TransUnion (TRU) Q4 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the TransUnion Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Aaron Hoffman, Vice President of Investor Relations. Please go ahead.

Good morning, everyone and thank you for joining us today. On the call today, we have Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We've posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website. Our earnings release includes 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. With that out of the way, let me now turn it over to Chris.

Well, thanks, Aaron and welcome everyone to our call. We've got a lot of ground to cover today. So let me quickly review the highlights of what we will discuss. First, I'll walk you through our strong performance in the fourth quarter and also for the full year. Todd will follow me and provide you with fuller details. Second, I'll share the reasons for our confidence that 2020 will be another year of solid growth and organizational progress at TransUnion. Again, Todd will cover further specifics in his section. And third, I'll reinforce our longer-term ambitions for TransUnion and confidence that we can continue to deliver superior financial results. Finally, I'll review our strong and differentiated portfolio and prudent approach to growth. We're very excited about our businesses and solutions globally and believe that they provide a terrific foundation for our continued success. So with that overview, let's get into our financial performance. For the fourth quarter and the full year 2019, TransUnion again generated very positive financial results. Our revenue, EBITDA and EPS for both periods grew double digits on an organic, constant currency adjusted basis. This strong performance is the result of broad-based innovation-led growth across our portfolio. So, now let's review some of the highlights. So in the US markets, Financial Services, our largest vertical, delivered a very strong year, despite a slow start in the first quarter. Our insurance and public sector verticals also grew rapidly and healthcare positioned itself for return to high-single-digit organic revenue growth with a year of strong new sales and implementations and a robust sales pipeline going into 2020. International results were almost uniformly strong over the year. We remain extremely bullish on our diversified and market leading position in India. We saw our UK business accelerate to double-digit top line organic growth and with EBITDA margins above 40%. And we also continue to deliver good performance in Consumer Interactive, driven by balanced growth between our direct-to-consumer and indirect channels. We also evolved our organization structure, standing up global solutions and operations functions in order to accelerate product development and increase operational effectiveness to better meet the needs of our customers. Additionally, we used our excess cash flow to substantially reduce our debt, while also refinancing it to link the maturities and reduce interest expense. So we accomplished a lot at TransUnion in 2019, continuing our track record of strong performance since going public in 2015. And since our IPO, we've delivered compound annual adjusted growth of 15% revenue, 19% EBITDA and 26% earnings per share. Now looking forward to 2020, while those results since IPO have been very satisfying for TransUnion and our shareholders, we're very aware that we need to continue to deliver strong performance. And we believe that 2020 is setting up to be another very positive year. Todd will take you through the specifics of our guidance, and you'll see forecast another solid year of top and bottom line performance with strong EPS growth and robust cash generation. As always, we want to guide you to financial results to which we have a good line of sight and that have some potential upside, but limited downside. We prefer this more certain approach to guidance and believe that our long-term shareholders do as well. Our optimism for this year is based on our industry-leading solutions and capabilities resulting from years of consistent internal innovation and strategic acquisitions. Our product development and sales pipelines continue to expand and mature, providing visibility into the growth we anticipate in 2020 and beyond. Second, the markets in which we operate remain positioned for growth. In the US, the consumer is healthy and overall lending activity continues to grow. More specifically across the financial markets, we expect strong consumer lending growth to continue, while credit card and auto lending will remain flat or grow modestly. There is more uncertainty in mortgage lending as it's driven by macro factors such as interest rates and even new housing supply and we try to account for this in our outlook. We also continue to benefit from a highly-competitive lending environment. Our lenders need differentiated data and analytic solutions that help them better understand consumers and manage credit marketing and collections risk. This creates opportunity ongoing for our industry-leading solutions such as CreditVision, CreditVision Link, IDVision with iovation and Prama. In our emerging vertical markets, both insurance and healthcare remains strong and customers are eager for the valuable solutions that we provide. We're gaining traction in the attractive public sector market at the federal, state and local levels. We have considerable opportunity to further penetrate many of our diversified markets such as telco, retail and e-commerce, utility and energy, gaming and gambling, as well as tenant and employment backgrounds. Each of these markets represent an attractive growth opportunity for our solutions, especially our investigative offering TLOxp. The direct-to-consumer space is also healthy as consumers remain focused on their credit scores and identity monitor. Internationally, we have attractive positions in emerging economies like India, Colombia and Brazil. These are fast-growing markets with outsized opportunities for us to diversify our offerings and provide value to clients. In developed markets like the UK and Canada, we're well positioned to capitalize on consumer trends addressed by our capabilities such as fraud mitigation, direct-to-consumer services, trended and alternative data and others. So the bottom line is that we're providing well-conceived, achievable guidance underpinned by tangible internal momentum as well as solid market dynamics. As we go through the year, we will calibrate our outlook to reflect any changes we experience in our markets and share that with you. We're well positioned for 2020 and committed to delivering industry-leading performance as we have since the IPO. Now, I'll talk about our broader ambitions for developing our business in the coming years. As we've talked about previously, we feel we have an effective platform for innovation and that there are many incremental growth opportunities that we want to pursue. Last year at our Investor Day, we outlined many of these opportunities, including value-added solutions like trended data, online fraud mitigation and entering fast-growing verticals such as insurance, international growth and expansion, and further investments in our technology and infrastructure. We believe that we are well positioned at the intersection of Big Data and technology and have the opportunity to further build our market position and create shareholder value. This means that from time to time, we're going to invest at elevated levels against the strategic priorities that allow us to develop further our diversified and innovation-led portfolio. We will be highly transparent about our plans, progress and outcomes, making these important investments will allow us to continue to deliver industry-leading organic growth at an attractive growing margin. For instance, in a few minutes, I'll discuss an accelerated technology investment. First, though I want to spend a few minutes on our unique market position and approach, which will help to provide context on the areas that we have and we'll invest in. So when we look across the different geographies and markets that we serve, we are strong innovators in a given market and are disrupting and taking share or we have an introductory attacker position in an attractive related market where we can leverage our capabilities. That's true in the US, in our direct-to-consumer business and internationally as well. So for example, in the US, we've seen rapid growth in our Financial Services vertical in part due to our first mover advantage with trended and alternative data, which generated new credit insights for lenders. That innovation and disruption has helped us grow at a much faster rate than the market as a whole. In our insurance vertical, we took an attacker position, expanding from our legacy credit solutions to a range of differentiated data and analytic products to take share from our largest competitor. The story is the same in healthcare and public sector and across the long tail of diversified markets. Internationally, we've executed with similar tactics though often in markets that have higher underlying growth rates as I mentioned earlier. And in our Consumer Interactive segment, we were the first to empower consumers at scale to the indirect channel, leveraging key strategic partnerships across a variety of industries, including personal financial management, lead generation, financial services and identity protection, and we continue to explore new attractive markets to extend our reach. We recognize that this was an attractive model and partnered with market leaders in their respective segments and had benefited from their growth. On top of our attractive market positions, we have an enterprise growth playbook that we've proven around the world in our various vertical markets. At its core, it's driven by consumer and customer insights and we have a successful approach along three dimensions; deep client engagement, ongoing product innovation and expansion into related adjacencies. The proof of our success is our ability to grow in excess often significantly of the underlying market growth rates. Whether it is a vertical like financial services or insurance or geographic market like India or Canada, we're able to deliver outperformance by diligently executing along these three dimensions. Critical to successfully executing this playbook is a powerful proprietary and third-party data assets that we access. In addition to our traditional attractive positions in consumer credit data, we've added an array of alternative information, including trended credit, payday and online short-term loans, retail loans, certain demand deposit, utility and other data. This extended data coverage enables us to provide behavior insights on millions of consumers that previously we could not. We've also diversified our portfolio overall with important expansions into insurance, healthcare, public sector, consumer identity, digital services and other verticals and categories. While we internally develop much of our data and analytics capabilities over these last seven years, we've also executed 18 acquisitions and a host of strategic partnerships that have meaningfully augmented our data assets and created value for our shareholders. Underpinning everything we do is a culture that emphasizes customer focus, individual accountability and performance. We've built a company that understands the needs of its customers and can deliver best-in-class solutions to meet those needs. Our talented, experienced leadership team has a proven track record of winning in the marketplace and delivering great results. And our success in growth has allowed us to hire extremely high caliber talent across the organization. We're also proud to have built a culture that understands the value of sound financial management and being good stewards of our shareholders' capital. This extends from our Board of Directors to senior leadership and down to frontline associates across the organization. Finally, I want to talk about our industry-leading technology stack, which has proven to be a competitive advantage and will continue to be. To further extend our leading technology, today we're announcing plans to accelerate our investment over the next three years. So let's start with a short history and then look forward to our vision of how our technology infrastructure is going to evolve. Beginning in early 2013, TransUnion developed a flexible and effective technology platform through consistent focus in investment. Our efforts begin with Project Spark, a systems migration from costly complicated mainframe technology to a modern, flexible, cloud compatible architecture based on high performance distributed clusters running both proprietary and open source software. Spark providing cost savings, improved development speed and created a cloud-ready platform, allowing us to standardize a lot of our underlying data ingestion and product fulfillment technology in a way that we could share globally to deploy products to market much more quickly. At the same time, we proactively improved our information security, along multiple dimensions, including personnel, procedures, hardware, software, reporting and the use of independent security experts. Since moving fully off mainframes in 2016, we stayed aggressive and evolved as new technologies and tools have become available. We've enhanced functionality for clients, reduced complexity internally, improved systems reliability and security, implemented Agile and DevOps, and began utilizing service architectures and API layers as well as developing proof of concepts for a new cloud architecture. Well, as technology advances in overseas, we continue to rationally evolve our infrastructure and our capabilities to efficiently interface with our clients in the business ecosystems in which we participate. The opportunity to take an expanded and further evolved enterprise approach to technology has become more significant as Transunion has become increasingly a global company. To that end, we're announcing today that we're going to accelerate our technology investments to ensure that across TransUnion, by design, we're even more effective, efficient, secure, reliable and performant. Our investment will be concentrated in streamlining processes, increasing automation and rapidly adopting a hybrid public and private cloud approach globally. By leveraging automation and how we work to most efficiently use technology tools and infrastructure, we're going to realize a number of critical benefits. First, like many tech-enabled companies, we have the opportunity to further streamline our application ecosystem. So we've developed a number of great applications that create value for us and that can and will be refactored and optimized into a more modern API-based and microservices-oriented architecture. Doing so allows us to simplify the delivery of IP on a global basis, reducing costs and increasing our speed-to-market even further beyond the significant benefits we achieved in Spark such as international rollouts of CreditVision, CreditView and IDVision, among other solutions. On further streamlining our application universe and implementing a hybrid infrastructure approach, we can more easily push IT into the public cloud and then pull it down for use in a given market. This approach will help us to continue our rapid international expansion as well as more easily deploy solutions across our markets. Second, we'll implement a hybrid infrastructure to create scale economies around computing and distribution. Through an infrastructure's code approach, we can automatically provision infrastructure in real time when new product features are developed. Doing so eliminates the time-consuming, manual provisioning process and replaces it with auto provisioning from either the private cloud or a public cloud provider, allowing us to quickly acquire the necessary infrastructure. At the same time, we layer policy as code on top of the infrastructure, which is built into the provisioning of our capacity, so it becomes online, fully loaded with the necessary compliance, model governance and security as well as our operational and development standards in place. Combining these two approaches with our Agile approach to software development will rapidly auto provision reliable, high-performance and regulatory-compliant infrastructure from selected public cloud providers and our private cloud to best meet the needs of our customers. And third, we'll more fully utilize readily available innovative tools from these providers instead of developing them ourselves. That will enable faster product development. Examples include new compliance tools, model training, machine learning and other cutting-edge technologies. By employing these types of tools in a more highly automated way, along with auto provisioning infrastructure, our developers can focus on value-added, revenue-generating work, free of traditional prep and enablement activities. And finally, this approach will help us to gain access to the many new business models being built on the public cloud and to capitalize more fully on these competitive opportunities. For example, public cloud providers have started building application and data marketplaces, and we're already participating in some, like AWS in its data marketplace. By doing so, we're future proofing ourselves to ensure that no matter how data and applications are delivered to customers, whether it's a public cloud marketplace or our own Prama data hub, we'll be able to participate. Beyond these very attractive benefits, our plan is to deliver a meaningful financial benefit. We expect to realize a savings by 2023 of between $20 million and $30 million per year. Todd will provide you with additional details shortly. We have deep confidence that we will successfully execute on time and on plan, while maximizing the benefits to TU and our customers. We have the distinct benefit of operating what is already the best-in-class technology stack in our industry, and we have the in-house experience of delivering Spark. This is real value to TransUnion and has underpinned much of our seamlessly executed post Spark technology evolution. In recent years, you've already moved to a more hybrid infrastructure approach with the development of Prama and the acquisitions of Callcredit, iovation to TruSignal, all of which leverage the public cloud in various ways. We can now leverage these valuable learnings to quickly and reliably execute our accelerated plans [ph]. And our in-house experience is bolstered by our new Chief Information and Technology Officer, Abhi Dar 20 year ago. Abhi has broad-ranging experience leveraging cutting-edge technology to build disruptive, consumer and customer facing institutions. We also recently added Akshay Kumar to our team as EVP of Global Technology and Architecture. Kumar joined us from Discover Financial, where he was Chief Data Officer, and led the migration of Discover's data and analytics ecosystem to the public cloud. Prior to this, he served as Chief Data Officer at Aetna, where he established the data science practice, along with the development of a 20-plus petabyte private cloud-based analytics platform. He's also held technology leadership roles with UBS Investment Bank, MBNA and American Express. So in many ways, TransUnion is a technology company as much as we are an information solutions provider. These next steps are critical to maintaining our long-standing tech leadership and for supporting our strong marketplace and financial performance. And so to recap, TransUnion had a very strong year in 2019 and is well positioned to deliver again in 2020. And we're also going to increase the technology spending over these next several years to accelerate our platform evolution to reduce costs and to maintain our technology leadership. When taken together, all of these factors are still confident that TransUnion is positioned to deliver long-term success for our associates, customers, consumers, as well as shareholders. So that concludes my discussion of our business. I'll now turn the time over to Todd, who'll walk you through our financial results and outlook. Todd?

Thanks, Chris. Let me start with our consolidated results. And for the sake of simplicity, all of the comparisons I discuss today will be against the fourth quarter of 2018, unless noted otherwise, and all revenue discussions relate to adjusted revenue. Starting with the income statement. Fourth quarter consolidated revenue increased 10% on a reported basis and in constant currency. Revenue from acquisitions contributed slightly less than 0.5 point of growth in the quarter related to the May 2019 acquisition of TruSignal. And one other reminder, the impact of lapping incremental credit monitoring from a breach at a competitor was again about a 1-point headwind in the quarter. As we've discussed previously, we received an immaterial amount of revenue in 2019 compared to 2018, as the offering is now handled by another provider and serves significantly to your subscribers. So excluding the comparability impact from this revenue, organic revenue in constant currency would have grown 11%. Adjusted EBITDA increased 11% on a reported basis and in constant currency. Our adjusted EBITDA margin was 40.2%, up about 30 basis points from the fourth quarter of 2018. For the full year, adjusted EBITDA margin was 39.8%, up about 70 basis points and slightly better than the high end of our guidance provided in October. Fourth quarter adjusted diluted EPS grew 13%, with a 26% adjusted tax rate. The rate in the quarter and the full year were slightly lower than our full year expectation of 27% as a result of realizing the benefits of certain tax planning initiatives. I'll wrap up my comments on our consolidated results with some good news about our cash flow and balance sheet. During the fourth quarter, we voluntarily prepaid another $75 million of debt after prepaying $265 million earlier in the year and $60 million in the fourth quarter of 2018. This brings our prepayment total to $400 million over the past 13 months and further demonstrates the very strong cash generation of our business model. Going forward, we'll likely continue to voluntarily prepay additional debt in the absence of any significant investments. During the quarter, we also refinanced our debt. Initially, we launched a refinancing of $1.75 billion of our B loans. As the offering was significantly oversubscribed, we were able to upsize to $2.6 billion, allowing us to pay off all of our B loans, reduce the interest rate by 0.25 point and extend maturities to November of 2026. We then refinanced all $1.1 billion of our A loans, extending their maturity to December of 2024. This is our second highly successful refinancing over the past three years. In between the refinancings, we issued $1.8 billion of debt with very attractive terms in mid-2018 to fund the acquisitions of Callcredit and iovation. We've consistently seen strong market demand for our debt, reflecting the stability and consistency of our business and our cash flows. Given our track record, we feel very confident in our ability to access the debt markets again in the future, if necessary. At the same time, our leverage ratio has continued to decline and was 3.2 times net debt to adjusted EBITDA at the end of the fourth quarter. The deleveraging has come from our fast-growing adjusted EBITDA and good cash conversion. Our preference is generally to stay below 3.5 times, providing good financial flexibility to participate in strategic M&A, fund organic opportunities, pay our dividend and prepay debt. I would add that we would be comfortable moving back above 3.5 times for the right acquisition that aligns with our strategy and has strong top and bottom line characteristics supporting a clear path to deleveraging back under 3.5 times. Now looking at segment financial performance. US markets grew 12%. Excluding the impact of the TruSignal acquisition, organic revenue would have been up 11%. Our Financial Services vertical revenue grew 16% on a reported and organic basis. As Chris mentioned, despite a slow start to the year, the vertical built momentum each quarter behind the continued strength of our innovation, some share shift, deeper penetration with certain customers and an improving macro backdrop. In the fourth quarter, we saw growth in all of our lending end markets. Emerging verticals combined grew 7% and 6% on an organic basis. Insurance delivered another strong quarter and posted high teens organic revenue growth for the full year. We continue to benefit from successful innovation, market share gains, the expansion of our property and casualty offerings, and the diversification of our portfolio into the life market as well as overall constructive market conditions for underwriting activity. The public sector continues to deliver strong results, and the future looks promising as we are winning new business and growing our sales pipeline. Healthcare had another solid quarter as we continue to see earlier contract signings beginning to monetize. As our recent acquisitions are progressing as expected, we are starting to realize cross-sell synergies between them and our core back-end business. The vertical delivered organic mid-single-digit growth for the full year, in line with the guidance that we've maintained throughout 2019. Given the meaningful improvements we've made recently and the pace of business wins, we are confident that the vertical will return to high-single-digit growth in 2020. In diversified markets, we have made inroads into the fast-growing telco industry with line of sight to additional attractive opportunities. Overall, for our emerging verticals, still note a slight deceleration from the last several quarters from an 8% organic growth to 6%. This is the result of the timing of certain revenue and continued declines in our collection vertical. Additionally, over the course of the year, we have proactively reshaped our media vertical to better leverage our unique ability to understand the connected consumer and develop people-based marketing technology. The acquisition of TruSignal supports the strategy by expanding our access to relevant data and providing a flexible platform for real-time audience creation. At the same time, as we adapted to evolving industry dynamics, we moved away from some legacy business, and that resulted in a drag on revenue in 2019. Adjusted EBITDA for US markets increased 17% on both the reported and organic basis. For my comments about international, all comparisons will be in constant currency. For the total segment, revenue grew 11%. Regional results were generally quite strong, highlighted by 25% growth in India. Our Indian business continues to benefit from a positive overall macro environment as well as our diversified portfolio. We continue to see broad-based growth in our core consumer lending business, a fast-growing commercial lending offering, direct-to-consumer, fraud as well as analytics and decisioning tools. Our UK business grew 12% again, driven in large part by our strong fraud mitigation business and our fast-growing gaming vertical. Canada continues to consistently deliver outstanding results despite a very slow growth lending market, with revenue up 12% in the quarter, you can see the benefits of our strategy to rapidly diffuse IP and capabilities into this market. We are helped by innovations like CreditVision, CreditView and IDVision as well as deploying our vertical market strategies in insurance and public sector. Our Asia-Pacific region grew 8%, as we lapped the shutdown of our D2C platform in early December and saw continued strength in the Philippines. Without the impact of the D2C platform shutdown, revenue would have grown in the mid-teens. And in Latin America, growth slowed a bit to 4% in the fourth quarter, largely due to the timing of some one-time items in the fourth quarter of 2018 as well as short-term, weaker results in one of our larger markets. Full year growth for the region was 9%, and we expect to get back to high-single-digit constant currency growth in the first quarter of 2020. Africa grew 5% during the quarter, with particular strength in our auto data business and our insurance vertical. Adjusted EBITDA for international grew 14%. Consumer interactive revenue increased 2%, driven by balanced growth between the indirect and direct channels. As I noted earlier, this result includes the headwind of comping against the impact of lapping last year's incremental credit monitoring from a breach at a competitor. So normalizing for this impact, the segment would have grown approximately 6%, in line with our general expectations for the segment. Our results continue to reflect solid consumer interest through credit management and identity protection. And our analytics-driven marketing strategy has addressed these favorable market trends. We continue to focus marketing efforts in areas that deliver efficient returns, and these efforts have proven effective for growing revenue within the direct business. Adjusted EBITDA for Consumer Interactive was up slightly in the quarter, so it would have been up more excluding the impact of lapping the incremental credit monitoring. Turning now to our guidance for 2020. Let me start with some revenue and adjusted EBITDA assumptions to help with your modeling. For the full year, the TruSignal acquisition should have a negligible impact on adjusted revenue growth. The recent disposition of a small business in the UK called Recipero will have an immaterial impact on total TransUnion revenue. In the UK, it will have a more significant effect. So excluding the impact of the divestiture, our business is still expected to deliver double-digit constant currency growth in 2020. Back to total Company, for FX, we expect to see about 50 basis points tailwind impacting both adjusted revenue and adjusted EBITDA. We expect adjusted revenue to come in between $2.857 billion to $2.872 billion, up 7% to 8%. So on an organic constant currency basis, adjusted revenue should be up 7% to 7.5%. And it's worth pointing out that given the accelerating growth rates for the total Company over the course of 2019, particularly our largest vertical Financial Services, we would expect comparisons to stiffen as we move through 2020. Meaning, this will be a front-end loaded year in all likelihood. Reflecting on some of Chris' comments about guidance, we are taking a prudent view around our Financial Services vertical, particularly with mortgage, which may end up as a headwind in 2020. We also will likely see a slight deceleration in international from the very strong 15% for the full year. Finally, Consumer Interactive was slightly stronger in 2019 than our longer-term expectations, and we are modeling more modest growth in 2020. Adjusted EBITDA is expected to be between $1.141 billion and $1.151 billion, up 8% to 9%. At the high end of our guidance, adjusted EBITDA margin is expected to be up about 30 basis points from 39.8% in 2019, pushing the margin north of 40% for the first time. Adjusted diluted earnings per share for the year are expected to be between $3.14 and $3.18, up 13% to 14%. This particularly strong outlook is a combination of our adjusted EBITDA growth, combined with the benefits of the debt refinancing and prepayment I discussed earlier as well as the implementation of global tax planning initiatives. For our accelerated technology initiatives, our current expectations are that we'll incur between $150 million and $175 million of investments over the three-year period. Based on our current forecast, we anticipate that the investments will ramp over the three years. These investments are largely for outside project management and consulting expertise, system migration costs, new software purchases and hiring of additional internal resources. We should see modest benefits begin to accrue in 2021 and 2022. And beginning in 2023, we expect to realize $20 million to $30 million of annual benefits from these initiatives in addition to the operational improvements Chris outlined. That gives us the opportunity to reinvest the benefits, let them flow to the bottom line or do some of both. Finally, we expect to absorb the capital expenditures related to these initiatives in our normal spend of about 8% of revenue each year. The capital expenditures associated with our technology initiative are largely related to internally-developed software. I also want to preview that we intend to adjust out the $150 million to $175 million of operating expenses related to the accelerated technology initiatives when we calculate our non-GAAP metrics. Although certainly part of our anticipated evolution, given the pace and magnitude of the investment, we believe it is appropriate to adjust the costs out. At the same time, this provides valuable transparency to our investors about the cost and timing of our actions. To update you on some other modeling assumptions, we expect our tax rate to fall to 25.5% compared to 26.7% in 2019. This is a result of the good tax planning work that I referenced earlier, offsetting our rapid, but profitable growth in higher rate jurisdictions like India, Canada and Colombia. As we continue to grow internationally, which, of course, is a very good thing to do, we do have a growing need to address the tax rate impact through other planning initiatives, and we're actively working on those. Total depreciation and amortization is expected to be approximately $375 million. Excluding the step-up in subsequent M&A portion, depreciation and amortization should be about $180 million and net interest expense should be about $140 million, down compared to 2019, as a result of prepaying debt and refinancing last year. And as I just mentioned, we anticipate that capital expenditures will be about 8% of revenue this year, in line with our long-term expectation. Turning now to the first quarter of 2020, let me provide our assumptions. For adjusted revenue, we expect an immaterial M&A contribution from TruSignal. There is no material impact on either adjusted revenue or adjusted EBITDA from FX. Adjusted revenue should come in between $681 million and $685 million, an increase of 9% to 10%. On an organic constant currency basis, adjusted revenue should be up 9% to 9.5%. The slight difference in the high-end is the result of rounding that combined modest M&A and FX impact. Adjusted EBITDA is expected to be between $261 million and $264 million, an increase of 9% to 10%. Adjusted diluted earnings per share are expected to be $0.69 to $0.70, an increase of 15% to 17%. In the spirit of further transparency, let me offer a few thoughts about a couple of puts and takes that will impact our first quarter performance. First, US markets overall and particularly, our Financial Services vertical had favorable comparisons to the first quarter of 2019, which should result in strong reported results in the first quarter of 2020. Second, it's also worth reminding you that the first quarter of 2019 results in India were unusually strong as a result of some one-time business and the timing of the launch of our revamped industry-leading commercial credit score. With that in mind, you should expect a challenging comparison in the first quarter of 2020 that will slow India's percentage growth rate to mid-teens. However, full year 2020's growth rate will be significantly stronger than that. So that concludes my review of our financial results. I'll return the call back to Chris for some final comments.

Well, thanks Todd. And to conclude, TransUnion continues to be on a strong growth trajectory with a very good year in 2019 and very solid guidance for 2020. As we discussed today, our ambitions are clear and we'll continue to invest aggressively in our world-class, unique market positions and growth approach to ensure relative outperformance over the longer term. Before I move to QA, I want to take a moment to thank Leo Mullin, who we previously announced is retiring as the Chairman of our Board this May. Leo has made a tremendous contribution in TransUnion over these past six years. We're pleased to have also announced that Pam Joseph has been on the Board for the past 4.5 years, will succeed Leo. We've already greatly benefited from Pam's service, including having her as a highly engaged audit chair, and we look forward to her continued contributions. With that, I'll turn the time back to Aaron.

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

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Manav Patnaik of Barclays. Please go ahead.

Thank you. Good morning, gentlemen. My question is just more around the incremental tech investments you called out. I was wondering if you could just simplify that for us a bit. Is this a lot of catching up to newer technology or outbound sentiment? Is this trying to be one step ahead of the competition catch up? Just maybe three [ph] is around those banks does in terms of what's exactly going on there with the accelerated spend.

Okay, great Manav. This is Chris. Happy to elaborate a bit on that. I mean, let's start with -- as you know, we've been making continuous investments in our tech stack in recent years. After we completed the migration of the mainframe that was Project Spark. Post Project Spark allowed us to implement what I'd characterize as the Big Data architecture and technology stack, where we moved from the mainframe to distributed low-cost clusters of servers supporting both our credit operations and our public record. And essentially, that architecture runs in what you could consider a public cloud. So if you look at where we're at today, I'd characterize it as a cloud-ready architecture, but operated internally in our data centers, which we have consolidated over this period, too. And since we achieved that milestone, we've continued to invest in systems reliability, information security and of course, innovation. We've had a lot of functionality over that period. On the stability front, for about 18 months now, we've had almost 99.999% [ph] reliability, which is hugely important to our clients. And we've made a lot of investments, further investments in our information security. And as you guys know, that work is never done. Where we stand now, though, is we look at how the public cloud has evolved and the amount of functionality that you can now procure with code, and we think it makes sense for certain of our applications to migrate to the public cloud, which will require some adaptation and rewrite of the underlying code base to take advantage of the cloud providers full utility of services. So part of this tech investment is to just simply enable that migration and take advantage of public cloud economics, infrastructure and security. The other part, though, is as we take a more global perspective for operating our business, we have an opportunity to rationalize certain aspects of our tech stacks on a global basis. And so in recent years, we have developed an enterprise architecture, a services level architecture, and there are certain applications decisioning, for example, and there are others where we have some redundancy and overlap in our implementations globally. This is a chance for us to redevelop our next-generation application that is more functional and more mass configurable in the public cloud, and it becomes a destination to which we will, over time, migrate the various instances that exist in our different operations around the globe. So think of a tech investment as enabling just the next step in our evolution, which is, one, leveraging the goodness of the public cloud and getting some savings; and two, implementing the next-gen services and microservices architecture in key parts of our tech portfolio. So, I'll pause there.

Our next question comes from Andrew Steinerman of J.P. Morgan. Please go ahead.

Hi, it's Andrew. I surely understand the additional tech investments getting added back here for 2020 guide. When I look at the underlying implied margin of the 2020 guide, it looks like it's only up modestly maybe 20 basis points. Is that right? And why is that the case?

Hey, good morning, Andrew. This is Todd. I'll take that question. So yes, you're -- I think you're looking at the adjusted EBITDA guidance correctly. I guess what I would point out, first of all, is that the high end of the guide is contemplating that TransUnion will be over a 40% adjusted EBITDA margin for the full year. We view as very strong and leading amongst our peer group, and I think what that guide also contemplates is a significant amount of investment backed into TransUnion in 2020 and also setting us up beyond. Chris talked about the tech investment already. And yes, we're adding that back just due to the size and the magnitude of that, and we want to make certain, as I've already said that our shareholders have an appreciation for the milestones that we're going to deliver. But on top of that, we have a very aggressive agenda ahead of us to continue our top line growth rate. In particular, if you think about the changes that Chris made last year to the -- to his leadership team and the emphasis that he put on solutions to help find those next big ideas to drive our organic growth and as well as on operations. Putting someone in charge of that to find the efficiencies throughout the organization, whether that just be -- and the simple things like just doing business with TransUnion and trying to make that easier, we're putting a significant amount of effort against that. So, I think the way -- I hope you take away this guide is that we're going to let some of the goodness of our revenue flow through. But at the same time, we are still taking a very aggressive approach towards investing back into the business for future returns.

As a reminder, this -- yes, this is Chris. I just want to reinforce what Todd said, because you hit the nail on the head. I mean, certainly, we could post higher margins. But as you and I have talked about previously, we think we create a degree of shareholder value over time through very strong top line organic revenue growth. We continue to have a lot of ideas to grow the business. We're investing in them. And increasingly, we see opportunities to become more efficient and effective in our customer service and our customer operations, and we're investing in those.

Great. Thank you.

The next question comes from Jeff Meuler of Baird. Please go ahead.

Yes, thank you. So Chris, I would love your response to kind of the thought that I understand that the tech spend is outsized for the next three years. But is it outsized on a semi-permanent basis going forward? And I'm asking from the perspective, it seems like Project Spark was created not or was finished not too long ago. So is it going to be the case that every five or seven years, you're going to go through this two or three-year period where you're going to have this elevated type of spend? Or is there some reason why there's kind of a unique set of circumstances right now? And I'm again, kind of keying off of the investments that's been made sense, but just how relatively recent Project Spark was. Thanks.

Yes. Okay, Jeff. I definitely understand the sentiment behind your question. And I would say firmly, I don't expect to have to declare incremental tech investment every three or four years kind of the means some other companies do outside of the space. It's ironic; when we're going through the Spark migration, our goal was to establish a Big Data architecture and get off of the mainframe. We didn't realize that we were actually commencing the journey of migrating to this thing called the cloud, which really wasn't popularized and mature at that point in time. Now it is, and now it does offer us the potential to become a little bit more efficient and also to liberate our programmers from doing some of the routine stuff and apply more of those resources around innovation. I actually think that this kind of seed investment or bubble investment where we have to spend to build out the future while we maintain the present, right? I think that's going to position us for a dynamic where we've got ongoing savings and ongoing development productivity improvements, which can drive the top line, which I think will be sufficient to enable us to continue to refactor application stacks, move things to the cloud, et cetera. I also expect that, overtime, we'll start to generate benefit from our operations program. And again, that'll give us the option of either delivering more margin to shareholders, more likely a balance between margin improvement and accelerated investments in new markets through additional product functionality or even go-to-market resources, right? So think of this as a seed investment to get the flywheel spinning in the positive direction and grow shareholder value through that dynamic.

Thanks, Chris.

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

Thank you. Just thinking about growth for a second. You had a really strong year in '19 and a solid fourth quarter as well. So just looking at the deceleration in top line growth embedded in the guidance. I understand you'd want to have achievable guidance. But I guess, you're about 75 basis points below where the guidance was at the beginning of last year. So I'm just hoping you could talk about is there something that you're viewing as worse in 2020 outside of maybe mortgage and then if you could maybe talk about the pipeline for growth, like how that compares to last year as well? Just trying to think about top line dynamics. Thanks.

Toni, this is Todd. Thank you for the question, and let me provide some more specifics around that. So yes, last year at this time, we guided our organic constant currency to be between 7.5% and 8.5%. And this year, we're at 7% to 7.5%. I think the first thing that I would call out is that when we look across our three segments, we're relatively consistent with what we've talked about being the targets for growth across those businesses. So for instance, in the US markets, we're still expecting a high-single-digit growth rate, International, low double digits, and then in Consumer Interactive, mid-single digits. So that's still kind of our expectations. I think the thing that really to call out is, you got to go back and look at the performance of our businesses throughout 2019. And we did see some pretty outsized -- significant outsized growth throughout the year. So in particular, India had a very strong year. And look, we expect the business to continue to perform well in 2020 as well, but maybe not at the same growth rate in excess of 30%, right? And I covered that earlier on the call. We're expecting it to still be in the 20%. So the business is bigger, it's a bigger base now. Still really excited about it. The innovation that we've driven on there is really just starting to take hold. So that's one area. Another area I'd call out would be insurance. We talked about this as well earlier. The Insurance vertical posted an exceptionally strong year. Again, we're expecting another good year from -- but probably not as strong on a growth basis. The other thing, too, is you've already alluded to this in your question, mortgage. I mean, right now -- or I should say, let's go back to the fourth quarter. We definitely had a little bit of a tailwind with mortgage, and that we're still experiencing that into the first quarter. But as we look further out into the year, we just don't have the same visibility. And we didn't feel it was appropriate to bet on that happening. And mortgage, as we've talked about before, has roughly been between 7% to 8% of TransUnion's total revenue. So it's not a huge piece. But when we think about guidance, it's something that we want to make certain that we hit on. So I think that those are the kind of the differences that I would call out. The last part of your question, it was just more about the quality of the pipeline. Chris and I do monthly reviews with each of our lines of businesses, and they go through their pipelines with us. I would say that the pipelines are just as good, if not better, than where we were at a year ago. So it's really just about -- the guidance right now is just about what we have that line of sight to and understanding these little subtleties that I went through.

Yes. So my add to that, Toni, would be that in terms of pipeline, we know worldwide that our sales closes in 2019. We're excellent, right? So we had a good selling year and pipelines have continued to grow. So that does position us well for 2020. The other point I'd make, though, is quarter-by-quarter over '20, our comps will become more difficult. And as we get to the third and fourth quarter of '20, we'll be comping off of really robust Q3 and Q4 performance from '19. Now the business in '19 has been quite solid, as you can see from our results. However, the comps for '19, third and fourth quarter, were actually soft because of the downturn we experienced at the end of '18, right? So that factored a bit into our thinking that we are climbing a hill in terms of comps over the course of the year. But we do feel well positioned, and we're kind of excited at the condition of the consumer in the various markets in which we compete.

Thank you.

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

Good morning. So I guess, just on -- you continue to talk about investing heavily in innovation and product development, and now also with the continued evolution of your technology infrastructure. I guess sort of a two-parter. Do you feel like there's any issue around internal capacity to manage all of that this year over the next couple of years? And maybe could you just give us a couple of high-level thoughts on where the areas you're seeing the most opportunity in terms of innovation, product development at the moment? Thank you.

Okay. Yes, good question. Well, let me start by answering it at a high level. As part of our business planning, where we affirm our enterprise strategy and our strategy for the different divisions each year, and then from that, we develop very detailed tactical plans. In recent years, we've done an increasingly sophisticated approach of mirroring our ambitions for the business to our actual execution capacity. And all roads lead to technology in this business, And it's easy to oversubscribe the tech organization given that the number one focus is, of course, security. The number two focus is systems reliability and availability, and then we have to invest in innovation. And then, of course, structural changes like the development of a services-oriented architecture or the migration to public cloud. We've been pretty detailed and thoughtful about whether we have the resources to execute against this latest evolution in our tech stack. I believe that we do. I think we have kind of a measured and systematic approach to evolving what is already a highly performing and cost-effective tech stack. And again, we're doing it with a tech organization that really proved its capabilities and extended its capabilities with the Project Spark migration. And in the subsequent years of architectural refinement, security improvements and reliability investments. So we've got a battle hardened tech core. And most of this migration, I mean, essentially, it will entirely be done with our internal resources, which is one of the reasons that we can accomplish this for the price tag that we have outlined. So we're feeling pretty good about that. In the operational areas, we're exploring various opportunities. And again, what I -- in my experience around operational excellence is once you make that a focus and you start to examine your business, you find opportunities and you find quick wins and savings that can then become the raw material for further resource investment and an acceleration of an effectiveness program. I think you're going to see that dynamic unleashed here at TransUnion. In terms of areas that we're excited about. I mean, look, globally, there's an appetite to extend our go-to-market, right? When we hire a sales executive in any particular segment, there's an upfront investment period of about a year, maybe 18 months until it's breakeven. We also have different verticals that we're extending in our emerging portfolio, and that's true in the US and also internationally. There may be some opportunities to start up a bureau in a given geography or to certainly extend or bring in our product suite into other areas of the portfolio we're doing that actively. Yes; so those are some of the highlights. I don't know if -- I think Todd's good. So we'll leave it at that.

Thank you.

The next question comes from George Mihalos of Cowen. Please go ahead.

Hey guys, thanks. Thanks for taking my questions. Todd, just wanted to ask on the emerging vertical. The 6% growth that you saw there. It sounds like, given the momentum in healthcare, the continued strength in insurance and the like that we should, from this level, sort of see an acceleration going into 2020. Is that correct? And then, secondly, I think you had mentioned for going voluntarily some revenue within that vertical again. How much of an impact did that have on the quarterly growth rate? Thank you.

George, good morning and thanks for the question. Yes, when we look at the emerging verticals, I mean, I think first thing to think about, right, is emerging verticals contain several different vertical markets that we see an opportunity to be able to take TransUnion's core data assets and analytical capabilities into. So think of -- we talk about collections. We talk about tenant screening, diversified markets, insurance, public sector, media, healthcare, it's a whole collection of verticals that are in there that any one point in time are going to -- some are going to perform well, and some of them may be a little bit of a drag on the overall growth rate. So, when we look -- when you look at emerging verticals, as we've already spoken about, insurance had a particularly strong quarter as well as what we've done in public sector. So that continued to do quite well. The healthcare business, we've talked about this over the last couple of years, that this is a business that tends to be lumpy from quarter -- could be from quarter-to-quarter. So I think first thing to call out there is on a year-over-year basis, the comparable was a little bit tougher for the healthcare business. But I think the most important point to make about that is, what I've already addressed earlier is that, the business did exactly what we said it was going to do, being that it grew in the high single -- in the mid-single digits in 2019, and we're expecting it to ramp to the high-speed is still there for us. Collections continue to be soft for us. And I think that's again just the kind of a testament to the state of the consumer in the US, delinquency rates in general, are flat or if they're ticking up, not too much. And then, yes, the other part of this business is our media business. And yes, I did talk about that this was an area that we repositioned or reshape, to better understand what we refer to as the connected consumer and what we're focused on there is just developing people-based marketing technology. And we made the acquisition of TruSignal. It was a smaller acquisition, but it gave us access to data for real-time audience creation, right. So what we're doing is, we're in essence pivoting this business, and we moved on from our original entree into this space, and we've kind of sunsetted some of our legacy products. So there's a little bit of a drag on there on the media. But we continue to be excited about the investments that we made there. We're excited about the leader that we have run in this space. So there's some good runway ahead for us in the emerging verticals. So as we look forward, to kind of the last point of your question, I would expect a similar type of performance as we go forward because there are so many different puts and takes because we operate in so many different verticals. So that's really probably the best way to think about it.

The next question comes from Andrew Nicholas of William Blair. Please go ahead.

Hi, good morning. In response to the last question, you alluded to your success in the public sector of late and it certainly seems like it's one of the bigger near-term opportunities for TransUnion. I was hoping you could provide a little bit more detail on the size of that business, what's realistic for that business in terms of a near-term growth rate? And then maybe what you consider to be the key areas of opportunity in that business over the next 12 to 18 months? Thanks.

Okay. Well, listen, happy to elaborate on that. We don't disclose the size of the subsegments within emerging on the quarterly calls. But I would say that public sector has attained a critical mass for us. And in terms of the nature of what we're doing there, it's everything from assisting with employment screening to ongoing active monitoring for security purposes. There's a lot of -- we leverage our fraud mitigation suite to identify and authenticate consumers as they access different government agencies in order to secure benefits provided, and it's a very broad and power need. We insist the government in various ways with our data to do various analyses really to mitigate risk and to optimize operations. We also have a nice component of the business from our public records based investigated product, which is called TLOxp, and that's sold to enforcement agencies at all levels of government, really, so federal, state and local. So yes, I think those are the highlights of the revenue components within public sector.

The next question comes from David Togut of Evercore ISI. Please go ahead.

Thank you. Good morning. Embedded in your low double-digit revenue growth guide for international, could you talk about your expectations for the UK from a growth perspective? And in particular, how is your product set evolving for open banking? Is there a number of companies that have introduced new applications there in the last six to 12 months?

Okay. Yes, good morning and thanks for the question. We're expecting to have a good year in the UK based on the revenue momentum that we've established in the third and fourth quarter of this year. We reached double digits in terms of top line organic growth. That is an expectation for 2020 as well. It's a combination of good momentum from a more effective selling operation on all dimensions. We have confidence based on the business that we closed in '19, the robustness of the pipeline for '20 and the fact that a lot of the complementary products around our credit products that we've migrated into the UK are in market, and we're demoing them and we're building pipeline, and that's true, whether it's our trended credit data product, which we call TruVision in the UK or our CreditView Solution, or our fraud mitigation solution. Now in terms of open banking, we've been in market with an open banking product for many quarters now. And we're making good progress there. One of the more exciting use cases that we've established with the products is various financial institutions want to use our categorization logic from our open banking solution to apply to their own customers and their own transactions to better understand those consumers and those relationships. So we're winning a lot of business, helping provide that insight for our financial customers.

David, I'd just add one other thing just to emphasize the point that I made when I went through the 2020 guidance. And don't lose sight of the fact that we did divest of a small business in the UK that was called Recipero. Overall, TransUnion not material, so we weren't able to classify it as discontinued operations. So meaning, we'll have to deal with the comparable in the prior year. So when we talk about the UK throughout 2020, we will talk to you of ex that divestiture and consistent with what Chris just said when you exclude that, we do expect the business to grow double digits on that basis.

Understood. Thank you very much.

And the last question today due to time constraints comes from Andrew Jeffrey of SunTrust. Please go ahead.

Hey, thanks for squeezing me in. I appreciate it. I realized the comps get tougher in the Financial Services vertical as the year progresses. But Chris, I wonder if you can comment on just sort of generally, how much of the outsized growth you're seeing there is driven specifically by fintech? And we saw Visa making to acquire Plaid, for example. And I just wonder if there's sort of an intrinsic share shift that's taking place that's fueling some of that growth for TransUnion to that given your strong position?

Okay. Well, putting aside the question of share shift for a moment. The growth across the different segments of the financial landscape, be it fintech, overall consumer lending, car, auto, mortgage, is it's pretty diversified and strong. In a couple of those categories, namely auto and mortgage, we talked about being at kind of market peaks in previous calls, certainly true of auto where the challenge has been affordability as well as just the volume of vehicles being sold. However, we experienced nice growth in all these categories. We got an extra boost in mortgage because the rate environment is favorable to refinancing. As we think about 2020, we're not sure how long that is going to continue. And we attempted to model a conservative posture into our overall guidance. That said, so far, so good in the year, but we'll just have to see how that develops. But we're not overly reliant on any subvertical within the financial services landscape to attain our goals for 2020.

This concludes our question-and-answer session. I would like to turn the conference back over to Aaron Hoffman for any closing remarks.

All right. Thank you very much. We appreciate everyone's time today, and we look forward to speaking with you all very soon. Have a wonderful day.

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