Equifax Inc. (EFX) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thanks for joining us, and thanks for being here, wherever you might be. My name is George Mihalos. I cover the broad fintech space here at Cowen, and it's my pleasure to welcome back to the conference Equifax. And we have with us today CEO, Mark Begor; and CFO, John Gamble. I'd be remiss if I didn't say we're also joined by Trevor Burns and Jeff Dodge. So thank you, everyone, for being here. Thank you for taking the time. And to kick things off, I hope you're all well and safe.

We're all good here, George. Thanks for having us.

Great, great. Just one thing before we jump in, for anyone who does want to ask a question, there is a dashboard set up, feel free to send something across and I'll endeavor to get to it.

So why don't we get right into it? Mark and John, Equifax was very early in reporting. I think you guys went way back April 21, which kind of feels like almost like a decade ago at this point in time. You provided some very helpful data as to how the business was trending. I think overall, it was down about 6% or 9%, maybe another 6 points or so if we adjust for mortgage. Can you update us as to what you've been seeing since then?

Yes, you're right, George. It feels like a long time ago. I'll go first, and John can jump in. But that was the early days of the lockdowns, and many of our customers were struggling with their BCP plans and operating. And since then is, really, 2 things have happened. I think kind of the second chapter was our customers getting used to operating in the work-from-home mode. And we've seen upticks as you go through late April and into May. And now as we're starting to see some shelter-in-places being lifted, we're continuing to see more improvements, whether it's in auto. Mortgage was operating through the cycle. I'm talking about U.S. right now, but struggled in the early weeks of COVID. Really got used to doing virtual closings, our mortgage customers and so on, same with auto when they were doing video, showings of the cars, delivering them to the curb. So some of that got adapted. And now we're seeing another step-up in revenue volume as the shelter-in-places are lifted. As you know, in the States, we're starting to see that in the last couple of weeks, and we've seen that whether it's in retail or cards or some of the other verticals. When you go outside the United States, the shelter in places were more restrictive in a lot of the markets we're in, U.K.; Spain, which was a hotspot; Australia; New Zealand. Some of the Latin American countries are still struggling with coronavirus. And it appears that those lockdowns were stronger. In some markets, you couldn't leave your home at all. They -- you're just literally were locked into your home, except maybe to go to the grocery store, which was more restrictive than most of the U.S. restrictions. And it's our sense that they're going to last a bit longer. You've got many of those markets not coming back until July. But even with those international markets, which had some really sharp declines, in some cases, over 50% in the kind of early days of COVID. We've seen that creep back up, but it's still lagging the United States. One of the positives, as you know, is the mix of our businesses. We over index on mortgage, both from our tri-bureau business in the United States and from Workforce Solutions. So those 2 businesses, as we pointed out in April, really have a recession growth mode in -- with the low interest rate environment. And then, of course, we've got our unemployment claims business, which we can chat about, but that business is obviously performing well with the high unemployment claims. So there's about 55% of Equifax that, from our perspective, in the '08, '09 time frame -- and it's our expectation as we go into this COVID recession, we'll grow through that recession and be less impacted. And we're seeing that in the second quarter.

And as Mark said, internationally, we are seeing, fortunately, some countries that were -- had very restrictive lockdowns starting to release them. You probably read that [indiscernible] starting to release, Spain is starting to release, Australia is starting to release. So you're starting to see some improvements in some of the markets as the government regulations start to decline.

Great. So it sounds like you're echoing a lot of what we've heard from other peers and other players in tangential spaces, the U.S. kind of sort of leading the way back, if you will. A bit of a lag international. But it seems that even in the international markets, in aggregate, hopefully, we've seen a bottom. Is that a reasonable assumption here?

I think that's fair. I think the one uncertain point -- and the reason we pulled guidance in April -- and my expectation is I don't see it coming back soon as we get through the second quarter, because it's still hard to predict where this is going. Is there going to be another dip? Will there be another flare-up and another work-from-home lockdown? Maybe. We'll see how that operates. Is there going to be another wave of unemployment? You see companies announcing, almost every day, layoffs coming in September, perhaps, or late August after the PPP program in the States expires. So there's just still a lot of uncertainty, but we're really pleased with the resiliency of Equifax. And one of the positives for us, too, was if you think about our recovery post the cyber event over the last 2 years, even though the second half of 2018 -- I'm sorry, 2019, and as we moved into the first quarter -- we had a very strong first quarter. Our businesses were performing above our expectations. When we hit COVID, USIS was on a nice recovery track. It's been important to you and our investors to see that continue. We had USIS in our internal plans, tracking to kind of a mid-single-digit non-mortgage organic growth exiting the fourth quarter. And obviously, that's different now. But the -- their resiliency coming into the COVID recession is really powerful for us. And then the other thing that's really made me feel a lot more confident is how we performed in the last 10 weeks, 11 weeks. We're having great engagement with our customers. The differentiated data at Equifax, we're really engaging with customers. And John and I were on a call yesterday with the USIS team and the Workforce Solutions team, our normal monthly updates. And the USIS team has been building their deal pipeline in the last 11 weeks, which is really pretty remarkable, and that's with engagement with customers. So really good signals as we go into finishing the second quarter. But when we look at the second half, it's really hard to forecast where is this thing going.

Understood. Well, that's encouraging. And there's a lot to unpack there. We'll go through it through the course of the conversation. I did want to hone in on one thing. You mentioned a few verticals, but I'm just curious if you're seeing any sort of meaningful change. And maybe I should rephrase that, any surprising change, positive or negative, from some of the key verticals outside of mortgage as you've gone through the month of May, whether it be auto or card or anything to really kind of call out, positive or negative, that might have been a bit surprising to you guys.

Yes, George. I would say there's a couple of areas that I think have been surprisingly -- verticals that have been surprisingly resilient from my perspective in how creative the companies have been to operate in the COVID environment during the lockdown. Auto, I already mentioned. We've seen auto really recover in the last 4 or 5 weeks, which was surprising to me because most of that was still in the lockdown, but the creativity of the auto dealers, and you've seen the ads on TV. You can buy a car, we'll deliver it to your curb. We never see you, but really creative to do that, in the mortgage space, doing virtual closings and just how they've been operating. So you've seen that come back. The purchase volume in mortgage, most of us would think about a refi volume, which most of that can be done, unless you're doing a cash out, without having inspections and all that. But the industry has really been quite resilient in that in how they've come forward. The other thing that has been, I think, a real catalyst for us is this is a very unique economic event. And as you recall, George, in '08, '09, I was on the other side of the table running GE Capital's credit card business, which is now Synchrony. So I operated through the '08, '09 recession and understood the value of data then. What is really unprecedented now and I think one that we'll talk more about in the coming months and quarters, and we're having incredibly active dialogues with our customers, is how unusual and unprecedented this recession is for the U.S. consumer and global consumer. You've got unemployment at levels we've never seen before. That's a really challenging event for our customers. And then you add in there the forbearances, which are really never at this scale. There's so many customers that have a forbearance code now on their credit file. So that makes it confusing or challenging for a customer to navigate through that. Add on top of that the furloughs, which we've never done before in the United States or globally at this scale, and the salary reductions. Think about a prime customer, a family that was making $100,000 10 weeks ago. Now they're at $75,000. They've had a 25% salary reduction. That customer was doing fine making payments. Now they're struggling, but they're not -- the only way to see that is understanding what their income and employment is. And that's where the value of our Workforce Solutions data, we'll come back and talk about it, has really been unprecedented. And the other real lever for Workforce Solutions is just the scale of the database now. If you go back to '08, '09, when I was running the credit card business of GE Capital, this -- the database was fairly small, so the hit rates weren't as high. You might have had a 1 in 10 hit rate. And while it was a valuable data asset, it was hard to use in a lot of operations inside of financial services. Now that we're approaching half of the nonfarm payroll, it becomes really the true north for a lot of our customers. We've had incredible dialogues over the last 8 weeks about how to use that data set to really understand what's happening with the consumer this week. Because remember, that data is updated every pay period. So it's the most accurate current data out there. So we're having a lot of dialogues around that data set. So when I think about maybe surprise for me is just the momentum commercially and with our customers about how valuable that data set is probably another one.

So I definitely want to dig into Employer and that data set and how differentiated it is. But just before we get there, one question here for John, just as it relates to mortgage specifically. And obviously, the revenue streams that show up in USIS, the revenue streams that show up in EWS. John, just curious, it looks like the mortgage growth rate in EWS is somewhat faster than what we're seeing in USIS overall. I think it grew something like 50% versus 15%. What explains that delta in the faster EWS mortgage growth?

It's really -- are 3 major factors. First one is, and something we talk about frequently, which we think a lot more about when we talk about EWS is, as Mark mentioned, it's just growth of the database. And since the database is growing substantially, with the same number of inquiries, the hit rate grows faster in EWS as we continue to substantially add more contributors. And as we talked about in the third and fourth quarter of last year, we had very substantial [ growth ] in the database and increased the number of contributors to around under 50,000 to on the order of 700,000 over a 6-month period. So that results in much faster growth in not just mortgage, but...

Hey, John?

But with the [indiscernible]. Yes, Mark? Yes?

John, I just want to put one more point on that for George and those that are listening in is the database growth is really important. But remember, George, we get inquiry system to system from our customers. And we literally are unable to fulfill close to half of the inquiries we have because we only have half of the nonfarm payroll. So as we grow that database, it's instantly becomes revenue for us. So that's really the leverage there. And then obviously, as you think about the scalability of Workforce Solutions, as we add those records and move from 85 million actives towards 150 million actives, the scale of the business rides with that. Sorry, John.

No. No problem. And Mark covered the second big factor, right, which is an increase in the number of system to system integrations. So we have made tremendous progress, and increasing the number of mortgage lenders right now put us directly in their workflow [indiscernible]. We see more of their inquiry volume. So we're increasing the percentage of the market that we see in our Workforce Solutions and then also increasing, as Mark said, the percentage of those inquiries that we can fulfill as we're growing the database. And then what you ask me [indiscernible] is we're seeing an increase in the number of times people will pull the work number, right, on an individual transaction as the value of income and employment keeps going up and up. And we're doing that also by adding new products that incents people to pull more frequently. So offering them a product that lets them purchase more often. Obviously, the price of that product is higher. It incents them to pull early or pull an income validation and then an employment validation later on. And in doing that, pay more for the service in total. So I'd say, those 3 main factors are probably driving the greatest -- the substantial increase in growth in EWS relative to USIS as you take a look at the overall mortgage market. But also, quite honestly, at least 2 of those factors -- actually probably all 3, really benefit EWS also in the auto market, right? And other markets in -- that participate because those factors also affect -- also are beneficial in those markets as well. Mortgage is just way bigger.

Understood. One last point, just as it relates to margins on the mortgage side as we think of USIS versus EWS, is it correct to think that the overall margin profile on the EWS side of that mortgage revenue is going to be higher than the USIS?

Absolutely. Go ahead. Sorry, John.

Yes. So the only difference, right, again, is that we do pay some royalties in EWS when we work with partners to have them attribute records. And obviously, in USIS, that wouldn't be the case. The difference being in USIS is when we deliver, we have to purchase scores, right? So if you're talking about online, then online margins in USIS are probably a little higher than EWS. If you're talking about blended margins because we have a tri-merge business in USIS, where we purchase files from our 2 competitors, that margin is obviously much lower. So the blended margin may be a little lower in USIS. But straight online, if you're comparing online poll to online poll, probably slightly higher in the USIS.

Yes. No, that's exactly what I was getting at, the blended. So appreciate that color. Mark, you've sounded, COVID-19 aside, the last several quarters just more confident about the company's positioning in the marketplace. And you mentioned, I think, last quarter, the win rate being up by about 5 points year-over-year. And pipeline strong, seems like, again, you're still continuing to build there on the USIS side. You talked about potentially hosting an Investor Day the latter part of this year. Just -- can you talk a little bit about what you're seeing from a competitive standpoint? And are you comfortable that, frankly, Equifax is just out of that penalty box that it was in back in 2017?

That is no question we're out of the penalty box. If you think about kind of 2018 and 2019, the last 2 years post the cyber event, 2018 was a year where we were in the penalty box. We spent a lot of time with customers back then around security and what our security protocols were. That's behind us. I think our customers understand that we've got a different bar now when it comes to security. We're investing extremely heavily. The $1.25 billion we're spending in 2018, '19 and '20 really have taken that off the table. That said, we're still going to continue to drive to be an industry leader in security. It's something we're not done with. But we know it's table stakes, and our customers understand that. When you get into 2019, particularly the second half of 2019, I would characterize us as being a more normal mode with our customers. And remember, the business that was impacted, it was really USIS. EWS continue to power through 2018 and '19. International had its own macro impacts in some markets, but there wasn't an impact from the cyber event. In GCS, we self-induced shutting down originations in 2018, which we started in late 2018, and that started to come back in 2019. So back to USIS, in the second half, the confidence was building back with our customers. The basis of Equifax of having, we believe, a set of differentiated data our competitors don't have, whether it's the NCTUE database, which is [ self and ] utility database, which is massive scale, only Equifax has that. And of course, TWN, our Workforce Solutions data. And as you know, we go to market in the United States in our financial institution side through USIS. So USIS sells all Equifax products, including TWN. And we've really been focusing under the new leader, Sid Singh, who joined us a little over a year ago in USIS, around really making sure we're taking advantage of all of the product capabilities that we have, both Workforce Solutions and USIS and going to market with a bundle or how can we better position ourselves in the marketplace. We've got new sales incentives in place. Sid is a very much commercial leader. As you think about Sid, he joined in March of 2019. He's got 12 months under his belt, and he's rebuilt the team. He's got a new commercial team. He's built a new leadership team. And as they exited the year, they were operating much stronger in the second half of 2019 than the first half. And then, of course, the first quarter through February, they were 2.5% non-mortgage growth. Now that's not our historical 5% to 7% in the prior framework where USIS was. But as I said earlier, we saw a path pre-COVID with their momentum to move forward. So that was one point about confidence. The second is around the tech transformation. As you know, this is not for the faint of heart. It's a very big exercise for us. It's one we staffed up for, spending $1.25 billion in a 3-year period and moving from a legacy data environment and a legacy cloud environment to a single data fabric is one that takes a lot of lifting. And 2018 and 2019 was a lot of work in getting the technology right. Our confidence is building that it's working, that the technology is working. Our confidence is building and our customers value that. And when we go in -- when I go in to talk to customers now, and Sid does and the rest of the team, we've got our differentiated data to talk about. We've got the most advanced data infrastructure in our single data fabric in the industry to talk about. We've got the fact that we're going to have the newest technology stack and the most advanced technology stack in the marketplace. So that's a very attractive thing to our customers. And then the last is our new products. That's one that we've really put a new focus on, I'd say, in the last 18 months. And you remember last summer, when the business was starting to really improve, we had some additional margin dollars. We moved back in to product, and we took our product to delivery up to 90 products last year from 60 in 2018 and about 70 to 80 historically. This year, we're on track to do 100. So that helps build your confidence also. But it all goes back to the customer reaction. They want us to be successful. They are really pleased with our investments in technology, in data and in product. And as you pointed out, our pipelines are building. Our win rates are building. We're having competitive wins, which, as you know, are challenging because you're so sticky with the customer. It's hard to displace someone else, but we've had our share of wins there, and we're going to continue to focus on that.

That's great color. I want to focus in on the differentiated assets, particularly Employer, and the concept of bundling. And I'm just curious, what verticals do you think are most apt for sort of a bundled solution with Employer? And maybe even give us some examples of where you're gaining traction. It sounds like auto is one of them.

Well, there's a bunch of them, actually. It's auto, it's cards, it's P loans, mortgage, to a lesser degree. We've got some other products outside of the credit file that we can bring together in a full product suite to our customers. But the incentives that we've put in place for our commercial teams to make sure that they're incented to sell all of the Equifax products is another one. And the integration of the businesses. Sid Singh and Rudy Ploder, the 2 business leaders and their teams, they're having joint commercial discussions about targeting where they're going to go after. Use fintech as an example where Workforce Solutions has a very strong position in income employment data in the fintech space, whether it's P loans or some of the other subprime auto. We might not have as strong a share. As you know, our competitors are stronger there. And that's a place where we're really -- we've added resources. If you go back 2 years ago, we might have had 3 or 4 people calling on fintech. Now we've got 15. And then the fact that we can go together as one Equifax into those solutions, it gives us a leverage point that we think is attractive.

Great. And just wanted to dig in a little bit more on one point. It sounds like in this kind of a more uncertain environment, that employer data is perhaps more valuable than maybe what it was a year ago. Firstly, just to confirm that. And then secondly, any concerns now with these employment trends as there's more unemployment and the like that, that could affect the efficacy of the database?

Yes. Sure. There's no question it's -- the uniqueness of this economic event is unprecedented in our lifetimes and the impact on the consumer's employment and income. And again, it's much more than just unemployment. It's the hidden unemployment of salary reductions. You don't see that when someone is working or not working. You have to understand how much they're making and the impact that it has on the consumer. So the value of the data, so that's point one. Second is the scale of the database in this recession versus '08, '09. I made that point earlier and it's so different. And there's some element of catalysts for the business in some verticals where we're not as penetrated. As you know, we have great penetration in mortgage. We have a lot of growth opportunity there to penetrate further. And John talked about that is converting customers that maybe are pulling at closing on the mortgage and move them back to also pull at origination to make sure that, that customer is going to qualify, and it's worth spending the $2,000 in that application process. There's examples there. Auto is one where, pre-COVID, we were pulling the TWN number our customers were for subprime customers. Now they're moving up in the near prime and even some prime customers because of the volatility around incomes, the point you made about the consumer. And then you go into cards and P loans. Those are opportunities to really expand the usage of the database, particularly because of the uncertainty of the consumer and the scale of the database. Back in '08, '09, when I was running a credit card business, it was hard to use it because you didn't get the hit rates. Now you have very attractive hit rates, and those are going to keep growing. Another area, which I'll just touch on for a minute, and then I'll come back to your point on the database, is government. As you know, we've got a large government business in Workforce Solutions also with USIS and the credit file. But with the social services and the fact there's more people that need it now, there's another opportunity for us to continue to grow that business. And I think you saw on the April call, we announced a large contract that starts in 2021 with Social Security administration. That will be an incremental $40 million to $50 million a year to Workforce Solutions over a 5-year period. So an example of the database, because of its scale and the uniqueness of the accuracy and currency of it being quite valuable. As with regards to the database, there's no question, less people working will put some pressure on the database. And what we're finding is a lot of employers have furloughed their employees, and they're still paying a portion of their salary for benefits. And then that employee is able, under the current CARE Act, to go get unemployment benefits. They're still showing up in our database. And that has value to us. We can still sell that in a valuable data set. So there -- we've seen some slight pressures, a lot less than we actually thought because of the uniqueness of some of the unemployment situations that are happening. But there'll be no question there'll be less people working, which will put some pressure on the database. I think you know we have a dedicated team that reports to the CEO of Workforce Solutions, that their only goal is to add records. And as you know, we -- I use the term kind of in fun with our team, we only have half of the nonfarm payroll to the team, meaning, let's go get the rest of the nonfarm payroll, and that ability to keep adding. And as John pointed out, we've grown the database by over 10% in the last 12 months. We've grown it through COVID. So we're continuing to add data records in the database, and we expect to continue going forward, that dedicated team. As you know, there's 2 avenues for growth. One is we go to companies. And with the value prop to the HR leader, we will do this for your employees for free, and we'll do it in a secure way, in a private way. We're open 24/7. And then for the HR manager, they no longer have to take those calls. They can shut down their small call center that was really fielding those. For the employees, who's getting a mortgage between 8 and 5 every day? Everyone is getting an auto loan or a mortgage or a credit card at night and on weekends, and Equifax is always open. So that's a real value prop there. And we're still adding companies. I was involved personally in one in the fourth quarter where we added a company with 0.5 million employees. That's a lot of scale. So we're out there doing it. And as John pointed out, we've gone from a year ago, 30,000 companies contributing. Right now, we're over 700,000 companies contributing. So driving forward. The second leg, as you know, is payroll processors, and we're working with partnerships there. It becomes a value prop for them to bring to their customers, where they're providing this free service from Equifax to their customers, meaning the companies and the HR departments. And then for the payroll processor, we have a revenue share. So they get some incremental margin. So there's an avenue there. And we still have a long runway to go from half of the nonfarm payroll and keep building it going forward.

That's great momentum. John, I did want to ask a question going back to expenses. And I think on the last call, you talked about $90 million of discretionary spending cuts. Curious if you can give some color around that. And then is there a portion of that $90 million that is just permanent as we think about '21 and beyond?

Sure. And Mark's talked about this multiple times in other call, right? So effectively, what we've done is we've frozen headcount for the rest of the year, right? And obviously, we'll see what happens as the year progresses, but the plan currently has it frozen for the rest of the year. Dramatically curtailed travel, which includes travel from site to site. So let's call it noncustomer, nonregulator travel. That's probably something that doesn't come back, right? That's, I think, what we found through the video conferencing and other tools we've implemented. We're a big Google user that those types -- that type of travel really isn't needed. So that's probably a permanent cost reduction. And then we've also taken just a very, very close look at any spending that we were doing that probably wasn't going to be beneficial during this current recession in any case. And a bunch of that's been paired back. And we continue to scrub that. And certainly, some of that spending is stuff that won't come back in the future. Now I think what we will start doing is as you -- as we see things start to open up again is you'll see us reinvest. So you'll see spending come back, but it won't come back in the same place as that it was taken out. I think we'll be smarter about where we spend and making sure we focus in areas that will help us grow more aggressively. To the extent that -- as Mark said, to the extent that there's -- that we see another leg to the recession, something that happens later in the year, very difficult to predict. But we've done planning and we know what the next leg in our cost reductions could be. And to the extent that's necessary, we'd be prepared to execute.

And John, maybe just -- I'll add on there. John talked about the headcount [ freeze ]. We've got our belt tight, and it's really on -- we're still adding people in technology, which I think John pointed out. That's an area where early on we said, frankly, in mid-March, that we're going to keep the pedal to the metal on our tech transformation. The leverage for Equifax and the benefits to Equifax is just too high. Second is around product. We're continuing to add product resources. We announced 2 weeks ago a new product lead for us. Earlier this spring, we added a product leader in USIS. So those are 2 areas, George, which we're investing in. As far as the permanent cost reductions, I think [ T&L ] will be one. The site-to-site travel, which is about half of our travel, a little less than half is one that will probably go to 0 longer term. We can operate so effectively with video. And then while it's early days, and I think we'll probably focus on it maybe in the second half of the year, I would expect some of our footprint changes we'll take a look at, which will give us some permanent cost reductions. The work-from-home mode, we're coming back actually on a 50% density basis in some of our markets starting next week. But it's very effective working from home, and we may have more of that in some pockets of our business, which will help our real estate costs.

Great. So guys, I think we've come up on time. So again, I can't thank you enough for being here. Very much appreciated and informative as always. So thanks, everyone. Appreciate it. And please disconnect.

Thanks, George.

Thank you for having us.

See you.