TransUnion (TRU) 2017 Q4 法說會逐字稿

Good morning, and welcome to the TransUnion Fourth Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Aaron Hoffman. Please go ahead.

Good morning, everyone, and thank you for joining us today. I'm joined by Jim Peck, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We've posted our earnings release on the TransUnion Investor Relations website this morning. 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 also included in these schedules.

As a reminder, today's call will be recorded, and a replay will be available on the TransUnion website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, in the comments made during this conference call and in our most recent Form 10-K, 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.

So with that done, let me turn the time over to Jim.

Thanks, Aaron. TransUnion closed out a very good year in 2017 with a strong fourth quarter. The growth trends that we experienced throughout the year continued. For both the full year and the quarter, revenue grew double digits for the total company as well as for USIS and International. Consumer Interactive delivered stronger-than-expected revenue growth of 6% for the year and double digits for the fourth quarter.

Adjusted EBITDA and adjusted EPS both increased significantly for the year and the quarter. Adjusted EBITDA margin for the full year expanded by more than 100- basis points. This marks 3 consecutive years of double-digit revenue, adjusted EBITDA and adjusted EPS growth. Over that 3-year span, adjusted EBITDA margin has expanded by about 400- basis points.

As we've discussed on previous calls, our strategy is to deliver this sort of top-tier performance from a broad-based set of growth drivers. And over this time, our growth has come from a variety of diversified sources, ranging from new products to rapidly growing verticals to attractive international positions. In fact, over the past 3 years, more than 50% of our top line growth has come from new products, growth verticals and emerging markets. And we expect a similar story over the next 3 years and likely beyond that. This gives us not only great conviction in the long-term durability of our growth trajectory, but the diversification also limits downside risk that can come from overreliance on any one area of the business. Our strong performance also makes us strong cash generators, and you've seen that our board has approved a dividend policy. I want to stress that we will continue to fully invest in our robust pipeline of organic and inorganic opportunities.

Underlying our growth objectives are a series of focused, highly impactful strategies that provide the engine for our current and long-term performance.

Starting with how we are driving growth through innovation, let me spend a few minutes on CreditVision and CreditVision Link, our industry-leading trended and alternative credit products. We've talked about them frequently and with good reason. In 2017, the 2 products together grew revenue in the U.S. by about 130% and are very well-positioned to continue to deliver significant incremental growth. Our products have been widely used in all our lending end markets, from mortgage to card to auto to personal lending and FinTech. And while we benefited significantly from Fannie Mae's adoption of CreditVision, we have penetrated these other markets such that almost 2/3 of CreditVision revenue last year came from uses outside of mortgage.

The success of these products hinges on a true win-win for both our customers and consumers, for our business customers to gain a better understanding of consumer credit behaviors, making lending decisions more relevant, timely and risk appropriate. And just as important, these products increase consumers' ability to access credit. CreditVision allows our customers to reliably score 26 million U.S. consumers who otherwise would have no credit score. With no score, consumers seeking credit often face denied access or significantly more expensive terms. Similarly, our products moved 23 million Americans into super prime credit scores, allowing them to receive more favorable lending terms.

Like so many innovative products and capabilities at TransUnion, CreditVision has been successfully rolled out in Canada, Hong Kong, India, Colombia, South Africa as well as a number of our smaller Latin American markets. In 2017, CreditVision in these markets increased revenue by more than 50%. Like the U.S., there is significant runway ahead as we continue to penetrate these markets.

Another area where we see considerable future opportunity, and it dovetails with CreditVision Link, is the broader use of alternative data to deliver valuable products to our customers. Acquisitions like TLO and L2C provided key alternative data assets and foundational aggregating and linking capabilities. Today, our specialized risk group, which we discussed in our last earnings call, employs these capabilities across a wide range of verticals, from financial services to collections to government. In the fourth quarter, we added yet another outstanding alternative data source with the acquisition of FactorTrust. In simple terms, FactorTrust serves as a credit bureau for the -- for short-term lenders and provides us with an attractive entry into this previously untapped market.

Let me first provide a little background. Historically, short-term lending was an underdeveloped and highly fragmented space. In recent years, however, the industry has consolidated into larger, more sophisticated players as consumers move from local branch-based borrowing to online and mobile, where data and analytics play an increasingly important role on customer acquisition and underwriting. We view FactorTrust as the highest-quality asset in this space. It is among the largest players in the industry and is the fastest grower. We also inherited a strong management team. Very importantly, FactorTrust collects both positive and negative data on borrowers, which is not the case for all players in this market. Obviously, having both creates a more robust valuable data asset that has significant value to TransUnion and both our business and consumer customers.

FactorTrust has lending data on more than 25 million U.S. consumers who largely have limited or no credit history with traditional lenders. With this, we can immediately expand and enrich our holistic view of the consumer, including CreditVision Link. For our traditional customers in financial services and many other verticals, we can now offer a view of consumers who they may not have a relationship with but surely would like to. As TransUnion hasn't participated in the short-term lending market in a meaningful way, we have the opportunity to sell our existing product portfolio to this almost entirely new customer base. We can leverage an array of our core capabilities and sell collections, fraud and traditional financial services products to FactorTrust customers. As we continue to expand and deepen our capabilities, we expect that our innovation pipeline will remain robust and help drive strong long-term growth.

The second strategy I want to discuss is our expansion in attractive geographic and vertical markets. Starting with international markets, we operate in more than 30 countries outside of the U.S., with generally very strong positions. A few highlights from 2017 include our largest international market, Canada, growing 14% in constant currency on the heels of a 20% increase in 2016. Similarly, we posted back-to-back years of double-digit growth in our other developed market, Hong Kong. In both cases, we have delivered excellent performance in a relatively low growth macro environment. Our ability to efficiently penetrate these markets comes from several factors. First, we've seen meaningful new business and share gains relative to innovative products, like CreditVision and CreditView. Second, we are benefiting from launching verticals like insurance and government in Canada and direct-to-consumer offerings in both markets. This strong performance is a reflection of our ability to lift and shift products and capabilities from one market into others quickly and effectively.

On the other hand, in India, our second-largest international market, we're seeing outstanding underlying market growth fueled by Indian President Modi's mission to utilize financial inclusion to expand the middle class. We can then layer our products, verticals and capabilities on top of that to achieve truly outstanding growth. This led to constant-currency revenue growth this year of more than 30% and almost 25% growth last year. We continue to be very bullish on this fast-growing dynamic market.

Turning to our verticals. Our health care business continues to be one of our most dynamic businesses, growing 16% organically in 2016 and another 18% last year. This very strong performance has been driven by new customer wins, high-impact product launches and the successful integration of 2 acquisitions which I'll touch on in a moment. As a reminder, within health care, our focus is on revenue cycle management, helping health care 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 estimation, 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 integrate acquisitions. On the front end of the cycle, our offerings more accurately verify patient identity, insurance eligibility, benefits and authorization requirements and is rated highest by health care research firm, KLAS, for accuracy in determining patient payment estimates.

Collectively, we refer to these services as patient access. We provide insurance verification before services are rendered, leading to fewer claim rejections and denials and then also lays the foundation for the accuracy of the financial transactions that follow. Leveraging TU's core credit data, we can also provide an estimate of a patient's income and propensity to pay their bills, helping both patient and provider make smart informed decisions about procedures and payments. As the health care industry continues to move toward a higher deductible model, the need for more transparency in patient payments has become more pronounced.

On the back end of the cycle, our insurance discovery products uncover unidentified sources of third-party insurance coverage to help providers receive full payment for care provided. These products offer a differentiated market-leading technology that helps hospitals and health care systems reduce uncompensated care costs by identifying patient insurance coverage, either commercial, Medicare or Medicaid, after services were provided. Our automated platform provides a superior return on investments to a hospital's traditional manual processes, which are typically inefficient, labor-intensive and error-prone.

In 2016, we made 2 strategic bolt-on acquisitions, Auditz and RTech, to bolster our insurance discovery offerings. Both acquisitions have performed exceptionally well, driving revenue growth through enhanced yields, cross-selling opportunities and new customer wins. Importantly, both companies are now fully integrated into our data center, which improves their access to our enterprise capabilities, reduces costs and significantly improves their information security stance.

In fact, our newest health care solution, Revenue Assurance, combines the most significant benefits of the eScan, Auditz and RTech solutions into one offering. Revenue Assurance is a unique technology-enabled service that combines market-leading insurance coverage discovery with TransUnion's deep knowledge of billing, regulatory compliance and revenue cycle management to help ensure that at-risk revenue earned becomes paid revenue. As we are paid on the back-end when our customers collect revenue from appropriate third parties, Revenue Assurance is a win-win that delivers significant benefits to our customers and to TransUnion.

Looking ahead to 2018 and beyond. We continue to see a very robust growth trajectory for our health care business. In addition to favorable industry trends that fit our suite of products, we have a fair amount of additional tailwind. First, we have a strong backlog of new business implementation occurring in 2018 from many customer wins last year. Second, we have a slate of new product offerings ready to launch for health care providers, the government and other health care payers as well as an analytics product that follows the Prama framework but for health care providers. And third, we see additional opportunities to enhance the yield of our insurance discovery products. At the same time, we continue to look at strategically valuable acquisitions that could further enhance our capabilities and growth profile.

Moving on to consumer offerings. We continue to enable and empower consumers through our direct offerings as well as through a growing roster of high-quality partners. In each case, we are bringing valuable credit-based information and financial education tools to consumers around the world. To use a cliché, knowledge is power. A knowledgeable and thus empowered consumer can make better decisions to improve their long-term financial health.

On the direct side of our business, since 2016, we have had a free product called TrueIdentity available online to all consumers. It allows them to see and monitor their TransUnion credit file and score while also providing the ability to easily lock and unlock their credit online or using an app, all at no cost. We have seen a nice uptick in this product along with our paid offering over the past 4 months or so.

On the indirect side, our partners use a customizable, flexible platform called CreditView, which enables us to collaboratively meet a wide range of customer needs. This market-leading solution provides our customers the credit data and tools that allow them to connect and engage with consumers. These consumers then have visibility to their credit profile and access to products and services that improve their financial lives. CreditView is the backbone of our successful offerings with partners like Credit Karma, Chase, Capital One and Intuit. We continue to see strong growth from the indirect channel and have a good pipeline of future opportunities.

The final strategy is leveraging our enterprise operating model. Over the past year, we've talked about a number of ways that we leverage our model. One area that I think is worth covering again is information security. When I joined TransUnion a little over 5 years ago, we made some important decisions about how we wanted to structure and invest in information security to maximize our ability to mitigate this critical risk.

First, we had to ensure that we had the right people in place and that they have had the right reporting relationships. To that end, we brought aboard a highly experienced Head of Information Security from the banking industry and built a very strong team around him that includes experts who have backgrounds in law enforcement, government and the military. Additionally, our security program includes professionals to analyze and assess each critical element of the program and are continually working to ensure that we do everything we can to mitigate this risk. Importantly, our Head of Information Security reports to our Chief Information and Technology Officer. Additionally, he has a direct relationship with our Audit Committee and has regular access to our entire Board of Directors. We also have a quarterly information security review with my executive leadership team, so they too are aware of risks, updates and information directly from the head of our information security organization.

Our information security team has done an excellent job of building awareness and knowledge across TransUnion such that it is embedded in the fabric of the organization. They're cognizant that in reality, our cybersecurity team is every single employee. At the same time, we made considerable investments in a multilayered security framework approach to mitigate the risk of any single point of failure. This framework covers 3 major areas of focus: prevent, detect and respond. In recent years and in response to a growing number of cyber threats each year, our information security team has grown fourfold, and our budget has tripled. And in 2018, we are planning for another year of meaningful investments in technology and people. In addition to our own team, we regularly use multiple independent third parties to assess and measure the effectiveness of key elements in our security program. In addition to security experts, because we're a third-party service provider to companies subject to the Gramm-Leach-Bliley's Safeguards Rule, it's routine for our commercial clients, including the largest financial institutions in the United States, to audit our entire security program. As cybersecurity remains the single greatest risk to our business, we remain vigilant in taking all appropriate measures to mitigate it.

That wraps up my look at our growth strategies. However, before Todd takes you through the financials and 2018 guidance, I want to spend a few minutes walking you through our marketplace assumptions for the year.

Looking ahead to 2018, we believe we'll see another solid year for credit markets but with different trends for different end markets. Positively, we expect the personal finance and FinTech space to remain strong. Auto lending should also be strong, largely driven by ongoing positive trends in used car lending. For context, not only are there more used cars financed every year, but there tend to be more credit inquiries with used cars than new. On the other hand, in mortgage, we expect the market to be flat to down low single digits. This is an improvement over last year when the mortgage market fell high single digits, basically in line with our outlook.

Our 2018 view reflects a combination of further sharp declines for refinancing and growth for purchases, and the credit card market is likely to remain a little soft. We expect our financial services vertical to have another strong year as we continue to layer innovations and capabilities like CreditVision, CreditVision Link, fraud and ID and collections on top of these generally good market conditions.

Outside of the U.S., as I've discussed earlier, we continue to see very favorable trends in markets like India and Colombia. In most other markets, the macro is fairly stable, which provides a solid foundation for us to drive growth through innovation and new offerings. The one market that remains challenging is South Africa, and we don't see any clear end to its macroeconomic and political headwinds at this time. We are, however, focused on new offerings like CreditVision, direct-to-consumer and insurance to help stimulate our growth there. Taken together, the overall environment for TransUnion is quite favorable and certainly supports continued growth into 2018.

Now I'll turn the time over to Todd to walk you through the financials and provide you with a full year and first quarter 2018 guidance. Todd?

Thanks, Jim. I'll start by walking you through our consolidated and segment results. For the sake of simplicity, all of the comparisons I discuss today will be against the fourth quarter of 2016 unless noted otherwise.

Fourth quarter consolidated revenue increased 16% on both a reported and constant currency basis, with strong performance across all 3 segments. Revenue from acquisitions contributed approximately 3 points of growth in the quarter. This was higher than expected as our guidance did not include the acquisition of FactorTrust during the quarter. We also realized about 1 point of growth, roughly $4 million, from incremental credit monitoring business from a competitor.

Adjusted EBITDA increased 16% on a reported basis and 15% on a constant currency basis. However, adjusted EBITDA margin was flat, largely as a result of 2 factors. First, we chose to invest all of the revenue related to the onetime incremental credit monitoring business from a competitor. We used the significant majority of these funds to invest in new data assets, advertising and marketing as well as some opportunities in South Africa. And second, we experienced the normal costs to integrate the 3 acquisitions we made late in the year: Datalink Services, eBureau and FactorTrust.

Adjusted diluted EPS increased 13%. The adjusted effective tax rate for the fourth quarter was 35.6% and was 36.1% for the full year, in line with our expectations of 36% to 37%.

Let's spend a minute discussing some of the key income statement items. Cost of services increased 20%. This increase was largely the result of higher product costs related to revenue growth and our continuing investment in strategic growth initiatives to drive long-term top and bottom line performance as well as the investments funded by the incremental monitoring revenue. SG&A was up 2% as we continue to see revenue growth significantly outpace our SG&A.

One final point on our total company results relates to the estimates that we booked in the fourth quarter related to the recently enacted tax reform in the U.S. We recognized a tax benefit of about $175 million. That figure includes a benefit of approximately $179 million from the remeasurement of deferred taxes and another benefit of roughly $32 million from releasing a liability related to unremitted foreign earnings. These are offset by a liability of about $34 million from the required onetime repatriation of foreign cash and earnings and other items. Adjusted operating income was up 16%, driven primarily by the increase in revenue.

Now looking at segment revenue and adjusted operating income. USIS revenue grew 16%, driven by strong performance across all 3 platforms. Excluding the impact of the acquisitions of Datalink, eBureau and FactorTrust, revenue would have been up 12%.

Online Data Services increased 18%, driven by the favorable macroeconomic environment and strength from innovative products like CreditVision, CreditVision Link and TLOxp. The 3 acquisitions I just mentioned are reported in this platform. Excluding them, Online Data Services would have grown 10%.

Marketing Services was up 14% due primarily to demand for our new solutions, including CreditVision, CreditVision Link and digital marketing as well as other batch jobs.

In Decision Services, revenue grew 15% due primarily to strength in our health care and rental screening verticals. Adjusted operating income for USIS increased 11%. This solid result is somewhat muted by the costs related to integrating our recent acquisitions.

Moving to International. Revenue grew 12% or 9% on a constant currency basis. Developed markets revenue was $33 million, an increase of 15% or 12% on a constant currency basis. Both Canada and Hong Kong continue to show strong double-digit growth. Emerging markets revenue increased 10% or 8% on a constant currency basis. We saw strong growth in India and other key markets tempered by ongoing softness in South Africa. In fact, excluding South Africa and on a constant currency basis, the total segment would have grown revenue by 15%, and emerging markets would have increased by 18%. Adjusted operating income for International grew 6% on a reported basis and 4% on a constant currency basis.

As we've discussed, South Africa continues to struggle. During the quarter, we made a series of investments there to set the business up for improved future performance. Adjusted operating income margin contracted by about 170- basis points as a result. Excluding these investments, operating margin would have expanded by roughly 240- basis points.

Consumer Interactive revenue increased 18%, driven by strong growth in both the indirect and direct channels. Within indirect, we continue to benefit from recent new wins, such as Chase and Intuit, as well as nice growth from legacy partners such as Credit Karma. Our indirect channel also realized about $4 million of revenue from the onetime incremental credit monitoring business from a competitor. Excluding this incremental revenue, Consumer Interactive would have grown almost 14%, and the indirect channel would have posted double-digit revenue growth. In the direct channel, we benefited from a greater number of subscribers for TransUnion Credit Monitoring due to increased activity starting in September with stronger retention over that time.

Adjusted operating income for Consumer Interactive grew 23%, driven by the increase in revenue. Adjusted operating income margin expanded by 200- basis points as a result.

Now moving to the balance sheet. Cash and cash equivalents were $116 million at December 31, 2017, and $182 million at December 31, 2016. During the quarter, we used cash on hand and some short-term borrowings to fund the acquisitions of eBureau and FactorTrust. Total debt, including the current portion of long-term debt, remained relatively flat even after funding acquisitions. Cash from operations rose by almost $80 million in 2017, reflecting the strong cash generation capabilities of our business. Capital expenditures came in at $135 million, and free cash flow also increased significantly to $333 million.

In addition to consistently funding our internal investments, we continue to make strategic growth-oriented acquisitions while simultaneously returning $133 million to shareholders through share buybacks in 2017. As we grow and mature as a public company, our capital allocation strategy also continues to evolve. However, the most important components of the strategy, driving growth through internal investments and strategic acquisitions, remain unchanged. Our top priority will continue to be fully funding all good internal investments. We have done this without fail for many years, and nothing changes going forward.

Similarly, we remain focused on identifying great strategic acquisitions that enable long-term growth. Jim and I have mentioned a handful today in our remarks, including FactorTrust, eBureau, Datalink, Auditz, RTech, TLO and L2C. Given the strength of our current M&A pipeline, it would not be a surprise if we closed additional meaningful transactions this year. What is changing today is our Board of Directors' decision to implement a dividend with a targeted payout of 10% to 15%. Our expectation this year is to pay out about 13% of our anticipated 2018 adjusted diluted earnings. That equates to $0.30 per share or about $57 million annually and results in a yield of about 50- basis points. We believe this provides many current and prospective investors with another attractive reason to invest in TransUnion without us sacrificing any of our organic and inorganic growth opportunities.

At the same time, we are modifying our stance on share repurchases. To date, we have repurchased $133 million of our $300 million authorization. We have previously discussed completing that authorization over 3 years, ending in 2019. We believe the appropriate strategy is to be more opportunistic, and we will extend the authorized time frame of the buyback. Doing so allows us to act in our shareholders' best interest by optimizing the timing of any repurchases relative to other investment opportunities and market conditions. We believe this strategy offers the best, most prudent use of our robust cash flow.

Turning now to our guidance for 2018. A couple of quick points about our assumptions for acquisition and FX impact. For the full year, acquisitions should add approximately 2 points of revenue growth and about 3 points of impact in the first quarter. For FX, we expect to have no significant impact in either period.

In the spirit of transparency, I also want to point out that the expectation in our guidance is for approximately $15 million of revenue for the full year from the onetime incremental credit monitoring from a competitor. This represents about 50- basis points of growth year-over-year. And we expect the revenue to be about $5 million per quarter for the first 3 quarters of 2018. We expect to invest at least 2/3 of this revenue in growth-oriented initiatives. Therefore, you can assume that there is limited flow-through impact on adjusted EBITDA.

For full year 2018, we expect revenue to come in between $2.12 billion to $2.14 billion, up 9% to 10% on a constant currency basis. Adjusted EBITDA is expected to be between $817 million and $832 million, up 9% to 11%. At the high end of our guidance, adjusted EBITDA margin is expected to be approximately 39%, up slightly from 38.7% in 2017. The limited increase in margin is a reflection of several factors. First, we have costs associated with the integration of the 3 acquisitions made in the back half of 2017. The other factor is our decision to invest the incremental credit monitoring revenue instead of letting it all flow through to the bottom line. You should expect the year-over-year comparison to be less favorable in the first half and improve in the second half as we complete the acquisition integration and lap the incremental monitoring revenue.

Stepping back, we delivered about 400- basis points of adjusted EBITDA margin expansion from 2015 to 2017, putting us in a good position to invest aggressively to help ensure we continue to deliver top-tier revenue growth.

Adjusted diluted earnings per share for the year are expected to be between $2.26 and $2.31, up 20% to 23%. Of that increase, we estimate our reduced adjusted tax rate of 29% to account for $0.24 per share. Excluding this impact, adjusted EPS would be up 8% to 10%.

A few points on EPS. First, on what we know today about tax reform, we estimate our adjusted tax rate to drop by about 7 points to approximately 29%. This is a combination of a significantly lower U.S. statutory rate plus state taxes, plus taxes on international income, offset by the loss of a variety of previously deductible items. Most importantly, this will result in about $30 million of incremental cash, which simply adds to the already large pool of cash available for organic and inorganic investments, dividend and opportunistic share repurchases.

The second takeaway from looking at our adjusted EPS is that the growth rate is slightly lower than our adjusted EBITDA growth rate. This is the result of 2 things. First, we expect net interest expense to increase slightly to a range of $85 million to $90 million as a result of higher debt levels and an increase in LIBOR on the unhedged portion of our debt to have a moderately negative impact. Second, we expect D&A unrelated to change in control to be $110 million to $120 million, an increase over 2017 due largely to the timing of our decision to extend the useful lives of certain intangibles. Share count is basically flat as we expect it to increase from $190 million to about $191 million.

A final point on guidance. We expect to spend almost 8% of sales on capital expenditures in 2018, which is above our normal target of about 7%. This incremental spend largely relates to growth-oriented investments designed to fuel our long-term performance.

From a segment perspective, for the full year, we expect the following. USIS should deliver another strong year, with high single-digit organic revenue growth driven by our successful innovation and the strength of our vertical market positions. International constant-currency revenue is expected to also increase low double digits as we benefit from generally solid underlying macro growth, combined with our aggressive plans to lift and shift innovation capabilities into new markets. Finally, Consumer Interactive should grow in the low single digits as we expect some softness as we lap some nonrecurring indirect revenue from the first half of 2017 and as we continue to see a slowdown in 3-bureau monitoring revenue.

Turning to the first quarter of 2018, we expect the following. Revenue should come in between $503 million and $508 million, an increase of approximately 10% to 11% on a constant currency basis. Adjusted EBITDA is expected to be between $187 million and $190 million, an increase of approximately 9% to 11%. Adjusted diluted earnings per share are expected to be $0.51 or $0.52, an increase of 22% to 24%. $0.05 per share or about 13 points of the increase relates to the positive impact of U.S. tax reform.

That concludes my review of our financial results. I'll turn the call back to Jim for some final comments.

Thanks, Todd. To wrap up, I think when you put together the pieces of our discussion today, you find TransUnion in a strong, enviable position. We have built a very solid track record since going public in June of 2015. With significant top and bottom line growth, we have demonstrated the strength of our business model and our ability to deliver industry-leading performance. At the same time, we've been good stewards of our shareholder capital. We've made meaningful acquisitions that are fueling our growth and should do so for many years to come. We efficiently bought back shares in 2017 by participating in 2 of our sponsor secondary offerings, and we're now in a position to offer shareholders a dividend even as we continue to aggressively invest in our business.

While this paints a good picture of the past few years, it also sets us up for strong future performance. We continue to have real conviction in our ability to drive top-tier revenue growth at an attractive margin while fully funding all of our best investment opportunities.

With that, I'll turn the time back to Aaron.

That concludes our prepared remarks. (Operator Instructions) Now we'll be glad to take your questions.

(Operator Instructions) Our first question comes from Andrew Steinerman with JPMorgan.

I wanted to ask about the full year margin guide for 2018, which is essentially flat. And my question is, usually, when you have an improved services company that's growing high single-digits organic revenue growth, the incremental margins are so much that you could invest healthily for your growth initiatives and show reported margin expansion. Is the difference here the M&A from 2017? Or is it something else?

Yes. Thanks, Andrew. This is Jim. I'm going to let Todd go through that, I think, again although he went through it a little bit already in his remarks. I'll just kind of give my view. So as you know, at this point in the year, we feel good about our guidance, and we've had a strong history of excellent top line growth and an ability to expand margins. However, that being said, we want to continue to invest in organic growth opportunities. So our guidance reflects where we're at, at this point in the year, and I think we're essentially keeping our powder dry. But as always, we're going to continue to try and gain efficiencies. The revenue we are putting on is good revenue. And you're going to see us emphasize always attempting to expand margins while we also invest in organic growth opportunities to drive the business. And you're on to something there. Obviously, the M&A has had some impact, but I think Todd should kind of restate the reasons.

Yes. Thanks for the question. So as it pertains to the revenue growth, Jim -- I'm just going to reiterate what Jim said. And you know that we've continued to drive top-tier revenue growth in our space, and a lot of that is dependent upon the innovation that we've brought. And we're able to take that innovation and not only deploy it here in the U.S. but also internationally. So there's obviously a cost to that, that we fully embrace because we believe that the growth initiatives have significant runway ahead of them. So we're definitely looking at that. And think of that as more of investments in talent and -- on the development and the sales side to keep that runway going. We've also talked a lot about the importance of alternative data as well and building out a more comprehensive view of the consumer. So we're investing also in data purchases to further build out our position with alternative data. And then finally, as you alluded to, M&A integration is definitely a factor of this, and we're excited about the acquisitions that we made. In particular, eBureau with the rapid model development that -- we feel that that's going to be a significant growth driver for us as well as FactorTrust again in that alternative data space. So there is a cost pertaining to that as well. So all in all, we feel very upbeat and excited about this because we know it's going to drive future top line growth for us.

Our next question comes from Manav Patnaik with Barclays.

Firstly, I applaud the move for the dividend, but I was just hoping if you could shed a little bit more light on how you came to that decision versus continuing the buybacks. And I know you said your current M&A plans are unchanged, which has been mainly tuck-ins. But I was just curious on what if that bigger opportunity comes along.

Yes. So regarding the dividend, I think this reflects 2 things: our strong cash flow, so we've talked about that, and we know that certain groups of shareholders really value the dividend. But I want to emphasize that this is not in any way going to change our desire and ability to fund organic growth initiatives of capital spend on those things and also our M&A activities that are going to drive both top and bottom line growth. And we have a strong pipeline for those things. Regarding the size of an acquisition, I think I look at it in 2 ways. We've -- our capability here now, we've got a technology platform that would allow us to do many interesting things if the right acquisition came along. And that would include sizable cost synergies, sizable boosts to kind of innovation with the new kind of data sets at a cost that we've already paid for really. So you're investing in a company that has put tremendous amount of money into a platform that I think is very unique in the industry. And the third thing I'd say there is our management team is as strong as it's ever been. I think it's one of the strongest in the industry. And it's reflected in all the ideas that we have and all the opportunities we have to take new things to market. So I think we're well positioned for something that you might call bigger. Whether that comes along or whether we feel like it's the right thing to do, we will take that as we come. And we know that we'd first have to look ourselves in the eye and make sure that we could create a tremendous amount of value if we ever did anything like that. And you know I've been through some of those things before. We'd have to look our board in the eye, and we'd have to look our investors and our analysts in the eye to make those kinds of things happen. But I would say the option is there. Whether we'll take it or not, I'd -- time will tell.

Our next question comes from Tim McHugh with William Blair & Company.

Just to circle back on the margin topic. You talked about in the International business, I think it was mainly South Africa, you stepped up investments to reposition for growth. Can you elaborate on, I guess, what you did? And were those onetime costs? Are those costs that stay with us here? And I guess what's the expected outcome or improvement that you're looking for from that?

Sure. So in South Africa, we kind of did a mini, what you'd call Spark. And we needed substantial improvement into those core systems. So we spent significant time and energy on that last year. Why are we doing it? There's -- South Africa in particular has probably the most robust set of assets in kind of single-supplier mode, whether it's credit data or insurance data or other kinds of information. So we believe the potential is huge there for us as the economy recovers. So essentially, we were just positioning ourselves to serve that market. And in some sectors, we grew quite nicely, but we are facing headwinds, as we described, for now. But that will not last forever. And whether we're kind of cruising along the bottom of the market there or not, it's hard to tell, but it appears we are. So we've just put ourselves in really good position to maintain our leadership position in what is a relatively big market for TransUnion.

Our next question comes from Gary Bisbee with RBC Capital Markets.

Can you give us an update on -- you mentioned it a couple of times, but just the FinTech space in general, it's something you've talked about as a growth driver over time. Could you either size that for us or just help us understand the momentum there and how big an opportunity that is for the company?

Yes. Sure, Gary. So as you know, given some of the innovative products, CreditVision to name a few, has helped us establish a very nice position in that space. In my personal discussions with some of the leaders in that space and from what we are seeing, we believe that, that has a long runway for us and that's going to continue to drive good growth. I think the outlook for the players in that space remains very positive. There's a phenomena occurring that they're not only trying to sell the core products that kind of got them in the business, but now they're trying to do cross-selling, which is only good for us as they expand the different kinds of lending vehicles that they can now cross-sell to their current client base. So I -- we're very bullish on that sector of the market for us.

Our next question comes from David Ridley-Lane with Bank of America.

Yes. A question on the Consumer Interactive revenue outlook for 2018. Can you size how meaningful those nonrecurring revenue is and then kind of the underlying assumption, excluding the onetime revenue you received from the competitor?

Yes. So as far as the question pertains to Consumer Interactive's growth rate for 2018...

2018.

2018, we had about 300- basis points, to answer the question.

Of?

Of growth, of the total growth rate.

We want to make sure we're answering your question, though. Can...

Sorry. So you mentioned that the growth rate in 2018 will be lower due to some nonrecurring revenue?

Right, that's right. It'll be -- and all I'm giving you is that about 300- basis points of that nonrecurring is the impact in total.

To the total company.

To the total company, correct.

Our next question comes from Nick Nikitas with Baird.

Just going to the international markets and just the outstanding growth in developed, can you guys just talk about how far along from a penetration rate you are with regard to some of the newer initiatives in those markets and is kind of the high single, low double-digit growth rate sustainable into '18?

Yes. So we're -- some of the initiatives are similar to the U.S. CreditVision, CreditVision Link, our fraud products are probably less penetrated and our -- certainly our expansion into the insurance segment. And we've also talked about the direct-to-consumer space, which also includes indirect. So if you kind of take those all in sum, we have, I think, a significant runway ahead of us on those products as well. And I think you'll see us to -- continuing to sustain similar types of growth rates going forward.

Our next question comes from Andrew Jeffrey with SunTrust.

With regard to the elevated level of investments seemingly across your business, would you expect to see a sort of payback in terms of fast organic revenue growth that you'd be calling out in '18? Or is that more of a '19 and beyond kind of development?

Yes. I -- first of all, I think we feel very good about 2018. And like I said, our guidance at this point reflects how early on we are in the year. And we have a large portfolio of, let's say, comp growth initiatives. They're in various states of penetration, whether, like I said, CreditVision, CreditVision Link, our new fraud products, our new insurance products, our SRG or strategic group products. And those are going to carry us through '18. Now the fact is that when you're doing innovative things, you don't know always how quick some of your new ideas are going to be taken up in the market. And that's the nature of being innovative. So we believe some of these things will start having an impact in 2018, some of the newer things we're doing. But -- and for sure, we're going to start seeing some of these things in 2019, '20, '21 and going forward. But the horses we're riding to drive a ton of growth this year are the ones that are in-market that haven't really anyway near fully penetrated their full capacity. And I left out health care there. I want to mention that's going to be a significant driver of growth. So I think we have a really nice portfolio that's going to drive growth in '18. And we expect to still be one of the top players in the market as far as top line growth in '18, and then we're doing things now to ensure those things continue and the new things start picking up '19, '20 and '21.

Our next question comes from George Mihalos with Cowen.

Todd, not to beat a dead horse on the margin front, but you mentioned reinvesting sort of the competitor or the peer proceeds from the breach and then obviously the M&A integration costs. If you were to isolate those items, how much of an impact is that having on '18 margins? Just trying to get a sense of what sort of a normalized margin rate might look like.

Yes. George, thanks for the question. So as far as the margin is concerned on the competitor breach revenue, I mean, the way that we've put it into the guidance is that we're just assuming a steady-state margin at the consolidated level, right? So we're guiding that we'll have $15 million worth of revenue, $5 million in each of Q1, Q2 and Q3. And we're in essence assuming around a 39% to 40% margin in our guidance that we'll assume that we will be opportunistic and spend some of that. So that's on the competitor side. As far as the M&A integration, I look at that as just more of a first half type of event. And by the second half of the year, we will have already significantly handled the majority of the integration efforts, and we'll have had that done. And in total, it'll be about 100- basis points combined.

Our next question comes from Toni Kaplan with Morgan Stanley.

With more time passing since the Equifax breach, can you just give us an update on your view of share shift in USIS? Are you still not expecting any? Could it take a few quarters to play out? What have you been hearing from clients?

Sure, sure. So I will point out that we've, over the last several years, been taking share, which is driving some of our growth. And we're taking it based on just new solutions that we're putting in the market, and that continues to happen. I would characterize it as some of that is happening more quickly now where we can probably be more on the offense even and our competitor may be in a position where they're trying to maintain. And so certainly, we're able to probably gain audiences much more quickly to put in some of these new innovations. And so I think it's hard to tell what drives share shift all the time. But it continues to happen, and we think it'll continue in 2018.

Our next question comes from Shlomo Rosenbaum with Stifel.

I just want to ask just about the impacts on the margins. Just -- you put different buckets out there, Todd, as integration costs, bringing products to international locations, some investments in South Africa. I was just wondering 2 things about this. Number one, if -- can you rank-order what are the highest impacts to the margin in this year in terms of keeping the margin flat? And then second, have you built into the guidance incentive comps? So if you outperform on the top line, you're still going to just have the margin flat or if you do outperform on the top line, is there a potential to drop more to the bottom line?

Okay. Thanks, Shlomo, for that question. So as far as how we would rank-order the investments, I mean, I think it just goes back to what I initially said as it pertains to the runway that we have on our new products. So I think of things like CreditVision, CreditVision Link, CreditView in the B2C space. We're continuing to invest heavily behind those initiatives, so -- because the runway is there, not only just in the U.S. and other markets but also internationally as well on that. So that's the important thing. Obviously, we just made some nice acquisitions also in the fourth quarter. So if I were to rank the integration, I'd put it right up there with that. We want to make sure that we get a good return for our shareholders on the M&A. So I would kind of rank-order them there, and I think they're kind of tight 1 and 2 there as far as that's concerned. Your question on incentive compensation, we do have some modeling in there for potential overperformance in the business. We'll just continue, though, if the business does outperform during the year as we provide guidance, any increase in incentive compensation will be part of that guidance. But right now, we do have a modest assumption in the guidance that we've provided.

Yes. I guess with regards to -- you guys are focusing a lot on margin. I just want to make the point that we are very aware of the importance of the quality of revenue at this company, and we're very early-on in the year. We have many, many opportunities to invest because we've put ourselves in a position to choose from different opportunities. And I think as you see the year progress, if and when we overperform, you're going to -- we're very confident that we have good-quality revenue that can drive margin expansion. But it's February. We have a great track record. But like I said before, we like to keep our powder dry at this point in time. But we're very confident in the year that we're going to have. We're very confident in all these ideas that we have. And we think these are the things that are going to continue to drive this really strong top line growth for this company. So we'll see what happens on the next earnings call, but I wanted you guys to understand that.

Our next question comes from Bill Warmington with Wells Fargo.

Under the wire. So a question for you on the Throtle investment you guys made back in December. I just wanted to ask how it fits into TransUnion's identity resolution strategy and what -- how you think about that opportunity for you.

Yes. So I'll take that one, Bill. So Throtle is a play in digital marketing for us. So we made a minority investment, as you already indicated, in that business just simply because we see where marketing trends are headed with our customers. And as you're well aware, they're headed more into the digital space. We do have 2 products with -- AdSurety and AdFuel, so -- which we've seen some nice traction with over the last 3 to 4 years. So we remain very interested in this space. We see that there's considerable upside in it. So we found Throtle and saw an opportunity to better learn more about the business and potentially be more of a partner to them.

Our last question comes from Kevin McVeigh with Deutsche Bank.

Just the comment on credit likely to remain soft, just could you help us reconcile that with, are you modeling in any benefit from individual tax cuts in '18? And could there potentially be some upside as we work our way through the year?

I think we might have commented that credit cards themselves...

Right.

Might remain soft or not as attractive as some of the other sectors. So we didn't -- we certainly didn't say credit. I think that the general view that the consumer right now is in a -- let's call it a buoyant phase. Mortgage isn't going to be great, but it's not going to be as bad as last year. Certainly, the FinTech space looks very good. Some parts of the auto market, especially used cars, look very good. I think we're just commenting that the credit card sector itself may remain a bit soft. So overall, we see it as being a good market for credit and a good market for TransUnion.

And that wraps up the call today. Thank you all very much for joining us and participating, and have a terrific day.

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