TransUnion (TRU) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Blair and I will be the host operator on this call.

(Operator Instructions)

Please note that this call is being recorded as of today, Tuesday, July 26, at 4 PM Central time. I would now like to turn the meeting over to your host for today's call, Aaron Hoffman, Vice President of Investor Relations at TransUnion. Please go ahead.

Good afternoon, everyone, and thank you for joining us today. This afternoon I am joined by Jim Peck, President and Chief Executive Officer, and Al Hamood, Executive Vice President and Chief Financial Officer.

We've posted our earnings release on our Investor Relations website, www.TransUnion.com\TRU. Our Form 10-Q for the second-quarter 2016 will be available on July 27. Our earnings release includes schedules which contain more detailed information about revenue, operating expenses and other items, including certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures are included in these schedules.

As a reminder, today's call will be recorded and a replay will be available on the TransUnion website. As we discuss results today, all growth comparisons relate to the comparable quarter of last year unless otherwise specified. 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 press release; in the comments made during this conference call; and in our most recent Form 10-K, Forms 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

With that, let me turn the time over to Jim.

Thanks, Aaron, and good afternoon to everyone joining us on the call and webcast today. I will spend some time discussing the quarter, then turn the call over to Al, who will walk you through some financial details. I will wrap up with our guidance before we take your questions. I'm pleased to report that TransUnion delivered another very strong quarter of revenue and adjusted EBITDA growth, building on an excellent first quarter and setting us up for an outstanding full year and allowing us to raise our guidance for 2016. This is the result of the real strength we see across each business segment, within the majority of our verticals and major geographies, even as we lap strong year-over-year comps. The clear takeaway is that TransUnion is continuing to perform very well while we also invest in technology, M&A and in innovation to ensure our long-term success.

Putting numbers around the quarter, revenue and adjusted EBITDA rose 12% and 18%, respectively. On a constant currency basis revenue grew 14%. Adjusted EBITDA was up 20%, demonstrating the significant operating leverage we see from incremental revenue. That leverage is further reflected in a 180 basis points of adjusted EBITDA margin expansion. Adjusted earnings per share was up 38% to $0.37.

Parsing these strong results, we're pleased to see meaningful diversification in the sources of our growth. Each segment grew revenue more than 10%. Adjusted operating income growth range from 12% for USIS to 30% for consumer interactive to 53% in international on a constant currency basis. As we have noted in previous quarters, the revenue growth is split roughly 40/60 between higher growth verticals, emerging markets and new product growth initiatives on one hand and our core business on the other. As I will discuss in a moment, this diversification is also evident in each segment, highlighting a core strength that we have been building in recent years with a portfolio that is more balance and less cyclical.

In addition to the strong financial performance, during the quarter we also hit key a milestone with the effective completion of our next-generation technology platform, which we refer to as Project Spark. Through this initiative, we have upgraded our technology and analytics environment, focusing on technology as a strategic enabler. Through this process we have reduced much of our maintenance spend and have redeployed those dollars into new development that drives revenue growth. With this important milestone behind us, I would like to spend a few minutes reviewing what we did, why we did it and how we are benefiting from Spark.

Historically, TransUnion has utilized a patchwork of legacy technology, including mainframes, which required substantial CapEx to maintain systems and a significant amount of outsourced infrastructure. This approach was inefficient and limited our opportunities for innovation. As you know, our vision for TransUnion is an innovative market-leading company enabled by the latest in big-data technologies that we own. The upgrade to our technology platform, or Project Spark, has delivered on this vision, along with a new operating model that is more efficient and cost-effective.

Let's look at how this shift significantly improves our business model. First, we are able to develop better solutions for our customers as we can now organize and handle massive amounts of disparate data, matching and linking the data and ultimately unlocking valuable insights from the data more effectively. Simple terms, this means that we can out pull together all the data we have from about 90,000 sources and link it to individuals to create a thorough and dynamic view of a consumer, enabling and enhancing decision-making and risk-management capabilities for our customers. Examples include the trend of data that underlies CreditVision and CreditVision Link as well as our ability to match traffic violations to drivers and our driver risk products, among others.

Second, we are now much faster to market, with a flexible, highly configurable technology platform. This results in a significantly faster time to market, things like traditional batch jobs as well as new solutions like CreditVision and Prama. Finally, all of these benefits can be delivered on a global basis over time as we have truly transferable and adaptable technology that can be quickly scaled in new markets. CreditVision is a great example of a product developed in the US that is now being rolled out to new markets. Particular, it has been a major factor in our recent strong growth in the share gains in Canada and Hong Kong. This provides a road map that we will apply to all of our international markets.

Overall, Spark is making a significant contribution to our ability to quickly deliver innovative and value-added solutions to our customers on a global basis, helping to drive long-term growth. We have now successfully deployed Spark in the US and are currently rolling it out internationally.

Moving onto our quarterly results and starting with our largest segment, USIS revenue increased 10%, driven by low double-digit growth in financial services, healthcare, insurance and rental screening. Driven by this strong, broad-based revenue performance, adjusted operating income grew 12% and led to a 40 basis point increase in adjusted operating margin. Within USIS, we continue to focus on our new product growth initiatives that are driving differentiated and meaningful growth across our verticals and end-markets.

One of these initiatives is CreditVision. Talked with you before about the potential opportunity with trended data and our CreditVision offering and we are proud to have been the pioneer of such an important solution, having driven the industry forward this new innovative approach. This quarter, Fannie Mae is scheduled to begin requiring trended data in our CreditVision offering in its assessment of mortgage applications. In preparation for this, we've been providing CreditVision to our mortgage resellers customers and will begin billing them for CreditVision in this third quarter. As Fannie and others require trended data, we're in the market and well-positioned to capitalize on this important industry transition.

As bullish as we are about the mortgage opportunity, we see far-reaching additional applications for CreditVision as it has the potential to replace traditional credit offerings anywhere that they are currently used. For instance, we recently announced a partnership to utilize trended data for auto financing and as we previously mentioned, CreditVision also has applications in credit cards. At this point we are only scratching the surface for CreditVision's potential in our verticals and across our geographic footprint.

Another area within our USIS business where we have seen tremendous growth is our healthcare vertical. This is a key area of focus for TransUnion as it enables us to leverage our core capabilities of data, technology and analytics and have tracked a fast-growing market, further diversifies our business. Within healthcare, our focus is on revenue cycle management, helping healthcare providers reduce uncompensated care costs and improve cash flow, enabling them to spend more time focused on patient care.

The revenue cycle management market consists of a front end that addresses patient identification and authentication, verification of insurance coverage, patient payment estimations, patient propensity to pay and presumptive charity determination. The middle of the market focuses on operations and claims processing and the back-end addresses accounts receivable management, collections and insurance coverage discovery after services are rendered.

We've successfully built front- and back-end platforms that leverage TransUnion's unique data sets, allowing us to efficiently incorporate partner data sets and importantly, as you will hear in a minute, integrate acquisitions. ClearIQ, our front-end offering, delivers critical patient information to healthcare providers. We provide insurance verification before services are rendered, leading to fewer claims rejections and denials and also lays the foundation for the accuracy of the financial transactions that follow. By leveraging TU's core credit data, we can also provide an estimate of a patient's income and a patient's propensity to pay their bills, helping both patient and provider makes smart, informed decisions about procedures and payments.

As the healthcare industry continues to move toward a higher deductible model, the need for more transparency in patient payments has become more pronounced. Just last month, TransUnion published a report that demonstrates how payment responsibility for medical costs continues to shift from employers and insurance companies to patients. In one year patients experienced a 13% increase in both deductible and out-of-pocket maximum costs.

eScan, our back-end solution, offers a differentiated market-leading technology that helps hospitals and healthcare systems reduce uncompensated care costs by identifying patient insurance coverage either commercial, Medicare, or Medicaid, after services are provided. We refer to this as insurance coverage discovery. eScan's automated platform superior return on investment to a hospital traditional manual processes, which are typically inefficient, labor-intensive and error-prone. To date, TransUnion healthcare through its eScan solution has identified nearly $1.3 billion in reimbursement to its clients and that number has increased by more than 25% since November of 2015, reflecting the rapid growth and share gains that we are seeing.

In June we acquired Auditz, a high-quality strategic bolt-on acquisition. Auditz uses sophisticated proprietary technology to help healthcare providers identify and recover payments, a complementary capability to our eScan solution. Through this acquisition, we gained new algorithms for identifying uncompensated care, particularly as it relates to optimizing the recovery costs associated with Medicare patient transfer, a process that results in the underpayment of millions of dollars per year to care providers. The net result is a greater yield for our customers when we analyze their unpaid claims files and of course, greater yield for them equates to more revenue for TransUnion.

As you can see, we have a comprehensive revenue cycle management solution suite that achieved significant industry recognition for our efforts. In May our core offerings of ClearIQ and eScan were named to the Healthcare Financial Management Association's peer review shortlist. This designation is very difficult to achieve and our top marks, along with the overall positive feedback from the peer review participants, are a reflection of our commitment to driving proven results for our clients and enable them to be more competitive in the dynamic healthcare market. We have built an outstanding healthcare business that is making a difference for our customers bottom line, being recognized by the industry and is making a significant contribution to TransUnion's strong financial performance.

Moving on to our international segment, revenue grew 15% on an as-reported basis and 24% in constant currency, with 10% of that growth coming from the acquisition of CIFIN in Colombia. We saw a good balance of growth between developed and emerging markets with a constant currency revenue of 20% and 26%, respectively. At the regional level, Canada, India and Latin America each grew revenue by more than 20% on a constant currency basis. On past calls we have discussed the opportunity to expand our international margins and you are seeing that come to fruition in the second quarter as adjusted operating margin jumped 590 basis points to 31.1%. This comes on the heels of a 240 basis point increase in the first quarter.

This improvement was driven by our strong revenue growth as well as a focus on reducing costs. As a reminder, over the past year or so we undertook a thorough review of our international costs and overall organizational structure. The result is a more highly efficient organization that benefits from the newly established centers of excellence. The margin improvement should be sustainable and we see further upside over time as we leverage new technology and products on a global basis, as I discussed earlier.

Another important development during the quarter, we increased our ownership stake in CIFIN in Colombia from 71% to approximately 95%. The business is performing well and the integration is going smoothly. Similarly, we upped our ownership in CIBIL in India from 66% to approximately 77%. We're very pleased with both positions as they provide a further countercyclical dimension to our portfolio while also adding to our exposure in two thriving economies. We see significant opportunity to continue to benefit from the underlying economic growth in each country, coupled with the introduction of new product offerings to provide better information solutions to customers and help consumers gain greater access to credit.

Turning to consumer interactive, we had another strong quarter. Revenue grew 16% while adjusted operating income was up 30%, driven by strong performance in both the direct and indirect channels. In the direct channel we saw an increase in our subscriber base with good retention levels. In our indirect business, we are thrilled to announce we extended our contract with Credit Karma. TransUnion and Credit Karma have enjoyed a very strong collaborative relationship and we are pleased to extend our partnership with the long-term contract that reflects the strategic value contributed by both parties.

In all our strategic partnerships we strive to find ways for our customers to utilize our innovation which in turn helps us gain a larger footprint within their organization. This agreement further cements our already strong strategic partnership and is a win-win for both of us. Al will walk you through the near-term outlook for this segment in a few minutes.

In summary, we've put together another very good quarter with strong revenue and adjusted EBITDA growth, expanding margins and significant free cash flow and raised our top- and bottom-line guidance. At the same time, we extended our relationship with Credit Karma, have already rolled out CreditVision to the mortgage reseller channel, effectively completed Project Spark, increased our ownership stakes in India and Columbia, completed a complementary healthcare acquisition and continue to invest in strategic growth initiatives. Given all that, we feel very good about our position today and also for the long term.

Now I'll turn it over to Al, who will walk you through the financials. Al?

Thank you, Jim, and good afternoon. Today I'm going to walk you through our consolidated results and segment results through adjusted operating income then I will finish up with a review of the balance sheet and cash flow statement. Second-quarter consolidated revenue was $426 million, an increase of 12%, or 14% on a constant currency basis compared with the second quarter of 2015. Revenue from acquisitions contributed about two points of growth in the quarter. Adjusted EBITDA was $159 million, an increase of 18%, or 20% on a constant currency basis compared with the second quarter of 2015.

Adjusted EBITDA margin was 37.5%, an increase of 180 basis points compared with the second quarter of 2015. Adjusted net income was $68 million, an increase of 70% compared with the second quarter of 2015. Adjusted diluted earnings per share was 37% compared with $0.27 in the second quarter of 2015. The adjusted effective tax rate for the second quarter was approximately 37%.

Now let me walk you through the details of our P&L. As I just mentioned, consolidated revenue increased 12%, or 14% on a constant currency basis. This again was driven by double-digit growth across each segment. Operating income was $64 million, an increase of 24% compared with the second quarter of 2015, driven by the increase in revenue and lower operating expenses as a percent of revenue. Cost of services was $144 million, an increase of 9% compared with the second quarter of 2015 due to costs associated with Project Spark, inorganic increases in operating expense from recent acquisitions, investments in key strategic growth initiatives, including new data assets and increased product costs.

SG&A was $144 million, an increase of 14%, driven primarily by increased advertising, increased variable compensation expenses related to the financial performance of the business, inorganic increases in operating expense from recent acquisitions and investments in key strategic growth initiatives. And depreciation and amortization was $74 million, an increase of 8%, due primarily to increased CapEx related to our ongoing strategic initiatives and from assets acquired with our recent business acquisitions. G&A not related to the 2012 change in control transaction and subsequent acquisitions was approximately $29 million for the quarter. Adjusted operating income was $130 million, an increase of 19% compared with the second-quarter 2015, driven primarily by the increase in revenue.

Now looking at the segment revenue and adjusted operating income, USIS revenue was $257 million, up 10% compared with the second quarter of 2015, driven by strong growth across all platforms. Starting with online data services, revenue was $168 million, an increase of 9% driven by an increase in credit report volume and higher average price. Marketing services revenue was $38 million, an increase of 8%, due primarily to increased batch activity and decision services revenue was $51 million, an increase of 16%, due primarily to the growth in the healthcare and insurance markets.

Adjusted operating income for USIS was $88 million, an increase of 12% compared with the second quarter of 2015, due primarily to the increase in revenue, partially offset by investments in key strategic growth initiatives, including new data assets, additional depreciation amortization and inorganic increases in operating expense from recent acquisitions. International revenue was $78 million, an increase of 15%, or 24% on a constant currency basis compared with the second-quarter 2015.

Revenue from acquisitions contributed approximately 10 points of growth in the quarter for international. We saw over 20% constant currency revenue growth in both developed and emerging markets. That was offset by a 9% decrease in revenue from the impact of foreign exchange rates, primarily the South African rand, Canadian dollar, Indian rupee and the Brazilian real. Developed markets revenue was $28 million, an increase of 16%, or 20% on a constant currency basis. Emerging markets revenue was $50 million, an increase of 14%, or 26% on a constant currency basis. Revenue from recent acquisitions contributed approximately 16 points of growth.

Adjusted operating income for international was $24 million, an increase of 42% compared with the second-quarter 2015. On a constant currency basis, adjusted operating income increased 53% driven by the increase in revenue along with savings enabled by key productivity initiatives delivering 590 basis points of adjusted operating income margin expansion in international in the quarter. Consumer interactive revenue was $107 million, an increase of 16% compared with the second-quarter 2015, driven by strong growth in both the direct and indirect channels. Adjusted operating income for consumer interactive was $45 million, an increase of 30% compared with the second-quarter 2015, due primarily to the increase in revenue.

As we [previewed] on the previous call, we expect consumer interactive revenue growth in the mid-to-high single digits for the full-year 2016. With this, it will imply revenue will be flat to slightly down in the second half of the year, primarily driven by three factors. First, as previously discussed on our call, one of our indirect channel partners is in the process of being acquired by a competitor. Second, our consumer interactive business saw tremendous growth in 2015, resulting in a very strong comparable to 2016. This included a one-time benefit in Q4 2015 due to data breach revenue in our direct-to-consumer reseller channel. As a reminder, last quarter we moved the direct-to-consumer reseller channel revenues into our consumer interactive segment.

Third, and as Jim mentioned, we have renegotiated at long-term deal with Credit Karma. This new contract reflects the strategic value contributed by each party and enables a more sustainable strategic partnership for the longer term. With this new agreement we expect our revenue growth from Credit Karma to moderate in the second half of the year. Our guidance fully reflects this and we are very pleased with the results, stability, consistency and a locked-in long-term valuable contract with a very important strategic channel partner.

These factors will impact the top-line growth optics of our consumer interactive segment in the near term. As these items lapse over an annualized period, we fully expect the business to deliver revenue growth at its normalized rate of mid-to-high single digits. Given the nature of the revenue coming off, we still expect adjusted operating income and adjusted operating margin to increase in the second half of 2016 and for the full year. Lastly, in the corporate segment, adjusted operating expenses were $27 million, an increase of 29% compared with the second-quarter 2015, due primarily to increased variable compensation expenses related to the performance of the business and investments in key strategic growth initiatives.

Now moving on to the balance sheet, cash and cash equivalents were $141 million at June 30, 2016, and $133 million at December 31, 2015. Total debt, including the current portion of long-term debt, increased to $2.4 billion at June 30, 2016, compared with $2.2 billion at December 31, 2015, primarily due to financing the acquisition of CIFIN. As of June 30, 2016, we had the full $210 million revolving credit facility available for use. Our net leverage as of June 30, 2016, was approximately 3.9 times. Excluding the impact of acquisitions completed in the second quarter, that leverage would've been 3.7 times.

As we discussed, we continue to take a balanced approach to capital allocation, diligently considering deleveraging growth in organic as well as inorganic opportunities. During the second quarter, we acquired another 24% of CIFIN, taking our ownership up to approximately 95% and our integration efforts continue to go well and the business is performing in line with expectations.

We also acquired another 11% of CIBIL in India, one of the fastest-growing and most dynamic markets in the world. We continue to execute on our growth play book and expect good things to come from this region, as we have mentioned previously. With this latest equity pickup, we now own approximately 77% of CIBIL. Lastly, as Jim mentioned, we also acquired Auditz in our healthcare business, a nice complementary asset to our eScan offering. As you can see, our M&A efforts are paying off and we continue to drive long-term and diversified growth.

Moving on to the statement of cash flows, for the six months ended June 30, 2016, cash provided by operating activities was $150 million compared with $117 million for the same period in 2015, due primarily to the increase in operating performance along with a decrease in cash paid for interest. Cash used in investing activities was $323 million compared with $77 million for the same period in 2015, due primarily to an increase in cash used to finance acquisitions. Capital expenditures were $55 million compared with $68 million for the same period in 2015. Cash provided by financing activities was $181 million compared with $642 million for the same period in 2015, driven principally by proceeds from the June 30, 2015, initial public offering.

That concludes our prepared remarks on the second-quarter financial results. I will now turn the call back over to Jim.

Thanks, Al. As I lay out our guidance, a couple quick points about our assumptions for acquisition and FX impact. In line with our previous guidance, acquisitions should add two points of revenue growth to both the full year and the third quarter. Also, we expect FX will continue to be a headwind, though at a slightly reduced rate given the recent favorable changes in some of our non-US currencies. Our guidance reflects about a 1.5 points of FX reduction in both revenue and adjusted EBITDA for the full year and about one point of reduction in the third quarter.

Now turning to our guidance for the full-year 2016, given the strong second-quarter performance we are increasing our outlook for 2016 revenue, adjusted EBITDA and adjusted EPS. We expect our revenue to come in between $1.665 billion and $1.675 billion, an increase over last year of 10% to 11% on a reported basis and up to 12% on a constant currency basis. Adjusted EBITDA for the year is expected to be between $613 million and $618 million, an increase over last year of 16% to 17% on a reported basis and 18% to 19% on a constant currency basis. This results in expected adjusted EBITDA margin of approximately 37%, roughly a 200 basis point increase over 2015 as we continue to reinvest in our business.

Adjusted diluted earnings per share for the year are expected to be between $1.37 and $1.39, or 25% to 27% growth, and for the third quarter of 2016, we expect the following. Revenue should come in between $420 million and $425 million, an increase of approximately 8% to 9% on a reported basis, or 9% to 10% on a constant currency basis. Adjusted EBITDA is expected to be between $155 million and $158 million, an increase of approximately 11% to 13% on both a reported basis and constant currency basis. Adjusted diluted earnings per share are expected to be between $0.34 and $0.35, an increase of 12% to 15% compared with the third quarter of 2015.

To wrap up, TransUnion had a very strong quarter. Top- and bottom-line financial performance was broad-based and outstanding, allowing us to raise our guidance for the second time this year. We are executing against our strategic growth plans while also investing for the future.

As we've discussed today, Spark is effectively complete, we extended our strategic partnership with Credit Karma, CreditVision has been rolled out to the mortgage reseller market and we will begin billing for in the third quarter and we added to our ownership positions in key emerging markets of India and Columbia, as well as expanded our portfolio in healthcare. This solid execution and focused strategic investment positions us very well for the remainder of 2016 and beyond.

That concludes our prepared remarks and now we will be happy to take your questions.

(Operator Instructions)

Andrew Steinerman, JPMorgan.

Hello, it's Andrew. I wanted to ask about trended credit data, specifically the Fannie Mae initiative and how much that might add to TransUnion's revenue growth from the mortgage lenders by the fourth quarter? Our team calculated it being about 1% if we're just counting the Fannie Mae piece.

Hey Andrew, without really getting into specifics there we, as you know, we are already live in the market, and I just want to confirm that we will be switching the switch on regardless of what happens relative to Fannie Mae or CreditVision trended data. So the use will happen, the billing will start, and we are really pleased with that.

And I just want to remind everybody that we are feeling really good about this because we are the pioneer in this space and it is great that we're going to get this revenue, Andrew, and the revenue is in fact in our guidance, but probably more importantly it is really signaling we think not only in the US but the world where this data can be used, not only in mortgage but also card auto where we have just done a deal to create a trended credit score in auto. We think we're going to be able to penetrate the market much more fully.

So while it's great for the third and fourth quarter, we think it's going to be great heading into next year and beyond to actually get that kind of information to be used much more broadly. So people ask me how far we are into this thing, we're kind of rounding first and heading to second now, so there is still plenty of upside. And like I said, the revenue that we anticipate getting is reflected in our guidance.

Can I just ask, is it just for Fannie Mae loans or does it include Freddie Mac loans as well?

It includes all our resellers that are selling into the mortgage market.

Perfect. Thank you.

Thank you, Andrew.

Gary Bisbee, RBC.

Hi, good afternoon. I wanted to ask specifically about the international business, and I guess a two-part question. The margins are obviously terrific as is the revenue growth.

In developed markets I think we thought there would be somewhat of a slowdown. You've lapped the big Canadian customer takeaway a year ago, but how does that continue to be as strong as it is? Is trended data a meaningful piece of that, and then how do we think about the margins going forward from here? Thanks.

Hi Gary. So I will answer the first question. Yes, it is a combination of many things. We continue to take share in markets like Canada.

We take not only share in the core area, but CreditVision is helping us to take that share because it is demonstrating how we're using innovative approaches to help them serve their consumers better, though we're shifting share constantly and we still think there is more to that. Also in Hong Kong for example CreditVision, as we have talked about, it is something new, but it is essentially required.

And so that allows us to expand the market there for credit information. That's why that continues to grow. We still are very bullish about our ability to grow in the established markets as well as the emerging markets, for that matter which are getting a double kick of being a non-cyclical way in the market where they're trying to grow that middle class where the volumes are constantly growing regardless as well as leveraging our new solutions like CreditVision. So they're getting both, but we feel good about both those things.

As far as the margins are concerned, we as you know last year, beginning last year we went on a mission to take a look at how we're organized there, how we could better leverage everything that we have built in the US, and we anticipated the margins improving this year and you are just seeing those results. We think we can continue to improve those margins going forward. Of course as we always say we temper that with if we see good opportunities for investment we want to balance expanding those margins with also investing for growth over the long haul.

So we will continue to do both those things going forward. We are feeling very good about our international markets, both from top line growth performance and outlook as well as the ability to expand margins.

Thank you.

Manav Patnaik, Barclays.

Thank you, good evening, gentlemen. Just a first question around the Credit Karma contract and guidance that you gave, so I guess with you implying that the revenue growths are the slowest but then becomes more stable, should we -- I guess what should we take away from that? Is that you've made the contract more ratable so it is more subscription versus transaction generated, or are you lowering the price or scope of the services to Credit Karma?

To back up a little bit, the relationship we have with Credit Karma goes back years, and as we have discussed they're very much a strategic partner. And so what we have done with them is certainly haven't reduced the kinds of things that we're doing with them, in fact we continue to work with them to give them what we think is some of our best innovation.

And it is because we want to be sticky with inside Credit Karma and we also want them to be very successful. Because if they have success we have success. And we chose the path of going down many different kinds of business models to bring credit into the consumer space because we felt it was our best bet to monetize that market overall. And so that's what we continue to do.

We're going to continue to see growth from Credit Karma. We also are able to continue to see growth in other players in the market and also as banks are starting to distribute scores in the market.

Our guidance reflects the new contract. We couldn't be more happy with that contract. It's long term and it really locks in that revenue for us going forward and lets us focus on being real strong strategic partners with each other and innovating together.

Okay. Al, if you could just help us with the guidance raise. At the midpoint looks like it is $30 million top line and maybe $10 million on EBITDA. The breakout between what was an organic contribution that raised versus maybe acquisition, which I'm guessing is primarily Auditz?

Here is -- you got it exactly. Here's what I would say, just to get regrounded. Full-year revenue guidance was $1.64 billion at the midpoint last quarter, now it's $1.67 billion at the midpoint, which is like you said an increase of $30 million.

The components of that $30 million really constitute an $18 million beat in the second quarter, slight favorability relative to first quarter from an FX standpoint, I think it was around $5 million. We expect a very small impact on revenue from Auditz in the second half of the year. That is a strategically great asset, but the absolute size will grow over time but it is not going to have us really -- the rounding is not going to make it enough for us to come off our like we said 2% growth from M&A.

It is these factors really which is really the beat coupled with a little bit favorable FX is allowing us to raise full-year revenue by $30 million. The second quarter beat plus FX is probably close to $24 million. We're really raising the second half of the year by about $6 million from a revenue standpoint. In total $30 million; like I said the two components are the big beat in Q2 as well as a little bit more favorability in the FX.

As it relates to EBITDA, equally important our full-year adjusted EBITDA guidance was $605 million at midpoint last quarter when gave guidance. Now it is $615.5 million, so it's an increase of around $10.5 million.

Our second quarter beat was approximately $12 million from our midpoint last quarter, and we got a little bit of favorability, a couple million dollars from an FX standpoint. However, we are going to take some of that beat and invest it back into the business to the tune of around $4 million or $5 million. And that is why and what we are doing in terms of raising our full-year guidance on a net basis by about $10 million or $11 million.

So in summary, EBITDA was a beat, we are taking all of that or a big chunk of that and raising our full-year guidance while pushing back into our own business. And like we've said, if we see the opportunity to reinvest our overperformance back into the business we are going to do that if we see that, it just continues to give us more confidence about our long-term top and bottom line growth. Particularly in a year where full-year EBITDA guidance is coming in at around 18% to 19% with a 200-basis point increase in margin and 12% constant currency growth.

That's very helpful. Thanks a lot.

Ato Garrett, Deutsche Bank.

Good afternoon. Just another question about your expectations in the back half of the year, given your new full-year guidance. Looking at the first half of the year you had some very strong organic revenue growth, double digits there, but then looking at organic revenue growth coming down to being 10% in the full year, just wondering if you're seeing any signs, any other additional areas you wanted to call out what might be behind that view other than the revenue change you discussed for the interactive segment?

Maybe I'll step back. This is Jim and then we will let Al dive in a little more.

So if you do step back, we've had nine quarters now of double-digit constant currency revenue and adjusted EBITDA growth, and I think that simply reflects the solid execution of what we have been telling. So consistent with what we have been telling you we have a growth strategy that is focused on initiatives that help us get to be at the top of the market as far as our overall revenue performance, and we continue to do that transformation we have been on along with consistently looking for ways to improve margins through efficiencies, bills are paying off, and then the markets are performing well.

This is really also added up to compounded build up of some fairly tough comps year on year. That said, we're still guiding in our view to very strong full-year performance at 12% constant currency revenue growth. Like Al just said, 18%, 19% EBITDA growth and 200 bps of improved margin.

So very, very strong performance which I believe also reflects a full year of what we've been telling you is focus on investing in growth initiatives, turning top performance in the top line in our category I guess, as well as expanding margins. And if I didn't say it, I want to remind you we are, and Al said it before, we do continue to reinvest in order to continue to drive growth. And I think that is something that you'd want us to do and something that is a fundamental part of our strategy. That said, we do believe we can continue making choices to expand margins moving forward as well.

I'll let Al elaborate if you would like more.

Yes, just to reiterate, to put final numbers on what Jim said, if you look at what we guided last time and you look at the implied guidance for the second half of the year, based on that, the second half of the year, you can see that our constant currency revenue is exactly in that range, maybe trending up even a little bit more than what we said last quarter, as well as EBITDA is right in the middle of the range of what we said last quarter while still investing back into the business for the second half of the year.

Okay. Great. And then just related to that topic of investing in the business, you mentioned how Project Spark finishing up for the US this quarter, and that being A, something else you're going to roll internationally. Just wanted to think are there any other areas of investment that you are going to plan on calling out for the business overall, or if you can give us a sense of the timing when you are going to start deploying a similar project to Project Spark in your international markets?

It's already happening, and I was asked a similar question last time, just to reconfirm. You're not going to see some like order of magnitude change in our investment because we are rolling it out in our CapEx, because we are rolling it out internationally.

In fact we have been doing it already. It's in South Africa, parts of it are in Canada, and we have a multi-year plan for rolling it out, starting with where it is going to have the most impact first, and then that would be Canada, India, South Africa and then finding its way obviously into Columbia with CIFIN where we have a little bit of a we're replacing their legacy system so we can have an impact there, and then ultimately finding its way through all our countries. So that's just part of the plan.

I think the other thing that is important to mention about Spark is it's allowed us to shift our spending from maintenance to new development. So several years ago or even last year 60% of our CapEx and even our OpEx was spent on maintenance. Now that is shifted to 60% on new development.

So we have taken out a bunch of costs, but we have also increased our capacity to develop in two ways. One now we put more money towards it, now that costs are down, and two we're just much more quick and nimble at getting new solutions into the market.

So you're going to see us be able to put even more wood behind the arrow in our growth initiatives. You will see us talking more over time about CreditVision continuing, CreditVision Link continuing because these things continue to grow and mature. Prama, our analytics platform, continuing -- it's rolling out in the US now, it's early stages, people are starting to beta test it, and it will roll out like anything else we do, establish beach head and then roll out and then roll out to the countries.

Things like our digital marketing play will continue to move, things like our ability to integrate and fuse data with our TLO platform will continue to move internationally. So we have a whole host of new growth initiatives that we are going to roll out, not only in the US but internationally. You're going to see more of our money being spent not on infrastructure but on the actual things that folks are buying where they are allowing us to increase our footprint or share in the US and internationally.

Great. Thank you very much.

David Togut, Evercore.

Thanks, good afternoon. Since Brexit we've seen a pretty significant drop in interest rates around the world, and I'm wondering if you have seen any pick up in demand for core credit reporting offerings as a result. For example credit card, auto, and mortgage, which tend to be interest rate sensitive?

Yes, as you know the interest rates in the US are down a little bit and the outlook is probably for them to stay there. We don't know for sure any of these things, and that has had the effect of helping our core business grow and we have factored that into our guidance going forward. We're not talking about any massive impact, but it has steady things and we don't see any reason for that to change going forward in mortgage, in auto, in credit card, and HELOC and other areas where credit is used.

Understood. Just as a quick follow up, could you talk a little bit about the handoff between the ending of spending on Project Spark and then the reduction in maintenance? In other words, what is the overall impact on the P&L on an annualized basis as you finish the spending and then see the expense leverage?

Much of the savings that we experience through Spark, in fact virtually all of it has already been reflected in the last year actually, and maybe partially in the first quarters of this year. That is really already in because that maintenance started coming down as we started migrating. There is really no further reduction in OpEx that you're going to see as part of Spark specifically this project.

We are seeing that we are taking an engineer or a dollar spent on software or other things and instead of it going to keeping the lights on or keeping the machines running or upgrading operating systems, it's being spent on new development. So we've substantially shifted where we are spending our money because what is happening now. You will likely see further improvement in margins internationally as we roll out Spark internationally and retire some of those systems as well.

You really are already seeing the benefit which is consistent with what we have been telling you. You seen the benefit of Spark last year and the beginning parts of this year.

Can you put some parameters around the expected margin expansion as you roll out Spark internationally?

It's Al. I think we're coming in, just to reiterate, in the quarter alone international margin has increased 600 basis points, which is pretty significant. Within our corporate business the adjusted EBITDA margin level is up 200, I don't know if we want to box or lock ourselves into margin expansion right now given the growth opportunities we see internationally and the investments associated with those potential things as we continue to see this 20% plus growth and we will probably continue to do that.

My view is obviously, Al, I'm the same. You were -- we don't like to lock ourselves into something or set expectations other than we do have the opportunity to raise margins if we need to or want to.

But we also want to be able to have clear bandwidth to invest, because we see a lot of opportunities out there to expand from our core into adjacent markets or with new capabilities. And I think as long as we can continue to prove that we can drive market-leading top line growth, this is a good use of our dollars. But like I said, we also always look for opportunities to create that buffer to expand margins.

Understood. Thank you very much.

Shlomo Rosenbaum, Stifel Nicolaus.

Hello, thank you for taking my questions. Just a few quick ones. Hey, Al, is the renegotiation with Credit Karma going to change the margin profile in interactive? In other words you had a very strong margin this quarter. Should we expect that the margin would come down on a sequential basis next quarter or in the fourth quarter?

I would say this; I wouldn't look at just Credit Karma. I think you have to look at Credit Karma along with the -- I talked about the indirect channel partner we have that was acquired by one of our competitors, and I'd look at it based on second half of 2016. And when you combine those two factors actually margins are going to expand.

That principally speaks to the types of revenues that are being acquired and that are going to be lapsing out of our business, as I mentioned on the last call, that it's lower margin type business. So those revenues are going to roll off and obviously it is lower margin. As it relates to -- so I would say generally speaking, you're going to get margin expansion when you combine the two together.

Great. And then in terms of the growth, the 9% growth in online data services, is there a way to parse it in terms of just core underlying demand versus some of the products that you clearly have a strong edge in? Is there some way to think about that?

I think online growth today, the way we see it, remembering Q1 there was 10% growth this quarter, it was close to 9% growth is the growth that we're seeing today. Any change or maybe potential uptick to that is going to be new product growth, such as things like Jim talked about Credit Karma, and the adoption of Fannie, which is going to trend up the second half of the year.

What would bring that down is if there was a pullback in consumer credit. I think as Jim said, all things being equal right now, we feel good about online, particularly the credit markets in the US which is the metric that you are talking about, and think that is going to remain pretty consistent with the goal of that continuing to trend up when we unleash things like CreditVision. You want to really take hold the second half of the year.

Great. And then what is the $9.3 million expense in the other line below the operating line in the P&L?

You mean --

Under other income and expense, looks like there is a $9.3 million --

I see. The principal drivers of that are acquisition fees. That's the biggest chunk of that; that's almost 80% of that $9.3 million. And what that has to do with is really pre-solidified M&A opportunity.

So for example if we are doing a deal in India, that will constitute the banker fees. Or we complete the audit acquisition like we did in healthcare, that would constitute banker fees. Or for buying the remaining part of CIFIN, there is banker fees. And generally speaking it's also any pre-due diligence expenses associated with that.

Last one if I could sneak it in, free cash in the second half of the year, stronger or weaker than first half?

Say that again?

Free cash flow in the second half of the year, should we expect it to get better or be similar to first half, or how should we think of that?

I think it's -- I mean listen, the components of it are pretty straightforward, to be quite honest with you. It's going to be EBITDA growth less our cash interest expense, which isn't going to change because we don't plan on refinancing our infrastructure. We've talked about our cash taxes, that's going to be pretty consistent, and I think our CapEx halfway through the year we've guided accordingly and we're about 50% of the way there.

If it's going to increase, all things being equal it's going to be an increase of EBITDA and maybe a slight benefit of working capital towards the second half of the year because we usually get benefits from working capital second half of the year versus the first half where it's a little bit more of a use for compensation payments and bonus payouts and things like that. I would expect it to be slightly better related to those factors.

Great. Thanks.

Tim McHugh, William Blair & Company.

Yes, thanks. Just a question on Project Spark rolling out internationally from an operational issue or question. Will you still be adjusting out the expense for that, or how should we think about how that is going to be reported I guess?

It's going to be reported straight up in the numbers. I think we viewed the original Project Spark as a special one-time transformational deal. This is just part of our regular operating budget moving forward both from an OpEx and CapEx standpoint.

I think someone asked me can we expect some kind of new project that will take up our CapEx in a substantial way. No, that will not happen nor will it happen from an OpEx standpoint.

It's really reflected already in our guidance, because we're already rolling it out. So that I think I'm getting at your question, you won't expect if there is some below the line costs or something like that, it's right now in our P&L.

If there's anything as we finalize the project, anything at all, it will be immaterial and be treated in the same way we have treated previous Spark related costs.

Okay. That's helpful and then on the trended data that you mentioned you're going to start billing in Q3, even though I guess it will be late Q3 before it is a mandated for Fannie Mae, when we try and think about the impact to you is your sense most of the customers who have been getting this are going to continue and will keep it on and pay you in Q3, or is there some part of the impact that won't hit until Q4?

There is really no choice that we're giving them. They are using it now, it's just part of the way it's going to work. So there's really not -- they will be paying us.

There's not a switch they can throw. It's the switch we throw. And we did this so that we had certainty, and we are certain that Fannie Mae will turn this on at some point. And so you can just count on it. It's done.

Okay. Thank you.

One more question?

We've got time for hopefully one more here.

Bill Warmington, Wells Fargo.

Under the wire. How are you doing?

4:59, you did it.

Congratulations on a solid quarter. A couple quick ones for you. First I was hoping to ask about how things are going in the rental market for you. I know you have got a couple of products there, Credit Retriever, SmartMove. Can you talk a little bit about the demand you are seeing there and what kind of adoption you are getting?

So SmartMove continues to grow at double digits for us. And again we don't see any slowdown in that part of our business.

On the Credit Retriever, we revamped that whole product, which you may recall, and so we're also seeing very good growth there and good demand. And that is coming in the form of taking back share that we may have lost a few years ago when the product was not where we wanted it or needed it to be, and in the form of taking share as well.

So we see that business as a nice little runway going forward based on the market itself, based on the SmartMove application continuing to grow as people do their self certification. And also as the bigger players like what they see Credit Retriever, which now also includes an analytics component that's pretty cool. And so we are seeing that's a nice market for us, and our products are getting nice uptake.

And then on the alternative credit data side, what industries are you seeing the most demand from and how are things going with credit link -- sorry CreditVision Link? And then is there potentially some opportunity for you in the payday lending space?

Yes, so we are seeing right now prior to mortgage let's say, we had a very nice uptake in the CINtec space where they're using -- they didn't have legacy systems so they took advantage of CreditVision early on for online lending, which answers the question around the payday lending space. We -- there's a lot of uncertainty in that space, but CreditVision Link, the alternative data portion of this suits that market very, very well. We'll see how the regulation plays out, but one way or another there's going to be demand for that kind of a product.

With regard to CreditVision Link, last time we talked to you I think we talked about 40 validations. Now over the last 12 months we have 60 customers trying to validate it, and we moved 20 customers into production and another 18 customers are in the process of migrating, So we're getting quite a good conversion in both CreditVision and then CreditVision Link, which is our alternative data trended data product.

Thank you very much for the insight.

Okay. Thank you.

That wraps up the call for tonight. Thanks everyone and have a wonderful evening.

Bye-bye. Thank you.

This concludes today's conference call. You may now disconnect.