TransUnion Q3 FY2022 Earnings Call

Good day, and welcome to the TransUnion 2022 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Aaron Hoffman, Senior Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for 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. With that, let me turn the time over to Chris.

Thank you, Aaron. I would like to welcome everyone and outline our agenda for this morning's call. I will start with an overview of the economic conditions in TransUnion's global markets, followed by a summary of our strong financial performance in the third quarter. I will also highlight the positive results from our recent acquisitions and the progress we have made in achieving our savings, revenue growth, and the integration of their leading technologies across the company. Todd will then provide a detailed review of our third quarter results and our guidance for the full year. So far in 2022, consumer financial health has stayed positive compared to pre-pandemic levels, supporting growth throughout TransUnion, particularly in our emerging markets. Employment rates, incomes, spending, balance sheets, and credit performance have all been robust this year. However, the significant rise in inflation globally, particularly in developed markets like the U.S., the U.K., and Canada, is starting to strain household finances, resulting in lower savings rates, increasing credit balances, and a slight uptick in credit delinquencies. Consequently, businesses are adopting a more cautious outlook due to growing market uncertainties. In the U.S., the U.K., and Canada this year, soaring inflation and higher interest rates have mainly affected below-prime consumers. Emerging markets like India and South Africa, while facing higher inflation and other challenges, have still shown strong growth, which we anticipate will continue in the near future. In the U.S., elevated inflation and interest rates have negatively influenced several of our business sectors. Rising borrowing costs due to higher rates have severely impacted mortgage refinance volumes and slowed new home purchases, caused by a mismatch between high home prices and decreased affordability. Additionally, as we mentioned last quarter, a lack of multifamily housing mixed with increased homeownership costs has driven rental rates to surge while moving volumes have dropped significantly, adversely impacting our tenant screening business. Although our credit card and consumer lending areas continue to perform well, lenders are reducing new customer acquisition efforts in light of increasing pressure on household finances, opting instead to focus on customer retention and portfolio risk management. Growth in the auto sector remains positive but is limited by well-known supply chain issues. Our large bank clients have shared during their recent earnings calls that while U.S. consumers are still strong, they are preparing their balance sheets for the significant economic challenges expected in 2023. Higher inflation has also dampened marketing efforts in the insurance industry, as carriers are focusing on rate increases rather than acquiring new customers due to rising repair and replacement costs. Given the complexities insurers face in securing rate increase approvals in every state they operate, it will take time before they can fully resume their marketing activities. We believe carriers will achieve higher coverage rates, and once they do, our insurance sector should return to its typical high single-digit to low double-digit growth rate as they reengage in marketing and consumers look for the best coverage and prices. Lastly, our marketing services products remain actively sought after this quarter. However, we expect that as economic uncertainty escalates, brand owners, media companies, and advertising agencies may cut back on volumes in certain markets, with the greatest risks emerging in 2023. Now, turning to our third quarter performance, we achieved solid results within our guidance range despite facing increasingly challenging conditions due to the economic pressures I mentioned earlier. Our strength in this quarter stemmed from various verticals in the U.S. as well as our international segment overall. U.S. financial services experienced a 9% growth, excluding mortgage, on top of a healthy 31% growth in the same quarter last year. Our media vertical grew at double-digit rates, while insurance also posted mid-single-digit growth, despite the slowdown in carrier marketing. International growth reached 16% on a constant currency basis, with five out of six regions demonstrating double-digit growth, led by 39% growth in India, 24% growth in Asia-Pacific, and 18% in Africa. Our adjusted EBITDA margins reached the upper end of our range, reflecting our high flow-through margins, cost savings from the Neustar acquisition, and prudent expense management overall. Our acquisitions exceeded our expectations this quarter as we continue to build revenue momentum and achieve cost synergies. Given the increasingly tough market conditions, we have lowered our fourth-quarter and full-year guidance to account for the impact of higher inflation across the markets we serve. We’ve also widened our guidance range due to economic uncertainties. First, currency headwinds worsened this quarter, and we now expect an additional $12 million reduction for the fourth quarter as a result. We foresee the unusually strong U.S. dollar persisting through 2023, tempering the impact of our international segment’s strong performance. Second, for the fourth quarter, we have further reduced U.S. mortgage revenues by $7 million, while still adhering to our previous range of a 30% to 35% decrease, but now trending towards the lower end. Third, we have adjusted revenue expectations downward by $33 million across the non-mortgage U.S. markets, which represents approximately $2.1 billion, due to softening market conditions. Lastly, I want to stress that we have not altered our outlook for international growth, given the strong performance year-to-date and continuing positive trends in our emerging markets. We’re closely monitoring performance in our 30-plus non-U.S. markets, and our management teams are performing well despite rising inflation, interest rates, and even rolling power outages in South Africa. We’re also retaining our estimates for consumer interactive, as it remains on track to meet the targets set last quarter. Now, regarding our three acquisitions, we’ve made significant strides in their integration into TransUnion this year. Each acquisition is progressing according to our business plans and the expectations established in previous calls. Importantly, we believe that our results to date and the market feedback confirm the rationale behind these deals and the advantages of our combined offerings. Starting with Neustar, revenue grew in the mid-single digits this quarter, in line with our full-year expectations across marketing, fraud, and communications. As our TransUnion and Neustar marketing solutions become more integrated, they’ve grown in the high single digits year-to-date. We have announced significant new marketing sales during the quarter to iHeartRADIO, Stirista, and InfoSum, along with a partnership with Snowflake. Despite industry concerns over future advertising levels, we are seeing robust interest in the full range of Neustar marketing solutions, which provide value throughout various market cycles. In a tighter advertising environment, marketers increasingly look to optimize their spending and demonstrate the effectiveness of their campaigns using reliable quantitative measures. With the decline of digital identifiers, marketing platform providers must also prove their advertising performance. Neustar is well-positioned to deliver these objective metrics related to marketing performance. In the communications sector, we secured new business with LiveVox and Transaction Network Services this quarter. We continue to see significant growth from our innovative Trusted Call Solutions, which include branded call display and caller name optimization. These solutions help businesses identify themselves clearly and restore trust in phone outreach to consumers, as 88% of all business calls remain unanswered due to the rise of robocalls, scams, and blocked numbers. A wide range of industries, including financial services, insurance, healthcare, and utilities, utilize Trusted Call Solutions to substantially increase call pickup rates, sales, and conversion rates. Nearly a thousand customers are using this solution, and we were integrated into the T-Mobile network last year and the AT&T network this year. At this stage, we estimate that we have only penetrated about 10% of the potential U.S. market, indicating significant growth opportunities ahead. Moving forward, we anticipate that our growth will accelerate through effective cross-selling between Neustar and TransUnion. We are continuing to secure new accounts in insurance collections and financial services for Trusted Call Solutions and have converted several substantial opportunities this quarter, building our sales pipeline for the upcoming year. We are also successfully integrating TransUnion's data assets into Neustar's advanced data management platform, OneID, to achieve cost savings and enhance performance. Our combined data assets have boosted our phone coverage by 15%, email coverage has increased by 10%, and we have improved our linking and matching capabilities across non-credit solutions. As part of our cost synergy plan, we aim to close seven data centers this year, reducing Neustar's physical footprint by over 90%. Moreover, we have migrated nearly 90% of their products and data management services to a new, cost-efficient public cloud provider. In summary, Neustar's adjusted EBITDA margin was around 29% in the third quarter, driven by revenue growth and our cost-saving measures. We anticipate the full-year margin to be 26%, which is up 500 basis points from 2021. We are on track to meet our target of more than $70 million in cost savings through the integration of Neustar, which we expect will significantly counterbalance potential margin compression during an economic slowdown or recession. Now, moving on to Sontiq, where revenue grew in the mid-teens with a margin in the low thirties, consistent with our full-year expectations. We continue to see strong engagement with insurance clients, both domestically and internationally, with over 40% of newly identified prospects coming from abroad. We also have an expanding pipeline of opportunities in financial services. As we mentioned last quarter, the combination of TransUnion and Sontiq allows us to secure business that would not have been possible individually, resulting in an eight-figure win for our indirect business that we expect to monetize in 2023. Lastly, Argus revenue grew by 4% for the quarter with a margin of 19%. We expect revenue growth for the full year to be in the low single digits, with a 20% margin, or 34% when excluding integration costs. We have already noted considerable interest from customers, both from consortium members and those looking to join, to explore new ways to utilize Argus data and insights. Revitalizing Argus data delivery on TransUnion's digital platforms and enhancing our thought leadership will be crucial to achieving higher sales. This concludes my update on market conditions, our third quarter performance, and the integration of our acquisitions. Now, Todd will review our third quarter results and full-year guidance. Todd?

Thanks, Chris, and let me add my welcome to everyone. I'll start off with our consolidated financial results. Third quarter consolidated revenue increased 26% on a reported and 29% on a constant currency basis. Neustar, Sontiq, and Argus added about 27 points to revenue and organic constant currency growth was 1%. Our business grew 5% on an organic constant currency basis, excluding mortgage from both the third quarter of 2021 and 2022. On a trailing 12 month basis, mortgage represented about 7.5% of our revenue, and we expect that to fall to below 7% for the full year. Adjusted EBITDA increased 13% on a reported and 15% on a constant currency basis. Our adjusted EBITDA margin was 36.3%, down 430 basis points compared to the year-ago quarter, driven primarily by Neustar's lower margin profile. Excluding the Neustar, Sontiq, and Argus acquisitions, the margin would’ve been 38.6%, down about 200 basis points compared to the year-ago third quarter. Third quarter adjusted diluted EPS increased 2% driven by adjusted EBITDA growth offset by higher interest expense. Now looking at segment financial performance for the third quarter. U.S. markets revenue was up 38% compared to the year-ago quarter. Organic revenue declined 2%, but was up 5% excluding mortgage. Adjusted EBITDA for U.S. markets increased 18% on an as-reported basis and declined 9% on an organic basis. Adjusted EBITDA margin declined by 610 basis points, but would have been down 300 basis points, excluding the Neustar and Argus acquisitions. Diving into the results by vertical, please note that to date 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% as reported and was down 4%, excluding Argus. Excluding mortgage, organic constant currency revenue growth was 9%, despite 31% growth in the third quarter of 2021, implying a 20% two-year growth CAGR. Looking at the individual end markets, consumer lending continues to be strong as high levels of activity persisted throughout the quarter, leading to 10% growth on top of almost 60% in the year-ago quarter. While lower marketing activity reveals some softness emerging in below-prime credit tiers, we are seeing FinTech lenders recalibrate their activity from customer acquisition to retention. We are also observing incremental activity around debt consolidation, which had slowed considerably in 2020 and 2021 when consumer balance sheets reached their peak. At the same time, we continue to see growth from our strong buy-now-pay-later position. Similarly, our credit card business had another good quarter, growing 9% after growth of nearly 30% in the year-ago quarter. Issuers continued to fight for top wallet position driving all-channel marketing spend, as well as incremental use of alternative data in more sophisticated tools for prequalification and origination. While we haven't seen a pullback in this activity yet, we are taking a cautious stance regarding fourth quarter activity. Our auto business delivered high single-digit growth in the quarter, as new business wins and on-trend innovation, particularly related to digital retailing helped offset lingering inventory issues for new and used vehicles. While demand remains relatively strong, we are beginning to see some softening caused by consumer affordability challenges driven by elevated vehicle prices and interest rates. To this point, the average new vehicle price in the U.S. is expected to rise to about $45,000 this year, a staggering increase of $10,000 over the past two years. For mortgage, rates have continued to rise with the average 30-year fixed rate mortgage up more than a point from the end of the second quarter and more than double what it was a year ago. This has substantially affected the total inquiry market, especially refinances. For the full year, we continue to expect the inquiry market to be down 40% to 45%, and our revenue to fall 30% to 35%. We designed our late July outlook to be conservative and to anticipate further headwinds, including higher rates and inflation without much if any reduction in home prices. The backdrop has largely played out as we expected, and therefore we are not altering our full-year outlook. As a reminder, we expect our business to perform better than the market as a result of volumetric pricing increases. Increased demand for targeted marketing solutions as the market tightens and increased interest in home equity lending products like HELOCs as a result of substantial home equity increases. Let me now turn to our emerging verticals, which grew 91% on a reported basis and 1% excluding the revenue associated with Neustar. Insurance delivered another good quarter with mid-single-digit growth, despite the slowdown in marketing, Chris described and building on a very strong year-ago quarter when revenue was up more than 20%. We continue to see strength from our innovative solutions in commercial and life applications, as well as DriverRisk in our traditional private auto market. As Chris mentioned, in addition to these organic opportunities, our recent acquisitions are driving significant incremental growth opportunities. Our public sector vertical declined in the quarter due to the timing of several deals. We remain confident that this business will return to growth in the fourth quarter. Tenant and employment screening grew slightly as a result of continued softness in the tenant market driven by fewer renters moving as inventory levels have tightened and rental rates have risen sharply. Employment screening, a smaller portion of this vertical, continues to deliver attractive growth. Though, we've seen signs of softness as employers take a more cautious approach to hiring. Our media vertical grew double-digits again in the quarter, and we continue to sign or expand contracts with leading social platforms and media companies that serve a broad range of categories. Consumer interactive revenue, which includes Sontiq, increased 9% on a reported basis and declined 9% organically due to decreases in both the direct and indirect channels. Adjusted EBITDA was up 5%, but down 6% excluding Sontiq. Similar to the second quarter, moderating consumer demand for paid credit-related solutions across both the indirect and direct channels and challenging multiyear comparisons to exceptionally strong performance in the direct channel in both 2020 and 2021, adversely impacted revenue. This is largely a result of a marketplace shift towards freemium offerings for credit monitoring. Partially offsetting this is continued strength in identity protection, an area where our Sontiq acquisition enhances our capabilities. On the indirect side, the restructuring of one of our key partnerships last year and some non-recurring breach revenue have created an unfavorable year-over-year comparison. For my comments about International, all comparisons will be in constant currency. For the total segment, revenue grew 16% with five of our six reported markets growing by double-digits. Adjusted EBITDA for International increased 18% as a result of our strong revenue growth. Now let's dig into the specifics for each region. In the U.K., revenue increased 4%. Excluding the revenue related to the one-time contracts including with the U.K. government, we would have grown about 9% in the quarter despite a challenging macro environment. Notably, higher inflation and political transition have weighed on customer activity and confidence. However, offsetting these forces, we are seeing an acceleration in TrueVision, our trended credit offering in the U.K., along with strength in direct-to-consumer as three of the four largest lenders now use our CreditView platform, and we're also seeing increased traction in our insurance vertical. Our Canadian business grew 10% in the third quarter, reflecting growth across the portfolio. While we see macro indicators softening a bit, our core business in the third quarter remains strong as we continue to garner new business ranging from large banks to one of the largest BNPL players. We expect these moves, once fully executed in 2023, will position us as the leader in the Canadian financial services market and the BNPL sector. Also driving growth, we continue to benefit from customers ordering incremental batch, data, and analytics to recalibrate their post-COVID models in order to be recession-ready. In India, we grew 39% 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. As a result, we benefit from a third of consumer lending and credit card issuance, along with the continued rise of FinTech and BNPL players, all markets where we hold very strong share positions. In Latin America, revenue was up 13% with broad-based growth across our markets, including double-digit growth in many of our key markets. This strong growth reflects good macro and consumer fundamentals, ongoing new business wins, shared shifts in financial services, particularly with FinTechs and neobanks, and continued uptake of CreditVision, and fraud solutions. In Asia-Pacific, we grew 24% from continued good performance in Hong Kong, driven by CreditVision's growth and new business with FinTech players. We expect revenue from the Philippines to double for the full year and to exceed pre-COVID levels as the economy has now fully reemerged from COVID and resumed its strong growth trajectory. Finally, Africa increased 18% based on broadly strong performance across the portfolio and the region, despite a challenging environment that includes rolling electrical blackouts in consecutive quarters of contracting real GDP in our largest market, South Africa. Notably, we won meaningful new business and secured important contract renewals in South Africa. Outside of South Africa, we have spent years establishing valuable footholds in emerging countries like Kenya and Zambia. We are now seeing the fruits of these investments with meaningful growth in these countries, particularly with micro and FinTech lenders further validating our global IP strategy. Now shifting to leverage and liquidity. We ended the quarter with roughly $5.9 billion of debt, $596 million of cash on the balance sheet, and pro forma leverage of 3.9 times. We expect to delever to 3.8 times by the end of 2022. We also intend to use a portion of our cash to prepay debt in the fourth quarter. That brings us to our outlook for the fourth quarter and the full year. All of the guidance provided reflects Neustar, Sontiq, and Argus. Starting with the fourth quarter, we expect about three points of headwind from FX on revenue and four points of headwind from FX unadjusted EBITDA. For revenue, we anticipate about a 19-point benefit from the acquisitions of Neustar, Sontiq, and Argus. We expect revenue to come in between $896 million and $916 million, or a 13% to 16% increase on an as-reported basis and flat to down 3% on an organic constant currency basis. Our revenue guidance includes an approximate four-point headwind from mortgage, meaning that we expect the remainder of our business will grow 2% to 4% on an organic constant currency basis. We expect adjusted EBITDA to be between $318 million and $333 million, an increase of 13% to 18%. We expect adjusted EBITDA margin to fall in a range of down 30 to up 50 basis points, primarily as a result of incorporating Neustar and Argus' relatively lower margins. On an organic basis, excluding the three acquisitions, we anticipate our margins to increase by more than 150 basis points. We also expect our adjusted diluted earnings per share to be between $0.80 and $0.86, a range of down 2% to up 6% negatively impacted by the effect of rising rates and approximately 30% of our debt that is floating. For the full year, we expect FX to impact revenue by about two points. Based on this recent dollar strengthening at current rates, we expect FX to have a negative impact on revenues for the next several quarters. We also anticipate about 24 points of benefit from M&A. We expect revenue to be between $3.704 billion to $3.724 billion, up 25% to 26%. Our guidance includes approximately four points of headwind for mortgage for the full year. So, excluding mortgage on an organic constant currency basis, we anticipate revenue will increase about 7%. For our business segments on an organic basis, we expect U.S. markets to grow low single digits, but up high single digits excluding mortgage. We anticipate financial services to be down low single digits, but up low double-digits excluding mortgage. We expect emerging verticals to be up mid-single digits. We anticipate that International will grow in the mid-teens on constant currency terms, and we expect consumer interactive to decline in the high single digits on an organic basis. Both International and consumer interactive are unchanged from our previous guidance. We expect adjusted EBITDA to be between $1.343 billion and $1.358 billion up 16% to 17%. We expect a two-point headwind from foreign exchange. Additionally, we expect our adjusted EBITDA margin to compress 280 to 260 basis points this year, driven by the lower margin acquisitions and acquisition integration costs for Sontiq and Argus. Anticipate the margin will decline about 25 basis points on an organic basis. We expect adjusted diluted earnings per share for the year to be between $3.63 and $3.69, up 6% to 7%. And to help you complete your modeling of 2022 at this time, we expect our adjusted tax rate to be approximately 22%, slightly lower than our previous guidance. Depreciation and amortization will still be approximately $520 million, and we still expect the portion excluding step-up amortization from our 2012 change in control and subsequent acquisitions to be about $210 million. Continue to anticipate net interest expense will be about $225 million for the full year. This implies our interest expense to be roughly $65 million in the fourth quarter. And as you think about interest expense modeling, roughly 68% of our debt is currently swapped from floating to fixed. We have $1.4 billion notional swaps that are expiring at the end of the year, which fixed the variable rates on that notion at 2.7%. We expect to renew that swap before the end of the year, but it is likely to come at a higher swap rate given higher and rising rates. As I noted, we will continue to focus on expected debt prepayment in the coming quarters, which will effectively reduce our floating rate exposure over time. Finally, we still expect capital expenditures to come in at about 8% of revenue. Looking ahead to 2023, as usual, we'll provide you with guidance when we report our full-year results next February. However, I think it's valuable to summarize some important considerations as we head into next year assuming these macroeconomic challenges persist. First and most important, we expect to deliver organic constant currency revenue growth at an attractive margin. To that point right now, we believe that mortgage inquiry volumes will decline again in 2023, with comparisons easing as we go through the year. The next two points relate back to Chris's commentary. One, the consumer in the U.S. remains relatively healthy, and that bodes well for our financial services vertical, excluding mortgage. Though, we are diligently watching for any material changes. And two, some of the headwinds we're experiencing in our emerging verticals are temporal and should resolve themselves next year. We continue to expect strong performance in our International business building on an impressive 2022. And in consumer interactive, we believe that business performance will improve as we lap the contract renegotiations and some of the headwinds in direct while also benefiting from the new business wins we've discussed. As Chris also mentioned, we're seeing a very nice new business pipeline develop across all three of our acquisitions. Specific to Neustar, we have a very successful cost reduction program that is running ahead of our $70 million expectation at this point, and we expect we'll continue to deliver meaningful savings next year. And finally, my current expectation is that free cash flow will be directed to debt prepayment, helping reduce our exposure to interest rate increases. At the same time, assuming we deliver more adjusted EBITDA dollars, that will help further reduce our leverage ratio. Now pivoting to some thoughts about a more severe downturn. On our last earnings call, I spent time detailing some puts and takes relative to how our business might respond in a recession. I won't comprehensively review that story today as you can revisit the transcript at your convenience. However, I do want to reiterate the conclusion of that discussion. First, in a somewhat normal recession, we still expect our business to deliver revenue growth, and we would prioritize protecting our margins without sacrificing important investments in our commitments to integrate our recent acquisitions. This is possible because of our expansive diversified portfolio of relevant solutions and our deep partnerships built on thought leadership and innovation. In a downturn, we would keep our focus on integrating our recent strategic acquisitions to ensure they deliver against our long-term expectations, and we would manage our cost structure to ensure it aligns the trajectory of revenue growth in order to deliver strong margin performance. I want to wrap up with a slide we showed you at our Investor Day in March of this year. Despite some of the market cyclicality we're seeing and anticipating, we still expect to deliver against these targets in 2025. Clearly, we don't expect the growth to be linear, but our attractive end markets and geographic footprint, differentiated complementary solution offerings, and innovation pipeline give us line of sight to fulfilling our long-term commitment.

Thanks, Todd. So to conclude, TransUnion delivered another good quarter of growth at an attractive margin. We also continue to make meaningful progress integrating our recent acquisitions, and clear top- and bottom-line benefits are emerging. We have appropriately recalibrated our guidance to reflect current market conditions. And while the broader environment remains uncertain, TransUnion continues to execute at a high level, giving us confidence that we can weather whatever economic uncertainty lies ahead, even as we continue to make growth-oriented investments. And before I conclude my remarks, I also wanted to take a moment to acknowledge yesterday's announcement by the Federal Housing Finance Agency Director Sandra Thompson, concerning evolutions in the mortgage underwriting space. We were pleased by Director Thompson's announcement to share the FHFA's perspective that safety and soundness and expanding home ownership are the twin objectives for any reform efforts. We're optimistic that the requirement of VantageScore 4.0 score use by mortgage lenders will responsibly and sustainably expand credit access for consumers and also in time increase competition and innovation in the space. We're also equally focused on the announcement that the FHFA and the GSEs will launch a multiyear program to adopt requirements that lenders use two, rather than three credit reports for mortgage originations. We anticipate that we will play a leading role engaging with the stakeholders across the mortgage industry in the coming years, especially the FHFA as we work on appropriate implementation timelines and details. So, taking together the adoption of VantageScore 4.0, and the migration over time from a tri-merge to a bi-merge requirement will reshape the mortgage landscape and present new opportunities for TU to sell both existing solutions and also encourage the development of new and novel customer data products. So, with that, I'm going to turn it over to Aaron.

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

We will now begin the question-and-answer session. The first question today comes from Andrew Steinerman with JPMorgan. Please go ahead.

Hi. I understand your slide 17 is a no-recession in kind of assumption in slide 18. Is what if a recession assumption? So I want to focus on slide 17. And the TransUnion team is suggesting that 2023 will have solid organic revenue growth, but below the long-term, 8% to 10% target. So, I just wanted to know, when you say solid organic revenue growth, does that mean mid-single digits organic revenue growth? And what's your macro assumption kind of underlying that?

Good morning, Andrew, and thank you for your question. This is Todd responding. Regarding slide 17, our message is our initial thoughts as we wrap up 2022 and approach the New Year. As you can understand, we are currently not in a position to provide guidance. We need to observe how the macro environment unfolds throughout the year and into the New Year before giving any guidance. In response to your inquiry about specific percentages, such as a 7% to 8% range, we did not include that on the slide because we are uncertain about future developments. However, we believe it is important to share our current perspective with the market and our investors. Based on the current economic trajectory, we anticipate delivering organic growth, but the exact growth rate is still uncertain and may align with our long-term growth expectations. We, like many companies, are also uncertain about the future, so we wanted to provide some guidance on what we are observing. To reiterate, we expect a decline in mortgage performance next year due to ongoing inflation pressures and a subsequent response in interest rates. In our U.S. financial services sector, the third quarter performance remained strong, although slightly lower than previously outlined, but still a robust quarter compared to last year. We are closely monitoring the U.S. consumer response. The emerging verticals experienced a growth rate of about 1%, impacted by several unique issues, which we expect will normalize in 2023. Our International business continues to perform strongly and remains resilient, but we are keeping an eye on developed markets like Canada and the U.K. Lastly, a positive development highlighted by Chris is that our acquisitions performed well in the third quarter. Neustar met our revenue expectations, and the integration is progressing well. We are on track to achieve the cost synergies we committed to a year ago, aiming for at least $70 million. Sontiq also had a strong quarter, and Argus is rebounding nicely. We feel optimistic about the momentum in the M&A sector as well.

Okay. Great. Thanks, Todd.

The next question comes from Surinder Thind with Jefferies. Please go ahead.

Thank you. Following up on the earlier question regarding the outlook for the fourth quarter or 2023, could you discuss the level of visibility or comfort you currently have compared to more typical circumstances? Reviewing the past two quarters, it seems quite challenging to predict the quarterly numbers, and changes appear to be occurring more quickly than expected. Any insights on that?

Thank you for the question. This relates to our guidance for the fourth quarter. We have revised our outlook downward from where we were about 90 days ago during our July call. This adjustment reflects feedback from our customers. To provide some detail, we presented a bridge that indicates a reduction of about $33 million in the U.S. markets excluding mortgages, with roughly half of that decrease coming from financial services, including consumer lending, cards, and auto. Despite lowering those numbers, as I mentioned in response to Andrew's question, we still expect solid growth rates in these business areas. The rest of the reduction is due to performance in other verticals, including tenant screening, where we are experiencing some pressure, as well as slower growth in media and insurance, although these areas are still growing. Our outlook is based on the activity and feedback from our customers, which is why we've made this adjustment. However, the situation remains uncertain. We indicated this when we met in July, and we're maintaining a wider range for our fourth-quarter guidance, similar to what we did for the third quarter. We feel that we have accurately captured market sentiment and have mitigated risk in our guidance by having this broader range.

I would like to add a small point to that. You mentioned that it's a more challenging environment for forecasting, and we agree. Todd explained our cautious approach to fourth quarter guidance while considering current trends. In situations like this, it's easy to dwell on the negatives and the slowdown compared to last year's performance, which was exceptionally high. However, there are also some positive aspects to consider for next year. For one, the impact of mortgages will be less significant, if at all, compared to this year. Our international segment will remain strong, and we anticipate considerable improvement in our direct consumer business. We believe the tenant screening market will see progress as well. There are several positive developments expected as the market seeks stability. As I mentioned, we are closely monitoring market conditions. The fourth quarter will provide valuable insights, and we will offer our guidance early next year along with a more detailed discussion about our expectations.

Thank you. That's helpful.

The next question comes from Jeff Meuler with Baird. Please go ahead.

Yeah. Thanks. Chris, would love your perspective as competition could play out for share in a bi-merge world. What's the pitch for why TransUnion should be included as one of the two? I'd imagine the industry-leading trended product is a big part of it, but just what else? And then, is this also a catalyst for bringing additional alternative data products into the mortgage underwriting process from your perspective? Thanks.

Yeah. Well, look, it's kind of early days based on the announcement that we just received yesterday. I think the win for consumers and the win for the mortgage industry and the economy is that we'll now be using a score that we know scores more consumers in the U.S. and scores them more accurately. So, it is a win for financial inclusion and mortgage origination generally. We also like the emphasis on safety and soundness by the FHFA and the GSEs. The two factors that go into that is one scoring accuracy, which I feel like they've addressed by requiring the VantageScore, but also just the volume and breadth of information. Now, they've indicated that they're going to suggest or recommend a change in the mortgage credit report market. I think we need time to better understand what exactly that means. The agency hasn't released its details nor an implementation plan. In an environment where there is more competition, be it around score or credit, we do have a great trended credit product. We are an industry neutral player, and we've got a wide range of data. And I think this will, net-net, just set off a period of innovation that could be quite helpful to the space and the consumers and the bureaus alike. But I think it's a little early now given some of these uncertainties and unknowns to kind of declare what the future is going to look like.

Fair enough. Appreciate your perspective. Thank you.

The next question comes from Kelsey Zhu with Autonomous Research. Please go ahead.

Hey, Chris and Todd. With India now 5% of total revenues and U.S. mortgages basically expected to be less than 7%, maybe we can switch gears a little bit and talk about what's happening in India. Obviously, this quarter, you're seeing 39% constant currency growth. Could you just break that down a little bit in terms of how much of that is driven by market growth versus market share gains versus cross-selling additional products and services?

Yeah. Well, look, I we just got back from an extended trip to India where we spend time not only in Mumbai with our leading credit franchise, but also in Chennai and other parts where we've got a lot of our employees, our development talent, and BPO as well. As always, it's a very invigorating experience to spend time in India, particularly with our business. India is very much emerging on the global stage economically, for sure, and even politically. And you sense a tremendous optimism when you're over there. We have certainly benefited from the underlying positive growth drivers in that market. Hundreds of millions of Indian citizens have entered the middle class. There's an equal tranches along the way. The government there is committed to aggressive economic growth by taking advantage of kind of the era of intellectual product and India's very progressive approach to digitizing their economy. So, we're benefiting from market trends. We also think we have reinforced or gained share along the way. And we're also diversifying our product line. I mean we, of course, are bringing in the full complement of products around consumer credit and analytics, and we expect considerable growth through the broadening of the product line there. We're making a similar play in commercial where we've really improved the competitiveness of our commercial credit bureau. And we continue to innovate. We've launched a score that will help commercial lenders evaluate small to medium businesses, a very fast-growing and dynamic segment of the Indian economy, and also a suite of products for agricultural lending, which, again, is an underpenetrated part of the Indian market. So, the combination of natural market growth plus broadening our product line across segments and adjacencies, I think, really positions us for strong growth for years ahead in India.

Thanks. Really appreciate that.

The next question comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Yes. Hi. Good morning. I wanted to talk a little bit more about the credit card and consumer lending piece of the business because it feels like there can be quite a lot of volatility there. So, maybe help us think through as we look ahead to 2023, a potential recession, sort of what are the range of outcomes there? And what type of metrics should we be watching?

Sure. Well, our financial services businesses break down into the four subsegments: cards, consumer loans, auto, and of course, mortgage. Mortgage is far and away the most volatile component of that. Mortgage was a great counterbalance during the downturn related to COVID, and it more than doubled in a couple of years because of the lower interest rates. Now the rates have reversed themselves. It's being halved again. So that's where the real volatility is. Auto's growth currently is constrained. Demand far exceeds supply currently. We would expect supply conditions to improve over time. And so, we're expecting relative stability on the auto side. And look, credit cards and consumer loans, while the growth rate has declined, it's still growing nicely. And card originations are healthy. Although, card marketing activity has tapered somewhat. The same is true on consumer loans. And the FinTechs remain strong and fast-growing, and we expect them to grow throughout the cycle, because they are disrupting the space. They are in aggressive growth mode. They continue to market. They continue to have secure funding sources. And so, while I think we're entering a period of likely slower growth, at least until we find an equilibrium with inflation and interest rates, we do expect the space, financial services that is, to remain a positive grower.

Thank you.

The next question comes from Manav Patnaik with Barclays. Please go ahead.

Thank you. Chris, maybe just a follow-up on that. Let's just say the macro is more just soft. Historically, how has credit card performed or held up? And maybe if you could just give us something similarly around Neustar well in that scenario.

Let me address Neustar first. The question concerns potential scenarios of economic slowdown and perhaps a deep recession. While we aren't making any specific predictions at this time, Manav is trying to grasp the extent to which credit card performance might decline in a recession. Given your experience managing the business during 2008, do you have any insights to share?

Sure. It's important to consider the range of services we offer at TransUnion. While credit card marketing may slow down in a recession, which would affect our prescreen marketing jobs, we have numerous services focused on portfolio reviews to help clients manage their existing business. This can be particularly valuable during downturns; it's not entirely countercyclical but serves as a mitigating factor. Clients will assess their current portfolios to understand potential risks and manage lines of credit, as well as identify cross-selling opportunities within their successful segments. For instance, during the early days of the pandemic, our clients quickly shifted from acquiring new customers to reviewing their portfolios, and our sales team was quick to offer these services. While you mentioned credit cards, I’d also note that there's ongoing strong marketing activity in the consumer lending and FinTech spaces, which is consistent with what I previously shared. TransUnion maintains relationships with 24 of the top 25 FinTech companies, and we have strong partnerships with them. If marketing does slow down, we still have a range of products to offer. The relationships we have with these clients are excellent, and we believe we can assist them in navigating any economic conditions.

Yes. On the card front, Manav, while we are indeed experiencing a slowdown, our sales performance remains strong. In 2021, we reached record sales, and we expect to significantly surpass that in 2022 within our financial services sector. What we are offering in the market is effectively attracting new customers and helping us expand within our existing customer base, which somewhat cushions the impact of the downturn. Regarding Neustar, in the pandemic year of 2020, it performed at a 1% growth across its three business lines, with marketing being flat. The second quarter posed significant challenges, followed by a gradual recovery in the third quarter, leading us towards normalcy in the fourth quarter. This serves as a reference for how the business may react during severe downturns like in 2020. Additionally, Neustar's marketing solutions provide value throughout the business cycle, with most of the offerings being subscription-based or subscription-like. This includes data hygiene practices to ensure efficient marketing efforts, which are critical during downturns. The importance of optimizing media mix and measuring marketing effectiveness increases in restrictive environments. Currently, 20% of our marketing portfolio is more volume-driven, particularly in audience generation and utilization. We have observed some of this in Neustar, which we have discussed throughout the year. On TransUnion's side, we are seeing rapid growth, and when considering both marketing segments, we must integrate them more closely. The marketing segment of TransUnion is growing at double-digit rates, which is promising. That’s my update on these two areas.

Thank you.

The next question comes from Heather Balsky with Bank of America. Please go ahead.

Hi. Thank you for taking my question. You mentioned some specific challenges you're currently facing in your Emerging Verticals segment. Can you explain what's causing these issues? I would also like to know what gives you confidence in that segment as we look ahead to next year. Additionally, when do you expect these challenges to improve and how long might it take to resolve them? That would be really helpful. Thanks.

Sure, I'll address the first part of your question regarding timing, which can be difficult to pinpoint precisely at this moment. The main driver of our emerging verticals is the insurance sector, which grew in the mid-single digits compared to a 20% growth from the previous year. The slowdown from its usual high single to low double-digit growth rate is largely due to inflation affecting the costs of repair and replacement. Consequently, claims expenses are up, leading carriers to raise policy prices. However, the process of increasing prices is complicated by regulations across all 50 states. Carriers are currently filing for rate increases, but it will take time for these to be approved, after which we expect policy origination to return to normal levels. This scenario is not new; we've experienced similar cycles in the insurance market before. Additionally, there has been an unusual slowdown in tenant screening, largely due to a market boycott. Reports in the mainstream press highlight significant price increases for apartment rentals, causing tenants to either stay put or avoid moving due to affordability concerns. The imbalance between supply and demand will take time to resolve, but I'm confident that we will reach a new equilibrium and resume transactions. On a more positive note, multifamily rental units in new home construction are promising. While it will take time for this supply to become available, it should help to boost transaction volumes in the intermediate term. Regarding the public sector, we had some significant one-time projects last year in Q3 and a new sale that was deferred to Q4, which contributed to a decline in that quarter. However, we anticipate growth in this sector going forward. In terms of communications, we have two major clients who merged, leading them to lower their demand for our products as they adjust to the merger. Although we still maintain our supply relationship, this has resulted in a slight decrease in transaction volume. Finally, collections have been challenging for several years. However, as government support and debt collection deferrals begin to fade, I am optimistic about our prospects for growth in this area in 2023, as we move towards a more normalized environment. All these factors contributed to what I believe was an unusual Q3 for our emerging markets. I hope this provides a clearer picture.

And Chris, I would just add that in 2023, our Neustar business will be considered organic. At that time, and for the reasons Chris mentioned regarding marketing, it’s also important to highlight the risk in the fraud business we currently have, along with the capabilities that TransUnion already possessed, and the communications business as well. Those are two businesses that should perform relatively well in a down environment, and they should also contribute to the growth rate for the year.

Yeah. That's a good add. So, my commentary was focused really on TransUnion, and the Neustar stuff has been very positive. But those are solid growers. And as you saw in the third quarter, we had solid performance across Neustar's portfolio. That is going to average our performance overall.

Thank you.

The next question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Thanks, Todd. Historically, you've employed a beat and raise strategy when giving guidance. This quarter, it appears the adjustments are related to a decrease in organic growth rather than foreign exchange or mortgage impacts like last quarter. At the start of the year, you mentioned incorporating less conservatism into the guidance. I'm looking for an update on our current position. Is this guidance conservative or realistic, especially given the significant uncertainty in the macro environment? I understand you noted the range is wider due to this uncertainty, so I wanted to clarify.

Sure, Toni. I'm happy to address that. It's a valid question to explore. As I mentioned earlier, the decrease we experienced in the fourth quarter is largely due to a combination of our daily observations and the insights provided by our clients. Our U.S. business effectively engages with various advisory boards to gather direct feedback from buyers regarding their expectations and sentiments. By considering these two aspects, we develop our forecasts. I want to emphasize that all our guidance has consistently been based on reality. This approach dates back to the times when we were in a phase of exceeding expectations and raising forecasts. However, the macroeconomic landscape has shifted dramatically since then. Reflecting on two or three years ago, when we were achieving better results, the economic environment was quite different compared to today, where we are facing high inflation and rising interest rates. We are trying to assess consumer sentiments while monitoring their savings and spending habits. This analysis has led us to the guidance we've provided based on these factors. I wish I could assure you that it's conservative and that we might see another outperforming outcome, but I can't offer that certainty. This is also the reason why we decided to widen the range, similar to what we did in the third quarter, which helped us meet our revenue expectations. As you can see, we delivered within that range in the third quarter, indicating that we have taken market sentiment into account and adjusted our guidance appropriately by allowing a wider range.

Yeah. So, net-net, realistic guidance, perhaps a little additional downside sentiment in the quarter relative to the guidance, but we're dealing with the sea change in macroeconomic conditions and so it's less certain.

Super. Thank you.

The next question comes from Andrew Nicholas with William Blair. Please go ahead.

Hi. Good morning. Thanks for taking the question. I wanted to ask a question on the International outlook, specifically as it relates to your considerations for 2023. Obviously, you expect another strong year. That seems to be a bit more optimistic than maybe the financial services business ex-mortgage. Can you just dive into that a little bit more? What gives you confidence in maybe the disparate growth assumptions for next year? Is it more about the economic backdrop in those regions? Is it new product development? Is it maybe some lag there in terms of how those economies are progressing relative to the U.S.? Any additional color on why it seems like International is you're going to be a bit more resilient or at least stronger next year than what you're expecting in the U.S. ex-mortgage? Thank you.

When we look at our International division, including both emerging and developed markets, emerging markets like India, Latin America, and South Africa are in a better position. The inflation rates in these areas, especially in India, are lower because they didn't experience as much stimulus, leading to less inflation and stronger GDP growth. India is benefiting from favorable demographics and a government that supports business and digital initiatives. We are also expanding our product offerings and seeing rapid growth in new areas. Latin America's situation mirrors India's but on a smaller population scale. In South Africa, our investments are starting to yield positive results, and we are experiencing good growth both there and across the continent. The Asia-Pacific region is similar, with Hong Kong performing well and the Philippines recovering. This rebound from COVID is also present in our emerging markets, which reopened later than the U.S., contributing to a favorable growth environment. In Canada and the U.K., we are seeing high single-digit organic growth, although it's somewhat moderated. Canada is experiencing one-time revenue effects, but we continue to acquire new customers which positions us well for the future. In the U.K., the growth figures have been impacted by a large government contract that contributed significantly in the past, but as the pandemic situation improves, revenue from that contract is decreasing. Overall, we expect to see sustained strong growth in International next year, which is crucial for TransUnion's overall performance.

Great. And we will wrap it up there. I think it's a great question to end on, actually. A very exciting story in International. I know it's a very busy earnings day as we're in the midst of the earnings season. So, we're going to give you guys a little bit of time as well as a little bit of time here. Thank you all for joining us today and we hope you have a great day.

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