TransUnion - Q3 2023

Transcript

Operator (participant)

Good morning, and welcome to TransUnion's 2023 third quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal an operator by pressing star followed by zero. After today's presentation, there will be an opportunity to ask questions. You may ask a question by pressing star then one on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Aaron Hoffman, Senior Vice President. Please go ahead.

Aaron Hoffman (SVP of Investor Relations)

Good morning, everyone, and thank you for attending today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer, 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 earnings call, and in our most recent Form 10-K, Forms 10-Q, and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statement. With all that, let me turn it over to Chris.

Chris Cartwright (President and CEO)

Thanks, Aaron. Let me add my welcome and share our agenda for the call this morning. First, I'll discuss the macroeconomic conditions we're facing and the impact that they had on our business in the third quarter. Then I'll provide an overview of our third quarter financial performance. I'll also review the continued progress we're making with Neustar, accelerating revenue growth and achieving savings targets. I'll wrap up with a short discussion about our approach to managing through a more challenging and uncertain macro environment. Finally, Todd will detail our third quarter results, along with our fourth quarter and full year guidance. Economic conditions softened across several TransUnion markets in the third quarter, most notably in the U.S. and the U.K. While U.S. consumers continue to benefit from low unemployment and modest real wage growth, lingering inflation and rising borrowing costs have taken a toll on household finances.

Spending has slowed and consumers have largely spent through the excess savings accumulated during COVID. Although demand for credit remains strong despite elevated costs, banks have tightened lending standards due to weakening consumer finances and increasing capital constraints. Recent commentary from lenders supports these observations, noting that cracks have appeared across consumer lending, especially in the lower credit tiers. Now, TransUnion entered the third quarter cautiously optimistic after exceeding guidance in the first two quarters, while maintaining our full-year guidance as a cushion against ongoing economic uncertainty. However, lending volumes in the U.S. and U.K. softened progressively over the third quarter, causing our revenues to come in slightly under the low end of our guidance. In U.S. Financial Services, year-over-year revenue grew 3% in July and 1% in August, but declined 5% in September.

Rising rates in the quarter had a negative impact as the ten-year Treasury rate spiked 50 basis points, after only increasing 20 basis points in the first half of the year. The decrease in loan demand, combined with tighter credit standards, also fueled a pullback in marketing activity, which negatively affected our consumer audience and campaign management volumes. We experienced a similar slowdown in our insurance vertical, where carriers remain primarily focused on increasing profitability and have reduced marketing to acquire new customers. Insurance revenue grew 5% in July, 4% in August, but declined 4% in September. Increasing policy renewal rates and carriers exiting unprofitable geographies is fueling increased consumer shopping, which only partially offsets the decline in marketing volumes.

While policy attrition from large carriers is often acquired by smaller and non-standard carriers, TU typically realizes less revenue per transaction, as smaller carriers usually do not utilize our full product suite. Financial services and insurance volumes have a high flow through to profits, and their softening has weighed on our Adjusted EBITDA dollars and margin. Our international segment continues to benefit from healthy economic conditions in India and Asia-Pacific and strong market outperformance in Canada. Other parts of the portfolio, such as the U.K., Latin America, and Africa, slowed over the quarter, although segment revenues in total were up low double digits. In the third quarter, TransUnion grew revenues 3% organically, driven by strength in international, Neustar, and several verticals within U.S. emerging markets.

U.S. markets grew 2%, with financial services flat and emerging verticals up 4% in total due to high single-digit revenue growth in Neustar. Our bookings remain strong overall, including within financial services, insurance, and media, and we continue to benefit from our portfolio diversification as we grew double digits in public sector and media and high single digits in tech, retail, and e-commerce, all areas of recent organic and inorganic investment. Revenue in our international segment grew by 11% in constant currency in September for the 10th consecutive quarter of double-digit growth. India led with 31% revenue growth, while Canada and APAC also grew revenues double digits. We continue to outperform our underlying markets because of solution innovation, share gains, and expansion into new adjacencies.

We prepaid another $75 million of debt during the quarter, bringing our total for the first nine months to $225 million. We expect to make further prepayments in the fourth quarter. We also settled two legal matters with the CFPB and the FTC with no admission of wrongdoing. We're pleased to have resolved these matters and to proceed with our work of providing important business services to help consumers reach their goals. Neustar delivered 7% revenue growth in the quarter, despite increased macroeconomic headwinds, and is proving to be nicely accretive to our growth rates in our core U.S. verticals, even in these challenging market conditions. While bookings and subscriptions continue their strong growth, Neustar's transactional revenues in marketing and risk solutions softened in the quarter.

As a result, we're reducing our fourth quarter growth assumptions in line with volumes in September and lowering our full year guide to mid-single digits growth instead of high single digits. We also expect a 31% EBITDA margin, up around 450 basis points over 2022, as we complete integration and achieve our target cost synergies. Now, in the quarter, we announced a number of new partnerships that further support our confidence in Neustar's growth prospects. In marketing, we signed a substantial multi-year identity deal with a large CPG company, as well as new business with a large apparel company and a major personal care brand. We also announced that our marketing solutions business, TruAudience, will integrate its identity product line with AWS Entity Resolution from Amazon Web Services.

TruAudience brings advanced identity resolution capabilities to AWS customers to improve their data hygiene and customer insights from within AWS's secure cloud environment. Communication Solutions continue to grow on the strength of our suite of trusted TruContact Trusted Call Solutions, or TCS, which grew about 70% in the third quarter across a range of verticals. We recently expanded our relationship with one of the three major wireless carriers in the U.S. to become their exclusive provider for branded calling, part of our TCS solution suite. Branded calling allows users to place their brand and call purpose on outbound calls to cut through the fog of anonymous robocalls and securely engage with clients and prospects. We also won a multi-year, multi-million dollar with a large federal government agency to provide branded call display.

We're enjoying strong growth in our TCS solutions and broad interest across our verticals as clients value improved answer rates and reduced costs. Now, I want to wrap up my part of the call by reinforcing our long-term approach to creating shareholder value, even as macroeconomic and lending market conditions may cycle. We're focused on helping our customers address their current market challenges by applying our complimentary credit, marketing, and fraud solutions through our insight-led, consultative approach. With tightening lending standards, declining loan volumes, and rising delinquencies, our rich, trended and alternative credit data and powerful analytic and modeling tools will help lenders maximize their portfolios and find attractive segments for growth. Our marketing solutions enable customers to optimize their spending and ensure positive outcomes, which is even more important in challenging conditions.

Our identity resolution, audience segmentation, and predictive analytics help clients understand which customers to contact, how best to reach them, and what messages will most likely resonate. Planning and measuring the effectiveness of marketing spending by utilizing our rich history of pipeline conversion data ensures that the best results are achieved with the least possible investment. Our trusted call and fraud mitigation solutions also help clients reach consumers more efficiently and minimize their fraud losses. We continue to invest in the strategic initiatives that will position us for our next chapter of growth and profitability. These include innovations from combining the best of Neustar and TransUnion, launching our next-generation fraud mitigation platform, and scaling our new products across our thriving international footprint.

Reducing our costs structurally by scaling our global capability centers, refining our organization structure, and standardizing and modernizing our core technologies and operations remains key objectives for TransUnion. Through the series of initiatives, many of which have been in progress for some time now, we believe we can further reduce operating costs materially. Given the more challenging growth environment in which we find ourselves, we are accelerating these efforts and will share additional details when appropriate. We also remain laser-focused on achieving the cost savings from our acquisition integrations and reducing our interest expense through prepayment of our debt. Now, that concludes my comments this morning on our market conditions, our third quarter performance, and our approach to managing through these softer market conditions. Todd will now provide further details on our third quarter financial results and our fourth quarter and our full year 2023 outlook. Over to you, Todd.

Todd Cello (EVP and CFO)

Thanks, Chris, and let me add my welcome to everyone. I'll start off with our consolidated financial results. Third quarter consolidated revenue increased 3% on a reported and constant currency basis. There was no impact from acquisitions and immaterial FX impact. Our business grew 2% on an organic constant currency basis, excluding mortgage from both the third quarter of 2022 and 2023. Adjusted EBITDA increased 5% on a reported basis and 4% in constant currency. This result was negatively impacted by an incremental $7 million charge for the recent legal settlements above the amount we previously reserved. We also benefited from a reversal of accruals for variable cash compensation to account for our current view of revenue and adjusted EBITDA for the full year.

Our adjusted EBITDA margin was 36.8%, up 50 basis points compared to the year-ago third quarter, and improved sequentially by 180 basis points from the second quarter of 2023. Third quarter adjusted diluted EPS declined 2% as a result of higher interest expense. Finally, we took a $495 million impairment to our U.K. business during the quarter. This remains an attractive market in business for TransUnion, with a highly diversified portfolio, an array of successful product offerings like TrueVision and TrueEmpower, and an adjusted EBITDA margin over 40%. Leveraging our innovation, we've gained meaningful share across the lending ecosystem and delivered market-leading growth under our ownership. However, the U.K. has faced an unusually harsh confluence of macro events, resulting in inflationary pressures and soaring interest rates, which has slowed the underlying lending growth.

Before I get into U.S. markets results, a reminder that we are reporting Neustar revenue within our vertical market structure, and we will discontinue providing standalone Neustar reporting at the end of 2023. Now, looking at segment financial performance for the third quarter, U.S. markets revenues were up 2% compared to the year ago quarter. Adjusted EBITDA for U.S. markets increased 2% and adjusted EBITDA margin was flat at 35.2%. Financial services revenue was flat. Consumer lending revenue declined 9% compared to high single-digit growth in the third quarter of 2022. Absolute lending volumes remain healthy as unsecured personal loans have become a mainstream product for consumers. With that said, marketing activity remains depressed, rising rates have weighed on consumer demand, and capital funding continues to be highly selective.

Our credit card business was down 5% compared to low double-digit growth in the year ago quarter, with marketing down mid-teens. Issuers continue to react to rising delinquencies by moderating marketing spend. With that said, like with consumer lending, activity levels for card remain healthy on a historical basis. Our auto business delivered 6% growth in the quarter on the strength of continued share gains, pricing, strong pre-qualification volumes, the impact of cross-selling Neustar marketing and call center solutions. We are seeing strong demand for new vehicles, somewhat offset by continued weakness in the used vehicle market and challenges around affordability. For mortgage, revenue was up 26% in the quarter, despite inquiry volumes falling about 21%. As Chris pointed out, growth slowed considerably over the course of the quarter as mortgage rates jumped to 20-year highs in recent weeks.

Existing home sales reached their lowest level since 2011, and applications in mid-October fell to their lowest point since 1995. On a trailing-twelve-month basis, mortgage represented about 7% of total TransUnion revenue. For 2023, we now expect the inquiry market to be down roughly 30% and our revenue to increase roughly 15%. Let me now turn to our emerging verticals, which grew 4% in the quarter. Insurance delivered low single-digit growth despite the challenges that Chris described. Even in this environment, we continue to win new business for innovative products like TruVision Driving History, which has grown fivefold over the past five years, penetration of newer markets like Life and Commercial Auto, and successful cross-selling of Neustar and Sontiq solutions.

Tenant and employment screening was down as we've recalibrated our solutions to provide the most customer and consumer-friendly approach possible. This has cost us some volume in the short term, but we believe it will ultimately be a long-term competitive advantage. The public sector, media and tech, retail and e-commerce verticals all delivered strong growth, highlighting the value of our diversified business and in particular, the benefits of integrating Neustar solutions into existing TransUnion end markets to enhance growth. The telco vertical was down slightly as declines in landline caller ID offset growth in other areas like Trusted Call Solutions. Consumer interactive revenue declined 3%, in line with our expectations. Adjusted EBITDA margins were 50.4%, up about 80 basis points as a result of more focused advertising spending.

Our direct business continues to see moderating declines as we recalibrated our marketing approach to focus on higher value consumers. Thus far, we've seen good returns on the revamped tactics, with better than expected customer acquisition, acquisition stats at attractive cost to acquire. Our indirect business was flat, as lenders have pulled back on utilizing offer aggregators and other channels for marketing, like the trends we're experiencing in our financial services vertical. Our breach and identity protection offerings, built through our acquisition of Sontiq, continued to deliver good growth. For my comments about international, all revenue growth comparisons will be in constant currency. For the total segment, revenue grew 11%, with three of our six reported markets growing by double digits. Adjusted EBITDA margin was 45.3%, up about 95 basis points. Now let's dig into the specifics for each region.

In India, our largest international market, we grew 31%, reflecting strong market trends and generally healthy consumers. We saw meaningful growth in both consumer and commercial credit markets, as well as from fraud, marketing, and direct consumer offerings. We continue to expect India to deliver another year of over 30% growth. In the U.K., revenue declined 4%. Excluding revenue related to one-time contracts, including with the U.K. government, we would have declined 2%. While the U.K. fintech market continues to be challenged, the rest of our business is growing despite the challenged macro environment, with good growth in banking, driven by share gains and traction with products like TrueVision and CreditView, as well as strong performance in insurance and gaming. Our Canadian business grew 17% in the third quarter.

While the market remains low growth, we have generated strong outperformance across our portfolio and continue to win new share in financial services, fintech, insurance, and direct-to-consumer. In Latin America, revenue is up 3%, with healthy online performance offset by a decline in batch marketing activity. Brazil was down in the quarter as we've seen some weakness in the fintech market. While macro conditions have softened across Latin America, our teams continue to win new business in financial services, insurance, government, and telcos. In Asia Pacific, we grew 12% from continued good performance in Hong Kong and very strong growth in Philippines, where we continue to add new offerings and win new business. Finally, Africa increased 8% based on a broadly strong performance across the portfolio and the region, despite a challenging macroeconomic and social environment in several of our largest markets.

We ended the quarter with roughly $5.4 billion of debt after prepaying another $75 million in the quarter. That left us with $421 million of cash on the balance sheet. We finished the quarter with a leverage ratio of 3.7 times. We have now prepaid $225 million of debt in 2023, and at this point, we intend to prepay additional debt in the fourth quarter. Looking back, since we announced the acquisition of Neustar in September of 2021, we've prepaid about $1.5 billion of debt. We're in the midst of refinancing our revolving credit facility and term loan A that matures on December 10th, 2024. Based on early indications, we expect a favorable outcome, and we will update you when we complete this transaction.

To reiterate our previous comment, at this time, we have no intention to pursue any large-scale acquisitions and even smaller bolt-on acquisitions are not in our plans this year. We are focused on integrating and maximizing the growth potential of Neustar, Sontiq, and Argus. That brings us to our outlook for the fourth quarter. We expect FX to be insignificant to revenue and Adjusted EBITDA. We expect revenue to come in between $917 million and $932 million, or up 2%-3% on an as reported and organic constant currency basis. Our revenue guidance includes approximately two points of tailwind from mortgage, meaning that we expect the remainder of our business will be flat to up 1% on an organic constant currency basis. We are reducing our revenue assumption considerably from that implied in our previous guidance.

We have essentially extrapolated the difficult September results across the fourth quarter to better match the current trends in our business. We expect adjusted EBITDA to be between $303 million and $315 million, down 2%-6%. We expect adjusted EBITDA margin to be down 100-260 basis points. I want to spend a minute on the sequential change quarter-over-quarter in our adjusted EBITDA expectations. The high end of our fourth quarter is $41 million lower than the actual result for the third quarter. More than three quarters of that change is a result of the reduced revenue outlook, which primarily came in financial services and carries a very high flow through to margin.

The remainder is largely the result of the two items I mentioned earlier, that the third quarter benefited from a reduction in variable cash compensation that was partially offset by the incremental reserve related to our settlement with the CFPB. We also expect adjusted diluted earnings per share to be between $0.67 and $0.72, a range of down 8%-14%. Turning to the full year, we expect approximately one point of headwind from FX on revenue and Adjusted EBITDA, and we expect less than one point of impact from M&A. We expect revenue in between $3.794 billion and $3.809 billion, or up 2%-3% on an as reported and organic constant currency basis, and up about 2% excluding the impact of mortgage.

The roughly $53 million reduction at the midpoint of our full-year revenue expectation is comprised of $9 million from weaker mortgage inquiries and $6 million of FX headwinds, with the remainder largely as a result of the softening trends in consumer lending, insurance, and Neustar. For our business segments, we expect U.S. markets to grow low single digits and flat, excluding mortgage. We anticipate financial services to be flat and down low single digits excluding mortgage. We expect emerging verticals to be up low single digits. We anticipate that international will grow low double digits in constant currency terms, driven by ongoing strength in emerging markets, and we continue to expect consumer interactive to decline low single digits.

Turning back to total company outlook, we expect Adjusted EBITDA to be between $1.32 billion and $1.333 billion, down 1%-2%. That would result in adjusted EBITDA margin being down 130-150 basis points. We anticipate Adjusted Diluted EPS being down 9%-11%, and we continue to expect our adjusted tax rate to be approximately 23%. Depreciation and amortization is expected to be approximately $520 million, and we expect the portion excluding Step-up Amortization from our 2012 change in control and subsequent acquisitions to be about $225 million. We anticipate net interest expense will be about $270 million for the full year, down slightly as a result of our continued debt prepayments.

We expect capital expenditures to come in at about 8% of revenue. Finally, given the current level of uncertainty about the global economy, we believe it is prudent to withdraw the 2025 financial targets that we provided in mid-March of 2022. Clearly, a lot has changed in the macro backdrop since our Investor Day in March of 2022. However, we remain as bullish as ever about our long-term prospects, the value of our expanded product portfolio, and our ability to outgrow our underlying markets. We intend to reestablish new targets when we have greater visibility into into the trajectory of the global economy. I'll now turn the call back to Chris for some final comments.

Chris Cartwright (President and CEO)

Thank you, Todd. To wrap up, the third quarter proved to be more challenging than expected and conditions deteriorated as it progressed. Despite these headwinds, we delivered growth from our diversified portfolio, and we remain focused on delivering a good 2023. We continue to execute against our strategy, and we're proactively driving new revenue opportunities, investing in our business, managing our cost structure, and maintaining our capital discipline. We remain highly confident in the long-term performance and potential of our business, and we're taking all the necessary steps to deliver the best possible results for shareholder. Now, let me turn the time over to Aaron.

Aaron Hoffman (SVP of Investor Relations)

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

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. Our first question will come from Kelsey Zhu of Autonomous. Please go ahead.

Kelsey Zhu (Financial Information Technology Analyst)

Good morning. Thanks for taking my question. Chris, I was wondering if you can help us understand the Neustar revenue mix a little bit better in terms of what percentage of Neustar revenue comes from subscription versus, you know, usage-based revenues across marketing, fraud, and communications.

Chris Cartwright (President and CEO)

Yeah, sure. Aaron, you gonna-

Aaron Hoffman (SVP of Investor Relations)

Yeah. So Kelsey, so 80% roughly of the marketing portion of Neustar is subscription-based marketing is about 40% of the total, so 80% of 40 is about 32. So about a third of total Neustar is, would be truly subscription-based revenue.

Chris Cartwright (President and CEO)

Yeah, and look, let's take this opportunity to talk about Neustar's performance in the third quarter. As you know, it was one of the leading growth areas at 7% organic year-over-year, which we feel is especially strong given the overall difficult macro conditions that we discussed in our prepared commentary. You know, that said, we were expecting higher growth out of Neustar. We were expecting roughly 10% organic growth over the second half of the year. And, you know, what we experienced, well, just to break down the piece parts, you know, when there's a macroeconomic pullback, as we've seen in lending and in insurance, it's gonna impact various components of our business.

It will reduce the number of batch prescreens, it will reduce the number of marketing campaigns, which impacts our audience generation and segmentation and our campaign planning tools, and that's what we experienced. Now, the subscription piece of overall Neustar revenue has held up quite well and consistent with the financial expectations that we outlined, so that's a positive. We've also booked exactly, you know, what we expected to book at this point in the year, and we're trending toward achieving our full bookings targets, which will be a little bit above last year's bookings, which were a record year for Neustar. The sale of Neustar products across the three lines is positive.

Now, the mix of what we're selling at Neustar varied from our expectations in that we're selling less data and audience services that are quicker to fulfill and recognize revenue than we expected, and we're selling more effectiveness measurement, which are consulting-type projects, where the booking takes more time to realize. And so some of the revenue from the bookings pushed out of the third quarter and even out of fourth quarter expectations. So that was one of the components in our guide down for Neustar. And then the third component really rests on the volume of data sales, of TruAudience, audience generation in the specific marketing campaign management. And again, that's gonna correlate with growth or decline in lending volume and insurance origination. So hopefully that gives you a sense of the dynamics that underpin Neustar performance.

Kelsey Zhu (Financial Information Technology Analyst)

Super helpful. Thanks so much.

Operator (participant)

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

Faiza Alwy (Managing Director of US Company Research)

Yes. Hi, thank you. Good morning. I wanted to touch on your comment regarding lending standards that tightened through the course of the quarter. I'm curious if it was across the board in terms of lenders, whether it's regional banks, fintechs or big banks. And if you can talk about any trends across various consumer cycles, you know, whether it's a prime versus prime. So just a bit more color around what's happening with lenders, lending standards.

Chris Cartwright (President and CEO)

Yeah, listen, absolutely. So happy, happy to start, you know, with some overview on the macro conditions we see across banking. So, you know, as the quarter progressed, I think, Well, first on the positive, unemployment remains low and there is some real wage growth, although I think the consensus is that the employment market is deteriorating somewhat. That said, you know, the metrics and measures of that, you know, you've got pros and you've got cons. That said, though, the excess in savings that had accumulated on consumer balance sheets, declined a lot. And, you know, recently, the Federal Reserve Bank of San Francisco suggested that, those excess savings balances would be gone by the end of the third quarter and have been gone for some time for all segments of the population, except the most affluent quintile, right?

And so over the course of the quarter, but really pronounced in September, we saw banks becoming more cautious about originating new loans. Now, over the past couple of weeks, the large banks, the large publicly traded banks, have reported their results, and while they were down a bit, they were generally more positive than expectations. The one area, though, that underperformed expectations has been new lending volumes. Now, if you tease that apart, the revolving component of new loans is fine. It's the incremental volume to consumers that was most impacted. Now, the other dynamic to be aware of in the market, and this really goes back to the earlier part of the year, where we had some stability concerns. There was a flight of deposits upmarket to larger institutions that were perceived as more stable.

In this recent round of earnings, you see that those banks, while they're performing well, it's driven by net interest income, you know, growth, but the lending activity is down. When you look at the performance of mid-market banks and smaller banks, the pinch on new credit origination is quite pronounced. We see that in our numbers because, I mean, obviously, lending is a big part of our portfolio, and we serve banks, you know, traditional banks of all sizes in Fintech, of course, as well, got the largest share there. We're just seeing a pullback in lending volumes. When banks become more cautious, that's gonna reduce the number of batch prescreens that we produce, it's gonna reduce the credit pulls that happen, and it's gonna reduce the marketing planning. It's really this macro retreat that we've seen in the lending that's impacting the business fundamentals.

Faiza Alwy (Managing Director of US Company Research)

Thanks, Chris.

Operator (participant)

The next question comes from Jeff Mueller of Baird. Please go ahead.

Jeffrey Meuler (Senior Research Analyst)

Yeah, thank you. So I know Chris had more details to come on accelerating structural expense and efficiency programs, but just anything else you can talk to regarding how much opportunity there is to adjust the expense structure to a weaker volume environment? And I caught the, you know, the decremental margins and the incentive comp adjustment in Q3, but the Q4 margins and implied decremental margins in Q4 still seem really weak, and I'm just trying to understand if that's more a function of time to implement the new programs or just how we can think through, like, incremental margins going forward if the volume environment remains weak for a while? Sorry for the long question. Thanks.

Chris Cartwright (President and CEO)

Yeah. No, listen, it's a good question, and there are several things to unpack in it. The first I would say is, and we purposefully included our year-over-year revenue growth rates in each month in the quarter, so you can appreciate how materially volumes fell in September in lending origination and also insurance, right? So we've had a revenue drop very recently without much time to adjust the expense structure, right? And so over the past 18 months, as our markets have progressively slowed, you know, we've been proactively managing expenses. It starts with the easy things of reducing travel and entertainment, of cutting external consulting, if you will, reducing marketing, and of course, being very judicious about headcount. So we decelerated new hires, and then we've been in somewhat of a hiring freeze and not filling backfills.

All of that has allowed us to kind of proactively adjust the expense structure in a softening revenue environment and, you know, maintain our strong margins. But again, there will be some work that we need to do to balance the cost structure against the current revenue environment, and you know, you can count on us to do what is necessary. But in my comments, I was really referring to the benefit of the global operating model that we implemented roughly three years ago, where we have been progressively increasing the proportion of our employees that are in centers of excellence that are located in attractive talent markets that can reduce our cost structure over time. Now, we've moved to roughly one third of total TransUnion employees operating over those markets.

That said, there's still more opportunity as we evolve toward what we'd say, the ideal balance, both in terms of total employees and the management structure, what functions are being led over that. And, you know, we're gonna continue to push on that dimension because it will have a material impact on our structural profitability. Additionally, we've centralized all of the operating support functions, for our different credit businesses. We will be able to streamline and balance our costs against our volumes more effectively by leveraging that. The other point I wanted to make, though, is in our technology journey. You know, we've been investing to migrate to the cloud via Project Rise. We've taken a significant proportion of our applications.

We've also digested all of the Neustar technology that came, and we've begun leveraging the core Neustar platform, OneTru, as a destination for our various data product platforms globally. What you'll see us do now is accelerate our efforts to consolidate the multiple and redundant platforms we have on this next generation and very technologically advanced platform, which is gonna let us take a lot of technology costs out. So there'll be a strong focus on that. And finally, we got to complete the work on acquisition integration. We continue to do really well on that front. We're highly confident we're gonna take $80 million out of the Neustar cost structure. We'll get some benefit going forward from the full realization of those synergies.

You know, we're gonna hit our integration takeouts for Argus and Sontiq as well. So really think about cost management along those dimensions. You know, yes, there's been a drop in revenue. It takes some time to correct the cost structure, but there's also a lot of structural benefits in the pipeline that we're gonna accelerate, and there will be margin improvements as a result of acquisition integration. Got it. Thanks, Chris.

Operator (participant)

The next question comes from Andrew Steinerman of J.P. Morgan. Please go ahead.

Andrew Steinerman (Equity Research Analyst of Business & Info Services)

Hi. I think you talked, excuse me, you talked about bringing out a new fraud platform today. I just wanted to see within Neustar, is fraud still about a quarter of the business? And then strategically, I want to know on the—again, this is on the fraud side, how you've done in integrating Neustar with iovation and TLO, or is that really kind of part of the next reiteration of fraud?

Chris Cartwright (President and CEO)

Yeah, good question, Andrew. So the Neustar risk or fraud business is roughly 20% of their total revenue. Communications would be the largest. It grew quite nicely, low double digits in the quarter, and marketing grew high single digits in the quarter. We just expected it to grow much faster. Risk didn't grow very much, right? It grew low single digits, and it's really because of the impact we see on the risk volumes that are coming through call centers and online. And look, our contracts are volume-bounded, and when we budget or set expectations, we're assuming a certain degree of upcharges because of volume excess. That just didn't happen this quarter. We believe it's tied to the softening macro conditions. Now, in terms of platforms and the next generation of this, look, fraud is a substantial part of our business.

We have multiple fraud products and platforms in the U.S. When we acquired Callcredit, we got another set of attractive, although largely duplicative, fraud solutions in the U.K. market. Then when we bought Neustar, well, we got a variety of risk point solutions, but we also got a great platform and OneID upon which we can unify all of these different fraud mitigation products on a common data repository with orchestration and advanced analytics in machine learning and AI. We have been working for, really, since the outset of the acquisition, to accomplish all of that technical work. We launched that version of the product in the early part of next year. Now, you can think of that as like an advanced beta launch with friendly customers, but it's going to allow us to do two things. One, it is truly a platform of the future.

It's next generation, it's a global consolidation of all of our point solutions, and it can be leveraged across the globe, right? So we're very excited about that, and it should allow us to accelerate growth in this important product category. It's also going to allow us to retire all of the, legacy cost structures, whether it's the variety of solutions in the U.K., or it's, iovation, or it's the legacy solutions here, in TransUnion, Chicago.

Andrew Steinerman (Equity Research Analyst of Business & Info Services)

Excellent. Thanks for taking the time.

Operator (participant)

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

Heather Balsky (Senior Research Analyst)

Hi, thank you. I was hoping you could just dive in a little bit more on your emerging vertical segment. Just given the changes that you made in the tenant screening part of the business and what you're seeing in insurance, can you just help us think about what you need to see for those sales to accelerate and visibility, you know, in the near term? Thanks.

Chris Cartwright (President and CEO)

Sure. Right. So, I mean, look, from a first principles basis, we've talked about, you know, the diversification we've achieved in our portfolio because of our investments in recent times. And even though this is a difficult quarter, in a challenging macro period, you can see some of those benefits coming to the fore. You know, old TransUnion would be reporting results based on U.S. credit sales only, and those would be negative. We've got, you know, 4% growth happening in the emerging markets, although not all cylinders are firing and emerging, as you point to, right? But we are benefiting from, from some offset there. Now, look, insurance, typically in normal conditions, is a high single-digit grower, and our sales have continued to be strong in insurance.

The problem that we're seeing, and it's what we've been discussing and the industry's been discussing, is that risk isn't priced appropriately right now, and insurers are reluctant to ramp up their underwriting engines. And, and so, you know, they're increasing their prices a lot upon renewal, and they're walking away from some consumer risk and some jurisdiction or geographical risk. Now, it takes some time for those unfulfilled policies, if you will, to trickle down in the ecosystem. Some go to smaller carriers, some go to non-standard carriers, some go unfulfilled, right? And as I mentioned, you know, the revenue dynamics is upstream. We've got greater penetration of the full suite of our products, so we're realizing, a higher data payload per origination, per policy origination. So insurance is going to remain soft for a bit. Now, the carriers are working hard to correct that.

You know, they continue to push for approvals for higher rates, and I think that'll be successful over time, but right now, they're cautious. Tenant employment screening is undergoing a bit of a reset because of regulatory scrutiny, which led to the settlement that we announced with the CFPB around our renter screening business. What happened there is the current leadership of the CFPB believes that certain categories of information around evictions and even criminal records should not be used in tenant screening, or should only be used in a certain way at a certain point in time. Now, that is in a differing interpretation of the FCRA, and it differs materially from historic industry practices.

In working with the CFPB, we've had to adjust the data that we provide and when we provide it, in accordance with their views, and we've done that in our tenant employment screening business. The CFPB and the FTC in particular have been very clear. They've said, "With this change of practice and with this settlement, this TU reset, if you will, expresses the new standard for the industry. Now we expect the other rental screeners and their clients, who will now have regulatory risk, to then begin adjusting their practices." That's in large part why tenant hasn't provided the growth that it typically would, but we expect it to stabilize and for the growth prospects to improve now that we've got this industry reset.

Todd Cello (EVP and CFO)

Yeah, let me just add on to your question, Heather, because Chris definitely talked about the two verticals where we have the most, you know, challenge. But I think it's. We'd be remiss to not point out, you know, that we have had some success as well in the emerging verticals. You know, in particular, the media vertical grew double digits. As Chris already said, we expected something greater than that. But nevertheless, in this environment, we posted some pretty strong results in that business. And it was on the back of, you know, some significant wins with the Neustar marketing, you know, capabilities. You know, and just to remind you, you know, Chris talked about those in his prepared remarks.

So that, that's a big deal, for us as well. You know, our, our public sector, vertical also grew, a very strong double digits, and we saw growth, in what we refer to as services collections, as well as tech, commerce, communications. In those areas, in particular, what we are seeing a really nice benefit from is our Trusted Call Solutions, also from, Neustar. The revenue is up, significantly, across those verticals.

Operator (participant)

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

Toni Kaplan (Executive Director and Equity Research Lead Analyst)

Thanks so much. You mentioned in the prepared remarks that September trends had been getting, you know, got a lot worse. Wanted to ask about sort of the early October trends, just given rates started to move quicker. Did you see it getting worse or just continuing on sort of at the pace that you were seeing in September? Thanks.

Todd Cello (EVP and CFO)

Yep. Thank you, Toni, for the question. So I think to start on this one, the best place to go is just the beginning of the third quarter. And I would say, you know, July and August were months that were okay. They were tracking to the guidance that we had provided on our earnings call in late July. Unfortunately, we saw a sudden shift of lending volumes, as Chris has already articulated, you know, in September. And, you know, that impacted, just to reiterate, you know, in consumer lending, card, mortgage, and insurance, and media coming in a little bit lower than what we had expected.

So as we looked out into the fourth quarter to prepare our guide for the remainder of the year, we took that sudden reduction that we experienced in September, and we rolled that forward. We also looked at where we were at up until last week in October and where volumes were at. And what we feel like we have done is we've taken this rather weak environment, and we have thoroughly de-risked you know the Q4 guide with the numbers you know that we have put out today.

Toni Kaplan (Executive Director and Equity Research Lead Analyst)

Thank you.

Operator (participant)

The next question comes from Ashish Sabadra of RBC Capital Markets. Please go ahead.

Ashish Sabadra (Senior Research Analyst)

Thanks for taking my question. I just wanted to clarify whether the CFPB settlement, whether that's included within the Adjusted EBITDA, and if you could quantify how much was it in third quarter or fourth quarter? Because the question we are getting from investors is, the revenue at the high or at the midpoint, the fiscal year 2023 revenue guidance was lowered by $54 million, but the EBITDA was lowered by $78 million. Why was the EBITDA so much like, EBITDA guidance lowered significantly more than the revenue guidance? Is that due to CFPB settlement? Thanks.

Todd Cello (EVP and CFO)

So Ashish, you got two questions there for us this morning. So let me take the first one as it pertains to the CFPB. We settled two matters with the CFPB, and one you know pertained to the FTC, and that was our rental screening, a settlement that Chris has talked about, that was for $15 million. And then, the security freeze matter, we settled for $8 million, for a total of $23 million. All of those settlements had been reserved for within our adjusted EBITDA, not as an add back, you know, coming into the quarter, with the exception of $7 million. So, and I in my prepared remarks, you know, I made reference to that.

So there was an incremental aspect of $7 million in the quarter that we did not have in our guidance. So the other amount was already accrued for, and it had impacted Adjusted EBITDA. So the second question is pertaining to our, you know, our Q4 Adjusted EBITDA outlook, and, you know, why the change, you know, if you look at revenue compared to our prior guide, and why EBITDA is a little bit greater than that. I mean, it goes back to, you know, the question that Toni just asked about, you know, what the trends in September and our Q4 guide. So it really starts with the revenue.

And the, you know, the revenue, you know, that we, that we saw, suddenly fall off in late September, is more of our, core credit, type of products that carry a higher margin. And so that is what, you know, we have taken down. What that's been offset by is, you know, growth that we've seen in products, such as the Trusted Call Solutions, which I just referred to, that while still at a very attractive margin, relative even to TransUnion's Adjusted EBITDA margin, is one that is at a, a lower margin than the core credit products carry. So when you take that mix together, you end up with a, a situation where, the profit of expectation is ends up being greater than what the revenue on takedown is.

Chris Cartwright (President and CEO)

Yeah, look, I think that's an important dynamic to appreciate. I mean, you'll see in our financial disclosure that our cost structure remained the same. It's not a cost issue quarter to quarter. It's a revenue mix issue. And so when we confirmed our guide in July based on the lending trends that we'd seen, we simply expected to sell more credit products than we actually ended up selling, and credit products have a very, very high flow-through to profit. But as I've discussed, we had a retreat in volumes in lending, which reduced credit products. And the parts of the portfolio that performed best have a lower contribution margin things like our mortgage credit, because of the score, and Trusted Call Solutions, because of licensed data costs.

Ashish Sabadra (Senior Research Analyst)

That's very helpful color. Thank you. Thanks.

Operator (participant)

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

Manav Patnaik (Managing Director and Equity Research Analyst)

Thank you. I was just hoping we could talk to, you know, all your fintech exposures, please. So just in the U.K., like, you know, what was it, I suppose, as a percentage of revenues and, you know, exactly what led to the write-down, and then maybe, you know, what the U.S. exposures and if there's any kind of, you know, risk we should consider there as well?

Chris Cartwright (President and CEO)

Well, let me just start Fintech generally. And Manav, and you and I have talked about this before. We have a very large and leading share in Fintech, and that is true both in the U.S. and also in the U.K. And Fintech has been materially impacted in the downturn because of rising rates and also tightening lending standards. So that's already had an impact, and that's already incorporated in our third quarter results, but also our thinking about the fourth quarter guide, which Todd just articulated. Now, shifting to our U.K. business in the writedown in goodwill. If you recall, we acquired the business in 2018. It was a low double-digit grower then, but it was not particularly profitable. So we took cost action, which slowed revenue growth for about six months.

By the time we exited 2019, you know, we posted 9% organic growth, and the exit quarter was back to low double-digit. And that was our expectation, high single-digit, low double-digit, that underpinned the assessment of book value and the amount of goodwill that we put on the balance sheet. Well, from that point forward, the U.K. market has been buffeted by a series of macro issues. The first is that the regulators in the U.K. decided to put pressure on small-dollar unsecured lenders. We would call them, in part, payday lenders here. Some of them were online. They call them the money lenders in the U.K. Well, Callcredit had a disproportionate share of that marketplace. It was a foundational component of their business.

So first, we had to, we had to adjust to that contraction, which we did, and we compensated for it by pushing further upstream into the core and mainstream lending market and taking share, which we did. The next impact came from Brexit and then COVID, and then all of that together seems to have fueled some high rates of inflation and increasing unemployment in the U.K., which has made it a very difficult lending environment, which continues to impact the fintechs. So after digesting all of this and looking back at the growth rates that we expect, well, one, that we've achieved, but also that we can expect in the intermediate period, given the condition of that economy, we thought it was prudent to take the charge to goodwill that we did in the quarter.

Operator (participant)

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

Andrew Nicholas (Senior Research Analyst)

Hi, good morning. Thanks for taking my question. Heard quite a bit about some of the, the strengths and weaknesses within core credit in the U.S. I just wanted to, to ask maybe more directly on, on market share there. Seems like, most of, of the rationale to this point is, is tied to end market weakness or end market dynamics. Is there anything that you can say about kind of competitive positioning or, or competitive successes in that market, and how much conviction you have that you're still growing share there? Thank you.

Chris Cartwright (President and CEO)

Yeah. As we look at it, we don't believe it's a share issue. It's an issue more of business comparability at this point. As many of you have noted, you know, the portfolios of the three bureaus have diverged over time. You know, some are more focused on direct-to-consumer, some are more focused on employment and income. And then TransUnion has very large share, arguably leading market share in the U.S., providing services to lenders and insurers that wanna originate loans and policies. There's also a question of what's reported in the various segments and kind of the surgery you've gotta do to get a true comparison. One example is that, you know, we report batch marketing services within our U.S. vertical. Not everybody does. We separate, you know, direct-to-consumer. Some people include that. We don't have commercial data.

Given the size of our lending business overall, the benefits in mortgage of a significant price increase from a third-party score provider gets diluted a bit over our larger market share and lending base than with other players in the space. So as we compare and evaluate our own performance, you know, you got to consider those differences in what's included, as well as the varying size of the respective positions. But no, we don't think share has really anything to do with this, and we're not really pointing at anything to the positive or the negative.

Aaron Hoffman (SVP of Investor Relations)

Great. Given the time is, we're on a busy earnings day, we are gonna end our call at this point. We thank you all for joining us this morning, and we look forward to speaking with you either later this week or over the course of the quarter. Thanks.

Operator (participant)

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