TransUnion

NYSE:TRU

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the TransUnion 2022 First 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, Senior Vice President, Investor Relations. Please go ahead.

[Aaron Hoffman, VP, IR]

Good morning, everyone, and thank you for joining us today. Joining me on the call are Chris Cartwright, President and Chief Executive Officer; and Todd Cello, Executive Vice President and Chief Financial Officer.

We posted our earnings release and slides to accompany this call on the TransUnion Investor Relations website this morning. Our earnings release and the accompanying slides include various schedules, which contain more detailed information about revenue, operating expenses and other items as well as certain non-GAAP disclosures and financial measures, along with their corresponding reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures.

Today's call will be recorded, and a replay will be available on our website. We will also be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions and are subject to risks and uncertainties.

Actual results could differ materially from those described in the forward-looking statements because of factors discussed in today's earnings release, in the comments made during this 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 statement.

That done, let me turn the time over to Chris.

[Christopher Cartwright, President, CEO & Director]

Thank you, Aaron, and let me add my welcome. To start, let me outline the agenda for this morning's call. First, I'll discuss the mostly positive macro conditions that support our attractive full year guidance despite inflationary headwinds, then I'll review our strong first quarter performance, which has been driven by favorable macro conditions and the resurgence of our growth-oriented portfolio post pandemic, the cumulative benefit of the strong sales performance over the pandemic and our successful innovations over time.

I'm pleased to report that our outperformance year-to-date and confidence in the remainder of the year allow us to raise revenue and EBITDA guidance for the full year, and I'll provide an update on the impactful acquisitions that we've closed over the past 4 months. For Neustar and Sontiq in particular, we've experienced early successes in going to market together, with really encouraging interest from customers across a wide variety of end markets. And then I'll pass the baton to Todd to discuss our first quarter results in detail, along with second quarter and full year guidance for 2022.

Now as I mentioned previously, we expect market conditions in 2022 to support our strong organic revenue guidance, along with the post-pandemic resurgence in our growth-oriented portfolio, especially in consumer lending, U.S. emerging verticals and the international markets. While a lot of the focus today is justifiably on rising inflation and the long-term impacts of this, I want to remind you that the U.S. consumer remains in a strong position with respect to credit markets. Household debt levels relative to income remain low by historical standards. Average credit card balances are well below prepandemic levels, and delinquency rates for most loans are near record low levels. Additionally, the unemployment rate in March fell to 3.6%, and wages grew by 5.6%.

Despite increasing inflation, consumers remain well positioned to drive the economy. We heard as much from many large financial institutions this quarter who provided positive and pragmatic guidance during the recent earnings, noting the current strength in loan growth, spending activity and credit performance, but also acknowledging the potential uncertainty ahead. We continue to diligently monitor consumer health, particularly lower income households that have less ability to absorb rising costs.

As the Fed seeks to curb inflation, rising interest rates have become an important corollary discussion. As such, I'll end this section by addressing the impact that interest rates have on our various lines of business. While rates certainly have an impact on the lending market, the overall health of the consumer, which I've just described, has greater influence on borrowing behavior and rates in most cases.

Mortgage refinance represents the one part of the lending market almost entirely driven by interest rates. The simple math dictates whether or not it makes sense for a consumer to refinance a mortgage. And unsurprisingly, rates have some impact on purchase originations, though consumers don't shop based solely on rates. They shop based on a monthly payment where rates are one part of the calculation, along with the purchase price, the down payment and the long terms.

For auto and card lending, rates have a very modest impact given the balances the average American carries. For instance, for every 0.25-point increase in rates, that translates into an increase in the monthly payment on the average card balance by only $1. So we tend to see far less impact from rising rates for these loan products.

Now shifting to our first quarter. We posted strong results that exceeded our guidance, with broad-based growth across our businesses as our regions and verticals benefited from positive momentum buoyed by the healthy consumer as well as business wins and ongoing innovations. As Todd will discuss in detail, our first quarter outperformance and an improved view of our nonmortgage business for the remainder of the year has allowed us to raise our full year guidance. We did that while also embedding a more aggressive assumption around mortgage declines, implying broad and significant acceleration in our nonmortgage business.

We continue to drive above-market performance by executing our growth playbook that focuses on repeatable, differentiated go-to-market approaches, industry-leading innovation and complementary expansion into adjacent markets. Our extension into high-growth and complementary credit fraud and marketing solutions continues to resonate with customers across our business while providing valuable diversification in our portfolio.

In U.S. markets, we delivered another quarter of double-digit organic growth, excluding mortgage, with strong performance in Financial Services, Insurance and Media. This highlights our very strong position in fintech and other fast-growing market segments. Internationally, we experienced robust growth in India, Latin America and Asia Pacific, where we have leadership positions in these markets, and they have strong underlying growth trends. Todd will provide more details about the performance of each of these businesses shortly.

And let me wrap up with a short summary on our ESG efforts. We recently published our 2021 diversity report, which highlights steady improvement in the diversification of our workforce across underrepresented groups. And last week, we published our 2021 sustainability report, which provides a broad picture of the progress we made last year, including issuing baseline carbon emissions data, setting a net-zero emissions goal, improving workforce diversity, further enhancing our cybersecurity and data privacy oversight, along with many other achievements. I hope you'll all take time to read these meaningful updates.

Now I want to use the remainder of my time to share with you the performance of the 3 acquisitions that we've closed over the past 4 months. But before I do that, I want to highlight that the current market backdrop that I described a few minutes ago really accentuates the value of our recent acquisitions, particularly with Neustar and Verisk Financial Services. Now both of these can help lenders find attractive segments within the market and drive timely insights via the changing landscape.

Now starting with Neustar. The acquisition substantially strengthens our identity resolution capability for a variety of online applications. Neustar provides real-time identity resolution through its OneID platform, powering solutions that currently serves 3 attractive markets: marketing, cloud mitigation and communications. In the first quarter, Neustar generated $150 million of revenue, up 9% in total, with another quarter of double-digit growth in marketing and at a margin of nearly 25%.

During the quarter, we made meaningful progress integrating Neustar and have received some really encouraging feedback from the market and gained valuable learnings from customers that support the long-term growth thesis. Internally, we've completed our organizational design efforts quickly in order to provide clarity and ensure retention of critical employees. This has helped us retain nearly 100% of the top talent that we've identified thus far.

I want to note the very high-caliber workforce that we've acquired with Neustar, and we benefit from quickly and efficiently expanding our talent in critical areas like technology, data science, product development and many others. In the current competitive environment, adding so many high-quality employees would have been extremely difficult.

We've also brought together critical functions to fully benefit from our increased scale and capabilities. For instance, by standing up data and analytics as its own organization under the leadership of Venkat Achanta, we brought further clarity and purpose through a critical area of our business. Now Venkat has extensive experience in data and analytics, and most notably drove the development of Neustar's impressive OneID platform. Our internal teams have already benefited from collaborating with each other as part of one newly formed org and setting the stage to better leverage the powerful assets and capabilities of both companies.

Now speaking of OneID. Through the integration process, we've learned the platform performs even better than we understood during our diligence, particularly the system's ability to rapidly ingest, index and tag data to prepare it for analytic and solution development and deployment is more advanced than we understood. This increases our ability to utilize data assets and put them into production rapidly. From a commercial standpoint, we've begun to integrate our sales teams, including extensive training to drive cross-selling activities across customers and solution types.

Now let me share some of the early views and successes from the field. The more substantial and differentiated marketing solutions from Neustar, combined with our TruAudience offerings, have already opened the door to opportunities in our fast-growing Media vertical. Our teams have taken a coordinated approach to actively pursuing these opportunities and have early traction with key clients. In Financial Services, we secured our first cross-sell contract of Neustar solutions to a mid-tier lender, and we've had extremely high interest levels as we continue to meet with other customers.

In the Insurance markets, Neustar currently provides its sophisticated solutions to 3 of the top underwriters in the U.S. Our combined teams recently met with one of the largest insurers and heard how impactful Neustar's marketing solutions have been for that customer as they spend billions of dollars on marketing each year, and they indicated that their return on their marketing investment has improved significantly as a result of the Neustar optimization solution.

And given that TransUnion currently has relationships with 19 of the 20 -- the top 20 largest insurers in the U.S. and an array of other players, we think there's a sizable opportunity to bring the same type of marketing capabilities to the rest of our client base who also spend considerably on marketing and are consistently looking for ways to drive better returns.

And in third-party collections, we signed our first cross-sell contract with an existing TransUnion customer who will now use Neustar's phone-based intelligence to identify the best time to call individuals to improve their hit rate on outbound collections calls. The now integrated sales team has attended major trade collection shows recently and discussed similar solutions with the almost 50 existing TransUnion new clients.

And let me end by reminding you about the financial expectations for this business. In 2022, we expect Neustar to deliver another year of high single-digit organic revenue growth driven by strong performance in marketing and fraud. We expect the business to deliver low double-digit revenue growth beginning in '23 and beyond, and we're expecting roughly $160 million of adjusted EBITDA in '22, which would imply a 25% margin. Now supporting the improvement in 2022 and our path to deliver 40% margins by 2025, we have a clear line of sight to at least $70 million in cost synergies and have become increasingly confident as we've progressed through the integration process.

In part, Neustar has begun its cost reduction program before we acquired them, and that included activities like consolidating 8 data centers and 2 colocation sites. At the same time, we are benefiting from working together. For instance, we're leveraging data sets across organizations to reduce costs related to the name, address, phone and e-mail data that we collect by millions of dollars. And we've also begun to consolidate office locations in Chicago and London, which will both happen this year.

Now turning to Sontiq, which provides an entry point into the fast-growing ID protection market that's been driven by rapid e-commerce evolution. In this environment, consumers have heightened awareness of and a concern about the risks of identity theft. Sontiq allows us to access a considerably larger part of this market, fueling strong long-term growth.

In the first quarter, Sontiq generated roughly $23 million in revenue, up approximately 13%, at a margin of roughly 33%, which was slightly depressed by integration costs. Also during the quarter, we began our integration activities and have seen meaningful opportunities materialize. Our teams are fully leveraging our global capabilities in areas such as operations and solutions, and expanding their go-to-market collaboration between our Consumer Interactive teams and their U.S. Market counterparts, especially in Financial Services and Insurance, but also across our international teams as well.

For instance, we've positioned ourselves to bid on a sizable nonfinancial services contract in the identity protection space based on the addition of Sontiq's expansive solution suite, which we believe will be the first of many such opportunities. We're also off to an encouraging start selling Sontiq solutions to our network of insurance underwriters. Insurance represents about a quarter of Sontiq's revenue today, and we see a clear path to expand that position on the strength of our relationships in the space.

We've identified similar opportunities across our U.S. Markets portfolio. Notably, in Financial Services, our customers are showing a strong interest in Sontiq's capabilities. And based on the existing momentum in the business and the ongoing integration, Sontiq is currently trending ahead of the plan, and we expect mid-teens revenue growth for 2022, excluding integration costs, at a nearly 40% margin.

Now let me wrap up with the acquisition of Verisk Financial Services. We completed the transaction on April 8 and have decided to retain Argus and Commerce Signals, a marketing business, and to classify the remainder of the portfolio as discontinued operations with an intention to sell these assets. As a reminder, the business in total generated $143 million of revenue in 2021, with about $95 million coming from Argus and Commerce Signals.

The decision to divest the noncore assets will focus our energy on enhancing the core Argus asset while also allowing the other business to benefit from new ownership. Argus brings differentiated card and deposit transaction data as well as the IP to link the personalized transaction data across sources to create a consumer level full wallet view. With this, we'll be able to deliver enhanced insight to action to measurable outcomes for Argus' consortium members.

Argus increases TransUnion's thought leadership and insights, helping our customers develop more refined strategies to target profitable consumers or to identify sophisticated patterns of card fraud. We can help our customers take action on those insights with TransUnion solutions, whether they are traditional credit-based or noncredit-based through our Neustar capability. And we'll be able to do this through a unified platform powered by Prama and OneID.

And we're happy to report that we're getting very positive feedback from the existing consortium members about our ownership and their desire for enhanced insights delivered using a modern technology-enabled platform. We've also heard from lenders who have not participated in the consortium, and many have expressed interest in joining in order to benefit from Argus' powerful data and insights.

As we integrate Argus in 2022, we anticipate growth in the low single digits, though at a temporarily depressed margin as we absorb the necessary integration costs. In '23, we expect growth to improve to high single digits and then reach low double digits in 2024, with the margins expanding over this period as we trend toward our goal of 40% margins in 2026.

Now that wraps up my update on our market backdrop, the first quarter performance and the integration of these 3 key acquisitions. Now I'll turn the time over to Todd to walk you through our first quarter financial results, our second quarter guidance and the full year guide as well. Todd?

[Todd Cello, EVP, CFO & Interim Principal Accounting Officer]

Thanks, Chris. And let me add my welcome to everyone this morning. I'll start off with our consolidated financial results. First quarter consolidated revenue increased 32% on a reported and constant currency basis. Neustar and Sontiq added about 25 points to revenue, and organic constant currency growth was 8%. Excluding mortgage from both the first quarter of 2021 and 2022, our business grew 13% on an organic constant currency basis. On a trailing 12-month basis, mortgage represented about 10% of our revenue, and that is expected to fall to 7% for full year 2022.

Adjusted EBITDA increased 20% on a reported and 21% on a constant currency basis. Our adjusted EBITDA margin was 36.3%, down 340 basis points compared with the year ago quarter driven primarily by the lower margin profile of Neustar. Excluding both the Neustar and Sontiq acquisitions, the margin would have been 38.8%. First quarter adjusted diluted EPS increased 11% driven by adjusted EBITDA growth offset by higher interest expense and depreciation and amortization.

Now looking at segment financial performance for the quarter. U.S. Markets revenue was up 42% compared to the year ago quarter. The Neustar acquisition had about 35 points of impact on revenue growth. Organic growth was 7% or 15%, excluding mortgage. Adjusted EBITDA for U.S. Markets increased 23% on an as reported and 2% on an organic basis. Adjusted EBITDA margin declined by 580 basis points, with 380 basis points of the decline due to the acquisition of Neustar.

Diving into the results by vertical. Please note that at this time, we have included Neustar's financial results within Emerging Verticals. As we evaluate our operating structure as a fully integrated business, we will provide you with any necessary updated financial information.

Financial Services revenue grew 5% and was up 21%, excluding mortgage. Looking at the individual end markets. Consumer lending continues to be very strong, with considerable investor demand focused on thoughtful expansion, particularly as loan consolidation and personal loans for large purchases have become more mainstream.

Our BNPL position also continues to grow on the strength of the market and share gains. Based on our discussions with many of the largest BNPL lenders, we are also confident that during 2022, we will enable them to furnish data. This will enrich our credit data for all lenders while promoting greater financial inclusion as consumers who utilize BNPL loans will get credit, no pun intended, for their activity.

We also had another strong quarter in our credit card business as issuers pursued incremental share of wallet, continuing a trend of historically strong origination and marketing activity. We anticipate further good growth in 2022 as issuers remain focused on customer acquisition and portfolio review.

Our auto business delivered solid growth in the quarter as new business wins and on-trend innovation, particularly related to digital retailing, helped offset well-publicized inventory issues for new and used cars even as consumer demand remains high. We're seeing traction with Auto Payment Shopper, a digital retailing platform that satisfies consumer desire for end-to-end online auto shopping. We're also seeing greater interest in CreditVision Link to better assess consumers and drive greater financial inclusion by utilizing powerful alternative data.

And for mortgage, rates have moved to their highest level since 2018, which considerably shrinks the potential refinancing pool. On the purchase side, consumer demand remained solid but continues to be constrained by limited inventory, particularly in highly desirable locations and rising rates. At this time, we expect our mortgage business revenue to decline about 25% for full year 2022. We expect the mortgage market as measured by inquiries to be down 30%. We expect our business to perform slightly better than the market as a result of volumetric pricing increases that partially offset the volume declines.

Let me now turn to our Emerging Verticals, which grew 104% on a reported basis and 10% excluding the revenue associated with Neustar. Our Media vertical continues to deliver very strong double-digit growth and was up about 50% organically in the quarter as we signed new accounts and expanded existing relationships with a large media agency and several very large media companies focused on video and streaming platforms.

The TruAudience marketplace, which was built from the TruOptik acquisition, continues to deliver substantial growth. Notably, these acquisitions don't reflect any of the anticipated upside from incorporating highly differentiated Neustar marketing capabilities, which we believe can drive further upside in the future.

Insurance also delivered double-digit growth on the strength of key innovative solutions like DriverRisk, National Driving Record Solution, TLO-based investigative tools, continued traction in digital marketing enabled by the TruAudience platform and expanding opportunities in both the commercial and life markets.

Public Sector delivered another good quarter driven by ongoing new business wins, particularly related to fraud mitigation. Tenant and employment screening remains strong as employment screening has accelerated with increased employment levels and tenant screening continues to perform well, though with moderation as movement has slowed due to the soaring rental prices and extended eviction moratoriums.

Consumer Interactive, which includes Sontiq, revenue increased 15% on a reported basis and declined 3% organically as we were down in both the direct and indirect channels. Adjusted EBITDA was up 18%. Revenue was impacted by moderating consumer demand for paid credit-related solutions across both the indirect and direct channels, particularly with changing consumer spending habits coming out of COVID.

We expect this broad market theme to persist and for the segment revenue to be down slightly more in the second quarter than in the first quarter. This trend further strengthens the case or expanding into the identity protection market via the Sontiq acquisition as those subscriptions are more durable over time and are often provided to consumers by employers, insurers and others.

For my comments about International, all comparisons will be in constant currency. For the total segment, revenue grew 18% as we saw underlying market improvement in most of our regions. Adjusted EBITDA for International increased 18% as a result of the strong revenue growth. Let me dig into the specifics for each region. In the U.K., revenue increased 15%. We continue to benefit from a meaningful onetime government contract.

Excluding that revenue, our U.K. business would have grown about 3% in the quarter as the mortgage and auto markets have been under pressure due to increasing rates and inventory constraints. This 3% growth rate was also impacted by comparability with some onetime revenue seen in Q1 2021, so underlying performance was high single digits. Also recall that the benefits of the government contract started in Q2 2021 and ramped through Q1 2022, so we expect reported growth to be impacted as we lap the contract starting next quarter. Most importantly, we expect underlying growth to remain healthy.

So moving back to the quarterly performance in the U.K., we continue to see solid performance across our lending solutions, most notably in the fast-growing BNPL space. In fact, in February, we became the first U.K. bureau able to accept BNPL data into our credit files. Working closely with prominent BNPL providers, we can now incorporate this data into credit reports to support consumers that are using this type of point-of-sale finance while also ensuring lenders have a comprehensive picture of a borrower's financial position.

We also continue to see strength in our gaming and gambling vertical, which is benefiting from our ability to employ open banking solutions to help online and physical casinos better determine a participant's capacity to bet. This solution helps the operator and the bettor set appropriate limits and is highly encouraged by regulators.

Our Canadian business grew 1% in the first quarter, reflecting growth across the portfolio partially offset by a comparison to significant breach remediation business in the year ago quarter, which I have mentioned on the past several calls. Excluding the nonrecurring breach business, revenue would have grown 4%. We expect to see a similar breach impact in the second quarter and a less significant effect in the second half of the year. We continue to see strength across the business with improving demand and growing pipelines from both traditional and nontraditional lenders, setting us up well for stronger growth in the coming quarters.

In India, we grew 37%, reflecting strong market trends, successful innovation and the benefits of our diversified portfolio. Despite rising inflation, the Indian consumer remains healthy and continues to spend aggressively. This is helping to drive an expected GDP of 7%, along with 9% growth in the credit market in 2022, fueled by a resurgence in consumer lending and credit card issuance, along with the continued rise of fintech and BNPL players.

We have outstanding positions across the entire lending spectrum, including with these players, allowing us to capture this meaningful market growth while also outperforming the underlying market. This outperformance is driven by our innovative approach to the market, strong relationships and continued diversification into the fast-growing businesses like commercial credit and direct-to-consumer.

In Latin America, revenue was up 17%, with broad-based growth across our markets, including double-digit growth in our largest markets, Colombia and Brazil. This very strong growth reflects good macro and consumer fundamentals, along with ongoing new business wins and share shifts in Financial Services, and particularly with fintechs and neobanks, and continued strong uptake of CreditVision and fraud solutions.

In Asia Pacific, we grew 25% driven by continued good performance in Hong Kong and the start of recovery in the Philippines, which had been under lockdown longer than any of our other markets. Finally, Africa increased 9% on the continued strength of our Insurance and retail businesses as well as meaningful growth outside of our largest market, South Africa. We also continue to see additional adoption of CreditVision, TruValidate and our commercial credit solutions.

We ended the quarter with roughly $6 billion of debt and $1.3 billion of cash on the balance sheet and pro forma leverage of 3.5x. Since quarter end, we have deployed $515 million of cash for the purchase of Verisk Financial Services and associated fees and also paid roughly $355 million in taxes associated with the sale of Healthcare. Factoring these payments, cash on the balance sheet would be closer to $400 million, in line with our more typical cash balances.

Adding Verisk Financial Services to the equation but excluding those businesses classified as discontinued operations, we expect our pro forma leverage ratio to be approximately 3.9x in the second quarter as a result of deploying the cash held for taxes and purchasing Verisk Financial Services. However, we expect to delever to 3.6x by the end of 2022. We expect to use the proceeds from the sale of the noncore Verisk Financial Services business for general corporate purposes.

Before turning to guidance, I'd like to quickly comment on free cash flow. You will notice our cash flow statement that first quarter 2022 cash from operations was lower than last year. This was primarily due to higher interest expense and increased usage of net working capital primarily related to higher incentive compensation.

That brings us to our outlook for the second quarter and the full year. All the guidance provided reflects the acquisition of Verisk Financial Services, though, notably, only Argus and related business called Commerce Signals as we are treating the noncore businesses as discontinued and intend to divest on. As a reminder, for 2021, Argus revenue was $95 million of the reported $143 million for Verisk Financial Services. The prorated amount contemplated in our 2022 guidance is $68 million based on the April 8 closing date.

Starting on with the second quarter. We expect 1 point of headwind from FX on both revenue and adjusted EBITDA. And for revenue, we anticipate a 27-point benefit from the acquisitions of Neustar, Sontiq and Argus. Revenue is expected to come in between $958 million and $968 million or a 32% to 33% increase on an as reported basis and 6% to 7% on an organic constant currency basis. Embedded in our revenue guidance is an approximately 4.5-point headwind from mortgage, meaning that the remainder of our business will grow 10.5% to 11.5% on an organic constant currency basis.

Adjusted EBITDA is expected to be between $347 million to $353 million, an increase of 17% to 20%. Adjusted EBITDA margin is expected to decline 440 to 400 basis points, primarily as a result of incorporating Neustar and Verisk Financial Services' relatively lower margins. On an organic basis, excluding the 3 acquisitions, margins are expected to decrease approximately 50 basis points.

Adjusted diluted earnings per share is expected to be between $0.96 and $0.99, an increase of 8% to 11%. And for the full year, we expect immaterial FX impact to revenue, and we also expect about 24 points of benefit from M&A. Revenue is expected to be between $3.85 billion to $3.9 billion, up 30% to 32%. Our guidance includes 4 points of headwinds from mortgage for the full year. So full year revenue excluding mortgage on an organic constant currency basis is expected to increase 10% to 12%, a 100 basis point increase over the guidance that we provided during our February earnings call driven by the first quarter outperformance and our improving full year outlook.

For our business segments, on an organic basis, we expect U.S. Markets to be up mid-single digits, but up mid-teens, excluding mortgage. Financial Services is also expected to be up mid-single digits, but about 20% excluding mortgage. We expect Emerging Verticals to be up low double digits. We anticipate that International will grow low teens in constant currency terms, a slight increase over the previous guidance of low double digits, and we expect Consumer Interactive to decline low single digits on an organic basis as a result of challenging prior year comparison.

Adjusted EBITDA is expected to be between $1.405 billion and $1.44 billion, up 21% to 24%. We expect our adjusted EBITDA margin to compress 260 to 220 basis points this year driven by the lower-margin acquisitions and acquisition integration costs for Sontiq. Compared to prior guidance, the slightly greater margin decline is a result of adding the Argus business at a lower margin that is further compressed by integration costs. Without the Argus addition, margin would remain in the same range we provided previously, 36.9% to 37.4%. We also continue to expect the margin to expand about 40 basis points on an organic basis.

Adjusted diluted earnings per share for the year is expected to be between $3.84 and $3.98, up 11% to 16%. The modest change in the top end of the range is most significantly a result of higher interest expense from rising LIBOR rates. A slight increase in our expected tax rate also impacted adjusted diluted earnings per share. Without these headwinds, adjusted earnings -- adjusted diluted earnings per share would be about $0.07 per share higher due to our increased adjusted EBITDA expectations.

And to help you complete your modeling of 2022, at this time, we expect our adjusted tax rate to be approximately 22.5%, up slightly from 22.2%. Depreciation and amortization is expected to be approximately $525 million, and the portion, excluding step-up amortization from our 2012 change in control and subsequent acquisitions, is expected to be about $220 million, up from $215 million. We anticipate that net interest expense will be about $220 million, up from $205 million due to higher LIBOR and expectations of future LIBOR increases as implied by the forward curve. As a reminder, about 68% of our debt is fixed using hedge instruments, and 32% is floating.

Let me spend a moment to recap our hedging philosophy. We want to ensure we leave sufficient room to prepay debt, which would lower leverage, decrease interest expense and therefore increase cash flow for other strategic purposes. We also want to avoid the potential of being overhedged, which would place TransUnion at speculative hedging position. And finally, we expect capital expenditures to come in at about 8% of revenue.

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

[Christopher Cartwright, President, CEO & Director]

Thanks, Todd. Well, to conclude, TransUnion delivered another strong quarter while also quickly integrating strategic acquisitions that further position us for long-term differentiated growth. We raised our guidance despite meaningfully de-risking our outlook with more aggressive expectations for mortgage declines. This reflects the strength and diversity of our portfolio. We expect another very good year in 2022 driven by the continuation of constructive market conditions and the execution of our growth playbook.

[Aaron Hoffman, VP, IR]

Great. And that concludes our prepared remarks. [Operator Instructions]. And now we'll be glad to take those questions.

[Operator]

[Operator Instructions]. Our first question will come from Andrew Steinerman with JPMorgan.

[Andrew Steinerman, JPMorgan Chase & Co.]

It's Andrew. I wanted to ask about margin expansion after '22, and I know that was highlighted at -- to be 100 basis points per your Analyst Day. But I'm still reminded today that margins will be down this year due to acquisitions, and I did like Slide 16 where you show operating margins to be up 40 basis points this year on an organic basis. I'm just asking the basic question. How could we be assured that margins will expand in years ahead past '22, including potential acquisitions?

[Todd Cello, EVP, CFO & Interim Principal Accounting Officer]

Andrew, this is Todd. I'll take that question. So as it pertains to our confidence in being able to expand margins beyond 2022, I think it's instructive is just to remember the growth drivers that we anticipate. First, we expect to continue to deliver very strong organic revenue growth, which has a very significant flow-through to the bottom line. So think about just the leading innovation that TransUnion has in many product categories. We're going to continue to deliver, and that will also -- that will bolster the bottom line.

In addition to that, you have to then shift to the inorganic piece. So starting first just with the acquisitions of Neustar, Sontiq and now the recently-closed Verisk Financial Services acquisitions. Neustar and Verisk Financial Services currently carry a significantly lower margin profile than TransUnion, where Sontiq primarily does have a margin similar to TransUnion's, but right now, it's being weighed down by normal integration costs to make Sontiq part of the business as it continues to grow.

But if you go back to Neustar, and as Chris talked about in his remarks, the business generated a 25% adjusted EBITDA margin. And we -- as that business continues to grow, which it did grow 9% in the quarter and we're expecting it to grow high single digits, there's a nice flow-through there, but don't forget also about the cost synergies that we committed to, which are $70 million, which we believe by the end of 2023, we will secure roughly about 80% or so of those synergies. So the team has been working very hard, as again Chris talked about, in being able to integrate the organization but also to find those cost savings. So we feel very confident about being able to deliver on that piece.

And then Verisk Financial Services, which, as you've seen this morning, we have put in -- because of close on April 8, we put into our guide the businesses of Argus and Commerce Signals. And we will be divesting the remainder of the businesses. Right now, again, similar to Sontiq, those businesses are turning a lower margin, and it's primarily this year due to the integration expenses that I think you'd expect us to have to incur to make that business part of TransUnion.

But again, importantly, again, as the future outlook for that business, as we begin to rank -- as it begins to be part of TransUnion and we're able to change the way we go to market with Argus as well as the way we deliver the product, that will have a significant impact on the profitability, and then the integration costs will eventually go away as well.

[Christopher Cartwright, President, CEO & Director]

Yes. And so, Andrew, those are all the right details. And we have a lot of confidence that we're going to deliver the margins that we've outlined. We reconfirmed full year guide. You can see improving margins in the core. With regard to Neustar, we're ahead of the initial guide that we provided when we acquired the business. So we've got a lot of confidence that we're executing in a way that will deliver the margins we've guided to.

[Operator]

Our next question will come from Jeff Meuler with Baird.

[Jeffrey Meuler, Robert W. Baird & Co.]

I want to acknowledge the good revenue performance before asking another margin question. But on Argus onboarding at a lower margin, I think you're implying that you're onboarding it at a lower margin than you previously expected, so would love some detail on that. Is it that the integration cost on the lower acquired EBITDA base because of the planned divestitures has that dilutive effect? Is there anything on how much you're planning to invest behind it or if the margins on the retained business were lower?

Just any aspects like that, and then just any comment on the Q1 margin. I know that you had previously said that you took some of the conservatism out of your old guidance methodology with this guidance. But normally, when we see revenue upside, it comes with pretty good incremental margins. So any comment on Q1 margins?

[Todd Cello, EVP, CFO & Interim Principal Accounting Officer]

Jeff, I'll take that one. And I think I'm hearing kind of a couple of different questions in there. I think you're asking, first, just about what happened with Argus and the expectations on margin, but then also you're asking about Q1. So why don't -- let me start with Q1 first and tell you just where we came in with margins. And so clearly, you can see that we did have a strong revenue performance, as you already indicated. We were $7 million higher than the high end of our guide on revenue, but adjusted EBITDA of $334 million was mid-range on the guide that we provided back in February.

The drivers really kind of fall into 3 buckets for us, the first just simply being product mix. And with the increase in revenue, costs go up, but also that mix of revenue, there's some variable costs that drive that. So that's number one component. The second component primarily relates to compensation-related increases that we had within the quarter. I think there's some incentive comp. There's also some items that were just simply timing-related that we will capture later in the year. And then the third category was just the remediation efforts that we took pertaining to the data incident in South Africa.

But I think what's most important to take away from the materials today is that, yes, margin was lower in Q1, but what we've committed to for the full year is to get the margin back to 37.4% before the Verisk Financial Services acquisition is included. So we're -- yes, Q1, expenses were a little bit higher, but we have -- we've managed that, within the updated guidance we've given, to be able to stay flat.

If I flip over to your question pertaining to the Argus margin, lots of moving pieces. So I know most of the participants on this call are familiar with Verisk Financial Services and the financial profile, but -- and that's obviously everybody's starting point. But with us making the decision to hold the Argus and Commerce Signals only in -- to divest the other 4 businesses, there's a lot that move within those numbers. So that's kind of one thing.

The second thing then, it is the M&A integration expense. We are not adding back, for our non-GAAP metrics, anything pertaining to the integration for Verisk Financial Services. We are for Neustar, right, just simply because of the time and the materiality. So -- and add Sontiq as well, too, just to clarify what we're doing. So Verisk gets burdened, and our integration efforts for Verisk, I'd say they're very aggressive. So meaning that there's a significant amount of spend that's contemplated in 2022 for that business.

[Christopher Cartwright, President, CEO & Director]

Yes. And just to be clear, we're right on track with Verisk, right? This is exactly what we expected, right? And it is our typical approach to not add back. We just made an exception with Neustar because of the size of the deal.

[Operator]

Our next question will come from Heather Balsky with Bank of America.

[Heather Balsky, Bank of America Merrill Lynch]

I wanted to ask a question with regards to the consumer and how you're thinking about the macro environment. And appreciate your call -- sorry, your color at the start of the call. But you talked about staying close to the lower-income consumer and watching them. Can you just talk about how your business is exposed to that consumer in particular and what you're seeing right now?

[Christopher Cartwright, President, CEO & Director]

Yes. Sure. I'm happy to start this. Well, look, as we all know, the consumer in the U.S. overall, whether it be high income or lower income, is in very good shape. From a balance sheet perspective, consumers and households have delevered over the course of the pandemic. And at the lower end of the income spectrum, they were primary beneficiaries of that. There was a lot of forbearance of loan repayment during the pandemic as well as infusions of income from various government sources, right?

On top of that, the employment market's incredibly robust. We're at 3.2% unemployment. There's almost 5 million jobs in the U.S. that are unfilled currently. Wages are increasing, ending in an abundance of employment opportunities. So we believe, and if you follow the banks as they reported their results earlier this season, they believe that the consumer is pretty well positioned.

Now of course, there is the intermediate concern about rising inflation and the impact on consumers, particularly lower-income consumers, but there are offsetting factors like rising household income, high employment and relatively low credit card balances and leverage in general. So consumers have the ability to earn more and continue to consume, and there's still a lot of pent-up consumption coming out of the pandemic period, and they have the ability also to increase their leverage, right? So there's really a mix of issues that we think shades to the positive for 2022.

[Operator]

Our next question will come from Ashish Sabadra with RBC.

[Ashish Sabadra, RBC Capital Markets]

I just wanted to focus on the fintech and BNPL. You obviously talked about the strength there in the U.S. but also the international markets. I was just wondering, in your conversations with the fintech, have you -- have they indicated any kind of slowdown in demand or marketing activity, particularly going into the back half of the year? And also maybe just to tag onto that, you talked a lot about the Neustar and the cross-selling. Can you also talk about any traction of Neustar with your fintech customers as well?

[Christopher Cartwright, President, CEO & Director]

Yes. I'd be happy to. So the short answer to your question is no, the fintechs don't believe there's going to be any slowdown. And if you look at our results in the U.S. where we grew over 20% in Financial Services in the first quarter, a lot of that is resurgence among fintech and disproportionate contribution from the BNPL sector where we also have nice share. But overall, the consumer is strong, and lending is increasing. And we're very optimistic about our Financial Services performance for the full year, independent of the deflation we've got in the mortgage market because of rising interest rates.

And again, what I would remind you of, and we commented on this earlier in the pandemic, but our portfolio is largely growth-oriented. And we are attacking and taking share in many of the markets in which we compete. We've got a disproportionate share of the emerging fintech and BNPL markets. We've got an international portfolio that skews toward higher-growth economies with emerging middle classes and increasing borrowing rates.

And then if you look in the U.S., the emerging markets division, we have kind of attacker positions in insurance, in public sector, in the investigative solutions realm. And we think as the economy has now firmly emerged from the pandemic period, we're going to return to that growthful trajectory that we've demonstrated through the years.

[Ashish Sabadra, RBC Capital Markets]

That's very helpful color. And maybe I was just wondering if you could talk about the Neustar traction in the fintech side, if you don't mind.

[Christopher Cartwright, President, CEO & Director]

Yes. Well, look, Neustar services some of those companies today. With the partnership now with TransUnion, there's an enormous opportunity to cross-sell back and forth. Not just Neustar coming into fintech, but truly, the cross-sell potential is very exciting. Having spent a good deal of time both in Neustar and in Sontiq, I think our investment thesis about the power of the cross-sell, about the complement between the 2 services, has been completely confirmed. And I'm really excited to just focus on integration execution and delivering some good results in the coming quarters.

[Operator]

Our next question will come from Toni Kaplan with Morgan Stanley.

[Toni Kaplan, Morgan Stanley]

Wanted to ask about the ex-mortgage organic growth increase for the year. So you raised it by about 100 basis points. Could you just give some additional color on the main drivers there leading to sort of better expectation than what you were previously thinking of? Maybe just talk about sort of the -- which verticals are performing better than you originally thought.

And maybe also if you think about Financial Services, you're expecting 20% ex-mortgage organic for the year. You have some difficult comps coming up next quarter, particularly. Just talk about the confidence in sort of what's changed and the ease of hitting those numbers.

[Todd Cello, EVP, CFO & Interim Principal Accounting Officer]

Toni, this is Todd. I'll take your question, which is an important one for us to go through with you. So let me start first with Financial Services and just the confidence that we have in the updated guide on an organic basis ex the mortgage impact.

So within there, first, this goes back to the previous question. The fintechs continue to be very strong for us. And in particular, just to highlight a little bit more on what Chris just said, we have seen some very strong marketing activity from the fintechs. So that -- the position that TransUnion has built in that space over the last several years is significantly benefiting us not only in the first quarter but also in our expectations for Q2 through Q4.

In addition, smaller, but the BNPL players as I highlighted in my remarks at the beginning, they continue to be strong, and they're growing, and we're benefiting from that in the U.S., but we're also benefiting from -- in our International operations as well, as I said earlier. Also within Financial Services, again, on the customer acquisition side, the credit card marketers that we have stronger positions with, we find them to be significantly more aggressive on the marketing side. So that's definitely another driver for us and gives us the confidence there in Financial Services.

The shift out of Financial Services, and think about the other areas that are driving growth for us, in the Emerging Verticals, Insurance, as I'm sure everyone can appreciate, that's a big vertical for TransUnion, and it continues to grow at a double-digit pace. The team just continues to drive innovation into the customer base to solve very sophisticated customer needs. So that's a big part of it.

The Media vertical, we grew significantly based on the acquisitions that we had made back in 2020 to build out our capabilities. So not only is that business performing well, but then you couple that with Neustar and the marketing business there, that grew 10% or greater than 10% in the quarter. We feel really good about the position that we have built, in particular, in Media.

And then the International portfolio is also where we have just a significant amount of conviction. And I think what I would highlight of most importance is where that growth is coming from. And it's coming predominantly from more emerging economies like India, Latin America, Asia Pacific. And even our African business posted very strong results, and we're expecting that to continue. So that's the -- that's what gives us the conviction in the overall guidance.

[Christopher Cartwright, President, CEO & Director]

Yes. The good news is it's very broad-based at this point.

[Operator]

Our next question will come from Manav Patnaik with Barclays.

[Manav Patnaik, Barclays Bank]

Just like you guys gave us kind of the mix and assumptions on the mortgage side, I was hoping you could talk a little bit about how that would look if you looked at card and auto as well. And maybe just at a high level, too, I was hoping those 2 verticals specifically, like where are they versus pre-COVID levels today?

[Christopher Cartwright, President, CEO & Director]

Look, it's all about pre-COVID levels. And if you look at the piece parts of our Financial Services business, and again, U.S. focused here, very strong on consumer lending, which is a very material part of that group. Card, strong activity as well, and auto holding up well despite the frequently discussed supply chain issues. So again, overall, with the exception of mortgage, which we've all talked a lot about and understand what's going on there, performance is strong in Financial Services.

[Manav Patnaik, Barclays Bank]

I mean just curious, any sense of the assumptions you've made on those 2 categories for the year, just kind of like how you laid it out for mortgage?

[Todd Cello, EVP, CFO & Interim Principal Accounting Officer]

Yes. Manav, I don't think we would have anything more to say than what I had said earlier. So I could reiterate that, I mean, it's -- in the card space, we continue to just see very aggressive marketing with the customers that we have strong relationships with. That's a meaningful driver for us there.

And then in the auto space, what we're experiencing, and I said this earlier, just is there's demand, but the inventory issues that are holding things back. So we're still able to grow in that space. And a lot of it is, again, like what I highlighted is just the innovation that we brought to the market that we're able to differentiate ourselves as the sale of cars goes more digital today.

[Operator]

Our next question will come from Andrew Nicholas with William Blair.

[Andrew Nicholas, William Blair & Company]

I just wanted to ask if you could expand on the addition of buy now, pay later data to consumer credit profiles. Just kind of interested in how much demand you're seeing from your client base for that information specifically. And any sense for where your BNPL data set sits relative to your competitors in terms of size and breadth and that sort of thing?

[Christopher Cartwright, President, CEO & Director]

Yes. Sure. So let me just talk more generally about this. I mean it's an emerging area, and the industry is figuring out the best way to account for BNPL activity on the credit bureau files. Each of us have an approach to doing it. TransUnion is accumulating that information from our providers, and we're going to put it on a partition spot on the credit file as it is today, and our clients will have the ability if they choose to incorporate that data that signal into their lending models.

It's important to note, though, that BNPL activity is different from a traditional credit trade line. These are fairly small dollar purchases, and they need to be consolidated in order -- they would need to be consolidated in order to appear as a trade line on the credit report. Now we can currently do that through partnership, but the industry is still working out the best way to accommodate it.

I can't really comment on the relative size of the data that we're accumulating versus our competitors. I guess what I will say is that we feel like we compete very well in fintech, and BNPL is no different. So I imagine the size of our data repository is going to be attractive when lenders are ready to incorporate that signal.

But you have to be judicious because the data is different than traditional trade lines, you can't just plug that into conventional credit models without kind of disrupting the results, right? So we think accumulating the data and creating data attributes based on it, that our clients can then incorporate it into their origination models and their marketing propensity models and the like. We think that's a very sound way to go about it.

[Operator]

Our next question will come from Hamzah Mazari with Jefferies.

[Mario Cortellacci, Jefferies]

This is Mario Cortellacci on for Hamzah. I guess prior to the big 3 acquisitions you made, you commented on how much your portfolio is levered to the credit cycle. Could you just update us on your thoughts there? And then obviously, several times throughout the call, you mentioned how bullish you guys are on the consumer and the health of the consumer. I think you also commented a little about consumer -- about what your customer comments were, specifically from banks, but maybe you could also comment on what you're hearing from your customers internationally on the credit cycle.

[Christopher Cartwright, President, CEO & Director]

Yes. So what I would say is in recent years, because of our innovation and our expansion into adjacencies and also just adding new capabilities, we've diversified our total revenues away considerably from direct correlation to origination activities. And that's the expansion into fraud mitigation services, analytic services, consumer -- direct-to-consumer and credit enablement as well as marketing, where we made substantial investments.

The recent 3 acquisitions that you outlined, that just continues the diversification, but also, we're adding highly complementary capabilities to the mix. So TransUnion's portfolio today relative to where we were 5 years ago, certainly 10 years ago, during the last major downturn, it's been more than 10 years now, we're considerably more diversified, plus the international markets form a significant proportion of total revenues, and those have been very fast-growing and resilient in all circumstances except this recent pandemic, right? So we feel more diverse and pretty positive.

[Mario Cortellacci, Jefferies]

And on the customer comments just internationally on the credit cycle.

[Christopher Cartwright, President, CEO & Director]

Yes. The customer commentary that I'm referring to, it's the way the banks were guiding the market during their recent earnings calls, right, in consumer lending, in particular, the health of the consumer is a strong area that they were citing, right? So I think our guide and our experience -- frankly, the numbers that we've delivered are consistent with that positive outlook.

And I think it's much the same internationally. I mean we had a really strong performance in India, which has rebounded from a very difficult time with the pandemic and across Latin America and our businesses in Asia. The Philippines had some of the most severe lockdown that's reemerging. Our direct-to-consumer business in Hong Kong has also reestablished itself. So really looking around the portfolio globally, there's a lot of bright spots.

[Operator]

Our next question comes from Shlomo Rosenbaum with Stifel.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

Chris, you talked a little bit about OneID platform being more powerful than initially anticipated. [Indiscernible] this ingest and tag data faster. Can you talk a little bit about how this being better than you expected, how should we think about this manifesting in terms of commercial potential? Should we see faster new product innovation? Is there a better ability to cross-sell? Can you just go through some specifics on how this being more powerful helps the company going forward on like a practical, on the ground level?

[Christopher Cartwright, President, CEO & Director]

Yes. Good question. So obviously, the speed at which you can ingest data and your ability to fuse that data with other related elements and incorporate it into your data graphs and all of that, that reduces or rather it accelerates the product development cycle, speeds it up, helps you to get to market faster, helps you do more powerful kind of product engineering. So I see that as a benefit.

But in addition, we have many compliance and regulatory demands to meet globally. And Neustar has a great ability to tag the data based on its source and permissible uses and the like, which will make it easier for us to comply with a continuously expanding realm of legislative and regulatory scrutiny if you look across the global markets in which we compete.

Yes. And there's just a lot of intelligence that we can incorporate in that core OneID platform that we can kind of access centrally in a greater scale and make changes more quickly in the central repository that then flow out to all of the connected product offering, the product offering that we will connect increasingly over time as we integrate this business.

[Shlomo Rosenbaum, Stifel, Nicolaus & Company]

You're seeing more potential commercially from what you saw beforehand. So we should think about that in terms of the context of the ability to come out with more innovation now.

[Christopher Cartwright, President, CEO & Director]

Well, look, I think we're going to quickly integrate TU's, and in many cases, TU's superior data sources into the OneID platform. I think much of that will occur over the course of this year, which is very quick. I can't tell you whether it's faster than it was previously.

We always were very positive on the platform. But we're going to quickly integrate our best-in-class data interrelated with the data elements within the OneID platform, and that will improve the ability to resolve identity, and those benefits will flow through to all of the products that have created the OneID platform in terms of improving match rate, right?

So look, I wouldn't push it too much further and say, oh, we're raising our growth expectations across the different products. Just think of it as an additional reason to feel confident in the numbers that we provided TheStreet and in the -- just in the inherent value of the technology that we acquired with Neustar.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Aaron Hoffman for any closing remarks.

[Aaron Hoffman, VP, IR]

Great. Thanks, everyone, for joining us today. We're going to wrap it up here. I know it's a busy day of earnings as usual, so we'll make sure everybody has time to transition over to other calls as we need to. So we hope you have a great day. Thank you for your time.

[Operator]

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