TransUnion (TRU) Q4 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the TransUnion 2018 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Aaron Hoffman. Mr. Hoffman, please go ahead.

Good morning, everyone, and thank you for joining us today. On the call today, we have Jim Peck, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. Chris Cartwright, the President of our US IS segment is also on the call today. In November, Chris was named Jim's successor effective May 8 of this year. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website. Our earnings release include schedules which contain more detailed information about revenue, operating expenses and other items, including certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures are also included in these schedules. Today's call will be recorded and a replay will be available on our website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, 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. I'd also like to point out that, beginning this quarter, we have enhanced our revenue reporting to now show you the largest US IS vertical, financial services, separately and we will also report six countries or regions in our international segment. At the same time, to better align with our management reporting and consolidated results, we will report segment-level adjusted EBITDA instead of operating income and adjusted operating income. On our website, you will find these new disclosures provided for 2016, 2017 and 2018, as well as each quarter of 2018. We believe this incremental disclosure offers valuable insight into the long-term performance and growth drivers of TransUnion. With all that, let me turn the time over to Jim.

Thanks, Aaron. We concluded 2018 on a strong note, capping an outstanding year for TransUnion. For both the quarter and full year, we delivered double-digit organic adjusted revenue, adjusted EBITDA, and adjusted EPS growth. This also marks five consecutive years of achieving double-digit growth for each of these three key performance metrics. That kind of performance is a testament to a very strong team and culture that we've built. We had world-class innovation, consistent execution, attractive vertical and geographic markets, as well as unique capabilities. We've made TransUnion into a highly sustainable growth engine. What that means is that we should be able to continue to deliver relative outperformance above our underlying markets for the long term and through cycles. As a result, we again saw strong top and bottom line performance in all three of our segments. This consistent performance year-to-year and quarter-to-quarter reflects our strong business model that broadly leverages data assets and capabilities across our organization to help us realize this industry-leading revenue growth with good incremental margins. While this approach certainly contributes to our financial performance, it has also created a more sustainable, diversified growth profile that we believe can deliver relative outperformance. This morning, we'll spend some time reviewing our performance and outlook for each of the three segments. I'll cover International and Consumer Interactive. Chris, as you'd expect, will talk about USIS. To start off, our International segment delivered an outstanding year, highlighted by strong revenue growth in most of our geographies and solid margin expansion. The other highlight was the acquisition of Callcredit, the number two credit bureau in the UK. As that's our largest international market now, let's start there. By the third quarter, and as we expected for the fourth quarter, revenue growth was impacted by substantial rapid and necessary changes to the business. I'm very pleased with the impressive progress the team has made, but I will note that this amount of change is quite disruptive. As a result, our UK business grew 3% in constant currency in the quarter. Let me walk you through, at a high level, what we're doing. In simple terms, we are recalibrating the UK to fit TransUnion's international playbook. Our highly-successful approach addresses innovation, adjacencies and client engagement. In terms of innovation, we are rapidly building CreditView and True Vision, which is the name of our trended credit product in the UK. In terms of adjacencies, we are augmenting the business' existing fraud, insurance and alternative lending products to drive incremental long-term growth. And client engagement encompasses our go-to-market strategy. We are changing our sales force, how they service customers and how they are compensated. And we are installing our global pricing discipline. We are pleased to already see some meaningful contract wins and a robust pipeline build even in the midst of this repositioning. At the same time, we see benefits to improving back office processes in various elements of their technology platform. Taken together, this is a very thorough, necessary, but disruptive process. The good news is that we've completed the vast majority of the heavy-lifting and are now in a position to execute against our international playbook. This is the same approach we've taken to outperform underlying markets in countries like India, Canada and Colombia, to name a few. We expect to see our UK business to deliver accelerating constant currency revenue growth over the course of 2019 as we roll out innovation and fully embed our go-to-market approach. This exit run rate for the year in the fourth quarter is expected to be strong double-digits, reflecting the full execution of the changes I just discussed. They also give us clear line of sight to more than the original $15 million of 2019 cost savings that we committed to at the time of acquisition. We remain extremely bullish about our UK business and expect to see performance accelerate considerably going forward. The rest of our International business performed quite well; and across the board, outperformed our underlying markets by running the international playbook that I discussed a few minutes ago. In India, where the underlying market remains robust, we grew constant currency revenue by 34% in 2018. We're experiencing success resulting from a combination of new products and augmented capabilities. For instance, we have rolled out CreditVision, CreditView, advanced decisioning and analytic solutions as well as an influx of fraud mitigation offerings. We're also seeing meaningful growth from FinTech and other non-traditional lenders. We have the right products and capabilities to grow with these lenders as they become a larger part of this exciting market. India remains one of the most exciting and current long-term opportunities for TransUnion to grow as we begin to build a vibrant economy that expands financial opportunity more broadly. Canada grew constant currency revenue 12% in 2018 as a result of share gains and successful innovation, like CreditView, CreditVision, Prama and IDVision. We also experienced growth in our insurance and government verticals there. While the market growth in Canada is limited, there's still meaningful opportunities for us to deliver strong performance by running our international playbook. And Africa had a good year. Coming off a tough 2017 where South Africa had fallen into technical recession for several quarters, we made some changes to our leadership team and they began to execute our playbook. The results speak for themselves. We flipped from a 7% decline in constant currency revenue in full-year 2017 to a growth of 4% in 2018. We also saw solid performance this year in our Latin America and Asia-Pacific regions. Looking to 2019, we expect another strong year as we continue to aggressively diffuse our IP across our global footprint. Moving to Consumer Interactive, we had another good quarter with strength in both our direct and indirect businesses. On the direct side of our business, we continue to see strong retention in our paid subscription products from customers who signed up in the wake of our competitor's data breach in late 2017. In addition, consumers in the market for credit products, like cards and loans, are recognizing the value and utility of the features we provide in our paid services. In the indirect side, we saw continued growth from key partners across the markets that we serve. We are also excited that we are expanding our strategic partnership with Credit Karma, this time to the United Kingdom. As a reminder, TransUnion partnered with Credit Karma at its inception to empower tens of millions of consumers with the information they need to make smarter financial decisions. We successfully expanded our partnership with Credit Karma to Canada two years ago. Now we are expanding the relationship to the UK where Credit Karma is in the process of acquiring the direct-to-consumer business of Callcredit, branded as Noddle. Noddle provides free credit reports scores to millions of UK consumers. Credit Karma is a great owner of this asset, given their world-class and proven capabilities in this arena, and we're excited to be the primary provider of credit data in a multiyear deal. A large part of Consumer Interactive's mission is to enable and empower consumers. This deal helps us fulfill that mission in the UK and we look forward to supporting Credit Karma as they continue to expand globally. That wraps up my comments on Consumer Interactive. As I pass the time over to Chris to discuss USIS, I also want to say a few things about passing the leadership of TransUnion to him. As you all likely know, Chris joined TransUnion about six months after I did and was an apparent long-term successor given his extensive background of successfully running information service businesses. Chris did a terrific job building the USIS segment by driving innovation, leveraging our data assets and capability, as well as bringing us close to the customers. Chris and I share the same vision with regards to organic growth driven by innovation and leveraging a common set of capabilities across the enterprise. Along the way Chris earned the respect and trust of the whole organization including his peers. The Board's decision to appoint him to this role has been well received across TransUnion and he is clearly the right person at the right time to successfully lead the company for years to come. With that, let me turn the time over for him to discuss USIS. Chris?

Well, thank you, Jim. I really appreciate your kind words and the ongoing support over the past six years. It means the world to me and I wouldn't be here without it. I'd also like to thank all of the associates at TransUnion, especially those in the USIS who played such an instrumental role in our company's success. We literally couldn't have done it without you guys. It's an honor to have a chance to succeed Jim and to be given the opportunity to lead a world-class company like TransUnion. I don't take this responsibility lightly and I want to assure our associates, customers, partners and our investors that, while I am a different person than Jim, of course, you shouldn't expect any fundamental changes at TransUnion. We will still be the same intensely-focused, aggressive, innovative and collaborative company that you've come to know. We still have a broad array of powerful and unique data assets and we'll keep building off this strong base to continue to deliver best-in-class topline growth at an already good margin that expands over time. So, as you all know, I've been intimately involved in the creation of TransUnion as you see it today. And I'm very excited about the near limitless potential we have in the future. Now turning to USIS, we had a terrific year across the segment. Financial Services, which is roughly half of our revenues, grew double digits again on the strength of innovation and share gains. Underling that, we saw varying performance in our end markets. But, overall, it was a strong net positive. So, to dig in a little bit on the innovation front, CreditVision and CreditVision Link grew almost 25% in the quarter on what is now a very sizable base as we continue to fully penetrate each of our end markets. In particular, we saw accelerating uptake in auto lending, particularly as a result of CreditVision Link. We're also starting to see signs of greater adoption in the credit card market. The pipeline of closed deals is substantial, giving us confidence that we'll have another year of excellent performance in 2019. The combination of iovation and IDVision is also proving to be a catalyst for strong performance. IDVision is our historical suite of fraud and authentication products largely derived from individuals' personally identifiable information. iovation was acquired in 2018 and adds the ability to utilize device-level data to mitigate transactional fraud. As a reminder, iovation has 14 years of history on more than 5 billion devices around the world. The combination of these two offerings is unique in the industry and has already helped us close substantial new business. And I'm confident that we've only scratched the surface of how powerful our fraud offering will become as we fully integrate these data assets. Built for both business users and analytic users, our Prama analytic suite continues to grow, add new customers and, most importantly, expand its features and functionality. Prama is a user-friendly platform that enables on-demand customer analytics, benchmarking, data ingestion, archive, extract and, ultimately, model-building and implementation. We see this solution as a critical value-add for customers. We're seeing the payoff to our approach and purposely building Prama from the ground up on a single, secure, self-service platform as we believe we have the most comprehensive product in the market today. So, moving to slide eight and Financial Services, so we'll look further into our Financial Services end market. Let me give you a quick update on what we saw last year and what we expect in 2019. Starting with Consumer Lending, we continued to see strength with traditional consumer lenders as well as with FinTechs. In the case of FinTech, we hold the largest share of this vibrant growing market and saw substantial growth in 2018. This resulted from FinTech lenders using more of our innovative products, including all of those I just mentioned, and also expanding into multiline lending and gaining share against traditional lenders. We also continued to have great success with startup and early stage FinTechs, positioning TransUnion well as they develop scale. We expect another strong year in 2019. The mortgage market started off 2018 better than we had expected, contributing to some fairly significant outperformance in Financial Services. As we moved into the second half and experienced several interest rate increases, the refinance market dried up. The new home purchase market softened meaningfully as a result of a significant increase in home prices and a lack of affordable entry-level inventory. We talked about this on the third quarter call and the situation worsened in the fourth quarter. In fact, from the time we provided guidance in October to the end of the quarter, the mortgage market weakened so much that it caused an approximate $3 million revenue shortfall against our expectations. If you follow any of the public data points from the MBA or large banks, this should come as no surprise. As we entered 2019, we remain highly cautious and conservative in our outlook. Given the comps through 2018, the first half will likely show less year-over-year growth and that should accelerate, though, in the back half. Now moving to the credit card market, it picked up nicely as the year went along. First-half growth was a bit muted by comps against the tail end of the rewards war that took place among issuers in late 2016 and early 2017. As we move past that, we saw card origination rates increase to their highest level since 2016. At the same time, we ended the year with more Americans having access to cards than at any other time in history. Additionally, we saw continued increase in CreditVision usage for card marketing. And importantly, we have our first large client working towards using this product for card decisioning. We expect another solid year of market and new product growth in 2019. And finally, new car sales seemed to have finally hit a tipping point, putting pressure on the auto lending market. Offsetting that, though, is continued strength in used car sales and lending. It's worth pointing out that there are actually more used cars financed in the US every year than new cars. At the same time, CreditVision Link, IDVision, collections and other TransUnion solutions are being adopted by our customers to improve their marketing and to better manage risk. Even with new car builds likely easing in 2019, we anticipate another solid year of growth in auto lending. So, on slide 9, I'll give you a little color on the next two largest verticals in USIS -- healthcare and insurance. So let's start with healthcare. As we discussed in 2018, we saw a slowdown in this business, driven largely by external factors which started in the second quarter. That led to flat organic revenue growth in the third quarter. I'm pleased to report, however, that the business returned to growth in the fourth quarter. On the last call, we mentioned that we had signed three significant back-end contracts; and those, along with other signed earlier in the year, started to monetize late in the quarter and should continue to ramp over the course of 2019. In the fourth quarter, we had strong sales performance having signed five contracts, each worth more than $1 million in annual value. These contributed to the largest dollar value in contracts inked in a single quarter in the history of our healthcare vertical. As these move through our implementation process, they will start to deliver revenue in mid-2019. This momentum comes from the combined efforts of our legacy TransUnion Healthcare solutions and also healthy contract closes from our two recent acquisitions, HPS and Rubixis. This contract momentum sets us up for a good second half. However, the first half will still be impacted by the customer consolidation that occurred during the second quarter of last year. So we expect that healthcare will deliver mid-single-digit organic revenue growth in 2019. I do want to take a moment to remind everyone that, as the back end of our business gets larger, it makes the vertical's results lumpier. The front end tends to be a steadier, transactional software run rate business, while the back end is largely contingent payments driven that don't necessarily flow as predictably. Wrapping up with our insurance vertical, we had a really great year here. Building on good market conditions, insurance delivered double-digit organic revenue growth. We saw positive impact from the 2017 acquisition of Datalink Services, which gives us the ability to deliver state-issued motor vehicle reports, or MVRs, on a national basis. In the second half of 2018, we launched our National Driving Record Solution. This combines our DriverRisk product, which is primarily used as an alert to determine if an applicant has driving violations in the 34 states where DriverRisk is offered, and state-issued motor vehicle reports. Combining these two solutions allows TransUnion to provide its customers with all the driving record needs on a national basis. In addition, insurers will now be able to more easily ingest both moving conviction information found on the MVR and the valuable insights DriverRisk maintains about active violations, especially out-of-state violation activity. Typically, most state MVRs only include conviction activity for in-state offenses, whereas DriverRisk develops a composite driving record of all violation of activity regardless of where the driving citation was issued. This new National Driving Record solution will provide a comprehensive view into a consumer's driving record that will allow insurers to more properly evaluate and price automobile insurance policies as a cost-effective price point. Early response by customers has been quite favorable and we're in the process of implementing National Driving Records in several accounts already. As this affects a key element of their underwriting, it does take time to go from the sale to revenue generation, but we have a line of sight to that already. So I'll wrap up my comments on USIS there and turn the time over to Todd, who'll walk you through our results and outlook. Todd?

Thanks, Chris. To echo Jim and Chris, we had a strong fourth quarter. For the sake of simplicity, all of the comparisons I discuss today will be against the fourth quarter of 2017 unless noted otherwise. And as Aaron pointed out, we have some new disclosures and my remarks will be built around those as appropriate. So let's start with the income statement. Fourth quarter consolidated adjusted revenue increased 23% on a reported basis and 25% in constant currency, with strong performance across all three segments that I'll detail in a moment. Adjusted revenue from acquisitions contributed approximately 13 points of growth in the quarter. This was related to FactorTrust, which closed in 2017, as well as the 2018 acquisitions of iovation, HPS, Callcredit and Rubixis. Organic constant currency adjusted revenue growth was 11% in the quarter. There was an immaterial impact on our growth rate from the credit monitoring business from a competitor as we began receiving this revenue stream in the year-ago fourth quarter. Adjusted EBITDA increased 27% on a reported basis and 29% in constant currency. Fourth quarter adjusted EPS grew 32% with a 25.8% tax rate. Without the benefit of tax reform, adjusted EPS in the quarter would have been up 14%. For the full year, adjusted EPS increased 33%, with an adjusted rate of 27%. Excluding the benefits of tax reform, full-year adjusted EPS would have been up 16%. Let's spend a minute discussing some of the key income statement items. Cost of services increased 22% and SG&A was up 23% as a result of higher operating and integration costs related to our recent acquisitions, as well as investments in strategic initiatives and higher data costs associated with revenue growth. As we did last quarter, we want to show you the impact that recent acquisitions have had on our margin and help you see the good performance of the underlying business. As you can see, excluding the impact of the acquisitions, the margin on our underlying business expanded by almost 150 basis points in the fourth quarter and 130 basis points for the full year, reflecting the typically strong incremental margin profile of our business. As a reminder, due to the size of the transaction, we are excluding the integration costs for Callcredit for two years, which is a departure from our normal practice. Before I move into our segment results, let me touch on a few important balance sheet items. First, we prepaid $60 million of debt in the quarter and it's our intention to deploy additional free cash to that purpose this year, barring any additional acquisitions. We also put in place an additional hedging instrument to now fix the rate at about 72% of our debt. This is generally where we like to keep our fixed floating exposure. Let me also point out that our pro forma net leverage dropped from 4.2 times at the end of the third quarter to about 4.1 times at the end of this quarter as a result of our strong adjusted EBITDA growth. I expect that ratio to continue to fall below 3.5 times by the end of 2019 per our expectations. Now, looking at segment revenue and adjusted EBITDA. USIS adjusted revenue grew 19%, driven by strong performance across the business. Excluding the impact of the acquisitions of FactorTrust, iovation, HPS and Rubixis, organic adjusted revenue would have been up 12%. Our Financial Services vertical grew 19% on a reported basis and 15% organically. Chris covered some of the positive trends that contributed to this very strong performance, including new product growth, continued strength with FinTech customers and an improving credit card market. The other verticals, including healthcare, insurance, rental screening, collections and government, combined grew 18% and 9% on an organic basis. Healthcare returned to growth and insurance and government had a strong quarter. Collections continues to be weak as defaults remain at relatively low levels historically. Adjusted EBITDA for USIS increased 17% and was up 12% on an organic basis. Moving to International, adjusted revenue grew 57% and 64% in constant currency. On an organic constant currency basis, the segment was up a very strong 17%. You can see the impact of the TransUnion International playbook across our other markets, highlighted by 37% constant currency growth in India. The market there remains robust and customer adoption of our new products and capabilities adds a significant additional layer of growth. The meaningful above-market growth is playing out elsewhere, with Canada up 16%, Africa up 17%, and our Latin America region up 14% on a constant-currency basis. Jim talked about the significant activity in the UK and how that creates a short-term deceleration in their growth rate. I would note, however, that we've already seen a substantial improvement in their adjusted EBITDA margin, which hit 40% in the quarter and should continue to improve going forward even as we aggressively invest in the business. Adjusted EBITDA for International grew 68%. On an organic constant-currency basis, it was up 27%, with margins expanding by almost 330 basis points. This very large increase is the result of good flow-through of the strong revenue growth and substantial improvement in our Africa margin. If you'll recall, in the year-ago fourth quarter, we took significant steps to move off their legacy technology platform and to further invest in the business for growth. Consumer Interactive adjusted revenue increased 6%, driven by balanced growth between the indirect and direct channels. We saw less than one point of benefit from the incremental credit monitoring business from a competitor. As I noted earlier, we began receiving this revenue in the fourth quarter of 2017 and the incremental year-over-year benefit was less than $1 million. Adjusted EBITDA for Consumer Interactive grew 9%, driven by the increase in revenue. Turning now to our guidance for 2019, let me start with an update to some base assumptions. For the full year, acquisitions, including Callcredit, iovation, HPS and Rubixis, should add approximately five points of adjusted revenue growth. For FX, we expect to see about one point of headwind impacting adjusted revenue and adjusted EBITDA. The strengthening US dollar is clearly a headwind and our forecast reflects the rates as of the last day of 2018. Going forward, we don't believe there will be a material revenue stream related to the incremental monitoring from a competitor. While we don't have perfect visibility into the percentage of the original subscribers that have migrated to the replacement service, we believe there is substantial breakage. This means that only a small fraction of the consumers who subscribe to the original offering have taken the opportunity to re-subscribe with the intermediary now providing the service. The other variable is that we have a different pricing relationship with each of these firms. Therefore, comparisons to 2018 will be unfavorable due to the absence of this revenue, and we'll talk about our underlying organic constant currency revenue growth excluding this. This is the same approach we took last year in describing our business without the benefit of the incremental revenue. The significantly lower year-over-year revenue from monitoring will result in a one point headwind for the year. To round out your modeling assumptions, we expect our tax rate to be approximately 27% again in 2019. We continue to look at further opportunities to improve the rate with a structure that matches our global footprint. Total D&A is expected to be approximately $355 million. Excluding the step up and subsequent M&A portion, D&A should be about $160 million. And net interest expense should be approximately $180 million. We anticipate that capital expenditures will be about 8% of revenue this year as we aggressively invest in new products and integrate our recent acquisitions. Now, on to the actual guidance. We expect adjusted revenue to come in between $2.59 billion to $2.61 billion, up 10.5% to 11.5%. So on an organic constant currency basis, excluding the incremental monitoring, adjusted revenue should be up 7.5% to 8.5%, which is slightly higher than the initial guidance we provided for both 2018 and 2017. Adjusted EBITDA is expected to be between $1.017 billion and $1.032 billion, up 11% to 13%. At the high end of our guidance, adjusted EBITDA margin is expected to be up between 20 basis points and 40 basis points from 39.1% in 2018. Adjusted diluted earnings per share for the year are expected to be between $2.57 and $2.63, up 3% to 5%. What stands out from the guidance is the disconnect between adjusted EBITDA growth and adjusted EPS growth. I think it's worth laying out all the puts and takes from 2018 and 2019, so you can see the significant impact of non-operational items. In 2018, we had significant adjusted EBITDA growth and a very large benefit from tax reform, the impact of which we've discussed in every quarterly call, so you have transparency to the underlying growth. We saw interest expense jump midyear as we added about $1.8 billion of debt to fund acquisitions. And depreciation and amortization increased as a result of several factors, first, as a result of the evolution of our business and our technology transformation, in 2016, we reevaluated and extended the useful lives of our internally developed software, which led to a significant benefit that year and in 2017. However, we faced a headwind in 2018 as we worked through the further impact of that amortization change. Second, we continue to invest capital in great revenue-generating projects, and we spent almost 8% of revenue on capital expenditures in 2018. This also includes the impact of capital expenditures related to our recent acquisitions. Shares were a very small headwind of $0.01. In the end, we delivered very good EPS growth as these non-operating items largely offset each other. When we flip to 2019, we have a similar increase in interest expense and D&A for the reasons I just disguised, plus a small headwind from taxes. Even though the tax rate is projected to be flat, as we have more revenue and income, we have a larger tax impact. The year-over-year effect is more pronounced given the sizable benefit we saw in 2018, primarily due to tax reform. Shares, again, should be a nominal headwind. The biggest opportunity to improve the overall EPS growth will come as we are able to deliver more adjusted EBITDA over the course of the year. While this assortment of non-operating items will hold EPS growth back this year, we are highly confident based on what we know today that, in 2020 and 2021, you will see a return to a more normal relationship between adjusted EBITDA and adjusted EPS growth. Turning to the first quarter of 2019, let me start with our assumptions for the quarter. For adjusted revenue, we expect about 12 points of contribution from M&A. We also expect 3 points of headwind from FX on adjusted revenue and 3 points on adjusted EBITDA. Adjusted revenue should come in between $614 million and $619 million, an increase of 14% to 15%. Adjusted EBITDA is expected to be between $233 million and $236 million, an increase of 15% to 17%. Adjusted diluted earnings per share are expected to be $0.58 or $0.59, an increase of 2% to 4%. That concludes my review of our financial results. I'll turn the call back to Jim for some final comments.

Thanks, Todd. With another strong quarter and year behind us, our focus is now squarely on delivering again in 2019. We are quite well positioned to do that as we execute against a wide range of opportunities. Overall, the markets we serve remain conducive to growth. Our innovation pipeline is as robust as it's ever been. Through the outstanding strategic acquisitions in 2017 and 2018, we've added considerable new data assets and capabilities in our verticals and international scope. Taken together, we are in an outstanding position to deliver another strong year. With that, I'll turn the time back to Aaron.

Thanks, Jim. That concludes our prepared remarks. For the Q&A, we ask that you each ask only one question, so that we can include more participants. Now we'll be glad to take those questions.

[Operator Instructions] The first question today comes from Manav Patnaik with Barclays. Please go ahead.

Thank you. Good morning, gentlemen. I guess, my first question is just more oriented around the emerging verticals. You would think that business should be growing faster than, I think, it is currently and, I guess, it was before. So, is that mainly just the healthcare drag that you talked about? And, I guess, I was just curious, when you think about healthcare, you used to call it a strong double-digit growth business. Now, it sounds like it's mid-single with high-digits getting lumpier. Like, how do you think about that fit within the company now?

Hey, good morning, Manav. And thanks for the question. Definitely, a good point that you are calling out there. As it pertains to the emerging verticals, yes, healthcare, clearly, is reported there. And as we noted in our comments this morning, the business did return to growth, but it's not at that double-digit pace maybe that we were accustomed to in 2016, 2017, early 2018 timeframe. So, that's a little bit of a drag. Also, sitting within our emerging verticals is the collections business. And what we're dealing with there is consumers are paying their bills. So, in essence, the business itself is not generating as much revenue just simply because delinquency rates overall are low. So, we're not seeing as much upside. So, I would say that those are the two biggest drivers of kind of what the disconnect would be there.

This is Chris. If I could add to that, the collections business is one of the countercyclical components of our portfolio. During this period of economic growth and really disciplined lending practices, delinquencies are low. Thus collections activity is low. That industry, the players, have been struggling. Some have gone out of business. Many have merged into one another. And it's hard to grow with that type of consolidation. Over this period, though, we have really strengthened our product and our selling capabilities. We are selling lot of net new business. And I do think, as we ride the credit cycle, it's going to return and be a real growth contributor. And then, I think of all the various other components of the emerging portfolio, we've got a lot of strength. We have a very positive growth outlook for them in 2019. And they do represent the high growth diversification that we've achieved over these past five years.

The next question comes from Andrew Steinerman with JPMorgan. Please go ahead.

Hey, Todd. This is just a simple one, net interest expense of $180 million for 2019. I am assuming that assumes no debt pay-down from here. Is that the probability that there won't be any debt paydown. And then, when you said financial leverage goes under 3.5 times by the end of the year, is that just coming from EBITDA growth then?

Hey, good morning, Andrew. Yeah, thanks for the question on that. So, yes, the $180 million of interest expense just assumes steady state for our capital structure. It doesn't assume any incremental M&A. And as a result of that, the free cash flow that we're generating is just assumed to build on the balance sheet in our models. However, as we just demonstrated in the fourth quarter, absent any type of M&A, we will have a more aggressive posture in 2019 towards making prepayments towards our debt. So, that's how you should think about the cash flow. Leverage ratio, yes. The EBITDA growth that we experienced is the main reason for the leverage ratio ticking down and trending in the direction that we've signaled all along to be below our target of about 3.5 times.

Okay, thanks.

The next question comes from Gary Bisbee with Bank of America. Please go ahead.

[Technical Difficulty] trends throughout 2018 that you highlighted and also the fact that the acquisitions lap about a quarter from now. Can you help me understand the significantly less margin expansion that you're calling for in the guidance? And as part of that, where's the incremental spend coming? Is it broad based? Is it largely bolstering the M&A? Is that underlying margin, if you will, going to slow sharply this year? And if so why? Thank you.

Hey, Gary. Good morning. This is Todd. I'll take that question. So, the guidance that we've provided for 2019 is kind of our all up and in guidance. So, when we are guiding margins to go up 20 basis points to 40 basis points. That's including the M&A that we did in 2018. So I think the way to think about that is we still do have some integration ahead of us because we're only about six months in through the end of 2018. So the underlying margin will be significantly stronger than the 20 basis points to 40 basis points because that's the all in number. So, similar to like what we did this morning in the slides, we will continue to provide that level of transparency every quarter to show you what the underlying margin would look like. But I would expect something similar to what you saw in 2018 as it pertains to that. However, we are still making significant investments back in our business. So, you will see an attractive margin profile, but we're not slowing down as far as making investments. And Chris, in his comments, highlighted Prama as one of those areas where we see just some substantial upside. So we're aggressively investing into those capabilities as well, just our analytic side [ph] just in general. So that's where I would say the priorities are going.

Your next question comes from Jeff Meuler with Baird. Please go ahead.

Yeah, thanks. First, congrats to both you and -- Jim and Chris. Questions on the 2019 guidance, understand there is a lot of global headwinds. But I think it's interesting on the organic constant currency side, as you called out, Todd, you actually are entering the year guiding the underlying growth slightly higher than you've guided the past, I think, three years. And you're calling out the H1 healthcare headwinds, mortgage and new car sales and there's some investor skittishness around macro and consumer credit. So I'm just trying to reconcile entering the year relative to past years where you've put up pretty consistent double-digit growth and Jim's feeling is good as ever about the business. Just anything on guidance methodology or what do you leave out of the guidance? What opportunities could drive upside relative to the guidance range? Thanks.

Good morning, Jeff. Thanks for the question. So, I would say that our playbook with guidance all along is to give you something that we sit here today and know that we can achieve and deliver on. So, sometimes we're called conservative. I like to think that we're actually prudent with that. Just giving what we know we're going to be able to deliver on. When you look at the guidance, and particularly in the first quarter, I think it's important to remember that Q1 of 2018 was the strongest organic growth that we had. We were up 14% and we're lapping that here in Q1 of 2019. And there were some headwinds which you already highlighted. So I think that would be the reason for maybe a little bit lower of a guide in Q1. But I think, just as far as -- you've seen how we handle these things, I would expect that, if we have a strong Q1 in 2019, that we would reflect that in our updated guidance for the full year as we always have. So --

Thank you.

The next question comes from Timothy McHugh with William Blair. Please go ahead.

Thanks. Just wanted to ask a little on International. I guess, two parts to it. Basically, South Africa, I think there's a pretty easy comp because 4Q '17 was fairly weak. So, I guess, more on an underlying basis, do you feel like that business is back on a solid growth trajectory as we go to 2019? And then, India, the growth really accelerated, I guess, it looks like, as the year played on. So obviously, a good number. But is there something happening that's driving even faster growth, I guess, as 2018 progressed?

Sure. Tim, this is Jim. So, with regards to South Africa, you observed correctly. We had a lot of reasons, including a pretty tough economy in South Africa, that caused the poor quarters last year or the year before. And so, the comps were not as difficult. On the other hand, we feel like we've gotten the business back on track. And so, you can expect growth from that business. Now, we've got to give it a few quarters to prove itself. But we're feeling much better about South Africa not being a drag on our business. India, on the other hand, as we've always said, is one of our most exciting opportunities. It's got a huge population, the drive to build the middle class, the very applicable -- or all our tools like CreditVision, Prama and others are very applicable in that segment. And so whether we can maintain these huge growth rates over time, time will tell. But we're very bullish on that country, and there's still plenty of upside relative to the number of consumers who are trying to become credit -- trying to become part of the credit system.

The next question comes from Andrew Jeffrey with SunTrust. Please go ahead.

Hi. Good morning. Thanks for taking the question. I wonder if I could dig in a little bit more on healthcare. I guess, two things. One, how do you have confidence or gain visibility to being able to implement on the back-end deals that you've signed, given that there's been a little bit of disruption over the last year or so? And then, is the mix sort of structurally shifting more toward back end long term or are there more front-end deals in the pipe that might balance that out as we go through the year and look into '20?

Yes. I'm going to go ahead and take that one. This is Chris. So, as we told you last year, we had some challenge, non-operational, in the second quarter with healthcare, namely the merger between a couple of big clients that led to lower overall pricing. And that caused us to have a flat third quarter. Now, what's happening currently is that the team was continuing to sell in the market, win some new big contracts. We won several million-dollar deals that we were in the process of implementing and ramping revenue. And that's what allowed the business to return to growth in the fourth quarter of 2018. Now, we also had a very good quarter for new sales in Q4. It was the largest in healthcare's history. We closed five deals $1 million or more. Those deals were spread across the three parts of the business -- the legacy core business, HPS and Rubixis. And so, it gives us good line of sight into our 2019 performance in healthcare where we think we can return to mid-single digits. And longer term, we just remain really bullish on revenue cycle management. We think it's a high single-digit organic grower in a very large addressable market. And you are correct that our mix of revenue is shifting a bit more toward the back. The back end is driven more by contingency payments, so you can expect a bit more lumpiness. But we're excited to see the management team turning this thing around from a revenue standpoint and returning it to the growth that we've come to enjoy.

Thank you.

The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Thank you. Jim, you mentioned the 3% constant currency growth in the UK and you mentioned what you're doing to achieve the long-term growth rates that you think the business should be doing. Could you give us a better idea of what impacted growth in the quarter and how quickly you'd expect to turn it around? Was Brexit a factor? Was it the integration or maybe something more customer specific? Thank you.

Yes the issue was not I guess structural or whatever or systemic. It really was may be an underestimation on our part of the things that we had to do to put in the systems that we'd like relative to sales compensation revenue recognition. And it caused quite a distraction. and like any company they have a pipeline they're closing we've monitored that pipeline systematically let's call it. And the number of closes just slowed substantially. And they traditionally also had a big fourth quarter. The way to recognize revenue to kind of a push things. So that all kind of combined to slow revenue growth. And so I think you'll see we've already kind of seen the worm turning a little bit and they are getting back on track. And I think we'll get back to double-digit growth sometime in the second half of the year. So there's nothing wrong with the business. Everything is as we expect it. There's no we can tell there's no material impacts from Brexit CreditView and our trended products are going to fit very well in that space. We've got our new leader in place there who's establishing control. So we feel really bullish about the business.

The next question comes from Ashish Sabadra with Deutsche Bank.

Chris you highlighted share gains and financial services driven both by innovation. As you think going forward as traditional lenders trying to replicate what FinTechs are doing and you have such a great success at the FinTech how does that position you for gaining further market share in financial services both on the online side as well as marketing and messaging services?

I think it positions us well. I mean as we've said before we have a proportionate share in the FinTech space and the FinTechs are driving a lot of innovation across financial services. Some of the larger players established players are going to follow suit. And I just think we have very good credentials or credibility in that space. That said we think that the lending market overall is still robust. We think market conditions are strong. Maybe they're not as strong as they were a year ago but we still have very strong GDP growth very high employment beginning with some wage inflation a lot of and I think more stability than we had in the fourth quarter. So our outlook is positive for both the FinTech space very positive there. But really across sort of the entire portfolio of lending.

The next question comes from George Mihalos with Cowen.

Just wanted to ask a question on the guidance front may be a little differently. I think you did 11% adjusted in the fourth quarter. You're talking 7.5% to 8. 5% now for full year 2019. It sounds like from a vertical perspective outside of mortgage everything seems to be shaping up in line to somewhat better than what you may have seen in the fourth quarter. So is that in fact the case from a vertical perspective? And then just a question Todd as it relates to USIS and the margins there, is there any sort of noticeable difference in incremental margins from the emerging vertical and the financial services?

Yes as far as the guidance is concerned I understand we're coming off of double-digit performance here in the fourth quarter annual guiding 7.5% to 8.5% on organic constant currency growth. I think it kind of goes back to what Jeff's question and just really kind of our thought process around that just making sure that the guidance we are providing is something that is achievable. Another point that I would make is that guidance is a number that we give to make sure that the market understands where we're headed. But from management's point of view we run the higher numbers than this. So if we don't hit this number the guidance number incentive compensation is significantly impacted. So that's an important point I know we've talked about that before in the past. At the vertical market level I would say yes there's relative strength kind of across all the vertical markets healthcare. Obviously for what we talked about in these calls it had some slowdowns but were confident that this business is going to grow nicely. As it pertains to margins we don't anticipate giving the margins by each of our vertical markets but we'll continue to give it at the segment level. But to give you some type of perspective on that our core financial services margins are meaningfully higher than the emerging verticals. But I think that's just kind of the obvious. The obvious reason for that is they're emerging verticals right? So we're investing back into those businesses because we see a lot of future potential there in there. So let me ask Chris to add on a couple more comments on that.

Yes just some quick perspective about the conditions we expect in the user lending markets. Mortgage is the one that has the headwind. The first half of last year was pretty strong in mortgage stronger than we expected right. So in the first half of 2019 we've got high comp. The slowdown in mortgage started second half of last year worsened in the fourth quarter. That said we'll lap those easier comps towards the second half of this year. Mortgage should flatten or return to a bit of growth right? And that's the toughest scenario that we faced. Consumer lending personal loans very strong core lending stable and growing as well, may be a little bit sideways to down in the auto space. But remember we've got the surge in used car purchasing. Used car purchases typically require more credit polls. And so the net effect of that it won't hold us back much. But still overall very favorable macro conditions still a lot of confidence amongst lenders and the strength to consumers relatively low inflation and as said seems to have stabilized and the forecast for raising rates. So overall nice market conditions.

The last question today comes from David Togut with Evercore ISI.

Could you give us a perspective on where we are in the evolution of the freemium market? The Consumer Interactive growth rate has varied over the last couple of years between strong double-digit and now approximately mid-single digits. Is freemium still a high-growth market for you? Or is this business sort of entering the middle innings?

This is Jim. I don't know if it's entering what middle innings. But there's still plenty of opportunity. I think it's not only in the U.S. but internationally as consumers seek to understand their credit report their credit scores and how they work. Our partners including those like Credit Karma are continuing to add more functionality their new partners new large bank printers that are also seeking to establish kind of engagement with the consumer. I think now in one way or another I think we through our partners and our own site we touched like 166 million consumers. And that's good because they are learning about they're engaged and they're learning about how their credit works. So there's always other things that we can start putting in their hands for free that will also help us drive revenue growth. So I think it's going to be a strong grower the indirect channel we call it going forward.

Great. Thanks everyone for joining us today. As we are at the top of the hour we're going to wrap things up here. So we thank you all for your time today and I wish you a great day. Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.