Good morning. And welcome to TransUnion's 2023 Third 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. 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; 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 and the comments made during this earnings 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 all that, let me turn it over to Chris.

Thanks, Aaron. Let me add my welcome and share our agenda for the call this morning. First, I'll discuss the macroeconomic conditions we're facing and the impact that they had on our business in the third quarter. Then I'll provide an overview of our third quarter financial performance. I'll also review the continued progress we're making with Neustar, accelerating revenue growth and achieving savings targets. I'll wrap up with a short discussion about our approach to managing through a more challenging and uncertain macro environment. Finally, Todd will detail our third quarter results, along with our fourth quarter and full year guidance. Economic conditions softened across several TransUnion markets in the third quarter, most notably in the US and the UK. While US consumers continue to benefit from low unemployment and modest real wage growth, lingering inflation and rising borrowing costs have taken a toll on household finances. Spending has slowed and consumers have largely spent through the excess savings accumulated during COVID. Although demand for credit remains strong despite elevated costs, banks have tightened lending standards due to weakening consumer finances and increasing capital constraints. Recent commentary from lenders supports these observations, noting that cracks have appeared across consumer lending, especially in the lower credit tiers. Now TransUnion entered the third quarter cautiously optimistic after exceeding guidance in the first two quarters, while maintaining our full year guidance as a cushion against ongoing economic uncertainty. However, lending volumes in the US and UK softened progressively over the third quarter, causing our revenues to come in slightly under the low end of our guidance. In US Financial Services, year-over-year revenue grew 3% in July and 1% in August, but declined 5% in September. Rising rates in the quarter had a negative impact as the 10-year treasury rate spiked 50 basis…

Thanks, Chris, and let me add my welcome to everyone. I'll start off with our consolidated financial results. Third quarter consolidated revenue increased 3% on a reported and constant currency basis. There was no impact from acquisitions and immaterial FX impact. Our business grew 2% on an organic constant currency basis, excluding mortgage from both the third quarter of 2022 and 2023. Adjusted EBITDA increased 5% on a reported basis and 4% in constant currency. This result was negatively impacted by an incremental $7 million charge for the recent legal settlements above the amount we previously reserved. We also benefited from a reversal of accruals for variable cash compensation to account for our current view of revenue and adjusted EBITDA for the full year. Our adjusted EBITDA margin was 36.8%, up 50 basis points compared to the year ago third quarter and improved sequentially by 180 basis points from the second quarter of 2023. Third quarter adjusted diluted EPS declined 2% as a result of higher interest expense. Finally, we took a $495 million impairment to our UK business during the quarter. This remains an attractive market and business for TransUnion with a highly diversified portfolio, an array of successful product offerings like TruVision and TruEmpower and an adjusted EBITDA margin over 40%. Leveraging our innovation, we've gained meaningful share across the lending ecosystem and delivered market leading growth under our ownership. However, the UK has faced an unusually harsh confluence of macro events resulting in inflationary pressures and soaring interest rates which has slowed the underlying lending growth. Before I get into US markets results, a reminder that we are reporting Neustar revenue within our Vertical market structure and we will discontinue providing stand-alone Neustar reporting at the end of 2023. Now looking at segment financial performance for the…

Thank you, Todd. And to wrap up, the third quarter proved to be more challenging than expected and conditions deteriorated as it progressed. But despite these headwinds, we delivered growth from our diversified portfolio and we remain focused on delivering a good 2023. We continue to execute against our strategy and we're proactively driving new revenue opportunities, investing in our business, managing our cost structure and maintaining our capital discipline. We remain highly confident in the long-term performance and potential of our business, and we're taking all the necessary steps to deliver the best possible results for shareholders. Now let me turn the time over to Aaron.

Thanks, Chris. That concludes our prepared remarks today. For the Q&A, we ask that you each ask only one question so that we can include more participants. Operator, we can begin the Q&A session now.

[Operator Instructions] And our first question will come from Kelsey Zhu of Autonomous.

Chris, I was wondering if you can help us understand the Neustar revenue mix a little bit better in terms of what percentage of Neustar revenue comes from subscription versus usage based revenue across marketing, fraud and communications?

Yes, sure. Aaron, you want to...

So Kelsey, so 80% roughly of the marketing portion of Neustar is subscription-based. Marketing is about 40% of the total. So 80% of 40 is about 32. So about a third of total Neustar is -- would be truly subscription based revenue.

And look, let's take this opportunity to talk about Neustar's performance in the third quarter. As you know, it was one of the leading growth areas at 7% organic year-over-year, which we feel is especially strong given the overall difficult macro conditions that we discussed in our prepared commentary. That said, we were expecting higher growth out of Neustar. We were expecting roughly 10% organic growth over the second half of the year. And what we experienced -- well, just to break down the piece parts, when there's a macroeconomic pullback as we've seen in lending and in insurance, it's going to impact various components of our business. It will reduce the number of batch prescreens. It will reduce the number of marketing campaigns, which impacts our audience generation and segmentation and our campaign planning tools. And that's what we experienced. Now the subscription piece of overall Neustar revenue has held up quite well and consistent with the financial expectations that we outlined. So that's a positive. We've also booked exactly what we expected to book at this point in the year and we're trending toward achieving our full bookings targets, which will be a little bit above last year's bookings, which were a record year for Neustar. So the sale of Neustar products across the three lines is positive. Now the mix of what we're selling at Neustar varied from our expectations in that we're selling less data and audience services that are quicker to fulfill and recognize revenue than we expected, and we're selling more effectiveness measurement, which are consulting type projects where the booking takes more time to realize. And so some of the revenue from the bookings pushed out of the third quarter and even out of fourth quarter expectations. So that was one of the components in our guide down for Neustar. And then the third component really rests on the volume of data sales of TruAudience, audience generation in the specific marketing campaign management. And again, that's going to correlate with growth or decline in lending volume and insurance origination. So hopefully, that gives you a sense of the dynamics that underpin Neustar performance.

The next question comes from Faiza Alwy of Deutsche Bank.

I wanted to touch on your comment regarding lending standards that tightened through the course of the quarter. I'm curious if it was across the board in terms of lenders, whether it's regional banks, fintechs or big banks. And if you can talk about any trends across various consumer cycles whether it's subprime versus prime, so just a bit more color around what's happening with lending standards.

So happy to start with some overview on the macro conditions we see across banking. So as the quarter progressed, I think -- well, first, on the positive, unemployment remains low and there is some real wage growth. Although I think the consensus is that the employment market is deteriorating somewhat. That said, the metrics and measures of that, you've got pros and you've got cons. That said, though, the excess in savings that had accumulated on consumer balance sheets declined a lot and recently the Federal Reserve Bank in San Francisco suggested that those excess savings balances would be gone by the end of the third quarter and have been gone for some time for all segments of the population, except the most affluent quintile, right? And so over the course of the quarter but really pronounced in September we saw banks becoming more cautious about originating new loans. Now over the past couple of weeks, the large banks, the large publicly traded banks have reported their results, and while they were down a bit they were generally more positive than expectations. The one area, though, that underperformed expectations has been new lending volumes. Now if you tease that apart, the revolving component of new loans is fine, it's the incremental volume to consumers that was most impacted. Now the other dynamic to be aware of in the market, and this really goes back to the earlier part of the year where we had some stability concerns. There was a flight of deposits upmarket to larger institutions that were perceived as more stable. And so in this recent round of earnings, you see that those banks, while they're performing well, it's driven by net interest income growth but the lending activity is down. When you look at the performance of mid-market banks in smaller banks, the pinch on new credit origination is quite pronounced. And we see that in our numbers because -- I mean, obviously, lending is a big part of our portfolio and we serve banks -- traditional banks of all sizes in fintech, of course, as well, we got the largest share there, and we're just seeing a pullback in lending volumes. And when banks become more cautious, that's going to reduce the number of batch prescreens that we produce, it's going to reduce the credit pools that happen, and it's going to reduce the marketing planning. And so it's really this macro retreat that we've seen in the lending that's impacting the business fundamentals.

The next question comes from Jeff Meuler of Baird.

So I know Chris had more details to come on accelerating structural expense in efficiency programs. But just anything else you can talk to regarding how much opportunity there is to adjust the expense structure to a weaker volume environment? And I caught the decremental margins and the incentive comp adjustment in Q3, but the Q4 margins and implied decremental margins in Q4 still seem really weak. And I'm just trying to understand if that's more a function of time to implement the new programs or just how we can think through like incremental margins going forward if the volume environment remains [weak] for a while. Sorry for the long question.

So listen, it's a good question and there are several things to unpack in it. The first I would say is -- and we purposely included our year-over-year revenue growth rates in each month in the quarter, so you can appreciate how materially volumes fell in September in lending origination and also insurance, right? So we've had a revenue drop very recently without much time to adjust the expense structure, right? And so over the past 18 months as our markets have progressively slowed we've been proactively managing the expenses. It starts with the easy things of reducing travel and entertainment of cutting external consulting, if you will, reducing marketing. And of course, being very judicious about headcount. So we decelerated new hires and then we've been in somewhat of a hiring freeze and not filling backfills, and all of that has allowed us to kind of proactively adjust the expense structure in a softening revenue environment and maintain our strong margins. But again, there will be some work that we need to do to balance the cost structure against the current revenue environment and you can count on us to do what is necessary. But in my comments, I was really referring to the benefit of the global operating model that we implemented roughly three years ago, where we have been progressively increasing the proportion of our employees that are in centers of excellence that are located in attractive talent markets that can reduce our cost structure over time. Now we've moved to roughly one third of total TransUnion employees operating over those markets. That said, there's still more opportunity as we evolve toward what we'd say, the ideal balance, both in terms of total employees and the management structure, what functions are being led over that. And we're…

The next question comes from Andrew Steinerman of JPMorgan.

I think you talked about bringing out a new fraud platform today. I just wanted to see within Neustar, is fraud still about a quarter of the business? And then strategically, I wanted to know on the -- again, this is on the fraud side, how you've done an integrated Neustar with iovation and TLO or is that really kind of part of the next reiteration of fraud?

So the Neustar risk or fraud business is roughly 20% of their total revenue. Communications would be the largest, it grew quite nicely, low double digits in the quarter and marketing grew high single digits in the quarter. We just expected it to grow much faster. Risk didn't grow very much, right? It grew low single digits, and it's really because of the impact we see on the risk volumes that are coming through call centers and online. And look, our contracts are volume bounded. And when we budget or set expectations, we're assuming a certain degree of up charges because of volume excess. That just didn't happen this quarter, we believe it's tied to the softening macro conditions. Now in terms of platforms and the next generation of this, look, fraud is a substantial part of our business. We have multiple fraud products and platforms in the US. When we acquired CallCredit, we got another set of attractive, although largely duplicative fraud solutions in the UK market. Then when we bought Neustar where we got a variety of risk point solutions but we also got a great platform in OneID upon which we can unify all of these different fraud mitigation products, on a common data repository with orchestration and advanced analytics in machine learning and AI. We have been working for really since the outset of the acquisition to accomplish all of that technical work. We launched that version of the product in the early part of next year. Now you can think of that as like an advanced beta launch with friendly customers. but it's going to allow us to do two things. One, it is truly a platform of the future. It's next generation. It's a global consolidation of all of our point solutions and it can be leveraged across the globe, right? So we're very excited about that, and it should allow us to accelerate growth in this important product category. It's also going to allow us to retire all of the legacy cost structures, whether it's the variety of solutions in the UK or it's iovation, or it's the legacy solutions here in TransUnion in Chicago.

The next question comes from Heather Balsky of Bank of America.

I was hoping you could just dive in a little bit more on your emerging vertical segment. Just given the changes that you made in the tenant screening part of the business and what you're seeing in insurance, can you just help us kind of think about what you need to see for those sales to accelerate and kind of visibility in the near term?

So I mean, look, from a first principles basis, we've talked about the diversification we've achieved in our portfolio because of our investments in recent times. And even though this is a difficult quarter in a challenging macro period, you can see some of those benefits coming to the fore. Old TransUnion would be reporting results based on US credit sales only, and those would be negative. We've got 4% growth happening in the emerging markets, although not all cylinders are firing any emerging as you point to, right? But we are benefiting from some offset there. Now look, insurance, typically, in normal conditions, is a high single digit grower and our sales have continued to be strong in insurance. The problem that we're seeing and it's what we've been discussing and the industry has been discussing is that risk isn't priced appropriately right now and insurers are reluctant to ramp up their underwriting engines. And so they're increasing their prices a lot upon renewal and they're walking away from some consumer risk in some jurisdiction or geographical risk. Now it takes some time for those unfulfilled policies, if you will, to trickle down in the ecosystem, some go to smaller carriers, some go to nonstandard carriers, some go unfulfilled, right? And as I mentioned, the revenue dynamics is upstream, we've got greater penetration of the full suite of our products. So we're realizing a higher data payload per origination for policy origination. So insurance is going to remain soft for a bit. Now the carriers are working hard to correct that. They continue to push for approvals, for higher rates and I think that will be successful over time, but right now, they're cautious. Tenant deployment screening is undergoing a bit of a reset because of regulatory scrutiny, which…

Let me just add on to your question, Heather, because Chris definitely talked about the two verticals where we have the most challenge, but I think we'd be remiss to not point out that we have had some success as well in the emerging verticals. In particular, the media vertical grew double digits. And as Chris already said, we expected something greater than that. But nevertheless, in this environment, we posted some pretty strong results in that business. And it was on the back of some significant wins with the Neustar marketing capabilities. And just to remind you, Chris talked about those in his prepared remarks. So that's a big deal for us as well. Our public sector vertical also grew very strong double digits. And we saw growth in what we refer to as services collections as well as tech, commerce and communications. In those areas, in particular, what we are seeing a really nice benefit from is our trusted call solutions also from Neustar. The revenue is up significantly across those verticals.

The next question comes from Toni Kaplan of Morgan Stanley.

You mentioned in the prepared remarks that September trends had been getting -- got a lot worse. I wanted to ask about sort of the early October trends, just given rates started to move quicker. Did you see it getting worse or just continuing on sort of at the pace that you are seeing in September?

So I think to start on this one is where the best place to go is just the beginning of the third quarter. And I would say July and August were months that were okay,t hey were tracking to the guidance that we have provided on our earnings call in late July. Unfortunately, we saw a sudden shift of lending volumes, as Chris has already articulated in September. And that impacted just to reiterate, in consumer lending, card, mortgage and insurance and the media coming in a little bit lower than what we had expected. So as we looked out into the fourth quarter to prepare our guide for the remainder of the year, we took that sudden reduction that we experienced in September and we rolled that forward. We also looked at where we were at up until last week in October and where volumes were at. And what we feel like we have done is we've taken this rather weak environment and we have thoroughly derisked the Q4 guide with the numbers that we have put out today.

The next question comes from Ashish Sabadra of RBC Capital Markets.

I just wanted to clarify whether the CFPB settlement, whether that's included within the adjusted EBITDA, and if you could quantify how much was it in third quarter or fourth quarter? Because the question we're getting from investors is the revenue at the high -- at the midpoint of the fiscal year '23 revenue guidance was lowered by $54 million, but the EBITDA was lower by $78 million. Why was the EBITDA so much like -- EBITDA guidance lowered significantly more than the revenue guidance, is that due to CFPB settlement?

So Ashish, you got two questions there for us this morning. So let me take the first one as it pertains to the CFPB. We settled two matters with the CFPB and one pertains to the FTC, and that was our rental screening settlement that Chris has talked about, that was for $15 million. And then on the security freeze matter, we settled for $8 million for a total of $23 million. All of those settlements have been reserved for within our adjusted EBITDA not as an add back coming into the quarter with the exception of $7 million. And in my prepared remarks, I made reference to that. So there was an incremental aspect of $7 million in the quarter that we did not have in our guidance. So the other amount was already accrued for and had impacted adjusted EBITDA. So the second question is pertaining to our Q4 adjusted EBITDA outlook and why the change. If you look at revenue compared to our prior guide and why EBITDA is a little bit greater than that. And if it goes back to the question that Toni just asked about what the trends in September and our Q4 guide, so it really starts with the revenue and the revenue that we saw suddenly fall off in late September is more of our core credit type of products that carry a higher margin. And so that is what we have taken down. What that's been offset by is growth that we've seen in products such as the trusted call solutions, which I just referred to, that while still at a very attractive margin relative even to TransUnion's adjusted EBITDA margin is one that is at a lower margin than the core credit products carry. So when you take that mix together, you end up with a situation where the profit expectation ends up being greater than what the revenue takedown is.

Yes, I think that's an important dynamic to appreciate. I mean you'll see in our financial disclosure that our cost structure remain the same, it's not a cost issue quarter-to-quarter, it's a revenue mix issue. And so when we confirmed our guide in July, based on the lending trends that we've seen, we simply expected to sell more credit products than we actually ended up selling and credit products have a very, very high flow through to profit. But as I've discussed, we had to retrieve volumes in lending, which reduced credit products. In the parts of the portfolio that performed best have a lower contribution margin, things like our mortgage credit because of the [Technical Difficulty] score and trusted call solutions because of license data costs.

The next question comes from Manav Patnaik of Barclays.

I was just hoping we could talk to all your fintech exposures, please. So just in the UK, like what was it, I suppose, as a percentage of revenues and exactly what led to the write-down? And then maybe what the US exposure is and if there's any kind of risk we should consider there as well?

Well, let me just start fintech generally, Manav, and you and I have talked about this before. We have a very large and leading share in fintech and that is true both in the US and also in the UK. And fintech has been materially impacted in the downturn because of rising rates and also tightening lending standards. So that's already had an impact and that's already incorporated in our third quarter results but also our thinking about the fourth quarter guide, which Todd just articulated. Now shifting to our UK business and the write-down in goodwill. If you recall, we acquired the business in 2018. It was a low double digit grower then, but it was not particularly profitable. So we took cost action, which slowed revenue growth for about six months. By the time we exited '19, we posted 9% organic growth and the exit quarter was back to low double digit. And that was our expectation, high single, low double digit that underpinned the assessment of book value and the amount of goodwill that we put on the balance sheet. Well, from that point forward, the UK market has been buffeted by a series of macro issues. The first is that the regulators in the UK decided to put pressure on small dollar unsecured lenders. We would call them payday lenders here, some of them were online, they call them the money lenders in the UK. Well, call credit had a disproportionate share of that marketplace. It was a foundational component of their business. So first, we had to adjust to that contraction, which we did and we compensated for it by pushing further upstream into the core and mainstream lending market and taking share, which we did. The next impact came from Brexit and then COVID and then all of that together seems to have fueled some high rates of inflation and increasing unemployment in the UK, which has made it a very difficult lending environment, which continues to impact the fintechs. So after digesting all of this and looking back at the growth rates that we expect, the one that we've achieved but also that we can expect in the intermediate period given the condition of that economy, we thought it was prudent to take the charge to goodwill that we did in the quarter.

The next question comes from Andrew Nicholas of William Blair.

I heard quite a bit about some of the strengths and weaknesses within core credit in the US, I just wanted to ask maybe more directly on market share there. It seems like most of the rationale to this point is tied to end market weakness or end market dynamics. Is there anything that you can say about kind of competitive positioning or competitive successes in that market and how much conviction you have that you're still growing share there?

As we look at it, we don't believe it's a share issue, it's an issue more of business comparability at this point. As many of you have noted, the portfolios of the three bureaus have diverged over time. Some are more focused on direct-to-consumer, some of them are more focused on employment and income and then TransUnion has a very large share, arguably leading market share in the US, providing services to lenders and insurers that want to originate loans and policies. There's also a question of what's reported in the various segments and kind of the surgery you've got to do to get a true comparison. One example is that we report batch marketing services within our US vertical, not everybody does. We separate direct-to-consumer, some people include that. We don't have commercial data and given the size of our lending business overall, the benefits in mortgage of a significant price increase from a third-party score provider gets diluted a bit over our larger market share and lending base than with other players in the space. And so as we compare and evaluate our own performance, you got to consider those differences in what's included as well as the varying size of the respective positions. But no, we don't think share has really anything to do with this and we're not really pointing anything to the positive or the negative.

Great. And given the time is we're on a busy earnings day, we are going to end our call at this point. We thank you all for joining us. this morning, and we look forward to speaking with you either later this week or over the course of the quarter. Thanks.

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