TransUnion Q1 2016 Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; compared with the three months ended March 31, 2015 unless otherwise noted. Amounts are in U.S. dollars.
Business context and reporting period
TransUnion provides consumer credit and information services, analytics, decisioning, and consumer credit and identity-protection products. It reports three operating segments: U.S. Information Services (USIS), International, and Consumer Interactive.
In February 2016, TransUnion acquired a 71% interest in Colombian credit bureau CIFIN. It also reorganized certain U.S. consumer-facing activities between USIS and Consumer Interactive and reallocated $105 million of goodwill; prior-period segment results were recast, with no effect on consolidated results.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $405.7 million | $353.1 million; up 14.9% |
| Operating income | $51.9 million | $36.5 million; up 42.3% |
| Operating margin | 12.8% | 10.3% |
| Net income (loss) attributable to TransUnion | $12.6 million | $(6.6) million |
| Diluted EPS | $0.07 | $(0.04) |
| Adjusted EBITDA | $141.4 million | $114.8 million; up 23.1% |
| Cash provided by operating activities | $41.7 million | $16.5 million |
| Capital expenditures | $30.9 million | $30.1 million |
| Cash and cash equivalents | $150.3 million at March 31 | $133.2 million at December 31, 2015 |
| Total debt | $2,357.5 million at March 31 | $2,204.6 million at December 31, 2015 |
Revenue growth reflected organic gains across all segments and recent acquisitions, partly offset by foreign-currency effects. Management attributed the increase in operating cash flow mainly to higher operating income excluding depreciation and amortization and lower cash interest paid. The reported income-tax provision was $12.0 million, an effective rate of 45.1%.
Material changes and segment performance
- USIS: Revenue rose 12.8% to $247.0 million. Decision Services grew 24.6%, Marketing Services 12.0%, and Online Data Services 9.8%. Segment operating margin declined to 12.2% from 12.7%, reflecting technology-transformation maintenance costs, compensation, and depreciation.
- International: Revenue rose 6.8% to $67.8 million, including CIFIN. Weak currencies reduced reported revenue; management cited a 15.1% currency impact on the segment. Segment operating margin increased to 7.5% from 4.3%.
- Consumer Interactive: Revenue rose 25.4% to $106.1 million, primarily on indirect-channel growth and more average direct subscribers. Segment operating margin increased to 38.2% from 31.6%.
- Interest expense fell to $20.4 million from $44.8 million, mainly because the 2015 IPO proceeds and related borrowing had been used to redeem higher-cost senior notes in July 2015.
- Operating expenses increased 11.7% to $353.8 million, below revenue growth; cost of services rose 18.7%, while SG&A rose 8.4%.
Liquidity, debt, outlook, and risks
At March 31, total debt was $2,357.5 million, including $2,309.5 million of long-term debt. The company borrowed an additional $150 million under Term Loan B on March 31 to repay revolving-credit borrowings used for CIFIN and general corporate purposes. No amounts were outstanding on the revolving line at quarter-end; $210 million was available. Cash included $68.2 million held outside the United States.
Term loans bear variable rates; the reported rates at March 31 were 3.50% for Term Loan B and 2.88% for Term Loan A. Interest-rate caps are intended to cap LIBOR exposure on a portion of term loans at 0.75% beginning June 30, 2016. Their fair-value movement generated a $14.8 million after-tax loss in other comprehensive income and a $0.7 million loss in earnings from hedge ineffectiveness during the quarter. The company reported compliance with debt covenants; the quarterly net leverage covenant ceiling was 6.5-to-1.
Management said cash on hand, operating cash flow, and available revolver capacity should fund planned capital expenditures, debt service, and operating needs for the foreseeable future. It expected 2016 capital expenditures to be lower as a percentage of revenue than in 2015 and expected to complete its technology-platform transformation in the first half of 2016. No specific revenue or earnings guidance was provided.
Management cited improving U.S. lending and consumer demand, but noted continued uncertainty restraining consumer spending and currency headwinds in International. Principal risks include macroeconomic and credit-market conditions, data security and access, regulation and litigation, customer retention, technology-transformation execution, acquisition integration, foreign-exchange exposure, and servicing debt and covenant requirements.
TransUnion is routinely involved in consumer, privacy, credit-reporting, and regulatory matters. It stated that outcomes and potential losses cannot be predicted with certainty for some matters; certain outcomes could materially affect results in a particular period. CIFIN acquisition accounting included estimated fair values, and contingent acquisition obligations had maximum potential payouts totaling $33.5 million, subject to performance conditions through 2018.
Important facts for investors to verify
- Whether CIFIN’s acquisition, planned additional ownership purchase, and integration deliver the expected growth; the company had rights and obligations to acquire approximately another 24%, subject to regulatory approvals.
- Progress and costs of the technology transformation, including whether completion in the first half of 2016 and lower capital expenditures as a share of revenue are achieved.
- Debt levels, variable-rate exposure, interest-rate-cap effectiveness, available revolver capacity, and ongoing covenant compliance.
- Whether organic growth offsets International currency pressure and whether segment-margin trends persist.
- Developments in litigation, regulatory matters, tax audits, and contingent acquisition payments, for which ultimate outcomes or exposure may be uncertain.