TransUnion (TRU) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Kelly, and I will be your host operator on this call.

(Operator Instructions)

Please note that this call is being recorded, as of today, Tuesday, October 25, at 8 AM Central Time. I would now like to turn the meeting over to your host for today's call, Mr. Aaron Hoffman, Vice President of Investor Relations at TransUnion. Please go ahead.

Good morning, everyone, and thank you for joining us today. This morning, I'm joined by Jim Peck, President and Chief Executive Officer; and Al Hamood, Executive Vice President and Chief Financial Officer. We posted our earnings release on the TransUnion Investor Relation's website at www.TransUnion.com/TRU.

Our Form 10-Q for the third quarter of 2016 will be available later today. Our earnings release includes schedules, which contain more detailed information about revenue, operating expenses and other items, including certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures are also 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 all that, let me turn it over to Jim.

Thanks, Aaron, and good morning to everyone joining us on the call and webcast today. I will spend some time discussing the quarter, and then I'll turn the call over to Al, who will walk you through more financial details. I'll also 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 half and setting us up for outstanding full year, and allowing us to again raise guidance for 2016. Putting these results in the broader context of our strategy, we are realizing the benefits of our technology investments, focused on innovation, diversification into fast-growing verticals like healthcare, as well as the significant emphasis we have placed on developing our international footprint.

We continue to leverage our core capabilities of content, technology, and analytics, against new growth opportunities that make TransUnion a critically important information solutions provider to both consumers and businesses across a broad array of end markets. Today, TransUnion is a stronger, more diversified Company, that is nicely positioned to deliver long-term future growth.

And most importantly, we're seeing our strategy translate into very strong financial performance. In the quarter, revenue and adjusted EBITDA rose 12% and 19% respectively. That reflects the significant leverage we see in our business, and translates to 210 basis points of adjusted EBITDA margin expansion, in line with our full-year expectations.

Adjusted earnings per share was up 23% to $0.38. As we have noted in previous quarters, the revenue growth is driven by higher growth verticals, emerging markets and new product growth initiatives, as well strong performance from our core business.

Moving on to our quarterly results, and starting with our largest segment, USIS revenue increased 14%, driven primarily by robust growth in financial services, healthcare, and rental screening. Adjusted operating income increased 10% as revenue growth flows through to income, and as we continue to incrementally invest in more strategic initiatives that will continue to drive long-term growth.

Last quarter, we told you that our next-generation technology platform was effectively complete. I'm happy to report that we have literally pulled the plug on our legacy mainframes, and the project is now entirely done. The new platform has helped improve margins, and is a critical enabler for our pipeline of new product growth initiatives, like Prama, alternative data, fraud, as well as CreditVision.

We have talked with you for some time now about our trended credit data offering, CreditVision. Fundamentally, trended data provides lenders with a significantly better view of a customer's credit history. Instead of looking at a single point in time as traditional credit reports do, CreditVision looks at 30 months of credit history and incorporates additional data to offer a more holistic and accurate look at a consumer's credit.

Lenders have found this to be a powerful tool, not only producing a more accurate predictive credit score, but also for expanding their pool of potential borrowers. CreditVision is driving growth now, and should continue to do some for years to come, as we roll it out globally to mortgage, auto, credit card, and other consuming lending customers.

In USIS this quarter, we saw substantial lift as we began pricing CreditVision to our mortgage reseller customers, in line with Fannie Mae's requirement that lenders utilize trended data for underwriting. We were first to market with trended data, and have a longer credit history associated with our product than competitive offerings. We have leveraged our first mover advantage globally to drive growth and gain share.

CreditVision isn't the whole story of trended data, it's the just beginning. Last year, we launched CreditVision Link which combines trended credit data with alternative data, to provide a more robust credit score and history for thin-file and no-file borrowers. This is valuable to our customers, as they seek to broaden their customer base. Just like CreditVision, we were first to market with this value-added solution, reflecting our focus on continuous innovation and our ability to rapidly deliver it to our customers.

Before we leave USIS, I also wanted to touch on a couple of strategic bolt-on acquisitions in our healthcare vertical, which turned in another outstanding quarter. In the second quarter, we acquired Auditz, which uses sophisticated proprietary technology to help healthcare providers identify and recover payments, a complementary capability for our existing business, that serves the back end of the revenue cycle management market.

Through this acquisition, we gain new algorithms for identifying insurance coverage. We have already seen cross-selling wins and new-customer gains in the short time we have owned Auditz.

In September, we acquired our RTech, which further builds our capability for insurance coverage discovery, helps us improve our yield for our customers on the back end of the revenue cycle management, and provides a strong foot hold in the academic medical center market. Both transactions bring new customers, technology, and data assets, strengthening our leading position in a very attractive fast-growing market.

Moving on to our international segment, revenue grew 20% on an as-reported basis, and 22% at constant currency. We saw a good balance of growth between developed and emerging markets, with constant currency revenue growth of 17% and 25% respectively. The growth was broad-based across our global footprint, highlighted by strong performance in Canada, India and Latin America.

Adjusted operating income grew 46% as reported, and 48% in constant currency. International margins continued to expand rapidly from the very strong top-line growth, and as we leverage the productivity initiatives we put in place last year to address our cost structure and drive operating efficiencies.

In the third quarter, adjusted operating margin at constant currency increased 580 basis points to 32.8%. This comes on the heels of the 280 and 590 basis point increases in the first and second quarter respectively. The margin improvement should be sustainable for 2016, and we see further upside over time as we leverage new technology and products on a global basis.

On past calls, we have talked about some examples of specific countries that are doing very well, like Canada, India, and Colombia. Today, given the performance of the international segment, I have a very bullish outlook for the business in the near and long term. I want to spend a few minutes reviewing our strategy and global positions.

Our international segment is a critical component of TransUnion's long-term growth strategy. This segment continues to deliver robust double-digit constant currency revenue growth, with margin expansion, driven by a balanced global footprint of both emerging and developed markets. Let me start with emerging markets, where credit is generally in its infancy, representing an outstanding growth opportunity in the near and long term.

As these economies evolve and mature, we see a strong push toward financial inclusion and serving an expanding middle class. We are well-positioned to provide the right products and services, as these markets evolve, from credit reports to fraud monitoring to analytic products like Prama. And we are able to expand into attractive verticals like insurance.

Our emerging market exposure has grown significantly in recent years, as we continue to make meaningful and focused investments in emerging markets like India, Colombia, Brazil, Asia Pac, and Latin America. In fact, over the past five years, our emerging market revenue has roughly tripled on a constant currency basis.

We have focused investment in emerging markets. We have built to number-one positions in India and South Africa, as well as leading positions throughout Asia Pacific and Latin America. Our recent entry into Colombia, with the purchase of CIFIN, the number-two player, allows us to grow with one of the more robust economies in the world.

During the third quarter, we also increased our ownership stake in CIBIL in india from 77% to 82%, giving us another Board seat, and further solidifying our commitment to this dynamic high-growth emerging market. We also have outstanding businesses in developed markets that have delivered very strong growth.

We operate in two markets outside of the US. Hong Kong, where we are the only bureau, and hold the number-one position, and Canada, where we are number two and quickly gaining share. In both emerging and developed markets, we are executing a strategy built on our successful US business. That provides us with significant opportunities to deepen our penetration and gain share by globally leveraging enterprise solutions such as CreditVision, fraud and ID and decisioning, as well as our effective sales force.

In Canada, CreditVision and our refocused sales force have contributed to the 20% plus constant currency revenue growth we've delivered every quarter this year, including nice share gains at some of the largest financial institutions. This growth playbook is transferable to other markets, and we're now in the process of rolling out CreditVision in South Africa, India and Colombia. And over time, we are confident that our new innovative analytics program, Prama, will provide the same revolutionary customer-driven insights internationally that we're seeing during its US rollout.

Another driver of international growth will be the expansion into new verticals, such as insurance. We already have a strong position serving auto insurance carriers in Canada, South Africa and Brazil, and will continue to drive growth in these markets through new innovative solutions leveraging our existing capabilities, as well as through the introduction of insurance offerings to other countries.

Finally, we continued to build our direct-to-consumer business in Canada, Hong Kong, India, Colombia and South Africa. Leveraging our expertise and innovative solutions to drive further growth in each of these markets.

Taken together, the story of our international segment isn't so much about each individual country, though we have outstanding positions and very favorable market trends in many of them. The story is about our ability to layer high-growth opportunities onto our existing positions, to drive very strong growth over the long term. And given the more efficient organizational structure we have implemented, we expect that the rapid growth will flow to the bottom line, and help drive further margin expansion.

Turning to Consumer Interactive, revenue grew 2% behind continued solid growth in the direct channel, offset by an expected modest decline in the indirect business, as we discussed on our last call. Adjusted operating income was up 11%, and adjusted operating margin expanded by 370 basis points, as product mix improved with the loss of certain relatively low-margin business.

Last quarter, we provided you with some context on the anticipated slowdown in Consumer Interactive growth, namely a decrease in revenue associated with one of our indirect channel partners that was acquired by a competitor, and our new long-term agreement with Credit Karma, that extends and builds on our already strong relationship. During the quarter, we signed a number of new strategic partnerships, and had significant business wins in our indirect channel, including traditional financial institutions and online channel partners.

Across the board, we continue to see meaningful opportunities to help our customers provided enhanced services like credit marketing, ID protection, and educational tools for consumers who are more engaged than ever. New business wins and strategic partnerships like these give us confidence in our 2017 outlook, and the longer term health of the business.

In summary, we are very pleased with our continued strong results. We saw positive financial performance and meaningful marketplace wins in every segment, while we continued to invest for the long term with an increase in our ownership stake in India and the acquisition of RTech in healthcare.

With one quarter to go in 2016, we were able to again raise the guidance. We remain confident we will deliver another outstanding year. And just as importantly, we have positioned the Company for strong performance in 2017 and beyond. Now I will turn it over to over to Al to walk you through the financials. Al?

Thank you Jim, and good morning. Today, I am going to walk 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.

Third-quarter consolidated revenue was $438 million, an increase of 12%, or 13% on a constant currency basis, compared with the third quarter of 2015. Revenue from acquisitions contributed about 2 points of growth in the quarter. Adjusted EBITDA was $167 million, an increase of 19% on a reported and constant currency basis, compared with the third quarter of 2015. Adjusted EBITDA margin was 38.1%, an increase of 210 basis points compared with the third quarter of 2015. Adjusted diluted earnings per share was $0.38, an increase of 23% compared with the third quarter of 2015.

Now let me walk you through the details of our P&L. As I just mentioned, consolidated revenue increased 12% or 13% on a constant currency basis.

Cost of services was $141 million, an increase of 5%, compared with the third quarter of 2015, due to increased product costs, resulting from the increase in revenue, continued investments in key strategic growth and productivity initiatives, and increased operating expense related to recent acquisitions. This was offset by savings enabled by our technology transformation and other productivity initiatives, as well as a decrease in product costs in our Consumer Interactive segment. SG&A was $137 million, an increase of 12%, driven primarily in investments in strategic growth initiatives, additional headcount to support these activities, increased operating expense related to recent acquisitions, and increased variable compensation, related to the strong performance of the business and advertising.

Finally, depreciation and amortization was $63 million, a decrease of 12% compared with the third quarter of 2015. The decrease was due primarily to the discontinued use of internally developed software and computer hardware assets, in conjunction with Project Spark, and the completion of Project Spark. [D&A] not related to the 2012 change of control transactions and subsequent acquisitions was approximately $29 million for the quarter, compared with $28 million in the prior year. Adjusted operating income was $138 million, an increase of 22% compared with the third quarter of 2015, driven primarily by the increase in revenue. Now, looking at the segment revenue and adjusted operating income.

USIS revenue was $273 million, up 14% compared with the third quarter of 2015, driven by strong growth across all platforms. Starting with online data services, revenue was $178 million, an increase of 15%, driven primarily by our new product growth initiatives including CreditVision. Marketing services revenue was $41 million, an increase of 5%, due primarily to increased batch activity. And decision services revenue was $54 million, an increase of 19%, due primarily to revenue growth in the healthcare and insurance markets.

Adjusted operating income for USIS was $90 million, an increase of 10% compared with the third quarter of 2015, due primarily to the increase in revenue, and savings enabled by our technology transformation. Partially offset by increased product costs, resulting from the increased revenue, investments in strategic growth initiatives, increased operating expenses related to recent acquisitions, and increased variable compensation, due to the strong performance of the business.

International revenue was $82 million, an increase of 20%, or 22% on a constant currency basis, compared with the third quarter of 2015. Revenue from recent acquisitions contributed approximately 11 points of growth in the quarter for international. Developed markets revenue was $29 million, an increase of 17%, both on a reported and a constant currency basis.

Emerging markets revenue was $53 million, an increase of 21%, or 25% on a constant currency basis. Revenue from recent acquisitions contributed to approximately 17 points of this growth. Adjusted operating income for international was $27 million, an increase of 46%, compared with the third quarter of 2015.

On a constant currency basis, adjusted operating income increased 48%, driven by increase in revenue, along with savings enabled by productivity initiatives, partially offset by increased operating expense related to recent acquisitions, and increased variable compensation due to the strong performance of the. This resulted in a 580 basis point margin expansion on a constant currency basis in the quarter.

Consumer Interactive revenue was $97 million, an increase of 2% compared with the third quarter of 2015. These results are well aligned with our expectations, and what we communicated on our last call. As previously discussed, we expected revenue in our Consumer Interactive segment to be flat to slightly down in the second half of the year, due primarily to moderated growth related to our new long-term contract with Credit Karma, and a decrease in revenue associated with one of our indirect channel partners that was acquired by a competitor, along with a particularly tough comp in the fourth quarter, due in part to one-time revenue in the fourth quarter of 2015, related to third-party data breach.

Adjusted operating income for Consumer Interactive was $42 million, an increase of 11% compared with the third quarter of 2015. Given the lower margin profile of the revenue that came off, related to the acquisition of one of our indirect channel partners by a competitor, we saw adjusted operating income actually grow, and adjusted operating income expand 370 basis points in the quarter.

Now, moving on to the balance sheet. Cash and cash equivalents were $138 million at September 30, 2016 and $133 million at December 31, 2015. Total debts, including the current portion of long-term debt, increased to $2.4 billion at September 30, 2016 compared with $2.2 billion at September 30, 2015, primarily due to the financing of the acquisition of CIFIN.

As of September 30, 2016, we had access to all the $210 million revolving credit facility. Our net leverage as of September 30, 2016 was approximately 3.7 times, down from 3.9 times at the end of the second quarter of 2016, and in line with our expectation that based on our current guidance, we will be at approximately 3.5 times by year end.

As we have talked about, we will continue to take a balanced approach to capital allocation, focusing on organic investments as well as strategic inorganic opportunities, while always diligently considering deleveraging. In the quarter, as Jim mentioned, we acquired RTech to further build out our healthcare portfolio, strengthening our leadership position, in a very attractive high-growth market. We also picked up another 5% of CIBIL in india. Our M&A machine is working, and we're driving meaningful long-term growth, with acquisitions in highly attractive markets and verticals.

Moving on to the statement of cash flows, for the nine months ended September 30, 2016, cash provided by operating activities was $276 million, compared with $206 million for the same period in 2015, due primarily to the increase in operating performance, along with a decrease in cash interest expense. Cash used in investing activities was $442 million, compared with $118 million for the same period in 2015, due primarily to an increase in cash used for acquisitions.

Capital expenditures were $86 million, compared with $96 million for the same period in 2015. Cash provided by financing activities was $168 million, compared with a use of cash of $33 million for the same period in 2015, due primarily for additional borrowings in 2016, to finance acquisitions.

That concludes my review of our third-quarter financial results. I will now turn the call back to Jim.

Thanks, Al. As I lay out our guidance, a couple quick points about our assumptions for acquisitions and FX impact. Acquisitions should add 2 points of revenue growth to the full year, and 3 points to the fourth quarter. We expect FX to negatively impact revenue and adjusted EBITDA by 1 point for the full year, and to have essentially no impact in the fourth quarter.

Now turning to our guidance for the full-year 2016. Given the strong third-quarter performance we are increasing our outlook for 2016 revenue, adjusted EBITDA and adjusted EPS. We expect our revenue to come in between $1.690 billion and $1.695 billion, an increase over last year of 12% on an as-reported basis, and up 13% on a constant currency basis. Adjusted EBITDA for the year is expected to be between $625 million and $627 million, an increase over last year of 19% on a reported basis, and 20% on a constant currency basis.

This results in expected adjusted EBITDA margin of approximately 37%, roughly 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 $1.42 and $1.43, or 30% to 31% growth. And for the fourth quarter of 2016, we expect the following. Revenue should come in between $421 million and $426 million, an increase of approximately 9% to 10% on an as-reported basis, and constant currency basis.

Adjusted EBITDA is expected to be between $157.5 million and $159.5 million, an increase of approximately 15% to 16% on an as-reported basis and constant currency basis. Adjusted diluted earnings per share are expected to be between $0.34 and $0.35, an increase of 11% to 15%, compared with the fourth quarter of 2015.

To wrap it up, TransUnion continues to deliver outstanding broad based top- and bottom-line financial results. As was the case in each of the previous quarters this year, this performance allows us to raise guidance again, reflecting the continuing strength and momentum in our business. And even as we are executing against our strategic growth plans, we are also investing for the future, as we have discussed today. CreditVision is fully rolled out to our mortgage reseller customers, and is making meaningful gains in many other end-markets.

Our international business continues to deliver very strong results, and is well positioned to continue their performance in spite of some headwinds at Consumer Interactive. We delivered margin expansion and won some important new business. We increased our ownership stake in India, and we made our second strategic bolt-on acquisition in our fast-growing healthcare vertical. This strong execution and focused strategic investment positions us very well for the remainder of 2016, and into 2017 and beyond.

That concludes our prepared remarks this morning.

(Caller Instructions)

Now we will be glad to take those questions.

(Operator Instructions)

Manav Patnaik, Barclays.

My first question is just on trended data. I'm just trying just trying to see if you could help us size what the incremental list, if there was any this quarter, from the Fannie Mae going official, because I know you have talked about how you have been selling CreditVision already and that's international and so forth. Just trying to understand how that blends into what we should think about in terms of the run rate going forward there.

Good morning, Manav. As we've talked about before, CreditVision really came into the market significantly in the mortgage market, for two months of the quarter. It has had an impact on our results, and will continue to have an impact on our results going forward, as all, let's say the resellers in the mortgage business integrate this into their systems.

Probably important to point out is we still have a lot of runway ahead of us. I think I talked at your conference last time, and said we were rounding first on CreditVision. I would say now we are starting to slide into second, maybe, and it's showing how meaningful it can be. It's doing that because we're also beginning to establish CreditVision in the other markets like credit card and auto with the FICO score that we created. We're also leveraging CreditVision internationally, which is what you can expect of us going forward, not only with CreditVision, but with all of our growth initiatives.

We don't have a specific number to give you here, but it is having a significant impact, not only in the CreditVision revenue itself, but it's also helping us establish or take market share, because we have the first move advantage, because our product has 30 months of history, which is more than the other folks, and because we have actually made it work across all the different kinds of lending vehicles the banks are using, and because we are already leveraging internationally. So it is a significant driver and growth for us, and now and into 2017 and 2018 and beyond.

Got it. And my follow-up somewhat related to that is, down here at the Money2020 conference, and yesterday at your, taking a good demo with Prama and a bunch of other products you have out there. But just in terms of if you're calling CreditVision going into second innings, I suppose, just trying to understand, when we think about Prama and the other stuff in there, should that collectively be much larger than CreditVision? And how, what timeframe should we expect that to rollout to contribute to solid growth?

I guess to continue the analogy, the baseball analogy here, we have many other initiatives. You saw Prama, you may have saw digital marketing. We have our CreditVision Link product, which is an alternative data play. In addition to that we have a bunch of initiatives in insurance, and I can keep going on in healthcare et cetera, et cetera.

Many of those are, we would say taken together, rounding first. They are contributing significantly to our top and bottom line, the way they have been built, but they will drive, taken together, substantial growth going forward.

The thing is, with all of these, when you have so many, we don't know all the time which ones are going to be the biggest. But we do know that each of them is contributing now, and if you look at our overall portfolio, in the performance in this quarter, you can see that many things must be hitting, for us to continue to drive the strong double-digit growth.

Got it. Thank you. I'll get back into queue.

Gary Bisbee, RBC Capital Markets.

I guess a question for each of you, Al and Jim, and Al, I will start with you. Can you give us some more color on why the USIS margins were down so much year over year, and how should we think about that trending going into the next few quarters?

We don't give specific adjusted operating income margin guidance. Just to step back, overall EBITDA margins are going to go up 200 basis points from 2015 to 2016, for the enterprise. I would say specifically within USIS you saw good top line growth coming through at approximately 14%, and then you saw adjusted operating income growth, too, coming in at approximately 10%.

Within that 10%, you have got a couple things that will flip to accretive. In the near-term, one, acquisitions, so we're still integrating in some of our acquisitions in that particular business. But that is typical and traditional, with how we generally will go do a deal, and invest to make certain those enterprises that we purchase are at our standards, from a security, data, IT standpoint. And equally important, during the quarter, you had some one-time investments that are going to pay off in 2017.

I would say we took them now, given the overall performance of the business and the timing of those particular, what I call to be productivity related initiatives, but you will see clear benefits coming in in 2017. Last but not least, given the strong performance in that particular business, with 14% top line growth, we also had some variable comp that we took, given the strong performance of the business.

But I would say those items collectively, none of which are truly sustainable, are what impacted this quarter. We feel very good about the top line growth, as we end the year for USIS, and the bottom line impact and benefit, as well.

Okay great. The investment that you mentioned there, would that be safe to say, when you said a quarter ago that you were going to use the opportunity of such strong upside to do some reinvestment, that's what you're referring to?

Yes, I think the last couple quarters, and I think Jim has been really clear on it, is that as we continue to perform and outperform our own guidance, as well as even when you look at Street consensus, we are going to take the opportunity, if we see it, because we evaluate it every quarter, both short-term and long-term opportunities to invest in top line and bottom line growth.

Gary, our strategy here is to continue developing a pipeline of growth initiatives, and continue to layer those things on the core, and are already in growth market initiatives. It is a constant way of life here. When we see those opportunities, especially given the over performance, we are going to take them, because I think it just increases our ability to stay at the top of the heap of our peer group, when it comes to top line growth, and the investments we make in our operational efficiencies, and if we're, for example, able to leverage our capabilities across vertical and across countries. That's allowing a lot of that top line growth to fall to the bottom line, and that's what's helping to drive margin expansion.

Great. Thank you. The follow up, Jim, you mentioned at the end of your remarks that all of the investments and things that are going well position for a strong 2017. Can you give us any more color on how you are thinking about how next year? It would seem given all these positives and the baseball analogy you just gave, that you would likely be positioned to grow in excess in the long term growth framework that you have talked about.

First of all, with all the baseball analogies, I am from Cleveland, so I am also hoping for a good next couple weeks, living in Chicago here. Based on what we see today, the US consumer remains super engaged, and consumer lending markets continue to benefit from that growth. I will mention, though, we are not overly reliant on any consumer trends driving the business forward.

We haven't assumed some type of substantial juice to the economy, or anything super bad happening. We also see continued strength across our international markets, so virtually of them are in very good shape. Especially in our emerging markets, where they are, regardless of the economy, looking to expand their middle class, looking to do financial inclusions.

In addition to that, like you said, rounding first, we have all these initiatives that -- or growth initiatives, that are continuing to take hold. It is allowing us to simply close new business every month again and again and again. In addition to that, it is allowing us to take share.

Then you add in some of the acquisitions that we have made, CIFIN, Auditz, and RTech. This makes us feel really good about 2017, both in terms of the top line and our ability to expand margins.

Great, thank you.

Tim McHugh, William Blair & Company.

Just wanted on the healthcare business, particularly given the acquisitions, can you give us any more sense of the size of that business at this point, and the organic growth in terms of what you have seen and maybe what you would hope to be able to grow during the next few years?

Sure. So I think I made a statement at a recent conference that the healthcare business is getting big enough that we are going to have to report it separately. We don't know exactly when that will be, so its a meaningful part of our business.

We believe in that space, and particularly the revenue cycle management portion of that space, where we play in the front end, helping providers and consumers understand their coverage, their ability to pay, putting them on payment plans to get out ahead of any potential issues. And on the back end, where there are still billions of unrecovered, basically billings. These are associated in a large part by just people not understanding the kind of coverages they had and the providers not understanding that.

So our two recent acquisitions have bolstered our position in that space. They follow what we told you are going to be our approach to acquisitions. They are either going to get us into new markets to sell our current capabilities, or they're going to help us take new capabilities into our newer markets, or current markets. This happens to do both.

Each of these have slightly different solutions to help us increase the yield for our current customers. They also got us into new spaces, in particular RTech got us into the northeast region of the US and in academic medical centers, and Auditz got us into something called Transfer DIG without getting too much into it. It just helps with the recovery costs associated with Medicare patient transfer, which is a big issue.

Both of these acquisitions are going as planned, if not ahead of plan. I think we expect a good solid double digit growth in this business going forward. We continue to see it as a place to both innovate, with our new solutions we put in place.

Things like Prama will actually work in this space as well. Also an opportunity, an opportunistic acquisitions that we know we can make work. We are very bullish on this part of our business.

Okay. Thanks. Just on the consumer part of the business, you talked pretty positively about the new business activity there. Have we rebased that business versus Q3, can we see sequentially from here growth in the revenue?

Yes, what we told you on the last call, and I think we are reiterating on this call, is that the consumer interactive business is moderating its growth, primarily for three reasons. One is the decrease in revenue associated with the loss of an indirect channel partner that was acquired by a competitor. This revenue, by the way, is relatively low margin.

We very purposefully signed a new long-term agreement with Credit Karma. I think all of you should be and would be happy with. It secures a very large, long-term revenue stream and strategic partnership with them, but it does moderate the revenue.

And we have had tremendous growth in 2015, particularly in the fourth quarter, as associated with the data breach. All of that taken together, we believe for the last half of this year and the first half of next year, we are going to have very moderated growth. As we proceed into the second half of 2017, we think you'll see that growth get more into the mid to high single digits.

This is associated with continuing to do what we do with our current partners, but also with some new business closes that we have had, that we'll get implemented and start ramping. These will all be very good margin businesses. I think you will also see our margins expand in this business as well, next year. We feel good about the business going forward.

Great, thank you.

David Togut, Evercore.

Corporate expense was down 13% year over year, and was well below our expectation, which was nice to see, as you completed your technology refresh. Is this new level of corporate expense, the $23 million range to $24 million range, sustainable?

I think that it is going to be sustainable, I think you had a little bit more than year-over-year decline, slightly because of some of the one investments we made last year during the quarter. Yes, I think as you look at corporate and corporate expense, it is going to become more sustainable at this level, as some of these investments we made leave our system and start to generate returns.

Thanks. Just as a quick follow-up, Jim, you highlighted some of the advantages that you have in CreditVision, first-mover advantage, 30 months of history. Do you think you have a sustainably better product than your competitors? Because both of your main competitors obviously are investing aggressively in this area, as well. Is this mostly a time advantage, or do you think you could demonstrate you have a superior product?

Yes, sure. So as, again, repeating myself from previous calls, we welcomed our competitors getting into this space. One reason, it helps this become the standard for the industry, and you see that happening with Fannie Mae. I think it's pretty clear that we were the innovators in this area.

This is a product that takes a good significant amount of time, to get to a place where you can really integrate into your customer's workflow. Not only in the mortgage space, but also in all the other lending vehicles. I think you are seeing us already do that.

It also becomes much more powerful if you integrate it with other things like alternative data. We have CreditVision Link in the market already. My view though, however, on innovation, is that you have to keep at it constantly. That is why you are seeing other things come into play for us, like Prama, like our digital marketing play, and other things that we are doing in fraud.

For now anyway, I do see us being able to sustain our advantage here. If you look at the way we've been able to take share in Canada, that is largely, that is the market you go look at it as a microcosm. The reason we have been able to do that is we have introduced CreditVision into that space.

Now customers are using it, and with it came market share. We really aren't facing any competition for CreditVision there. That's just an example, give proof to the fact that we are not just putting this into the market, but we have learned, and we are able to continue adding functionality to it, to have a sustainable advantage.

I think anyone would be hitting you if they didn't say you have to keep at it, which is what we're doing, and we're continuing to invest. I will take this opportunity to bring up the Spark Project, which is our whole new infrastructure platform. Something we call Shape layered on it, which is our whole analytics core infrastructure, and then Prama sits on top of that. That is done.

We are now moving it into all of the different countries, where it makes most sense to move it into. Most people don't really get there, I've read that only 5% of companies do this, where they actually pull the plugs on their mainframes. We have done that. They are out of our system.

This is all enabling us to not only have ideas for innovation, but have the backup of technology to be able to do it. I feel really good about our ability, not just in CreditVision but overall, to be again at the top of the heap on innovation, and being able to monetize that innovation.

Understood. Congrats on the strong results.

David Chu, Bank of America Merrill Lynch.

For online data services, is it fair to say that most of the accelerating growth came from the Fannie Mae going live?

I don't think so. I think when you look at our overall revenue growth, just broadly speaking across the board, about 50% comes from our core business this last quarter, and about 50% came from new initiatives that include CreditVision, but also include our fraud products, include our newer products in our insurance business like DHI, also our healthcare business overall which includes, again, new solutions, but also some of the acquisitions. I would say it is about 50/50. Al do you want to?

If you're talking specifically within USIS, online data services, is that correct?

Yes.

I would say, if you look at the last three quarters and even going back to 2015, that has been, generally speaking, a high single digit, possibly low teen grower. This quarter, you have a little bit of a pop above and beyond that. That pop is probably proportionately a little bit attributable to CreditVision. T

hat is where you see the uptick, but consistently that has been a nice grower for us, and continues to be. Underlined by new products and innovation, one. Two, some really nice new wins. And three, the macro market environment remaining buoyant.

Okay. If you look at the core business there, not these new initiatives, are we seeing steady growth, is growth accelerating slightly? How would you speak to that?

I would say it is steady growth. I think we continue to see steady growth in our core US consumer credit markets across the board. We are not seeing any slowdown, we're not seeing any massive acceleration. It's nice steady growth. That's been, quite honestly, consistent for the last several quarters.

As Jim pointed out, as we look at 2017, those are the trends that we see today. And when we do plan and when we will provide guidance in 2017, we are not going to be making any bets on any significant accelerations or decelerations, based on what we see today. We feel very, very good about that market from a core standpoint. But as Jim talked about, probably equally or not more important, the things that we can control about investments, new wins, continue to invest, both to get top and bottom line growth for 2017 and beyond, we feel very good about as well.

Great. That's very helpful. Just as a follow-up, I think the plan is to take Project Spark internationally. How should we think about costs associated with that?

Al, if you can keep me right here, but the capital guidance that we have given is something like 7% of revenue. We are going to drop to that. During Spark, we were well above that for the US. That's all factored into our guidance.

Now what we are going to, what we are already doing frankly, is all factored in. You are not going to see some big major new project associated with it, because the stuff is built, and now it is largely migrating different specific applications that go on in these different countries, to the Spark platform, which is a different job than actually building it from the ground up, which took a tremendous amount of investment and brain power.

The other thing I would mention is that the ratio of what we are spending on infrastructure now versus new stuff that drives new revenue growth, has changed. We are able to spend significantly more dollars on new revenue-generating items than we have in the past, because with Spark which is infrastructure, going away, and these mainframes are going away, and they sucked a tremendous amount of capacity from us. Basically to keep the lights on versus driving new revenue growth.

That dynamic that we have talked about is really happening. As we wound down Spark we're allocating all these people either to international stuff or to new initiatives that are going to drive yet more growth. This recipe for growth is only getting better.

Last point on that, as it relates to Project Spark and the cost, if just you take a look when you have a chance at schedule 3 of your earnings release, you can see on the line item, technology transformation. We had zero cost there this quarter, as an adjustment to reconciling items. That is very consistent with what we said the last couple years, that we will complete it in Q2 2016.

You will see no longer any one-time costs associated with that, which is reflected in our Q3 schedule 3. Adjusted net income and adjusted earnings per share and reconciliation. Any guidance we gave is going to have international Spark contemplated in it.

And also, although we are rolling it out and continue to roll it out, we still expanded adjusted operating income margins internationally, based on some of the productivity plays we put in place over the last year or so by nearly 500 basis, in terms of adjusted operating income margin.

Not only are we seeing nice benefits from past productivity plays, and continuing to invest in Spark, but we are still able to see that type of margin growth. We feel very good about where we are today, and where we are going, while still being able to field investments like Spark internationally.

Great. Thank you very much.

Ato Garrett, Deutsche Bank.

Related to just what you were discussing with this rollout of Project Spark internationally, and some of the productivity initiatives that you also have going there, the margin expansion has been great for the last two quarters, coming in, by math, well over 500 basis points. As you think about where margins might go for that segment as you are going forward, do you think last two quarters are going to represent a high watermark, or do you think this is in line with the way we can think about international margins?

As it relates to any margins at this point in time, and the way we talk about and look at them, we don't want to give specific margin guidance, because we are seeing, like Jim has talked about and I talked about, good opportunities to continue to invest, while still increasing margin throughout the year. An example, right? Adjusted EBITDA margin was up 200 basis points for the full year. That is what we are guiding to. Last year, we talked about some of the investments we were making internationally, and you'd see the margin expansion, which is driving the 500 basis point margin expansion in the quarter.

I do think there will be an opportunity to continue to expand our margins, but at the rate, probably not going to see another 500 point increase next year. But clearly, with some of the initiatives we have been placed like Project Spark, for example, being worked on or rolled in South Africa, you'll see those costs disappear and productivity associated with that come in. That is only an example of margin expansion of what we are working on.

Great. Just a follow-up question on some of your, when you look at the business, in terms of your growth initiatives that are away from the core business. Looking at the scale of your fraud products, can you talk about where you are in terms of rolling that out and building it? If you have another baseball analogy there, that would be great.

The way I would characterize it, I can't think of a good baseball, but it's all coming together, might be one way to look at. It's still early on in the penetration. But between Trustev and some other things that we are doing, we think we have a unique offering, that not only lets us get into the account origination portion of fraud, but also the transactional portion of fraud. As you all know, that is not getting any better.

We look at, it's a substantial part of our business going forward. If you saw that, you would say, wow, probably. It also is driving substantial growth going forward. Not only in the US, but also internationally.

Great. Thank you.

Your next question comes from the line of Tony Kaplan from Morgan Stanley. Your line is open.

This is Patrick Hoffman in for Toni. I wanted to ask about consumer interactive margins, which expanded nicely in light of the anticipated top line deceleration. I know you mentioned that you shed some lower margin revenue this quarter, but can you help us understand the leverage you have left to bring up margin further in that business, as we lookout into 2017 and beyond?

I will let Al comment more specifically, but we did shed that revenue. Some of the deals we have closed on the indirect side, are also very good margins. That is helping contribute to the overall growth, or ability to expand margins, as it always has been. Al do want have more color? It's pretty much that simple.

I think you're going to get earnings growth next year, slightly ahead, well ahead of revenue growth. That's going to drive margin expansion, and we're going to continue to see that. The main drivers of margin expansion in that business are going to be continuing to drive indirect channel revenue, with some of the new opportunities Jim has talked about. Because that and a lot of times, it's a fixed cost and you are putting revenue on top of that.

That is going to drive margin and margin expansion, as well as returns, after we pass our payback period for our direct business. Which too has shown pretty solid mid to high single-digit growth. Again, as we get into 2017, we will give more margin guidance, adjusted operating margin guidance on this particular business, but for the quarter, as you pointed out, nearly 400 basis point margin increase is pretty good, while still continuing to advertise more on a year-over-year basis to drive direct channel growth in the future. Another example of where margins are expanding, and we are investing in the future, such as incremental year-over-year advertising.

Thanks. I wanted to ask one follow-up on your M&A strategy now that you're approaching your leverage targets for the end of the year. I'm wondering if acquiring additional alternative data assets is going to become more of a focus, now that you've made a couple of investments abroad and domestically in healthcare?

To remind everybody, our M&A strategy, and which I told you before, is really to look at our space and say what opportunities at our acquired companies allow us to really clearly penetrate our existing customer based more effectively, so these are more capabilities. You look at another axis, and you say, what would allow us to get into new markets? That is what we are going to continue to do.

I think I have clarified that. We thought a lot about it. We are going to stick pretty near to our knitting.

What do we mean by that? We are really good at understanding and integrating solutions, having to deal with helping the consumers, and helping businesses deal with consumers and back and forth. You won't see us likely getting into areas like energy, or whatever. We will be sticking to that.

The natural conclusion is, and that would probably get us more into certain areas of healthcare, and potentially more into areas where alternative data comes into play. Because as I think you know, I have talked about in other venues, content still remains a very, very important part of anybody in our space's strategy. Analytics are important, technology is important, but that content is equally if not more important. You could see us making moves in, let's call it alternative data spaces, as well. It would fit our strategy.

Great, thanks for taking my questions.

Bill Warmington, Wells Fargo.

I also had a question on the non-credit data side. On TLO, that has been one of your more visible brands there. It seems like there are a lot of potential applications there. ID authentication, fraud prevention, legal compliance, debt collections, just to name a few. My question for you is, where are you getting the most traction there, and how big a driver is it for current revenue growth?

But the capabilities it provides, broadly speaking, are what's called investigative solutions, or you could say fraud prevention solutions. We have gained significant traction there in the investigative area, both in and out of law enforcement. We've also gained significant traction in the third-party collection space in particular, but it also just runs across the board of the different kinds of companies that have the regulatory justification to use this kind of data.

We are seeing broad-based growth. We will continue, I think, to see that make a significant contribution, as it finds its way into what's called first-party collection space, into the banking space, and into virtually any retail or any other space that's looking to provide ID fraud identification. As you know, I came from that world. My previous job.

I really felt strongly that a traditional credit bureau like TransUnion, combined with the company like TLO that collects massive amounts and aggregates massive amounts of public records data and then fuses them together in different ways than a credit bureau might, provides a much broader ability to affect the whole customer footprint. All the way from ID fraud identification to the very end, with collections and investigative services.

This really again helps us across our whole business. Not just financial services. I did not mention insurance, which also has a big investigative component as well, and even healthcare. It's a very broad-based solution that fits well right next to our other, let's call them credit-based solutions.

Thank you for that. And then housekeeping question, on the higher revenue guidance, how much is coming from the two acquisitions, versus how much has come in from the strength in the core business?

The guidance, you are getting a de minimus amount in the fourth quarter related to the healthcare acquisitions.

Got it. Thank you.

We have one more person on the line. We will take one more question and then wrap things up.

George Mihalos, Cowen.

Congrats on the quarter. Just wanted to ask, on the guidance for the fourth quarter, the $421 million to $426 million, it looks like a bit more of a seasonal decline than what we have seen 3Q to 4Q in the last couple of years. Is there anything aside from consumer being a little bit softer, that we should be thinking about? Or is that just the usual TransUnion conservatism that we have seen?

I won't comment on the last point. I will say, no, there's nothing other than like you pointed out, the consumer side. Like I said earlier, trends are very, very good in our business, in our underlying business, and as Jim has talked about a lot on the last several calls, the growth initiatives that we're executing on continue to perform or slightly outperform our expectations.

As always we continue, even in the fourth quarter of this year, to invest in things that we think will benefit us going forward. With the notion that we will meet guidance.

Okay great. Last question. Jim in your conversations with lenders, are there any verticals, any patches out there where you may be starting to see a little bit a weakness for a bit of a pause. I know people have talked in the past about, for example, auto. Just anything that perhaps worries you in the lending landscape, based on your conversations?

Based on what I see, the actual results I see, we have solid performance across all the lending vehicles. To translate it, and maybe what's important to TransUnion, we haven't for next year assumed, and I've said this before, any significant upside or any massive downside to any of these. We are not overly reliant as we project our confidence for 2017, on any of these things. Of course, we can't predict the future.

What I will say is all of our initiatives, and everything we are doing here are really designed to help offset that cyclicality. Yes, we can be exposed to it. It helps to offset it. I think it will keep us in the upper right-hand quadrant when it comes to growth, both in terms of top line and bottom line.

Great. Congrats again.

That concludes our call today. I want to take everybody for joining us. We wish you have a great day.

Thank you.

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