Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good day, and welcome to the Equifax Investor Revenue Trends Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to John Gamble. Please go ahead.

Thanks, and good afternoon. Welcome to today's conference call. I'm John Gamble, Chief Financial Officer. On today's conference call are Mark Begor, Chief Executive Officer, Trevor Burns; and Dorian Hare, our new Investor Relations leader. Today's call is being recorded. An archive of the recording will be available later today on our website at www.equifax.com in the Investor Relations section under Events and Presentations. During the call today, we will be making reference to certain materials that can also be found under Events and Presentations. These materials are labeled 3Q '20 Investor Update. During this call, we will be making certain forward-looking statements to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties and other factors, including the impact of COVID-19 and economic conditions on our future operations that could cause actual results to differ materially from our expectations. Certain Risk factors inherent in our business are set forth in filings with the SEC, including our 2019 Form 10-K, our first and second quarter Form 10-Qs and subsequent filings. Also we will be referring to certain non-GAAP financial measures, including adjusted EPS attributable to Equifax, adjusted EBITDA and adjusted EBITDA margin, which will be adjusted for certain items that affect the comparability of our underlying operational performance. Adjusted EBITDA is defined as net income attributable to Equifax adding back interest expense, net of interest income, income tax expense, depreciation and amortization. Our non-GAAP measures for completed periods are detailed in reconciliation tables, which are included with our prior period earnings releases and are also posted on our website. Now I would like to turn it over to Mark.

Thanks John, and thanks, everyone, for joining us this afternoon. And welcome to Dorian Hare, who joined us today as our Investor Relations leader. We're excited to have someone of Dorian's experience joining the Equifax team. I also want to thank Trevor for his outstanding leadership over the past 2 years. Trevor was a great partner to me, John and the Equifax team. We are pleased he will take on the important role of SFO for our GCS business going forward. And Trevor and Jeff will work with Dorian over the next few months as he transitions into his new role leading Investor Relations for Equifax. We continue to face unprecedented times during the COVID-19 global pandemic. I hope you and your families are safe and managing in this unusual environment. At Equifax, we continue to face the COVID challenge head on, and I'm proud of our team's performance and the resiliency of our business over the past 6 months. Even as many states and countries reopen, the COVID-19 global pandemic remains the most challenging consumer environment in our lifetime, leading our customers to place more value than ever on our unique data as they try to manage the impact of the pandemic on their own customers. Differentiated data is always valuable but even more so in this unprecedented COVID recession. Building off our momentum from the second half of 2019 and strong first half 2020 results, our third quarter revenue trends have improved significantly from the framework we provided for third quarter back in July. While we are still unable to provide guidance for our operations in the third quarter or second half, we want to continue our transparency by sharing our near-term revenue trends with you this afternoon. Turning first to Slide 4. Based on current trends, we now expect revenue of between $985 million and $1.005 billion with growth of between 10% and 12%, which is up strongly from the 4% to 6% growth framework we outlined in our July call for the third quarter. This will be the first quarter in Equifax's history with revenue approaching $1 billion. We continue to see very strong growth in our U.S. mortgage businesses, USIS and EWS, as consumers continue to take advantage of record low interest rates in the residential refi market and the volume of new home purchases were up strongly in June and July. We are also seeing our EWS unemployment claims business continued to deliver strong incremental revenue growth driven by new initial jobless claims applications. We expect incremental UC revenue to be between $15 million and $20 million in the third quarter, which represents close to 20 basis points to our Equifax revenue growth rate in the quarter. EWS continues with very strong and broad-based performance, and USIS is operating very well with strong commercial momentum. We're also seeing broad-based improving trends across our international properties as shelter-in-place orders are lifted and economic activity improves. Equifax continues to operate exceptionally well in this challenging COVID environment. We continue to see strong customer engagement as we rollout recession-based products, leveraging our unique data assets, including TWN data, all featured in our industry-leading customer webinar series. Since March, we've held 29 webinars across the company with over 28,000 attendees. And next week, on September 15 and 16, we will be hosting a large virtual Equifax Customer Summit called Ignite Live 2020, focused on exposing our customers to our unique data assets, cloud capabilities and resources to manage in this unprecedented COVID recessionary environment. U.S. Mortgage and Workforce Solutions are powering Equifax results with both USIS and EWS continuing to perform exceptionally well. Our TWN employment and income data remains uniquely valuable with so much volatility around employment and income as it is one of the only data sets that is updated each payroll cycle and at scale. The TWN database now has 3x the records it had during the 2008-2009 global financial crisis with close to 50% of the U.S. nonfarm payroll in our database, which makes the asset -- the data asset incredibly valuable to our customers. We continue to see opportunities to penetrate existing and new verticals like auto, p loans and cards, given the scale and value of the unique TWN database. We're also continuing to make positive progress on our cloud data and technology transformation, with completed milestones consistent with what we laid out on our July earnings call. As expected, USIS customer migrations have begun to accelerate with over 3,000 migrations completed so far this year, and we continue to see greater system availability for our customers through August. We have real momentum around our cloud technology transformation and remain convinced that this investment will differentiate Equifax in the marketplace. The pace of new products continues to be strong, and we now expect to launch about 110 NPIs this year, which is up from about 100 in our July update and 90 last year. Under the leadership of our new product leader, Cecilia Mao, we are seeing enhanced focus, discipline and energy in our NPI process. Innovation in new products is a big focus for our team and for me personally as we work to leverage our cloud investments to accelerate our growth in the future. And while we are very pleased with our strong performance in 2020, we are keeping tight constraints on our costs outside of investments in cloud technology, data and analytics, product and security. Turning now to Slide 5. As I previously mentioned, we expect third quarter revenue to approach $1 billion, which will be the first time in our company's history, a huge milestone for Equifax. This comes off of exceeding $900 million of revenue for the first time in the fourth quarter of 2019. Underlying our strong revenue growth is our U.S. B2B businesses, USIS and EWS, where we expect their combined revenue in the quarter to be up over 30 -- or I'm sorry, up over 25%. While we continue to benefit from very strong mortgage refi and new purchase volumes, we also continue to see strong structural and above-market growth in workforce solutions from new records, new products, pricing and incremental data pulls per closed loan. Embedding our TWN data into mortgage workflows is reducing risk for our customers and generating more pulls of this unique data. Last month, the Workforce Solutions team surpassed another huge milestone onboarding its 1 millionth employer into the TWN database, which is up from around 700,000 contributors a year ago. An outstanding achievement for Rudy Ploder and his team and a reflection of the depth and breadth of our TWN database. While we are pressured from rising unemployment levels on our TWN database, we do expect to grow our TWN database in the third quarter. USIS commercial momentum continues in the third quarter with some competitive wins. Our EWS unemployment claims revenue continues to remain strong, but at a lower rate than the second quarter given the sequential decline in initial jobless claims from the second to third quarters. As I mentioned earlier, we expect incremental UC revenue of about $20 million in the third quarter versus incremental revenue from UC claims of $48 million in the second quarter. We are also seeing improving trends across many of our international properties, led by Canada, Latin America and the Asia Pacific region, which is primarily Australia, while still negative versus 2019 are much stronger than the '08, '09 global financial crisis. And lastly, we remain on offense with new products. Our strong COVID response is driving incremental value for our customers and revenue for Equifax. Turning to Slide 6, where we compare our 2020 results to the '08, '09 global financial crisis. Our very strong performance in the second and third quarters, with Equifax delivering growth of over 40% is significantly above the '08, '09 global financial crisis where Equifax revenue was down 9% to 10% in the first 3 quarters of that recession. Over 55% of the Equifax portfolio is showing strong growth in this current COVID recession, driven by the strength of our U.S. mortgage businesses and the outside growth from Workforce Solutions. The strength, breadth and resiliency of the Equifax portfolio is powering our results in the COVID recession. John will provide more detail later in the call, but at a high level, our revenue trends through early September are consistent with our new framework, which we are sharing with you today for the third quarter. Turning now to Slide 7. Back in April, we detailed some of our proactive COVID-19 response plans for our employees, customers and consumers. We remain on offense and focused on growth. I'm very pleased with our team's performance at meeting, and in many cases, exceeding our goals that we set out back in April as we entered the COVID pandemic. We established clear priorities around our team's health and safety; second, maintaining our customer and consumer service levels; and then lastly, delivering on our cloud data and technology transformation. We've reopened our offices in the U.S. markets starting in early June as shelter-in-place orders were lifted and expect to open our remaining offices around the globe later this month on a red blue rotational team basis and a 50% density. We've made customer engagement and support a top priority. Through virtual meetings, blogs, white papers and other analytical tools, we've kept strong connections with our customers during these unusual times. In many cases, stronger than pre-COVID engagement. As we mentioned on the July call, we are seeing continued commercial momentum in the marketplace. We've also continued to support our customers with our Equifax COVID-plus credit resource center, which contains new tools to manage the challenging environment as well as providing free reports to U.S. and Canadian consumers. In every country where we do business, Equifax is in active discussions with lawmakers and regulators to enable the continued credit reporting that captures the status of consumer payments and lender accommodations. Specifically in the U.S., we are in regular communications with federal regulators, particularly the Consumer Financial Protection Bureau, and we share data trends with the Bureau regarding both consumers and furnitures. We protected our franchise by staying on our offense with investments in our cloud data technology transformation, new products and M&A. You may have recently seen our announcement of the Ansonia acquisition, a small commercial tuck-in acquisition that provides unique U.S. commercial data in the logistics leasing space. As our customers are focused on the quality of lending during these challenging times and the credit health of their underlying customer base, we are delivering unique solutions to help them manage in this unprecedented environment. Our TWN employment income data, NCTUE, telco and utility data and IXI wealth data are unique data sets that give deeper insights on consumers in this challenging time. We're finding TWN to be particularly valuable given the scale of the database and the uniqueness of the income and employment data in this environment. We remain on augments, delivering tailored solutions to our customers to address the effects of COVID-19, including our COVID response products as well as our economic impact suite, enhanced credit trends and mortgage products. We're also partnering with other companies like FICO to enhance these unique COVID solutions. And lastly, we've taken proactive steps to manage our P&L and our balance sheet, including our $1 billion bond offering in the second quarter, and remaining laser-focused on headcount controls and discretionary spending while balancing incremental growth investments I discussed earlier. Our team is committed to executing on our COVID response plans and staying on offense for our customers. Given the ever-changing economic climate and COVID environment, we're still unable to provide third quarter guidance and do not expect to provide fourth quarter guidance on our third quarter earnings call in a few weeks. Moreover, John will again provide an illustrative framework to help you think about our performance through the end of August and the first few days of September. Now I'll hand the discussion over to John to provide more detail on our third quarter trends.

Thanks, Mark. As Mark pointed out, we are seeing significant improvements in our revenue trends from the discussion we had on July 23. This is principally driven by strength in U.S. B2B, USIS and EWS, primarily from stronger-than-expected mortgage revenue. We are also seeing better-than-expected performance in international and in the consumer direct portion of our global consumer business. On Slides 8 through 10, we are providing an update to the BU level trends we shared during our July earnings call. The chart shows the implications on the 3Q '20 revenue growth rate of recent revenue trends. As shown on Slide 8, starting from the bottom right, U.S. B2B online revenue is strengthening substantially. We now expect U.S. B2B online revenue, which reflects USIS online and Mortgage Solutions and Workforce Solutions Verifier to be up over 25% in 3Q '20 as compared to the expectation of up over 15% when we discussed our July earnings call. We are seeing continued strength in the U.S. mortgage market, and we now expect USIS mortgage revenue to be up over 45% in the third quarter and to be slightly stronger than the overall market. Workforce Solutions verification services mortgage revenue is now expected to more than double in the quarter, outgrowing the market by more than 50 percentage points. Overall, U.S. nonmortgage online revenue is roughly consistent with our expectation at the July earnings call. We are seeing improving trends in government, principally driven by our identity validation products and in insurance as well as in rental. This is being offset by weaker performance in auto. Banking and lending is about flat on average across July and August. Workforce Solutions Employer Services is performing slightly stronger than we discussed in July earnings call, due to continued stronger-than-expected new filings for unemployment insurance. Turning to Slide 9. International is expected to perform slightly better than we expected in July, down about 8% in the quarter. The improvement is principally in Canada, where we expect constant currency revenue to approach flat in 3Q '19, and led TAM, which is seeing better-than-expected performance across the region. Australia is also trending generally positive, consistent with where we were in July. GCS Consumer Direct revenue, our consumer subscription business in the U.S., Canada and the U.K. are now expected to be up about 5% in 3Q '20 versus last year. We're seeing consistent subscription growth this year in the U.S. Our GCS partner business is expected to be down about 10% in 3Q, with significant further weakening in 4Q from a reduction in lead generation partner revenues. As Mark mentioned and consistent with our July earnings call, we are not providing third quarter guidance. While the current trends are better than we expected with the July trends, visibility remains a challenge, which adds to the difficulty in providing meaningful guidance. On Slide 10, we are providing an update to the illustrative third quarter framework we provided in July for perspective on total Equifax 3Q '20 performance. To the extent total Equifax revenue continues at the pace I described earlier, based on August trends, at current FX rates, 3Q '20 revenue would be -- would likely be almost $1 billion, up 10% to 12% with no material impact from foreign exchange. This is clearly stronger than the framework we discussed with you in the third quarter in July. At these revenue levels, adjusted EPS could be in the range of $1.50 to $1.60 per share, up 1% to 8% and up significantly from our framework 6 weeks ago. Slide 10 also provides a walk explaining the translation versus 3Q '19 of the revenue impact of pretax income and adjusted EPS. The ranges provided for 3Q revenue and adjusted EPS reflect current variability in trends, not a view of potential third quarter outcomes. Importantly, at these adjusted EPS levels, Equifax could deliver about $350 million in adjusted EBITDA in the third quarter. As we consider the balance of 2020, there is still substantial uncertainty regarding the pandemic and its impact on the economy, limiting our forward visibility and ability to forecast and therefore, we do not expect to provide fourth quarter guidance on our earnings call in October. We hope the detail and framework we provided on the impacts we have seen to date are helpful as you estimate Equifax third quarter results. Let me turn it back to Mark.

Thanks, John. Let's turn to Slide 11 to wrap up. Equifax is performing very well in an extremely challenging environment. Our differentiated data, portfolio recession growth businesses, cloud transformation, commercial focus and increased focus on innovation and new products is paying off. We're extremely encouraged by the strong improvement in our revenue trends and improving margins in cash generation, especially with our U.S. B2B businesses, as USIS and EWS commercial teams work together to bring commercial solutions to customers that support them through this unprecedented COVID recession. Our differentiated data such as TWN, NCTUE and IXI being built on a single cloud data fabric is at the forefront of our industry meeting solutions. The continued strength and resiliency of our business in the second and third quarters, allows us to accelerate our cloud data and technology investments and make incremental investments in innovation and new products, deploying our customer analytics sandbox Ignite around the world and making strategic bolt-on acquisitions that complement our robust unique data and geographic footprint. Our cash balance sheet -- our cash generation and balance sheet remains strong, which will allow us to make these investments, which are critical as a leading data analytics and technology company which will also position us strongly for 2021 and beyond. As we navigate through the COVID -- challenge of COVID-19, we are also mitigating or navigating several very important social issues. At Equifax, we stand together focused on creating a culture of diversity and inclusion for our employees. We believe that a diverse work environment makes us a stronger company, enabling better outcomes for our customers, partners and consumers. As we move forward, you'll hear me and us talk more about environmental, social and government issues like diversity, consumer education, energy usage, data privacy and security, to name a few. At Equifax, we are committed to making the world a better place. We recently launched on our equifax.com website, a new ESG homepage under the About Equifax tab. I encourage you to visit the website to learn more about our progress on ESG. We are very pleased with the performance so far in the third quarter and are energized about the future of Equifax as we invest for 2021 and beyond. With that, operator, we can open up the line for questions.

[Operator Instructions] And we take our first question today from Toni Kaplan with Morgan Stanley.

Mortgage has obviously been a significant outperformer in the quarter so far. Can you talk about your expectations from here? Can the strength really continue into Q4 despite the really challenging comps? I know it's lasted a lot longer than I would have thought, so just how are you thinking about the next 4 quarters just given mortgage has been so strong since 4Q of last year?

Yes. Toni, as you know, that's a tough question. It's one -- it's not our strong suit to forecast the mortgage market. Others are much smarter at that. And as you know, we've been generally wrong with the strength of the current market. I would say that we've been surprised with the strengthening, meaning the market getting stronger. I think all of us were surprised by the impacts of COVID on the new purchase volume in June and July, and those seem to be continuing. As you may remember, on the second quarter earnings call, we laid out at least some frameworks of things that we look at related to the mortgage market and some of the data that we collect from Freddie and Fannie and Black Knight and others around different forecasts, and all of those would indicate there's still a fairly sizable population of U.S. consumers that would benefit from a mortgage refi at this record low interest rate environment. As you know, that ticked down in the last couple of weeks even further. So while it's hard to predict the fundamentals seem to be there on the refi side, for some continued strong volume as we go through the rest of the year. And as you know, the Fed being pretty clear that they expect to leave the current record low interest rate environment through 2021, that bodes well for that environment. And then on the purchase side, we've seen this phenomena of renters buying homes, primary homeowners buying a second home, has really been fueling the purchase market. And it feels like there's some legs left on that one. So hard to predict. But I would say most of the fundamentals feel like there's going to be some strength through the end of the year. The question is how strong.

That's great. And what do you see as the main catalyst for recovery in USIS non mortgage? Is it just reopening and consumers spending more? Or would you view it as more NPI and new product -- and new customer wins? Just -- what are the drivers that will sort of pick that negative 8% to a more positive trajectory?

Yes. There's no question. It's impacted by the economic environment. It's just -- there's been a cutback by our customers in mortgage originations in the last, I don't know, 60 days, we've seen some reduced volume in auto as there's less inventory out there, where as you know, that was stronger in kind of the April, May and maybe in the June time frame. So the economic environment is clearly going to impact all of us in the space, and it impacts USIS and our other businesses in the non-mortgage space. But we've tried to be pretty clear that we're really pleased with the commercial momentum of the USIS team, whether it was in the second half of 2019, in the first quarter before the COVID pandemic, how they operated in the second quarter. Their pipelines continue to be very strong. The commercial activity is strong. We're seeing ourselves have competitive wins. And as you point out, the NPIs that we kept building out in 2018 and in '19, we're now able to take to the marketplace. And as you heard from my comments, we're expanding our NPIs even further in 2020, up to 110-or-so NPIs from what we thought would be around 100, call it, 60 days ago. So those NPIs are also going to be quite positive. So the commercial momentum, the new leadership team we have there, we're encouraged by that impact in the marketplace. And then the economic headwinds are just tougher to forecast when those shelter and place orders. As you know, if you looked at kind of the April, May and the June time frame, things were moving more positively. And then there was some hotspots in Florida, in Texas and other markets, following the Memorial Day weekend. It curtailed some -- resulted in some more restrictions and then curtailed some economic activity. So we're really fighting through that. And none of us know what's going to happen with a potential second wave and later in the flu season as we get into October, November. So it's still an uncertain economic environment, but we're very pleased with the commercial strength, I would call it, of USIS in the marketplace.

Congrats on the progress in the quarter so far.

Thanks, Toni.

Next we'll hit from Manav Patnaik with Barclays.

I had a question on the verification business, the non-mortgage, the trend is flat to down, I guess, at the moment. What are the big mixes there in terms of verticals? And can you just talk about some of the trends there? Like when can we potentially see that slip? Or is that just a factor of -- in unemployment?

Yes. So the non-mortgage piece, I would characterize as similar to the prior question that we just had around economic activity. There's no question that all of our businesses are impacted by the lower economic activity, by unemployment, by shelter-in-place orders, and that applies to EWS' non-mortgage business as well as USIS' international businesses. So I think you got to start there. We're pleased with the performance broadly with EWS, obviously, whether it's in the mortgage side or non-mortgage side, they're performing extremely well. We talked a little bit about record growth, which we expect to see record growth in the quarter. And of course, contributors, reaching $1 million is another real milestone there. John, what else would you add on Manav's question around EWS?

Yes. So if you're just talking about non-mortgage verifications, Manav, right? So much bigger portion of that business is government, right? So we've seen the performance in government has been relatively strong. But then as you get into the non-government portions of the non-mortgage section of Verification Services, it's principally around auto. And then some debt services, which are more related to government debt, which were, where we've seen quite a bit of weakness. And then talent solutions, where hiring hasn't really recovered yet. So I think we've seen some better overall performance driving us toward flat in the government portions of the business. And then kind of, some of the 3 larger commercial segments are a little bit weaker because of their structure. But overall, the performance in non-mortgage, given the economic environment at about flat, it's still relatively good. Thanks.

Got it. And then Mark, early on you talked about your competitor wins in USIS. And I guess this is just more a broad question, like are there any areas, categories outside of workforce, clearly because either we're pretty strong there, where you're seeing competitive shifts so it's kind of more of the same and everyone's dealing with the kind of volume headwinds?

Manav, is your question around EWS or USIS or both?

Well, mainly outside of EWS, just a competitive dynamic.

Yes. I think you know well that USIS is the selling arm for EWS in the FI space here in the United States. So they have the ability to go-to-market with the very unique TWN data, which is a competitive positive for them in the marketplace. And you also know, you think back the last couple of years of USIS 2018, they were -- that business was obviously struggling following the data security breach, was in the penalty box with some customers during 2018 that came out in 2019, particularly in the second half. So we're starting to see some real momentum from the NPIs and commercial activity by USIS with their customers, and as I mentioned, competitive wins or share gains, we've seen a handful of those, which is encouraging. And you've seen their improvement kind of pre-COVID was going in the right direction sequentially. It's harder to see now because of the economic impact of the COVID recession. But when we look at their pipelines and their win rates, we view that as quite positive on how they're operating commercially and competitively in the marketplace.

Next, we'll hear from Kevin McVeigh with Credit Suisse.

Great. I wonder, obviously, on the mortgage side, how much of the over performance versus kind of the initial framework was -- just more transactions in terms of applications or more just frequency of pulls? Said another way, obviously, it seems like there's been much more frequency through the channel. So any way to frame how much of the outperformance is, again, just more applications as opposed to increased frequency?

Yes. There's no question is, the market itself is much stronger now than we thought 45 days ago or whatever it is. And it's been increasing and getting stronger, as you know, when we talked a little bit about the purchase volume. I don't think any of us anticipated the strength of the purchase volume that started in June and continued in July. So that's clearly been much stronger. The refi volume has continued to accelerate, meaning applications and actual volume as the mortgage originators really learned to operate in a COVID environment, scaled up some of their capabilities to process the refi applications and refi mortgages. So that's clearly been a benefit. But as you point out, there's also an element of the execution or performance, and we're talking specifically about Workforce Solutions that is growing dramatically above the market, that comes from records. It comes from new products. It comes from the system-to-system integrations that we've talked out about before, that the team is focusing on adding. All of those are benefiting that business and driving its revenue to be really a multiple of the market growth, which is obviously quite positive as we look forward to the rest of 2020 and into 2021.

That's helpful. And then just real quick. Anything to call out in Canada? Obviously, that really seems like it's trending much better than what you would have thought as well?

Yes. I think the shelter-in-place orders kind of loosened up in the last 30 days. They've got a mortgage market that's also benefiting from the mortgage space, obviously much smaller in scale for us and for the industry than the United States, but that's been a positive in Canada. And pretty consistently, we've seen as the shelter-in-place orders get lifted in some level of commercial and consumer activity resumes, whether it's buying a car or opening up a new credit card or doing in-store purchases on a new credit card, that's been pretty consistent in the United States and around the globe as those shelter-in-place orders get lifted. What's hard to predict is where it stabilizes and where it goes in this COVID environment.

David Togut with Evercore ISI has the next question.

Could you comment on, let's say, the sustainability and convergence of the strength in mortgage due to these exceptionally low interest rates and some of the new use cases that have developed for the work number. As we look, let's say, beyond the COVID era, perhaps interest rates stay low as per your comments about the Federal Reserve through 2021. But how do you think about use cases for the work number kind of evolving post-COVID and how that might dovetail with demand for mortgage?

Yes. So specifically, David, on mortgage with Workforce Solutions, if you look at Equifax over -- I don't know, as long as I've been here, probably before that, call it the last 2 or 3 years, you've seen Workforce outgrow the market consistently. And so we'll talk just about mortgage, but even in non mortgage. And as you know, the drivers of that are record growth. We're able to add records. And as you add records, remember, we only fulfill, call it, half of the inquiries we get because we only have, I say only, we have half of the database. So as we add records, they become monetizable or monetized really almost instantly. So that's the power of records. But then you also see the innovation that we've been driving in new products, and new verticals in Workforce Solutions. Specifically on mortgage, we've talked a lot about the system-to-system integrations, where we see a sizable lift in the usage of the TWN data. As you get to a system-to-system integration versus an individual keying into our website to process an application and pull down an inquiry, so that's been a real positive. You've seen new products that we've been rolling out that have different capabilities, different price points. That's been fueling their growth, and I would call it, their outsized multiples of market kind of performance, whether it's mortgage or non-mortgage. And then, of course, new verticals. Specifically, in the COVID recession, we've talked about this before, areas like in mortgage, we're seeing more pulls because of the value of the data. That value was there pre-COVID. Now there's a real catalyst because of the uncertainty around income and employment. And we think that's going to be a positive going forward. You could say the same about Auto, where pre-COVID, the TWN data was used primarily in subprime, income and employment verifications. Now you're seeing it in near prime and up and prime because of the lift that they get in the COVID recession, we expect that to be sustainable. And another area that we talked about that we're really excited is around having TWN penetrate into the card space, which historically, it was only used in portfolio management or in some collections activities, but having it being used as an addition to the credit file to get the higher predictability in this environment and in any environment, the lift that comes from that in cards. We're seeing a lot of discussions happen with our customers there. And those are all positives for Workforce Solutions, which gives us confidence. You had asked about sustainability. It's hard to talk about sustainability of the mortgage market. We've given you our best thinking about that framework around interest rates and the population of U.S. consumers that would benefit from a refi. You go into the sustainability of their ability to grow above the market. We've got some confidence in that. And then you add I-9 and some of the other areas that they're investing in at some of the new verticals. We're energized about that for the future for our Workforce Solutions. A lot of this, you remember, we covered on the June call with the Workforce Solutions team, and we'll make sure we keep sharing that with you because it's clearly our most powerful business, our most differentiated business.

Next, we'll hear from Hamzah Mazari with Jefferies.

This is Mario Cortellacci filling in for Hamza. Just wanted to ask about the NPIs. So you guys increased the guide from $100 million to $110 million. You did $70 million in the first half this year. I guess just obviously, you made great progress. Just I guess, what is driving the slowdown? Is there anything that's stopping you from reaching, say, $140 million, because you did $70 million in the first half? And then in conjunction with that, I guess what kind of success do you see in these new products? Is there typically, say, only 10% or 20% of them are wildly successful and the rest are -- see some revenue stream? I'm just trying to get a sense for how much of these new products typically contribute to a portion of the growth?

Yes. I'm glad you pointed out the new products. It's a big priority of mine personally and the teams. What do you attribute -- what I would attribute the increase in the end number of NPIs is just our increased focus on it. As you know the last couple of years, we've been focused on the technology transformation to the cloud. Now we're focused on leveraging it. And how do you leverage that is through new products and innovation. And you know we brought some new people in. We're adding resources here. We did in the second half of last year or so in 2020. So we've got a real focus on NPIs. They're not sequential, meaning if we did 70 in the first half, is it likely we're going to do 70 in the second half, I would say no. The increase from $100 million to $110 million is a big jump for us because that's up from $90 last year and up from, I think, $70 million the year before. So you should get a sense that we're putting more resources, people and focus on new products. As you know, it fuels our growth. It allows you to have high-return incremental revenue from the new products. So it's got a big focus of ours. With regards to the success rate, there's a bell curve like anything. You're going to have a number that are very highly successful, others that are more in the middle and then some that are less so. That's why we're focused on trying to make sure we bring successful products to the marketplace by collaborating with our customers. But also doing more of them. And we're really energized around the second half of this year and really getting into '21 and '22, that's, as I call it, our next chapter is really around new products. And my goal is to continue to increase the new products by putting more people on it, more resources on it because that's how we can really leverage the cloud transformation and drive our top line growth to higher levels.

Great. And then the -- my second question is on the Work Number records, like you guys hit another milestone, I guess, with the number of contributors. And it feels like during COVID, that in some portions of the economy that the sales cycle has shortened a bit with some urgency. And just wanted to know, are you seeing more businesses willing to work with you and willing to provide records? And could we see the pace of record acquisition pick up in the back half of the year?

Yes. I don't want to give a forecast for the second half of the year on Records, but I think you've seen pretty consistent growth in Records from Equifax and Workforce Solutions over the last number of years. We talked on prior calls in the last 6 months during COVID, that we do see a positive environment because our value prop is very strong with the companies that have these payroll records, whether it's a payroll processor or the company itself. And if you think about it, we do it for free for the company. We do it securely with high degrees of privacy. And we make sure there's consumer consent before the records are used. So the employees consenting it. We're open 24x7, where the company is doing it themselves, they're doing it from, call it, 9 to 5, Monday through Friday. And when do their employees go to get a mortgage or an auto loan, typically at nights and on weekends. So it's a very strong value prop that I would say was strong pre-COVID, which is why we've been adding records pretty consistently. And has been even stronger probably in COVID. The other change was the benefit of the tech transformation, as you picked up on -- we're going to be passing or we passed the 1 million company or contributor mark, which is a huge milestone, but think about it. A year ago today, we were talking about 70,000 companies contributing. And now we're over 1 million. So the technology to be able to onboard that many companies, that many records is really one of the benefits of our cloud transformation that we started a couple of years ago, it's really providing real benefits. And you know the value of new records is really powerful in Workforce Solutions because we can monetize them so quickly because we only fulfill, call it, half of the inquiries we get, as you add new records, we go above 50%. So that's really positive.

Our next question will come from George Tong with Goldman Sachs.

It looks like Mortgage Workforce Solutions is definitely gaining share versus competitors, given strong record growth that you're seeing. If you look at your USIS business, can you talk about how mortgage volume growth compares with the broader industry and with your peers?

Yes. I can't speak for our peers. I would suspect they're benefiting from mortgage growth the same way we are, but you should talk to them and get their perspective. But as you know, most mortgages and virtually all mortgage in the United States, when there's a credit 5 pull, they pull all 3. So our competitors are getting the same benefit we are from that. We talked about it in the second quarter earnings call that we're even in USIS, outgrowing the mortgage market slightly from new products and innovation that we're bringing to the marketplace. And of course, as you know, we have our tri-bureau business where we're selling not only directly, but we're selling through our tri-bureau business, all 3 credit files, which is a part of the Equifax benefit in a strong mortgage market.

Got it. That's helpful. You gave a lot of details around revenue performance in the third quarter. Can you talk a little bit about your expected incremental margins and the kind of margin flow-through you expect from the revenue upside versus your initial expectations, as well as progress on various cost initiatives, both temporary and permanent cost take up?

Yes. I'll maybe talk to the second one first, and John can do the first one on the margins. You gave some color already in the framework on margins, where we think a framework for our EPS is, and as you know, incremental revenue is generally very high market in our industry and for Equifax. On the cost side, you know that we tightened up, like most companies, back in April, we kept those controls in place. For example, on T&L, no one's traveling anyway because of the COVID recession. So that's clearly a benefit for us. When we think about the future on T&L, our expectation is it will be down meaningfully in the future from pre-COVID run rates just because we're going to do less internal travel, for example, which was a meaningful part of our T&L. There may be some efficiencies through video through customer travel, when instead of going to see a customer 3 or 4 times, you might do 2 videos and 1 customer trip. We'll see how that unfolds. We're also, while keeping our belt tight, as you know, we're being quite proactive around investing in Equifax. The cloud transformation is an example. We've worked to try to accelerate, are expanding on the cloud transformation during the COVID recession over the last 6 months. We're also putting more resources and dollars into new products, it's a big priority of ours to leverage the cloud transformation. And you're seeing benefits of that around our NPIs going from $100 million to $110 million. We're investing in D&A. It's another area. And of course, we're continuing to invest in security. John, maybe you want to touch anything else on margins that you didn't already cover?

No -- Slide 10, kind of on the bottom right of the slide, right, we kind of give a walk, that we'll walk you from the incremental revenue down to the incremental income. Variable margins are very high. A lot of this is mortgage. The variable margins on mortgage are a little lower, some for the reasons Mark mentioned because we have a Mortgage Solutions business. So it's a little lower than you would see on a growth on a pure online hole. And then you see a -- somewhat increase in some of the other expenses we reference there. Some of that is just the fact that as we're performing much better, you're seeing some higher variable compensation in other items negatively affecting the walk. But overall, I'd say the variable margins that are flowing through as, as you'll see on the right-hand side of Slide 10 there are quite high.

Our next question will come from Ashish Sabadra with Deutsche Bank.

Congrats on the solid progress in the quarter. My question was just on the GCS direct portion that has been trending really well. I was just wondering if you plan to increase your marketing effort on that front with the kind of progress that you're seeing.

Yes, thanks. We have increased our marketing in -- slightly in 2020, as we've seen good take rates on the paid search that we've been doing for that direct business, both in the United States and Canada. And we'll continue to take advantage of that where we see the right financial returns.

That's very helpful. And then maybe just on FMS, that tends to be choppy and does have some difficult comps in this third quarter in particular. But I was just wondering if you could provide any color on the weakness there. Is that on the portfolio analysis, marketing front or anything from the product like -- sorry, product perspective from card, auto or p loans, any color on that front?

Yes. We talked on a number of calls since the COVID recession that a lot of the marketing originations work really was curtailed very, very sharply in the second quarter, April, May, June, July time frame. We're starting to see both discussions and some levels of marketing starting to pick up again, but still at levels below 2019. We would expect that to change as -- meaning, we would expect marketing to increase as we go through the rest of the year. Our customers want to start marketing again, but they obviously want to do effective marketing, meaning to consumers that they know can they can pass their underwriting. So I think that's the work that's happening with our customers. On portfolio management, that's been fairly strong through the COVID recession. And we're seeing a lot of dialogues with customers as they work to manage their portfolios. And the expectation of higher delinquencies after accommodations come off and some of the complexities of the consumer in this current environment. I think we talked on the second quarter call about the increased usage of like TWN income and employment data in some of the portfolio reviews as a result of the unusual environment around consumers about who's working, how much are they paid, if they had been furloughed or they had a salary reduction, and who can pay back their loans, who should you call in a collection center, all those activities are strong, and we expect that to continue to strengthen as we get further into the COVID recession.

Andrew Steinerman with JPMorgan has our next question.

Just a quick one. When I was listening to describe mortgage, I sensed that you were saying that the upside to mortgage in the third quarter is coming from purchase, not refi. Could you just verify that? And maybe it's coming from both?