Description

TransUnion is a high-margin, free cash flow generative information services business with a strong moat, secular growth prospects and an embedded transactional-based revenue stream.  The company has leveraged its core credit reporting agency (CRA) data to gather new data sets traditionally underutilized by the CRA vendors (including public records data, identity resolution data and alternative data), diversifying the business and reducing the sensitivity to the consumer credit cycle. 

The company has a market cap of $9.3 billion, has $4.9 billion of net debt (levered 3.7x LTM EBITDA) and has an enterprise value of $14 billion.

Shares are trading at their lowest multiple of forward EBITDA, EPS and FCF since the 2015 IPO, though admittedly visibility on earnings momentum over the next few quarters is low.  

I think the recent share price decline following a surprisingly soft Q3 earnings report provides an attractive entry point for longer-term investors.  My differentiated view stems less from earnings over the next twelve months (I am modestly below revised sell-side estimates), but more from my belief that 1) the business is more diversified than perceived, 2) the outlook for U.S. consumer credit growth may be better than feared and 3) the 2021 Neustar transaction- while egregiously expensive and underperforming- has strategic merits.

The defensive characteristics of the business are possibly being overlooked at the moment considering:

• The business only declined 4% organically in 2008 and 9% in 2009, when the company was much more heavily exposed to US consumer credit at a time when households and consumers were particularly heavily indebted

• Management have mentioned as recently as summer 2023 that they expect to grow organically through a garden variety recession.

• The company has diversified into categories like insurance, collections, public sector, rental screening, media, communications, which all should be less cyclical than portions of the legacy business

TransUnion also has a collection of excellent international businesses which are largely still growing healthily and have strong secular growth prospects driven by large populations and low credit penetration in emerging markets.  TransUnion’s India business alone—while only representing ~7% of consolidated revenue— could be worth ~$2.5 billion, or ~27% of the market cap, based on peer valuations.

Additionally, private market valuations for information services businesses like TRU are well above the current multiple.  While it would be a very large take-private transaction, this business has had multiple private equity owners in the past and it is conceivable a theoretical PE bid could provide a bit of a floor on the multiple.  The recent insider buy from a director suggests to me the board may be aware of the latent value of the company.

The opportunity exists today because TransUnion saw revenue growth trends decelerate sharply during the third quarter and into the start of the fourth quarter.  TRU skews more towards fintechs (think BNPL), lower-end customers and smaller regional banks.  And so it does make sense that growth would be slowing as the low-end consumer burns through its excess savings from the pandemic, interest rates have risen and smaller regional banks have moderated loan growth.

Shares are trading at 11.0x EV / 2024E EBITDA (post stock-based comp) on my estimates, 16.2x 2024E EPS (backing out amortization expense but deducting stock-based comp) and a 7.2% 2024E levered free cash flow yield.  And up until 10 days ago this was a business projected by management to compound EPS at a mid-teens clip.

Credit bureau comps Experian and Equifax are trading at 13.2x EV / 2024E EBITDA and 21x Price / 2024E EPS while the broader information services names (with more subscription vs. transaction-based revenue) are trading at 18.5x EV / 2024E EBITDA and 26x EPS.

Business Background 

TransUnion is a global information and insights company that was founded in 1968 and has operations in over 30 countries.  It owns one of the three national consumer credit bureaus in the US and provides credit data on 1+ billion consumer files globally using data from 90,000 sources.  TRU was previously owned by Advent and Goldman Sachs, and Madison Dearborn and the Pritzker family before that.

TRU possesses comprehensive and distinct data sets and decisioning tools at the center of the secularly growing themes of expanding credit assessment, ID verification/resolution and fraud mitigation.  TRU can be thought of as a collection of data sets— many of which are proprietary and have morphed into extremely strong moats— across a number of different verticals and use cases.  The company provides solutions that enable businesses to manage and measure credit risk, market to new and existing customers, verify consumer identities and mitigate fraud, and manage call center operations.

The most well-known asset within TRU is its core credit bureau business which is an entrenched oligopoly that derives network effects from lenders contributing credit information on consumers to the bureaus at no cost (the “give-to-get contributory model”), and the entrenchment of TRU and the other bureaus in many consumer underwriting processes.  Other proprietary data sets include driver violation history, phone activity, digital device identifiers, business data and rental payment history.  Global data assets encompass alternative data such as the voter registry in India, a vehicle information database and a mobile device data base.  The company believes it is the largest provider of scale in the US to possess both nationwide consumer credit data and comprehensive and diverse public records data, allowing the company to better predict behaviors and asses risk for its customers.

Management’s philosophy for growing in a vertical is to acquire or develop a point solution with some defensibility and differentiation and then expand across the entirety of the customer’s workflow or the lifecycle of the relationship with the customer. This is how the bureau business evolved over time and how TRU is growing in public records data, driver history data, alternative data (information on consumers with thin credit files) and identity resolution.

Roughly 80% of TRU’s revenue is embedded transactional and ~6% is fixed subscription.

Information Services businesses broadly are viewed as attractive models driven by “need to have” information, embedded data into workflows, closed data exchanges and network effects, the operational leverage from “build it once, sell it many times” and typically dominant market positions in targeted end markets.  Core data sets are located “behind the wall”, largely away from the public domain.  And for TRU Regulated data sets (e.g. consumer credit files) there is a need for validated factual accuracy

On the inevitable question of the generative AI risk TransUnion has private access to high quality data inputs which limits competition from open generative AI applications.

Strong historical (9% compounded from 2014-2022) and projected organic sales growth is driven by the proliferation of data, faster processing capabilities, growing demand for data and TRU’s ability to expand the scope of its underlying data, penetrate deeper into newer verticals and improve its tools and enhance its analytics & tech capabilities.  

Business Split

• U.S. Markets – 64% of LTM Revenue

  • Financial Services ~51%

    • Consumer lending, mortgage, auto and cards and payments

    • Customers include banks, credit unions, finance companies, auto lenders, mortgage lenders, fintech

    • Provide solutions across every aspect of the lending lifecycle, customer acquisition and engagement, fraud and ID management, retention and recovery

    • Products are focused on mitigating risk

      • Credit reporting, credit marketing, analytics and consulting, identify verification and authentication, debt recovery solutions

  • Emerging Verticals ~49%

    • The rest of Neustar, Insurance, Services & Collections, Tenant & Employee Screening, Public Sector, collections, media, diversified markets and other verticals 

      • Data-driven solutions addressing the entire customer lifecycle

      • Onboarding and transaction processing products, scoring and analytic products, marketing solutions, fraud and identity management solutions and customer retention solutions

      • Examples of services:

        • In TRU’s screening offering, TRU’s data can map rental applicant information to credit information, rental payment history, criminal history and eviction data to help landlords make informed decisions

        • Healthcare – help verify patient identities, provide cost /payment estimation and prie transparency, maximize reimbursement from insurance payers, find additional opportunities for revenue collection and reimbursement for under-billed accounts 

        • One of the largest providers of information to the auto insurance and property insurance segment

• International – 21% of LTM Revenue

  • Credit reports, analytics, technology solutions services and other value-added risk management services

    • Also offer insurance, business and automotive databases in select geographies

  • Sectors: financial services, retail credit, insurance, automotive, collections, public sector and communications

  • UK, India, Canada, LatAm, AsiaPac, Africa

• Consumer Interactive – 15% of LTM Revenue

  • Solutions that help consumers manage their personal finances and take precautions against identity theft 

  • Roughly two-thirds of revenue is via the indirect channel, i.e. providing data and scores to a variety of freemium and other types of players

    • Offers white label services to business partners who then combine the services with their own offerings to create products for consumers across financial services, retail credit monitoring, identity protection and insurance 

  • The direct-to-consumer credit-oriented subscription business has been distressed as it faced competition from freemium offerings and the adjustment of marketing practices.  Management’s goal here has been to moderate the decline and then get it to flat 

  • Identity protection, stemming from the Sontiq acquisition. Offering ID protection services on a subscription basis

3Q23 Earnings Release

On October 24, 2023, management reported Q3 earnings and noted that for the US Financial Services segment, revenue grew 3% in July, 1% in August and declined 5% in September.  They noted they saw a sudden downshift in lending volumes in September, with the trend weakening in October.  This deceleration impacted:

• Consumer lending

• Card

• Mortgage (lowered guidance for full-year mortgage inquiries to down 30% vs. down 25% previously)

• Insurance (carriers remain primarily focused on increasing profitability and reduced marketing to acquire new customers…Insurance revenue for TRU grew 5% in July, 4% in August and declined 4% in September)

• Media

The company cited a decrease in loan demand, combined with tighter credit standards leading to a pullback in marketing activity which negatively affected consumer audience and campaign management volumes.

The company lowered FY23 guidance for Neustar to “mid-single-digits” vs. high-single-digits previously, despite growing 6% and 7% in Q2 and Q3.

Because financial services and insurance volumes have a high flow-through to profits management’s revised full-year guidance implied Q4 EBITDA Margin compression of ~220bps y/y vs. margins increasing +50bps in Q3.

Management also removed their 2025 targets provided at the 2022 investor day (8-10% p.a. organic revenue growth, 100bps p.a. of EBITA Margin expansion, 15% p.a. EPS growth, $3bn of FCF from ’22-’25).

For good measure, the company took a $495 million goodwill impairment on their UK business, a function of their 2018 acquisition of Callcredit for $1.4bn, cementing their position as terrible acquirers in the minds of investors.

On the positive side, management noted they can reduce operating costs materially given the more challenging growth environment and are “accelerating these efforts and [will] share additional details when appropriate”. This is consistent with comments management has made in the past on their ability to manage costs to protect margins.  From a 2024 EBITDA bridge perspective, estimates should benefit from annualizing cost synergies achieved via the Neustar acquisition Neustar plus $25 million of costs associated with Sontiq and Argus that will go away in 2024.

Neustar

TransUnion acquired Neustar for $3.1 billion (27x EV/EBITDA) in late 2021.  Combining the time of the acquisition (absolute peak of the market), the price paid, the marketing tech exposure (viewed as a more competitive space) and some less exciting segments of the Neustar business model (call authentication and phone number intelligence), investors have been skeptical of the benefits of the transaction.

However, the transaction does have strategic merits and reinforced TRU’s strategy to become a leader in digital identities and digital identity resolution, to allow one-to-one marketing, more tailored marketing, online fraud mitigation, and bring similar capabilities around call authentication.

Neustar’s core competency is real-time identity resolution, or confirming a person is who they represent at the moment of claim.  This is done via matching personal identifiers to digital identifiers (e.g. IP addresses, mobile IDs) across devices and channels.  Prior to the TRU acquisition, Neustar generated revenue ~40% digital marketing, ~40% communications (telephony intelligence) and ~20% ecommerce risk mitigation.

Neustar has already begun to benefit the core TRU business:

• Through integrating the Neustar acquisition management was able to build out its OneID platform, which should enable product innovation with greater accuracy and scale. OneID is TRU’s technologically advanced data management platform taking all of TRU’s consumer information and characteristics, combined with Neustar’s “identity graphs”, integrated into a common platform

• Neustar enables TRU to offer a complete range of services to the consumer

  • Within the marketing vertical, TRU is now able to help clients understand their consumers and build target audiences while also attributing purchasing behavior to specific marketing investments.  

  • Neustar helps banks with a full ability to identify the consumer they want to do business with  

  • TRU previously weren’t as strong at acquiring customers and modeling and measuring the effectiveness of the spend to acquire those customers

  • Management noted that combining TRU and Neustar has led to the company identifying and resolving identity on roughly 15% more consumers in the US

  • Between Neustar and iovation, TRU services the full range of e-commerce ID and authentication use cases 

• TRU can now take the unique and proprietary data, the ability to get insights and spread it across different vertical markets in a very custom-tailored way.  Across marketing intelligence, consumer audience intelligence, credit information, public records, fraud histories, etc.

Macro

While sentiment on regional banks and near-prime lenders is quite poor at the moment following the stimulus-induced highs of 2021 and a steady burning through of COVID excess savings, the big picture consumer macro data suggests the consumer is not as late in the cycle as the market may perceive.  Or at a minimum the consumer is in a strong enough place to hold up relatively well in a recession.  Households have de-levered substantially during COVID.  Leverage ratios and debt service ratios for the consumer are still low relative to the 2010-2020 cycle, despite the higher interest rates.  Revolving credit to GDP is still well below 2019 levels.  Real wage growth, after being pressured for much of 2022, has turned positive in 2023.  While it’s possible consumer spending continues to soften over the next year, none of the metrics I look at suggest to me that TRU is on late-cycle earnings, or is exposed to a heavily over-levered US consumer.

Catalyst

• Continued organic sales growth