Good day, and welcome to the TransUnion 2022 First 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, Senior Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items as well as certain non-GAAP disclosures and financial measures, along with their corresponding reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded, and a replay will be available on our website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, in the comments made during this conference call and in our most recent Form 10-K, Form 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. That done, let me turn the time over to Chris.

Thank you, Aaron, and let me add my welcome. To start, let me outline the agenda for this morning's call. First, I'll discuss the mostly positive macro conditions that support our attractive full year guidance despite inflationary headwinds, then I'll review our strong first quarter performance, which has been driven by favorable macro conditions and the resurgence of our growth-oriented portfolio post pandemic, the cumulative benefit of the strong sales performance over the pandemic and our successful innovations over time. I'm pleased to report that our outperformance year-to-date and confidence in the remainder of the year allow us to raise revenue and EBITDA guidance for the full year, and I'll provide an update on the impactful acquisitions that we've closed over the past 4 months. For Neustar and Sontiq in particular, we've experienced early successes in going to market together, with really encouraging interest from customers across a wide variety of end markets. And then I'll pass the baton to Todd to discuss our first quarter results in detail, along with second quarter and full year guidance for 2022. Now as I mentioned previously, we expect market conditions in 2022 to support our strong organic revenue guidance, along with the post-pandemic resurgence in our growth-oriented portfolio, especially in consumer lending, U.S. emerging verticals and the international markets. While a lot of the focus today is justifiably on rising inflation and the long-term impacts of this, I want to remind you that the U.S. consumer remains in a strong position with respect to credit markets. Household debt levels relative to income remain low by historical standards. Average credit card balances are well below prepandemic levels, and delinquency rates for most loans are near record low levels. Additionally, the unemployment rate in March fell to 3.6%, and wages grew by 5.6%. Despite…

Thanks, Chris. And let me add my welcome to everyone this morning. I'll start off with our consolidated financial results. First quarter consolidated revenue increased 32% on a reported and constant currency basis. Neustar and Sontiq added about 25 points to revenue, and organic constant currency growth was 8%. Excluding mortgage from both the first quarter of 2021 and 2022, our business grew 13% on an organic constant currency basis. On a trailing 12-month basis, mortgage represented about 10% of our revenue, and that is expected to fall to 7% for full year 2022. Adjusted EBITDA increased 20% on a reported and 21% on a constant currency basis. Our adjusted EBITDA margin was 36.3%, down 340 basis points compared with the year ago quarter driven primarily by the lower margin profile of Neustar. Excluding both the Neustar and Sontiq acquisitions, the margin would have been 38.8%. First quarter adjusted diluted EPS increased 11% driven by adjusted EBITDA growth offset by higher interest expense and depreciation and amortization. Now looking at segment financial performance for the quarter. U.S. Markets revenue was up 42% compared to the year ago quarter. The Neustar acquisition had about 35 points of impact on revenue growth. Organic growth was 7% or 15%, excluding mortgage. Adjusted EBITDA for U.S. Markets increased 23% on an as reported and 2% on an organic basis. Adjusted EBITDA margin declined by 580 basis points, with 380 basis points of the decline due to the acquisition of Neustar. Diving into the results by vertical. Please note that at this time, we have included Neustar's financial results within Emerging Verticals. As we evaluate our operating structure as a fully integrated business, we will provide you with any necessary updated financial information. Financial Services revenue grew 5% and was up 21%, excluding mortgage. Looking…

Thanks, Todd. Well, to conclude, TransUnion delivered another strong quarter while also quickly integrating strategic acquisitions that further position us for long-term differentiated growth. We raised our guidance despite meaningfully de-risking our outlook with more aggressive expectations for mortgage declines. This reflects the strength and diversity of our portfolio. We expect another very good year in 2022 driven by the continuation of constructive market conditions and the execution of our growth playbook.

Great. And that concludes our prepared remarks. [Operator Instructions]. And now we'll be glad to take those questions.

[Operator Instructions]. Our first question will come from Andrew Steinerman with JPMorgan.

It's Andrew. I wanted to ask about margin expansion after '22, and I know that was highlighted at -- to be 100 basis points per your Analyst Day. But I'm still reminded today that margins will be down this year due to acquisitions, and I did like Slide 16 where you show operating margins to be up 40 basis points this year on an organic basis. I'm just asking the basic question. How could we be assured that margins will expand in years ahead past '22, including potential acquisitions?

Andrew, this is Todd. I'll take that question. So as it pertains to our confidence in being able to expand margins beyond 2022, I think it's instructive is just to remember the growth drivers that we anticipate. First, we expect to continue to deliver very strong organic revenue growth, which has a very significant flow-through to the bottom line. So think about just the leading innovation that TransUnion has in many product categories. We're going to continue to deliver, and that will also -- that will bolster the bottom line. In addition to that, you have to then shift to the inorganic piece. So starting first just with the acquisitions of Neustar, Sontiq and now the recently-closed Verisk Financial Services acquisitions. Neustar and Verisk Financial Services currently carry a significantly lower margin profile than TransUnion, where Sontiq primarily does have a margin similar to TransUnion's, but right now, it's being weighed down by normal integration costs to make Sontiq part of the business as it continues to grow. But if you go back to Neustar, and as Chris talked about in his remarks, the business generated a 25% adjusted EBITDA margin. And we -- as that business continues to grow, which it did grow 9% in the quarter and we're expecting it to grow high single digits, there's a nice flow-through there, but don't forget also about the cost synergies that we committed to, which are $70 million, which we believe by the end of 2023, we will secure roughly about 80% or so of those synergies. So the team has been working very hard, as again Chris talked about, in being able to integrate the organization but also to find those cost savings. So we feel very confident about being able to deliver on that piece. And then Verisk Financial Services, which, as you've seen this morning, we have put in -- because of close on April 8, we put into our guide the businesses of Argus and Commerce Signals. And we will be divesting the remainder of the businesses. Right now, again, similar to Sontiq, those businesses are turning a lower margin, and it's primarily this year due to the integration expenses that I think you'd expect us to have to incur to make that business part of TransUnion. But again, importantly, again, as the future outlook for that business, as we begin to rank -- as it begins to be part of TransUnion and we're able to change the way we go to market with Argus as well as the way we deliver the product, that will have a significant impact on the profitability, and then the integration costs will eventually go away as well.

Yes. And so, Andrew, those are all the right details. And we have a lot of confidence that we're going to deliver the margins that we've outlined. We reconfirmed full year guide. You can see improving margins in the core. With regard to Neustar, we're ahead of the initial guide that we provided when we acquired the business. So we've got a lot of confidence that we're executing in a way that will deliver the margins we've guided to.

Our next question will come from Jeff Meuler with Baird.

I want to acknowledge the good revenue performance before asking another margin question. But on Argus onboarding at a lower margin, I think you're implying that you're onboarding it at a lower margin than you previously expected, so would love some detail on that. Is it that the integration cost on the lower acquired EBITDA base because of the planned divestitures has that dilutive effect? Is there anything on how much you're planning to invest behind it or if the margins on the retained business were lower? Just any aspects like that, and then just any comment on the Q1 margin. I know that you had previously said that you took some of the conservatism out of your old guidance methodology with this guidance. But normally, when we see revenue upside, it comes with pretty good incremental margins. So any comment on Q1 margins?

Jeff, I'll take that one. And I think I'm hearing kind of a couple of different questions in there. I think you're asking, first, just about what happened with Argus and the expectations on margin, but then also you're asking about Q1. So why don't -- let me start with Q1 first and tell you just where we came in with margins. And so clearly, you can see that we did have a strong revenue performance, as you already indicated. We were $7 million higher than the high end of our guide on revenue, but adjusted EBITDA of $334 million was mid-range on the guide that we provided back in February. The drivers really kind of fall into 3 buckets for us, the first just simply being product mix. And with the increase in revenue, costs go up, but also that mix of revenue, there's some variable costs that drive that. So that's number one component. The second component primarily relates to compensation-related increases that we had within the quarter. I think there's some incentive comp. There's also some items that were just simply timing-related that we will capture later in the year. And then the third category was just the remediation efforts that we took pertaining to the data incident in South Africa. But I think what's most important to take away from the materials today is that, yes, margin was lower in Q1, but what we've committed to for the full year is to get the margin back to 37.4% before the Verisk Financial Services acquisition is included. So we're -- yes, Q1, expenses were a little bit higher, but we have -- we've managed that, within the updated guidance we've given, to be able to stay flat. If I flip over to your question pertaining to the Argus margin, lots of moving pieces. So I know most of the participants on this call are familiar with Verisk Financial Services and the financial profile, but -- and that's obviously everybody's starting point. But with us making the decision to hold the Argus and Commerce Signals only in -- to divest the other 4 businesses, there's a lot that move within those numbers. So that's kind of one thing. The second thing then, it is the M&A integration expense. We are not adding back, for our non-GAAP metrics, anything pertaining to the integration for Verisk Financial Services. We are for Neustar, right, just simply because of the time and the materiality. So -- and add Sontiq as well, too, just to clarify what we're doing. So Verisk gets burdened, and our integration efforts for Verisk, I'd say they're very aggressive. So meaning that there's a significant amount of spend that's contemplated in 2022 for that business.

Yes. And just to be clear, we're right on track with Verisk, right? This is exactly what we expected, right? And it is our typical approach to not add back. We just made an exception with Neustar because of the size of the deal.

Our next question will come from Heather Balsky with Bank of America.

I wanted to ask a question with regards to the consumer and how you're thinking about the macro environment. And appreciate your call -- sorry, your color at the start of the call. But you talked about staying close to the lower-income consumer and watching them. Can you just talk about how your business is exposed to that consumer in particular and what you're seeing right now?

Yes. Sure. I'm happy to start this. Well, look, as we all know, the consumer in the U.S. overall, whether it be high income or lower income, is in very good shape. From a balance sheet perspective, consumers and households have delevered over the course of the pandemic. And at the lower end of the income spectrum, they were primary beneficiaries of that. There was a lot of forbearance of loan repayment during the pandemic as well as infusions of income from various government sources, right? On top of that, the employment market's incredibly robust. We're at 3.2% unemployment. There's almost 5 million jobs in the U.S. that are unfilled currently. Wages are increasing, ending in an abundance of employment opportunities. So we believe, and if you follow the banks as they reported their results earlier this season, they believe that the consumer is pretty well positioned. Now of course, there is the intermediate concern about rising inflation and the impact on consumers, particularly lower-income consumers, but there are offsetting factors like rising household income, high employment and relatively low credit card balances and leverage in general. So consumers have the ability to earn more and continue to consume, and there's still a lot of pent-up consumption coming out of the pandemic period, and they have the ability also to increase their leverage, right? So there's really a mix of issues that we think shades to the positive for 2022.

Our next question will come from Ashish Sabadra with RBC.

I just wanted to focus on the fintech and BNPL. You obviously talked about the strength there in the U.S. but also the international markets. I was just wondering, in your conversations with the fintech, have you -- have they indicated any kind of slowdown in demand or marketing activity, particularly going into the back half of the year? And also maybe just to tag onto that, you talked a lot about the Neustar and the cross-selling. Can you also talk about any traction of Neustar with your fintech customers as well?

Yes. I'd be happy to. So the short answer to your question is no, the fintechs don't believe there's going to be any slowdown. And if you look at our results in the U.S. where we grew over 20% in Financial Services in the first quarter, a lot of that is resurgence among fintech and disproportionate contribution from the BNPL sector where we also have nice share. But overall, the consumer is strong, and lending is increasing. And we're very optimistic about our Financial Services performance for the full year, independent of the deflation we've got in the mortgage market because of rising interest rates. And again, what I would remind you of, and we commented on this earlier in the pandemic, but our portfolio is largely growth-oriented. And we are attacking and taking share in many of the markets in which we compete. We've got a disproportionate share of the emerging fintech and BNPL markets. We've got an international portfolio that skews toward higher-growth economies with emerging middle classes and increasing borrowing rates. And then if you look in the U.S., the emerging markets division, we have kind of attacker positions in insurance, in public sector, in the investigative solutions realm. And we think as the economy has now firmly emerged from the pandemic period, we're going to return to that growthful trajectory that we've demonstrated through the years.

That's very helpful color. And maybe I was just wondering if you could talk about the Neustar traction in the fintech side, if you don't mind.

Yes. Well, look, Neustar services some of those companies today. With the partnership now with TransUnion, there's an enormous opportunity to cross-sell back and forth. Not just Neustar coming into fintech, but truly, the cross-sell potential is very exciting. Having spent a good deal of time both in Neustar and in Sontiq, I think our investment thesis about the power of the cross-sell, about the complement between the 2 services, has been completely confirmed. And I'm really excited to just focus on integration execution and delivering some good results in the coming quarters.

Our next question will come from Toni Kaplan with Morgan Stanley.

Wanted to ask about the ex-mortgage organic growth increase for the year. So you raised it by about 100 basis points. Could you just give some additional color on the main drivers there leading to sort of better expectation than what you were previously thinking of? Maybe just talk about sort of the -- which verticals are performing better than you originally thought. And maybe also if you think about Financial Services, you're expecting 20% ex-mortgage organic for the year. You have some difficult comps coming up next quarter, particularly. Just talk about the confidence in sort of what's changed and the ease of hitting those numbers.

Toni, this is Todd. I'll take your question, which is an important one for us to go through with you. So let me start first with Financial Services and just the confidence that we have in the updated guide on an organic basis ex the mortgage impact. So within there, first, this goes back to the previous question. The fintechs continue to be very strong for us. And in particular, just to highlight a little bit more on what Chris just said, we have seen some very strong marketing activity from the fintechs. So that -- the position that TransUnion has built in that space over the last several years is significantly benefiting us not only in the first quarter but also in our expectations for Q2 through Q4. In addition, smaller, but the BNPL players as I highlighted in my remarks at the beginning, they continue to be strong, and they're growing, and we're benefiting from that in the U.S., but we're also benefiting from -- in our International operations as well, as I said earlier. Also within Financial Services, again, on the customer acquisition side, the credit card marketers that we have stronger positions with, we find them to be significantly more aggressive on the marketing side. So that's definitely another driver for us and gives us the confidence there in Financial Services. The shift out of Financial Services, and think about the other areas that are driving growth for us, in the Emerging Verticals, Insurance, as I'm sure everyone can appreciate, that's a big vertical for TransUnion, and it continues to grow at a double-digit pace. The team just continues to drive innovation into the customer base to solve very sophisticated customer needs. So that's a big part of it. The Media vertical, we grew significantly based on the acquisitions that we had made back in 2020 to build out our capabilities. So not only is that business performing well, but then you couple that with Neustar and the marketing business there, that grew 10% or greater than 10% in the quarter. We feel really good about the position that we have built, in particular, in Media. And then the International portfolio is also where we have just a significant amount of conviction. And I think what I would highlight of most importance is where that growth is coming from. And it's coming predominantly from more emerging economies like India, Latin America, Asia Pacific. And even our African business posted very strong results, and we're expecting that to continue. So that's the -- that's what gives us the conviction in the overall guidance.

Yes. The good news is it's very broad-based at this point.

Our next question will come from Manav Patnaik with Barclays.

Just like you guys gave us kind of the mix and assumptions on the mortgage side, I was hoping you could talk a little bit about how that would look if you looked at card and auto as well. And maybe just at a high level, too, I was hoping those 2 verticals specifically, like where are they versus pre-COVID levels today?

Look, it's all about pre-COVID levels. And if you look at the piece parts of our Financial Services business, and again, U.S. focused here, very strong on consumer lending, which is a very material part of that group. Card, strong activity as well, and auto holding up well despite the frequently discussed supply chain issues. So again, overall, with the exception of mortgage, which we've all talked a lot about and understand what's going on there, performance is strong in Financial Services.

I mean just curious, any sense of the assumptions you've made on those 2 categories for the year, just kind of like how you laid it out for mortgage?

Yes. Manav, I don't think we would have anything more to say than what I had said earlier. So I could reiterate that, I mean, it's -- in the card space, we continue to just see very aggressive marketing with the customers that we have strong relationships with. That's a meaningful driver for us there. And then in the auto space, what we're experiencing, and I said this earlier, just is there's demand, but the inventory issues that are holding things back. So we're still able to grow in that space. And a lot of it is, again, like what I highlighted is just the innovation that we brought to the market that we're able to differentiate ourselves as the sale of cars goes more digital today.

Our next question will come from Andrew Nicholas with William Blair.

I just wanted to ask if you could expand on the addition of buy now, pay later data to consumer credit profiles. Just kind of interested in how much demand you're seeing from your client base for that information specifically. And any sense for where your BNPL data set sits relative to your competitors in terms of size and breadth and that sort of thing?

Yes. Sure. So let me just talk more generally about this. I mean it's an emerging area, and the industry is figuring out the best way to account for BNPL activity on the credit bureau files. Each of us have an approach to doing it. TransUnion is accumulating that information from our providers, and we're going to put it on a partition spot on the credit file as it is today, and our clients will have the ability if they choose to incorporate that data that signal into their lending models. It's important to note, though, that BNPL activity is different from a traditional credit trade line. These are fairly small dollar purchases, and they need to be consolidated in order -- they would need to be consolidated in order to appear as a trade line on the credit report. Now we can currently do that through partnership, but the industry is still working out the best way to accommodate it. I can't really comment on the relative size of the data that we're accumulating versus our competitors. I guess what I will say is that we feel like we compete very well in fintech, and BNPL is no different. So I imagine the size of our data repository is going to be attractive when lenders are ready to incorporate that signal. But you have to be judicious because the data is different than traditional trade lines, you can't just plug that into conventional credit models without kind of disrupting the results, right? So we think accumulating the data and creating data attributes based on it, that our clients can then incorporate it into their origination models and their marketing propensity models and the like. We think that's a very sound way to go about it.

Our next question will come from Hamzah Mazari with Jefferies.

This is Mario Cortellacci on for Hamzah. I guess prior to the big 3 acquisitions you made, you commented on how much your portfolio is levered to the credit cycle. Could you just update us on your thoughts there? And then obviously, several times throughout the call, you mentioned how bullish you guys are on the consumer and the health of the consumer. I think you also commented a little about consumer -- about what your customer comments were, specifically from banks, but maybe you could also comment on what you're hearing from your customers internationally on the credit cycle.

Yes. So what I would say is in recent years, because of our innovation and our expansion into adjacencies and also just adding new capabilities, we've diversified our total revenues away considerably from direct correlation to origination activities. And that's the expansion into fraud mitigation services, analytic services, consumer -- direct-to-consumer and credit enablement as well as marketing, where we made substantial investments. The recent 3 acquisitions that you outlined, that just continues the diversification, but also, we're adding highly complementary capabilities to the mix. So TransUnion's portfolio today relative to where we were 5 years ago, certainly 10 years ago, during the last major downturn, it's been more than 10 years now, we're considerably more diversified, plus the international markets form a significant proportion of total revenues, and those have been very fast-growing and resilient in all circumstances except this recent pandemic, right? So we feel more diverse and pretty positive.

And on the customer comments just internationally on the credit cycle.

Yes. The customer commentary that I'm referring to, it's the way the banks were guiding the market during their recent earnings calls, right, in consumer lending, in particular, the health of the consumer is a strong area that they were citing, right? So I think our guide and our experience -- frankly, the numbers that we've delivered are consistent with that positive outlook. And I think it's much the same internationally. I mean we had a really strong performance in India, which has rebounded from a very difficult time with the pandemic and across Latin America and our businesses in Asia. The Philippines had some of the most severe lockdown that's reemerging. Our direct-to-consumer business in Hong Kong has also reestablished itself. So really looking around the portfolio globally, there's a lot of bright spots.

Our next question comes from Shlomo Rosenbaum with Stifel.

Chris, you talked a little bit about OneID platform being more powerful than initially anticipated. [Indiscernible] this ingest and tag data faster. Can you talk a little bit about how this being better than you expected, how should we think about this manifesting in terms of commercial potential? Should we see faster new product innovation? Is there a better ability to cross-sell? Can you just go through some specifics on how this being more powerful helps the company going forward on like a practical, on the ground level?

Yes. Good question. So obviously, the speed at which you can ingest data and your ability to fuse that data with other related elements and incorporate it into your data graphs and all of that, that reduces or rather it accelerates the product development cycle, speeds it up, helps you to get to market faster, helps you do more powerful kind of product engineering. So I see that as a benefit. But in addition, we have many compliance and regulatory demands to meet globally. And Neustar has a great ability to tag the data based on its source and permissible uses and the like, which will make it easier for us to comply with a continuously expanding realm of legislative and regulatory scrutiny if you look across the global markets in which we compete. Yes. And there's just a lot of intelligence that we can incorporate in that core OneID platform that we can kind of access centrally in a greater scale and make changes more quickly in the central repository that then flow out to all of the connected product offering, the product offering that we will connect increasingly over time as we integrate this business.

You're seeing more potential commercially from what you saw beforehand. So we should think about that in terms of the context of the ability to come out with more innovation now.

Well, look, I think we're going to quickly integrate TU's, and in many cases, TU's superior data sources into the OneID platform. I think much of that will occur over the course of this year, which is very quick. I can't tell you whether it's faster than it was previously. We always were very positive on the platform. But we're going to quickly integrate our best-in-class data interrelated with the data elements within the OneID platform, and that will improve the ability to resolve identity, and those benefits will flow through to all of the products that have created the OneID platform in terms of improving match rate, right? So look, I wouldn't push it too much further and say, oh, we're raising our growth expectations across the different products. Just think of it as an additional reason to feel confident in the numbers that we provided TheStreet and in the -- just in the inherent value of the technology that we acquired with Neustar.

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

Great. Thanks, everyone, for joining us today. We're going to wrap it up here. I know it's a busy day of earnings as usual, so we'll make sure everybody has time to transition over to other calls as we need to. So we hope you have a great day. Thank you for your time.

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