TransUnion Q2 FY2021 Earnings Call

Good morning and welcome to TransUnion's Second Quarter 2021 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 Aaron Hoffman, SVP of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today. Hope that all of you remain safe and healthy. On the call today, we have 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. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items as well as certain non-GAAP disclosures and financial measures along with their corresponding reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded and a replay will be available on our website. We will also be making statements during this call that are forward looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, in the comments made during this conference call and in our most recent Form 10-K, Form 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements. With that out of the way, my pleasure to turn things over to Chris Cartwright.

Thank you, Aaron. And let me add my welcome and my best wishes that you and your families are healthy and beginning to enjoy a return to more normal activity in your life. At TransUnion, while our associates continue to largely work from home, we have begun to slowly reenter the workplace in a thoughtful and safe fashion. We've started to conduct small in-person meetings in our offices. In fact, Todd, Aaron, and I are together in-person today for the first time in almost a year and a half. In the U.S., we currently plan to gradually return to in-office work in the fall, though with significant flexibility to capitalize on the benefits many employees enjoy working from home. Now, I'd like to lay out the agenda for this morning's call. First, I will discuss some of the broad macro and TransUnion specific trends that we experienced in the second quarter as well as highlight some recent progress related to social justice issues and other areas where we can make a difference as an organization. Next, in the context of our unique market positions and approach, I will discuss two growth areas: consumer lending and the public sector, to illustrate several dimensions of this approach that have consistently resulted in outsized long-term organic growth. Finally, I'll pass the baton to Todd to discuss our second quarter results in detail along with third quarter and full-year 2021 guidance. So, let me start with our second quarter performance. We posted very strong results as markets generally continue to rebound and our growth outpaced underlying market recovery on the strength of new business wins and a steady stream of new product innovation. Todd will discuss some of the specific revenue trends later as part of his remarks. In the U.S., where consumer spending has surged ahead of pre-COVID levels and consumers have substantial capacity to borrow, the recovery appears to be in full swing, although not yet complete. We expect additional recovery-driven upside in most of our U.S. businesses, particularly consumer lending, employment screening, collections and healthcare. At the same time, we believe that recovery in our international markets has only begun despite very impressive growth this quarter. In emerging markets like India, the Philippines, South Africa and much of Latin America, we see considerable upside as those markets improve over the next 6 to 12 months. Importantly, beyond market-based recovery we continue to deliver growth above our underlying markets. Todd will lay this out in greater detail, but you'll see that our multiyear growth stack in the second quarter clearly shows that the strong results we posted represent a combination of market recovery and organic growth. For instance, in the second quarter in the U.S., CreditVision and CreditVision Link grew almost 50%, well ahead of our strong financial services growth, reflecting the significant win that we've discussed in previous quarters. On our insurance vertical, which grew more than 20% in the quarter, we outpaced industry recovery on the strength of share gains and deeper penetration within our customers. More on our tenant and employment screening vertical where our focus on leveraging strategic tenant and screening partners have paid off and helped to deliver 30% growth in the quarter. We see the same sort of outperformance in our international markets driven by meaningful wins in every region, including new insurance and FinTech customers in Canada, new business with the U.K. government, strong CreditVision performance in South Africa, and new business with key lending customers in India. Given our strong second quarter and the increasingly positive macro environment, we have raised our full-year 2021 guidance again. Todd will provide you with the details shortly. Importantly, we remain confident in our long-term growth algorithm of high-single digit revenue growth at an expanding attractive margin with double-digit EPS spread. We also remain focused on how we conduct business and the positive impact we can have on our associates, our communities, and all of our stakeholders. To that end, we've increased our disclosure and established meaningful targets for workforce diversity and similar strategic imperatives to improve our business. For instance, during the quarter, we implemented a global supplier diversity procurement process. Also during the second quarter, a well-regarded third party completed a global assessment of our energy and carbon footprint. We’ve provided the 2019 and 2020 baseline data on our website. Using this data, we will develop appropriate targets to reduce our environmental impact. We also launched a thorough materiality assessment to refresh our understanding of key stakeholders’ views about TransUnion. This will further inform our future disclosure and target setting. So, now I’ll pivot to discuss our long-term growth priorities. On our last call, I spent some time delineating TransUnion’s differentiated market-positioning approach which fuels our long-term growth algorithm. Let me quickly review each of these differentiators. First, we've taken an innovator and attacker position across our markets and built a track record of delivering outsized unit growth across markets we serve by disrupting through disruption and market share gains. In addition to our attractive market position, we have a proven scalable enterprise growth playbook. Based on the foundation of customer and consumer insights, we've developed a repeatable approach to client engagement, product innovation and adjacency expansion. We complement the growth playbook with powerful proprietary and third-party data assets. In addition to our traditional attractive position in consumer credit data, we have developed an array of alternative data assets to serve core and high-growth use cases. Next, our industry-leading technology remains a competitive advantage. I've regularly discussed our proven track record of delivering on large scale complex technology initiatives as well as Project Rise, our current program to make TransUnion’s technology more scalable, secure, efficient and effective, and to keep us on the cutting edge of cloud computing and information security. And finally, underpinning these market positions, our culture emphasizes customer focus and partnership. We've built a company that understands the needs of customers and consumers and can deliver best-in-class solutions to meet those needs. We also balance the sense of humility with a deep inner drive to be successful and accountable while also taking a collaborative approach both internally and externally. So with that review as a backdrop, I want to provide a deep dive on two growth vectors, consumer lending and our public sector vertical. Now, candidly, we could have chosen many other vertical solutions or geographic markets. We chose these two to illustrate how we take an attacker position in attractive markets, also how we utilize the go-to-market approach in our growth playbook, and how we leverage data assets across the company. So let's start off with consumer lending which includes a number of lending markets such as FinTech, short-term lending, point-of-sale, and buy now pay later. Our total consumer lending business has generated about $200 million of annual revenue in recent years, running above that mark in 2019 and dipping below in 2020 due to the impact of the pandemic. Given our current trajectory, we expect to set a new high watermark above $200 million this year. FinTech represents the largest portion of the consumer business at about 50% of revenue followed by short-term lending at about 25% of revenue. Point-of-sale and now buy now pay later lending, while growing quickly, account for a low-single digit percentage of the consumer lending business. For my discussion today, I'm going to focus primarily on the FinTech portion of the business given its size and growth characteristics. From 2017 through 2019, FinTech revenue increased about 55% and then declined in 2020 as a result of the pandemic. We expect to see another significant leg of growth this year as the market rebounds and we benefit from recent share gains. TransUnion has a strategy of looking for the next major innovation in financial services, and we stay close to industry participants as well as venture capitalists to develop our viewpoint. More than a decade ago, we identified the burgeoning FinTech market as a significant opportunity. We developed a strategy that continues to this day, to engage early-stage FinTechs, partner to go to market quickly with TransUnion-enabled risk, fraud, and marketing solutions, and then support their expansion with thought leadership, industry expertise, and innovation. To formalize this approach, we created a FinTech startup kit making it as easy as possible for new players to enter the market using our data, our models and our expertise. As winners emerge, we’ve positioned ourselves as their primary and frequently exclusive bureau partner. And that leadership position continues today as we remain the primary partner to the majority of FinTech lenders. As we help enable the growth of the industry, we learned from our partners, allowing us to refine our strategy and solidify our leadership with new and existing customers. We now have a formal FinTech advisory board that has played a key role in new product development either by existing ideas or helping us to define our own. For example, based on input from our advisory board members, we developed a number of prescreen and prequalification solutions to enable FinTechs as well as our core financial services customers to provide more relevant credit offers to more consumers with increased convenience. Going back five years and based on feedback from our advisory board, we created our innovation lab to bring customers onsite for an immersive process to solve a specific problem or develop a new model leveraging the full range of our data capabilities and expertise at TransUnion, all enabled by our 2016 technology transformation Project Spark. Since we've had tremendous success using Innovation Lab to deepen and strengthen customer relationships with FinTech lenders as well as our core financial services partners and have expanded recently to engage with insurance customers. The other strong relationships in innovation, particularly CreditVision and CreditVision Link, have played an important role in solidifying our leadership position. Going forward, we have a significant opportunity to drive growth through greater penetration of fraud, marketing and direct-to-consumer solutions. Our leadership position has also helped us develop a differentiated file as we see such a high percentage of consumer imports. As you would expect, all three bureaus capture the trend line data when a lender issues a loan. However, only the bureau providing data for the application sees the inquiry. Given our broad coverage in this space, we see a disproportionate amount of the inquiries, which helps in two ways. First, customers can drive insights about consumer behavior if they see a pattern develop. And second, comprehensive inquiry data helps us identify loan stacking fraud and other key risk factors in a way that our competitors cannot match. As we look forward, despite our exceptional growth and strong share position, we expect considerably more growth in the future. First, as I mentioned earlier, we have meaningful opportunities to deepen our penetration with our customers in fraud mitigation, marketing, and direct-to-consumer initiatives. Second, FinTech players continue to diversify from mono-line lending into multi-line lending, and we advise many of them as they enter areas like car, auto, and mortgage. Third, broadly within consumer lending, while small today, we see buy now pay later and point-of-sale lending as attractive growth factors. We've taken the same approach with these lenders as we did with FinTechs in their earlier days and have helped to enable their success. We started with fraud solutions, and it pivoted to more traditional credit offerings as we capture significant portions of their traffic just as we did with FinTech. In addition to these opportunities in the U.S., we also have a meaningful business internationally with substantial growth potential. Year to date, FinTech represents about 13% of total international segment revenue but has accounted for roughly 25% of the segment’s growth. The U.K. has the most developed international FinTech market and it accounts for almost 60% of our international FinTech revenue. The next largest markets include India and Canada, followed by Hong Kong, Brazil and Colombia. We also have nascent businesses in South Africa and the Philippines. Interestingly, FinTechs in these markets have a more diverse portfolio addressing opportunities to shop and offer differentiated consumer experiences across not only traditional lending and buy now pay later, but also digital banking, payments and retail investing. This gives us the opportunity to address a more diverse set of FinTech sectors internationally and cross-sell a broader range of offerings to these customers. Our ability to rapidly identify the most attractive FinTech segments in markets within our international footprint and to effectively deploy our innovations like CreditVision, TruValidate, and Innovation Lab in these markets has helped us to build strong share positions just as we have in the U.S. Taken together, our U.S. and international FinTech positions represent a significant and fast growing part of our portfolio and should drive meaningful growth above the total company and segment rates in the years to come. Now I'd like to turn to our public sector vertical, which we formalized in 2015 to build off of a fledgling position that we had built more incidentally than deliberately. At that time, we had less than $10 million of government-related revenue spread across a number of our businesses but with no clear owner or strategy. Now, taking our assets and capabilities, we had a clear way to participate in this large attractive market, and in 2015 began the process of building out public sector as a stand-alone vertical utilizing our proven growth approach. First, we hired a dedicated leader, Jonathan McDonald, with deep industry expertise and gave him full P&L responsibility. Jonathan built up his team with dedicated government specialists from 19 associates in 2016 to 52 today. This team identified and prioritized the best opportunities for TransUnion which led to a two-pronged go-to-market strategy. The first part entailed identifying partners who could provide immediate access to various public sector business, allowing us to build the foundation and establish our brand. The second part involves playing the long game of gaining authorization to participate in government procurement processes directly to win business at the federal, state and local level. Five years later, we’ve developed an impressive group of partners that help us access local, state and federal opportunities and we’ve positioned ourselves to win business directly with all levels of government including higher education. Now, along with developing a market strategy, the team identified our existing solutions that could most readily fit this market need. In fact, we've never had to build a new solution specifically for public sector. We see that as a real positive that we can readily repurpose the assets within TransUnion and leverage them within a new vertical. This improves speed to market and lends itself to a higher-margin outcome as we don't have significant build-out cost. Now, while we've entered a number of areas, three solutions have driven a preponderance of our growth in the public sector. First, we leveraged our suite of identity solutions to allow agencies to authenticate consumers interacting through existing online channels. Unsurprisingly, we saw significant surge at both the state and federal levels during the pandemic and demand continues today. We also see further opportunity as the Biden administration launches new programs to provide support to various constituents. Second, we utilized our broad array of powerful data assets delivered as a portfolio review for insider threat monitoring. Using this solution, we can help agencies that provide high-level security clearance continuously monitor their workforce for any indication of financial distress or criminal activity, as either can indicate heightened risk of an employee being compromised. And third, we combined our collection’s prioritization tools and our leading industry insights around right party contact data to help states efficiently pursue parents who have failed to pay or continue to avoid paying child support obligations. This allows our customers to allocate limited resources in the most effective way to maximize recovery of child support. All of this good work has resulted in rapid growth and we will approach $50 million in revenue this year. As we look forward with the clear path in this vertical to topping over $100 million in revenue, the next leg of growth will continue to leverage the approach I've just described and that starts with further penetration across the customer base as we build our reputation and develop a track record of delivering high impact solutions. We have positioned ourselves to bid on and win larger contracts and to connect business with states as well as new agencies at the state and federal level. We’ve also launched a professional services offering for our customers where our experts assist with integrating, onboarding and managing our solutions to ensure a quick and effective start to contracts as well as heightened customer satisfaction. And we've launched a supply chain risk solution, as many agencies worry about subcontractors or other vendors becoming a weak link in the security chain or smaller subcontractors going out of business. We've leveraged our market-leading linking and matching capabilities to develop solutions that support both national security and business continuity. And finally, we see an opportunity to help agencies that provide critical benefits to constituents better market their availability to ensure that those in need of help receive it. To that end, we continue to explore leveraging the digital marketing capabilities that we've developed. So, the stories of consumer lending and the public sector illustrate two of the many growth vectors in TransUnion. And while they've realized exceptional growth, we have great conviction that they will continue to grow on a similar trajectory in the future, helping to fuel our long-term growth algorithm. And so with that, let me turn the time over to Todd to walk you through our financial results and our second quarter and full-year 2021 guidance. Todd?

Thanks, Chris. We knew entering the quarter that we would see our easiest comparisons of the year and thus, likely our strongest quarterly performance. As Chris discussed, that was the case as most of our businesses declined in the second quarter of 2020 as we all grappled with the most severe impacts of the pandemic. And as expected, almost all of our businesses posted very strong growth in this quarter as markets continue to recover. We continue to monetize these business wins across our portfolio, and we benefited from easy comparison. In order to help you appreciate the long-term trends and the above-market performance in the current quarter, I think it's instructive to look back at our growth in the second quarter of 2019 and 2020. Doing so helps make more sense out of the very large increases we posted across the business this quarter. To that end, this slide shows you how we performed in the second quarter of this year for the same quarter over the past two years. The conclusion is that we have delivered attractive growth above the underlying market including the outsized recovery this quarter. This holds true for almost every segment, vertical, and region. Now, let me take you through our performance starting with our consolidated results. And for the sake of simplicity, all the comparisons I discuss today will be against the second quarter of 2020 unless noted otherwise. Second quarter consolidated revenue increased 22% on a reported basis and 20% in constant currency. The Signal and Tru Optik acquisition had just about one point of impact. So, organic constant currency growth was 19%. Excluding mortgage, which represented about 13% of total revenue in the second quarter from both the second quarter of 2020 and 2021, our business grew 21% on an organic constant currency basis. Adjusted EBITDA increased 31% on a reported and 29% on a constant currency basis. Our adjusted EBITDA margin was 41.1%, up 290 basis points compared with the year-ago quarter driven primarily by the significant revenue outperformance. Second quarter adjusted diluted EPS increased 46%. This was largely driven by strong adjusted EBITDA growth and the benefit from reduced interest expense related to our debt refinancing, prepayment, and lower LIBOR, as well as a slightly lower adjusted tax rate of 23.2%. I also want to address one other item as it had a significant impact on our reported EPS that was backed out of our adjusted EBITDA and adjusted diluted EPS in the same way we accounted for the reserves that we previously booked. During the quarter, the United States Supreme Court reversed the circuit court opinion related to a class action suit called Ramirez v. TransUnion LLC. As the court reduced the size of the class by more than 75%, and remanded the matter back to the lower court for further proceedings, we reduced our reserves by $32.4 million. Now, looking at segment financial performance, U.S. markets’ revenue was up 20% compared to the year-ago quarter. The two media acquisitions had 2 points of impact on revenue. Excluding mortgage, organic revenue grew 22%. Adjusted EBITDA for U.S. markets increased 22% as reported and 24% on an organic basis. Adjusted EBITDA margin improved by 100 basis points, largely as a result of the strong revenue growth, partially offset by our continued strategic and operational investments and the cost to integrate and scale our recent media acquisitions. Diving into the results by vertical, Financial Services revenue grew 22% and was up 35% excluding mortgage. Notably, consumer lending, auto and credit card each delivered very strong results, while mortgage slowed significantly on a year-over-year basis. Looking at the individual end markets, consumer lending surged on the strength of historically strong credit applications and marketing activities, which disproportionately benefits TransUnion, given the strong leadership position Chris outlined. Lenders have aggressively stepped up their customer acquisition activity as consumer spending has increased. With that said, there are still more upside ahead once credit card balances return and debt consolidation becomes more attractive. Likewise, short-term lenders are just beginning to see significant recovery and buy now pay later and point of sale are continuing to grow. We also had a very strong quarter in our credit card business, with similar customer behavior in FinTech lending resulting in a high watermark for applications and marketing activity. Notably, we recently saw a top five U.S. card issuer where TransUnion is a primary provider of credit services switch away from FICO scores and replace them with VantageScore. This may set the stage for other lenders to follow suit. Other markets continue to be solid despite constrained new car inventory. We have benefited from meaningful demand recovery in the subprime segment since the beginning of the year, where TransUnion had a strong share position. We also continue to see strength in prequalification solutions as more consumers shift to digital commerce. And for mortgage for the full year, we continue to expect the market to be roughly flat, continuing to expect the market to be roughly flat in line with our previous view. However, with volatile rates and purchase market strain due to a lack of inventory and correspondingly higher prices, we continue to anticipate year-over-year declines in mortgage for the remainder of 2021. Let me now turn to our emerging verticals which grew 17% on a reported basis and 13% excluding the revenue associated with the two media vertical acquisitions. We saw strong double digit growth in almost all of our major verticals. Public sector, as Chris discussed in depth, remains a very strong growth sector for TransUnion and continuing to deliver outstanding growth even after an outstanding 2020. Even as most government operations continue business as usual, we also continue to identify new opportunities born from the pandemic and changing policies and new programs from the Biden administration. Employment screening was very strong particularly for tenant screening as we benefited from our expanded partnerships with large growing rental screening firms using our SmartMove solution. We also won a meaningful contract with a large partner to provide income and employment verification for rental screening. We expect employment screening to continue to pick up momentum as the U.S. returns to full employment levels. And our media vertical continues to deliver attractive growth even as we sign new accounts. One to note is our partnership with OpenAP, a consortium of Fox, NBC Universal and ViacomCBS. OpenAP aspires to build an industry standard ID that incorporates a broad range of streaming signals to help advertisers build targeted audiences and measure impact. Tru Optik data underpins and enables this identifier, so we are well-positioned to grow with OpenAP and other media companies like Blockgraph and MediaMath as they roll out their own identifiers and grow. We also saw insurance deliver a very strong quarter behind a brisk pace of business wins for our expanded set of solutions such as DriverRisk, National Driving Record Solution, CreditVision, Prefill, and TruValidate. We are also starting to see traction on the digital marketing side, similar to what we're seeing in the financial services vertical, and winning new business on the strength of our TruAudience platform. And finally, our healthcare vertical revenue was down slightly but we continue to see front-end volumes improve and monetize quickly. As we’ve discussed in the past, front-end volumes take three or four months to flow through to the back end of our business which is roughly twice the size of the front end. In the second quarter, we realized the highest level of new business wins in our history, setting us up to return to growth in the second half of the year and further positioning us for a good 2022 as the market more fully recovers. Consumer Interactive revenue increased 6% driven by growth in the direct channel. Adjusted EBITDA was up 5% as we continue to increase marketing in the direct channel during the quarter. That marketing helped drive low-double digit revenue growth in our direct business and a solid increase in our subscriber base. Consumers value our credit health and identity protection services. Our indirect channel returned to growth as lenders have increased their marketing activity and we continue strength with partners who provide identity protection for consumers. For my comments about international, all comparisons will be in constant currency. For the total segment, revenue grew 32% as we saw trends improve in most of our regions. Adjusted EBITDA for international increased 75% as a result of the strong revenue growth and particularly easy comparisons to the year-ago quarter. Let me dig into the specifics for each region. In the U.K., revenue increased 20% as lending markets continue their march back to pre-COVID levels and strong growth persisted in other markets like fraud and online gaming and gambling. And of note, we won another meaningful but largely one-time contract with the U.K. government to help consumers re-engage in more normal work and social activity. Our Canadian business grew 25% in the second quarter as lending markets slowly recovered and the business benefited from considerable portfolio diversification in fast growing areas like insurance, fraud, direct-to-consumer and FinTech. During the quarter, we also benefited from some one-time breach remediation business as we have over the past several years. In India, we grew 54% despite the negative impact of lockdowns in April and May. We ended the first quarter with lending markets nearly back at pre-pandemic levels, but that was short lived as the lockdown refocused consumer attention from shopping and borrowing for their health and welfare. As the surge abated, we saw lending markets steadily recover in the second quarter, though significant upside is likely to come over the remainder of the year. At the same time, our diversified portfolio continues to offer buoyancy in a difficult environment. We continue to see strength in commercial credit scoring, government programs, and fraud mitigation. We also expanded our thought leadership series, TGIF or TransUnion Great Information Fridays, to include CFOs and CMOs for the first time, deepening our already strong customer relationships. We also partnered with Google to deliver a report that provides trends and insights on the increasing reliance of consumers on the Internet for purchasing credit products caused by the unprecedented rise in digital adoption. In Latin America, revenue was up 46% on the strength of double digit growth in our two largest markets, Colombia and Brazil. Many of the smaller countries in Central America have returned to growth, and we expect significant additional recovery in the quarters to come. In Asia Pacific, we grew 27% driven by continued recovery in our largest market, Hong Kong, as well as positive momentum with our re-launched direct-to-consumer offerings and business wins with lending customers. Finally, Africa increased 37%. In our largest market, South Africa, the economy has started to show signs of improvement with expectations for annual GDP raised to 4.3% despite the slow pace of vaccination. Our business has seen continued strength of CreditVision insurance-related solutions. One of the many strengths of TransUnion is our balance sheet and our ability to rapidly generate cash. This provides us with consistent optionality to make the best decisions for the company and our shareholders. We finished the quarter with $526 million of cash on the balance sheet. At the same time, our net leverage ratio continued to decline from 2.7 times at the end of the first quarter to 2.4 times at the end of June. With our strong balance sheet, we remain in a good position to continue to proactively pursue additional attractive investments, which remain an important part of our long-term growth strategy. That brings us to our outlook for the third quarter and the full year. Starting with third quarter revenue, we expect slightly less than 1 point of M&A contribution from Signal and Tru Optik, as well as a 1.5 point tailwind to revenue from FX and we expect 1.5 points of benefit to adjusted EBITDA from FX. Revenue is expected to come in between $766 million and $777 million or a 10% to 12% increase and organic constant currency revenue growth is expected to be up 8% to 10%. Embedded in our revenue guidance is an approximate 4 point headwind for mortgage, meaning that the business would grow 12% to 14% excluding mortgage on an organic constant currency basis. Adjusted EBITDA is expected to be between $301 million and $308 million, an increase of 12% to 14%. Adjusted diluted earnings per share are expected to be between $0.91 and $0.93, an increase of 12% to 15%. And for the full year, we expect 50 basis points of benefit from M&A and a 1.5 point tailwind to revenue from FX. Revenue is expected to be between $3.034 billion to $3.059 billion, up 12% to 13%. Our guidance includes 1.5 to 2 points of headwinds from mortgage for the full year. To help with your modeling, we currently expect mortgage to be a 3 point headwind in the fourth quarter. For our business segments, we expect U.S. markets, financial services and emerging verticals each to be up low double-digits. Excluding the impact of mortgage, U.S. markets would be up mid-teens, financial services would be up high teens. We anticipate that international will grow more than 20% on an as reported basis and we expect consumer interactive to be up low single digits. Adjusted EBITDA is expected to be between $1.207 billion and $1.225 billion, up 16% to 17%. We expect 1.5 points of benefit from FX. We expect our adjusted EBITDA margin to expand 130 to 160 basis points this year, even as we continue to aggressively invest in the business. Adjusted diluted earnings per share for the year are expected to be between $3.63 and $3.70, up 21% to 23%. At this time, we have no material update to our other guided items about tax rate, G&A, interest expense and capital expenditures. They remain the same as what we have provided on our year-end earnings call in February. I’ll now turn the call back to Chris for some final comments.

Thanks Todd. And to conclude this morning, we took you through a strong second quarter and a much more bullish outlook for the full year based on significantly strengthened macro trends across most of our markets. And we highlighted two large growing market positions that have helped propel TransUnion to best-in-class growth since our IPO and which we believe will allow us to remain on that growth path. I'll end by reiterating my hope that all of you and your families remain safe and healthy. And with that, I'll turn the time back to Aaron.

Thanks Chris. That concludes our prepared remarks. For the Q&A, we ask that each of you ask only one question so that we can include more participants. Now, we'll take those questions.

Our first question comes from Manav Patnaik of Barclays. Please go ahead.

I just had a question around the comments you made around actively pursuing attractive investments given the healthy balance sheet. How should we think about that? Is that mostly organic or should we start seeing buybacks or is there still an active M&A pipeline out there?

Yes, hey Manav, good morning. This is Chris. It’s really both areas. I mean, certainly we have accelerated our organic investments in new product development. We've built out talent under the umbrella of our Global Solutions organization focused on our key and common solutions that we offer across the full enterprise. We've increased the number of Scrum teams and technologies on our product development, and then we're accessing and investing in more data. In addition, as we have migrated to this global operating model and we're investing and improving different components of our operations, we’ve put more dollars toward our project to streamline and standardize our operational processes around the world and to implement a new state-of-the-art CRM and order management platform. We've boosted advertising in our direct-to-consumer business. And in general, we have also increased our technology investment outside of that which we add back related to Project Rise. Now, to the second part of your question, I mean, as you know, it's a very robust and active M&A market. We, as we say in every call, continue to be engaged in the market evaluating different opportunities for TransUnion. And we'll be there as appropriate opportunities arise. I think Todd wanted to add a few things.

Yes, hey Manav. Thanks for the question and I'll just speak a little bit more specifically about M&A. So as you've seen, our leverage ratio has ticked down to 2.4 times at the end of the second quarter. That's the lowest mark since our IPO in 2015. So clearly that provides us with a significant amount of balance sheet capacity. In addition to that, we feel really good that we have access to the capital markets at very attractive terms. And I would say, in my 20-plus years with the company I've never seen a pipeline of deals that teams are working through right now. And I guess what I would say to that too is this is aligned to the strategy that we've talked about continuously. First being, we're always out on the lookout for data assets to create a fuller and more comprehensive profile on the consumer. We're always looking for new capabilities for our vertical markets. We're always looking to get into new markets, whether that's adjacencies onto our existing verticals or new international markets. But the one thing I'll leave you with is that we remain very disciplined in this environment, especially due to the elevated asset values that are out there.

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

Yes, thank you. I'm hoping you can talk through new product sales trends in international markets. It sounds like it's been good in the U.S. for a while. I'm wondering how unique that is with the bank balance sheet strength, the stimulus, the level of competition? I'm trying to parse out to what extent the international revenue trends on a two-year basis is more a reflection of just a delayed market recovery or if new product sales have been as good there as they've been in the U.S.?

Good question. So, for quite a few quarters now, we’ve commented on the strength of our new product sales in the U.S. and internationally too. The short answer is they've been just as strong internationally as they have been in the U.S. As we said before, there is a great deal of sharing of sales practices and product positioning expertise that takes place between the countries and the portfolio and the respective verticals, as well as our go-to-market sales discipline. We have vertical leaders who understand the industry and are tuned to the current needs of the market and continually invest to improve our go-to-market practices, and that's allowed us to notch a lot of sales wins. We launched Project Eliminate during the pandemic; the origins of that project actually began in the international markets and then it became an enterprise-wide effort. So, we've had really good success, and I think you can see in our results that we're starting this year to show the revenue benefits of the wins that we notched last year. With all that said, Jeff, obviously, the rebound in the markets helps a lot. The strongest rebound we experienced was here in the U.S. That's a function of the availability of the vaccine. And as we've talked elsewhere, a lot of our international markets are at earlier stages of the pandemic and are now only beginning to recover. We think that's a good thing for us in the intermediate term.

Our next question comes from Andrew Steinerman of JPMorgan. Please go ahead.

I wanted to jump into slide number 6. I appreciate you helping us to understand your mix of your portfolio in consumer lending. I understand the slide was divided between FinTech lenders on the right and non-FinTech lenders on the left. But just help me understand what's going into these short-term lending categories versus all other — like where is credit card? And also, when you look at the $200 million on this slide, what percentage of this slide is in U.S. mortgage?

So, hey Andrew. This is Todd. Thanks for the question. If you're specifically just looking within U.S. markets, financial services, and when we talk about the business, we talk about the four lines: we talk about mortgage, we talk about auto, we talk about credit card, and then we talk about consumer lending. So this is the breakout of consumer lending. Specific to your question about credit card, predominantly our revenues for credit cards are within the credit card line within financial services. So that's where you're going to find that. Otherwise, as the FinTechs branch out into new lines of business, we'll capture that revenue in the 50% piece of the pie. And then as it pertains to the short-term lending, I'll let Chris answer that question on the short-term lending what's in there.

Yes. The short-term lenders would be a mix of the payday lenders, storefront lenders, lenders that previously the trade lines were aggregated by our FactorTrust business — the more down-market, some title lending and the like.

Our next question comes from Hamzah Mazari of Jefferies. Please go ahead.

This is Mario Cortellacci filling in for Hamzah. Just a quick question on the Fraud and ID business. Could you update us on what's the current exposure in the portfolio as of today? And then, how much more M&A you could do in that space and how that product is currently differentiated from its competitors? It's a very fragmented market, but we'd love to get an update there.

Yes. So three parts to your question. Regarding exposure — were you asking about the percentage of our portfolio revenue that fraud represents?

Yes. So, I'll answer that question, Mario. When you think about what Fraud represents, just think of that as the second largest product category that TransUnion has globally, just behind core credit. And so that's how to size that one.

On its differentiation: I mean, going back to the basics, the knowledge that we have regarding the composition of consumers’ wallets and their credit profiles, as well as the public record data we maintain by operating an extensive public records business in the U.S., gives us a great foundation for knowledge-based authentication, which is a traditional way of doing it. Today, using that as a foundation, we expanded through acquisitions such as Trustev and iovation and became one of the leading players in device-based authentication. We have seen billions of unique devices from almost every country around the world. And we have reputation data which is shared across our network of consumers. Beyond that, we have invested in and added a portfolio of fraud mitigation point solutions that we offer through our umbrella of TruValidate, which includes document uploading, fingerprint or biometric verification, and a panoply of signals that comes into these fraud solutions. Those signals end up in an underlying data management layer where data scientists build fraud scoring and risk scoring algorithms. Based on that we use our decisioning software to allow lenders and all types of clients to configure the actions they want to take based on the risk of an individual transaction. Net-net, it’s the range of services from the traditional knowledge-based authentication and the scope of the solution on top of this integrated data layer that are our differentiation. We feel that we're one of the most complete and global players out there in the market.

And then just on the M&A piece, just further scaling that business given how fragmented the market is?

Yes, the market is fragmented and there's a whole range of opportunity. Valuations are extremely high. We've got a great path to integrate and improve our current holdings through organic product development and we're investing in that. That said, we're constantly in the market. We're pursuing partnerships where appropriate. We would consider minority investments in capabilities that we feel are an alternative to acquisition if we think it's going to drive growth and we can get a good return on it.

Our next question comes from Gary Bisbee of Bank of America Securities. Please go ahead.

Thanks for the color on FinTech and public sector. I just wanted to step back. If we think of the next three to five years and delivering to the growth algorithm you've discussed, how would you say the composition of that growth is going to compare to the last five years? Do you need a lot more singles and doubles to deliver given that there were a couple of outsized opportunities historically like trended data adoption and the massive step-up in innovation you had after the initial tech transformation? How do you feel like the portfolio today is positioned to deliver over the next several years? What are the top couple of opportunities over a multiyear forward-looking period?

Gary, I understand the question. I'm optimistic about the platform we've got in total. One of the biggest keys to success is growth in the end user markets that you serve, and one thing I love about our business is that even in the oldest of our lines of business, there's still a lot of innovation and a lot of end user growth, and we're well positioned to service that. The platform of new products from recent vintages is still in the early to mid-stages of adoption. I would bet you that if we're still around five years from now doing this, we'll still be talking about trended data adoption across parts of our portfolio, and we'll be talking about the expansion of scope, currency and accuracy of a large number of alternative datasets that are going to help us score more consumers around the globe and give lending and other institutions better insights to manage their marketing spend and their risk appetites. On top of that, you see us pushing more into technological delivery of these data and insights through solutions like Prama and other products that are designed to support a wider range of our customers’ workflows and internal processes that we can standardize and make more repeatable. I think those drivers provide some nice growth. On top of that, there's a lot of talent here motivated and incentivized to innovate. We talk a lot about our growth playbook and the deep expertise we hold in the end user markets that we serve. That's going to produce new ideas and new innovation. The fact that we're evolving our technology through Project Rise means we're going to be able to realize ideas as new products faster and more flexibly than before. And then inorganic opportunities — we've de-levered, we've got a healthy balance sheet, and attractive opportunities will arise that we will take advantage of when appropriate.

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

Thanks for taking my question. In terms of the guidance for emerging verticals, I think that's the only piece of business where expectations are unchanged versus last quarter. Could you unpack that a bit further? Is that simply a consequence of those businesses being on the whole a bit less exposed to macro trends or have there been some factors within that segment that are offsetting some outperformance by maybe some of the more pro-cyclical components of that segment?

Good morning, Andrew. On the emerging verticals, for the full year 2021 we are expecting that business to be up in the low double digit range. Within those verticals we've got momentum in many markets — public sector is an area of strength as I discussed, and insurance is another area of outsized growth. Tenant and employment screening are showing a nice rebound, and many of the diversified markets we operate in are improving. The one vertical that's been slower to recover is healthcare, which I think Todd and I discussed: the healthcare system was strained during the pandemic, with providers focused on COVID care and patients less comfortable with elective procedures. The front-end of our healthcare business — products like insurance eligibility — are picking up meaningfully, which means patient volumes are back and the volumes are ticking up. Estimation of care is another strong area. There's a lag effect for the back end of the revenue cycle management of about three to four months, and the back end of our healthcare business is where TransUnion is differentiated. We realized the highest level of new business wins in the quarter, which gives us optimism. We expect the business to return to growth and set up Q3 and Q4 and 2022 well.

Yes, I think those are great points. To emphasize, during the COVID period the performance of the Emerging Verticals in total was muted a bit because healthcare was in the mid-single digits negative. Now that we're recovering, if you exclude healthcare, the rest of the portfolio is recovering in double digits. A portion of those emerging markets are small business-focused and were particularly hard hit during the pandemic, so it will take a little longer for them to recover. But they are recovering and we expect acceleration in the quarters ahead.

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

Thanks very much. It sounds like you're very confident in both the U.S. and international, and you said that the improving environment is supported by a lot of data points. I wanted to understand how you're thinking about potential impact from the Delta variant. Have you included any haircut in the guidance? How have you offset that by a better lending environment? Just curious how that factors into the pieces within the guidance.

Good question. As we see the acceleration of new COVID cases due to the Delta variant, it's obviously an unfortunate development for the country given the wide availability of vaccines. About 60% of the country has received at least one shot, but the rate of inoculations decelerated and there remains some division. Personally, I'm hoping we'll bridge that divide. Politically, opinions are becoming more consistent around the importance of getting vaccinations. How that factors into our guidance: we have not currently included a specific haircut for the Delta variant, and we do not currently believe we need to alter our guidance as a result of this. We obviously hope the situation remedies itself in the weeks and months ahead.

Our next question comes from Shlomo Rosenbaum of Stifel. Please go ahead.

Thank you for squeezing me in. Chris, the numbers look really good and the momentum seems to be returning. When I step back, how should we think about returning back to normal in terms of the momentum? One of the things I think about is regulatory risk. Could you comment on what you're seeing over six months in with the change of administration? The 10-Q discloses the NOA letter from the CFPB — does that have to do at all with a change of administration? Any thoughts on how we should think about regulatory risk over the near and intermediate term?

Thanks, Shlomo. Regarding momentum, the second quarter of 2021 reflects a step function improvement due to underlying economic activity and our market success. We believe the market rebound is not done, and we see more upside in the U.S. and even more internationally given the relative states of the pandemic. Pivoting to Washington, the current administration and various branches of government are keenly interested in providing consumers with accurate and accessible credit information that enables their participation in lending and the economy. We're actively engaged in discussions explaining what we do, why it's accurate and effective, and how it supports the U.S. economy and the economies in the markets we serve. I expect to remain actively engaged in explaining, advocating and discussing with legislators and regulators alike the right balance to serve the American public. Broadly, there's alignment around increasing the scorable population by incorporating more alternative data beyond traditional credit. The private sector, including the three bureaus, has done a good job expanding financial inclusion by migrating to trended data sets and incorporating alternative data that is predictive of credit behavior. The industry has also broadened consumers' access to their credit information and the ability to dispute it and receive offers. Regarding the NOA letter — as we disclosed, we received a notice and opportunity to respond about our compliance with the 2017 consent order we entered into. We believe we are in compliance and look forward to discussing this with the regulator. We'll continue to cooperate and collaborate and hope to have the matter resolved in the near term.

Our next question comes from Ashish Sabadra of RBC. Please go ahead.

Thanks and congrats on solid results. I wanted to follow up on the comments regarding a top five issuer switching to VantageScore and increased traction. Could you provide color on what's driving that increased traction? Are you seeing that across traditional lenders as well as FinTechs? Is it focused on particular lending products or origination, portfolio management, or marketing? Any thoughts on potential for inclusion or for GSEs to start accepting VantageScores for mortgages?

Sure Ashish. There was an article last week that provided color on adoption of VantageScore. The reason for increasing adoption is that VantageScore works well. It's based on merged bureau data and has been demonstrated to score accurately the broadest number of consumers in the U.S. There have been obstacles to full adoption, but we've said for many years that Vantage is gaining broader acceptance, typically in portfolio management and direct-to-consumer offerings, and increasingly in loan origination. The fact that a top five card issuer adopted it for origination and loan syndication — which was another barrier — is a powerful comment on the state of thinking among top issuers. That issuer is not the only top-five lender that has adopted an alternative score for origination and other banks are thinking hard about this or in the process of migrating to VantageScore.

Our next question comes from Andrew Jeffrey of Truist. Please go ahead.

Appreciate you taking my question. Chris, could you elaborate on your new data set initiatives, specifically income and employment? It sounds like you're making nice inroads on tenant screening. Could you speak more broadly to your ambitions and outlook for new data sets and the employment and verification piece specifically?

Yes. Some time ago we stood up a team to focus on charting our entry into employment and income verification. There is a great opportunity to build a product and to migrate to the front of customer workflows during origination. We've struck relationships with — well, one large payroll processor and with financial account aggregators that get us access to deposit information. Business development efforts to expand the breadth of our data archives are ongoing and will remain ongoing. That said, we face a very large and entrenched competitor; we are not claiming at this point that our archives are as strong as theirs, but they are competitive, we are winning business, and we are putting significant resources behind this initiative. In terms of other data sets, fraud is our second largest category worldwide and we see enormous growth potential there. We're very interested in data around device identifiers, device reputation, and e-commerce-related identifiers. We're in the market both gathering those directly into our tool sets and licensing that type of data and integrating it into our identity graphs to improve matching logic and overall capability.

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

Great, thank you Kate. Thanks everyone for joining us this morning. As always, we really appreciate your time. We're going to wrap up here because we know it's a very busy earnings day. Make sure you all have some time to digest our earnings as well as a lot of other companies. So again, thank you for your time. Have a great day.

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