So what I'll say is, I mean, look, we know this asset very well because we've been partnered with them for over a decade. We've watched the performance of the asset, and we understand why its performance has been distressed in recent years, particularly in this past year. you know, where it was in the full grips of the pandemic. Now, this was a focal point for us in our due diligence. So as we completed our commercial due diligence, we talked to a wide range of customers, and they all said that the Argus data asset is extremely valuable, that they fully intended to continue to utilize it, go forward, and that they even expected to – to increase the discretionary analytic they previously asked for now that they've entered into a more customer acquisition-oriented period, one of robust growth. So part of this acquisition is a bet that we are acquiring the asset at the end of a market bottom, if you will. Now, the other feedback we received from clients was that they really wanted to improve the technology delivery capabilities. And again, Argus recently released an early version of a new and improved platform that provides some of the functionalities to clients that we envision providing. But of course, we have Prama. And again, Prama's been, we've been investing in it for four or five years now, tens of millions of dollars, and it is a state-of-the-art cloud-based data visualization, data analysis and delivery platform that is ideally suited for the type of data and studies that Argus has. So this is another reason why we're a good owner. And we also bring, you know, a large dedicated sales force to this product. Fair Risk did not have such a sales force, right? We do, and our sales people, you know, buttressed by the thought leadership our verticals provide are really good at helping clients get additional value from these type of analytics. So it's another reason why we think we can grow the asset. And, again, we can expand the data coverage, particularly in demand deposits. We can expand geographically. And we can innovate and develop new use cases for our clients that we can monetize. And, you know, maybe there will be some price there as we prove ourselves as a worthy owner, you know, delivering some increased value add to the consortium. But, again, I think if you look at the entry multiple and also the, you know, the fact that we've got considerable synergies, both revenue and expense, You know, this is a good opportunity for us, and it'll be immediately accretive, and we think we'll create a lot of shareholder value from this deal. And listen, we came away after the commercial diligence even more positive about the asset than we were previously. And, you know, in the early hours here post-announcement, you know, we're getting great feedback from a multitude of consortium members who really get the industrial logic of this asset in the hands of a bureau like TransUnion.
spk10: Very helpful. Thank you.
spk06: Our next question comes from George Mahalos with Cowen. You may now go ahead.
spk02: Hey, thanks for taking my questions, guys. I wanted to circle back a little bit to the increased tech spend, you know, sort of the $65 million or so increase from the original numbers for Roth. for Project RISE. And I guess first question, just a point of clarification, I want to make sure those will be excluded from the adjusted EBITDA calculation going forward. And then secondly, I think you had said by 2023, you were targeting $20 to $30 million of cost benefit. Are you able to sort of update those numbers for what they'll look like, I guess, kind of closer to 2025 when you're fully up and running from the tech transformation? Thank you.
spk04: hey George this is Todd thanks a lot for the question so yeah let me you know hit off the first one as far as the project rise costs are concerned yes we will continue to exclude our tech transformation from adjusted EBITDA so that's been our practice since 2020 so we'll continue to do that as it pertains to the you know, the commitment that we made a couple of years ago on cost savings of $20 to $30 million for Project RISE. As I said earlier in one of the responses, we actually did start to secure savings a lot earlier than we had anticipated, in particular in 2021. And as, you know, consistent with what we said back in February 2020 when we launch project rise we said we would take the opportunity to either let that flow back down to the bottom line or to reinvest back into the business so the meaningful savings that we had in 2021 we redeployed back into the business to support our organic product initiatives as well as our information security posture so that's that's where the priority has been
spk03: Great, and that brings us to the end of our time as we're coming up to the top of the hour. Give everybody a little bit of time. We need some transition to some other calls. Thank you, everyone, for joining us on the call today, and we look forward to speaking with people soon. Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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