TransUnion (TRU) 2020 Q3 法說會逐字稿

Good morning, and welcome to the TransUnion 2020 Third Quarter Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I'd now like to turn the conference over to Mr. Aaron Hoffman, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today. I hope that all of you are safe and healthy. On the call today, we have Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer. We've posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website.

Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items as well as certain non-GAAP disclosures and financial measures along with their corresponding reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures. Today's call will be recorded, and a replay will be available on our website.

We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release and the comments made during this conference call and in our most recent Form 10-K, Form 10-Q and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements.

Now with that, let me turn the time over to Chris.

Thanks, Aaron. I want to welcome all of you to our call and extend our most sincere hope that you and your loved ones are healthy and safe. At TransUnion, we continue to prioritize the health and safety of our associates, our customers and the wider communities in which we operate. Globally, almost every one of our 8,000 employees continue to work from home. A select number of associates have continued to work on-site to ensure our technology infrastructure operates uninterrupted. I want to thank all of them for their dedication and commitment.

Other than these critical employees, we see no need to rush back into our offices as our associates have demonstrated the flexibility to work remotely and run our business with virtually no interruption. In fact, during the third quarter, we conducted a company-wide survey of our associates and confirmed that they largely prefer to remain remote at this time and can work at very high levels while doing so.

Now on our last call, I talked about my personal commitment to making TransUnion a more diverse and inclusive company. I want to give you an update on our progress. First, we've appointed Teedra Bernard as our first ever Head of Talent and Diversity. In this role, Teedra's responsibilities include talent acquisition, employment branding, onboarding, associate and manager training, leadership development, career development, employee engagement and employee relations. By aligning all of these functions under Teedra's leadership will ensure a diversity and inclusion lens is brought to all of our human capital management decisions.

Secondly, we launched a task force, which we call Total Impact, which combines all our efforts to support racial equity and social justice and to connect these efforts through and for our associates, our culture and our operating model. This task force will amplify our consumer advocacy and outreach, offering tools and support aimed at increasing access to economic opportunities. It will examine the role our data and products play in the financial ecosystem in order to promote greater financial inclusion. The task force has already made progress to ensure that customers use our data responsibly and in line with our mission to promote equal access to economic and other opportunities. And related to this work, we continue to engage with U.S. regulators about how we can promote greater financial inclusion and participation.

Finally, we remain committed to training our top leaders to increase their understanding and awareness of racial inequities. During the quarter, they participated in a session on getting comfortable talking about race inequity. We then asked all managers across the globe to attend a 3-part series to learn more about race, bias and how they build more inclusive teams. Nearly 2,000 managers have participated in these important sessions. It's important to note that these actions represent only a starting point, and we remain committed to making meaningful long-term changes at TransUnion.

And we've also given our associates November 3 off to help them exercise their right to vote. Regardless of party affiliation and political views, we encourage our associates to get out and vote.

Now I'd like to lay out the agenda for this morning's call. First, I'll provide you with the details about our performance in the third quarter and the trends and dynamics that underpinned our ability to achieve our upside case outlook. I'll also discuss the current volume trends across our primary verticals and markets and how we continue to support our customers and consumers during this crisis.

You will hear a consistent story of adapting our go-to-market approach, our product offerings and solutions to address the current market conditions. Then I'll provide an update on the progress we've made with our global solutions, global operations and Project Rise. I'll also discuss our recent media acquisitions and how together they form the foundation of another attractive vertical. Finally, I'll turn the time over to Todd to discuss our third quarter financial results in more detail. We've decided to reinstate formal guidance for the fourth quarter and the full year albeit with a wider than normal range of expectations, and he'll provide those details as well.

Despite our restored comfort in providing guidance, I want to stress that we continue to monitor the state of the pandemic and the macro environment across the U.S. and around the world in the markets in which we compete. We recognize that there is ongoing risk to the economic reopenings based on the severity of the pandemic and also the degree of stimulus being provided to consumers in each of those markets.

So shifting to financial services. Let's look at the key trends in that market. I want to start by reviewing the online transaction volumes for financial services in the U.S., which is our largest vertical market. Volumes improved during the quarter with ongoing strength in mortgage and auto, with improvement in consumer lending, but offset by a very challenging comparison in our card business. I'll talk a little bit more about each of these on the next slide.

Before I do, I want to emphasize the impacts of our sales effectiveness programs and innovation. Using our U.S. financial services vertical as an example, our new sales pipeline has improved this year by 8% and reflecting robust sales activity in an engaged customer base. Our win rate has increased by 5 percentage points year-over-year and this has led to an impressive 43% gain in win dollars compared to the same period in 2019. Now taken together, this reflects greater sales efficiency, a focused strategy, a larger average win sizes and, of course, strong execution across the board.

We transitioned our teams to virtual selling, supported by investments in a seller training program, new collaboration technologies, an increased improvement in our digital content and the deployment of internal experts to operate more effectively in the current environment. And throughout my remarks, you'll hear about products across verticals and geographies that are meeting the needs of our customers in these current market conditions.

Now let's spend some time on the key lending markets that comprise the vertical. So continuing with FS. I want to start by talking with the health of the U.S. consumer overall. Over the past 6 months, consumer balance sheets improved and that should support the long-term health of the economy and our business. In fact, since the onset of COVID, bank deposits reached record levels, and the personal savings rate doubled. At the same time, delinquencies generally remain flat or even down for some lending products. A number of factors contributed to this. The significant government stimulus provided additional liquidity to consumers.

At the same time, lender forbearance programs alleviated the need for many consumers to pay their mortgages, allowing them to stay current on other debts, to pay down existing debt or simply save more money. And finally, the mortgage refinancing boom allows consumers to save hundreds of dollars each month, which again they can save or use to stay current on their obligations. This demonstrates the importance of government support and the potential impact on consumers as a rebate.

So with that as a backdrop, let's turn to mortgage. Both refinancing and home purchase activity remained very strong throughout the third quarter on the strength of our historically low interest rates. The cyclical strength in mortgage has certainly helped our results, but we remain cognizant that the cycle will run its course in 2021 and create some challenging comparisons. The current MBA outlook calls for mortgage volumes to decline 23% next year, while Fannie Mae forecast a 38% decline. In either case, we would expect the preponderance of the impact to occur later in the year.

Now auto financing held up well in the quarter as low rates and attractive financing offers stimulated shopping activity in both the new and the used car market. As our customers shifted to more digital acquisition channels, we've won new business for our prequalification tools. Looking ahead, tight inventory levels of both new and used cars resulted in constrained industry volumes. Additional market growth will likely require increases in production as well as used vehicle supply from trade-in and auctions to meet the current heightened demand.

And the credit card market improved slowly from the dramatic declines we saw between late March through July. Notably, insurers began to test marketing campaigns to determine how best to reach and market to consumers in the current environment. While marketing volumes remain down year-over-year, they have shown positive trends, and we believe they will continue to improve. For our business, as noted on this chart, we're comparing against our participation in a highly successful launch of a new credit card in the third quarter of last year. Excluding that impact, our results would better reflect the underlying market.

Finally, consumer lending continued to recover during the quarter as larger fintech lenders slowly returned to customer acquisition fueled by solid levels of investor commitment to funding loans. In particular, we continue to see significant growth with point-of-sale lenders, both from their own success as well as share gains. We expect this subset of the fintech space to benefit from the very strong holiday season with a likely dramatic increase in online shopping.

Across our end markets, we've seen 2 themes emerge with lenders. The first relates to their ability to adapt their models to understand the impact of the pandemic on consumers, leading to new sales of CreditVision Acute Relief attributes to help them better assess their current portfolios. And we're seeing meaningful traction in acquiring new users of both CreditVision and CreditVision Link as a means to improve their models for future customer acquisition.

The second trend builds on the accelerated transition to digital commerce, resulting in a heightened interest in online fraud mitigation solutions like iovation, and this spurred very substantial conversations around digital marketing, a topic I'm going to discuss a bit more later.

Now on to our emerging verticals. Across most of our emerging verticals, we saw trends improve during the third quarter. Beginning with Healthcare, our business continues to face headwinds as the pandemic has an idiosyncratic effect on our health care system. Performance played out largely as we expected during the quarter. Front end patient volumes recovered as providers saw increases that continued to improve the trend toward pre-COVID levels. However, ongoing declines for inpatient care, particularly for elective procedures as patients remain cautious about returning to health care facilities, partially offset the improvement in outpatient volumes.

Similarly, emergency department visits remain depressed. The impact of reduced volumes negatively impact the back end of the business, resulting in a reduced number of potential coverage discovery opportunities. This all comes against the backdrop of increased financial pressure on most health care systems. As our business helps providers recover cash, we remain somewhat insulated from the full impact of weaker volumes in the health care system. And as we look forward, we see no structural change to this market such that we won't return to a more steady growth profile post pandemic.

Now shifting to insurance. This vertical returned to modest growth in the third quarter. As industry volumes stabilized, we continue to realize success with innovative products like our National Driving Record Solution, which combines driver's risk as a prescreen for the presence of a motor vehicle violation with our ability to resell state-issued motor vehicle reports. This creates efficiencies for auto insurers.

We also continue to benefit from diversification into commercial auto, life and other aspects of property and casualty insurance. And our public sector market grew again as most government agencies continue to operate business as usual, providing necessary support for their constituents. Additionally, we gained some business related to the COVID pandemic in fraud mitigation and identification for individuals requesting support from government.

We also delivered growth in our screening business, which includes both tenant and employment screening. We saw solid performance in tenant screening as leasing companies remain active and our SmartMove screening product made additional inroads to the marketplace. Employment screening remains depressed as it mirrors employment trend. We offset some of the negative impact with a successful campaign focused on small business acquisitions, which we provided our ShareAble for Hires tool free for an introductory period. We're now seeing payoff as many new users have converted to the paid product. And the telco market continues to improve with the reopening of retail stores and as consumers resume a more normal purchasing cadence.

Finally, while we believe collections is countercyclical and will be over time, we don't expect to see any significant uptick until at least the beginning of 2021 as forbearance programs and state imposed moratoriums on collections continue to delay activity. As I mentioned earlier, government subsidies delayed some collections activities as they enable consumers to pay off debts or stay current, leading to lower delinquencies and default.

Now turning to Consumer Interactive. We delivered solid revenue growth in this segment as consumers and customers continue to recognize the value of credit and identity protection, credit monitoring and related financial education tools like those that we offer both directly and indirectly through our partners. In the quarter, we saw direct channel revenue accelerate behind continued successful marketing to consumers focused on their credit health. On the other hand, some of our indirect partners have curtailed their marketing programs, resulting in a decline in subscribers. This caused a slightly larger decline in this portion of our business compared to the second quarter, and we expect it to persist in future quarters. At the same time, though, we continue to engage with potential indirect partners about new long-term opportunities.

Now moving on to our International segment. Let's look at revenue trends, which illustrate the ongoing recovery across all reported regions and countries. Generally, successful reopenings have allowed economies to restart, leading to increased overall economic activity. I would note that the degree of reopening varies greatly across our markets. For example, Brazil has never shut down, while the Philippines recently started to emerge from a second complete closure. India took a more phased approach and the entire country only recently fully reopened. And in the U.K., we see the potential for isolated closures as COVID cases have spiked in certain areas. And of course, we continue to monitor all these situations closely.

Now let's spend a few minutes on each region where you'll see a common theme of partnering with our customers to help them navigate the pandemic, often while leveraging our innovation in CreditVision, CreditView, IDVision and other of our solutions.

In the U.K. thus far, government stimulus helped consumers manage through the crisis. However, the salary protection provided by the government will diminish from 80% coverage to about 67% coverage and only for areas with local lockdown at the end of October, shifting the burden to employers who may reduce their workforces. And during the fourth quarter, the payment holidays for mortgage and other loans will wind down. These actions may impact the already soft lending market. For our business, we continue to see an exaggerated weakness in the alternative lending market where we hold sizable market share. We also divested a small business earlier in the year, which negatively impacted our growth rate. Todd will provide more information about this later.

Successful COVID mitigation business helped offset some of the weakness in the market. That included business with the U.K. government, the rollout of a TrueVision transitional risk index to help lenders identify consumers who pose a risk of default in the future as well as a number of wins for CreditView including with NatWest, one of the largest lenders in the U.K. Our fraud mitigation business continues to deliver solid results, and we've seen a recovery in our online gaming and gambling vertical as sports resumed around the world.

Our Canadian business grew in the third quarter despite generally weak lending markets. At this time, various aspects of government stimulus are expected to continue. Our good performance reflects the meaningful portfolio diversification that we've intentionally developed. We saw double-digit growth in insurance and direct-to-consumer as well as a strong performance in the nascent fintech markets.

At the same time, we successfully introduced the Canadian version of CreditVision Acute Relief and a vulnerability index, both to assist lenders in better understanding the state of their consumers. In India, the country slowly reopened, and our volumes have mirrored that. We continue to benefit from our diverse product portfolio as well as specific programs to address critical pandemic-driven issues. For instance, we supported the Indian government's efforts to provide stimulus to small businesses by sizing the market and helping them identify who should receive the support. The Indian government also turned to us to help understand how individual lenders handle forbearance arrangements. We successfully launched a simplified version of our scores and algorithms using CreditVision for fintech lenders who in India tend to provide small ticket and very short duration loans. And we continue to deliver valuable insights to our customers.

We recently began a weekly thought leadership session called TGIF or TransUnion's Great Insights Friday, where we can bring our customers together virtually and help them work through the impacts of the pandemic.

Now in Latin America, we serve a variety of markets and most improved from the second quarter. Chile performed relatively well on the strength of its modern, highly digitized economy. Colombia also delivered improved performance as our customers increased their digital product consumption to meet consumer needs during the shutdown. Other markets saw more modest improvement, reflecting the limited level of government stimulus in some markets. And in Hong Kong, the market has stabilized. Recently, we won new business for our fraud mitigation tools related to digital onboarding. We saw improvement in our relaunch direct-to-consumer portal as well as some new opportunities for our CreditView platform.

Rounding out APAC, the Philippines continue to face significant headwinds as the country just recently began to reopen from a second complete shutdown. We expect a slow recovery there. And the South African economy remains challenged, with GDP expected to decline 9%, and consumers and small businesses strained despite the influx of nearly $3 billion of government stimulus. We generated momentum in our business behind CreditVision tools for portfolio review as well as IDVision and seamless onboarding to support our customers' transition to more digital consumption. Even as our businesses maintained a sharp focus on serving our customers and delivering good results in the quarter, we also continue to invest for our future with differentiated programs and approaches to sustain our industry leadership.

On our last earnings call, I detailed our global operations and global solutions organizations as well as our investment in Project Rise. I'll update each of those areas today, and I'll also highlight our investments to build out our media vertical.

Now moving to global operations. This area allows us to expand our core capabilities through centralization, optimizing processes and automating them leading to a better customer experience as well as cost savings that we will reinvest in new growth projects. I wanted to highlight our progress in this area over the past 3 months.

First, in global procurement, we've renegotiated a number of our largest supplier agreements that better focus our spend and leverage that to achieve more favorable terms. We've already realized some initial savings and cost avoidance and I expect that to increase over time. Our negotiations also included adding new features or services to facilitate growth across the enterprise.

Second, we intend to replicate the success of our global capability center in Chennai, India, which was recently named one of the 50 best workplaces for women in India by the Great Place to Work Institute. While we continue to add seats in Chennai, by the end of this year, we will open a second location in India in Pune. This location will focus primarily on Project Rise and other significant technology initiatives.

Finally, we continue to make progress on reengineering the customer experience through implementing new tools that allow us to better understand our customers and to make TransUnion easier to do business with. We remain confident that global operations will deliver significant efficiency and cost benefits that we will both reinvest and return to shareholders, while also furthering our market leadership through improved customer engagement.

Now let me update you on the progress in global solutions, which allows us to strategically develop and diffuse innovative products across the more than 30 geographies in which we compete. In recent months, we made significant progress on 2 partnerships to develop a more comprehensive view of consumers that we can leverage to help our customers make smarter decisions about customer acquisition and risk management.

First, we partnered with MX. Let me say that again, it's M like Mike and X like Xerox, to avoid any confusion with a large card issuer. We partnered with MX to incorporate consumer contributed data into our solutions. MX aggregates financial information through customer permission connectivity with banks and credit unions and fintech innovators on more than 30 million consumers. Through this partnership, in both the U.S. and Canada, TransUnion will be able to -- will enable consumers to enrich their credit profile, help lenders make better, more informed decisions and ultimately, consumers will benefit from access to better products and services.

For lenders, the near-term use cases, we will explore include income verification and the creation of new account derived attributes that will offer visibility into a consumer's ability to pay. In the spirit of leveraging our global capabilities, the solutions team already began coordinating with our U.K. business where we provide the industry-leading affordability suite of solutions and a best-in-class open banking platform. Both of these capabilities lend themselves to the work with MX and our entrance into consumer permission data. And we've identified similar solutions in other international markets, allowing us to coalesce around this opportunity on a global basis.

And we've made a minor equity investment and formed a commercial partnership agreement with FinLocker, which allows consumers to collect and permission their financial information needed to secure a mortgage among other loan types. Consumers may maintain control of their information throughout the process and can utilize educational resources to help prepare them for the mortgage application process as well as take advantage of a personalized financial health dashboard, something that first-time homebuyers find appealing. Importantly, FinLocker utilizes banking industry multilayer security like data encryption and application protections to safeguard consumer information. FinLocker also helps lenders better service their existing customers by finding the right products to offer based on the individuals' unique needs while supporting their financial journey to help drive a stronger relationship and reduce the lender's costs. Lenders can also leverage FinLocker for lead nurturing and conversion by gaining deeper insights into consumers' actions and behaviors, making smarter risk decisions and uncovering new opportunities to drive growth.

Through this partnership, we will offer our marketing and portfolio review solutions to mortgage originators and services, providing them with an end-to-end offering. We will also have distribution rights to sell FinLocker and will explore expanding beyond the mortgage vertical.

Now both of these partnerships provide valuable new avenues for growth. And by thoughtfully putting together these pieces, we position ourselves to begin to offer a broader view of consumers, helping our customers make better decisions through superior insights. At the same time, we can help consumers experience a more seamless credit journey. We're still in the early stages of this strategy and you can see a fairly attractive path in front of us as we fully anticipate identifying additional opportunities for these technologies and data in the future.

Now to the media vertical. As we've explained in the past, our vertical strategy provides us with a valuable source of sustained, differentiated growth. In recent years, we've built out our capabilities organically and through acquisitions to fuel public sector, telecommunications and our screening verticals, for example. Over a longer-term horizon, we did the same thing to build our nearly $200 million health care vertical and our similarly sized insurance vertical.

Most recently, we've applied the playbook to build a media vertical, focused primarily on digital marketing-related solutions. We recognize that we had foundational pieces necessary to compete successfully in audience segmentation and identity resolution, 2 growing categories within the larger digital marketing ecosystem.

Most notably, we possess a large array of data and world-class data linking and managing logic. As such, we identified the intersection of the media industry and digital marketing as a market for our expansion. We moved purposely to acquire the capabilities needed to offer a robust portfolio of solutions over these past 18 months that can enable people-based and identity-enabled marketing.

The first acquisition, TruSignal, brought a modern cloud-based platform that marketers and media companies use to build and distribute precisely defined audience segments. Users can access this platform directly or through an integrated API within other technology platforms.

The second acquisition, Signal, which we completed earlier this summer, added 2 key offerings. First, they brought products that allow us to work with our clients to structure and activate their own audience intelligence. Second, they provided a platform for real-time data collection and distribution to connected and complementary advertising and marketing technologies.

And earlier this month, we acquired Tru Optik to round out our market position. Tru Optik deepens our understanding of connected consumers via what they call a household identity graph, essentially a virtual map of the streaming video and audio devices within home. This understanding of the connected home adds yet another dimension to our ability to match an individual to a broad array of data as well as persistent digital identifiers. Tru Optik, with their focus on understanding the connected home and providing solutions for connected TV as well as streaming audio, have gotten ahead of the curve related to the adoption of streaming media services and the future of TV advertising investments.

Marketers turn to Tru Optik to select the homes they want to target for either a streaming video or streaming audio campaign. The streaming media providers leverage Tru Optik to enable the precision targeting that marketers expect.

Marrying all of the capabilities from these 3 acquisitions gives us an industry-leading position with a clearly defined part of the media market, and we believe we can now deliver meaningful, sustained growth. Additionally, to fully leverage this opportunity, we report the digitally focused marketing capabilities across the U.S. markets and vertical portfolio. In fact, in just a few weeks since we announced the acquisition, we have already engaged with a number of large financial institutions about using Tru Optik. And over time, we will also identify how best to extend these capabilities outside of the U.S.

And finally, I'd like to provide an update on Project Rise. I'll start with a broad point, namely that effectively, all roads in TransUnion lead back to technology as a core enabler. A lot of the work that we're doing in operations relies on technology. In the fourth quarter, we will migrate our consumer call center to the cloud, resulting in a better consumer experience and greater efficiencies. The partnership I described in solutions benefit from the modern technology stack and data architecture that we've nurtured over the past 5 years and future progress relies on the evolve technology foundation that Project Rise will deliver.

In the media vertical and digital solutions build-out depends on the cloud capabilities we're developing. Beyond that, we remain on track with our time line, our anticipated investment and effectiveness targets. In fact, in the fourth quarter, our first proof-of-concept applications go live using the first set of Rise capabilities we developed as planned. We continue to see clear operational benefits in security, reliability, performance and efficiency as we progress through this transition to the cloud.

As I wrap up my review of the business, I will reiterate the solid improvements we've seen in trends across our market, aided by outstanding sales and product development efforts. And at the same time, we continue to aggressively invest to maintain our industry leadership and our attractive growth profile.

And with that, I'll pass it over to our CFO, Todd.

Thanks, Chris. As Chris highlighted, we achieved our upside case scenario for the third quarter as we benefited from gradual improvement across almost all of our markets as well as the strength and diversity of our portfolio. I'll start with our consolidated results and for the sake of simplicity, all of the comparisons I discuss today will be against the third quarter of 2019, unless noted otherwise.

Starting with the income statement. Third quarter consolidated revenue increased 1% on a reported basis and 2% in constant currency. The Signal acquisition, which we completed during the quarter had an immaterial impact on the growth rate.

Adjusted EBITDA decreased 4% on a reported basis and 3% in constant currency. Our adjusted EBITDA margin was 38.8%, down about 190 basis points compared with the year ago quarter. Despite the decline, we still see this as a very good result given the significant challenges in the market. Third quarter adjusted diluted EPS increased 7%. We benefited from reduced interest expense related to our debt refinancings and lower LIBOR rates as well as a lower adjusted tax rate of 21.3%, which reflects our tax planning initiatives and a reduction in the Indian statutory rate.

Now looking at the segment financial performance. U.S. Markets revenue was up 4% compared to the year ago quarter. Signal had an immaterial impact on the results. Our Financial Services vertical revenue grew 11%. As Chris discussed, we saw improvement in all our lending end markets with considerable strength in mortgage and solid recovery in auto and consumer lending. Our card business faced challenging comps from our participation and a significant credit card launch in the year ago quarter. And to address the significant impact of mortgage in the quarter, excluding this cyclical growth, the vertical would have declined low single digits, an acceleration in non-mortgage performance compared to the second quarter.

I will reiterate my caution about the comparisons we may face in mortgage next year as they are likely to be a challenge. And it's worth noting that our mortgage business carries a particularly high margin, which will exasperate the impact of the tough comparisons whenever they come. Emerging verticals combined declined 3% on a reported basis and 4% organically. Growth in public sector, media, tenant and employment screening and insurance helped moderate declines in the other verticals.

Adjusted EBITDA for U.S. markets decreased 2% on both a reported and organic basis. Adjusted EBITDA margin declined about 260 basis points largely as a result of reserves for legal and regulatory matters that we took during the quarter.

For my comments about International, all comparisons will be in constant currency. For the total segment, revenue fell 7% as we saw trends improve in all of our regions, as Chris discussed in detail. As we mentioned on our February call, we divested a small business in the U.K., Recipero. Excluding that divestiture, International would have been about 1 point better, and our U.K. business would have been 3 points better. Adjusted EBITDA for International declined 8% in constant currency.

Consumer Interactive revenue increased 3%, driven by growth in the direct channel. Adjusted EBITDA for Consumer Interactive was up 1% as we continue to increase marketing behind the direct channel during the quarter and see solid returns on that investment. As I have stressed over the past 2 quarters, we have a strong balance sheet and the ability to rapidly build cash. As a result of our attractive cash conversion and prudent steps to appropriately retain cash, we finished the quarter with $554 million of cash on the balance sheet and have not drawn down our $300 million revolving credit facility. The net of all of this was that our leverage actually fell slightly from 3.0x at the end of the second quarter to 2.9x at the end of September. We will continue to take a prudent approach to cash retention, but clearly have sufficient comfort that we were able to fund 2 acquisitions recently and continue to be proactive in pursuit of additional attractive investments.

As Chris previewed, we are reinstating formal guidance, replacing the scenario-based outlooks we provided for the past 2 quarters during what we hope will be the worst of the pandemic impact. As we have seen markets generally stabilize, we have sufficient visibility to take a more typical approach to guidance. However, recognizing the potential unknowns of the upcoming election and the recent increases in COVID-19 cases, we have provided a wider range between the low and high end of guidance for revenue, adjusted EBITDA and adjusted diluted EPS compared to what we have done previously.

For the fourth quarter revenue, we expect about 1 point of M&A contribution from Signal and Tru Optik. There is also about 1 point of headwind to revenue and adjusted EBITDA from FX. Revenue should come in between $678 million and $698 million or a 1% decline to a 2% increase. Adjusted EBITDA is expected to be between $255 million and $271 million, a decrease of 2% to 7%.

Adjusted diluted earnings per share are expected to be between $0.74 and $0.80, a decrease of 1% to an increase of 7%. And finally, for the full year, we expect an immaterial impact from M&A and 1 point of headwind to adjusted revenue and adjusted EBITDA from FX.

Adjusted revenue is expected to be between $2.696 billion to $2.715 billion, up 1% to 2%. The adjusted EBITDA is expected to be between $1.031 billion and $1.047 billion, down 1% to 3%. Adjusted diluted earnings per share for the year are expected to be between $2.94 and $3.01 up 5% to 8%.

I want to wrap up with some updated thoughts about some of our other annual guidance items. First, we expect our tax rate to be about 23%, which is slightly higher than the third quarter rate as a result of the timing of the impact of some of our tax planning initiatives. Second, total depreciation and amortization is expected to be about $365 million. Excluding the step-up from our 2012 change in control and subsequent acquisitions, depreciation and amortization should be approximately $170 million. Third, net interest expense should be about $120 million, largely as a result of a lower forward LIBOR curve and the reduction in the margins on our term loans as a result of deleveraging and the late 2019 refinancing we executed.

Finally, capital expenditures will be around 7.5% of our revenue in 2020, which will be lower in absolute dollars than we had originally planned, of course.

I'll now turn the call back to Chris for some final comments.

Thank you, Todd. And now to conclude, this morning, you've heard how we continue to effectively manage the global stresses created by the COVID pandemic. At the same time, we continue to invest for the long-term strength of our business with meaningful progress in global operations and Project Rise, a very exciting set of strategic partnerships to enhance our data and capabilities around consumers crafted by our global solutions team and the well planned out build of our media vertical. While we maintain a clear plan for long-term growth, in the near term, we will continue to prioritize the well-being of our associates, customers, consumers and our communities. And I'll end by reiterating my hope that all of you and your families remain safe and healthy.

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

That concludes our prepared remarks today. (Operator Instructions). And now let's go to those questions.

(Operator Instructions) First question comes from Andrew Steinerman of JPMorgan.

So I'm thinking about the fourth quarter organic revenue guide to down 1% to up 2% year-over-year. Obviously, that's very similar to the plus 1% organic performance that we just had in the third quarter. And so my question is, how does that frame with the comments that we're seeing consumer credit recovering? When you look at your October trends, are you extrapolating conservatism from there? What frames that fourth quarter organic revenue guide range?

Andrew, well, this is Chris. And the first part of your question got cut off. So could I ask you to repeat it? And then I think Todd will best answer that one.

Okay. No problem. So I'm thinking about the fourth quarter organic revenue guide to down 1% to up 2% in the fourth quarter. And that sounds very similar to me to the third quarter performance that you just did a plus 1% organic revenue growth. And so my question is, what's being assumed in the fourth quarter guide in terms of consumer credit activity because you highlighted that consumer credit activity, on your slides, is recovering. So why isn't organic revenue growth, let's say, better in the guide than it is in the third quarter performance?

Okay. Thank you for the question. And as Chris indicated, I'll take that one. So why don't I walk you through some details as to how we're looking at the anticipated performance of our 3 segments in the fourth quarter. So first, starting with the U.S. markets, we are anticipating that U.S. markets will grow in a mid-single-digit range. Mortgage will continue to be strong for us. And as you alluded to, recovery will continue in our other end lending markets that we went through detail on of auto and consumer lending and card and banking.

However, the one area to call out is within the emerging verticals, we do expect that our Healthcare business will be down as we've signaled throughout our earnings calls in Q2 and Q3 because of the impact the front end has on the back end. And just to elaborate on that for a minute. The front end is where we're doing insurance eligibility checks and patient estimation at the onset of the pandemic. We saw significant declines in those volumes as either hospitals cut back on elective procedures or patients just didn't simply want to be in the facility. So that has an impact on the insurance coverage discovery part of our business in the back end.

So everything that we've laid out before about the impacts is playing out pretty much as we've been talking about over the last several -- over the last couple of quarters. If I move over to International. We are expecting International business to be down mid-single digits on a constant currency basis. In the fourth quarter, we are anticipating that the recoveries will continue. But as Chris said in his remarks, the recovery has been uneven across all of our geographies that we operate in. So that just continues to be an area of focus for us.

And then finally, our Consumer Interactive business, we are expecting it to grow low single digits. And we -- on the direct channel side of that business, we continue to see strong interest in our credit products of credit bureau monitoring. However, as again, we've talked about over the last couple of quarters, we do see the impact of our indirect channel partners curtailing their marketing programs, still having an impact in the fourth quarter. So when you take all of that together, Andrew, I mean, that's how we're getting to the guide that we put out for the fourth quarter.

Right. And can I just get a clarification? Are you assuming in U.S. markets, additional recovery from October or just kind of consistent with October levels?

I think you're seeing -- it depends on the market again, though, Andrew, right? And that's the context that we provided on the volume charts in the presentation. So I would say we continue to expect mortgage to be particularly strong into the fourth quarter. We expect to see a continued recovery in consumer lending.

The one word of caution that I would give you in consumer lending and when you look at those charts and just those charts in general, you're just looking at our online transactions. You're not looking at the full picture of our revenues. So I think that's just a caution for everybody on the call. Please take context from that. So there is a -- a meaningful part of our business is batch, and that's a good indicator of our consumers -- our customers' willingness to be more aggressive with marketing. So that we're starting to see our customers come back and be more aggressive, but not necessarily at the same level that we're seeing the online volumes. So then to kind of round that out, auto, we continue -- we expect to kind of continue on the trend that it's on as well as banking and credit card.

Next question is from Manav Patnaik of Barclays.

Just to follow up on your comments on the media ambitions there. Can you give us like an example, maybe a real-world example of how your data sets combine with these acquisitions and the value there? I guess I'm trying to understand what the niche share is. Is it more about just the ID side of it? Is it measurement? Or maybe it's more? I was just hoping you could help clear that up?

So -- Manav, thanks for the question. You kind of broke up at the beginning as well. I just want to make certain we got this right. Is your question about our media vertical and the acquisitions that we made?

Yes, correct. I just wanted to get some kind of a real-world example of how your capabilities and these acquisitions actually work? And what's the real niche you guys are going after?

Yes. Chris will take that one.

Great, Manav. And operator, I'm not sure if this is a technical issue, but the first 2 questioners, we missed the beginning of their questions. So we're going to struggle unless we can correct that.

Okay. Yes, Manav. So we believed for some time that there's an opportunity for us to expand into data and consumer matching and activation services in the digital marketing market. And we had obviously some intrinsic capabilities as a sophisticated data management company that also possesses a lot of valuable data for marketing enhancement and segmentation. And we've also got very rigorous matching logic, as you would expect as a leading bureau.

What we didn't have necessarily were some of the complementary capabilities needed to commercialize that. So one of those capabilities came in the form of the acquisition of TruSignal where we gained an online platform and a direct to the end user interface that allows marketers to come in and use a user-friendly UI to explore all of our data and the incremental data that TruSignal possessed and slice and dice can create very custom and precise audiences. That's a big part of what marketers do as they pursue ever more specific segmentation and eventually pursue this segment of one approach.

Then when we next acquired Signal. What we got there was, again, the beginnings of an identity graph, which is really a vehicle for organizing all of the various data elements, including digital identifiers around our traditional consumer records, which as you know are comprehensive and accurate. In addition, we gained connections to a variety of publishers in the digital marketing ecosystem, where our clients on the marketing side after they created an audience and they appended digital identifiers to those audience should then connect to publishers in pursuit of targeting those specific consumers.

And then the final piece in terms of M&A was with Tru Optik. And Tru Optik is one of the early pleaders in the over-the-top streaming media marketing services business. And what they have is relationships with various streaming providers where they can identify the digital identifiers, the URLs, et cetera, for the households that subscribe to various streaming services.

Now what's interesting about this is that terrestrial TV has obviously been in decline for many years. Cable TV is stagnant and many consumers are cutting the cord, but as I'm sure we all know from our own experience, streaming services are growing rapidly. And so there's an increasing audience there where streaming services are going into individual households, but there's not a lot of visibility as to who are the individuals in that household and how -- and what identifies them and how can they be segmented and then targeted.

And so the combination of what Signal brings, which is knowledge of the various streaming services that are connected into a household and then combining it with the data that TransUnion has and our advanced matching capabilities, allows us to deliver to marketers the segmented audiences that they need to determine whether they want to deliver advertising content to particular households on digital streaming services. In addition to that, we got very sophisticated identity graphing capabilities that we're also going to be integrating. So at this point, we feel that the combination of these various acquisitions plus the innate capabilities we had as a bureau and a marketing data company traditionally, plus some organic investment, and ongoing integration efforts, gives us a very nice complement of services to grow our revenues in this audience creation and segmentation and targeting portion of the very large overall digital advertising ecosystem. So I hope that helps.

Next question is Jeff Meuler of Baird.

Yes. Want to ask about the new sales metric that you gave us, both given that it's a new external metric and that 43% growth is a lot higher than I would have ever expected in this environment. So I guess 2 questions. First, can you just be more specific of what the metric is, especially given that many of your revenue streams are transactional? So is there just an estimate? Or is this based on minimums?

And then second, is there any rule of thumb or way that you can help us translate that into revenue? So picking something like if you'd normally get on making up a number, about 4 points of growth from new sales, if you have 40% plus growth, that's 5.6-or-so points of revenue contribution. Just any way you can help us with what it is and how to translate it into revenue?

Yes. So let me handle the first part of the question, but just as to the second part, Jeff, you sound like me at a business review looking for that rule of thumb translation. I think the first thing I just want to emphasize…

I'm in good company.

Yes, exactly. The first thing I want to emphasize is that these are not GAAP accounting numbers. These are numbers based on our internal sales pipelines, which we manage with some rigor, but they obviously don't meet the standard of direct revenue reporting and financial results. But they are indicative of the success we're having in the marketplace, both because we have adapted to what we're selling and the services that we're providing to consumers rather to our customers during the pandemic with improved sales practice that -- which come from a variety of effectiveness measures.

And so as you can see, in 2020, the year of the pandemic, our overall sales pipeline as we measure it, is up 8%. And then our rate of bookings or sales closes has improved by 5%. However, the dollar value of all those bookings year-to-date has improved 43%. And the way you bridge that math is simply are the average deal size has increased by about 1/3 roughly, right? And again, I just think it speaks -- and the reason we shared is it speaks to both the ongoing good health of the financial institutions that we serve and the broader marketplaces that we serve. And also that what we're offering is attractive and that we are delivering it successfully to the market. So that's really the answer to the first part of the question.

As to the second one, frankly, I just don't have a good rule of thumb. We're relying on the sales executives' estimates of the deal size. Sometimes that's right. Sometimes it's not. There's also uncertainties around how long it can take to integrate your particular client for a variety of reasons, client motivation, IT backlogs, et cetera, et cetera. So take it as a number, a directional number, of kind of the health of the business.

The next question is Toni Kaplan of Morgan Stanley.

Chris, you mentioned in your initial comments that you're working with regulators to try to help promote greater financial inclusion. And from my reading of Biden's proposal to create a new government-sponsored bureau, I guess, the objective seems to be just that. And so would you expect that if you and other bureaus are able to show progress on this front that perhaps maybe there wouldn't be a need for the government to set up a new bureau. Maybe you could just address that and any thoughts on the topic, in general, just given the election coming up next week.

Yes, absolutely. Happy to discuss. And obviously, this is a very important industry or rather issue not only for our industry but for the American economy and consumers. And look, I think the bureaus collectively do a very good job of providing comprehensive and accurate and objective information to serve as a basis for extending credit. Now we're not the only information that's used. And as you guys know, through the -- through recent years, each of the bureaus has been extending the range of data available to identify consumers and evaluate their eligibility for loans.

I think one thing that everybody can agree on is that increasing the visibility of all consumers so that they can participate in the lending market is a good thing. That's financial inclusion and I think both sides of the aisle are aligned around that. Often the debate comes down to a question of how do you achieve that end? Do you achieve it by the government providing the information and likely restricting certain negative aspects, like how long a delinquent credit remains on a credit report? Or do you provide even more information on the consumer, so that the consumer gets full credit for other financial behaviors that demonstrate the wherewithal to manage credit?

We believe in the latter. I mean, we think that and we know that when we moved to trend of data, we were suddenly able to score tens of millions of more consumers when we began adding alternative data like utility payments and negative activity on checking accounts and a whole variety of things that we've discussed previously. Again, we could score millions of more Americans and scored them accurately.

What we would advocate for is that the government assist in broadening our access to data types like telecommunications payments, utilities, consistent rent payments, et cetera, et cetera, and that will really round out individual consumers' financial profiles and help lenders evaluate them and extend credit and price credit accurately for a much larger swath of the population. So if the democratic candidate, if Biden does win the presidency and there is or imagine what we'll find is a period of intensive dialogue where we're really trying to identify what is the problem we're trying to solve, what's the best way to solve it. And I think the bureaus have an important role in whatever solutions are proposed.

The next question is Gary Bisbee, Bank of America.

Just one quick follow-up on another one and then a question of my own. Just on Manav, can you say who the customers are? Who's buying this (technical difficulty) marketing agencies (technical difficulty) are doing the marketing?

And then the question I'd like to ask is really on the cost front in the margins. I wondered if you could just say, is it right to think that the majority of the Project Rise and other investments you're making, whether that's product development and others are falling within U.S. markets? Because it's interesting to see costs there in dollar terms to accelerate the pace of growth reaccelerate quite a bit this quarter or significantly margins down more than international, where you're still seeing costs decline quite a bit. Just any color on how we should think about levels of investment within the segment?

Okay. I'll handle the first question, and I'll pass it to Todd for the second question, but in terms of the digital marketing services that we're providing, it could either be a marketing agency or a marketing adviser or intermediary that was assisting a corporation in its client acquisition through advertising efforts or it could be the corporation directly. We have both, right? But what we're able to do now is help marketers broadly understand who they're targeting and ensure that, that is indeed the audience they want to target and then we're able to array digital identifiers around those individuals and then help publishers -- and help activate those marketing campaigns through publishers.

Okay. Thanks, Chris. Gary, thanks for the question. So specifically on the margin, just kind of starting high level. Margin came in at 38.8% as I said at the onset of the call, close to 39%, what we would consider to be a very strong quarter, especially when we were comping against what was probably the highest adjusted EBITDA margin in the company's history.

When you drill down into the margins that we are seeing at the segment level, in particular, in the U.S. markets, we still came in with what we would consider to be a very strong 40.4% adjusted EBITDA margin. And to your point, we have continued to invest in particularly in areas such as solutions, operations, as we -- as Chris highlighted earlier in the call, but also in technology with Project Rise. The only caveat with that is with Project Rise, we do handle that as an add-back for our non-GAAP metrics. So you're really not seeing that impact when you look at the margins this way.

The other thing I'd highlight, and I mentioned this in my remarks, is within the U.S. markets, we accrued for some legal and regulatory matters for losses that we consider were probable and our best estimate. And for obvious reasons, I can't get into much -- more detail on that. But consider that to be a kind of a onetimer within the U.S. markets number as well, too.

And I think what you see if you kind of look at the other segments, you'll see International's margins coming in at 39.2%, which was down about 80 basis points. I think you're seeing, as the business comes back, kind of 2 things: the resiliency of the business itself and the flow-through of the profit, but you are also seeing those investments and solutions and operations in that business as well, too.

The next question is from Andrew Jeffrey of Truist Securities.

I guess just a couple of questions around the U.S. business, particularly the FI business. Chris, you called out strength in consumer, which is largely fintech. I wonder if you could drill down a little bit into your point-of-sale lending commentary and whether that includes buy-now-pay-later, if that's a driver. And just juxtapose that with some of the weakness in the indirect consumer segment, which I assume is, in some cases, similar customers. So if you could just kind of parse out that relationship a little bit, too, that would be helpful.

Okay. Look, I think you've identified an interesting mix issue that you see in the consumer subsegment of our financial results. I mean the first thing I'd say about the fintech and the consumer -- online consumer lenders, in general, is that stability has returned to that space. And we are seeing improved dollar volume as well as a strong return in online volume, although the mix is really different. And I know you follow this, Andrew, but there's consistent flowing into the fintech lenders. And they're beginning to deploy it through more aggressive albeit still depressed levels of direct marketing relative to pre-COVID, right?

But we've got a large swath of this market, as you know. And we have a particularly large chunk of the point-of-sale lenders, right? And those lenders are doing exceptionally well in this environment because e-commerce purchases have increased a lot. And that's why you see from the charts that our online transaction volume in the consumer segment has increased pretty much back to pre-COVID levels.

Now as Todd pointed out earlier, online transactions are a good portion of our revenues in the space, but they don't account for all of them, right? They're still batch analytics, portfolio management, marketing prescreens, et cetera. So point-of-sale lenders don't rely on us to prescreen and acquire customers. They ride on the marketing of their channel partners, right? And so while that segment is booming, and that's driving the high origination volumes you see, it's not leading to the batch marketing work that we were enjoying before COVID when the mix was different. And then as to your comments, a subsegment within the point-of-sale lenders, I really -- I just don't have visibility at that level. So I'll leave it to Aaron, and perhaps you guys can follow-up after the call.

The next question is George Mihalos of Cowen.

I guess I just wanted to follow up on the question Andrew asked, and maybe ask it a little bit differently. You're talking in the U.S. about momentum on the online side with consumer lending and fintechs, and again, you particularly called out the point-of-sale finance guys. I think you also made a point, Chris, though, when you were talking about the U.K., which is a big fintech market, a big neobank market in and of itself that in that area alternative lending is under some pressure. I was hoping maybe you can kind of juxtapose the 2 kind of why you think you're seeing sort of strength in the U.S. versus U.K.? Is it more nascency of the U.S., more mix of the U.S.? Just any sort of color you might be able to provide there?

Yes. I think what's happening in the U.K. is that their regulators have been examining lending practices across the space, and in particular, the online limiting segment, where the players in question, it's a combination of both online lenders, but also we call alternative lenders that are originating unsecured and very short-term loans. And the regulators have concluded that some of these players, their practices, be it interest rates or a variety of practices, they actually don't like, right? And so they put pressure on those lenders.

That pressure has led to a flood of complaints and recovery efforts by consumer advocacy firms in the U.K. that has pressured a variety of these players to lead the market. And that's really because of the cost of managing the complaints that they're receiving or the recovery requests.

You're not seeing that in the U.S. And I think it's a function of different lending practices and perhaps just a function of the stages of evolution of the 2 different marketplaces. But I think that's why we're seeing a net decrease in the lenders in the U.K. markets or there isn't that dynamic going on in the U.S. markets.

Next question is from Shlomo Rosenbaum of Stifel.

Chris, just a quick question on the commentary that the deals and the deal pipeline are going up a lot. Why -- which area is driving them up so much? Why are they going up so much? What's going on? Is there some kind of mix thing going on right now? Or what do you attribute that to?

Okay. Yes, you're talking about our sales pipeline, right?

Yes.

As I talked about earlier in the metrics and why have the sales been larger. Well, look, I'd like to think it's because -- but I can't exactly speak for what's happening in the market across our customer base. I do know that clients are upgrading their credit origination and their portfolio management data models and practices to use the latest and greatest data and attributes that are available from TransUnion. And those tend to be fairly chunky sales. So we're seeing CreditVision, CreditVision Link, and of course, the COVID-19 attributes driving a lot of that sales success.

And then as we've spoken in previous quarters, with the surge of activity online, online fraud mitigation, leveraging services like iovation and our overall fraud suite, which we call IDVision, that's been an attractive area for customers as well. So I think those are the 2 principal components that are driving the surge in sales in bookings revenue and the increase in average deal size.

Okay. And do you think that, that's unique for where we are right now, like within the cycle in the downturn? Or is that just something that you think is like a trend that you envision going forward?

Yes. I don't, by any stretch, believe that the demand for the 2 sets of products, credit and fraud mitigation, is played out by any way. I think it's probably accelerating on the credit side and really just begin -- well, I can't say beginning, but accelerating on the fraud side, too. Whenever the bureaus materially innovate on the data and analytics side in a way that can really help lenders better understand their risk around origination and portfolio management, it's going to lead to increased sales in an upgrade cycle, if you will. And I think that material segments of the marketplace as consumers have lost employment, are entering into forbearance relationships, are experiencing distress. And lenders need to understand that. And in order to understand it, they need to subscribe to our more advanced data set. And I think that's what's happening. And I think you'll see that upgrades continuing in the intermediate term.

Great. And that brings us to the end of the call. I know it's an extremely busy day with a spate of earnings throughout the space. So we want to be respectful of your time and give you guys the opportunity to deal with all of those. So thank you, everyone, for joining us on the call today, and we look forward to talking to you down the road, and we hope you're all safe and well. Have a great day.

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