Good day, and welcome to the TransUnion 2022 Second Quarter 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, 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 Web site 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 Web site. 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. With that, let me now turn the call over to Chris.

Thank you, Aaron, and let me add my welcome and share our agenda for the call this morning. I'll begin with an overview of our financial results along with commentary on the economic conditions in our markets around the globe. I also would like to share highlights on the performance of our acquisitions and the progress we've made to integrate them and realize their full potential. Todd will then review in detail our second quarter results, our revised full year guidance and the changes to our business over recent years that should improve its performance during economic downturns. Now throughout the first half of this year, economic conditions have been positive across our portfolio. Consumer employment, incomes, balance sheets, spending, savings rates and credit performance have been strong in most of the markets that we serve globally. We expect this favorable environment to continue over the balance of the year. That said, there are macroeconomic concerns emerging globally that could pressure consumer spending and growth over the intermediate term. Materially higher interest rates and inflation worsened by supply chain constraints and geopolitical uncertainties could negatively affect economic conditions in 2023. These factors are more visible today in our developed markets such as the U.S., Canada and the UK. We will continue to watch the economic factors and overall consumer health across our global portfolio and react appropriately to changing conditions. Now we also believe that we're well positioned to withstand an economic downturn due to our increased diversification across geographies, vertical markets, and solutions. Demand should remain strong during the slowdown across our emerging markets, where economic growth is inherently higher and credit utilization is expanding in the developing middle classes. Also, verticals such as insurance, telecom, collections, and professional services, legal and law enforcement in the public sector run…

Okay. Thanks, Chris. And let me add my welcome to everyone. I'll start off with our consolidated financial results. Second quarter consolidated revenue increased 30% on a reported and 32% on a constant currency basis. Neustar, Sontiq and Argus added about 27 points to revenue and organic constant currency growth was 5%. Our business grew 9% on an organic constant currency basis, excluding mortgage from both the second quarter of 2021 and 2022. On a trailing 12-month basis, mortgage represented about 9% of our revenue and we expect that to fall below 7% for the full year. Adjusted EBITDA increased 19% on a reported and 20% on a constant currency basis. Our adjusted EBITDA margin was 36.9%, down 360 basis points compared to the year ago quarter driven primarily by the lower margin profile from Neustar. Excluding the Neustar, Sontiq and Argus actions, the margin would have been 40.2%, down about 30 basis points compared to the year ago second quarter. Second quarter adjusted diluted EPS increased 11%, driven by adjusted EBITDA growth offset by higher interest expense. Now looking at segment financial performance for the second quarter, U.S. markets revenue was up 44% compared to the year ago quarter. Organic growth was 5% or 13% excluding mortgage. Adjusted EBITDA for U.S. markets increased 25% on an as reported and 3% on an organic basis. Adjusted EBITDA margin declined by 560 basis points, but would have only been down 60 basis points, excluding the Neustar and Argus acquisitions. Diving into the results by vertical, please note that at this time we've 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. So starting with financial services, revenue grew 11% as reported and…

Thank you, Todd. To conclude, TransUnion delivered another good quarter and we're set up for a strong full year with 9% to 10% organic constant currency revenue growth, excluding mortgage, and with an organic EBITDA margin of about 40%. And we continue to successfully integrate our recent acquisitions and to find additional confirmation of the investment thesis for each deal. Now, let me turn the time back over to Aaron.

Thanks, Chris. And that concludes our prepared remarks. For the Q&A, we ask that you each ask only one question so that we can include more participants. Now operator, we can begin with the Q&A.

Thank you. [Operator Instructions]. Our first question comes from Andrew Steinerman with JPMorgan. Please go ahead.

Hi. It's Andrew. I wanted to ask you a question about Slide 6, which is the current '22 guide. If you could, give us more color about the 25 million bar, which is the organic revenue growth reduction for second half of the year as it refers to U.S. markets ex-mortgage, like give us a sense, does this include an assumption about a slowing consumer lending environment or any vertical within emerging verticals that have had a kind of tempered expectation for the second half?

Hi. Good morning, Andrew. Thanks for the question. I'm going to give you a response and Chris will add on. And I think it's an important one to hit off from the onset this morning. So I think what is probably most instructive to think about that $25 million ex-mortgage is just simply the growth rates that we had anticipated in our financial services business for consumer lending and for card and banking, we expected to be higher than what I would consider to be already really strong growth rates. And consumer lending, as Chris already said, we grew 29% and card and banking we were 17%. Our original guide contemplated something on consumer lending greater than 30% and for card and banking, obviously, then plus 20%. So when we set the guide in April, the signal that we were getting from the business at that point in time is that things were -- things were going to continue to be very, very strong for us in the quarter. So with that being said, that feeds off [ph] financial services. And if you go to other parts of the business, auto also is a challenge for us. I think that's pretty well documented, just due to the vehicle shortage. But nevertheless, we still were able to grow that business about 5% in the quarter. So, overall, really good. But another part of the non-financial services that I'd call out would be our tenant screening business. And in essence, what we're seeing are consumers that are staying put and they're not moving. So when that move of activity dwindles, that means less activity for TransUnion on our screening product.

Yes. And just to provide some further context, starting with the tenant screening, we still had strong growth in that vertical. It's just as interest rates increase and as home prices increase, a lot of consumers get priced out of the purchase market. They look to the rental market. That demand has led to a spike in rent prices which leads to consumers getting priced out of that. So as a result, move velocity decreases and our volume decreases. But again, I think the broader context here is really important. When we guided 20%, that reflected significant outperformance relative to the market. Now that we're guiding in the mid teens, that still reflects significant outperformance in the market. So, look, it's unfortunate that we dropped the guide a little bit in core U.S. markets, but we do feel very strong about how we're competing in the market. We continue to broaden and deepen our relationships with those clients. And again, as I said, I think we're doing very well relatively.

Well said. Thank you.

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

Yes. Thank you. Good morning. I'll tackle I guess the CIP. So you've previously talked about the tough comps in the direct or paid business and you've told us about the contract restructurings in the past. So I guess I'm trying to understand like what's worse, did the attrition rate pick up? Is it the attraction of new consumers? And if you could just help us understand what worsened? And then on the indirect channel, how much of that is paid or you're seeing the weakness versus other parts, including the ad supported freemium partners?

Yes. Look, I'll break it down for you, Jeff. Look, we expected some softness this year as we guided. We came in the second quarter a little bit softer. That said, going back to the basics and the dynamics, our consumer business is 40% direct, 60% indirect. On the direct side, going back for more than a year, we have been growing low teens, sometimes mid teens. What we experienced this quarter, though, and really in the first half of the year, was just diminished performance in our acquisition efforts as we look across the industry and we've got a good industry perspective, because we've got relationships with all the players, we see an industry-wide slowdown in demand for paid credit subscriptions and a strong shift to the freemium model. So that drove the reduction in the direct performance. And we're recalibrating our marketing efforts to compensate for that. We will also place a greater emphasis on our own freemium offerings. On the indirect side, again, yes, we had some contract restructurings that are going to cause revenue compression over the course of this year, but the trade off was extending the duration and winning higher volume commitments over time. So we would expect that to return to growth after we lap this year of compression. In addition to that and particularly with the addition of Sontiq now, we have had some really good new sales. We've really boosted our ability to compete for breach and identity with that addition. And we're bringing on a couple of major partners that reflect our competitiveness. And the sales pipeline and the closes have never been bigger. So the combination on the indirect side of lapping the price compression from contract restructuring and the sales pipeline and the new wins and their ramp, I think that positions us well for '23. And on the direct side, we'll have to continue to work on our marketing strategies and turn that around in subsequent quarters as well.

Okay. Thank you.

Our next question comes from Heather Balsky with Bank of America. Please go ahead.

Hi. Thanks for taking my question. In terms of I guess your customers and consumer, there's a lot of questions out there in terms of the macro and what you're seeing and Walmart reporting this morning and having a little bit more cautious view of the consumer. I'm curious if you're starting to see any signs of a downturn. Any caution on the lending side, any caution on the demand side in terms of credit, and just kind of what you're looking for, or what you would be looking for that signals a potential downturn? Thanks.

Yes, sure, Heather. Like all of you, we're looking at a lot of data. We're looking at overall market data in the countries in which we compete, we're looking at consumer health, and we're looking at current demand across our various lines of business. Obviously, we're concerned by rising inflation. And we know over time, it's going to sap consumer discretionary spending and it could challenge credit performance in certain categories. We have been clear, though, that we haven't seen that materialize in our financials thus far, although it's certainly present in our developed markets. We see it in the U.S., we see it particularly in the UK, and there's been a diminishment in consumer spending in the UK recently, and some of that in Canada. So clearly historic cloud's [ph] out and that's kind of where you said the economic environment is less certain in 2023. But currently, if you look at our lenders, marketing activity remains strong. The fintechs are particularly aggressive in client acquisition and they have got adequate funding to continue to originate. Card volume is really strong. And again, as we pointed out, despite the diminishment in auto supply, we still managed to grow 5%. Now, of course, we have tempered mortgage expectations. We've reduced our inquiry expectations down 40% to 45% for the year translating in revenue fall off in the low 30s. And again, we're doing our best to estimate that and we're facing an industry increase coming up. But overall, marketing and origination volumes remained strong, delinquencies remain quite modest. And so the consumer is healthy. But again, we can't ignore the impact of higher rates and inflation and what that might bring over time.

Thank you for the color.

Our next question comes from Ashish Sabadra with RBC Capital Markets. Please go ahead.

Thanks for taking my question. I just wanted to focus on Neustar, good momentum there and you talked about new wins as well. But one of the key concerns that we hear is all about ad spending slowing down as well as some of the challenges which are faced by the social media companies. I was wondering if you can talk about the resiliency of Neustar and the visibility that you have for Neustar to deliver mid single digit for this year, but also momentum going into 2023. Thanks.

Yes, thanks for your question, Ashish. And look, obviously, we've watched the performance of the major ad tech players and we've seen a drop in their revenue trajectories and their equity values and the like. And certainly some of that reflects diminished levels of advertising. It's hard to separate, though, from the impact that certain privacy measures like the elimination of IDFA and the diminishment of third party cookies is having on their ability to target consumers and to articulate their performance. And so that's a structural shift that's happening in their side of the business. Drawing a distinction to train Neustar and our marketing capabilities as we've explained before, we resolve identity based on a broad range of factors, of which those mobile ad IDs and identifiers are just one of a range. And we have a very high proportion of our identity resolved based on first party data relationships, which are not diminishing, right? So I feel like we're fairly well protected against that structural performance decline. Now looking at Neustar this year and in the next, I think let's start with '21 performance. '21 was a very strong year for Neustar. It grew 8% plus and it reflected both their strongest year of new sales in their history, and it was really across their several product lines, but also a surge in the volumes that reflected just the economic re-openings and a rebound in activity and marketing, and also in call center and just economic engagement broadly. So we built our projections off of that volume foundation. What we're seeing across our communications business and a bit in the marketing as well is somewhat of a diminishment of volume as we're not getting the same bounce coming out of the pandemic re-openings as we did last year,…

That's very helpful color. Thanks, Chris.

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

Thanks very much. This is sort of been asked in a couple of different ways so far, but I just want to make sure that I'm understanding the characterization of what's going on with the U.S. business basically. So it sounds like you're seeing still some strong lending in the market. A number of the verticals are still sort of hanging in there. But it is a little bit slower now versus previously and slower than what your initial expectations were. And it sounds like from your comments, things are still strong, but maybe just a little bit slower. And just want to understand if I'm -- confirm that I'm understanding that correctly. I think a few other companies that have reported basically said they haven't really been seeing a slowdown at this point. So just want to understand what's maybe different here versus what others have been talking about? Thanks.

Yes, I think what I would say is, look, some of your characterization, I do agree with, and we have reduced our growth expectations for U.S. markets for the year. If you focus on the financial services component, we had an ambitious guide around 20%. It was founded in the trajectory of the business at the time. Now we're guiding into the mid teens range, if you will. Some of that diminishment is mortgage, which I think everybody's familiar with. And the other parts of it reflect not growing as fast as the exceptionally strong growth that we experienced -- that we projected. But Toni, what I want to be clear is if you compare the growth rates that we outlined our guide, it was materially higher than the market and our performance thus far as well as our guide for the full year reflects material outperformance. So we are really positive on the business and very positive on the guide. And at this point, we haven't seen any diminishment in lender performance or consumer strength, right? So I want to be really clear on that. The other part is the emerging markets business, which is an increasing portion we're forecasting roughly 8% growth organic over the course of the year. We have many components that are growing double digits by insurance and media and tenant and employment screening, the whole diversified markets portfolio in public sector. So while the guide is down a bit, growing low double digits is terrific. And I think you can -- if you just step back and look at this in the broad, you can only characterize our U.S. market's performance as exceptionally strong.

Thank you.

Our next question comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Yes. Hi. Good morning. Thank you. I just wanted to talk about emerging markets. It sounds like you're expecting those countries to be pretty resilient, and just wanted more color around that. And I'm curious if it's -- are you expecting sort of the macro situation in those markets to remain resilient, or do you think that your products and if your idiosyncratic drivers in those markets that should continue to grow to the extent there is sort of disappointing macro activity?

Yes. So, look, our international division is performing exceptionally well, mid teens organic, and within that the emerging components really, really strong growth. What I need to point out, though, is, well, first of all, overall, and certainly in the international portfolio, there is some increased challenge in forecasting results, because we have got to -- we're modeling the degree of rebound due to pandemic re-openings. In emerging markets, the shutdowns were particularly severe a year ago in India and in the Philippines and in Hong Kong. Those economies are considerably more open. It's not wide open right now, and so economic activity is returning to a more normal level. And the normal level is higher inherent economic growth than the developed markets. So GDP growth, you would expect just to be higher, and that's true even during a downturn. On top of that, you've got rising middle classes that are expanding their use of traditional credit. And so you've got the additional growth element there. So that's why we believe our emerging markets structurally will produce higher growth. Now in the quarter, India grew 51%. I would not advise you to update the CAGR for India to 51%. But it is going to remain a dramatic grower as is most of our emerging portfolio. And we look at our international business, in particular our emerging markets, and our core U.S. market's B2B business as key pillars of our outperformance.

Thank you.

Our next question comes from Seth Weber with Wells Fargo Securities. Please go ahead.

Hi. Thanks and good morning. I just wanted to go back to the margin performance in the quarter, which was very good, and your comment about cost management and the synergy initiatives? Is the cost management -- are you proactively reducing costs here ahead of what you see as a slowdown, or are all of those costs adjustments just related to the acquisitions? Thanks.

Yes. Well, look, a good portion of it relates to the execution of our cost programs for the acquisitions. And you guys will recall that with the Neustar acquisition in particular, they were executing a pretty dramatic cost restructuring on the technology side, which consisted of changing cloud providers and also shuttering a lot of the data centers as a result. And we have been able to confirm that we can deliver all of those savings and we are well down the path toward executing that over the course of the year. The other component was the natural synergies that we would expect in general administrative expenses as we combined Neustar into TransUnion. Those are proceeding ahead of plan and that's one of the reasons why our adjusted EBITDA margins for the year are going to be at 26% on that deal. So we're very pleased about the progress and driving the EBITDA from our acquisitions and we're confident that we can deliver on that dimension. Now in the broad though, of course, we are looking at our overall spending, as most companies are doing, and we're prioritizing where we invest. However, we're remaining highly investment focused. The way to get shareholder value out of these deals and out of the transformational efforts that we've got on operations and technology and around our centers of excellence is through execution. We got to get the work done to deliver the economic benefit. And I feel like we're tracking extremely well. Now, of course, we're going to be smart on where we travel, where we entertain, where we add incremental heads, et cetera. But again, we are leaning in to acquisition integration, product innovation, and business restructuring.

That's very helpful. Thank you.

Our next question comes from Manav Patnaik with Barclays. Please go ahead.

Yes. Thank you. Good morning. So I guess I just wanted to follow up on, it sounded like in April when you had those expectations of greater than 30% for consumer lending, 20% for card and banking, et cetera, I guess perhaps that turned out to be too optimistic. So just to get a gauge of what you're assuming for this year, could you just let us know what those revise assumptions in those two categories, and I think you call out auto and tenant as the other areas of slowdown?

Well, Manav, we provided the detailed breakdown in Q2, because it demonstrates the strength of our performance in financial services. We've [indiscernible] an overall guide for U.S. markets for the year. We haven't broken it down though. But I think independent of the breakdown you should assume that growth is going to continue to be very strong in those categories over the course of '22. Now we're trying to be conservative in our mortgage forecast. As you can see, we are probably at the top of the market in reducing the inquiry volume that we expect in the revenue flow through. So we really tried to derisk on the mortgage side. But as you know, Manav, that's tricky business and we're facing another three quarter point increase. We'll have to see how the market reacts. But we've tried to model that and model it to the conservative side.

Okay, got it.

Our next question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi. Good morning. Thanks for taking my question. I know it's a smaller piece of the business, but I wanted to ask another question on consumer interactive and specifically as it relates to the freemium shift. What do you think is driving that? Is it economic conditions at the lower end of the consumer market? Is it enhanced marketing from other players in that space that it sounds like you're kind of planning to catch up on or something more structural, just wondering if you have any thoughts on what's driving?

Yes. Well, I should emphasize that a big portion of our revenues from this division comes from supporting freemium players to the indirect. That's been our largest avenue of participation. And some of those agreements have been restructured to offer some, let's say, relief in the near term in exchange for duration and volume increases over time. So we're going to continue to benefit from freemium because we have kind of a supportive industry neutral relationship, if you will. And that has been a unique attribute of TransUnion for a long time. We also have our own freemium offering. It's relatively modest. And as we reformulate our marketing strategies based on our current rate of customer needs, we're probably going to increase the emphasis there. Now does this suggest some economic distress? I don't know. I wouldn't put my finger on that. I think it probably just reflects the prevalence of freemium offering, the wide availability and the need to kind of embrace that model where the basic credit report will be free, but then there's the opportunity to sell value-added services like identity protection and scores, and of course lead generation to lenders as upside.

Great. And that's going to bring us to the end of the call this morning. We know it's an extraordinarily busy morning with Moody's, MSCI, Fiserv also all reporting among others in this space. So thank you very much for taking the time with us, and we look forward to speaking with many of you over the course of the quarter. Thank you.

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