Equifax Inc. (EFX) Earnings Call Transcript & Summary

Thanks, everyone, for joining the webcast. For those who don't know me, I'm Ashish Sabadra, senior analyst at Deutsche Bank, covering business and information services companies. We are excited to host Mark, the CEO of Equifax; as well as John, the CFO.

And Mark, we would like to kick off the conversation, talking about the recovery Experian reported last week and TransUnion published an update earlier today. I was just wondering if you can talk about, at a high level, how different businesses within Equifax are positioned to benefit as the states start to open up as the economy starts to recover.

Yes. Ashish, thanks for having us. It's great to be on this call with you and some of our investors. We had our earnings call back in mid-April where we gave some guidance around trends at that time. And during that discussion, we were clear that our expectation was that we'd see continued improvement as shelter-in-place restrictions are lifted, not only in the states but in other markets around the globe. And if you go across Equifax, I'll start first in the United States. First, as you know, mortgage is quite strong for us and for the industry, both refi and some purchase volume. That was strong coming into COVID in mid-March. And that continued strong even through the last 10 weeks. There's been some strengthening there as companies, mortgage originators got more used to operating in the lockdown kind of mode. But we've seen them adapting and how they're doing closings virtually and doing inspections and so on. And of course, we're seeing shelter in place start to lift in the last couple of weeks. So we think that should continue going forward. And that's benefiting our USIS business, which over-indexed to mortgage because of our tri-bureau business. And of course, Workforce Solutions, our income and employment data business is quite strong from the mortgage space, and I'll come back to that maybe a bit later. If you look at nonmortgage in the United States, whether it's auto, banking and lending, which is cards and P loans, or some of the other verticals that we have, those were more impacted, certainly the mortgage early in the COVID cycle. We've seen those improve as we've finished up April and come into May and our expectation that those will continue to improve. For example, with auto, the auto dealerships that's early on in March and April, struggled with how to sell an automobile or finance it or deliver it in a lockdown mode. They got better at that, I would say, in the last 4 weeks, and we've seen that volume improve at Equifax as they've been able to do appointments now with shelter in place being lifted. And as retailers start opening up, we expect to see some improvement in card volumes going forward. And the same with P loans as companies become more comfortable originating in this COVID recession. I will say it's an unprecedented recession, and it's really having a big impact on our customers because of the unprecedented income and employment impacts on consumers. If you go back to the '08, '09 recession or global financial crisis, there was high unemployment, but you didn't have the breadth of salary reductions or furloughs that we're seeing now. And we've seen a real uptick in discussions around our income and employment data at Workforce Solutions. And then just quickly on international, clearly, much more significantly impacted in the U.S., part of that was the lockdowns were much more severe in international markets, whether it was U.K. or Spain, in our case, even Canada and Australia, they locked down sooner. They locked down harder. And they're staying locked down longer. So while we've seen some upticks there, it's not the same pace of recovery that we've seen in the U.S. market. And based on what we know from our teams around the globe, some of those restrictions won't lift until we get into the June and July timeframe and the international markets. Back on just maybe finishing one more point, back on the April call that we talked with investors about when we did first quarter earnings, we did -- shared a breakdown of Equifax's revenue. And we're a bit unique versus our competitors with Workforce Solutions and with our over-indexed to mortgage as well as a countercyclical business and unemployment claims and Workforce Solutions. Obviously, that's quite strong right now. And if you look at Equifax, you have over 50% of Equifax that we expect to grow in a recessionary environment, and that's reflected in the trends that we showed a few weeks ago in our April earnings call. So I'll pause there to see if there's other questions on kind of the recovery.

Yes. No, Mark, again, this was great color. Maybe we'll focus on the Workforce Solutions business. So the unemployment and the income data that you have is truly differentiated. Nobody else other than you have that kind of information. And as you mentioned, there has been definitely a strong demand for the product. I was wondering if you could just provide more color on what's driving the strength. Is it only mortgage? Or are you also seeing incremental strength outside the mortgage space?

Yes. And it is quite broad. Mortgage clearly is powering it. And it's not just the mortgage market. We've been very deliberate about rolling out new products, not only in the mortgage vertical, but in others, to really give more value and more solutions to our customers. For example, the number of poles per mortgage application is something we worked hard on. Historically, you go back a couple of years ago, the income and employment data was typically pulled just at closing to verify income and employment. Increasingly, in the last couple of years and even more so during the COVID recessionary environment in the last 10 weeks, we've got customers that are prequalifying their consumers that are applying for mortgage to make sure not only does their credit work, but also does their income and employment work. And as you know, a mortgage originator will spend a couple of thousand dollars in a mortgage origination process. And they want to make sure that they're spending the time on a consumer that they're going to be able to qualify into a mortgage. So that's an example for Workforce Solutions on more products. So a big focus on NPIs. Another big lever for Workforce Solutions, as you know, which is quite unique, is adding records. Most data businesses have most of their records. And Workforce Solutions, we've had a strong track record of growing the database. And when we grow the database, we grow our revenue because our hit rates go up. We're system to system in a large portion of our customer base, meaning that when they process an application, whether it's an auto loan or a mortgage, they automatically hit our file. And because we're growing the database, our revenue goes up with those hit rates. Conversely, we're only able to fulfill less than half of the inquiries we get because while we have a very large database, and it's only half of -- but it's only half of the -- of our payroll. So one of the strategies we have is to continue to grow the contributors. And if you look at -- in the last 12 months, we've grown the contributors by -- actually the records by over 10%. And the contributor is really multiples of that. We've gone from 95 million actives to over 100 million actives in our database every pay period. And then we've also grown the number of companies contributing. A year ago, it was probably in the 30,000 range of companies that we were collecting data from. And now we're up over 700,000 companies. So obviously, that grows out the database. So that's a second big thrust for us. And the third, is just further penetration in some of the other verticals outside of mortgage. Mortgage has a big runway for us to grow through more polls or different products that we're rolling out. Auto is one where increasingly, the data set is being used not only for subprime customers to verify income deployment but also for near-prime and prime customers, particularly in this COVID environment. And in the COVID environment, we're seeing more credit card issuers and P loan originators using the data set to verify income and employment because of the uncertainty in this unprecedented COVID environment. So there's a real catalyst happening for Workforce Solutions. It's clearly our most valuable business. It's our fastest growing business, and it's highly accretive to our revenue growth rate as a company. And it's highly accretive from a margin standpoint because its margins are over 1,000 basis points above Equifax's average. So it's a very attractive business with a very long runway.

That's great. And it has been growing at a very rapid pace, as you mentioned, very high margins and margin flow through. As we think about -- you talked about some of the growth drivers. I was wondering, even on the portfolio review side, and I don't know if you touched on that, but if you want to talk, have you started seeing more lenders request income data in order -- as they review their portfolio and do risk analysis on their portfolio?

Absolutely. Yes. And we're obviously trying to help -- you got to remember how different this recession is versus '08, '09, which is the worst we've ever seen. First off, unemployment is much higher. Multiples of that. Second is you have the forbearances at levels we've never seen before. Those were widespread in '08, '09. They're really much more widespread now. And then you add on top of it, you pick your term, hidden unemployment. Really the income and unemployment impact on so many consumers that's not unemployment. For example, getting a salary reduction. If you have a prime customer that was making $100,000, and now they've got a 25% reduction because they work for an airline or a manufacturing company that's really being impacted in this environment, they move from perhaps prime customer to a near-prime or subprime customer. That's hard to see inside of the credit file, and that's why the income and employment data is just so valuable and has seeing a real uptick in both customers, discussing it with us and Equifax doing its own outbound discussions with customers. And you have customers that historically might have done a portfolio refresh using our income and employment data once a year, now doing it much more frequently because of the volatility of the consumer in this COVID recession that's really quite unprecedented. So it's a real positive for us that I think will have a lasting impact going forward. Ashish, did we lose you? Or did I lose you?

Sorry about that. I was actually on mute -- so just the right way to think about this business is not only are you getting more demand for more lenders, but it's also the frequency has increased. Is that the right way to think about it?

It is. The example I used with mortgage, where we're having the report pulled more often. Same thing on portfolio reviews. The discussions with customers is around a desire to do portfolio refreshes more frequently. And I think the hypothesis is, which I support, that the expectation is there's going to be additional waves of unemployment. There may be additional waves of salary reductions or furloughs and that the really true north, the most accurate data that is available in the industry on a consumer is the payroll records that we have every pay period. So every 2 weeks, if that's the pay cycle, we get a refresh of that data. So it's very current and very valuable in such a fast-changing environment.

That's very helpful. Another business that you referred to was the unemployment claims. That's again pretty very unique compared -- I believe you are the only people which has it. Can you just talk about the revenue model there? Obviously, the unemployment claims activities has -- is pretty elevated right now. And how do you think about the revenue potential in that business?

Yes. It's obviously quite strong for us right now. We're one of the largest unemployment claims processors in the United States. We process 1 in 5 or 1 in 6 unemployment claims. And remember, we do it for companies. They have an obligation to do it under the various state laws. And so we have a subscription agreement typically with a company where when they lay off an employee, we'll process and verify the claims for their employees when they move to unemployment. And those subscription agreements typically have a volume amount in it that's done annually. And as you might imagine, this is unprecedented from any kind of planning in a subscription or revenue agreement, and we're blowing through those and going to pay by the process standpoint. So that's really boosting our revenue in the second quarter, and it's our expectation that we'll use this opportunity to renegotiate some of those subscription agreements, so it will benefit us in the longer term. But there will clearly be a bump in the second quarter because of this in Workforce Solutions and in Equifax in a very positive way. And we don't know what unemployment claims look like in the second half of the year, but some hypothesis that after PPP expires and some of these other government support programs, there may be some additional unemployment that will flow through that would benefit us on the other side. And what we're trying to do is use that incremental margin from that, which is quite valuable to make sure we stay on offense from a product and development standpoint and a technology standpoint. So we've kept our technology transformation that we're working on the cloud data and technology transformation. We've kept that going full throttle through the COVID environment. And we're also doing the same thing about investing in new product innovation. We want to make sure that we stay on offense and use some of these incremental revenue and margins to invest in the future.

Okay. Yes. And that's a great segue into a question on the technology transformation. So on the last earnings call, you highlighted that the client migrations weren't really impacted despite the COVID-19 impact. I was just wondering if you can talk about how the company -- the progress that you're making on the cloud migration. And are we still on track on the customer implementation? Has there been any pause? Any color on that front?

Yes. No pause. I was nervous about it 10 weeks ago when we went into kind of work from home and my technology leader who's very skilled at this said it's not going to be an issue because the technology team, we've got almost 5,000 technology people. They're built to work remotely. They work in teams. And it's really turned out that way. We're really pleased with the progress on the coding side, the technology side. We haven't missed a beat. We're actually either at or ahead of our expectations from a milestone standpoint. So that's quite positive. And we've -- as I said earlier, we've agreed as a team that we're going to continue to fund the technology transformation, and we've actually told the team if we can accelerate it, we will, because the benefits are so sizable, which we can talk about also. And then, as you know, the second element, first, you got to get the technology built. And remember, our technology is one where we're taking our legacy applications and moving it to the Google Cloud. We're also moving all of our databases from a legacy siloed data infrastructure to a single data fabric. So very, very different approach. Very different than our competitors to have a single kind of 360 view of an individual in our data fabric versus dozens of siloed data assets. So that work has been going on for the last 2 years, and we're in the last throes of completing that over the coming months and through the end of 2020 and probably somewhat into 2021. And then the second piece is migrating our customers from our legacy applications to our cloud based applications. And we've had milestones. We've been working that for well over a year. We've got dedicated teams in each of our businesses that are assigned to work on the migrations of our customers. And we haven't seen any slowdown during COVID. If anything, we found the accessibility of our customers to be higher. We're able to do remote migrations quite effectively. Video is working really well. So, so far, that's been working quite positively. And we were also nervous about that going into COVID, but so far, it's worked quite well.

That's good. That's really good. And you mentioned the focus on new product innovation. I was just wondering how does the tech transformation, does that help accelerate. We've seen significant increase in NPI over the last year and going into this year. And so how should we think about those NPIs going forward? And maybe just a related question on that front is just how does the data fabric of having just all the data in one single place, how does that help you on the NPI side?

Yes. So we were doing NPIs, meaning rolling out new products just in the last 10 weeks that we couldn't do a year ago. And just because of the ability of using the cloud to combine data assets to move products to market more quickly, to go from monthly updates to weekly or daily updates of different data assets. It's already benefiting our ability to be in market more quickly and with more powerful data assets. As we look forward to the NPI side, it's really an area that last summer we started to put more investment into new products. It's an area that I think is a real strength of Equifax, and I want to double down on it. And you saw us, as you pointed out last year, we rolled out 90 new products, and I think that was up from 60 in 2018. And this year, we're tracking to 100 new products or more. And when I look to 2020, I want to do -- I don't know what the right multiple is, but something well in excess of the 100. That's really where we want to take this, and we really want to leverage our technology transformation and cloud transformation and data transformation to really drive that. One of the product areas, as you pointed out, is the ability to combine data assets and what's happened in our industry is the explosion of alternative data and new data capabilities and that data is only valuable if you can absorb it and combine it generally with the credit file. That becomes kind of the anchor, in most cases. And by being in a single data fabric, we believe that we can combine that data more easily, and our customers can combine it more easily. And that's going to result in more solutions, more new products and more capabilities to bring to the marketplace. And revenue growth is one of the reasons we did the technology transformation and data transformation that we've got underway. We believe it's going to accelerate our revenue when completed. It's going to allow us to bring new products to the marketplace more quickly. It will allow us to deliver a stability that's always on. It's going to allow a speed to market and a latency of the data that is unprecedented. And then, of course, we talked on our April earnings call about the cost and cash benefits that are quite sizable that will also accrue from the cloud data and technology transformation that we're really excited about. And our intent is to incorporate the impacts of the cloud data and technology transformation into our long-term financial framework. When we put it back in place, our plans pre-COVID was to do that later this year. I don't think we've really changed that, but we're -- we want to see how COVID unfolds a little bit more. But our confidence in putting a framework in place that is attractive to Equifax and our investors is quite high, and that's what we're working towards.

That's very helpful, Mark. Maybe just a quick question on the benefit. Again, you provided a lot of good color on the cost savings as well as on the operating side as well as new product development side. How should we think about those cost savings versus the investment because a portion of it will get invested back? What's your philosophy around margins and margin expansion? Any color on that front?

Yes. I don't want to put the financial framework in place on this call, but I can tell you that historically, Equifax's financial framework had, obviously, a revenue growth framework. It had in their margin growth from that revenue growth. I would expect we'd have a similar focus when we put our framework back in place. I would also expect that Equifax will be balanced, meaning I will -- we'll want to reinvest in the company. We're doing that now. We started in last summer to reinvest or invest more in new products, and we're doing that in 2020. That will continue as we go into '20 and '21. So it will be a balance of taking some of that margin growth and putting it back into new products and innovation as well as dropping some of that margin growth through to growing our margins. We want to be balanced about on the short term and the long term. And I think we've shown that discipline over the last couple of years about trying to be balanced. And you're also going to get some real lift in margins from Equifax outside of the cloud transformation, but just from the USIS recovery, the incremental revenue growth that they're going to deliver and they were on a strong track record when COVID hit in the first quarter. That will continue, and that's going to deliver incremental margin dollars that will be attractive to our business model. And then, of course, Workforce Solutions, because it's growing faster than USIS and international and GCS is accreting revenue growth rate quite positively. And of course, their margins are, too. And then the last piece that we've talked about from the cloud transformation is that our cash conversion should be much higher. We're going to be investing less in CapEx going forward. And that should result in more cash to invest in M&A. We're continuing to focus on bolt-on M&A. That's been a strategy of the company for many years. It's a strategy of mine also. And we've done acquisitions in the last 2 years like DataX in 2018 and PayNet last year as well as a few other smaller bolt-ons. And our plan is to continue that going forward. And then my expectation is we'll have a framework that would include returning cash to shareholders through growth in our dividend, which we've just frozen at 2018, we haven't grown it since then, and in stock buyback in the future.

That's great. That's great. It seems like a very holistic capital allocation strategy, for sure. Just going back to -- Mark, you mentioned moving apps to the cloud. One app in particular that I want to talk about is the portfolio analytics solution, particularly your Ignite. You've also partnered with FICO. Just talk about your competitive positioning there, just given your partnership with FICO.

Yes, sure. So FICO -- I'll come to FICO in a minute, but Ignite is a very important analytics engine for us. It's one that we are moving to the cloud, and we've got -- in some markets already in the cloud. We're also integrating Ignite and InterConnect, which is our -- kind of the main way our customers connect to Equifax in one solution. So that's all part of this technology refresh that we've done in 2018, '19 and 2020. And we're getting real success as far as installations with our customers with Ignite. We're energized about our competitive position there and the access to our differentiated data. The FICO announcement we made a little over a year ago in March of 2019 was one to really augment Equifax. We're going to embed Ignite into their decision management tool. We're going to jointly sell that in certain solutions where it makes sense for the customer and include in there an integrated data set of Equifax data. So it's really a turnkey solution with the best from Equifax and the best from FICO. And that's one example of a couple of different products that FICO and Equifax are partnering on where we can take advantage of each other's technology or, in our case, our data as well as our distribution in a way that's beneficial for both of us. And I'm a big believer in bolt-on acquisitions. I'm a big believer in investing in your own technology and your own data assets, but I'm also a big believer in partnerships. And FICO is an example that we've announced in the last 12 months, a partnership with Yodlee around alternative bank transaction data. We announced another partnership here in the States with a company called Urjanet that has alternative consumer permissioned utility transaction data. And those are just examples of how we're trying to broaden our footprint of capabilities to operate in the marketplace.

That's very helpful. And looks like a pretty holistic solution, which involves both organic and inorganic and a partner strategy. So that will be helpful. Maybe just a couple of minutes on the fraud piece, fraud analytics or fraud mitigation software. There's definitely been an increase in account takeover fraud or synthetic ID or at least concerns as more people move digital. Can you just talk about Equifax fraud analytics offering and what kind of traction are you seeing?

Yes. It's a big issue. It's a very timely issue. I think there was an article in the journal today about an increase in account takeovers and phishing around credit card fraud. And it's a big cost to our customers. So it's one where Equifax has a big business there around identity and fraud. It's a place that we're investing in, both through data assets. The more data you have, the better you're armed in order to ensure that the consumer that's applying for a credit card or the transaction that's being processed is one that is accurate and there really is the consumer. And so data is a big piece of it. And then the analytics capabilities is another one. And we're investing in a new platform called Luminate that we're rolling out in the marketplace in 2020, that we're excited about the capabilities that will bring to our customers around identity and fraud. And we're also actually the second -- we've got a handful of these, but another product with FICO is AML/KYC solution that we're rolling out in the marketplace in the coming weeks, that will be another one around authentication of individuals around AML and KYC. So it's a -- clearly a priority for Equifax and one that we're continuing to invest in.

That's great. And then just on -- sorry, you mentioned the payment acquisition. I was just wondering if you can talk about the trends of the commercial credit side, particularly as SMBs are seeking more financing.

Yes. Are you talking about the trends during this COVID period?

In general, in COVID period, but also how you think about the trends going forward. How do you think -- you spend as much time on the commercial side. So anything there.

Yes. It's -- Equifax has a commercial business here in the States. We compete with Experian and Dun & Bradstreet. We also have a sizable one in Canada and in Australia. It's a space that we like. The PayNet acquisition was really quite unique and quite differentiating. Most of the commercial data today is bank transaction data. So it's bank loans, commercial loans and commercial credit lines and commercial credit cards. What PayNet had was really quite unique was leasing data. And if you think about a small business that might have one bank line and maybe one bank credit card, but they could have 10 trucks or 5 pieces of equipment that they're leasing and that payment data is very valuable in addition to the bank transaction data. So that's why we bought PayNet, which we thought was very valuable. And we're getting great traction in the marketplace as we roll out PayNet along with our core commercial data here in the United States, and it's actually in Canada also. As we roll that out to our customers, it's a very attractive addition to our commercial data assets. And it's a great example of the kind of bolt-on acquisitions that Equifax wants to continue to do. Even in the near term, in 2020, we've got a strong balance sheet. We're prepared to continue to look for the kind of M&A that's going to be accretive like a PayNet or a DataX, which was a consumer data set that we bought in 2018.

That's very helpful, Mark. Real great progress and real leadership. Just before we wrap up the call, I was wondering if you had any final comments or anything that you want to touch on based on what we are seeing here in the economy or based on the conversations that you've had with customers or investors.

Yes. This is a very challenging time for our customers. And you can pick every customer set, they're all being impacted. And as I mentioned earlier, in '08, '09, I was on the other side of the table. I was running GE Capital's credit card business. So that was a very difficult time. It was a very different recession. And this one, in my opinion, is much more challenging around the consumer. So I think that's one that is an important point. And what does it mean? It means the value of data is even more valuable today than it was in '08, '09. It's always been valuable. But this recession is so different. And then it really points back to, in our case, the benefit of owning Workforce Solutions in the really unprecedented impacts on employment and income for by U.S. consumers and the value of our Workforce Solutions data, particularly now with the scale it has. If you go back to '08, '09, the database was much smaller. So while it was valuable, it just wasn't as useful because it didn't have the hit rates. Now that we have, call it, half of the nonfarm payroll in our actives, it just becomes a very valuable data set. And it's a very powerful business, pre-COVID, even more so in this COVID environment. And it allows Equifax to have a big portion of our company between our mortgage business and unemployment claims and the Workforce Solutions business that grew in '08, '09. All 3 of those businesses grew in '08, '09, and they're going to grow and they are growing. And we expect them to grow during this COVID recession in 2020. It's a very powerful equation. It allows us to stay on offense. So we're -- we tightened our belt on discretionary costs, but we're investing in new products, and we're investing in our cloud data and technology transformation because we know it's going to position us strongly for the second half of '20 and more importantly, for '21 and '22.

That's very helpful, Mark. Great color. And yes, under your leadership, Equifax is really differentiated, both in terms of data, but also technology. So all the best with the technology transformation. And thanks for giving us this opportunity. Thank you.

Well, Ashish, thanks very much for having us. We appreciate the invitation.