TransUnion

Good day and welcome to the TransUnion 2022 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. 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 Aaron Hoffman, Senior Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for attending today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer, and Todd Sello, Executive Vice President and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning. Earnings released in the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses, and other items, as well as certain non-GAAP disclosures and financial measures, along with the corresponding reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded, and a replay will be available on our website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, 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, let me turn the time over to Chris.

Thank you, Aaron. And let me add my welcome and share our agenda for the call this morning. I'll first discuss the economic conditions in TransUnion's markets around the world, and then provide an overview of our solid, in-range financial results for the third quarter. I'll also review the encouraging performance of our recent acquisitions and the strong progress we've made to deliver our targeted savings, revenue acceleration, and sharing of their market-leading technologies across the enterprise. Todd will then take the reins and review in detail our third quarter results and our full year guidance. Thus far in 2022, consumer financial health has remained positive versus pre-pandemic conditions, supporting growth across TransUnion, especially in our emerging markets. Consumer employment, incomes, spending, balance sheets, and credit performance have been strong year to date. However, the dramatic increase in inflation globally, especially in our developed markets of the US, the UK, and Canada, have begun to pressure household finances, leading to a reduction in savings rates, increasing credit balances, and modestly higher credit delinquencies. As a result, businesses have adopted a more cautious outlook given rising market uncertainties. In the US, the UK, and Canada year to date, Soaring inflation and higher interest rates have primarily impacted below prime consumers. Emerging markets such as India and South Africa have digested higher inflation and other challenges and still delivered strong growth. We expect this positive performance to continue in the foreseeable future. In the U.S., higher inflation and interest rates have negatively impacted several of our businesses. Increased borrowing costs due to higher rates has decimated mortgage refinance volumes and slowed new purchases due to an imbalance between historically high home prices and dramatically decreased affordability. And as we discussed last quarter, a shortage of multifamily housing, along with higher home ownership costs, has caused rental rates to skyrocket and move volumes to decline precipitously, negatively impacting our tenant screening business. And although performance in our credit card and consumer lending verticals remain strong, lenders have reduced new customer acquisition in response to growing pressure on household finances and prioritized customer retention in portfolio risk assessment. Growth in the auto market also remains positive, albeit constrained by the well-publicized supply chain challenges. And our large bank customers, during their recent earnings calls, indicated that while the U.S. consumer remains strong, they are preparing their balance sheets for the material economic headwinds they anticipate in 2023. Higher inflation has similarly dampened marketing activity in the insurance industry, with carriers prioritizing rate increases over customer acquisition due to rising repair and replacement costs. Given the complexity insurers face obtaining rate increase approvals for the policies they offer in each state in which they operate, it will take some time before they secure the necessary price increases to resume their full marketing activity. We believe that carriers will succeed in obtaining higher coverage rates and that once they do, our insurance vertical will return to its typical high single digit to low double digit growth rate as carriers resume marketing and consumers shop for the best coverage and price. And finally, activity remains brisk for our marketing services products in the quarter. Although we anticipate that as economic uncertainty grows, brand owners, media companies, and ad agencies will reduce volumes in certain markets with the greatest risk coming in 2023. And now turning to our third quarter performance, we posted solid results within our guidance range, despite increasingly difficult conditions due to the economic pressures I previously discussed. Our strength of the quarter came from several verticals in the U.S. and our international segment overall. U.S. financial services grew 9%, excluding mortgage, on top of healthy 31% growth in the year-ago quarter. Our media vertical grew double digits, and insurance also posted mid-single-digit growth despite the carrier marketing slowdown. And international grew by 16% on a constant currency basis, with five of our six regions growing double digits, led by 39% growth in India, 24% growth in Asia Pacific, and 18% growth in Africa. We also delivered adjusted EBITDA margins at the high end of our range, reflecting our high flow-through margins, cost savings from the Neustar acquisition, and prudent expense management overall. And as I will discuss in a moment, our acquisitions performed ahead of our expectations for the quarter as we continue to build revenue momentum and achieve our cost synergies. Given the increasingly challenging market conditions, we have reduced our fourth quarter and full year guidance to reflect the impact of higher inflation across the markets we serve. We've also broadened our guidance range given the economic uncertainties. First, FX headwinds worsened in the quarter. and we now estimate an incremental 12 million reduction in the fourth quarter as a result. We expect the unusually strong U.S. dollar to persist throughout 2023 and temper the impact of the strong performance of our international segment. Second, for the fourth quarter, we reduced U.S. mortgage revenues by a further seven million, still within our prior range of 30 to 35% down, but now trending to the lower end of the range. Third, we reduced revenue expectations across the non-mortgage U.S. markets portfolio by $33 million across a base of approximately $2.1 billion due to softening market conditions. And finally, I want to emphasize that we did not reduce our outlook for international given the strong performance year-to-date and continuing positive conditions in our emerging markets. We continue to monitor our performance closely in our 30-plus non-U.S. markets And our management teams continue to perform well despite higher inflation and interest rates and even rolling electrical blackouts in South Africa. We also maintain our estimates in consumer interactive as it remains on track to achieve the targets we outlined last quarter. But now turning to our three acquisitions, we've made substantial progress integrating them into TransUnion this year. Each acquisition is on track against our business cases and the expectations we set on prior calls. Importantly, we believe our results thus far and the market feedback we've received proves the rationales for the deals and the power of combining them in a TransUnion. Starting with NuSTAR, revenue grew mid-single digits in the quarter, in line with our full year expectations across marketing, fraud, and communications. And our increasingly integrated TransUnion and NuSTAR marketing solutions grew high single digits year-to-date. As we continue to execute against our growth pipeline, we announced meaningful new marketing sales during the quarter to iHeartRadio, Starista, and InfoSum, as well as a partnership with Snowflake. Despite industry caution about future advertising levels, we see strong interest in the full family of new star marketing solutions, which provide benefits throughout market cycles. In a tighter advertising environment, marketers seek to optimize their spending and demonstrate the impact of their campaigns with reliable quantitative measures. With the decline in digital identifiers, marketing platform providers also need to prove the impact of advertising within their walls. NuSTAR is well positioned to provide these objective metrics on the marketing performance of these sites. In communications, we signed new business with LiveVox and Transaction Network Services during the quarter. We also continue to see meaningful growth from our innovative family of trusted call solutions, which include branded call display and caller name optimization. Both help businesses authoritatively identify themselves and reestablish trust in phone-based outreach to consumers, as 88% of all business calls go unanswered due to the proliferation of robocalling, scam calls, and blocked or unknown numbers. Companies across a wide spectrum of markets, including financial services, insurance, collections, healthcare, and utilities, use trusted call solutions to double or even triple call pickup rates, sales, and conversion rates. We have almost 1,000 customers using this solution, and were added to the T-Mobile network last year and the AT&T network this year. At this stage, we estimate that we've tapped under 10% of the potential U.S. market sending us up for significant future growth. Going forward, we expect that our growth will accelerate through successful cross-selling between NuStar and TransUnion. We continue to sign new insurance, collections, and financial services accounts for trusted call solutions and converted several material opportunities in quarter and are building our sales pipeline for next year. We also continue to successfully integrate TransUnion's superior data assets into NuSTAR's state-of-the-art data management platform, OneID, and to realize cost savings and performance improvements. Our combined data assets have increased our phone coverage by 15%, email coverage by 10%, and improved the robust linking and matching capabilities across our non-credit solutions. And as part of our planned cost synergies, we expect to close seven data centers this year. reducing NuSTAR's physical footprint by over 90%. We've also migrated almost 90% of their products and data management services to a new lower cost public cloud provider. To wrap up, NuSTAR's adjusted EBITDA margin was about 29% in the third quarter, driven by revenue growth and our cost reduction initiatives. We expect the full year margin to also be 26%, up 500 basis points from 2021. We also have line of sight to achieving our commitment of 70 million plus in cost savings through integrating NuSTAR, which we expect will provide a meaningful offset to potential margin compression during an economic slowdown or a full-blown recession. Now, turning to SONTIC, revenue grew in the mid-teens with a low 30s margin in line with our full-year expectations. We continue to see strong traction with insurance customers both domestically and abroad, with more than 40% of newly identified opportunities coming internationally. We also have a growing pipeline of opportunities in financial services. And as we mentioned last quarter, in Consumer Interactive, we can now win business we would not have been previously able to through TransUnion and Sontics combined strength. This combination has resulted in an eight-figure win for our indirect business that we expect to monetize in 2023. Finally, Argus revenue grew 4% in the quarter at a margin of 19%. For the full year, we expect revenue growth in the low single digits with a 20% margin or 34% excluding integration costs. We've already seen strong levels of customer interest, both from consortium members and non-members interested in joining, in finding new ways to use the Argus data and insights. Revitalizing the delivery of Argus data on Transgenium's digital platforms, as well as infusing our thought leadership, will be key to realizing higher sales levels. That wraps up my update on our market backdrop, third quarter performance, and the integration of our three acquisitions. Now, Todd will walk you through our third quarter and full year 2022 guidance. Todd?