Good morning, and welcome to the TransUnion Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [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 attending 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 the 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, Forms 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. So with that, let me turn the time over to Chris.

Thank you, Aaron, and let me add my welcome and share our agenda for the call this morning. First, I'll discuss the macroeconomic conditions in TransUnion's markets around the world. Then I'll provide an overview of our solid in-range fourth quarter revenue and adjusted EBITDA. I'll also review the posing progress with our recent acquisitions to accelerate revenue growth, achieve targeted savings, and leverage their technologies across the enterprise. Finally, Todd will detail our fourth quarter results along with our first quarter and full year guidance. Beginning with Slide 4, inflation in our developed markets around the world remained elevated throughout the year and central banks raised interest rates to slow consumer demand and return to long-term inflation targets. Economic growth flowed as a result. However, thus far, developing economies have been less impacted by these factors. Activity in our international emerging markets of India, Asia Pacific, South Africa and LatAm have remained strong. Over the course of 2022, in the U.S., the UK and Canada, higher inflation and interest rates have pressured consumers and sapped economic growth. In each succeeding quarter in these markets, growth slowed and consumers became more cautious, given the impact of inflation on their spending power. In the U.S., consumers are still healthy overall due to high employment and low debt-to-income levels, compared to before the pandemic. However, consumer savings have declined, delinquencies have risen and spending has fallen, especially for lower income and subprime consumers. Many of our large lending customers have confirmed this perspective and while their financials are still strong and consumer demand for credit is healthy, they too are cautious that their markets might slow further and as a result, have tightened lending standards, reduced originations and increased loss reserves. Despite these headwinds, TransUnion grew revenue at high-single-digits organically in '22,…

Thanks, Chris, and let me add my welcome to everyone. I'll start off with our consolidated financial results. Fourth quarter consolidated revenue increased 14% on a reported and 17% on a constant currency basis. Neustar, Sontiq and Argus added about 19 points to inorganic revenue and I'll remind you that both Neustar and Sontiq contributed to organic growth beginning in the month of December. Organic constant currency revenue declined 2%. Our business grew 2% on an organic constant currency basis, excluding mortgage from both the fourth quarter of 2021 and 2022. For full year 2022, mortgage represented about 6.5% or about $240 million of our total revenue. Adjusted EBITDA increased 14% on a reported and 17% on a constant currency basis. Our adjusted EBITDA margin was 35.6%, down 10 basis points, compared to the year-ago quarter. Excluding Neustar and Sontiq in October and November, and Argus from the full quarter, the organic constant currency margin would have been 36.8%, up about 110 basis points, compared to the year ago fourth quarter. Fourth quarter adjusted diluted EPS declined 4% with adjusted EBITDA growth offset by higher interest expense and a higher-than-expected full year adjusted tax rate of 22.4%, compared to our 22% guide. Our full year adjusted tax rate came in almost 0.5 point higher than we anticipated, primarily due to the completion of our analysis of certain tax implications of our recent acquisitions and the final determination of the impact of a change in the U.S. tax law regarding the requirement to capitalize and amortize R&D expenses. The result was a slightly higher full year adjusted tax rate with a cumulative catch-up recorded in the fourth quarter. I'd point out that our multi-year proactive tax strategy has resulted in an attractive adjusted tax rate and we continue to look at…

Thanks, Todd. I want to wrap up today's call by reiterating our commitment to our 2025 targets. Despite the market challenges we're experiencing, we expect to deliver against these targets, although we don't expect that the growth will be linear. Our combination of attractive end-markets and geographic footprint, along with differentiated and complementary solutions and a robust innovation pipeline gives us a line of sight to reaching these goals. Now let me turn it back to Aaron.

Thanks, Chris. 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. Operator, we can begin the Q&A now.

[Operator Instructions] The first question is from Jeff Meuler of Baird. Please go ahead.

Yeah, thank you. So the overall revenue guidance looks quite good to me. You gave us a lot of detail on international bookings and emerging markets, conditions, trends in U.S. Emerging Verticals, Neustar, et cetera. It looks – I guess, the area that I'm struggling a bit with is, it looks like it implies quite an acceleration in U.S. financial markets getting really good growth, probably later in the year. As you mentioned, consumer lending still worsening. You gave us mortgage. Just – it sounds like auto is kind of a mixed bag. Can you help us with that piece, just anything further you can say to give investors confidence in the implied better trends in U.S. financial markets later in the year?

Hey, Jeff, good morning. It's Todd. Thanks for the question. I think it's a very appropriate place to start this morning. So, clearly, when you look at our guide compared to the high end that we provided of about $3.885 billion, and you see whereQ1 where we're guiding $917 million at the high end, we definitely see a little bit of an uptick in the revenues from the Q1 levels. And largely, what we're seeing is we feel that we have felt the impact of businesses that are impacted by cyclicality. So, for example, the mortgage business, we definitely expect Q1 of '23 to be a further headwind. But as the year progresses, that those headwinds will start to find an equilibrium point, as well as we were able to take some pricing actions within mortgage that as the year goes on, we'll be able to moderate some of the volume decline. Another area to highlight would be our insurance vertical. We saw some unusual factors in the second half of 2022 with the high repair and replacement costs that our customers were seeing due to supply chain issues and they are in a way to increase their premiums. As you heard in my prepared remarks already this morning, we've started to see that subside. So we're expecting the insurance business to benefit from insurers being back in market – marketing, as well as consumers shopping for insurance. And just as a reminder, in our insurance vertical, it's not necessarily linked to car sales. It's more about the premiums and the impact to the consumer. So that shopping activity, we anticipate to be a driver as consumers are focused on managing their finances in this high inflationary environment. And to highlight that, too, the reason I just spent as much…

Yeah, look, let me just – this is Chris, and just the first question, let me just set level set here. The basis of our forecast in '23 is heavily influenced by the challenging market conditions we saw in the fourth quarter, right? And so, while we're not assuming a recession, we are also not assuming any particular recovery. Now of course, the growth rates are going to increase in the back half of the year, because the comparisons are going to ease substantially. And then as Todd said, the first quarter of the year, because of seasonality is typically our softest from a revenue standpoint and it just so happens that this year, we're comparing against a very strong first quarter in 2022 where the enterprise grew 8%, financial services U.S. grew, I don't know, I think it was in the mid-teens, right? So things were quite robust then. But, over the course of '22, with each passing quarter, we saw softening in our U.S. financial services business and also in the FS businesses in other developed markets. So, we took that endpoint, which we think is near a bottom and we extrapolated from that. Now we've also got some countercyclical benefits. As you saw, our acquisitions are delivering good growth and Neustar, which is a very material chunk of the revenue we're guiding it to 8%. We exited the year at 8%.We've got a strong line of sight to that revenue, in particular, because as we've said before, it's about 80%recurring and we had one of our best selling years ever last year, good sales volumes and momentum increasing with each passing quarter, right? So we feel like we've got a nice momentum in Neustar, which is a big kind of diversifying and countercyclical force at this point.

The next question is from Andrew Steinerman of JPMorgan. Please go ahead.

Hi, Todd. I wanted to look at Slide 19. Slide 19, this is the margin slide, and particularly focus on the second red bar, the 45 basis point drag to formulate the '23 margin. I was hoping you could break down and maybe explain a little bit more the three items that are highlighted there, incentive comp, royalties and continued investments, recognizing that these three items are offsetting the revenue flow through.

Yes, good morning, Andrew. Thanks for the question. So specifically, to the margin and you see almost a 50 point decline there. A couple of factors go into that. First of all, from a compensation perspective, since the second half of last year, TransUnion has been very focused on ensuring that we are making our hiring decisions on important strategic priorities for us. So we continue to fill roles that have that importance for us. But when – and when we look forward, we're very proud of the talented team that we have and all the work that they accomplished in 2022 with acquisitions and organic initiatives, we felt that it was important to make certain that we're fully recognizing the extraordinary work of our people by providing the compensation necessary to increase for our merit and promotion pool as well. In addition, we also needed to reset our variable compensation up to target levels when you compare to what the payouts were in 2022. . A second thing to cover here would just be when you think about our volumes in areas where we are experiencing year-over-year declines in volumes, it's important to note that those declining volumes have a higher margin impact than any type of pass-through pricing markup that we would have on a higher royalty expense as an example. So that's the second important factor to go into there and I think third, and really getting back to the point just on our people, we are continuing to invest in several organic initiatives. We're not sacrificing the long-term growth potential of TransUnion. So we continue to have meaningful investments in initiatives. Chris just covered several of them when he went through the global enablement platforms, and I think those areas really underscore the investments that we make to make certain that TransUnion is a growing and resilient company in the future.

The next question is from Faiza Alwy of Deutsche Bank. Please go ahead.

Yes, hi, good morning. Thank you. I wanted to pick up on the Neustar commentary. Chris, I think I heard you say that your Neustar revenues are derisked as we think about 2023. Maybe give us a little bit more perspective around that. And how do you additional sort of big wins as we look at 2023? And perhaps you can give us some commentary around your perspective on market share in that business. Are some of these new wins related to market share? Or is it more – just more demand for some of the analytics that you're able now provide? Thanks.

Well, just a quick comment on market share, I think it's difficult for us to comment on our relative market share with regard to Neustar marketing services at this point generally, there are more competitors, it's more fragmented. However, in my comments, I did highlight a series of very attractive wins that as we scored in this past year as well as pointing out that, that Fortune top 10 customer has been onboarding or did and the revenues are ramping. And so, look, I think those are good examples of competitive success in the market, and I would expect those to keep coming. Look, thinking about Neustar in a bit more detail. '21 was a very growthful year for Neustar. They did 8% organic and change. We expected that level of growth going into '22. What we were surprised by is that the foundation of growth in '21 was on an elevated level of e-commerce activity during the pandemic that dipped and as a result, midyear, we lowered our guide. We also had some of the normal, I'd say, integration growing pains in the early part of the year. But pretty quickly, all of that started to gel together and we began executing well on the sales side. And in each passing quarter, over the course of '22, we sold more, we sold more broadly and we built really nice momentum going into '23. And look, the 8% organic growth in the fourth quarter of last year for Neustar, it's important because that comes on top of 9% organic growth roughly the prior year, right? So it's growth over a meaningful comparison and then you get to '23. Now look, derisk in such a risky environment, is always a difficult term to address. And I'm only half kidding here. The…

The next question is from Kelsey Zhu of Autonomous. Please go ahead.

Hey guys. On Consumer Interactive, margin fee this quarter is partially due to kind of reduced in investment in advertising. So I was just wondering, should we expect this going forward into '23? And if that's the case, how do you think about the shift in competitive length in that market as some of your competitors is still continue to invest in these products?

Yes, absolutely. Well, look, our consumer direct businesses have faced a series of challenges in the near term. On the indirect side, we needed to lap some contract restructuring and that's the single largest piece and on the direct-to-consumer side also, we realized that some of our marketing wasn't yielding fully profitable new customers. And also, we wanted to adjust our acquisition workflows to ensure that they were as consumer-friendly as they could possibly be. As a result, we curtailed some of our direct advertising. And as a consequence of that, we're winning new – smaller new classes of customers, if you will, to replace those at attrit over the course of the year. As we look to '23 though, the foundation is firming considerably and the rate of decline is moderating, in particular, it moderates quarter-by-quarter over the course of the year. So first, there's Sontiq. Sontiq, we believe, is a long-term mid-teens grower. Now last year, we didn't have the benefit of a particularly large breach. But we did accelerate our subscription sales with Sontiq, which is especially valuable because of the high recurring nature. In '23, Sontiq grows in the mid-teens. On the indirect side, in '23, we expect to return to mid-single digits growth. And then in the direct subscriptions to consumers, the first half of the year, we're still declining because of the change in marketing spend and practices. But by the second half of the year, in the fourth quarter, in particular, we think we get that behind us. So net-net, those are kind of the dynamics that we see in direct-to-consumer. Todd, any particular comments on the margin profile go forward?

Yes. So the first thing I would add on the margin is the Consumer Interactive business always has had an attractive margin profile with adjusted EBITDA margin in the upper 40% range, sometimes to 50%. And clearly, that's what we just saw in the fourth quarter. So as we look forward into 2023, and Chris just spoke about the direct business, and that's really where the opportunity resides for us to gain efficiencies and optimize our advertising spend, the team has done a great job with that. So as a result, we would expect that the margin for this business would be in the same range that we've had historically. So in that high 40s to around 50% adjusted EBITDA margin.

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

Thank you very much. I noticed that you reiterated the 2025 targets. And for adjusted EPS at $6 versus the midpoint of the '23guidance, that would imply like a 30% CAGR from '23 to '25. So, maybe just talk about your confidence in achieving it. Like, I guess, clearly, you do believe it because you wouldn't have reiterated it, but I mean, I just think it sounds sort of high, but I know you can – I know you clearly have reasons as to why you think you can achieve it. Thanks.

Yes, thanks for the question, Toni. Well, look, I mean, right now, we're facing some challenging market conditions in lending verticals in developed markets, and I think it's easy perhaps to get a bit more pessimistic about those things. But we're talking about – we've got three full years to get there. We have a variety of paths to get there. We expect that over this period that market conditions generally are going to improve materially. And what we've seen is that our business has the potential to grow very rapidly coming out of downturns. We did so in the 2010 time frame. We did so again coming out of the pandemic where we posted 13% enterprise growth and again, there are a whole variety of different ways to get there. I would point out that our results in this particular quarter generally are tempered a bit by volumes in fintech.That said, the reason we went into the detail on that space and our commentary is we wanted to – we wanted the market to understand just how growthful that business has been. It's been a nice cherry on top of our overall lending portfolio. And we think that the growth coming from disruption in that space is going to continue. There's just been a bit of a pause, some caution, as players try to understand market conditions and funding sources and the like. So I think we're going to get disproportionate growth out of fintech, out of Neustar, out of the resurgence in Emerging Verticals and then India. India is becoming really material for us. It grew by 1/3 last year. And while we don't have that rate of growth in our plan, we've got a heck of a lot of upside and we've got a lot of ambitions to expand the number of markets that we play in, in India. So I mean, look, perhaps we revisit this at the end of the year. But at this point, I think, again, we can get there. There are a multitude of different paths. And then I think you were more focused on EPS, and I'm going to let Todd take that one.

So from an EPS point of view, I mean, one of the significant drags that we've had is the rise in the – in LIBOR, which our debt is still tied to for the time being. So that has a rather significant impact on the EPS. In 2023, we had an impact of about $0.22. So think of it another way. Our – the guide on EPS would be up another 22% if interest rates were, like roughly flat $0.22. So, if you now think about that over the next three years, if you believe that interest rates decline, TransUnion and the rest of the market, we get a natural benefit there. So not an operating factor, but it wasn't an operating factor that provided this headwind, as well.

Yes and again, just to reiterate, we're very focused on driving as much growth as we can out of the new acquisitions and taking costs out. We’re happy to be able to raise the guide to $80 million in synergies from Neustar. And look, I hope a year from now, I can come back and share even better news on that front, but we're also focused on paying down our debt. We're hoping to get to 3.5x this year and to take it as low as 3x or below by the end of the following year. That's a lot of interest savings that will benefit the EPS.

And just to underscore that point, as we always do with our guidance, we do not make assumptions on capital allocation decisions with cash that builds. So to that point, if you look at our guide for '23 and then even out into the future, those paydowns are not incorporated into the overall adjusted diluted EPS, as well.

The next question is from Manav Patnaik of Barclays. Please go ahead.

Thank you. Good morning. You had a lot of helpful commentary on how you would perform if there was a recession and I was just wondering, do you guys have any internal macro calls and probably the probability of that given all the data that you see? And just tied to that, the gaps overall, is this – would you characterize this as conservative as true has been historically or is it more, I think, last year, when we came out with guidance, you talked about it being less conservative, more realistic? So just trying to get a sense of what this year is set up to be.

Yes, Manav, good question on guidance philosophy, but also just kind of some macro insights. So what I'll say is, look, I think you should take us at our word on the guidance for '23, right? We crafted a range after a significant amount of deliberation and thought that we think is reflective of what we can do. Now if economic conditions were to deviate materially in one direction or another, that's a different factor, right? But I mean, we're guiding 3% to 5%. I think you should consider 3% to 5%. And again, if you look at our fourth quarter, we outlined a guidance range, and we delivered within that guidance range for revenue, for EBITDA, and on an operating basis from EPS. The small miss on the EPS was due to a tax item, below-the-line item, right? So I think we would just ask investors to take us our word on the guide, that's where we're targeting. And in terms of the macro stuff, look, I can arm your quarter back with you, but the reality is all of you guys have much smarter and more qualified economists on your staff. So, I am going to pass on that question.

The last question is from Heather Balsky of Bank of America. Please go ahead.

Hi, thank you. I am going to piggyback off the last question. I won't ask you your macro forecast again, but just in terms of the guidance range and looking at the low end of the range, I'd be curious to kind of what assumptions are baked into that is how you're thinking about that range? And then, layer on there, you expressed confidence in your ability to grow in a recession, so how to think of end of the range and maybe how that compares to a potential recession scenario?

Yes, probably the first comment to make on this question is about diversification across the portfolio and how that dynamic is playing out. Without a doubt, our lending lines of business has slowed materially in developed markets because of the effect of inflation, first, and then rising rates. And potentially, may have slowed a little extra because it just uncertainty, right? When there is uncertainty in the market, transaction volumes fall, right? And as certainty gets restored around the direction of inflation, around the direction of rates, we could see some improvements. But the negative is around the lending volumes. The positive and again, in the U.S., I'll remind you that the emerging verticals are equal in size to the lending verticals, right? And their growth is increasing. It increased from 1% in the third quarter, which we said was based on anomalous non-recurring factors, to 4%, and we expect it to improve again over the course of '23. The international businesses, there was less fiscal stimulus, so they are not dealing with the same degree of elevated inflation. They continue to roll. That business is $800million. It's grown – we've targeted to grow in the low double-digits. There's a lot of momentum there, right? And it's broad-based momentum because our footprint is more skewed. So that's going to be growthful. And then direct-to-consumer because we've had a reset in process over the past 12 months, has been a material drag on our results, and we see that improving substantially over the fourth quarter. Now again, I just want to reiterate in terms of the guidance. We didn't model in a recession, and we didn't model in economic improvement. We took a very challenging macro environment in our fourth quarter and we largely model off of that. Now again, there's any number of puts and takes given the multitude of verticals and sub-verticals. But we think it's a prudent guide, it's not overly negative, but it's also not founded on some back-end optimism. And again, the reason organic growth rates increased in the latter half of the year is because our comps are much, much easier, particularly in the fourth quarter.

Excellent. Chris, thank you, and thanks, everyone, for joining us this morning. There's a lot to digest I think in our call. We hope we take the time to do that and let us know we can be of assistance as you contemplate the print today. So we hope you have a great day. Thank you.

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