Equifax Inc. (EFX) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Toni Kaplan, the Head of U.S. Business Services Research here at Morgan Stanley. And joining me today from Equifax is Mark Begor, Chief Executive Officer; along with John Gamble, Chief Financial Officer; and we have Dorian Hare, Head of IR as well. Before I begin, we have to read the following disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect or reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Let me also just mention if you have a question during the chat and that you want to ask to Mark and John, please fill out the ask-the-question box. I'm sure that everyone is very familiar with that these days, unfortunately. But please do that, and I will ask the question that you have. So Mark was named CEO of the company back in 2018 and previously was at Warburg Pincus. And prior to that, he spent 35 years at General Electric. And John has been CFO of Equifax since 2014. And so Mark, John, thank you for joining us today at the Life After COVID Conference.

And one of the key themes that we've highlighted during COVID is, we've seen trends showing increasing demand for data and analytics. And that's really been happening over the last few years, but has accelerated a little bit during this time. So can you just talk about maybe some examples of where you're seeing that acceleration across your customer base?

Yes. Toni, I'll start. And thanks for having us. Title of your conference, I'm not sure it's after COVID yet, maybe we're talking about what life will be like after COVID because we're still in the thick of it, of course. But you hit on a big macro that I think is -- was underway prior -- there's a number of them that were underway prior to COVID. One is around the value of data. Data in the last 5 years in our space is really exploded, particularly around alternative data. Our customers and, of course, we and our competitors know that more data results in better decisions. So that's central to the whole theme. The other macro that we've seen is digital. There's just more contactless or by phone or e-mail kind of relationships with financial institutions, which are big customers. Of course, every company is really interacting that way. That was underway before it's been accelerated now. And both of those really drive back to the value of differentiated data, the value of data insights. We've seen it in the current environment where there's so much uncertainty around the consumer. You've got in the credit file the impacts from unemployment, you've got the impacts from accommodations. And those are really masked what's really happening with the consumer. So our customers are looking for more data to try to help look through that. And then you add to that, consumers either losing their job, but there's a wide portion of the population that have had salary reductions or have been furloughed. Those have dramatic impacts that typically don't show up in the credit file. So for example, in our case, our income and employment data and workforce solutions, we're just seeing a real uptick in usage, and we're seeing a real uptick in interest in it, particularly in all verticals, but also in some verticals that kind of pre-COVID weren't using that data. And the same holds for other data sets. So data is valuable in all times. But during this COVID crisis, it's become increasingly valuable. And our view is once we get into the workflows with our customers, you're going to stay in there. Because the additional data elements drive predictability and drive positive ROI for our customers. That was the case before COVID, but there's really been a catalyst to get into the workflows. And for example, we haven't had broad usage of our income and employment data in the credit card space. We're seeing a lot of credit card issuers now using, not only for portfolio management, but also for originations. Meaning, okay, I understand their credit score, let me confirm that Mark is working before I do a credit line increase or before I offer a new credit card to that consumer. So that's an example of where we're seeing broader usage of the data.

That's great. And I want to continue on sort of that theme with -- just talk about your moat in terms of what data is sort of proprietary that only Equifax has versus what do other players have that either can be replicated or gathered for sort of an easier time? So where is your biggest sort of moat and differentiators?

Yes. We've got a couple of them. Certainly, the income and employment data we have at Workforce Solutions and our Work Number database is the most differentiated because of the scale of it, over 110 million records every pay period, over 400 million total records, 85 million uniques. Every pay period is immensely valuable and one that is very differentiated for Equifax, and we'll talk, I'm sure, about Workforce Solutions. If you come into USIS, we've got a number of very unique databases at scale, which is really the other important point or we call it our NCTUE database, but it's the data set that we have around cellphone primarily, but also utility payment data, immensely valuable. And we have that for over 250 million Americans that's a very large-scale database. We have a wealth database that has securities holdings for U.S. consumers called IXI. It's another very unique and valuable and scale database. So those are examples of some of the data sets that we have. We've also been on the M&A front, looking to expand to our data sets. In 2018, we bought a company called DataX. They've brought in subprime data that's not in the credit file. So very, very valuable for the thin file customers, where there's 30 million or 40 million Americans that don't have trade lines on their credit file. So that's a valuable data set. Last year, we bought PayNet for our commercial business here in the United States, and that's another data set that's very unique. It's leasing data. And in the traditional commercial data file is bank transaction data from credit card and loans and credit lines. Leasing data is very rich and very broad. So it's a unique data set. So those are examples of where we're trying to add to our data capabilities. And the same storyline in international markets, where we're looking to grow our data assets because it's quite clear that more data results in better decisions, and we're focused on adding to our data capabilities.

Great. And then just thinking of other things as [indiscernible] COVID, the acceleration into digitization, including more e-commerce transactions, which is being conducted. I know you have a product that focuses on fraud analytics. Just talk about some of the trends that this acceleration in digitization is leading to product demand.

Yes. As we talked -- as I talked a minute ago, and you know this, this was underway pre-COVID, meaning digital was growing larger. So it was a place we've been focused on, both around digital solutions, but also around identity and fraud. So the real issue when you're not interacting with the consumer is verifying that Mark is really Mark and making sure it's not a fraudster. And fraud is actually -- pre-COVID was a very big problem. It's actually accelerated during COVID. There's just more opportunities. So the digital element, we think, is real and big. And our focus has been around identity and fraud. And you know we've talked about our new Luminate fraud platform that we launched in kind of mid-year 2020. We're in the process of rolling that out to customers in the U.S. and Canada and around the globe. And that orchestration engine for Luminate will allow us to not only take Equifax data assets, but take over 30 different data assets to be used in verifying that Toni is Toni when you're doing something on an online basis. And it's not only in financial services, there's so many different applications. We won a contract late last year that we implemented in the first quarter using our cloud capabilities with the Social Security Administration, where we're taking those wide array of data assets to verify that an individual who's trying to access their social security benefits is really that individual. So it's not a fraudster. It just has a very robust array of capabilities that our cloud transformation is really allowing us to really drive a lot of those and Identity and Fraud is a great example. And that's a place where we also like to do more M&A. We see some inorganic opportunities along with our new product initiatives to grow in the identity and fraud space.

That's great. And thinking sort of broadly about COVID, are there any changes that you're anticipating making across your organization from a strategy perspective? What kind of things could those look like?

Well, certainly, I guess, that's a big question. So let me take a couple of pieces on it. First is, we believe we're performing exceptionally well in COVID, above, I would suspect, your expectations when we entered COVID, certainly ours when we entered COVID. So what we're trying to do is really stay on offense with that. We've obviously got a mortgage tailwind, which is quite positive in the U.S. We also got some benefit from unemployment claims in our Workforce Solutions business. And we're obviously delivering a lot of those margin and cash to our bottom line. We're also accelerating investments in the company for '21, '22 and '23. So we've very proactively, and actually early in April said we were going to accelerate where we could our tech transformation. So we're doing that. And the other area that we've been investing in is around product, really accelerating our product capabilities. We really believe the next real lever for Equifax is going to be able to take our cloud transformation and our data transformation, remember, it's those 2 pieces, technology and data in the cloud and really leverage it for new products. And you've seen us really put the pedal to the metal around new products. We brought in some new people and some new resources. John and I have a regular cadence. We had a review yesterday with the product team around new products that they're working on. And that's going to fuel our growth, we believe, as a part of the cloud transformation, we've got the benefits of accelerating our revenue, driving our cost out because of the benefits from our technology stack. And then lastly, the cash benefits that come from both margin and lower CapEx going forward, and we think that's going to be quite powerful. With regards to how we work, video is going to change how we interact. Think about this. We would typically be in New York with your conference today, and we're able to do it fairly effectively via video. What role will that play post COVID? I think it will have a big one. I think we've all become agile in it. We've actually trained our commercial people on using video, kind of commercially how to operate with video, and we're having great success with that. I think it'll change how we travel. We'll go back to commercial travel probably less just because you can add video and make it more efficient. Internal travel will probably go away. We spent a good portion of our T&L budget, I was traveling from site to site for internal discussions. Those are very effective on video. So those will go way, way, way down. What it does to our footprint? We'll see. We're a collaborative work-from-office culture. That's how we think about Equifax. We're not going to be a work-from-home company universally. But there'll probably be some tweaks on how we work to have some more flexibility and to allow -- to take advantage of video and some elements of work from home. We have deliberately gone to some of our smaller sites that we accumulate over time, whether it's through small acquisitions or whatever and really trying to rationalize those to get some cost saves. So that will be a positive going forward. But I think the big game changer is just the ability to connect and communicate internally and externally through video.

That's great. And you mentioned the tech program. I wanted to talk about that. I think you've spelled out pretty well the cost savings of it. You've said on the revenue side that it could help facilitate new product development and speed that up. So any sort of further hints on top line implications from that? And also, maybe I'll give you another one, so you could pass by that as quick as you want. But any increase to the plan that you've done since the beginning? Because I know it started at $1.25 billion, now it's about $1.5 billion. So what was the incremental increase in terms of what the scope of the plan was?

Yes. So on the first one, we didn't go into this cloud data and technology transformation just for security or just for cost out or the cash benefits. Those are very meaningful benefits for us. Our security is going to be industry leading capabilities. It already is, and we'll continue to enhance that. John and I will talk on this call, I'm sure, a little bit about the cost and cash benefits, which we have a really clear vision on, meaning we know they're achievable as we complete the migrations. And for us, we knew and we went into it quite deliberately, knowing it was going to transform how our data is housed from multiple silo data assets to a single data fabric, and our ability to roll out new products. So I don't want to get into our long-term financial framework or '21 guidance, but there's no question we believe that the cloud transformation and our focus on new products or our enhanced focus on new products will be accretive to our revenue growth -- will drive our revenue growth going forward. And you're starting to see some signs of that. We started the year saying we're going to do about 100 new products, which was up from a little north of 90 last year, which is up from 70 to 80 kind of historically, meaning pre-2017. So 70 to 80 was kind of what we were running for many, many years very successfully before the cyber event. We put in focus on it last year as we started to getting some of our cloud capabilities and moved from that 70 to 80 up to 90, and now we're up to 110. And we want to keep growing that. And as you add new products, that drives revenue. That's -- it's really the difference between a GDP kind of revenue growth and, call it, mid- to high-single digits, it's the ability to roll out new products. And that's going to be so facilitated by our cloud investment that we're really energized about. The increased spend in technology is really just to accelerate the efforts. Coming into COVID, we didn't anticipate the strength of our financial results, but they've only accelerated as we've gone through second and third quarter. And we just want to take advantage of that where we were operating quite efficiently inside of the company and the ability to invest more in the cloud transformation. So we could get those benefits sooner, and we can chat about that, but those really start kicking in, in 2021 as we complete the technology work, which the large bulk of that is behind us and then really drive into the migrations, which we're well into. We're very deep in customer migrations. I don't know the right number, but it's -- we did something like 1,000 migrations this past weekend. So these are in the north -- in the United States. So these are trucking along. And as you know, migrating customers to the new capabilities really deepens our relationship with them. It gives them all the benefits of the new capabilities, whether it's stability, always on, access to our data, but it also allows us to deliver new products to them more quickly. And that's what's really going to drive our top line.

Have you got in customer feedback? So far everyone sort of happy with the transition and liking the new, I guess, interface or whatever they are seeing?

Yes. No question. Customers -- you might imagine that the customer dialogue is quite positive when you talk about the kind of technology investment we're making is so substantial. And at the heart of it, a data analytics company is a technology company because that's how you deliver the data, it's how you access the data, it's how you manage the data. And that clearly is front and center with Equifax. We think about ourselves as a data analytics technology company. So discussion is very positive. When you think about who our customers are, it's typically the Chief Risk Officer in a financial institution, it's the marketing leader, it might be the compliance leader. They all want the new capabilities. And where we have to work through is their technology team being aligned with our technology team in order to work it into their schedule, into their workflows in order to get those migrations completed, and those are going very positively. Some are really easy, some are not as easy and some are more challenging where we're very integrated with the customers. And we've got dedicated teams working on those. We have specific plans with each customer that we're working through those migrations plans, which are really going to be accelerating between now and year-end. And of course, we've already done a bunch of them and then continuing into 2021.