Equifax Inc. (EFX) Earnings Call Transcript & Summary

Yes. I wouldn't say identity of fraud is our most active. I would say there's probably 2/3 priorities that we have when it comes to widening Equifax. Now first, I would try to be crystal clear that we think about acquisitions in the kind of space of bolt-on M&A. And it's a term I use. It's -- I think it's self-explanatory, but it really means buying something that's going to strengthen the core of Equifax, whether it's Workforce Solutions or USIS or international. Those are the acquisitions where you get high synergies. I think it's also a big deal that we're on the throes of heading down the road of finishing up the cloud transformation. That makes acquisitions much more synergistic. We're able to integrate them more quickly into our new tech stack. We can take those data assets and combine them in our single data fabric, so cloud makes Equifax a more confident and a stronger acquirer. So you talk about where we want to play, identity and fraud, for sure. And Kount checked that box. And the other is unique data assets where Kount also checked that box. Whether It was PayNet we bought in 2019 or DataX in 2018, those unique data assets is another bucket of strong focus of Equifax because we want to keep building out our differentiated data. We believe we have data assets at scale that our competitors don't have. We want to keep building on that, and Kount hit that. The second area or third, really, that we want to build out is Workforce Solutions. And that's a business -- it's our biggest business now. It's our strongest business. It's our most valuable and fastest-growing business. And the idea of strengthening and widening Workforce Solutions is an M&A priority. As you know, we did 2 deals in the first quarter, HIREtech and i2verify that brought new capabilities to our benefit solutions business that provides services to HR managers that delivers records. So that's kind of the strengthening of Workforce Solutions. The widening, from using my words, is really around other unique data assets that would be accretive to our income and employment data, and that's really in the talent solutions world. We're in the hiring process, which is a -- there's 70 million people hired per year. We have a unique data asset in our TWN workforce solutions data, where not only can we verify income and employment today, but we have work history. So we have an average of 4.5 jobs. Remember, we have 90 million unique records, but we have 450 million total records. We use those in financial services and mortgage and other verticals. But in talent solutions, when you hire someone, you generally have to verify did Mark really work at Warburg Pincus before Equifax and GE before that. So you have to verify that. But you're also doing verifications of things like where do I go to school, what kind of licenses do I have, have I been arrested before, incarceration data. Those data elements is another area that we'd like to acquire in, if we could find them. There are many of them out there. We're going to keep looking for them, so I think that would be another area. And then probably the last is international and platforms. Last year, we bought out our partner in India. As you know, we bought Veda a number of years ago in Australia. There aren't a lot of those out there but expanding our footprint. So unique data assets, identity and fraud, strengthening and widening workforce solutions and then international platforms that really leverage all of Equifax would be our M&A focus. And I think as you know, and I'll let John jump to capital allocation discussion, but with our cash flow really accelerating in the last 12, 18 months through 2020 and our expectations with the cloud benefits where the CapEx coming down and our free cash flow going up, we're going to have more cash available for M&A and then also to return to shareholders. John, I know you're not going to be able to say too much about the capital allocation plan because that's going to be tied to our long-term framework. And Andrew, as you know, our intent is to have an Investor Day in the second half of the year and include in that rollout of our long-term framework and capital allocation plan. But go ahead, John.

Just in terms of priorities, right, as internal investment is obviously the #1 priority, but acquisitions, as Mark talked about, has long been our second priority and what we're going to continue to focus on. But as our cash generation accelerates, as Mark talked about, increasing that we'll be able to not only do acquisitions but also increase the level of cash we start returning to shareholders and then how that mix starts to come together, I think, is what Mark's referring to, as we talk about long-term framework and how we'll start thinking about that as we go forward. We did, this year, though, start to repurchase shares again, right, so to offset dilution. And obviously, we've maintained the dividend, even during the difficult times that happened after the cyber event. So maintaining the dividend, obviously, is something critical that we're focused on as well as now that we'd like to continue to buy back shares and certainly will, right, to offset dilution. And then as our cash flow accelerates, in addition to acquisitions, we'll have the opportunity to start returning more to shareholders.

Perfect. Super helpful. Wanted to spend a little bit more time on the Workforce Solutions business. Obviously, it's been exceptional, and competitive positioning there is unique. Usually, when positioning is that strong, investors worry about new entrants, and we've certainly seen some of the other bureaus move into the space a bit more aggressively. But rather than spend time on what competitors are doing, I thought it would be maybe more productive to speak or expand even further, Mark, on what you were saying about broadening and widening the moat. What areas are you investing in within Workforce Solutions that make -- build on the competitive advantage that you already have? Because I would imagine, from my perspective, that to the extent that you can build on something that people are already chasing, it just makes it that much more difficult to mirror. And so maybe that's the way that I'll ask the question about future investment opportunities internally.

Yes. It's a business we've been in for a decade. I think it's important to think about -- the credit file has been around for 50-plus years, actually close to 100, if you use different versions of credit file. And the income and employment data is incredibly predictive and quite powerful. So you think about that element of did Mark pay his bills on time. That's the credit file. And you add to it Mark's working and how much he makes. That's only 10 years old. It's really only 3 or 4 years old at scale and only 2 years old when you think about being more than half of nonfarm payroll. So the uniqueness of that data is really quite powerful. And we've invested a couple of billion dollars in the business over the last 10 years, over $300 million just in the cloud transformation for workforce. In the last couple of years, we're really investing heavily in the scale of the business. Now it's doubled in size in the last 3 years because of the uniqueness of the data, and we would argue there's an element of catalyst around the scale of the database. We've been at it for a long time. We've owned the business for over a decade, but it's only been in the last, call it, 18-plus months that we've gotten over 50% of nonfarm payroll. So that scale of the data set allows you to move across lots of verticals. We talked about talent solutions. Government is a big space for us. It's growing rapidly. We've got our new SSA contract that goes live in the second half. That's a big contract at $40 million to $50 million at full run rate in 2022, so very unique given the scale of the data set. And of course, in income and employment verification, whether it's in mortgage or cards or P loans or auto, real scale there. So investments for us are certainly internal. We're investing in the technology. The cloud investment has allowed workforce to ingest more data. We've gone from something like 100,000 contributors a number of years ago to over 1 million contributors, companies contributing data to us. That requires a ton of technology and a ton of scale because each company has a different nuance on what their payroll files look like. You have to normalize those. And remember, we deliver a ton of value in there. We have 50 different attributes that we're delivering in our income and employment report, like to the mortgage industry, gross pay, net pay, stock compensation, hours worked, tip pay, incentive compensation, so just a whole raft job title of information that's incredibly rich, so investing organically. We have a dedicated team that's focused on records, and that's really unique. Most data businesses have all the data, and they focus on price, product, driving new use cases, driving new verticals. We have all those and the uniqueness of adding records. And if you think about the scale of the data set, if you just focus on nonfarm payroll, call it 157 million, 158 million working Americans, we're now up to $90 million, and that's up 10% year-over-year through the end of the first quarter. And as you know, because of the system-to-system integrations we have, we're getting inquiries for all of our customers' transactions. We're only able to fulfill 60%. So as we grow the data set, we monetize instantly. So one way to think about growing the data set, just with nonfarm payrolls, you almost double the size of the business as you get to full nonfarm payroll. And as you know, we're going beyond nonfarm. We're going into the gig economy, 40 million to 50 million self-employed individuals in the United States. Maybe it's a second or third job or it could be their profession to be self-employed, pensioners. So records are a big deal. And as you know, 60% of our records come through our benefit solutions business, where we're providing services to HR managers and getting records in return in order to perform those services and then using those records for income and employment verification where we monetize them. And we have real scale in the benefit solutions business where, like in unemployment claims, we process 1 in 3 unemployment claims in the United States. That gives us access to lots of records. So the scale of the data set is really quite unique. And then I would characterize still the newness, meaning the opportunity of how the data is used. We believe the predictability of did Mark pay his bills on time, i.e., the credit file, and is Mark working, how much does he make is really quite similar and they're quite accretive to each other. And the opportunity to bring that into so many different use cases is really quite powerful. We have a -- we don't see all the mortgages, for example. We talk a lot about the mortgage vertical, which is our largest. Our biggest competitor there is pay stubs, where our customers -- we have a lot of customers that we don't have. We have customers that are still using pay stubs. Of course, we don't have the full data set. But even there's customers out there that don't use Equifax services, they will have their own manual verification process, so growth opportunity there. Pricing is a growth opportunity at workforce, just pure price because of the uniqueness of the data set is you're delivering more value, the history of the data set that we have, providing new products. And historically, workforce, because of technical limitations in the legacy environment that are now gone with the cloud environment, allows us to go from that single report that we sell for $20 or $30 and have different solutions, for example, with more historical data, 12, 24, 36, 48 months' worth of history that we have in our data set. And those price points, instead of $20 or $30, are more like $50, $75, $100, $150. A co-borrower report, where because some mortgages are husband and wife originated, so you need data on both. That's in the high $150 to $200. So products, the number of polls that are used, there's just a lot of levers. And I use the line internally with the team that we're in early innings in Workforce Solutions broadly, and we're also in early innings of the benefits of our cloud investment for workforce and more broadly at Equifax.

Yes. No. That's helpful. It certainly seemed like given the success of trended data within the kind of core financial services that it makes perfect sense that Workforce Solutions would have a similar dynamic. Maybe one more our Workforce Solutions, and this is a longer-term opportunity, at least based on my understanding. But can you talk a little bit about bringing that business international? What are your ambitions there? What's a realistic time line? And does -- what are the advantages of having the leading business in the U.S.? How much of that is portable into other regions? And just kind of thinking about whether or not you have a leg up versus other people who might be interested in something similar.

We think we do, and we're already there. I think you know we've got a Workforce Solutions business in Australia. We've got one in Canada, and we've got one in India. Those were all built out and are in the process of building out and adding records. That was started kind of pre-cloud transformation. We paused during cloud to build out the tech stack. We think we're going to be highly advantaged with a cloud environment to take it into other markets, and that's going to be our intention to expand workforce into other markets, both where Equifax is and where we're not. There are real advantages, number one, of the scale of the tech. We've already built the tech here, and we can take it and move it around in the cloud quite readily. So that's a real positive. Second is the relationships we have. Big multinationals that contribute data to us today in the United States want us to provide the same service to their employees in other markets, Canada, Australia, U.K., you pick it, because they've got employees there. And remember, we provide that service to the HR manager for free. And if we're not doing it for them in Canada or the U.K. or pick a country, they're doing it themselves, meaning they have a call center, and they have to worry about security and privacy. And is it really a mortgage broker calling to verify Mark's income and employment or is it a fraudster? We provide all those services. And then second is the payroll processor relationships we have. As you know, 40% of our records in the states come through partnerships. There's 30-plus relationships that we have. Most of them are exclusive, and they're in other countries, too. And we already have the pipes connected. And the idea of doing it in other markets is quite attractive to them. It's a value-added service they can bring to their customers. It's also a revenue share that they get from Equifax by being a part of it, so look for us to do more globally. Now what's going to move the needle, everything else we talked about in workforce over the next couple of years. But this will be a lever, and you should expect us to and want us to be investing, not only in all the core growth in acquisition work that we're doing in the United States around Workforce Solutions, but also investing organically to take the franchise globally. And that's part of our plan.

Absolutely. Looks like we only have a couple of minutes left, so I'll try to squeeze one more in. You talked quite a bit about the tech transformation. Maybe this is an easier question to answer in a shorter time frame. So can you give us just a quick look at kind of how far along you are? Anything quantitative that would help investors understand how close you are to the finish line? And then as a follow-up to that, is there any one business or segment that you expect to benefit more from the technology transformation versus the others? Or is it truly kind of a balanced benefit across the firm?

Yes. I'll do the second one first. It's pretty broad-based, meaning it's going to benefit all our businesses and obviously our scale businesses, which is why we focused in North America first, USIS and EWS. We're going to get the biggest benefit because they're just so big. So that's where we focused. We're well down the path in North America, including Canada, because it's on the same platform as the United States. And we'll be substantially complete late this year into 2020 -- late this year, and we'll finish up in 2022. And we're in the mode of customer migrations. We did 2,000 customer migrations in the first quarter, 1,000 internationally. So that's the mode that we're in as we're building out the technology. International will travel after that. We believe we're in the early innings of the benefits of the cloud. And we would argue our financial performance, which has been quite strong, is benefited by the cloud investments. Our new product rollouts, 134 new products last year, up from a 70 to 80 run rate, those are cloud benefited. And we think there's just more to come on that. So we're really energized. Our new strategy that we launched for the next 3 years called EFX2023 is focused on leveraging the cloud for innovation and new products. And as you know, new products really fuel our top line. They're highly incremental margins in those new products, and we're very focused. We've added resources over the last 12, 18 months around product, including a Chief Product Officer as a part of my leadership team, and really focusing on how do we leverage the cloud investment that we've made around new products. We're going to get a bunch of cost benefits from the cloud. It's going to give us real competitive benefits that should drive share gains. The biggest lever, we believe, is going to be around the single data fabric and the technology in the cloud that's really going to accelerate our ability to roll out new solutions that we couldn't do before that we think will be -- allow us to drive our top line.

Absolutely. And you've talked about on prior calls the improvement in Vitality Index and your expectations there. So that all syncs up. All right. I think we're out of time. Thank you, Mark. Thank you, John, for your time today. I appreciate everyone who dialed in or joined us on the webcast, and have a great rest of the day.

Thanks for having us, Andrew.