TransUnion Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the TransUnion Second Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Greg Barty, VP of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning and thank you for attending today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer and Todd Sello, Executive Vice and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning. They can also be found in the current report on Form 8 ks that we filed 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 reconciliation of these non GAAP financial measures to their most directly comparable GAAP measures.

Speaker 1

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 ks, Form 10 Q and other reports and filings with the SEC. We do not undertake any duty to update any forward looking statements.

Speaker 1

With that, let me turn it over to Chris.

Speaker 2

Thank you, Greg, and let me add my welcome and share our agenda for the call this morning. First, I'll provide the financial highlights for our Q2 2024 results. 2nd, I'll discuss One True and how we're modernizing our technology and product platforms. Finally, Todd will detail our 2nd quarter results along with our Q3 and full year 2024 guidance. Now in the Q2, TransUnion exceeded guidance across revenue, adjusted EBITDA and adjusted diluted EPS.

Speaker 2

Given the strength in the quarter and recent large breach remediation wins, we're raising our full year 2024 guidance, which Todd will detail later. We expect a strong year for both revenue and earnings growth. That said, we are maintaining our conservative guidance posture due to ongoing macroeconomic and geopolitical uncertainties. Revenue grew 8% on an organic constant currency basis, above our 5% to 6% guidance. Our organic constant currency growth, excluding mortgage, of 4% also exceeded our expectations.

Speaker 2

In the U. S, we experienced muted but stable lending volumes that were consistent with the Q1 and well below historical trends. Consumer finances in the U. S. Remain broadly healthy due to continued low unemployment and some real wage growth, but pressures on lower income consumers have led the waning spending activity.

Speaker 2

Inflation slowed in the quarter after a modest tick up at the start of the year and market expectations are for the Fed to start lowering interest rates later in the year. Rose slightly for mortgages and auto loans, but have begun to stabilize for credit cards and personal loans. Our U. S. Market segments grew 6%.

Speaker 2

Financial Services was up 11% led by 50% plus growth in mortgage. Emerging Verticals grew 4% driven by strength across insurance, public sector, tech, retail and e commerce and media. Within U. S. Markets, NuStar also delivered another solid quarter.

Speaker 2

Trusted Call Solutions continues to lead the way, growing more than 40% with positive contribution across our verticals. NuStar delivered mid single digit growth in the 1st 2 quarters of the year and remains on track for mid single digit growth in 2024. Consumer Interactive declined 1% as expected and we believe we're closer to an inflection point to return consumer and active to sustainable growth supported by strong identity protection and breach wins and progress in stabilizing our consumer direct offering. Our international segment grew by 14% on a constant currency basis, the 13th consecutive quarter of double digit growth. India led with 27% growth, while Asia Pacific, Latin America, Canada and Africa all grew double digits.

Speaker 2

And finally, we prepaid $80,000,000 in debt during the quarter and intend to make further prepayments in the second half of the year. We also completed a debt refinancing to extend our maturity profile and reduce our interest expense. We made strong progress with our technology modernization in the Q2. Slide 5 illustrates how we're aligning TransUnion around the new global technology platforms and solutions. By consolidating our powerful yet independent products into integrated suites on a next generation technology foundation, we believe that we can accelerate innovation, reduce cost and leverage our solutions across our regions to drive revenue.

Speaker 2

Now to orient you on this visual from the bottom up, OneDev is the internal name for our new technology infrastructure operating system. OneDev standardizes our infrastructure services and developer tools in a single foundation to reduce cost and increase engineering productivity. In fact, it's the primary driver of our technology modernization savings. Built off of OneDev, OneTrue is our core solutions enablement platform, which centralizes our common product services of data management, identity resolution, analytics and delivery. OneTrue is a key driver of innovation and revenue growth.

Speaker 2

In leveraging OneTrue, our solutions are being integrated into end to end product suites under single brands such as TrueValidate fraud prevention and True Audience marketing solutions. These integrated suites deliver dramatically better performance within clear global brand families. I'll now further explain how each technology layer creates value across the enterprise and share some examples of the benefits we've already delivered in our TruValidate Broad Suite and FactorTrust alternative lending product. Now OneDev builds upon the success of Project RISE to create a global technology foundation common across our applications, reducing complexity, saving costs and freeing engineering resources for innovation. 1 dev creates a single technology operating plane that is cloud agnostic preventing supplier lock in.

Speaker 2

It also standardizes our developer utilities creating a one TransUnion way for managing security, compliance, capacity provisioning and software deployment. In addition to improving our developer productivity, OneDev will help us rationalize third party software and other legacy technology costs. We will continue to operate our own private cloud infrastructure for certain applications where the economics are more attractive. OneDev provides the foundation for OneTrue, which is our central data management, identity and analytics hub. The platform standardizes the process of transforming raw data into actionable intelligence and deploying it within our product suites.

Speaker 2

This also allows our product specialists to focus on the data and analytic customization and workflow functionality needed to create innovative products. So let me detail the key processes that OneTrue standardizes. OneTrue integrates our data assets in credit risk, marketing and fraud prevention into a unified data management environment. We embed strong permission and compliance controls separate our credit and non credit data. Our data scientists have easy access to our full complement of proprietary and public data for rapid cross functional development of insights.

Speaker 2

One True Identity Graphs link our offline and online data together for a consistent view of consumer servicing clients across risk, marketing and fraud services, we participate in a broad feedback loop that reinforces our identity capabilities. OnTree Analytics Services consolidates and standardizes our tools and models in a single interface for use by our internal teams and customers alike. As new capabilities emerge such as artificial intelligence or machine learning as a service, we can deploy these capabilities rapidly and at scale. And finally, Onefru's delivery layer leverages consistent configurable technology for seamless delivery of our data and intelligence to customers for easier product upgrades and cross selling. Now I want to reinforce that OneTrue already powers heritage new star marketing and fraud products, as well as our new enterprise identity grasp, our innovation labs and our internal analytics environments.

Speaker 2

We're also launching a number of new products on OneTrue this quarter, including TrueValidate fraud prevention, True Audience marketing and a number of enhancements to our advanced acquisition suite. We plan to continue this rapid pace of innovation and modernization over the next 18 months as we further refine and scale this platform. Now TransUnion products will be integrated into broader functional suites built upon the world class capabilities of the One True platform and then taking the market using the True portfolio brands. Over the last few years, we've organized our broad range of B2B products our multitude of brands into several global product families. These global brand families clarify our offerings, they demonstrate the breadth of our capabilities and make it easier for customers to find what they need.

Speaker 2

We continue to leverage our core competency in consumer identity to expand further beyond credit and risk in the marketing and fraud prevention use cases. And we'll measure the success of our technology and product platform strategy in terms of driving better growth across credit, fraud and marketing, as well as delivering on our cost savings targets. In the interim, we are tracking progress toward improving our product quality, our time to market and the pace of innovation. So let me briefly spotlight the benefits that we're already seeing with TrueValidate and FactorTrust. Our integrated TrueValidate suite powered by 1True combines our comprehensive identity data along with fraud signals from a range of NuStar and TransUnion products.

Speaker 2

We aggregate the signal in our single platform where we apply advanced analytics to extract deep insights. The predictive uplift from consolidating all of our fraud signals and analytics onto OneTrue has been notable. When we compare OneTrue to our current end market offerings, we see a 30% plus increase along with a 75% decrease in false positives. This enhancement enables customers to better protect themselves while providing a friction right experience for consumers. Now we're nearing the end of our beta testing for our first release with select customers.

Speaker 2

The initial results are extremely positive. We expect the first general release to be available later this quarter. Our fraud product suite serves thousands of customers today around the world and represents roughly $300,000,000 in revenues last year against a multibillion dollar addressable market. We aspire to be the customer's first call for fraud mitigation and we see a substantial FactorTrust, our short term lending We're also in the process of modernizing FactorTrust, our short term lending bureau within our TruVisions suite to 1 true over the course of 2024. The FactorTrust modernization serves as proof of concept of how 1 True can enhance our credit bureau capabilities across batch, online and analytics.

Speaker 2

We're already taking foundational steps to migrate our core U. S. And Indian credit bureaus to OneTrue starting early in 2025. OneTrue is improving the speed and efficacy of factor trust, which we believe will strengthen our competitive positioning in short term lending space. We're seeing substantial improvement in the speed of batch processing from 24 hours to 1 hour, allowing faster on demand retrospective analyses.

Speaker 2

Additionally, OneFru's modern delivery layer allows us to deliver enhanced data attributes and model upgrades seamlessly with improved model deployment, self-service analytics and batch capabilities. We see opportunity for a near term upgrade cycle followed by more frequent and ongoing upgrades, strengthening our position for more competitive wins in the future. We look forward to continuing to update you on how OneTrue platform is driving innovation across our product lines over the next several quarters. And now I'll hand it to Todd to provide further details on our Q2 financial results and our updated full year 2024 outlook. Todd?

Speaker 3

Thanks, Chris. And let me add my welcome to everyone. As Chris mentioned, in the second quarter, we exceeded our guidance on all key financial metrics. Mortgage drove roughly half of our $15,000,000 of revenue outperformance. The other half of outperformance was broad based, principally in emerging verticals and international.

Speaker 3

2nd quarter consolidated revenue increased 8% on a reported basis and organic constant currency basis. There was no impact from acquisitions and an immaterial impact from foreign currency. Our business grew 4% on an organic constant currency basis, excluding mortgage from both quarter of 2023 2024. Adjusted EBITDA increased 11% on a reported and constant currency basis. Our adjusted EBITDA margin was 36.2 percent at the high end of our expectations and up 115 points compared to the year ago quarter due to flow through on revenue growth and realization of transformation cost savings.

Speaker 3

Adjusted diluted EPS was $0.99 an increase of 15%. Adjusted tax rate for the quarter was 23.4%. Finally, in the Q2, we took $33,000,000 of one time charges related to the next phase of our transformation program, $15,000,000 for operating model optimization and $18,000,000 for technology transformation. We incurred $76,000,000 of one time transformation expenses in the first half of the year and expect to incur approximately $200,000,000 throughout 2024, driving at least $65,000,000 of in year operating expense savings. As part of our to $375,000,000 program, we expect the remaining $75,000,000 to $95,000,000 of one time expenses to be incurred in 2025.

Speaker 3

Looking at segment financial performance for the 2nd quarter, U. S. Markets revenue, which includes Consumer Interactive, was up 6% compared to the year ago quarter. Adjusted EBITDA for U. S.

Speaker 3

Markets was up 9% and adjusted EBITDA margin was up 120 basis points to 39%. Our U. S. Markets segment benefited from a sequential increase in realized transformation cost savings. Financial Services revenue grew 11%.

Speaker 3

Excluding mortgage, Financial Services revenue was down 2%. Trends were consistent with the levels seen in the Q1. We continue to outperform softer volume activity driven by new business wins and successful cross sell, including with NuStar Solutions. In the 3rd Q4, we expect improving financial services ex mortgage growth rates as comparisons ease in the back half of the year. Our credit card and banking business was down 2%.

Speaker 3

Activity remains tempered as lenders balance improving deposit online activity remains muted but stable with a modest uptick in batch marketing. The short term lending space remains soft. We continue to see wallet and new logo wins across both FinTech and short term lending as well as expanding new customer use cases. Our auto business grew 3% despite continued headwinds in the auto market driven by our innovative credit solutions and new wins in trusted call solutions. New vehicle sales continue to grow modestly, but there remain affordability challenges across the market from higher interest rates and still high used car prices.

Speaker 3

We expect similar trends to persist throughout the year. For mortgage, revenue grew 53% against inquiry volume declines of 11%, modestly better than our expectations. We saw good prequalification volumes supported by healthy shopping activity, while mortgage originations remain down and significantly below Emerging Verticals grew 4% in the quarter led by insurance, public sector, tech retail and e commerce and media, offsetting modest declines in telco and tenant employment. Insurance grew 6% as market trends progress as anticipated, which we expect to support growth acceleration in the second half of the year. Insurers are gradually increasing marketing activity as rate adequacy improves, driving demand for our credit based marketing solutions as well as our suite of identity based data hygiene, audience and analytics solutions.

Speaker 3

Consumer shopping activity remains strong. We continue to have a robust new business pipeline, particularly across our TruVizion Driving History Suite as well as cross sell of NuStar and Sontiq Solutions. Public Sector grew double digits with strength across credit, communications and fraud solutions as well as favorable project timing. Media and Tech Retail and E Commerce both grew mid single digit. The overall marketing backdrop remains muted but stable and we delivered good growth in Trusted Call Solutions and our risk products.

Speaker 3

Collections grew modestly, while telco and tenant unemployment declined low single digit. Tenant employment year over year declines dissipated we expect growth in the second half of the year as we lap the impact of our product recalibration and ramp recent new business wins. Turning to Consumer Interactive, revenue decreased 1%. Our indirect channel grew benefiting from continued breach wins. Our direct business declined as expected as we work through the impact of our recalibrated marketing strategy.

Speaker 3

For my comments about international, all revenue growth comparisons will be in constant currency. For the total segment, revenue grew 14% with 5 of our 6 reported markets growing by double digits. Adjusted EBITDA margin was 42.8%, up 120 basis points. Now let's dig into the specifics for each region. In India, we grew 27% on top of 35% growth in the prior year's Q2.

Speaker 3

We grew strongly in consumer credit, commercial credit, fraud, marketing and direct to consumer supported by healthy market trends. Our U. K. Business returned to growth, up 4% in the quarter. The U.

Speaker 3

K. Market continues to stabilize with improving inflation figures and expectations for lower interest rates, supporting gradually improving banking and FinTech activity. Additionally, our consumer offerings as well as our insurance and gaming verticals drove strong performance. In Canada, we again delivered strong performance, growing 12% against flattish market volumes. Growth was broad based, benefiting from share gains and batch sales in financial services, strength in insurance and recent consumer indirect and breach wins.

Speaker 3

Into the second half of the year, we anticipate some deceleration in our growth rate in Canada as we lap sizable new business wins, but expect to deliver healthy and market leading performance. In Latin America, revenue growth accelerated to 13% with broad based growth across regions. Colombia grew double digits and we're starting to see the improving FinTech growth after a period of retrenchment. Brazil also accelerated the double digit growth driven by improving new business win momentum. In Asia Pacific, we grew 14%, led by very strong growth in the Philippines and another solid quarter in Hong Kong.

Speaker 3

Finally, Africa increased 10% with broad based growth led by our retail vertical. Turning to the balance sheet. We ended the quarter with roughly $5,200,000,000 of debt $543,000,000 of cash on the balance sheet. We finished the quarter with a leverage ratio of 3.3x. We made an $80,000,000 debt prepayment in the 2nd quarter and expect to make further prepayments over the course of 2024 with excess free cash flow after funding our transformation initiatives.

Speaker 3

Remember that we expect roughly $280,000,000 of accrued one time transformation expenses from the Q4 of 2023 through the end of 2024 with the majority paid out this year. In the quarter, we also successfully completed debt refinancings to extend our maturity profile and reduce our interest expense. We refinanced $1,500,000,000 of our $2,200,000,000 term loan B5 into term loan B8 as well as our entire term loan A and revolving credit facility. We extended the maturity of the portion of our Term Loan B5 from 2026 to 2,030 1 and our Term Loan A and revolving credit facility from 2028 to 2029. Additionally, we successfully removed the credit spread adjustment for the portion of our term loan B5, term loan A and revolving credit facility.

Speaker 3

Since announcing our Neustar acquisition, we have voluntarily prepaid $1,600,000,000 while executing on 3 refinancing transactions to lower our interest expense and extend our maturity profile. Net of our swaps, our all in average effective cost of debt at today's rates is roughly 4.9%, below the current SOFR rate. You can find 2 slides on our debt profile in the appendix of our presentation. Based on our expectation for adjusted EBITDA and cash generation, we expect our leverage ratio to be in the low three times range by the end of 2024. We continue to work towards our leverage ratio target of under three times.

Speaker 3

We do not view 3 times as an ending point for deleveraging and view debt prepayment as an attractive use of cash. Turning to guidance. We are pleased with our outperformance over the 1st 6 months of the year, but our approach remains unchanged. We continue to assume muted economic growth throughout 2024 with steady lending volumes and no benefit from interest rate cuts. That brings us to our outlook for the Q3 of 2024.

Speaker 3

We expect foreign exchange to have a less than 0.5% impact on revenue and insignificant impact on adjusted EBITDA. We expect revenue to be between 1.044 $1,060,000,000 or up 8% to 10% on an organic constant currency basis. Our revenue guidance includes approximately 2 points of tailwind for mortgage, meaning that we expect the remainder of our business to grow 6% to 8% on an organic constant currency basis. Included in our guidance is a roughly 4.5 percent benefit from recent large breach remediation wins that we expect will be realized in the 3rd quarter. We expect adjusted EBITDA to be between $367,000,000 $380,000,000 up 3% to 7%.

Speaker 3

We expect adjusted EBITDA margin of 35.2% to 35.8% or down 90 basis points to 160 basis points. A few nuances on 3rd quarter margin. The impact of our lower margin large breach wins is a roughly 80 basis points drag on quarterly margins. Additionally, the impact of normalizing incentive compensation when compared to last third quarter's low levels when we had a reversal of variable compensation accrual is a little over 100 basis points drag. Excluding those items, we expect to deliver strong underlying margin expansion benefiting from revenue growth and the realization of our transformation savings.

Speaker 3

We also expect our adjusted diluted EPS to be between $0.97 1.02 up 6% to 12%. Turning to the full year, we now expect revenue to come in between $4,098,000,000 $4,138,000,000 or up 7% to 8% on an as reported and organic constant currency basis. We expect our organic constant currency growth excluding mortgage to be up about 4% to 5%. For our business segments, we expect U. S.

Speaker 3

Markets to grow mid single digit or up low single digit excluding mortgage. We anticipate Financial Services to be up low double digit or low single digit growth excluding mortgage. We expect mortgage revenue to increase about 50% based on mortgage inquiries being down over 5%. We expect inquiries to be down roughly 5% in the second half of the year. We expect emerging verticals to be up low single digit.

Speaker 3

We now expect Consumer Interactive to increase low single digit and increase from down low single digit due to the breach wins. We continue to expect international to grow low double digit. Turning back to the total company outlook. We expect adjusted EBITDA to be between 1.45 $5,000,000,000 $1,485,000,000 up 8% to 11%. That would result in adjusted EBITDA margin being percent to 35.9 percent or up 40 to 80 basis points.

Speaker 3

We anticipate adjusted diluted EPS to be $3.78 to $3.90 up 12% to 16%. We expect our adjusted tax rate to be approximately 22.5%. Depreciation and amortization is expected to be approximately $530,000,000 We expect that the portion excluding step up amortization from our 2012 change in control and subsequent acquisitions to be about $245,000,000 We anticipate net interest expense will be about $250,000,000 for the full year and we expect capital expenditures to be about 9% of revenue. We continue to expect to incur approximately $200,000,000 in one time charges in 2024 related to our transformation program. Before wrapping up, I want to summarize the drivers of our guidance raise from what we guided in April.

Speaker 3

The increase in our revenue and adjusted EBITDA guidance is driven by 2 factors. 1st is our outperformance in the 2nd quarter as we exceeded the high end of our revenue expectations by $15,000,000 and adjusted EBITDA by $5,000,000 Second, we expect our large breach wins to contribute roughly $40,000,000 of revenue $5,000,000 of adjusted EBITDA in the second half of the year with the vast majority recognized in the Q3. The margin profile of breaches can vary depending on the services offered. With the acquisition of Santec, we are now able to play a meaningful role in the breach market with end to end services to meet the needs of a particular event. The large breach wins we are servicing now utilize all of our services, including print notification, which collectively are lower margin.

Speaker 3

By comparison, the numerous small breaches we continue to win typically utilize the higher margin services. These large breach wins build our momentum, credibility and relevance in the growing space. Importantly, excluding the breach benefit, our expectations for the second half of the year are unchanged from April. As we maintain our prudent guidance approach. We continue to expect healthy revenue growth and strong underlying margin expansion in the back half of the year.

Speaker 3

We are pleased with the progress on our transformation programs and remain well on track to deliver at least $65,000,000 of savings throughout 2024. I'll now turn the call back to Chris for some final comments.

Speaker 2

Thanks, Todd. And to wrap up, we exceeded 2nd quarter expectations driven by mortgage growth and broad based outperformance in emerging verticals and international. We achieved key milestones against our transformation and technology modernization programs reinforcing our confidence in delivering against our financial We remain focused and confident in delivering strong results in the current low growth market environment. Now, let me turn it back over to Greg.

Speaker 1

That concludes our prepared remarks. For the Q and A, we ask that you each ask only one question so that we can include more participants. Operator, we can begin the Q and A.

Operator

Thank you. We will now begin the question and answer And the first question will be from Jeff Meuler from Baird. Please go ahead.

Speaker 4

Yes. Thank you. Good morning. So I want to ask about card and banking and consumer lending, I guess, both in the quarter and going forward from the standpoint that it sounds like market conditions are stable, but your numbers got a little bit worse in the quarter on a year over year basis. So what drove that?

Speaker 4

And then going forward, I hear you on the benefit from the easier comp, but at what point do we see greater, I guess, underlying improvement beyond the easing comp benefit, especially now that DQs are starting to level off given that they're further along the normalization process? Thank you.

Speaker 3

Hey, good morning, Jeff. This is Todd. Thanks for the question. So, yes, as it pertains to financial let's talk about financial services just in total excluding mortgage. I know your questions about card and banking and consumer lending.

Speaker 3

But in the Q1, we did grow 1% and we just reported a decline of 2% in the second quarter. What we think is more a more instructive way to look at it is to look at what actually happened in the first half of the year. And when we look at it on that basis, everything was pretty much flat. And what we see there is simply a continuation of the trends that we saw exiting 2023. Needless to say, in Q3 of 2023, we saw a step down.

Speaker 3

And we've been pleased with what we characterized in our prepared remarks as a stabilization in our volumes. So when you look at the second half of the year, to your point, the volumes comparisons will definitely get easier. We're expecting in the Q3 a low single digit growth rate for Financial Services ex mortgage. But when you get into the 4th quarter, because remember the step down that we saw in 2023 was started really in September. So you saw the full run rate of that happened in the Q4 of 2023.

Speaker 3

So the comparable there, look, is about a mid single digit grower in the Q4 that we're expecting. A lot of the focus and rightfully so is on how our volumes are performing. But it is also important to note that we do continue to win meaningful new logos, new business, as well as we've been successful within Financial Services and cross selling NuStar capabilities. So the point in that is, it's important to look at this a little bit more broader than just the volumes because there are other places that we have had some success?

Speaker 2

Yes, I would just reinforce a couple of points. I mean, we view this as stable market conditions, even though technically we are a bit negative in the 2 categories that you pointed out. I mean, naturally, you're going to expect some variations in and around the floor. And so we think these fluctuations are within a stable, but muted lending environment. I think the more important takeaway is that we are demonstrating that through our diversification and overall business model strength, we can grow even when the conditions are muted.

Speaker 2

And so we've got nice top line growth, good fall through margin improvement and the ability to delever despite the fact that we're still in kind of a stable market, I mean, kind of a stable but depressed market conditions. Now looking forward, when do you think when do we think we're going to actually start to see growth beyond just steady conditions against easing comps? Look, it's tough to predict, but the consumers are holding up pretty well because they're employed and they're enjoying some real wage growth. There has been increasing distress among subprime and lower income consumers, but we think some of that is moderating. And as you point out, delinquencies are easing.

Speaker 2

The deposit bases within the banks are stabilizing. And I think that means we're getting closer to market conditions where marketing activity and the customer acquisition is going to improve. And of course, if the Fed does come through with any rate reductions in the second half of the year, that would be additive to our forecasts at this point.

Operator

Thank you. And the next question will be from Andrew Steinerman from JPMorgan. Please go ahead.

Speaker 5

Hi. Glad to hear that NuStar's revenue growth was solid in the quarter and on track for the year. Could you just give some more color on what's driving NuStar's revenues within the marketing and fraud solutions? And how is joint product development going traction in joint product development products that have been introduced? And lastly, is NuStar still expecting to have EBITDA margins around 32% this year?

Speaker 2

Well, first quickly on the margin question because that's probably faster to address. Yes, 32% is our guide for the year. And we do believe that there's upside to those margins as we complete the realization of the acquisition synergies, as we complete the technology modernization that we outlined in the 3rd, Q4 environment last year. And also, as we return to more normalized marketing conditions, marketing has been in retreat for about 12 months plus now. And our marketing products tend to be higher margin than the communication products because there's a lower cost of goods sold associated with them.

Speaker 2

So we also have some mix headwinds that are keeping NuStar margins a little bit lower than we expect in more normalized conditions. Now if you look across the board, we're having a pretty good year in fraud with NuStar. We're having a softer year in marketing relative to our guidance, and it's because of the pressures on businesses to find efficiencies in marketing in a more difficult environment. And we're doing pretty well in communication solutions, in particular, the subcomponent of communications, which is trusted call solutions where we're getting really outsized growth, because we've got a product that's getting great market acceptance and we're going to continue to ride that. On the innovation front, we are very close to launching the next generation of our integrated marketing products, a unified marketing solution that combines the best of Heritage, TransUnion and NuStar on a single integrated platform.

Speaker 2

And that's one of the reasons why we took the time in this earnings call to focus on the many components of OneTrue in the tech transformation because this next generation solution is built upon OneTrue and also on OneDev, the underlying foundation, And it's going to bring together all of the data, the marketing audience data, all of the identity data and resolution capabilities in the range of identity, hygiene, audience planning, activation and media measurement services in a single integrated system. So we expect that to launch late Q3, and rolling into next year, we think we're going to see material acceleration in growth there regardless of market conditions. We're also excited because we've achieved the same kind of product innovation milestone in the fraud world. We are launching the next generation TrueValidate fraud solution. We highlighted it in my section of the earnings.

Speaker 2

You can see it performs dramatically better and it's been a point of integration and consolidation of the various fraud solutions that we have either acquired or built in different geographies through the year on the common NuStar platform. And by aggregating all of that signal and bringing advanced analytics against it, we're able to identify fraud far more effectively, but also reduce false positives, which saves our customers a lot of needless labor. So I think the broad, Andrew, we're kind of moving from the acquisition integration phase and we're kind of deeply now in the acquisition innovation phase.

Operator

And the next question will be from Faiza Alwy from Deutsche Bank. Please go ahead.

Speaker 6

Yes. Hi. Thank you so much. So wanted to talk more about emerging verticals beyond NuStar. So you've done well in the first half, you've highlighted 4% growth and but you're still keeping the low single digit growth outlook for the year.

Speaker 6

So just curious on some puts and takes there and how we should

Speaker 7

be thinking about the back half?

Speaker 3

Good morning, Faiza. I'll take that question. Yes, we are pleased with the performance that we've had thus far with the emerging verticals, in particular, growing 4% in the latest quarter. But there are several moving pieces that I do feel are important to walk through. In our prepared remarks, we did speak about some good growth that we are seeing in insurance.

Speaker 3

The insurance vertical grew 6% in the quarter. As we think forward about that business, marketing continues a recovery, which is a positive thing for the industry overall as rate adequacy has improved. And we're also seeing some strong shopping activity by consumers. So we expect that to continue on. Segmenting where the growth came from.

Speaker 3

So insurance is clearly the standout because of its size and the growth that we're seeing. But also in the quarter, we saw good growth in public sector, which was a double digit grower, broad based, but the public sector business does have some project work in it. So that can be uneven from quarter to quarter, but nevertheless was a meaningful contributor to the growth rate. Also our tech retail and e commerce and our media vertical grew greater than the 4% for emerging verticals overall, which we view as a very solid result as much of the marketing revenue that we just spoke about from NuStar and the joint capabilities that TransUnion has created, they reside in these 2 verticals. So when you look at insurance, public sector, tech retail, e commerce, media, that's where the vast majority of the growth is coming from.

Speaker 3

Offsetting that, we are seeing our collections business still growing, but lower than the overall growth rate for emerging verticals. And as we said in our prepared remarks, the tenant employment business declined, but we expect that those declines will have dissipated. We know they have and we're going to see this business return back to growth with our recalibrated product offering. And then finally, something to always keep in mind, Chris just talked about our communications product suite, which TCS is part of, but our communications vertical houses many of the legacy NuStar products that are slow flattish to slow or declining growth and they're going to be a drag. So the net net is you see some good growth from the vast majority of these verticals and then there's some offsets that are there.

Speaker 3

Thinking about this just relative to our guide for the second half of the year. As we said, we didn't change the guide. So with that being said, I think that we look at this and say that the risk in the emerging vertical skews more to the upside than to the downside for all the reasons that I just went through for each of the emerging verticals.

Speaker 2

Yes. And I think that's just kind of an important point philosophically to emphasize really to all of the analysts and investors on the call is that we're maintaining our guidance posture of beat and hold as opposed to beat and raise, right? And so we're letting the beats flow through, but we're maintaining the same conservative expectations in the future quarters in the second half of the year that we did at the outset of the year. And we think that's more prudent given the gyrations in the macro market over the past couple of years and some of the difficulty in forecasting the business. And we feel like we're well positioned to deliver against the guidance that we're reinforcing in this call.

Operator

And our next question will be from Toni Kaplan from Morgan Stanley. Please go ahead.

Speaker 8

Thanks so much. I think this was touched on a little bit, but just wanted to really nail it down. You mentioned that you didn't change sort of your guidance expectation. So I definitely appreciate that. But backing out the breach wins, your 3Q organic growth guide implies bit of a deceleration in organic growth.

Speaker 8

And so maybe just talk about what the slowdown implied would be from and maybe it's just conservatism, but are there specific headwinds to call out or really is it just you wanting to really be able to show good numbers and be conservative? Thanks.

Speaker 3

Tony, I'm glad you asked the question because it's an important point and it really just kind of reinforces the point that Chris just made. In that when you look at the our performance and let's do this for TransUnion in total, excluding mortgage. In the Q1, we grew 5%, 2nd quarter, we grew 4%. And now the growth rate at the high end, we're saying Q3. And then you can do the math and the implied in the Q3.

Speaker 3

And then you can do the math and the implied is going to be about 3% for the 4th quarter. So clearly, a step down from what we've seen. But just simply put, as Krish just said, we just feel it's the prudent thing right now to not get in a situation where we're raising expectations because the business in core Financial Services, I answered previously, it continues to be stable. We haven't seen that uptick yet happen. So as a result, we think what's best is for us to stick with the numbers that we put out going back to February for the second half of the year, because things do still remain uncertain for us.

Speaker 3

So that second half guide is unchanged. And again, reinforcing no assumption of a lending recovery or any type of marketing recovery benefit from a Fed rate cut. And I'll just leave you with Q1 and Q2, we guided 2% to 3% and we were fortunate to be able to outperform that. And I can tell you that, that is what the team is working towards to do that in the second half of the year.

Operator

Thank you. And the next question will be from Kelsey Xu from Autonomous. Please go ahead.

Speaker 7

Hi, good morning. Thanks for taking my question. So on breach revenues, I think you mentioned large breach wins in the quarter. I was wondering if you can give us a little bit more details on that. I think breach revenues are generally hard to forecast and can be lumpy.

Speaker 7

So what's a sustainable level of growth in your view? And then on top of that, if you could tell us a little bit more about the competitive landscape there, that will be great because Experian also highlights that there's strong growth there.

Speaker 2

Yes, Kelsey. Well, breach is a large and growing market and you only have to follow the news for a few weeks and you're going to see major companies sustaining breaches. With the acquisition of NuStar I'm sorry, with the acquisition of SonTic and the investments that we've made, we feel like we have emerged as a significant player in breach now. And our brand is such that we are kind of in the deal flow and we've got the broad set of capabilities to serve a small and large needs alike, rich needs that skew through the physical or the digital. We've got the comprehensive range of services and we're going to compete more effectively, win share and have a higher sustainable level of breach revenues.

Speaker 2

Now that said, you are correct. These deals are episodic. Sometimes we're going to have big ones, sometimes we may not have the big one in the quarter. And that's why we've taken pains to

Speaker 3

really call out

Speaker 2

this higher than usual level of breach wins in the Q3. I think it's also important to understand that these breach wins come with attractive margins. They may not be quite as high as our enterprise margins in total, but they're not dramatically different, right? So I would hate for an analyst to look at what we're reporting in the Q3 and conclude that that's the typical margin of the Breach business. That Q3 financial performance really is just about the timing of revenue arrival against the expenses.

Speaker 2

And on these particular breaches, we're doing broad physical notification through the mail and we're just paying a lot of postage. What it doesn't include is the much higher tail of revenue that's going to continue for the next year or 2 related to the digital services associated with these wins. So we look at the breaches on a deal by deal basis. They are attractive in margin, it's fast growing and we think we're much better positioned to compete for them go forward.

Operator

And the next question will be from Manav Patnaik from Barclays. Please go ahead.

Speaker 9

Thank you. Just wanted to ask on that 7 product suites that you showed. It sounds like you've grouped all your offerings into that. But is that internally I suppose is the leadership aligned by each of those or is it more by the segmentation you provide? Just wondering how interconnected these things are?

Speaker 9

Or are they really being separated into these 7 product offerings or brands rather?

Speaker 2

Yes, Manav. I love the question. So let's talk about our global operating model. Certainly, we've got countries and we have vertical leadership within those countries that focus on the specific wants and the needs and the use cases for our products that are most relevant within those verticals. But we also have a parallel product organization, our solutions organization.

Speaker 2

And we have defined leadership and product management teams that align directly to the product families that you see. So if you were here, I could introduce you to our marketing lead, our fraud lead, our consumer lead, etcetera. And so it is much like a large global software company that's going to have a product leader overseeing a particular category of software or a consumer packaged goods company that's going to have a category manager. But then they are interfacing with the folks that lead, the go to market in the countries or the specific verticals.

Operator

Thank you. And the next question will be from Heather Balsky from Bank of America. Please go ahead.

Speaker 10

Hi, good morning. Thank you for taking my question. I wanted to ask a question on consumer interactive outside the breach. You talked about nearing an inflection in that business. I'm curious if you can talk a little bit more about that, what you're seeing and what gives you confidence in the business accelerating?

Speaker 2

Yes, good question, Heather. So we talked a lot about consumer in recent calls and the three portions of consumer. And look, the most challenged one has been the direct to consumer subscription business that we have through transunion.com and other properties. And what we're seeing now is that the rate of decline is slowing and slowed in the second quarter. We expect it to slow further in the third and reach kind of an equilibrium point or kind of low single digit declines by the Q4 of this year.

Speaker 2

And that will really reduce the drag on earnings from this piece of the business. In the larger indirect piece, where there has been really a mix of success for the freemium players and revenue pressure from the subscription players and just more kind of competition for share in that, we're seeing stabilization and we're getting growth out of that segment. And then what's really helping our results the most is the multi year mid double digit compounding that we're getting out of SonTek. So SonTek grew 20% last year. It was a great year, driven in part by success in Breach, but also in underlying identity subscription sales.

Speaker 2

And this year, we're positioning ourselves for another year of really strong growth. Now stepping back a bit, we still firmly believe that we're going to return the consumer business in total to consistent revenue growth, to consistent compounding. And we're going to pursue each of the monetization options to make that happen. So we're going to continue to do well on the subscription front. We're going to improve our capabilities in terms of offering supporting offers directly to consumers both through our web properties, but also enabling other players to do so in the marketplace.

Speaker 2

And we're going to build upon the momentum in identity and breach remediation.

Operator

Thank you. And the next question will be from Shlomo Rosenbaum from Stifel. Please go ahead.

Speaker 4

Hi, thank you very much for taking my question. Just I want to just one clarification thing and then to jump on to one other item. Just was there any unusual breach activity in the current quarter in the 2Q 'twenty four just because the bottom of Slide 12 says consumer interactive indirect growth led by Breach. I want to know if that is with some of the unusual activity you talked about that's heading in 3Q. Did any of it kind of pop into 2Q?

Speaker 4

And then the more important question is, Chris, where do you guys stand in terms of the transformation project? Are you tracking in line ahead? I'm not just talking about the cost, I'm talking about what you expect to get out of it, the timing of the project and your optimism about the success?

Speaker 3

Okay. Well, thanks for both

Speaker 2

of your questions there. And look, there was nothing unusual in the breach activity. I mean, the only, I guess, unusual or new thing is our ability to compete and win these big breach jobs. And we won several of them, and we're getting the benefit of that in the Q3. But the Q2, it's not really a factor.

Speaker 3

Well, we have it on the slide, right? So that's what he's responding. That's what he's asking about. So we do we did have in our indirect channel, Shlomo, all we're doing is just characterizing where the growth is coming from in that channel. And indirect, remember, it represents Breach, but also our business with the freemium players, the offer aggregators as well.

Speaker 3

So the point there is just that breach was the driver of the growth. Right. In the indirect? Yes. In the indirect.

Speaker 2

Other people's breaches as opposed to our own. So but then moving on to your question about the technology transformation, which again we spotlighted in this quarter, I feel like we are making great progress. We are well apace to achieve the technology transformation benefits. Certainly, the ones that we outlined in the Q3 call from last year, and you're going to see a good deal of savings in 2024 because of those activities. And then the longer pole in the tent was the technology specific savings that are largely enabled by One True that will come a little bit later, but we're definitely tracking to that.

Speaker 2

But just something I said earlier, we focused in the early days after guided for NuStar and all the acquisitions for both Argus and Sontiq. We're very confident about delivering that. But what we've really been focused on now is reengineering our products into these integrated product suites in the 7 families, leveraging what we think are best in class underlying platforms. 1 true certainly, which includes the guts and the intelligence of all information products, be it data management, identity, analytics and the ability to flexibly deliver that to the upstream product families. And of course, this underlying infrastructure utility layer, which we can now standardize across TransUnion, across all the products that reside on the suite, which is going to simplify a lot, take a lot of cost out and free up engineering cycles.

Operator

Thank you. And ladies and gentlemen, our final question today will be from Andrew Nicholas from William Blair. Please go ahead.

Speaker 4

Hi, good morning. This is Tom Roch on for Andrew. I want to touch on auto and ask if you saw any disruptions in the quarter from the CDK outage and if there was any help out July and Q3 volumes? Thank you.

Speaker 3

As far as you go back to our prepared remarks, auto, we were pleased with the performance. We grew 3%. We saw a little bit of impact from that situation. And as we look forward into the second half of the year, again, kind of small impact. If it was something of significance, we would have flagged it for you.

Speaker 3

So we feel that it's managed.

Speaker 1

Perfect. That brings us to the end of today's call. Thank you for your time and have a

Speaker 3

great rest of the day. Thanks.

Operator

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

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Earnings Conference Call
TransUnion Q2 2024
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