TransUnion (TRU) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. My name is Blair, and I will be the host operator on this call. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] Please note that this call is being recorded as of today Tuesday, July 26, at 4:00 PM Central Time. I would now like to turn the meeting over to your host for today’s call, Aaron Hoffman, Vice President of Investor Relations at TransUnion. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. This afternoon I’m joined by Jim Peck; President and Chief Executive Officer; and Al Hamood, Executive Vice President and Chief Financial Officer. We posted our earnings release on our Investor Relations website at www.transunion.com/tru. Our Form 10-Q for the second quarter 2016 will be available on July 27. Our earnings release includes schedules, which contains more detailed information about revenue, operating expenses and other items, including certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures are included in these schedules. As a reminder, today’s call will be recorded, and a replay will be available on the TransUnion website. As we discuss results today, all growth comparisons relate to the comparable quarter of last year, unless otherwise specified. 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 press 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 Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. So with that, let me turn the time over to Jim.

Thanks, Aaron, and good afternoon to, everyone, joining us on the call and webcast today. I’ll spend sometime discussing the quarter and turn the call over Al, who will walk you through some financial details. I’ll wrap up with our guidance before we take your questions. I’m pleased to report that TransUnion delivered another very strong quarter of revenue and adjusted EBITDA growth, building on an excellent first quarter, and setting us up for an outstanding full-year and allowing us to raise our guidance for 2016. This is the result of the real strength we see across each business segment in the majority of our verticals and major geographies even as we lapped strong year-over-year comps. Clear takeaway is that, TransUnion is continuing to perform very well, while we also invest in technology, M&A, and innovation to ensure our long-term success. Putting numbers around the quarter, revenue and adjusted EBITDA rose 12% and 18%, respectively. On a constant currency basis, revenue grew 14%. Adjusted EBITDA was up 20%, demonstrating the significant operating leverage we see from incremental revenue, that leverage is further reflected in a 180 basis points of adjusted EBITDA margin expansion. Adjusted earnings per share was up 38% to $0.37. Marking these strong results, we’re pleased to see meaningful diversification in the sources of our growth. Each segment grew revenue more than 10%. Adjusted operating income grew in the range of 12% for USIS, 30% for consumer interactive to 53% in international on a constant currency basis. As we’ve noted in previous quarters, the revenue growth is split roughly 40/60 between higher growth verticals, emerging markets, and new product growth initiatives on one hand, and our core business on the other. As I’ll discuss in a moment, this diversification is also evident in each segment, highlighting a core strength that we have been building in recent years with the portfolio that is more balanced and less cyclical. In addition to the strong financial performance, during the quarter, we also hit a key milestone with the effective completion of our next-generation technologies platform, which we refer to as Project Spark. Through this initiative, we have upgraded our technology in analytics environment, focusing on technology as a strategic enabler. Through this process, we’ve reduced much of our maintenance spend and redeployed those dollars into new development that drives revenue growth. With this important milestone behind us, I’d like to spend a few minutes reviewing what we did, why we did it, and how we are benefiting from Spark. Historically, TransUnion had utilized a patchwork of legacy technology, putting mainframes, which required substantial CapEx to maintain system in a significant amount of outsourced infrastructure. This approach was inefficient and limited our opportunities for innovation. As you know, our vision for TransUnion is an innovative market-leading company, enabled by the latest and Big Data technologies that we own. The upgrade to our technology platform of Project Spark has delivered on this vision, along with a new operating model that is more efficient and cost effective. Let’s look at how this shifts significantly improves our business model. First, we’re able to develop better solutions for our customer, as we can now organize and handle massive amounts of discrete data, matching and linking the data, and ultimately unlocking valuable insights from the data more effectively. Simple terms, this means that, we can now pull together all the data we have from about 90,000 sources and link it to individuals to create a thorough and dynamic view of a consumer, enabling and enhancing decision-making of risk management capabilities for our customers. Examples include the trended data that underlies CreditVision and CreditVision Link, as well as our ability to match traffic violations to driver and our drivers risk products among others. Second, we are now much faster to market with a flexible highly configurable technology platform. This results in a significantly faster time to market things like traditional batch job, as well as new solutions by CreditVision and Karma. Finally, all of these benefits can be delivered on a global basis over time, as we have truly transferable and adaptable technology that can be quickly scaled in new markets. CreditVision is a great example of a product developed in the U.S. that is now being rolled out to new markets. Particular, it has been a major factor in our recent strong growth and the share gains in Canada and Hong Kong. This provides a roadmap that we will apply to all of our international markets. Overall, Spark is making a significant contribution to our ability to quickly deliver innovative value-added solutions to our customers on a global basis, helping to drive long-term growth. We have now successfully deployed Spark in the U.S. and are currently rolling it out internationally. Moving on to our quarterly results and starting with our largest segment, USIS revenue increased 10%, driven by low double-digit growth in financial services, healthcare, insurance, and rental screening, driven by the strong broad-based revenue performance, adjusted operating income grew 12% and led to a 40 basis point increase in adjusted operating margin. Within USIS, we continue to focus on our new product growth initiatives that are driving differentiated and meaningful growth across our verticals and end market. One of these initiatives is CreditVision. To talk with you before about the potential opportunity with trended data and our CreditVision offering, and we’re proud to have been the pioneer of such an important solution, having driven industry forward with this new innovative approach. This quarter Fannie Mae is scheduled to be in requiring trended data and our CreditVision offering and its assessment of mortgage application. In preparation for this, we’ve been providing CreditVision to our mortgage reseller customers and we’ll begin doing them for CreditVision in this third quarter. As Fannie and others required trended data, we’re in the market and well-positioned to capitalize on this important industry transition. As bullish as we are about the mortgage opportunity, we see far-reaching additional applications with CreditVision, as it has the potential to replace traditional credit offerings anywhere that they are currently used. But instant, we recently announced the partnership to utilize trended data for auto financing, and as we previously mentioned, CreditVision also has applications in credit card. At the point, we’re only scratching the surface with CreditVision’s potential in our verticals and across the geographic footprint. Another area within our USIS business, where we’ve seen tremendous growth is our healthcare vertical. This is the key area focus for TransUnion as it enables us to leverage our core capabilities of data, technology and analytics, and attractive fast-growing market further diversifies our business. Within healthcare, our focus is on revenue cycle management, helping healthcare providers reduce uncomplicated care costs and improved cash flow, enabling them to spend more time focused on patient care. The revenue cycle management market consist of a front-end that addresses patient identification and authentication, verification of insurance coverage, patient payment estimation, patient propensity to pay and presumptive charity determination. The middle of the market focuses on our operations and claims processing, the back-end addresses accounts receivable management, collections, and insurance coverage discovery after services are rendered. We successfully built front and back-end platform that leverage TransUnion’s unique dataset, allowing us to efficiently incorporate partner dataset, and importantly, as you will hear in a minute integrate acquisitions. ClearIQ of front-end offering delivers critical patient information to healthcare providers. We provide insurance verification before services are rendered, leading to fewer claims rejections and denials and also lays the foundation for the accuracy of the financial transaction as follows. Leveraging to use core credit data, we can also provide an estimate of a patient’s income and a patient’s propensity to pay their bills, helping both patient and provider makes smart informed decision with our procedures and payments. As the healthcare industry continues to move toward a higher deductible model and need for more transparency in patient payment has become more pronounced. This last month, TransUnion published to report that demonstrates our payment responsibility for medical costs continues to shift on quarters and insurance companies to patients. In one-year, patients experienced a 13% increase in both deductible and out-of-pocket maximum costs. eScan, our back-end solutions offers a differentiated market-leading technology that helps hospitals and healthcare systems reduce uncompensated care cost by identify patient insurance coverage either commercial, Medicare or Medicaid after services are provided. We refer to this as insurance coverage discovery. eScan’s automated platform provides a superior return on investment to a hospital traditional manual processes, which are typically inefficient, labor-intensive, and error-prone. Today, TransUnion healthcare through its eScan solution has identified nearly 1.3 billion in reimbursement to its client and that number has increased by more than 25% since November of 2015, reflecting the rapid growth in share gains that we’re seeing. And in June, we acquired Auditz, a high-quality strategic bolt-on acquisition. Auditz use a sophisticated proprietary technology to help healthcare providers identify and recover payments, a complementary capability to our eScan Solution. Through this acquisition, we gain new algorithms for identifying uncompensated care, particularly as it relates to optimizing the recovery cost associated with Medicare patient transfer process that results in the underpayment of millions of dollars per year to care providers. The net result is a greater yield for our customers when we analyze their unpaid claims files, and of course, greater yield for them equates to more revenue for TransUnion. As you can see, we had a comprehensive revenue cycle management solution, as we achieved significant industry recognition for our efforts. May our core offerings of ClearIQ and eScan were named to The Healthcare Financial Management Association peer review shortlist. This designation is very difficult to achieve and our top marks along with the overall positive feedback from the peer review participants are a collection of our commitment to driving proven results for clients that enable them to be more competitive in the dynamic healthcare market. We’ve built an outstanding healthcare business that is making a difference for our customers bottom line, being recognized by the industry and is making a significant contribution to TransUnion’s strong financial performance. Moving on to our International segment, revenue grew 15% on an as reported basis and 24% in constant currency, with 10% of the growth coming from the acquisition of CIFIN in Colombia. So our good balance of growth between developed and emerging markets with constant currency revenue growth of 20% and 26%, respectively. At the regional level, Canada, India, and Latin America, each grew revenue by more than 20% on a constant currency basis. On past calls, we’ve discussed the opportunity to expand our international margin, and we’re seeing that come to fruition in the second quarter, as adjusted operating margin jumps 590 basis points to 31.1%. This comes on the heels of a 240 basis point increase in the first quarter. This improvement was driven by our strong revenue growth, as well as the focus on reducing costs. As a reminder, over the past year or so, we undertook a thorough review of our international costs in overall organizational structure. The result is a more highly efficient organization that benefits from the newly established centers of excellence. The margin improvement should be sustainable and we see further upside over time, as we leverage new technology and products on a global basis as I discussed earlier. Another important development during the quarter, we increased our ownership stake in CIFIN, and Colombia is 71% to approximately 95%. The business is performing well and the integration is going smoothly. Similarly, we upped our ownership in CIBIL in India from 66% to approximately 77%. We’re very pleased with both positions as they provide a further countercyclical dimension to our portfolio, while also adding to our exposure into thriving economies. We see significant opportunity to continue to benefit from the underlying economic growth in each country, coupled with the introduction of new product offerings to provide better information solutions to customers and help consumers gain greater access to credit. Turning to consumer interactive, we had another strong quarter. Revenue grew 16%, while adjusted operating income was up 30%, driven by strong performance in both the direct and indirect channels. The direct channel is not increasing our subscriber base with good retention levels. In our indirect business, we are thrilled to announce, we extended our contract with Credit Karma. TransUnion and Credit Karma have enjoyed a very strong collaborative relationship, and we’re pleased to extend our partnership with a long-term contract that reflects the strategic value contributed by both parties. In our strategic partnerships, we strive to find ways for our customers to utilize our innovation, which in turn helps us gain a larger footprint within their organization. This agreement further cements our already strong strategic partnership, and is a win-win for both of us. Al will walk you through the near-term outlook for this segment in a few minutes. In summary, we put together another very good quarter with strong revenue and adjusted EBITDA growth, expanding margins, and significant free cash flow, and raised our top and bottom line guidance. At the same time, we extended our relationship with Credit Karma, have already rolled out CreditVision to the mortgage reseller channel, effectively completed Project Spark, increased our ownership stakes in India and Colombia, completed a complementary healthcare acquisition and continue to invest in strategic growth initiatives. Given all that, we feel very good about our position today and also for the long-term. Now, I’ll turn it over to Al, who will walk you through the financials. Al?

Thank you, Jim, and good afternoon. Today, I’m going to walk you through our consolidated results and segment results through adjusted operating income, then I will finish up with a review of the balance sheet and cash flow statements. Second quarter consolidated revenue was $426 million, an increase of 12% or 14% on a constant currency basis compared with the second quarter of 2015. Revenue from acquisitions contributed about 2 points of growth in the quarter. Adjusted EBITDA was $159 million, an increase of 18% or 20% on a constant currency basis compared with the second quarter 2015. Adjusted EBITDA margin was 37.5%, an increase of 180 basis points compared with the second quarter 2015. Adjusted net income was $68 million, an increase of 70%, compared with the second quarter 2015. Adjusted diluted earnings per share was $0.37, compared with $0.27 in the second quarter 2015. The adjusted effective tax rate for the second quarter was approximately 37%. Now, let me walk you through the details of our P&L. As I just mentioned, consolidated revenue increased 12% or 14% on a constant currency basis. This, again, was driven by double-digit growth across each segments. Operating income was $64 million, an increase of 24% compared with the second quarter of 2015, driven by the increase in revenue and lower operating expenses as a percent of revenue. Cost of services was $144 million, an increase of 9% compared with the second quarter 2015, due to costs associated with Project Spark, inorganic increases in operating expense from recent acquisitions, investments in key strategic growth initiatives, including new data assets, and increased product costs. SG&A was $144 million, an increase of 14%, driven primarily by increased advertising, increased variable compensation expenses related to the financial performance of the business, inorganic increases in operating expense from recent acquisitions, and investments in key strategic growth initiatives. And depreciation and amortization was $74 million, an increase of 8%, due primarily to increased CapEx related to our ongoing strategic initiatives and from assets acquired with our recent business acquisition. D&A not related to the 2012 change of control transaction and subsequent acquisitions was approximately $29 million for the quarter. Adjusted operating income was $130 million, an increase of 19% compared with the second quarter 2015, driven primarily by the increase in revenue. Now, looking at the segment revenue and adjusted operating income. USI’s revenue was $257 million, up 10% compared with the second quarter of 2015, driven by strong growth across all platforms, starting with online data services, revenue was $168 million, an increase of 9%, driven by an increase in credit report volume and higher average price. Marketing services revenue was $38 million, an increase of 8%, due primarily to increased batch activity and decision services revenue was $51 million, an increase of 16%, due primarily to the growth in the healthcare and insurance markets. Adjusted operating income for USIS was $88 million, an increase of 12% compared with the second quarter 2015, due primarily to the increase in revenue, partially offset by investments in key strategic growth initiatives, including new data assets, additional depreciation and amortization, and inorganic increases in operating expense from recent acquisitions. International revenue was $78 million, an increase of 15% or 24% on a constant currency basis, compared with the second quarter 2015. Revenue from acquisitions contributed approximately 10 points of growth in the quarter for international. We saw over 20% constant currency revenue growth in both developed and emerging markets, that was offset by a 9% decrease in revenue from the impact of foreign exchange rates, primarily the South African rand, Canadian dollar, Indian rupee, and the Brazilian real. Developed markets revenue was $28 million, an increase of 16% or 20% on a constant currency basis. Emerging markets revenue was $60 million, an increase of 14% or 26% on a constant currency basis. Revenue from recent acquisitions contributed approximately 16 points of growth. Adjusted operating income for international was $24 million, an increase of 42% compared with the second quarter 2015. On a constant currency basis, adjusted operating income increased 53%, driven by the increase in revenue, along with savings enabled by key productivity initiatives, delivering 590 basis points of adjusted operating income margin expansion in international in the quarter. Consumer interactive revenue was $107 million, an increase of 16% compared with the second quarter 2015, driven by strong growth in both the direct and indirect channels. Adjusted operating income for consumer interactive was $45 million, an increase of 30% compared with the second quarter 2015, due primarily to the increase in revenue. As we previewed on the previous call, we expect consumer interactive revenue growth in the mid to high single-digits for the full-year 2016. With this, it will imply, revenue will be flat to slightly down in the second-half of the year, primarily driven by three factors. First, as previously discussed on our call, one of our indirect channel partner is in the process of being acquired by a competitor. Second, our consumer interactive business saw tremendous growth in 2015, resulting in a very strong comparable to 2016. This included a one-time benefit in Q4 2015, due to data breach revenue in our direct-to-consumer reseller channel. As a reminder, last quarter, we moved the direct-to-consumer reseller channel revenues into our Consumer Interactive segment. Third, and as Jim mentioned, we have renegotiated a long-term deal in Credit Karma. This new contract reflects the strategic value contributed by each party and enables a more sustainable strategic partnership with a longer-term. With this new agreement, we expect our revenue growth from Credit Karma to moderate in the second-half of the year. Our guidance only reflects this and we’re very pleased with the results. Stability, consistency, and a locked-in long-term valuable contract with a very important strategic channel partner. These factors will impact the top line growth optics of our Consumer Interactive segment in the near-term. As these items laps over an annualized period, we fully expect the business to deliver revenue growth at its normalized rate of mid to high single-digit. Given the nature of the revenue coming off, we still expect adjusted operating income and adjusted operating margin increase in the second-half of 2016 and for the full-year. Lastly, in the Corporate segment, adjusted operating expenses were $27 million, an increase of 29% compared with the second quarter 2015, due primarily to increased variable compensation expenses related to the performance of the business and investments in key strategic growth initiatives. Now, moving on to the balance sheet. Cash and cash equivalents were $141 million at June 30, 2016, and $133 million at December 31, 2015. Total debt, including the current portion of long-term debt, increased to $2.4 billion at June 30, 2016 compared with $2.2 billion at December 31, 2015, primarily due to financing the acquisition of CIFIN. A of June 30, 2016, we had the full $210 million revolving credit facility available for use. Our net leverage as of June 30, 2016 was approximately 3.9 X, excluding the impact of acquisitions completed in the second quarter, that leverage would have been 3.7 X. As we discussed, we continue to take a balanced approach to capital allocation, diligently considering the leveraging growth in organic as well as inorganic opportunities. During the second quarter, we acquired another 24% of CIFIN, taking our ownership up to approximately 95%, and our integration efforts continue to go well and the business is performing in line with expectations. We also acquired another 11% of CIBIL in India, one of the fastest-growing and most dynamic markets in the world. We continue to execute on our growth playbook and expect good things to come from this region – have we – as we mentioned previously. With this latest equity pickup, we now own approximately 77% of CIBIL. Lastly, as Jim mentioned, we also acquired Auditz in our healthcare business. A nice complementary asset to our eScan offering. As you can see, our M&A efforts are paying off, and we continue to drive long-term and diversified growth. Moving on to the statement of cash flows, for the six months ended June 30, 2016, cash provided by operating activities was $150 million compared with $117 million for the same period in 2015, due primarily to the increase in operating performance, along with a decrease in cash paid for interest. Cash used in investing activity was $323 million compared with $77 million for the same period in 2015, due primarily to an increase in cash used to finance acquisition. Capital expenditures were $55 million compared with $68 million for the same period in 2015. Cash provided by financing activities was $181 million compared with $642 million for the same period in 2015, driven principally by proceeds from the June 30, 2016 initial public offering. That concludes our prepared remarks on the second quarter financial results. I will now turn the call back over to Jim.

Thanks, Al. As I lay out our guidance a couple of quick points about our assumptions for acquisition and FX impact. In line with our previous guidance, acquisition should add 2 points of revenue growth to both the full-year and the third quarter. Also, we expect FX will continue to be a headwind toward a slightly reduced rate, given the recent favorable changes in some of our non-US currencies. Our guidance reflects about a 1.5 points of FX reduction in both revenue and adjusted EBITDA for the full-year and about 1 point of reduction in the third quarter. Now, turning to our guidance for the full-year 2016. Given a strong second quarter performance, we are increasing our outlook for 2016 revenue, adjusted EBITDA, and adjusted EPS. We expect our revenue to come in between $1.665 billion and $1.675 billion, an increase over the last year of 10% to a 11% on a reported basis, and up to 12% on a constant currency basis. Adjusted EBITDA for the year is expected to be between $613 million and $618 million, an increase over the last year of 16% to 17% on a reported basis, and 18% to 19% on a constant currency basis. This results in expected adjusted EBITDA margin of approximately 37%, roughly a 200 basis point increase over 2015, as we continue to reinvest in our business. Adjusted diluted earnings per share for the year are expected to be between $1.37 and a $1.39, or 25% to 27% growth. And for the third quarter of 2016, we expect the following. Revenue should come in between $420 million and $425 million, an increase of approximately 8% to 9% on a reported basis of 19% to 10% on a constant currency basis. Adjusted EBITDA is expected to be between $155 million and $158 million, an increase of approximately 11% to 13% on both the reported basis and constant currency basis. Adjusted diluted earnings per share are expected to be between $0.34 and $0.35, an increase of 12% to 15% compared with the third quarter of 2015. To wrap up, TransUnion had a very strong quarter. Top and bottom line financial performance was broad-based and outstanding, allowing us to raise our guidance for the second time this year. We’re executing against our strategic growth plans, while also investing for the future. As we discussed today, Spark was effectively complete. We extended our strategic partnership with Credit Karma. CreditVision has been rolled out to the mortgage reseller market, and we’ll begin billing for in the third quarter, and we added to our ownership positions in key emerging markets of India and Columbia, as well as expanded our portfolio in healthcare. The solid execution and focused strategic investment positions us very well for the remainder of 2016 and beyond. That concludes our prepared remarks, and now we’ll be happy to take your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Andrew Steinerman from JPMorgan. Your line is open.

Hi, it’s Andrew. I wanted to ask about trended credit data, specifically the Fannie Mae initiative, and how much that might add to TransUnion’s revenue growth from the mortgage lenders by the fourth quarter? Our team calculated it being about 1%, if we just counting the Fannie Mae piece?

Yes, hey, Andrew, without really getting into specifics there, we as you know, we’re already live in the market. And I just want to confirm that we will be switching the switch on regardless of kind of what happens relative to Fannie Mae or CreditVision trended data. So the use will happen, the billing will start, and we’re really pleased with that. And I just want to remind everybody that we – we’re feeling really good about this, because we’re the pioneer in this space and it’s great that we’re going to get this revenue, Andrew, and the revenue is, in fact, in our guidance. But probably more importantly, it’s really signaling, we think not only in the U.S., but the world, where this data can be used not only in mortgage, but also card, auto, where we’ve just done a deal to create us – trend its credit core – credit score in auto. So we think we’re going to be able to penetrate the market much more fully. So while it’s great for the third and fourth quarter, we think it’s going to be great heading into next year and beyond to actually get that kind of information to be used much more broadly. So, people ask me how far we are into this thing? We’re kind of rounding first heading the second now, so there’s still plenty of upside. And like I said, the revenue that we anticipate getting is reflected in our guidance.

Can I just ask, it is just for Fannie Mae loans, or does it include Freddie Mac loans as well?

It includes all our resellers that are selling into the mortgage market.

Perfect. Thank you.

Thank you, Andrew.

Your next question comes from the line of Gary Bisbee from RBC. Your line is open.

Hey, guys. Good afternoon. I wanted to ask…

Hello.

…specifically about the international business, and I guess, the two-part question, the margins were obviously terrific as the revenue growth. In developed market, I think, we thought there would be somewhat of a slowdown, you lapped the big Canadian customer takeaway a year ago. But how does that continue to be as strong as it is? Is trended data meaningful piece of that? And then how do we think about the margins going forward from here? Thanks.

Hi, Gary, so I’ll answer the first question. Yes, we – it’s a combination of many things. We continue to take share in markets like Canada. And we take not only share in the core area, but CreditVision is helping us to take that share, because it’s demonstrating our – how we’re using innovative approach to help them serve their consumers better that we’re shifting share kind of constantly and we still think there is more to that. Also in Hong Kong, for example, CreditVision as we – we’ve talked about, it’s something new, but it’s essentially required. And so that allows us to kind of expand the market there, the credit information. So that’s why that continues to grow. And we still are very bullish about our growth in the established markets, as well as the emerging markets for that matter, which are getting kind of the double – being in a kind of a non-cyclical way in the market, where they’re trying to grow that middle-class, so the volumes are constantly growing kind of regardless, as well as leveraging our new solutions like CreditVision. So they’re getting both, but we feel good about both of those things. As far as the margins are concerned, we – as you know last year – beginning last year, we went on a mission to take a look at how we’re organized there, how we could better leverage everything that we built in the U.S., and we anticipated the margin improving this year, and you’re just seeing those results. We think we can continue to improve those margins going forward. Of course, as we always say, we tempered that with – we see good opportunities for investment. We want to balance, expanding those margins with also investing the growth over the long haul. So we’ll continue to do both of those things going forward. So we’re feeling very good about our international markets, both from top line growth performance and outlook, as well as our ability to expand margins.

Thank you.

Okay, thanks, Gary.

Your next question comes from the line of Manav Patnaik from Barclays. Your line is open.

Thank you. Good evening, gentlemen.

Hello.

Just a – hey, just a first question around the Credit Karma contract and guidance that you gave. So I guess with you implying that the revenue growth sort of slows, but then becomes more stable. Should we – I guess, what should we takeaway from that? Is that you sort of made the contract more ratable, so it’s more subscription versus transaction generated, or are you lowering the price as scope of facilities to Credit Karma?

Yes. So just to backup a little bit of that, the relationship we have with Credit Karma those back years, and as we discussed, they’re very much a strategic partner. And so what we’ve done with them is certainly haven’t reduced the kinds of things that we’re doing with them. In fact, we continue to work with them to give them what we think is some of our best innovation and it’s because we want to be sticky with inside Credit Karma and we also want them to be very successful, because if they have success, we have success, and we chose the path of going down many different kinds of business models to bring credit into the consumer space, because we felt it was our best to monetize that market overall, and so that’s what we continue to do. So we’re going to continue to see growth from Credit Karma. We all are – we also are able to continue to see growth in other players in the market and also with banks are starting to distribute, of course, in the market. So our guidance reflects the new contract. We couldn’t be more happy with that contract. It’s long-term and it really locks in that revenue for us going forward, and let’s us kind of just focus on being real strong strategic partners with each other and innovating together.

Okay. Al, if you could just help us with the guidance raised at the midpoint looks like it’s $30 million top line and maybe $10 million on EBITDA like the breakout between what was sort of an organic contribution that raise versus maybe acquisitions, which I’m guessing is primarily Auditz?

Yes, here is – you got it exactly. Here is that I would say just to get reground in full-year revenue guidance was $1.64 billion at the midpoint last quarter, now it’s a $1.67 billion at the midpoint, which is like you said, an increase of $30 million. The components of that $30 million really constitute an $18 million beat in the second quarter, slight favorability relative to first quarter from an FX standpoint. I think it was around $5 million. We expect a very small impact on revenue from Auditz in the second-half of the year, that is a strategically great asset. But the absolute size will grow over time, but it’s not going to have us really – the rounding is not going to make an enough for us to come off or like we said 2% growth from M&A. And it’s these factors really, which is really the beat coupled with a little bit favorable FX is allowing us to raise full-year revenue by $30 million. The second quarter beat plus FX is probably close to $24 million. So we’re really raising the second-half of the year by about $6 million from a revenue standpoint. In total $30 million, like I said, the two components are the big beat in Q2, as well as a little bit more favorable in FX. As it relates to EBITDA, equally important, our full-year adjusted EBITDA guidance was $605 million at midpoint last quarter, when we gave guidance. Now, it’s $615.5 million, so it’s an increase of around $10.5 million. Our second quarter beat was approximately $12 million from our midpoint last quarter, and we got a little bit of favorability, $2 million from an FX standpoint. However, we are going to take some of that beat in investor back into the business for the tune of around $4 million or $5 million. And that is why and what we are doing in terms of raising our full-year guidance on a net basis by about $10 million or $11 million. So, in summary, EBITDA was a beat. We are taking all of that or big chuck of that and raising our full-year guidance, while pushing back into our business. And like we’ve said, if we see the opportunity to reinvest our over performance back into the business, we are going to do that if we see that. It just continues to give us more confidence about our long-term top and bottom line growth, particularly in the year, where full-year EBITDA guidance is coming in at around 18% to 19%, with 200 basis point increase in margin and 12% constant currency growth.

Got it. That’s very helpful. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Ato Garrett from Deutsche Bank. Your line is open.

Hey, good afternoon.

Hello.

I just have a question about your expectations in the back-half of the year, given your new full-year guidance. Looking at the first-half of the year, you had some very strong organic revenue growth, double-digits there, but then looking at organic revenue growth coming down to being 10% in the full-year. Just wondering if you’re seeing any signs, any other additional areas you want to call up, or what might be behind that view other than the revenue change you discussed for the Interactive segment?

Yes, let – maybe I’ll step back, this is Jim, and then we’ll let Al to dive in a little more. So if you do step back, we’ve had nine quarters now double-digit, constant currency revenue, and adjusted EBITDA growth. And I think that simply reflects the solid execution of what we’ve been telling use of consistent with what we’ve been telling you, we have a growth strategy focused on initiatives that help us get to be at the top of the market, as far as our overall revenue performance and we continue to do that. Transformation, we’ve been on along with kind of consistently looking for ways to improve margins through efficiencies, those are paying off, and then the markets are performing well. So these – this is really also added up to compounded kind of buildup of some fairly tough comps year-on-year. So that said, we’re still guiding in our view to very strong full-year performance at 12% constant currency revenue growth, like Al just said 18%, 19% EBITDA growth and 200 bps of improved margin. So, very, very strong performance, which I believe also reflects a full-year of what we’ve been telling you is focused on investing in growth initiatives, turning top performance in – on the top line in our category, I guess, and as well as expanding margins. And if I didn’t said I want to remind you, we are and Al said it before, we do continue to reinvest in order to continue to drive growth. And I think that’s something that you want us to do and something that is fundamental part of our strategy. That said, we do believe we can continue making choices to expand margins moving forward as well. So I’ll let Al elaborate if you like more.

Yes, just to reiterate to put final numbers on what Jim said, if you look at what we guided last time and you look at the implied guidance for the second-half of the year. Based on that the second-half of the year, you can see that our constant currency revenue is exactly in that range maybe trending up even a little bit more than what we said last quarter, as well as EBITDA is right in the middle of the range of what we said last quarter, while still investing back into the business for the second-half of the year.

Okay, great. Then just relate to that the topic of investing in the business. Hey, you mentioned that Project Spark finishing up to the U.S. this quarter, and that being something else you can roll out internationally. Just want to think, if there were any other areas of where of investment that you can plan in calling out for the business overall, or if you can give us a sense of the time when you’re going to start deploying a similar Project – the Project Spark in your actual markets? Thanks.

Yes, so it’s already happening. And I think I was asked similar question last time just to read, from you’re not going to see some like order of magnitude change on our investment, because we’re rolling it out in our – in a CapEx, because we’re rolling it out internationally, in fact, we’ve been doing it already. It’s in South Africa parts of that are in Canada. And we have a kind of multi-year plan for rolling it out, starting with where it’s going to have the most impact first. And then that would be Canada, India, South Africa, and then finding its way obviously into the Colombia with CIFIN, where we kind of have a little bit of a replacing their legacy system, so we can have an impact there. And then ultimately finding its way through all our country. So that’s just part of the plan. I think the other thing it’s important I mentioned about Spark, it’s allowed us to shift our spending from maintenance to new development. So several years ago or even last year, 50% of our CapEx and even our OpEx was spent on maintenance now that is shifted to 60% on new development. So we’ve taken out a bunch of cost, but we’ve also increased our capacity to develop in two ways; one now, we put more money towards it, now the costs were down; and two, we’re just much more quick and nimble at getting new solutions into the market. So you’re going to see us be able to put even more wood behind the arrow in our growth initiatives. So you’ll see us talking more over time about CreditVision continuing CreditVision Link continuing, because these things continue to grow and kind of mature from our analytics platform continuing, it’s rolling out in the U.S. now it’s kind of early stages. People are starting to beta kind of test it and hopefully like anything else we do establish beachhead and then roll out and then rollout to the countries, things like our digital marketing play will continue to move things like our ability to integrate the used data with our TLO platform, we’ll continue to move internationally. So we have a whole host of new growth initiatives that we are going to roll out not only in the U.S., but internationally. And that’s you’re going to see more of a money being spent not on infrastructure, but on the actual things that folks are buying, but they’re allowing us to increase our footprint or share in the U.S. and internationally.

Great. Thank you very much.

Thank you.

Your next question comes from the line of David Togut from Evercore. Your line is open.

Thanks. Good afternoon.

Hello.

I think Brexit, we’ve seen a pretty significant drop in interest rates around the world. And I’m wondering, if you’ve seen any pickup in demand for core credit reporting offerings as a result, for example, credit card, auto, and mortgage, which tend to be interest rate sensitive?

Yes, we – as you know that the interest rates in the U.S. is down a little bit and the outlook is probably for them to stay there, we don’t know for sure any of these things and that has had the effect of helping our core business grow and we have factor that into our guidance going forward. And we’re not talking about any massive impact, but it has kind of steady things and we don’t see any reason for that change going forward in mortgage and auto, and credit card, and key lock, and other areas were credit is used.

Understood, just as a quick follow-up, can you talk a little bit about the sort of handoff between the ending of spending on Project Spark? And then the reduction in maintenance, in other words what’s the overall impact on the P&L on an annualized basis as you finish the spending and then see the expense leverage?

Much of the savings that we experienced through Spark in fact virtually all of it has already been reflected in the last – that last year actually and maybe partially in the first quarter of this year. So that really already in because that maintenance starts coming down as we started migrating. So there is really no further reduction in OpEx that you’re going to see is part of Spark, specifically this project. We are seeing that we’re taking a engineer or a dollar spent on software other things and instead of it going to kind of let’s say keeping the lights on or keeping machines running or upgrading operating systems, it’s being spent on new development. So it substantially shifted where we’re spending our money is what’s happening now. If you will likely see further improvement in margins internationally as we rollout Spark internationally and retire some of those systems as well. But you really already seen the benefit, which is consistent with what we’ve been telling you, seeing the benefit of Spark last year and the beginning parts of this year.

And you put some parameters around the expected margin expansion as you rollout Spark internationally?

I – it’s Al. I mean I think what we’re coming in. I mean just reiterate right in the quarter alone international margins increased 600 basis points, which is pretty significant. And in – within our corporate business at the adjusted EBITDA margin level, it’s up 200. I don’t know if we want to tell to box or locker cells into margin expansion right now given the – with the growth opportunities we see internationally in the investments associated with those potential things as we continue to see this 20% plus growth and will probably continue to do that.

Right, so my view is obviously Al, I’m just saying you were – we don’t like to lock ourselves into something or set expectations other than we – you do have the opportunity to raise margins if we need to or want to. But we also want to be able to have clear bandwidth to invest because we see a lot of opportunities out there to expand from our core into adjacent markets or with new capabilities and I think as long as we can continue to prove it, we can drive market leading top line growth. This is a good use of our dollars. But like I said, we also always look for opportunities to bringing that offer to expand margins.

Understood. Thank you very much.

Thank you.

Your next question comes from the line of Shlomo Rosenbaum from Stifel. Your line is open.

Hi, thank you for taking my questions.

Hi, Shlomo.

Just a few quick ones, hey, Al is the renew – the renegotiation of Credit Karma going to change the margin profile in interactive, in other words you guys had a very strong margin this quarter, should we expect that the margin would come down on a sequential basis next quarter and in the fourth quarter?

I would say this – I wouldn’t look at just Credit Karma. I think you have to look at Credit Karma along with the – I talked about the indirect channel partner we have that was acquired by one of our competitors, and I’d look at it based on second-half of 2016. And when you combine those two factors, actually margins are going to expand. And that principally speaks to the types of revenues that are being acquired and that are going to be lapsing out of our business as I mentioned on the last call that is lower margin type business. So that revenues are going to roll off and obviously to lower margin. But as it relates to – so I would say, generally speaking, you’re going to get margin expansion when you combine the two together.

Great. And then in terms of the growth – the 9% growth in online data services. Is there a way to parse it in terms of just core underlying demand versus some of the products that you guys are clearly have kind of a strong hedging just someway to think about that?

I think online growth today the way we see it, remember in Q1, it was 10% growth, this quarter, it was close to 9% growth is kind of the growth that we’re seeing today. The – any change or maybe potential uptick to that is going to be a new product growth, such as, things like Jim talked about Credit Karma. And the adoption of Fannie, which is going to trend up the second-half of the year. What would bring that down is if there was a pullback in consumer credit. But I think, as Jim said, all things being equal, right now, we feel good about online, particularly the credit markets in the U.S., which is the metric that you’re talking about. And I think that’s going to remain pretty consistent with the goal of that continuing to trend up when we unleash things like CreditVision going to really take hold in the second-half of the year.

Great. And then what’s the $9.3 million expense and the other line below the operating line in the P&L?

A 9, you mean?

The other income and expense looks like there was a $9.3 million?

Oh, I see, okay. The principal drivers of that are acquisition fees, that’s the biggest chunk of that, that’s almost 80% of that $9.3 million. And what that has to do with is really pre-solidify M&A opportunity. So, for example, if we’re doing a deal in India, that will constitute the banker fees or we complete the audit acquisition like we did in a healthcare, that would constitute banker fees or for buying the remaining part of CIFIN their banker fees. And then generally speaking, it’s also any pre-due diligence expenses associated with that.

Okay. Last one, if I could sneak it in…

Go ahead.

…free cash flow in the second-half of the year stronger or weaker than first-half?

Hey, say that again?

Free cash flow in the second-half of the year, should we expect it to get better or be similar in the first-half, or how should we think that?

I think it’s, I mean, listen the components of it are pretty straightforward to be quite honest with you, it’s going to be EBITDA growth, less our cash interest expense, which is going to change as we don’t plan on refinancing our infrastructure. We’ve talked about our cash taxes, that’s going to be pretty consistent. And I think our CapEx halfway through the year, we’ve guided accordingly, we were about 50% early there. So if it’s going to increase all things being equal, it’s going to be an increase in EBITDA and maybe a slight benefit of working capital towards the second-half of the year, because usually get benefits from working capital second-half of the year versus the first-half, where it’s a little bit more of a use for compensation payments and bonus payouts and things like that. I would expect it to be slightly better related to those factors.

Great. Thanks.

The next question comes from the line of Tim McHugh from William Blair and Company. Your line is open.

Yes, thanks. Just a question on Project Spark rolling out internationally from a, I guess, operational issue or question. Will we – will you still be adjusting out the expense for that, or as – how should we think about how that’s going to be reported I guess?

That’s just – it’s going to be reported right up in the numbers. So I think we viewed the original Project Spark as a kind of a special one-time transformational deal. This is just part of our regular operating budget going forward both from an OpEx and CapEx standpoint. I think someone asked me, can we expect some kind of new project that will take up our CapEx on a substantial weigh, I know that will not happen, nor will it happen from an OpEx standpoint.

It’s really reflected already in our guidance, because we’re already rolling it out and then, so that I think I’m getting your question, you don’t – you won’t expect there is some below line cost or something like that. It’s right now in our P&L.

Yes, and if there is anything as we finalize the project, anything at all, it will be material and be treated in the same way if we treated previous Spark related costs.

Okay, now – and that’s helpful. And then on the trended data, you mentioned you’re going to start billing in Q3, even though I guess it will be late Q3 before it’s mandated for Fannie Mae. How – when we trying to think about the impact to you, is your sense most of the customers who have been getting this are going to continue or I guess will keep it on and pay you in Q3 or is there some part of the impact that won’t hit for Q4?

Yes. No, there is really no choice that we’re giving them. They’re using it now. It’s just part of the way it’s going to work. So there is really in that – they will be paying us. Yes, there is not a kind of a switch they can throw. It’s the switch we throw. And we did this, so that we had certainty and we’re certain that Fannie Mae will turn this on at some point. And so you can just count on it, it’s done.

Okay. Thank you.

Thank you. Just one more question.

We have time for hopefully one more here.

Okay. And the last question will come from the line of Bill Warmington from Wells Fargo. Your line is open.

[I’ll go a little higher] [ph].

Hey, Bill.

How you guys doing?

4.59 [ph], you did it.

Congratulations on a solid quarter. So a couple quick ones for you, first I was hoping to ask about how things are going into rental market for you? I know you’ve got a couple of products there, Credit Retriever, SmartMove, can you talk a little bit about the demand you’re seeing there? And what kind of adoption you’re getting?

Yes, so SmartMove continues to grow at double-digits for us, and we – again we don’t see any slowdown in that part of our business. On the Credit Retriever, we’ve revamped that whole product as you may recall. And so we’re also seeing very good growth there, and good demand, and that’s coming in the form of kind of taking back share that we may have lost two years ago when the product was not where we wanted it or need it to be and in the form of taking share as well. So we see that business has a nice slow runway going forward based on the market itself, based on the SmartMove application continuing to grow as people do their self certification and also as the bigger players like what they see Credit Retriever, which now also include an analytics component is pretty cool. And so we’re seeing – that’s a nice market for us, and products are getting nice up-tick.

And then on the alternative credit data side, where – what industries are you seeing the most demand from – and how are things going with credit links – sorry CreditVision Link and then is there potentially some opportunity for you in the payday lending space?

Yes, so we’re seeing right now prior to mortgage, let’s say we have a very nice up-tick in the syntax space, where they’re using. They didn’t have legacy systems though. They took advantage of CreditVision early on for online lending, which kind of answers the question around the payday lending space. We – there is a lot of uncertainty in that space, but CreditVision Link, the alternative data portion of this fruits that market very, very well. We’ll see how the regulation plays out, the one way and other, there is going to be any demand for that kind of a product. With regard to CreditVision Link, last time we talked to you, I think we’ve talked about 40 validations, now we – over the last 12 months, we had 60 customers trying to validate it and we move 20 customers into production and another 18 customers are in the process of migrating. So we’re getting quite a good conversion in both CreditVision and then CreditVision Link, which is our alternative data, trended data product.

Thank you very much for the insight.

Okay, thank you.

Great. And that wraps up the call for tonight. Thanks everyone and have a wonderful evening. Bye-bye. Thank you.

This concludes today’s conference call. You may now disconnect.