TransUnion Q1 FY2022 Earnings Call

Good morning, everyone, and thank you for joining us today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses, and other items as well as certain non-GAAP disclosures and financial measures, along with 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 statement. That done, let me turn the time over to Chris.

Thank you, Aaron, and let me add my welcome. To start, let me outline the agenda for this morning's call. First, I'll discuss the mostly positive macro conditions that support our attractive full year guidance despite inflationary headwinds, then I'll review our strong first quarter performance, which has been driven by favorable macro conditions and the resurgence of our growth-oriented portfolio post pandemic, the cumulative benefit of the strong sales performance over the pandemic and our successful innovations over time. I'm pleased to report that our outperformance year-to-date and confidence in the remainder of the year allows us to raise revenue and EBITDA guidance for the full year, and I'll provide an update on the impactful acquisitions that we've closed over the past 4 months. For Neustar and Sontiq in particular, we've experienced early successes in going to market together, with really encouraging interest from customers across a wide variety of end markets. And then I'll pass the baton to Todd to discuss our first quarter results in detail, along with second quarter and full year guidance for 2022. Now as I mentioned previously, we expect market conditions in 2022 to support our strong organic revenue guidance, along with the post-pandemic resurgence in our growth-oriented portfolio, especially in consumer lending, U.S. emerging verticals, and the international markets. While a lot of the focus today is justifiably on rising inflation and the long-term impacts of this, I want to remind you that the U.S. consumer remains in a strong position concerning credit markets. Household debt levels relative to income remain low by historical standards. Average credit card balances are well below prepandemic levels, and delinquency rates for most loans are near record low levels. Additionally, the unemployment rate in March fell to 3.6%, and wages grew by 5.6%. Despite increasing inflation, consumers remain well positioned to drive the economy. We heard as much from many large financial institutions this quarter who provided positive and pragmatic guidance during the recent earnings, noting the current strength in loan growth, spending activity, and credit performance, but also acknowledging the potential uncertainty ahead. We continue to diligently monitor consumer health, particularly lower-income households that have less ability to absorb rising costs. As the Fed seeks to curb inflation, rising interest rates have become an important corollary discussion. As such, I'll end this section by addressing the impact that interest rates have on our various lines of business. While rates certainly have an impact on the lending market, the overall health of the consumer, which I've just described, has a greater influence on borrowing behavior and rates in most cases. Mortgage refinance represents the one part of the lending market almost entirely driven by interest rates. The simple math dictates whether or not it makes sense for a consumer to refinance a mortgage. And unsurprisingly, rates have some impact on purchase originations, though consumers don't shop based solely on rates. They shop based on a monthly payment where rates are one part of the calculation, along with the purchase price, the down payment, and the loan terms. For auto and card lending, rates have a very modest impact given the balances the average American carries. For instance, for every 0.25-point increase in rates, that translates into an increase in the monthly payment on the average card balance by only $1. So we tend to see far less impact from rising rates for these loan products. Now shifting to our first quarter. We posted strong results that exceeded our guidance, with broad-based growth across our businesses as our regions and verticals benefited from positive momentum buoyed by the healthy consumer as well as business wins and ongoing innovations. As Todd will discuss in detail, our first quarter outperformance and an improved view of our nonmortgage business for the remainder of the year has allowed us to raise our full-year guidance. We did that while also embedding a more aggressive assumption around mortgage declines, implying broad and significant acceleration in our nonmortgage business. We continue to drive above-market performance by executing our growth playbook that focuses on repeatable, differentiated go-to-market approaches, industry-leading innovation, and complementary expansion into adjacent markets. Our extension into high-growth and complementary credit fraud and marketing solutions continues to resonate with customers across our business while providing valuable diversification in our portfolio. In U.S. markets, we delivered another quarter of double-digit organic growth, excluding mortgage, with strong performance in Financial Services, Insurance, and Media. This highlights our very strong position in fintech and other fast-growing market segments. Internationally, we experienced robust growth in India, Latin America, and Asia Pacific, where we have leadership positions in these markets, and they have strong underlying growth trends. Todd will provide more details about the performance of each of these businesses shortly. And let me wrap up with a short summary on our ESG efforts. We recently published our 2021 diversity report, which highlights steady improvement in the diversification of our workforce across underrepresented groups. And last week, we published our 2021 sustainability report, which provides a broad picture of the progress we made last year, including issuing baseline carbon emissions data, setting a net-zero emissions goal, improving workforce diversity, further enhancing our cybersecurity and data privacy oversight, along with many other achievements. I hope you'll all take time to read these meaningful updates. Now I want to use the remainder of my time to share with you the performance of the 3 acquisitions that we've closed over the past 4 months. But before I do that, I want to highlight that the current market backdrop that I described a few minutes ago really accentuates the value of our recent acquisitions, particularly with Neustar and Verisk Financial Services. Now both of these can help lenders find attractive segments within the market and drive timely insights via the changing landscape. Now starting with Neustar. The acquisition substantially strengthens our identity resolution capability for a variety of online applications. Neustar provides real-time identity resolution through its OneID platform, powering solutions that currently serve 3 attractive markets: marketing, cloud mitigation, and communications. In the first quarter, Neustar generated $150 million of revenue, up 9% in total, with another quarter of double-digit growth in marketing and at a margin of nearly 25%. During the quarter, we made meaningful progress integrating Neustar and have received some really encouraging feedback from the market and gained valuable learnings from customers that support the long-term growth thesis. Internally, we've completed our organizational design efforts quickly in order to provide clarity and ensure retention of critical employees. This has helped us retain nearly 100% of the top talent that we've identified thus far. I want to note the very high-caliber workforce that we've acquired with Neustar, and we benefit from quickly and efficiently expanding our talent in critical areas like technology, data science, product development, and many others. In the current competitive environment, adding so many high-quality employees would have been extremely difficult. We've also brought together critical functions to fully benefit from our increased scale and capabilities. For instance, by standing up data and analytics as its own organization under the leadership of Venkat Achanta, we brought further clarity and purpose through a critical area of our business. Now Venkat has extensive experience in data and analytics, and most notably, drove the development of Neustar's impressive OneID platform. Our internal teams have already benefited from collaborating with each other as part of one newly formed organization and setting the stage to better leverage the powerful assets and capabilities of both companies. Now speaking of OneID. Through the integration process, we've learned the platform performs even better than we understood during our diligence, particularly the system's ability to rapidly ingest, index, and tag data to prepare it for analytic and solution development and deployment is more advanced than we understood. This increases our ability to utilize data assets and put them into production rapidly. From a commercial standpoint, we've begun to integrate our sales teams, including extensive training to drive cross-selling activities across customers and solution types. Now let me share some of the early views and successes from the field. The more substantial and differentiated marketing solutions from Neustar combined with our TruAudience offerings have already opened the door to opportunities in our fast-growing Media vertical. Our teams have taken a coordinated approach to actively pursuing these opportunities and have early traction with key clients. In Financial Services, we secured our first cross-sell contract of Neustar solutions to a mid-tier lender, and we've had extremely high interest levels as we continue to meet with other customers. In the Insurance markets, Neustar currently provides its sophisticated solutions to 3 of the top underwriters in the U.S. Our combined teams recently met with one of the largest insurers and heard how impactful Neustar's marketing solutions have been for that customer as they spend billions of dollars on marketing each year, and they indicated that their return on their marketing investment has improved significantly as a result of the Neustar optimization solution. Given that TransUnion currently has relationships with 19 of the top 20 largest insurers in the U.S. and an array of other players, we think there's a sizable opportunity to bring the same type of marketing capabilities to the rest of our client base, who also spend considerably on marketing and are consistently looking for ways to drive better returns. In third-party collections, we signed our first cross-sell contract with an existing TransUnion customer, who will now use Neustar's phone-based intelligence to identify the best time to call individuals to improve their hit rate on outbound collections calls. The now integrated sales team has attended major trade collection shows recently and discussed similar solutions with the almost 50 existing TransUnion clients. And let me end by reminding you about the financial expectations for this business. In 2022, we expect Neustar to deliver another year of high single-digit organic revenue growth driven by strong performance in marketing and fraud. We expect the business to deliver low double-digit revenue growth beginning in '23 and beyond, and we're expecting roughly $160 million of adjusted EBITDA in '22, which would imply a 25% margin. Now supporting the improvement in 2022 and our path to deliver 40% margins by 2025, we have a clear line of sight to at least $70 million in cost synergies and have become increasingly confident as we've progressed through the integration process. In part, Neustar has begun its cost reduction program before we acquired them, and that included activities like consolidating 8 data centers and 2 colocation sites. At the same time, we are benefiting from working together. For instance, we're leveraging data sets across organizations to reduce costs related to the name, address, phone, and email data that we collect by millions of dollars. We've also begun to consolidate office locations in Chicago and London, which will both happen this year. Now turning to Sontiq, which provides an entry point into the fast-growing ID protection market that's been driven by rapid e-commerce evolution. In this environment, consumers have heightened awareness of and a concern about the risks of identity theft. Sontiq allows us to access a considerably larger part of this market, fueling strong long-term growth. In the first quarter, Sontiq generated roughly $23 million in revenue, up approximately 13%, at a margin of roughly 33%, which was slightly depressed by integration costs. Also during the quarter, we began our integration activities and have seen meaningful opportunities materialize. Our teams are fully leveraging our global capabilities in areas such as operations and solutions and expanding their go-to-market collaboration between our Consumer Interactive teams and their U.S. Market counterparts, especially in Financial Services and Insurance, but also across our international teams as well. For instance, we've positioned ourselves to bid on a sizable non-financial services contract in the identity protection space based on the addition of Sontiq's expansive solution suite, which we believe will be the first of many such opportunities. We're also off to an encouraging start selling Sontiq solutions to our network of insurance underwriters. Insurance represents about a quarter of Sontiq's revenue today, and we see a clear path to expand that position on the strength of our relationships in the space. We've identified similar opportunities across our U.S. Markets portfolio. Notably, in Financial Services, our customers are showing a strong interest in Sontiq's capabilities. Based on the existing momentum in the business and the ongoing integration, Sontiq is currently trending ahead of the plan, and we expect mid-teens revenue growth for 2022, excluding integration costs, at a nearly 40% margin. Now let me wrap up with the acquisition of Verisk Financial Services. We completed the transaction on April 8 and have decided to retain Argus and Commerce Signals, a marketing business, and to classify the remainder of the portfolio as discontinued operations with an intention to sell these assets. As a reminder, the business in total generated $143 million of revenue in 2021, with about $95 million coming from Argus and Commerce Signals. The decision to divest the non-core assets will focus our energy on enhancing the core Argus asset while also allowing the other business to benefit from new ownership. Argus brings differentiated card and deposit transaction data as well as the IP to link the personalized transaction data across sources to create a consumer-level full wallet view. With this, we'll be able to deliver enhanced insight to action measurable outcomes for Argus' consortium members. Argus increases TransUnion's thought leadership and insights, helping our customers develop more refined strategies to target profitable consumers or to identify sophisticated patterns of card fraud. We can help our customers take action on those insights with TransUnion solutions, whether they are traditional credit-based or noncredit-based through our Neustar capability. We'll be able to do this through a unified platform powered by Prama and OneID. We're happy to report that we're getting very positive feedback from the existing consortium members about our ownership and their desire for enhanced insights delivered using a modern technology-enabled platform. We've also heard from lenders who have not participated in the consortium, and many have expressed interest in joining in order to benefit from Argus' powerful data and insights. As we integrate Argus in 2022, we anticipate growth in the low single digits, though at a temporarily depressed margin as we absorb the necessary integration costs. In '23, we expect growth to improve to high single digits and then reach low double digits in 2024, with the margins expanding over this period as we trend toward our goal of 40% margins in 2026. Now that wraps up my update on our market backdrop, the first quarter performance, and the integration of these 3 key acquisitions. Now I'll turn the time over to Todd to walk you through our first quarter financial results, our second quarter guidance, and the full-year guide as well. Todd?

Thanks, Chris. And let me add my welcome to everyone this morning. I'll start off with our consolidated financial results. First quarter consolidated revenue increased 32% on a reported and constant currency basis. Neustar and Sontiq added about 25 points to revenue, and organic constant currency growth was 8%. Excluding mortgage from both the first quarter of 2021 and 2022, our business grew 13% on an organic constant currency basis. On a trailing 12-month basis, mortgage represented about 10% of our revenue, and that is expected to fall to 7% for the full year 2022. Adjusted EBITDA increased 20% on a reported and 21% on a constant currency basis. Our adjusted EBITDA margin was 36.3%, down 340 basis points compared with the year-ago quarter driven primarily by the lower margin profile of Neustar. Excluding both the Neustar and Sontiq acquisitions, the margin would have been 38.8%. First quarter adjusted diluted EPS increased 11% driven by adjusted EBITDA growth offset by higher interest expense and depreciation and amortization. Now looking at segment financial performance for the quarter. U.S. Markets revenue was up 42% compared to the year-ago quarter. The Neustar acquisition had about 35 points of impact on revenue growth. Organic growth was 7% or 15%, excluding mortgage. Adjusted EBITDA for U.S. Markets increased 23% on an as-reported and 2% on an organic basis. Adjusted EBITDA margin declined by 580 basis points, with 380 basis points of the decline due to the acquisition of Neustar. Diving into the results by vertical. Please note that at this time, we have included Neustar's financial results within Emerging Verticals. As we evaluate our operating structure as a fully integrated business, we will provide you with any necessary updated financial information. Financial Services revenue grew 5% and was up 21%, excluding mortgage. Looking at the individual end markets. Consumer lending continues to be very strong, with considerable investor demand focused on thoughtful expansion, particularly as loan consolidation and personal loans for large purchases have become more mainstream. Our BNPL position also continues to grow on the strength of the market and share gains. Based on our discussions with many of the largest BNPL lenders, we are also confident that during 2022, we will enable them to furnish data. This will enrich our credit data for all lenders while promoting greater financial inclusion as consumers who utilize BNPL loans will get credit for their activity. We also had another strong quarter in our credit card business as issuers pursued incremental share of wallet, continuing a trend of historically strong origination and marketing activity. We anticipate further good growth in 2022 as issuers remain focused on customer acquisition and portfolio review. Our auto business delivered solid growth in the quarter as new business wins and on-trend innovation, particularly related to digital retailing, helped offset well-publicized inventory issues for new and used cars even as consumer demand remains high. We're seeing traction with Auto Payment Shopper, a digital retailing platform that satisfies consumer desire for end-to-end online auto shopping. We're also seeing greater interest in CreditVision Link to better assess consumers and drive greater financial inclusion by utilizing powerful alternative data. For mortgage, rates have moved to their highest level since 2018, which considerably shrinks the potential refinancing pool. On the purchase side, consumer demand remained solid but continues to be constrained by limited inventory, particularly in highly desirable locations and rising rates. At this time, we expect our mortgage business revenue to decline about 25% for full year 2022. We expect the mortgage market as measured by inquiries to be down 30%. We expect our business to perform slightly better than the market as a result of volumetric pricing increases that partially offset the volume declines. Let me now turn to our Emerging Verticals, which grew 104% on a reported basis and 10% excluding the revenue associated with Neustar. Our Media vertical continues to deliver very strong double-digit growth and was up about 50% organically in the quarter as we signed new accounts and expanded existing relationships with a large media agency and several very large media companies focused on video and streaming platforms. The TruAudience marketplace, which was built from the TruOptik acquisition, continues to deliver substantial growth. Notably, these acquisitions don't reflect any of the anticipated upside from incorporating highly differentiated Neustar marketing capabilities, which we believe can drive further upside in the future. Insurance also delivered double-digit growth on the strength of key innovative solutions like DriverRisk, National Driving Record Solution, TLO-based investigative tools, continued traction in digital marketing enabled by the TruAudience platform, and expanding opportunities in both the commercial and life markets. Public Sector delivered another good quarter driven by ongoing new business wins, particularly related to fraud mitigation. Tenant and employment screening remains strong as employment screening has accelerated with increased employment levels and tenant screening continues to perform well, though with moderation as movement has slowed due to the soaring rental prices and extended eviction moratoriums. Consumer Interactive, which includes Sontiq, revenue increased 15% on a reported basis and declined 3% organically as we were down in both the direct and indirect channels. Adjusted EBITDA was up 18%. Revenue was impacted by moderating consumer demand for paid credit-related solutions across both the indirect and direct channels, particularly with changing consumer spending habits coming out of COVID. We expect this broad market theme to persist and for the segment revenue to be down slightly more in the second quarter than in the first quarter. This trend further strengthens the case for expanding into the identity protection market via the Sontiq acquisition, as those subscriptions are more durable over time and are often provided to consumers by employers, insurers, and others. For my comments about International, all comparisons will be in constant currency. For the total segment, revenue grew 18% as we saw underlying market improvement in most of our regions. Adjusted EBITDA for International increased 18% as a result of the strong revenue growth. Let me dig into the specifics for each region. In the U.K., revenue increased 15%. We continue to benefit from a meaningful one-time government contract. Excluding that revenue, our U.K. business would have grown about 3% in the quarter as the mortgage and auto markets have been under pressure due to increasing rates and inventory constraints. This 3% growth rate was also impacted by comparability with some one-time revenue seen in Q1 2021, so underlying performance was high single digits. Recall that the benefits of the government contract started in Q2 2021 and ramped through Q1 2022, so we expect reported growth to be impacted as we lap the contract starting next quarter. Most importantly, we expect underlying growth to remain healthy. Moving back to the quarterly performance in the U.K., we continue to see solid performance across our lending solutions, most notably in the fast-growing BNPL space. In fact, in February, we became the first U.K. bureau able to accept BNPL data into our credit files. Working closely with prominent BNPL providers, we can now incorporate this data into credit reports to support consumers that are using this type of point-of-sale finance while also ensuring lenders have a comprehensive picture of a borrower's financial position. We also continue to see strength in our gaming and gambling vertical, which is benefiting from our ability to employ open banking solutions to help online and physical casinos better determine a participant's capacity to bet. This solution helps the operator and the bettor set appropriate limits and is highly encouraged by regulators. Our Canadian business grew 1% in the first quarter, reflecting growth across the portfolio partially offset by a comparison to significant breach remediation business in the year-ago quarter, which I have mentioned on the past several calls. Excluding the nonrecurring breach business, revenue would have grown 4%. We expect to see a similar breach impact in the second quarter and a less significant effect in the second half of the year. We continue to see strength across the business with improving demand and growing pipelines from both traditional and nontraditional lenders, setting us up well for stronger growth in the coming quarters. In India, we grew 37%, reflecting strong market trends, successful innovation, and the benefits of our diversified portfolio. Despite rising inflation, the Indian consumer remains healthy and continues to spend aggressively. This is helping to drive an expected GDP of 7%, along with 9% growth in the credit market in 2022, fueled by a resurgence in consumer lending and credit card issuance, along with the continued rise of fintech and BNPL players. We have outstanding positions across the entire lending spectrum, allowing us to capture this meaningful market growth while also outperforming the underlying market. This outperformance is driven by our innovative approach to the market, strong relationships, and continued diversification into the fast-growing businesses like commercial credit and direct-to-consumer. In Latin America, revenue was up 17%, with broad-based growth across our markets, including double-digit growth in our largest markets, Colombia and Brazil. This very strong growth reflects good macro and consumer fundamentals, along with ongoing new business wins and share shifts in Financial Services, particularly with fintechs and neobanks, and continued strong uptake of CreditVision and fraud solutions. In Asia Pacific, we grew 25% driven by continued good performance in Hong Kong and the start of recovery in the Philippines, which had been under lockdown longer than any of our other markets. Finally, Africa increased 9% on the continued strength of our Insurance and retail businesses as well as meaningful growth outside of our largest market, South Africa. We also continue to see additional adoption of CreditVision, TruValidate, and our commercial credit solutions. We ended the quarter with roughly $6 billion of debt and $1.3 billion of cash on the balance sheet and pro forma leverage of 3.5x. Since quarter-end, we have deployed $515 million of cash for the purchase of Verisk Financial Services and associated fees and also paid roughly $355 million in taxes associated with the sale of Healthcare. Factoring these payments, cash on the balance sheet would be closer to $400 million, in line with our more typical cash balances. Adding Verisk Financial Services to the equation but excluding those businesses classified as discontinued operations, we expect our pro forma leverage ratio to be approximately 3.9x in the second quarter as a result of deploying the cash held for taxes and purchasing Verisk Financial Services. However, we expect to delever to 3.6x by the end of 2022. We expect to use the proceeds from the sale of the non-core Verisk Financial Services business for general corporate purposes. Before turning to guidance, I'd like to quickly comment on free cash flow. You will notice our cash flow statement that first quarter 2022 cash from operations was lower than last year. This was primarily due to higher interest expense and increased usage of net working capital primarily related to higher incentive compensation. That brings us to our outlook for the second quarter and the full year. All the guidance provided reflects the acquisition of Verisk Financial Services, though notably, only Argus and related business called Commerce Signals, as we are treating the non-core businesses as discontinued and intend to divest. As a reminder, for 2021, Argus revenue was $95 million of the reported $143 million for Verisk Financial Services. The prorated amount contemplated in our 2022 guidance is $68 million based on the April 8 closing date. Starting on with the second quarter. We expect 1 point of headwind from FX on both revenue and adjusted EBITDA. For revenue, we anticipate a 27-point benefit from the acquisitions of Neustar, Sontiq, and Argus. Revenue is expected to come in between $958 million and $968 million or a 32% to 33% increase on an as-reported basis and 6% to 7% on an organic constant currency basis. Embedded in our revenue guidance is an approximately 4.5-point headwind from mortgage, meaning that the remainder of our business will grow 10.5% to 11.5% on an organic constant currency basis. Adjusted EBITDA is expected to be between $347 million to $353 million, an increase of 17% to 20%. Adjusted EBITDA margin is expected to decline 440 to 400 basis points, primarily as a result of incorporating Neustar and Verisk Financial Services' relatively lower margins. On an organic basis, excluding the 3 acquisitions, margins are expected to decrease approximately 50 basis points. Adjusted diluted earnings per share is expected to be between $0.96 and $0.99, an increase of 8% to 11%. For the full year, we expect immaterial FX impact on revenue, and we also expect about 24 points of benefit from M&A. Revenue is expected to be between $3.85 billion to $3.9 billion, up 30% to 32%. Our guidance includes 4 points of headwinds from mortgage for the full year. So full-year revenue excluding mortgage on an organic constant currency basis is expected to increase 10% to 12%, a 100 basis point increase over the guidance that we provided during our February earnings call driven by the first-quarter outperformance and our improving full-year outlook. For our business segments, on an organic basis, we expect U.S. Markets to be up mid-single digits but up mid-teens, excluding mortgage. Financial Services is also expected to be up mid-single digits but about 20% excluding mortgage. We expect Emerging Verticals to be up low double digits. We anticipate that International will grow low teens in constant currency terms, a slight increase over the previous guidance of low double digits, and we expect Consumer Interactive to decline low single digits on an organic basis as a result of challenging prior year comparisons. Adjusted EBITDA is expected to be between $1.405 billion and $1.44 billion, up 21% to 24%. We expect our adjusted EBITDA margin to compress 260 to 220 basis points this year, driven by the lower-margin acquisitions and acquisition integration costs for Sontiq. Compared to prior guidance, the slightly greater margin decline is a result of adding the Argus business at a lower margin that is further compressed by integration costs. Without the Argus addition, margin would remain in the same range we provided previously, 36.9% to 37.4%. We also continue to expect the margin to expand about 40 basis points on an organic basis. Adjusted diluted earnings per share for the year is expected to be between $3.84 and $3.98, up 11% to 16%. The modest change in the top end of the range is most significantly a result of higher interest expense from rising LIBOR rates. A slight increase in our expected tax rate also impacted adjusted diluted earnings per share. Without these headwinds, adjusted earnings per share would be about $0.07 per share higher due to our increased adjusted EBITDA expectations. To help you complete your modeling of 2022, at this time, we expect our adjusted tax rate to be approximately 22.5%, up slightly from 22.2%. Depreciation and amortization is expected to be approximately $525 million, and the portion, excluding step-up amortization from our 2012 change in control and subsequent acquisitions, is expected to be about $220 million, up from $215 million. We anticipate that net interest expense will be about $220 million, up from $205 million due to higher LIBOR and expectations of future LIBOR increases as implied by the forward curve. As a reminder, about 68% of our debt is fixed using hedge instruments, and 32% is floating. Let me spend a moment to recap our hedging philosophy. We want to ensure we leave sufficient room to prepay debt, which would lower leverage, decrease interest expense, and therefore increase cash flow for other strategic purposes. We also want to avoid the potential of being overhedged, which would place TransUnion at a speculative hedging position. Finally, we expect capital expenditures to come in at about 8% of revenue. I'll now turn the call back to Chris for some final comments.

Thanks, Todd. Well, to conclude, TransUnion delivered another strong quarter while also quickly integrating strategic acquisitions that further position us for long-term differentiated growth. We raised our guidance despite meaningfully de-risking our outlook with more aggressive expectations for mortgage declines. This reflects the strength and diversity of our portfolio. We expect another very good year in 2022 driven by the continuation of constructive market conditions and the execution of our growth playbook.

Great. That wraps up our prepared statements. We are now happy to take any questions.

Our first question will come from Andrew Steinerman with JPMorgan.

It's Andrew. I wanted to ask about margin expansion after 2022, and I know that was highlighted to be 100 basis points per your Analyst Day. However, I am still reminded that margins will decrease this year due to acquisitions. I appreciated Slide 16 showing operating margins up 40 basis points this year on an organic basis. My basic question is how can we be assured that margins will expand in the years following 2022, including any potential acquisitions?

Todd responded to Andrew's question regarding margin expansion beyond 2022. He emphasized the importance of the growth factors that the company expects to drive margin improvements. Todd pointed out that they anticipate strong organic revenue growth, which significantly benefits the bottom line, thanks to TransUnion’s leadership in innovation across various product categories. He then discussed the inorganic growth aspect, mentioning recent acquisitions including Neustar, Sontiq, and Verisk Financial Services. He noted that Neustar and Verisk currently operate with lower margins compared to TransUnion, while Sontiq's margin is comparable but impacted by integration costs. Todd shared that Neustar generated a 25% adjusted EBITDA margin and is projected to grow at a high single-digit rate. He also highlighted the $70 million in cost synergies they aim to achieve by the end of 2023, which the team has been actively working on. As for Verisk Financial Services, Todd indicated that while the current margin is lower due to integration costs, they expect changes in how they market and deliver products like Argus will positively influence profitability in the future.

Yes. And so, Andrew, those are all the right details. We have a lot of confidence that we're going to deliver the margins that we've outlined. We reconfirmed full year guidance. You can see improving margins in the core. With regard to Neustar, we're ahead of the initial guide that we provided when we acquired the business, so we've got a lot of confidence that we're executing in a way that will deliver the margins we've guided to.

Our next question will come from Jeff Meuler with Baird.

I want to acknowledge the good revenue performance before asking another margin question. But on Argus onboarding at a lower margin, I think you're implying that you're onboarding it at a lower margin than you previously expected, so would love some detail on that. Is it that the integration cost on the lower acquired EBITDA base because of the planned divestitures has that dilutive effect? Is there anything on how much you're planning to invest behind it or if the margins on the retained business were lower? Just any aspects like that, and then just any comment on the Q1 margin. I know that you had previously said that you took some of the conservatism out of your old guidance methodology with this guidance. But normally, when we see revenue upside, it comes with pretty good incremental margins. So any comment on Q1 margins?

I'll address that question. It seems you're asking about two different topics: the situation with Argus and our expectations for margins, as well as our performance in Q1. Let’s begin with Q1. As you've noted, we had a strong revenue performance, exceeding our guidance by $7 million, but our adjusted EBITDA of $334 million fell within the mid-range of the guidance provided in February. The factors influencing this can be divided into three main areas. First is product mix; as revenue increases, costs rise along with variable costs tied to that mix. The second factor pertains to increases in compensation during the quarter, including some timing-related compensation that will be addressed later in the year. The third factor involves remediation efforts connected to the data incident in South Africa. It's important to note that while margins were lower in Q1, we have committed to restoring margins to 37.4% for the full year, excluding the Verisk Financial Services acquisition. Although Q1 expenses were slightly higher, we managed to align them within the updated guidance to remain stable. Regarding the Argus margin, there are many variables at play. Most participants on this call are familiar with the financial profile of Verisk Financial Services, which serves as a baseline. Our decision to retain Argus and Commerce Signals while divesting the other four businesses introduces additional complexity to the numbers. Moreover, we are not adjusting for integration expenses related to Verisk Financial Services in our non-GAAP metrics, although we are accounting for Neustar due to its timing and significance. The integration efforts for Verisk are intense and involve substantial spending planned for 2022.

Yes. Just to be clear, we're right on track with Verisk. This is exactly what we expected. It is our typical approach to not add back. We just made an exception with Neustar because of the size of the deal.

Our next question will come from Heather Balsky with Bank of America.

I wanted to ask a question with regards to the consumer and how you're thinking about the macro environment. And appreciate your color at the start of the call. But you talked about staying close to the lower-income consumer and watching them. Can you just talk about how your business is exposed to that consumer in particular and what you're seeing right now?

Yes. Sure. I'm happy to start this. Well, look, as we all know, the consumer in the U.S. overall, whether it be high income or lower income, is in very good shape. From a balance sheet perspective, consumers and households have delevered over the course of the pandemic. And at the lower end of the income spectrum, they were primary beneficiaries of that. There was a lot of forbearance of loan repayment during the pandemic as well as infusions of income from various government sources, right? On top of that, the employment market's incredibly robust. We're at 3.2% unemployment. There are almost 5 million jobs in the U.S. that are unfilled currently. Wages are increasing, ending in an abundance of employment opportunities. So we believe, and if you follow the banks as they reported their results earlier this season, they believe that the consumer is pretty well positioned. Of course, there is the intermediate concern about rising inflation and the impact on consumers, particularly lower-income consumers, but there are offsetting factors like rising household income, high employment, and relatively low credit card balances and leverage in general. So consumers have the ability to earn more and continue to consume, and there's still a lot of pent-up consumption coming out of the pandemic period, and they have the ability to also increase their leverage. There's really a mix of issues that we think shades to the positive for 2022.

Our next question will come from Ashish Sabadra with RBC.

I just wanted to focus on the fintech and BNPL. You obviously talked about the strength there in the U.S. but also the international markets. I was just wondering, in your conversations with the fintech, have they indicated any kind of slowdown in demand or marketing activity, particularly going into the back half of the year? And also maybe just to tag onto that, you talked a lot about the Neustar and the cross-selling. Can you also talk about any traction of Neustar with your fintech customers as well?

Yes. I'd be happy to. So the short answer to your question is no, the fintechs don't believe there's going to be any slowdown. If you look at our results in the U.S. where we grew over 20% in Financial Services in the first quarter, a lot of that is the resurgence among fintech and disproportionate contribution from the BNPL sector where we also have nice share. Overall, the consumer is strong, and lending is increasing. We're very optimistic about our Financial Services performance for the full year, independent of the deflation we've got in the mortgage market because of rising interest rates. I would remind you that our portfolio is largely growth-oriented, and we are taking share in many of the markets in which we compete. We've got a disproportionate share of the emerging fintech and BNPL markets. We've got an international portfolio that skews toward higher-growth economies with emerging middle classes and increasing borrowing rates. Our emerging markets division has attacker positions in insurance, public sector, and investigative solutions. We think as the economy has now firmly emerged from the pandemic period, we're going to return to that growthful trajectory that we've demonstrated through the years.

That's very helpful color. And maybe I was just wondering if you could talk about the Neustar traction in the fintech side, if you don't mind.

Yes. Well, look, Neustar services some of those companies today. With the partnership now with TransUnion, there's an enormous opportunity to cross-sell back and forth. Not just Neustar coming into fintech, but truly the cross-sell potential is very exciting. Having spent a good deal of time both in Neustar and in Sontiq, I think our investment thesis about the power of the cross-sell, about the complement between the 2 services, has been completely confirmed. I'm really excited to just focus on integration execution and delivering some good results in the coming quarters.

Our next question will come from Toni Kaplan with Morgan Stanley.

I wanted to inquire about the increase in ex-mortgage organic growth for the year, which has been raised by around 100 basis points. Could you provide more details on the main factors contributing to this improved outlook compared to your previous expectations? Please discuss which verticals are performing better than anticipated. Additionally, regarding Financial Services, you are projecting 20% ex-mortgage organic growth for the year, but you have some challenging comparisons approaching next quarter. Please share your confidence in what has changed and how attainable those targets seem.

Toni, this is Todd. I'll take your question, which is an important one for us to go through with you. So let me start first with Financial Services and just the confidence that we have in the updated guide on an organic basis excluding the mortgage impact. Within there, first, this goes back to the previous question. The fintechs continue to be very strong for us. In particular, just to highlight a little more on what Chris just said, we've seen some very strong marketing activity from the fintechs. The position that TransUnion has built in that space over the last several years is significantly benefiting us not only in the first quarter but also in our expectations for Q2 through Q4. Additionally, the BNPL players continue to be strong, and they're growing. We're benefiting from that in the U.S., but we're also benefiting from our International operations as well. Another driver for us is the credit card marketers, where we find them to be significantly more aggressive on the marketing side. So that's definitely another driver for us and gives us confidence there in Financial Services. Looking at the other areas driving growth for us, in the Emerging Verticals, insurance continues to grow at a double-digit pace. The team continues to drive innovation to solve sophisticated customer needs. The Media vertical has performed well, aided by acquisitions we've made to build out our capabilities. Notably, this business performed well alongside Neustar. We feel really good about the position we built, especially in Media. The International portfolio is another area where we have significant conviction. Much of that growth is coming from emerging economies like India, Latin America, and Asia Pacific, as well as our African business, which posted strong results. We're expecting that to continue. That's what gives us confidence in the overall guidance.

Yes. The good news is it's very broad-based at this point.

Our next question will come from Manav Patnaik with Barclays.

Just like you guys gave us kind of the mix and assumptions on the mortgage side, I was hoping you could talk a little bit about how that would look if you looked at card and auto as well. And maybe just at a high level, too, I was hoping those 2 verticals specifically, like where are they versus pre-COVID levels today?

Look, it's all about pre-COVID levels. If you look at the piece parts of our Financial Services business, and again, U.S. focused here, very strong on consumer lending, which is a very material part of that group. Card, strong activity as well, and auto holding up well despite the frequently discussed supply chain issues. Overall, with the exception of mortgage, which we've all talked a lot about and understand what's going on there, performance is strong in Financial Services.

In the card space, we continue to just see very aggressive marketing with the customers that we have strong relationships with. That's a meaningful driver for us. In auto, what we're experiencing is there's demand, but the inventory issues are holding things back. We're still able to grow in that space. Much of it can be attributed to innovation that we brought to the market that helps us differentiate ourselves as the sale of cars goes more digital today.

Our next question comes from Andrew Nicholas with William Blair.

I just wanted to ask if you could expand on the addition of buy now, pay later data to consumer credit profiles. Just kind of interested in how much demand you're seeing from your client base for that information specifically. And any sense for where your BNPL data set sits relative to your competitors in terms of size and breadth and that sort of thing?

Yes. Sure. So let me just talk more generally about this. I mean it's an emerging area, and the industry is figuring out the best way to account for BNPL activity on the credit bureau files. Each of us has an approach to doing it. TransUnion is accumulating that information from our providers, and we're going to put it on a partition spot on the credit file as it is today, and our clients will have the ability if they choose to incorporate that data signal into their lending models. It's important to note that BNPL activity is different from a traditional credit trade line. These are fairly small dollar purchases, and they need to be consolidated in order to appear as a trade line on the credit report. We can currently do that through partnership, but the industry is still working out the best way to accommodate it. I can't really comment on the relative size of the data that we're accumulating versus our competitors. What I will say is that we feel like we compete very well in fintech, and BNPL is no different. I imagine the size of our data repository will be attractive when lenders are ready to incorporate that signal. You have to be judicious because the data is different than traditional trade lines, and you can't just plug that into conventional credit models without kind of disrupting the results. We think accumulating the data and creating data attributes based on it, that our clients can then incorporate into their origination models and their marketing propensity models. We think that's a very sound way to go about it.

Our next question will come from Hamzah Mazari with Jefferies.

This is Mario Cortellacci filling in for Hamzah. Before the three major acquisitions you made, you mentioned how much your portfolio is influenced by the credit cycle. Could you provide an update on your thoughts regarding that? Additionally, throughout the call, you've expressed strong confidence in the consumer and their financial health. You also touched upon customer feedback from banks, but could you share what you're hearing from your international customers regarding the credit cycle?

Yes. In recent years, due to our innovation and expansion into related areas, as well as adding new capabilities, we have significantly diversified our total revenues, reducing their direct correlation to origination activities. This includes our growth in fraud mitigation services, analytic services, direct-to-consumer offerings, credit enablement, and marketing, where we have invested substantially. The recent acquisitions you mentioned further enhance this diversification and add complementary capabilities to our portfolio. Compared to five years ago, and certainly ten years ago during the last major downturn, we are much more diversified. Additionally, international markets now represent a significant portion of our total revenues and have shown substantial growth and resilience in all circumstances except for this recent pandemic. Overall, we feel more diverse and optimistic. The customer commentary I am mentioning refers to how the banks were guiding the market during their recent earnings calls, particularly in consumer lending. The health of the consumer is a strong area they highlighted. I believe our guidance and our experience, as well as the numbers we've delivered, align with that positive outlook. This is also true internationally. We saw a really strong performance in India, which has bounced back from a challenging period during the pandemic, and in Latin America and our businesses in Asia. The Philippines experienced some of the most intense lockdowns but is now recovering. Our direct-to-consumer business in Hong Kong has also regained its footing. Looking at our global portfolio, there are many encouraging developments.

Our next question comes from Shlomo Rosenbaum with Stifel.

Chris, you mentioned that the OneID platform is more powerful than you initially expected. This platform processes and categorizes data more quickly. Can you elaborate on how this unexpected strength could translate into commercial opportunities? Should we anticipate quicker innovation of new products? Is there a greater capacity for cross-selling? Can you provide some specific examples of how this increased power benefits the company in practical terms moving forward?

Yes. Good question. The speed at which you can ingest data and your ability to fuse that data with other related elements and incorporate it into your data graphs and all of that, that reduces or rather accelerates the product development cycle, helping you to get to market faster and do more powerful product engineering. I see that as a benefit. We have many compliance and regulatory demands to meet globally. Neustar has a great ability to tag the data based on its source and permissible uses and the like, which will make it easier for us to comply with a continuously expanding realm of legislative and regulatory scrutiny across the global markets where we compete. There is a lot of intelligence we can incorporate into that core OneID platform that we can access centrally in a greater scale, allowing us to make changes more quickly in the central repository that then flow out to all of the connected product offerings that we will these increasingly connect over time as we integrate this business. You're seeing more potential commercially from what you saw beforehand. So you should think about that in terms of the context of the ability to come out with more innovation now.

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

Great. Thanks, everyone, for joining us today. We're going to wrap it up here. I know it's a busy day of earnings as usual, so we'll make sure everybody has time to transition over to other calls as we need to. So we hope you have a great day. Thank you for your time.

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